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GOVERNMENT

FISCAL YEAR 1991

O

THE BUDGET DOCUMENT
This single volume, the Budget of the United States
• Historical Tables, Budget of the United States GovGovernment, Fiscal Year 1991 replaces several publicaernment;
tions previously issued by the Office of Management
• Management of the United States Government; and
and Budget:
• United States Budget in Brief;
• Major Policy Initiatives.
• Budget of the United States Government—Appendix;
The information presented in the above mentioned
• Special Analyses, Budget of the United States Gov- volumes is incorporated, in somewhat revised form, in
ernment;
this document.

GENERAL NOTES
1. All years referred to are fiscal years, unless otherwise noted.
2. Detail in the tables, text and charts of this volume may not add to the totals because of rounding.

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON 1990

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402




TABLE OF CONTENTS
Section One. Overview
I. THE BUDGET MESSAGE OF THE PRESIDENT
II. DIRECTOR'S INTRODUCTION TO THE NEW BUDGET
III. INVESTING IN THE FUTURE

Page
1
5
23

A. Increasing Saving, Investment and Productivity

25

B. Expanding the Human Frontier—Space and Biotechnology, and the Superconducting Super Collider

49

C. Enhancing Research and Development

67

D. Investing in Human Capital

93

E. Ending the Scourge of Drugs

Ill

F. Protecting the Environment

119

G. Improving the Transportation Infrastructure

133

H. Bringing HOPE to Distressed Communities

141

I. Preserving National Security and Advancing America's Interests Abroad

151

J. Preserving America's Heritage

165

IV. ADVANCING STATES AS LABORATORIES

169

V. REFORMING MANDATORY PROGRAMS

181

VI. ACKNOWLEDGING INHERITED CLAIMS

213

A. Accounting for Debt and Unfunded Annuities

215

B. Recognizing Federal Underwriting Risks

229

C. Cleaning Up Federal Facilities

257

VII. MANAGING FOR INTEGRITY AND EFFICIENCY




263

A. Reforming the Budget Process
B. Restoring a Basis for Confidence
1. Reducing Investment in Low-Return Programs
2. Strengthening Management Oversight

265
271
271
278

C. Managing by Objectives

289

Page

Section Two. Notes and Appendices
I. NOTE ON ECONOMIC ASSUMPTIONS AND SENSITIVITIES
II. NOTE ON ALTERNATE APPROACHES TO BUDGET PRESENTATION

A-l
A-9

III. NOTE ON RESOLUTION TRUST CORPORATION (RTC) AND THE TREATMENT OF "WORKING CAPITAL" OR "BRIDGE" FINANCING

A-19

IV. SUMMARY INFORMATION

A-25

A. Baseline Estimates

A-27

B. Receipts, User Fees, and Other Collections

A-49

C. Tax Expenditures

A-59

D. Civilian Employment in the Executive Branch

A-77

E. Federal Transactions in the National Income and Product Accounts

A-81

F. Technical Perspectives on Expenditures, Off-Budget Activities, Capital Outlays, and Borrowing

A-83

G. Federal Programs by Function

A-145

H. Federal Programs by Agency and Account

A-157

I. Historical Tables
V. DETAILED BUDGET ESTIMATES
A. Detailed Budget Estimates by Agency

A-279
A-337
A-349

B. Proposed Supplemental

A-1205

C. Other Materials

A-1209

D. Government-Sponsored Enterprises

A-1213

VI. GLOSSARY OF BUDGET TERMS
VII. LIST OF CHARTS AND TABLES
VIII. INDEX
ii




A-1229
A-1233
A-1243

Section One

OVERVIEW

BUDGET OF THE UNITED STATES GOVERNMENT







I. THE BUDGET MESSAGE OF
THE PRESIDENT




1

The Federal Government Dollar

Fiscal Year 1991 Estimate
Where It Comes From...
Excise Taxes

RECEIPTS, OUTLAYS, DEFICIT/SURPLUS UNDER THE PRESIDENT'S
PROPOSED POLICY
(In billions of dollars)
1989

Receipts
Outlays
Surplus or Deficit ( + / —)

 2


1990

1991

1992

1993

1994

1995

990.7
1,142.6

1,073.5
1,197.2

1,170.2
1,233.3

1,246.4
1,271.4

1,327.6
1,321.8

1,408.6
1,398.0

1,486.3
1,476.9

-152.0

-123.8

-63.1

-25.1

+ 5.7

-1-10.7

+ 9.4

I. THE BUDGET MESSAGE OF THE
PRESIDENT
To the Congress of the United States:
I have the honor to present the Budget of
the United States Government for Fiscal Year
1991,
The American economy is now in its eighth
consecutive year of expansion and growth. It is
essential that the growth of the economy continue and increase in the future. The budget is
designed to achieve that goal.
The budget has five broad themes:
• Investing in Our Future—With an eye
toward future growth, and expansion of
the human frontier, the budget's chief emphasis is on investment in the future. It
proposes: a capital gains incentive for
long-term private investment and new incentives for family savings; record-high
amounts for research and development,
space, education, and Head Start; a major
investment in civil aviation; and a large
increase in spending to attack the scourge
of drugs. At the same time, the budget
maintains a strong national defense while
reflecting the dramatic changes in the
world political situation that are taking
place; and it fulfills responsibilities to protect the environment, and preserve America's cultural heritage.
• Advancing States as Laboratories—The
budget recognizes the emergence of new
ideas and initiatives originating at the
State and local level. The Federal Government will foster such innovation and experimentation in numerous fields, from
transportation to health, through waivers
of certain rules and regulations, and
through demonstration grants.
• Reforming Mandatory Programs—Entitlement and other mandatory spending now
constitutes nearly half the budget, not
counting an additional 14 percent for interest. The budget provides for full payment of social security benefits and funds




growth in health, low income and other
mandatory programs. However, it proposes
reforms where warranted to slow the
growth in some of these programs and
thus leave more room in the budget for
priority initiatives.
• Acknowledging
Inherited
Claims—The
budget faces up to such inherited claims as
the cleanup of decades old environmental
damage at nuclear weapons facilities. It
analyzes potential claims from unfunded
annuities and Federal insurance programs. It assesses the growing volume of
defaults in Federal credit programs and
proposes essential credit reforms.
• Managing for Integrity and Efficiency—
The budget contains suggestions for reforms in the way Congress deals with the
budget. It provides more resources and
suggests improved methods for managing
the vast Federal enterprise better. It identifies low-return domestic discretionary
programs where a smaller investment of
budgetary resources is warranted.
The budget meets the deficit target of $64
billion for 1991 established by the GrammRudman-Hollings law, without raising taxes. It
would balance the budget by 1993 as required
by that law, begin reducing debt, and protect
the integrity of Social Security.
Each of the themes outlined above is discussed in more detail in Section One of the
budget, the Overview. The customary tabular
and appendix material is contained in Section
Two.
I look forward to working with the Congress
in the weeks and months ahead to produce a
budget that meets the Gramm-Rudman-Hollings target, advances the Nation's essential
interests, and keeps the economy on the path
of continued growth.
GEORGE BUSH
JANUARY 29, 1990
3







DIRECTOR'S INTRODUCTION
TO THE NEW BUDGET




II. DIRECTOR'S INTRODUCTION TO THE NEW
BUDGET
GREEN EYESHADES AND THE
COOKIE MONSTER
If anything were meant for viewing through
proverbial green eyeshades, it would seem to
be the Federal budget. The typeface is small.
The text is tedious. Tables are seemingly endless.
The sheer size of the budget makes it seem
like a monster. It contains almost 190,000 accounts. At the rate of one per minute, eight
hours per day, it would take over a year to
reflect upon these! The budget's annual outlays are larger than all countries' economies
except those of the United States, Japan, and
the Soviet Union. (The Federal budget is
roughly the size of the entire West German
economy.) Clearly, at some point, green eyeshades must be put aside. Detail must be considered; but the capacity to abstract should not
be lost.
Of course, with or without green eyeshades,
monsters do not naturally invite examination.
Still, if a monster is present, one might address certain threshold questions: Is it threatening or potentially helpful, and how is one to
tell? The answers are not always as obvious as
the questions.
On "Sesame Street," the children's educational television program, there is a wonderful
character known as Cookie Monster. As all
monsters are, Cookie Monster is initially intimidating. His manner is gruff. His clumsiness occasionally causes damage.
But quickly, Cookie Monster comes to be
seen as benign—indeed, downright friendly.
He has a few bad habits. He cannot resist
gobbling up anything and everything that
might be consumed—especially cookies. And
he cannot quite control the way in which he
spews forth crumbs. He is the quintessential
consumer. Yet clearly, he means no harm.



The budget, for all its intimidating detail,
might be seen similarly: as the Ultimate
Cookie Monster. Its excessive tendencies
toward consumption are not exactly ennobling.
(It does not ordinarily present itself as seriously concerned with investment.) But at the
same time, its underlying motivation is clearly
not malevolent. What harm it may cause is
largely unintended. Its massive presence might
be understood as little more than a compilation of cookies received, cookies crumbled, and
crumbs spewed forth.
Yet apt though the Cookie Monster perspective may be, it does not suffice. It is not quite
fair to either Cookie Monster or the budget. In
reality, a budget is not just a monstrous mass
of cookies and crumbs. It is more: an implicit
statement of values and expectations for the
future. Inescapably, it is headed somewhere—
or other. To gain a meaningful sense of the
whole, and where it may be headed, one must
look beyond green eyeshades and the Cookie
Monster. One must frame the budget from several broader (and more serious) perspectives.
This introduction tries to help do that.
Among the additional perspectives are these:
a global historical perspective; a conventional
deficit-estimating perspective; a capital budgeting perspective; a perspective that gives greater weight to future liabilities; another that attends to investment in the future; and finally,
a congressional perspective. These are discussed (sequentially) below.

AND THE WALL CAME
A'TUMBLIN' DOWN . . .
Looking a bit beyond Cookie Monster to the
television news, one is struck with a rare impression: there may be a compelling pattern to
the flow of current events. It is not represented in the budget detail by any quantitative
"baseline," nor any conventional statistical
7

8

THE BUDGET FOR FISCAL YEAR 1991

measure. It was captured visually by a single
dramatic symbol, beamed around the world,
and etched in the mind of people everywhere:
the fall of the Berlin wall.
To put the symbolic fact more clinically:
State-centered, command-and-control systems
seem to be decomposing. The Soviet Union has
been forced to explore the virtues of restructuring, decentralization, and openness. Communist regimes in Eastern Europe have been
falling like dominoes. The Iron Curtain has
been opened. And the drama has not been confined to Eastern Europe. Just as liberated celebrants have cheered the opening of the Berlin
wall and the decline of communist dictators, so
too have liberated Panamanians celebrated the
fall of the dictator in near-by Panama.
While it would be naively euphoric to consider this pattern "the end of history" (even in
the limited Hegelian sense), clearly the sudden
and dramatic shift toward pluralist democracy
has far more than the ordinary historical significance. The events of 1989, and what they
will have unleashed, may one day rise to a
place with those of 1688, 1776, or 1789. This is
not small stuff. It is another giant leap of the
human spirit yearning to breathe free.
Yet this great historical shift has been
almost trivialized in its translation into public
debate about the budget. The issue has been
framed as: "How big is the 'peace dividend'?^—and, in effect, "How can I get mine?"
These are issues that the budget and the political system must treat. They are discussed further in the budget. But they are second-order
issues at best.
Ahead of them in line, surely, ought to be
these points:
• The favorable pattern of recent events has
not been caused exclusively by the political and economic bankruptcy of particular
state-centered regimes. It has also resulted
from U.S. (and allied) military and economic strength. These, in turn, have resulted from market-oriented economic policies and sound public and private investment policies. It would be a highly unfortunate irony if—just as the world were
affirming more market-oriented and investment-oriented principles—the United
States were to do anything other than




strengthen its commitment to these very
principles.
• As the world moves away (at whatever
pace) from an emphasis on the risk of traditional military superpower conflict, the
relative importance of U.S. economic
strength only increases. Increased economic strength is essential to inspire and to
assist evolving lesser powers. And it is fundamental to success in the global competition with rising economic superpowers.
• Thus, there is a first-order issue for the
budget (and the economic policy it represents): How can it best preserve and build
on America's strengths, while advancing
the American economy toward even greater capacities for leadership and growth? If
the "dividend" metaphor must be applied
to the budget: How can policy best assure
that there is a continuing growth dividend?

HOW BIG IS THE DEFICIT?—LET
ME COUNT THE WAYS
In considering this issue, many traditional
analysts turn first to the size of the budget
deficit. This is not necessarily as relevant a
starting point as many argue. But it is relevant.
Unfortunately, a meaningful answer to the
question—How big is the deficit?—is not quite
as simple as the question. This budget attempts to answer the question from a wide
range of relevant perspectives.
• The " Gramm-Rudman-Hollings
(G-R-H)
Baseline Deficit"— This perspective is
flawed. It biases analysis toward excessive
outlay growth. But it is required by law. It
constructs an estimate that uses the Administration's economic and technical assumptions; assumes entitlements grow
with the beneficiary population and with
prescribed benefit changes; and assumes
discretionary programs grow with inflation (in effect, treating them as permanent
entitlements). It assumes no change in current law. From this perspective, the estimated deficit for the current fiscal year
(1990) is $122 billion; and for the coming

II.

9

DIRECTOR'S INTRODUCTION TO THE NEW BUDGET

budget year, 1991, it drops to $84.7 billion.
It moves to surplus in fiscal year 1994.

will not be repeated in 1991. But G-R-H
implicitly assumes that it will be. If one
adjusts for these anomalies, the adjusted
G-R-H baseline deficit for 1991-95 would
be as in the chart below.

• "Adjusted G-R-H Baseline Deficit9—The
G-R-H baseline, an artificial construct, is
used by some for reference purposes. Even
for its advocates, it can be misleading.
This year, for example, the Food Stamp
authorization for appropriations expires. It
will almost certainly be extended in some
form, but G-R-H does not assume that.
Conversely, the decennial census of 1990

This suggests that without major legislative
action—but assuming continued economic
growth—the deficit would move toward surplus
in 1995. This would mark a steady, although
slow, pattern of correction from the deficit
high of $221.2 billion reached in 1986.

ADJUSTED G-R-H BASELINE ESTIMATE
(In Billions of Dollars)

Deficit

-260k -221.2

ACTUAL DEFICIT

-200-

ADJUSTED G-R-H
BASELINE ESTIMATE

-166.1

-160-

-152.0

-149.7

^ -122.0
^-100.5

-100-

V-72.9

-50-

-39.2
-13.1
• +13.4

50
i
Surplus 1986

i
87

i
88

i
89

i
i
90
91
FISCAL YEAR

• The "President's Policy
Deficit"—The
President's investment-oriented proposals
would help assure that the economic
growth assumed in the baseline is actually
achieved. Other policy proposals would
further improve the rate of deficit reduction by reducing spending on low-return
programs, reforming selected mandatory
programs, and charging appropriate fees.
These additional program savings (relative




i
92

i
93

i
94

i
96

to the G-R-H baseline) are discussed further in Parts V and VII below. Their total
contribution is $36.5 billion for 1991, rising
to $95.8 billion for 1995.
As a result, the Administration estimates
that implementation of the President's budget
would meet (and slightly surpass) the legally
required G-R-H deficit targets of $64 billion in
1991 and zero in 1993. The President's Policy
deficit would be $63.1 billion in 1991, moving

10

THE BUDGET FOR FISCAL YEAR 1991

to surplus for 1993-95 (even after adjusting to
assure Social Security integrity). (See table.)
Overall spending for 1991 would still increase—by about 3.0 percent. Almost every Department of the government would have
higher budget outlays than it did the previous
year. But the deficit would be reduced because
estimated receipts would increase even more—

by $96.8 billion or 9.0 percent (without
"ducks"). This reflects the "flexible freeze" at
work: spending growth is held at a level slightly below the inflation rate; while revenues increase at a higher rate on the strength of economic growth. This is summarized in the table,
"President's Policy: Outlays, Receipts, and Deficit Improvement for 1991."

PRESIDENT'S POLICY: OUTLAYS, RECEIPTS, AND DEFICIT
IMPROVEMENT FOR 1991
(In billions of dollars)
Change
Percent
Amount

1990

1991

286.8
910.4

292.1
941.2

+5.4
+30.7

+1.9%
+3.4%

Total Outlays

1,197.2

1,233.3

+36.1

+3.0%

Receipts:
Current Law
New Measures

1,072.8
0.6

1,156.3
13.9

+83.5
+13.3

+7.8%
+1.2%

Total Receipts

1,073.5

1,170.2

+96.8

+9.0%

123.8

63.1

-60.7

-49.0%

Outlays:
Department of Defense
Non-Department of Defense..

Deficit

• The Treatment of Social Security—Current
law defines Social Security as "off-budget",
but requires its inclusion for purposes of
G-R-H deficit calculations. Social Security
is also included in traditional "consolidated" or "unified" deficit estimates. There
are many good and important reasons to
continue to include Social Security in
these calculations.
But in recent years a problem has arisen.
The increasing annual Social Security operating surpluses have masked the true
size of the underlying non-Social Security
operating deficit. In effect, the surpluses




have allowed more non-Social Security
spending than might otherwise have been
the case. If this were long to continue, it
would result in an excessive burden of
debt for future generations. It would thus
undermine the effect of the build-up of reserves intended for retiring baby-boomers.
To address this problem, without doing violence to the traditional concept of a consolidated budget, the Administration proposes to establish a "Social Security Integrity and Debt Reduction Fund." It would
receive each year, as outlays, an amount
equivalent to an increasing portion of the

11

II. DIRECTOR'S INTRODUCTION TO THE NEW BUDGET

proposal would effectively prevent the government from spending Social Security receipts on non-Social Security purposes. The
proposal is discussed f u r t h e r in P a r t s
VI-A and VII-A below. Its effects on the
deficit are displayed along with the other
ways of looking at the deficit in t h e table:
"Deficit/Surplus—Under Selected Definitions."

projected Social Security operating surplus
(reaching 100 percent in 1996). It would be
obliged to use these outlays to reduce Federal debt and thus leave a more manageable financing burden for f u t u r e generations. This Fund would be linked with a
continuing obligation to meet a G-R-H deficit target of zero (i.e., a p e r m a n e n t balanced budget) starting in 1993. Thus, the

DEFICIT/SURPLUS—UNDER SELECTED DEFINITIONS
(In billions of dollars)
1990
"G-R-H Baseline Deficit/Surplus"

1991

1992

1993

1994

1995

... -122.0

-84.7

-55.5

-20.1

7.9

36.3

-16.2
1.0
-0.6

-17.0
1.3
-1.7

-17.7
1.3
-2.6

-18.6
1.5
-3.9

-19.5
1.5
-5.0

-122.0

-100.5

-72.9

-39.2

-13.1

13.4

0.6

36.5

46.9

57.5

75.6

95.8

__

-14.1

-53.6

-101.8

Adjust for outlay anomalies:
Food Stamps
Census
Debt service

...

Total "Adjusted G-R-H Baseline
Deficit/Surplus"

,

—
—

Adjust for policy recommendations
Adjust for "Social Security Integrity
and Debt Reduction Fund"
Total "President's Policy Deficit/Surplus"
excluding "gimmicks" (speed-ups)

... -121.4

-64.0

-26.0

4.2

8.9

7.4

...

-62.0

-80.3

-93.1

-107.4

-124.2

-137.2

-183.4

-144.3

-119.1

-103.2

-115.3

-129.8

62.0

80.3
1.0

93.1

107.4

124.2

137.2

—

—

—

-63.0

-26.0

4.2

8.9

7.4

1.6
-1.7
0.1

1.6
-0.7

1.6
-0.1

1.6
0.1

1.6
0.4

—

—

-63.1

-25.1

Adjust for on-off budget:
Exclude Social Security
Total "On-Budget Policy Deficit/Surplus".
Adjust for G-R-H and speed-ups:
Include Social Security
Include withholding and other speed-ups

...

Total "President's Policy Deficit/Surplus"
including speed-ups

-121.4

Adjust for "Consolidated Budget":
Include asset sales
Include Postal Service
Remove nondefense spendout adjustment.... ...
Total "Consolidated Budget Deficit/Surplus"




—

-2.4

. -123.8

—

—

—

5.7

10.7

9.4

12

THE BUDGET FOR FISCAL YEAR 1991

• The Effect of Alternative Economic Scenarios—In considering the deficit—by
whatever definition—it is important to
consider its sensitivity to economic variables. For a discussion of these sensitivities,
see Section Two, Part I: "Note on Economic Assumptions and Sensitivities." The
single most important variable affecting
the size of the deficit is probably the real
economic growth rate. As a practical
matter, the net deficit-reducing effects of
economic growth (or its absence) are likely
to be far greater than the effects of a socalled peace dividend.

of the credible range. But the Administration's assumptions are plausible and
achievable.
The Administration first presented its own
economic assumptions in July 1989—at
which point they were also judged to be at
the optimistic end of the credible range.
Intervening performance has, in fact, been
highly consistent with the Administration's forecast. But that does not mean
either that macroeconomic science has improved substantially, or that the Administration will always be so fortunate as to be
correct.

As a general rule of thumb, a sustained
one percent additional increase in real
GNP growth—with all else equal—would
reduce the deficit by an additional $18 billion in 1991 and an additional $98 billion
in 1995. (A sustained one percent lesser
increase in real GNP growth—all else
equal—would have roughly the equivalent
numerical effect, but with the sign
changed.) For those seriously interested in
either achieving greater deficit reduction
or freeing up resources for greater spending, this underlines the importance of pursuing policies likely to maximize the
growth dividend.

In developing the budget, the Administration formally considered several alternative economic scenarios. Two of these are
discussed in the "Note" in Section Two,
Part I. Both of these are also plausible.
One is slightly more optimistic, and one
more pessimistic, than the scenario actually adopted. These alternative scenarios are
specifically described in the Note. If the
President's Policy deficit were presented
with either the higher growth or the lower
growth assumptions, the deficit (or surplus) would appear as follows (after adjusting to assure Social Security integrity).

The economic assumptions used by the Administration are toward the optimistic end

DEFICIT (-)/SURPLUS (+) UNDER ALTERNATIVE
ASSUMPTIONS
(In billions of dollars)

1991

1992

1993

1994

1995

Higher growth scenario

-54.6

-16.9

+15.1

+24.7

+31.6

Lower growth scenario

-77.5

-48.4

-27.2

-32.9

-42.4

• Deficits as a Share of GNP—Meeting the
G-R-H deficit target for 1991, as proposed
by the President, would reduce the consoli-




dated deficit to about 1 percent of GNP.
The deficit would thus fall clearly within
the "normal" range for most of America's

II.

13

DIRECTOR'S INTRODUCTION TO THE NEW BUDGET

major trading partners. In any case, it
would mark a significant improvement
from the 5.2 percent level of 1983 (6.3 percent for the fiscal year). The pattern is
suggested by the chart, "Deficits as a
Share of GNP: U.S. vs. Major Trading
Partners." While the trend is favorable,
however, it should not be given excessive

weight. The United Kingdom and Japan
are both running surpluses—but with very
different real growth rates. As with all
measures of the deficit, it is necessary to
get beyond this somewhat superficial measure, to an examination of the underlying
economic policies and their relation to the
future.

DEFICITS AS A SHARE OF GNP:
U.S. VS. MAJOR TRADING PARTNERS

J^SSff
6

6

4

3

2

1

i

1983

i

84

i

85

i

I

• Deficit Effects of Capital Budgets—The
current budget concept—essentially a
"cash" budget—was developed to conform
with the President's Commission on
Budget Concepts (1967). The "cash" perspective is especially useful for determining needs for financing in the public debt
market. Indeed, it is essential. That is
why, regardless of whether trust funds are
treated as "on" or "off' budget, there
must be some consolidated accounting that
shows the total governmental cash position. But if one is seriously interested in
the effects of budget policy on the future,




i

86
87
88
CALENDAR YEAR

i

89

i

90

i

91

one must get beyond the cash budget frame
of reference represented by the G-R-H and
consolidated deficit calculations. One
needs a better sense of future liabilities
and of the extent to which current income
and borrowing are financing investment
for the future (as opposed to current consumption and transfers).
With this perspective in view, many have
criticized the Federal
Government's
"cash" budget. Some have argued that the
Federal Government should adopt one
form or another of capital budget and/or a
budget that better distinguishes between

14

THE BUDGET FOR FISCAL YEAR 1991

trust funds, governmental operating needs,
and activities conducted by Governmentsponsored enterprises.
In order to begin to address this thoroughly appropriate interest in getting beyond
cash budgeting, the President's budget is
re-configured as it might appear under the
conceptual approach suggested by the General Accounting Office and the approach
used by the state of California. These approaches are strictly illustrative—and are
presented in Section Two, Part II: "Note
on Alternate Approaches to Budget Presentation." They are not intended—now, or
in the future—to displace the cash budget;
but rather, they are intended to supplement it.
While these additional perspectives are
useful, it is clear that they, too, are not
fully satisfactory. In going only as far as
they do, they tend to do little more than
confirm what is now generally accepted
wisdom: that the Federal Government invests a relatively small percent of its
annual expenditures in capital;, and that
there is a sharp dichotomy between the
operating surpluses in certain trust funds
and the operating deficits that characterize the rest of government. They necessarily suggest, but do not satisfactorily settle,
many difficult issues of definition as to
what is and is not investment. They do not
adequately treat "intellectual capital" and
"human capital," for example. And they
do not provide a dynamic picture of expected future liabilities and future returns.
Stepping back from this surfeit of deficits—
all differently conceived and defined—one
might summarize where the collection of different deficit pictures suggests things may be,
and where they may be headed.
• First, by several different deficit measures,
the consolidated Federal deficit seems, at
worst, to have stabilized. If the President's
policies were adopted, this pattern of stabi-




lization would obtain, in the near term,
even if Social Security were excluded from
deficit calculation. The pattern of continuous erosion that characterized the earlyand mid-1980s seems to have been broken.
By many measures, the deficit is headed
toward improvement—assuming that economic growth continues. Although further
progress is not guaranteed, the change in
the underlying pattern must be viewed as
welcome. See chart: "Alternative Deficit
Paths."
The proviso concerning the necessity for
continued economic growth is fundamental, however. The economy is in its eighth
consecutive year of growth. This is the
second-longest period of continuous growth
in America's history. (Post-War Japan has
enjoyed two longer periods of growth: one
of 20 years, 1953-73 and one of 15 years,
1975 to the present.) There is reason to
suggest that the traditional notion of the
inevitability of a tight business cycle may
be overtaken. But, to underline the obvious: Growth is not automatic. It depends
on growth-oriented policies being pursued
not only by the Administration, but also
by Congress and the Federal Reserve.
• But second, stabilization of the underlying
deficit should not lead to complacency.
Complacency would lead to a loss of fiscal
discipline. And even with stabilization,
deficits mean rising debt. America's recorded Federal debt is already approaching three trillion dollars. (See Parts III-A
and VI-A.) That is not necessarily bad per
se. It depends on whether or not the debt
is being used in conjunction with policies
that will increase future productivity,
growth, and capacities for debt service—
and whether future hidden liabilities are
being kept within reasonable bounds.
Here, unfortunately, is where conventional Federal deficit accounting and budget
presentation have been woefully inadequate. And here is where there is legitimate cause for concern—as is discussed
further below.

II.

15

DIRECTOR'S INTRODUCTION TO THE NEW BUDGET

ALTERNATIVE DERCIT PATHS
(In Billions of Dollars)

Deficit

HIDDEN PACMEN
The problem with relying solely on the consolidated cash budget—or even on that plus a
capital budget—is that it does not give a full
picture of the Federal "balance sheet." There
is a host of technical reasons why it is not now
possible to present a complete and valid Federal balance sheet—not to mention a valid projection of the future balance sheet. But it is
possible to do a better job of highlighting potential liabilities, as well as important areas of
investment, which have significant future effects. This budget presentation attempts to
move in that direction.
One curious thing about future Federal liabilities is that many of them are not yet fully
visible. Their particular nature varies. But
each is like a hidden PACMAN, waiting to
spring forward and consume another line of
resource dots in the budget maze. These
hidden PACMEN are discussed in some detail




in Parts VI-A and VI-B below. A few introductory points may help outline the problem:
• Rising Costs of Health Care—A quarter of
a century ago, health care expenditures
consumed about 6 percent of America's
GNP. Now, that share has almost doubled,
to 12 percent. Within the growing Federal
budget, the share has risen even more rapidly, from less than 5 percent in 1970 to a
projected 15 percent in the early 1990s.
Obviously, this is a trend that cannot be
sustained forever—or health care costs
would drive out all else. There are, nonetheless, increasing demands to assure
health insurance coverage for those not
now covered, and to provide better financing for long term care. Each of these could
entail an additional multi-billion dollar
annual bill. Yet the projected health expenditure obligations of current law are
not fully covered by projected future receipts. The estimated present value of unfunded liabilities (the actuarial deficiency)

16

THE BUDGET FOR FISCAL YEAR 1991

for Medicare hospital insurance alone
could be over $250 billion. (See Parts V
and VI-A.)
• Rising Budgetary Claims of Mandatory
Programs—In President Kennedy's Administration, transfer payments to individuals comprised about a quarter of the Federal budget. Now they consume almost
half. So-called "mandatory" programs—selected payments to individuals (entitlements) and other automatic spending programs—have grown from 34 percent of the
budget in 1970 to roughly half the 1991
budget—and will reach a projected 57 percent for 1995. (Mandatory programs plus
net interest expenditures account for
almost 62 percent of the budget.) Since
these programs generally have broadbased and well-represented beneficiary
populations, they tend to have a powerful
claim on resources, and grow faster than
the economy as a whole. Yet again: It
would seem obvious that this pattern of
more rapid growth cannot be extended indefinitely. (See Part V.)
• Unfunded Retirement Program Liabilities—There is much talk about the projected build-up of Social Security reserves
to cover the anticipated obligations to the
baby-boom generation when it reaches retirement. The medium term build-up intended by (and projected under) current
law is, indeed, enormous. But even so, over
the long term, under some assumptions,
the present value of current-law obligations minus projected receipts could be a
negative number. This is a speculative
matter with a high degree of uncertainty.
(See Part VI-A.) Somewhat less speculatively, there are clearly identifiable major
shortfalls in unfunded Federal employee
retirement
programs—although
these
should be able to be serviced by future
contributions. And the Railroad Retirement System, although not fully a Federal
responsibility, is substantially underfunded—with a reported actuarial deficiency of
$14 billion.
• Obligations to Clean Up Federal Facilities—For a variety of reasons, the Federal
Government historically has not been
prompt in attending to environmental



clean-up at many of its facilities. For reasons of both law and policy, the pattern of
the past is now changing. But the bills are
yet to be fully paid. The present-value cost
of already-identified future clean-up obligations and waste management improvements at Federal facilities over the next
30 years is on the order of $140-200 billion. (See Part VI-C.)
• Contingent Risks of Federal Credit Programs and Government-sponsored Enterprises (GSEs)—The Federal Government's
direct and indirect credit subsidies are far
more extensive than is commonly appreciated. In housing, over a trillion dollars in
outstanding mortgages have been guaranteed by Federal agencies or securitized by
GSEs. In agriculture, the Farmers Home
Administration has accounted for 15 percent of all farm debt outstanding, and the
Farm Credit System has financed another
26 percent—for a combined total of about
$55 billion. In education, nearly all student loans are Federally guaranteed. The
government helps provide credit for export
finance, rural utilities, small businesses,
and minority-owned businesses. The purposes of all this credit support are generally worthy. But there can be no denying
that there is an enormous and increasing
Federal exposure—approaching one trillion dollars in direct and federally guaranteed loans alone. This necessarily involves
a risk of substantial future claims against
the government. These claims are virtually certain to be in the tens of billions of
dollars. Without continued economic
growth, and the credit reforms proposed
by the President, the claims would be substantially higher. (See Part VI-B.)
• Contingent Risks of Federal Insurance Programs—The Federal Government funds
programs that directly insure individuals
and firms against many hazards not covered by private insurance. These formal
insurance programs cover bank deposits,
pensions, veterans life insurance, crops,
floods, overseas private investment, nuclear risks, and war risks. The total face
value of this insurance coverage (excluding
Medicare) exceeds four trillion dollars. Deposit insurance accounts for about 70 per-

17

II. DIRECTOR'S INTRODUCTION TO THE NEW BUDGET

cent of this total. But the remainder is
still over one trillion dollars. Clearly, the
Federal Government is not at risk for the
entire face value of the insurance. But
again: The likely future claims are virtually certain to be in the tens of billions of
dollars. (See Part VI-B.)
When one adds up all these likely future
claims—unfunded health and retirement programs, environmental clean-up obligations,
credit risks, and insurance risks—one can
produce a rather intimidating total. (See especially Parts VI-A and VI-B.) But it is important to put this, too, in perspective. The claims
do not come due all at once. Indeed, they come
due over an extended period of time. If one
assumed that the likely range of unfunded
claims were spread smoothly over the extensive time period in which they are to come
due, one would reduce the total to a much less
intimidating—indeed, a manageable—level.
This is not to say that there is not a built-in
shortfall. There is. (See Part VI.) It is to say,
rather, that the "amortized" annual amount of
the projected shortfall may be on the order of
one-half to one percent of GNP—assuming the
problem is managed on an orderly basis.
Over the long term, there are five ways this
shortfall could be handled:
• by reducing the growth of future obligations—through "mandatory" program reforms, credit reforms, and insurance reforms (these are discussed in Parts V,
VI-A, and VI-B below);
• by reducing spending on other Federal
programs where returns on investment
are judged to be of lower relative value
(these are discussed in Part VII-B-1
below);
• by increasing the government's managerial integrity and efficiency (this is discussed
in Part VII below);
• by pursuing growth-oriented economic and
budgetary policies—investing in the
future—so that future economic productivity and Federal receipts are higher than
otherwise projected (this is the principal
area of emphasis in Section One, the Overview, and is discussed especially in Part
III below); or




• by increasing the relative burden of debt
and/or new taxes (these latter approaches
are not a part of the President's program).

INVESTING IN THE FUTURE
As noted, "Investing in the Future" is a
theme given special emphasis in the Budget
Overview. It was first introduced to the presentation of the budget by the President, last
year, in Building a Better America.
The emphasis is consistent with three fundamental points: First, a budget must be viewed
as more than a static snapshot; it necessarily
influences the future, and the nature of that
influence must be examined. Second, there is a
generally accepted moral obligation to try to
leave future generations in a better position
than their predecessors. Third, the obligations
for future expenditures and debt service are
more manageable insofar as current expenditures and tax policy contribute to increased
growth. Together, these three points argue
compellingly for attention to the extent to
which a budget (and its associated economic
policy) encourage investment—investment in
the future.
The President's budget encourages investment in a host of ways that are discussed in
greater detail in the Overview. These are outlined here—with references to appropriate
Parts of the Overview noted parenthetically:
• Deficit reduction—By reducing the deficit,
meeting the G-R-H targets, and then
buying down debt, the President's budget
policy would improve the U.S. savings rate
and reduce the cost of capital. (This is discussed further in Part III-A below.)
• Incentives for Private Savings and Longterm Investment—The President's program
would improve the incentives for saving
and investment through Individual Retirement Accounts (IRAs); create a new allpurpose savings incentive through Family
Savings Accounts; and encourage growthoriented, job-creating investment through
a new long-term capital gains incentive.
(These are discussed further in Part III-A
below.)

18

THE BUDGET FOR FISCAL YEAR 1991

• Research and Development—The President's budget funds initiatives to expand
human frontiers in space—NASA would
grow 24 percent over 1990 to a record
$15.2 billion—and in biotechnology; to advance the development of the superconductive supercollider and to increase investment across the full range of basic research ($12.3 billion—up almost $1 billion);
to advance applied research in areas as
diverse as defense and health, agriculture
and high speed rail transportation, semiconductor development and materials
processing. The President also proposes to
enact and extend major tax incentives to
encourage greater investment in R&D by
the private sector. Total proposed governmental expenditures for R&D would
exceed $70 billion. (These are discussed in
Parts III-B and III-C below.) In the design
and implementation of Government programs, the President's budget also recognizes and encourages the innovative role
of "States as Laboratories" (discussed in
Part IV below).
• Investment in Human Capital—Although
Federal money is not the key to solving
the nation's serious education problems,
the President does propose to increase the
discretionary budget authority of the Department of Education by $1.2 billion—
bringing the Departmental total to a
record $24.6 billion. Program increases are
principally in areas of investment that are
consistent with the Federal Government's
role and responsibilities—reflecting the
basic understanding that true solutions
must depend heavily on states, localities,
parents, and a system that promotes greater innovation, flexibility, and accountability. The budget re-proposes the President's
child care initiative—on which the Congress failed to act last year. And the President proposes not only to reauthorize
Head Start, but to increase it by half a
billion dollars in a single year—bringing
Head Start to an unprecedented $1.9 billion. (These and other investments in
human capital are discussed in Part III-D
below.)
• Drug Control Strategg—Clearly, it makes
little sense to invest in human capital only
to have drug abuse undermine that invest


ment and, indeed, destroy the very social
fabric that makes human growth and investment worthwhile. Drug abuse negates
investment. It is fundamentally destructive. It must be stopped. Like education,
drug abuse is a problem that cannot be
solved by Federal funds alone—or by
funds alone whatever their source. Nonetheless, the 1991 budget proposes $10.6 billion in budget authority and $9.7 billion in
outlays to combat drug abuse. These levels
represent increases of 12 percent in budget
authority and $2.8 billion (41 percent) in
outlays relative to 1990. They are necessary to advance the next stage of the comprehensive National Drug Control Strategy (and are discussed further in the Strategy, which is published separately, and in
Part III-E below).
• HOPE and Enterprise Zones—The problems of economically distressed areas will
be alleviated some by the job-creating effects of continued economic growth. The
problems will be mitigated also by the
President's anti-drug abuse strategy. But
more needs to be done to bring hope and
opportunity to severely distressed areas.
Thus, the President is re-proposing his initiative to stimulate growth through the
creation of special incentives for investment and job creation in Enterprise
Zones—a proposal on which the Congress
has failed to act. And he is introducing
legislation to advance project HOPE—
Homeownership and Opportunity for People Everywhere. (These proposals are discussed further in Part III-H below.)
• Transportation
Infrastructure—Improving
the U.S. transportation system is essential
to economic efficiency and growth. It is a
shared responsibility involving the private
sector, Federal, state, and local government. The Federal contribution is substantial. For example, the President proposes a
record $8.6 billion for aviation in 1991 to
help keep the U.S. commercial aviation
system the best in the world. Of this, $2.5
billion—an increase of 45 percent—is proposed to modernize the FAA's air traffic
control system. (These and related transportation issues are discussed in Part
III-G below.)

II. DIRECTOR'S INTRODUCTION TO THE NEW BUDGET

• Environmental Protection—The emphasis
on the importance of economic growth
must, of course, be accompanied by a responsible concern for the protection and
preservation of the environment. The
President proposes over $2 billion in new
spending to fund: "America the Beautiful," a new program to improve the stewardship of public lands and natural resources, and to promote reforestation; a
major increase in the U.S. Global Change
Research Program; an acceleration of hazardous waste clean-up; and a 12 percent
increase in the EPA operating budget.
(These are discussed in Part III-F below.)
• The American Heritage—To the extent
that investment tends to emphasize rapid
technological advance, there is need for a
complementary emphasis on aesthetic
values, history, and the traditional cultural values that have made America uniquely strong. Although the Federal role in
this area must be limited—for important
reasons of pluralistic philosophy—it must
not be overlooked. America's progress in
the future will be the greater for building
on its diverse cultural strengths. Thus programs to foster and preserve the American
Heritage are treated as themselves an
issue of investment. (These are discussed
in Part III-J below.)
• National Security—None of the foregoing
would be worth very much if the budget
failed to provide for the protection of U.S.
national security. Though responsible analysts may differ about the best means of
protecting it, national security holds a fundamental claim on governmental investment. Without adequate investment in national security, ultimately, all that America holds dear could be lost. There is, further, an obligation that America has long
championed: the advancement of pluralistic, market-oriented democracy throughout
the world. These fundamental interests
and obligations are dependent upon U.S.
economic growth. But they are also, in
some respects, preconditional to it. (They
are discussed in Part III—I below.)
• Management Oversight—Federal
investments in the future will only achieve their
objectives if they are effectively managed.




19
Improved returns on investment require a
better budget process and more effective
management oversight. Americans are entitled to greater assurance that their tax
dollars are being invested wisely and managed with efficiency and integrity. Proposals to manage America's government
better are discussed in Part VII below.

WONDERLAND REVISITED—THE
CURRENT CONGRESSIONAL PATH
In the presentation of the first Bush Administration budget, a critique of "Wonderland"
budgeting was offered. It focused on the curious Washington habit (indeed, legal requirement) of "current services baseline" budgeting.
Under this system, a "cut" may really be an
increase; and a deficit said to be going "down"
may really be going up. With "current services'" built-in bias toward increasing expenditures, it should be little wonder that the
system has failed to bring the deficit under
satisfactory control.
In the Mid-session Review of the Budget,
OMB introduced a new budget projection: the
"Current Congressional Path." This was done
in order to underline what some might think
an obvious point. That is, the deficit is not
determined, in the end, by either "current
services" projections or by mathematical extensions of a "President's Policy." Forecasts
based on such projections are almost always
bound to be wrong. Budgets are legislated.
Congressional action (or inaction) is, therefore,
a fundamental determinant of actual deficits.
In trying to forecast realistically, it is important to have some sense of the "Current Congressional Path."
Unfortunately, however, the Current Congressional Path is not entirely clear. Indeed,
Wonderland seems to be running wild with
attractive fantasies, but without yet having established coherent direction. One might consider, for example, the two big games now in
play—and a third that is soon to be:
• The Spend-the-Peace-Dividend-Game—This
is a new game, premised on the assumption of a substantial, near-term "peace dividend." It starts by over-estimating the
dividend. Then each player plans to spend

20

THE BUDGET FOR FISCAL YEAR 1991

the dividend in his or her preferred way.
The sum of all such planned expenditures
totals about ten times the over-estimated
dividend, which is itself perhaps five times
the actual dividend. Thus, Washington entertains the notion of spending fifty times
a dividend that has not yet definitively
materialized—a true Wonderland phenomenon.
In reality, the near-term peace dividend is
likely to be smaller than is commonly assumed for three reasons: First, the true
cost of the previously planned and Congressionally-approved defense program is
substantially higher than the current DoD
funding levels (and higher than "current
services"). Much of the dividend will have
to be used just to adjust the previous program downward toward current levels.
Second, this adjustment—while politically
popular in the abstract—will not be politically popular in all its particulars. Third,
any tendency to cut further would likely
focus on reducing U.S. troop strength
abroad at a more rapid rate than proposed
by the President—a more rapid rate than
consistent with preserving a strong alliance and negotiating equitable and enforceable agreements with the Soviet
Union. Presumably, these countervailing
interests will be better appreciated as the
debate about the "peace dividend" unfolds.
• The Cut-Social-Security Game—This is ordinarily a very dangerous game politically.
But in its most recent form, it has started
with a superficially attractive proposal: to
cut Social Security taxes. Clearly, that
would be desirable if it could be done without significant cost to the people paying
the taxes and to the economy as a whole.
Unfortunately, the most recent proposal to
attract significant attention fails that test.
It is ironic in three respects. First, some of
its advocates have argued, until recently,
that the government was under-financed
(and under-taxed) not cwer-financed. Yet
few, in fact, can seriously argue that the
government as a whole is over-financed.
Second, the emerging conventional wisdom
had been that one needed to do more to
protect the capacity to pay future Social
Security benefits, not less. Cutting Social




Security taxes now would mean giving up
on that objective—giving up on the bipartisan commitment to build up reserves for
the future retirement needs of the baby
boom generation. Third, and perhaps most
telling: Cutting Social Security taxes now
would likely hurt the very people it is ostensibly intended to benefit, today's workers. It would either force an increase in
their non-Social Security taxes (to compensate for the enormous revenue loss—$55
billion in 1991 alone); or it would force a
reduction in their future retirement benefits. (See Part VI-A.)
The President's proposal to establish a
"Social Security Integrity and Debt Reduction Fund" is a responsible way to protect
the future interests of today's workers.
But Social Security is a notoriously volatile subject when it enters the political
domain; and whether rationality will prevail remains to be determined.
• The Beat-the-Budget Game—This is the
game that begins with the reaction to the
President's budget. It has become an
annual ritual. At the start, it is predictably partisan. Priorities are judged to be
incorrect. Economic assumptions are ridiculed (but later adopted). Gimmicks are
scorned (but later outdone). The failure of
the budget process is lamented (but ideas
for evasion proliferate). The refusal to
raise "new taxes" is condemned (as proposals to cut taxes are advanced). Incentives
for savings and investment are criticized
for their alleged adverse effects on the deficit (as alternative proposals to increase
the deficit are advocated). Stalemates are
followed by "heroic compromises" that
earn the parties self-congratulation, but
somehow manage to leave much of the serious job to the future. And the public,
understandably, grows more skeptical.
It may be apt to view all this metaphorically
as a set of children's games: the Budget as
Cookie Monster; its future threatened by
hidden PACMEN; its path a journey through
Wonderland. But at some point, it is appropriate to put games aside—at least for a while. At
some point, there is an obligation to be serious.
At some point, partisan posturing must yield
to the responsibility to govern.

21

II. DIRECTOR'S INTRODUCTION TO THE NEW BUDGET

Sooner or later, the American political
system will rise to the responsibility to be serious: to complete the job of fiscal policy correction. It may do this in small steps or large. It
cannot do it with side-steps.
This year's budget meets the responsibility
to be serious. It is seriously presented—giving
a more complete and balanced perspective on
both the present and the future than has previously been characteristic. Its emphasis on investment and growth-oriented policies and its
realistic attention to long-term liabilities
should be welcome. Its economic assumptions
are not outside the credible range. It meets the
Gramm-Rudman-Hollings deficit targets with
specific and defensible deficit-reduction meas-




ures—and without gimmicks. It seeks to preserve a meaningful consolidated budget, while
tightening the budget process. If implemented,
it would reach balance in 1993 (as required by
law), and would thereafter begin the process of
reducing Federal debt.
This, of course, is not to assert that the
budget will be treated seriously in the very
next round of the Beat-the-Budget game. It is
simply to suggest that it should be.

Richard G. Darman
Director,
Office of Management and Budget

Note: This budget is presented in a new,
comprehensive, single-volume form. There is
no formal record of the number of individuals
who may have read, cover-to-cover, the previous seven-volume editions of the budget. (Nor
are there epidemiological studies of their fate.)
This new single-volume form is provided with
the hope that it may be more convenient for
the reader; and with the belief that it may
actually provide more, not less, useful information. If any reader finds important information
to have been dropped, OMB will try to remedy
that unintended effect.




III. INVESTING IN THE FUTURE




23




III.A. INCREASING SAVING, INVESTMENT
AND PRODUCTIVITY
The United States faces major challenges
and opportunities in the coming decades. To
take advantage of these opportunities and to
meet the challenges, a step-up in the rate of
economic growth is essential. Higher economic
growth is needed to increase living standards,
sharpen international competitiveness, and
lessen the burden of the surge in retirement
expected in the next century.

the factors that influence them, and how they
can be increased in coming years. The key to
faster productivity growth is an increase in
investment, where investment is broadly understood to include not only additions to physical capital, but also additions to knowledge in
the form of research and development (R&D)
and improvements in human capital resulting
from education and training.

This Part analyzes saving, investment, and
productivity growth: their historical record,

SOURCES OF ECONOMIC GROWTH
The rate of economic growth can be thought
of as the sum of the growth in employed labor
plus the rate of increase in labor's productivity. Economic output can expand either because
more people are working or because those who
are working are able to produce more.
Productivity Growth and Living Standards
In the long run, the standard of living depends essentially on productivity. While it is
also essential for employment to rise when the
number of willing workers is growing, simply
having more people at work does not necessarily mean higher wages per worker. Higher
earnings and a better standard of living require that increased productivity accompany
increases in the number of jobs.
The chart below shows the relationship between productivity advance (measured by
output per hour in the nonfarm business
sector) and growth in average living standards,
(measured by real per capita disposable
income). Productivity and living standards
both rose at a relatively high rate of about 2Vfe
percent a year from 1948 to 1973. However,
growth in both measures declined sharply
after 1973, especially the rate of productivity
advance.


250-298 O-1990-1


Factors other than labor productivity affect
growth of income per capita, particularly labor
force participation rates. Women (who previously had been excluded to some degree) have
been joining the labor force in increasing numbers since 1973, adding to measured output
and causing per capita income to rise faster
than productivity.
Demographic developments suggest, however, that this source of growth will not be as
strong in the coming decades as it has been
during most of the postwar years. A slower
rise in female participation rates is expected.
More importantly, the United States population is getting older, and its rate of increase is
much smaller. Between now and the turn of
the century, the labor force is projected to increase at an average annual rate of only 1.2
percent—below the 1.6 percent rate of advance
since 1980 or the 1.8 percent average since
1950. After the year 2000, current projections
show labor force growth slowing almost to
nothing for the next several decades. The population slowdown has the potential to raise
significantly the proportion of retirees to workers. For this reason, the prospects for achieving higher real living standards will depend
even more on strengthened growth of labor
productivity.
25

QL3

26




THE BUDGET FOR FISCAL YEAR 1991

AVERAGE ANNUAL GROWTH RATES
FOR INCOME AND PRODUCTIVITY

1948:04-1973:04

1973:04-1980:01

1980:01-1989:03

SOURCES OF LABOR PRODUCTIVITY GROWTH IN THE
NONFARM BUSINESS SECTOR
(Average annual percent change)
1948-73

Output per hour
Contribution from:
Capital/labor growth
Labor quality
Business R&D, direct impact..
Other factors

1973-79

1979-87

2.5

0.6

1.2

0.8
0.2
0.2
1.3

0.6

0.8
0.3
0.2

—

0.1
-0.1

—

III.A.

INCREASING SAVING, INVESTMENT AND PRODUCTIVITY

Factors Behind Productivity Growth
Among the factors that explain trends in
productivity, the most important that have
been identified are R&D, investment in human
capital, and the capital/labor ratio. Based on
the latest work of the Bureau of Labor Statis-

27

tics (BLS), these three factors accounted for all
of the 1.2 percent average annual rate of
growth in output per hour during the 1979-87
period. These variables can be positively affected by public policy.

PRIVATE AND PUBLIC INVESTMENT
This section analyzes four major categories
of investment with significant productivity effects: R&D, human capital, business capital,
and Federal physical capital.
RESEARCH AND DEVELOPMENT
R&D has long been identified as a major
source of economic growth. It results in new
processes that produce more output with less
input, it creates innovative products to perform old tasks more effectively, and it opens
up previously unimagined markets.
In today's international marketplace, the
United States can remain competitive only if it
stays at the forefront of technological innovation. In calendar year 1988, the United States
spent $132 billion on R&D, more than the combined R&D spending of France, West Germany, the United Kingdom and Japan. In relation to the size of their overall economies, however, the United States and each of these other
nations spent about the same—roughly, 2V2
percent of GNP.
Industry R&D
Industry accounted for about half of the Nation's R&D spending in the 1980s, up from 35
percent in the 1960s. This investment has both




a direct and indirect effect on productivity
growth. The direct effect stems from the
higher returns earned by the firm making the
investment and by the other firms in the same
industry that also benefit from the innovation.
The direct rate of return for R&D is high: a
mid-range estimate is in the neighborhood of
30 percent—about three times higher than for
physical capital. Combining the high rate of
return with industry outlays on R&D, the
direct contribution of industry-financed R&D
to productivity growth is estimated by BLS to
be about 0.15 percentage point per year in
each of the last 35 years.
Industry-financed R&D also has an indirect
effect on industries that use the innovation or
imitate the new process. This indirect contribution is probably as large or larger than the
direct contribution. The successful development of new computers, for example, can offer
a high rate of return to computer-makers, but
it also can raise the net returns to industries
purchasing this improved capital equipment.
Such "importation" of R&D is substantial.
Over 40 percent of the R&D used within a
typical manufacturing industry was developed
in another industry. In non-manufacturing,
where little R&D is done, the proportion is
much higher.

28

THE BUDGET FOR FISCAL YEAR 1991

REAL R&D SPENDING
$ Billions

(In 1982 Dollars)

120-1

0
* i" 7 * i** • * 7 T I' 7 "i " i' 7 * V ' i' 7 V i' T V i "\ "\ ' i' 7 V i * 7' V ' i * 7 ' V * i * 7 ' V ' i * 7 *'
1953 65 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89
CALENDAR YEAR

It is difficult to get a reliable estimate of
these indirect benefits because the returns attributable to purchased R&D are often inseparable from the returns to the capital in which
it is embodied. A mid-range estimate would
put the indirect return at slightly larger than
the direct return. This puts industry R&D's
total contribution to long-term productivity
growth in the range of 0.3 to 0.4 percentage
point per year on average over the postwar
period, compared with 0.15 percentage point
estimated for its direct contribution.
Although 0.3 or 0.4 percentage point per
year may appear small at first glance, it represents nearly 20 percent of the productivity rise
during the postwar period. More importantly,
from a long-term perspective, even small
changes, compounded over many years, can
have a big impact on living standards. Starting
at current levels of GNP, a yearly contribution
of this magnitude would mean $350 billion of
additional GNP over 20 years, or over $1,200
per capita.




Government R&D
Government R&D outlays totaled $61 billion
in calendar year 1988, slightly less than half of
all R&D spending, down from two-thirds 25
years ago. The budget proposes outlays of $65
billion for the conduct of R&D and another $3
billion for investment in R&D facilities in
1991; these proposals are discussed in Part
III-C, "Enhancing Research and Development." Like industry R&D, the Federal Government's R&D dollars contribute to higher
measured output as well as other kinds of wellbeing. It is, however, much more difficult to
measure the benefit of the Government's R&D
for the economy.
In part the problem is that much of Government R&D improves the delivery or enhances
the performance of public goods whose values
are not easily measured in economic terms. In
the 1980s, 65 percent of all Federal R&D
spending went to defense, 11 percent to health,
and 6 percent to space. In an ultimate sense, a
secure and healthy nation is a prerequisite for

III.A.

29

INCREASING SAVING, INVESTMENT AND PRODUCTIVITY

continued economic growth—but the dollar
value of health and security is unknowable.
Environmental research is another example of
a public good that improves the quality of life
but does not directly raise GNP as currently
measured.
One area where Federal R&D has focused
directly on improving private sector productivity is agriculture. Because there is a market
valuation for farm products, the returns from
improved yields can be measured more reliably
than in most other areas. Here, the returns to
Government outlays are very high, often estimated in the neighborhood of 50 percent.
While R&D spending for defense and space
are primarily directed toward achieving payoffs in these fields, the experience of the past
45 years shows that they have spillovers into
commercial applications. Significant advances
in civil aviation have their origins in defensesponsored R&D, as do civilian uses of lasers,
integrated circuits, and weather satellites. In
the field of medical technology, defense R&D
has contributed to acute trauma care, laser
surgery, magnetic resonance machines, and
the lithium batteries used in pacemakers.
The need for public support for basic research has long been recognized, and substantial funding has been supplied in this area.
Basic research accounted for 16 percent of Federal R&D spending in the 1980s, up from about
12 percent in the prior two decades. Commercial payoffs from basic research, funded in part
by the National Science Foundation, include
genetic engineering, solar collectors and testing for carcinogens, to mention only a few.
Conclusion
R&D contributes substantially to economic
well-being both in terms of measurable additions to private output and in unmeasurable
improvements in welfare. Moreover, because
the benefits to society from R&D are often
much higher than those accruing to the individual innovator, not enough resources from
the point of view of society would be devoted to
R&D. These externalities are the principal justification for the Government's role in boosting
the Nation's R&D effort.




HUMAN CAPITAL
During the past 30 years, there has been a
growing recognition that the quality of the Nation's workers is an important factor determining trends in productivity. Education and
training at home, at school, and on the job
affect the skills, ingenuity, and adaptability of
the work force. The better educated and
trained the work force is, the higher will be its
productivity.
The decision to undertake education and
training is similar to the decision to acquire
physical capital, which is why education and
training are often referred to as investment in
"human capital." Such investment involves
costs in terms of actual outlays and forgone
earnings, and it leads to benefits, both monetary and nonmonetary, accruing over many
years. The similarity between the two kinds of
investment decision has enabled the extensive
research on physical capital to be applied fruitfully to human capital. The result has been
estimates of how much is invested in human
capital annually, the existing stock of human
capital, the quality of the labor force, and the
rate of return to investment in education and
training.
There is reason to be both encouraged and
concerned about what the recent trends in
human capital formation imply for productivity growth. On the plus side, the aging of the
baby-boom generation will make the work
force of the 1990s more experienced; the average worker will have had more on-the-job
training. In addition, as described in Part
III-D, "Investing in Human Capital," the Administration is committed to improving the
quality of American education and job training.
On the other hand, the average level of educational achievement remains disappointing,
far below that of students abroad. Furthermore, an increasing share of future school children and new workers will come from minority groups that our educational system has
been least successful in reaching.
Investing in People
Because of its substantial returns, governments, individuals and businesses invest heavily in education and training. In calendar year

30
1988, $330 billion—nearly seven percent of
GNP—was spent on private and public school
education. Roughly 60 percent of this amount
went to elementary and secondary schools; the
remainder, to colleges and universities. The
Federal Government spent about $20 billion,
directly and indirectly, through grants to State
and local governments. That sum does not include funds for Head Start and worker training, which are also investments in human capital. In addition, businesses spend about $30
billion annually for direct training of their
workers. All of these outlays together were
two-thirds as large as the total physical investment of business in new plant and equipment
in 1988, and they do not even include the forgone earnings and out-of-pocket expenses of
students and trainees, which often exceed the
direct expenses.
Looking at it another way, the stock of
human capital can be thought of as the discounted value of the future stream of income
provided by that capital. A more educated and
better trained population produces a larger
stream of income. A recent estimate of the
value of human capital using this method reveals, indeed, that our Nation's wealth resides
in its people, rather than its material possessions: the stock of human capital based on discounted future life-time earnings is estimated
to be three and a half times larger than the
stock of private nonhuman wealth.
Contribution to Productivity Growth
The "quality" of the labor force is an ambiguous term, but work experience, years of
schooling, and the quality of our educational
system are all elements of it. Studies of the
first two factors, conducted at BLS, suggest
that there was a favorable shift in the quality
of the labor force during the 1980s. By contrast, during 1973-79, the influx of baby
boomers into the labor market reduced the average work experience of both men and
women, partially offsetting the contribution to
labor quality from an increase in years of
schooling. In the 1980s, both work experience
and years of schooling were on the rise.
These improvements had important consequences for the growth of productivity, raising
it by 0.3 percentage point per year in 1979-87,
compared with no positive impact during




THE BUDGET FOR FISCAL YEAR 1991

1973-79. Although a contribution of 0.3 percentage point per year might appear small, it
accounts for 25 percent of the overall rise in
productivity of 1.2 percent per year during the
1980s. In dollar terms, the upward shift from
the flat trend of the 1970s boosted real GNP in
1987 by about $80 billion.
Both work experience and years of schooling
could provide a still larger contribution to productivity growth through the year 2000. By
then, the average age of the labor force will be
just over 39 years, up SV2 years from the late
1980s. (During the 1980s, it rose about a year
and a half.) Because length of work experience
is related to the age of the labor force, there
should be a similar or even larger gain in this
component of labor quality. Years of schooling
should also be on the rise.
The challenge will be to make the quality of
those years of education better than it has
been in the past. How well or how poorly students learn the essential skills of reading, listening, writing, analyzing, and thinking has
serious consequences for productivity growth.
Between 1967 and 1980, the average scores obtained by students taking standardized general
intellectual achievement tests fell by the
equivalent of 1XA grade levels. If, instead,
scores had increased at the pace of the prior
quarter century, the improvement in productivity growth observed in the 1980s, as these
students matured and entered the labor force,
would have been even stronger. By 1987, real
GNP could have been two percent higher, a
gain of over $85 billion above the actual level
of output. The nonmonetary benefits to society
from a better educated population would have
made the total gain even larger.
Benefits to Investment in Human Capital
The more educated a person is, the greater
is the likelihood of success in the labor market.
Among persons aged 25-34, almost 90 percent
of those graduating from college were in the
labor force in 1988, compared with 82 percent
for high school graduates and 69 percent for
those without a high school degree. The average unemployment rate for these college graduates in 1988 was just 2.3 percent. The rate for
those finishing high school was 6.9 percent; for
those dropping out of high school but still in
the labor force, 13.9 percent.

III.A.

31

INCREASING SAVING, INVESTMENT AND PRODUCTIVITY

1988 EDUCATIONAL ATTAINMENT AND MEDIAN EARNINGS
(Dollars)
Under 35 years
All
workers

Year-round fulltime workers

Male

Less than 4 years of high school
1 to 3 years of college
4 years or more of college

The monetary returns to investment in education and training are substantial. For people
under 35 years of age working full-time during
all of 1988, the average earnings for college
graduates were twice those of people without a
high school degree. The relative effect of education is enormously magnified when the earnings-depressing effect of unemployment is considered as well. In 1988, the average earnings
of all college-educated male workers under the
age of 35 were about six times larger than that
for men with less than 4 years of high school,
many more of whom were not working; for
women, the differential was 9 to 1.
In light of the close relationship between
education and income, it is not surprising that
the poverty rate is highest among families
with the least education, and falls off sharply
as educational attainment rises. In 1988, 21
percent of all families headed by someone
without a high school degree were in poverty.
The poverty rate for families headed by a high
school graduate who had not gone on to college
was only 8.9 percent; and for those with one or
more years of college, the rate was just 3.5
percent.
Experience on the job has a measurable
effect on human capital and on earnings. Holding education levels constant, an additional
year of work experience in the mid-1980s is
estimated to have boosted real earnings by
about 2V2 percent. For those recently entered
into the work force with only 5 years of experience, the payoff from additional experience
was a much larger 6.4 percent for men and 4.6
percent for women. These newer workers were



Female

Male

Female

4,720
15,540
26,310

2,160
9,510
18,850

14,790
20,620
30,440

10,500
15,220
23,260

on the steep part of the learning curve, where
additional time on the job adds substantially to
their skills.
The monetary returns to investment in
human capital are just one of its benefits.
Higher levels of educational attainment result
in better health, better child rearing, reduced
crime, and increased donations of time and
money to charity. A better educated citizenry
is able to make more intelligent choices. Such
external effects provide the rationale for the
public support of education.
PRIVATE PHYSICAL INVESTMENT
Business capital formation provides workers
with the tools they need to work effectively.
The increase in the ratio of business capital to
labor has been the single largest source of productivity growth throughout the postwar
period. It accounted for about two-thirds of the
increase in productivity from 1979 to 1987.
This section discusses recent changes in the
determinants of business investment, focusing
particularly on changes in Government policies. It analyzes how investment has responded
to these policies. And it concludes that additional investment, and therefore additional
saving, will be needed to meet the challenges
of the 1990s and beyond.
Determinants of Investment
Business fixed investment is determined by
the change business desires in its stock of fixed
capital. Decisions to spend on plant and equipment are made by comparing the benefits—the

32

THE BUDGET FOR FISCAL YEAR 1991

net revenues to be earned from additional
sales of output—and the costs. Therefore, expected sales have a dominant influence on the
rate of investment by business. Although the
1980s began with a deep recession, it has been
followed by 7 years of economic expansion.
There were pauses and not all sectors or regions benefited equally or at the same time,
but the overall strength of the economy in the
1980s was a plus for business investment.

ed, which has greatly increased their share of
investment dollars. The cost of capital also reflects the expenses of maintaining capital as it
ages. If these costs are not covered, the investing firm will not preserve the capital value of
its assets.
The cost of capital also depends on interest
rates. When interest rates rise, the carrying
cost of capital increases. This is obviously so
when capital is financed by borrowing, but it is
also the case when equity investment is the
source of the funds, because interest income is
forgone when investing in equities. Real interest rates reached record highs in the first half
of the 1980s. Rates came down somewhat in
recent years in response to lower budget deficits and reduced inflation expectations but,
even so, the dearth of saving helped to keep
rates high. For the decade as a whole, real
interest rates on corporate borrowing averaged
about 6 percent, compared with under 3 percent in the prior two decades.

The cost of capital also determines business
investment. A lower cost of capital can induce
additional investment even when sales are not
expected to change. This is a complex calculation with several elements. First, it depends on
the actual purchase price of capital. A lower
price relative to other goods and services will
encourage businesses to use more capital.
Prices for business plant and equipment have
been rising much more slowly than for output
generally over the past two decades. Indeed,
the effective price for computers has plummet-

REAL CORPORATE INTEREST RATES *
(Calendar Year)

Percent

10

9
8
7
6
5
4
3
2
1

0
-1

1960

62

64

66

68

70

72

74

76

78

80

82

84

86

88

* The real rate equals the corporate AAA bond rate leaa the 4 quarter percent change in the GNP
fixed weighted price index.




III.A.

INCREASING SAVING, INVESTMENT AND PRODUCTIVITY

It is the after-tax return on capital that
really matters to investors, so taxes also affect
the cost of capital. High tax rates can raise the
cost of capital sufficiently to discourage investors from undertaking otherwise profitable investments. The impact of tax changes on capital costs in this decade has been mixed. The
1981 Economic Recovery Tax Act reduced the
cost of capital by accelerating depreciation
schedules, increasing the investment tax credit
for some types of equipment, and lowering the
maximum marginal tax rate on capital gains
to 20 percent. The 1986 Tax Reform Act had
mixed effects. It raised the cost of capital by
repealing the investment tax credit, lengthening depreciation guidelines for structures, and
eliminating the preferential tax treatment of
capital gains. But the Act also lowered the top
corporate tax rate from 46 to 34 percent. Overall, the changes in the 1986 Act diminished the
distortion between one kind of investment and
another that was inherent in such special provisions as the investment tax credit. Therefore,
tax reform promises to have long-term positive
effects on investment and the economy by increasing economic efficiency.
Finally, the general investment climate
shapes business expectations and thus helps to
determine the level of investment. In a climate
of rapidly rising and widely fluctuating prices
such as prevailed in the 1970s, price signals
are distorted. Uncertainty about the future is
increased, inducing private decision makers to
emphasize the short run. High real interest
rates can have a similar effect on business
incentives, favoring quick payoff investments
over those requiring longer commitments.
The Effect on Investment
As a result of the relatively favorable cast of
some determinants of investment—economic
growth, the tax and regulatory environment,




33

and capital goods prices—the share of real
gross business fixed investment in real GNP
reached its highest postwar levels in the investment boom of the mid-1980s. As the chart
shows, it remained near those levels in late
1989. By contrast, real net business fixed investment measured as a share of Net National
Product has been on a declining trend for
almost a quarter of a century, reaching a postwar low during the 1981-1982 recession but
hardly recovering thereafter.
It is important to understand why the two
differ. There has been a major shift in the
composition of investment over the last 25
years away from structures and towards equipment. This shift was accentuated in the 1980s
when investment was concentrated on computers, which have a very short service life. Because the average service life of capital goods
is shorter, depreciation now equals a larger
share of total investment. Thus, trends in
gross and net investment diverge.
These considerations argue for taking the
actual level of capital services into account
when estimating productivity, rather than any
single measure of gross or net investment.
That is how the contributions of capital to productivity, shown in the table on sources of
labor productivity growth, were estimated.
When that is done, the contribution of business fixed investment, as reflected in the rate
of change in the capital/labor ratio, turns out
to be about the same in the 1980s as it was in
the 1970s and earlier decades. There was no
decline in the past decade, but there was not a
major improvement either.
To increase the supply of capital services
used by business—which is what counts for
accelerating productivity growth in the longrun—will require more investment, and therefore more saving, than the Nation has
achieved in recent decades.

34

THE BUDGET FOR FISCAL YEAR 1991

REAL NONRESIDENTIAL INVESTMENT RATIO
Percent

CALENDAR YEAR

FEDERAL INVESTMENT IN PHYSICAL
CAPITAL
In addition to its support for R&D and
human capital, the Federal Government invests in tangible capital, some of which contributes to economic growth and the rest of
which contributes to national security or
serves other public purposes. Federal outlays
for physical investment are estimated to be
$131.6 billion in 1991, up 54.6 percent in real
terms from 1980. They will amount to 10.7
percent of Federal outlays. This section analyzes the composition and effects of such investment; more detailed data are provided in
Section Two, Part IV-F.

nondefense programs. Most defense investment
is for weapons and other equipment (e.g.,
ships, planes, and computers); one-tenth is for
construction.
Defense has accounted for most of the
growth in real Federal physical investment
since 1980. In this budget, the President proposes to reduce real defense investment, accelerating a change in direction that began in
1988. Details concerning the defense investment proposed for 1991, and the changes in
international conditions and strategies on
which the proposals are based, are discussed in
Part III—I, "Preserving National Security and
Advancing America's Interest Abroad."

Direct Federal Investment

Direct Federal Nondefense Investment

National defense accounts for $87.9 billion,
or two-thirds of the total Federal physical investment proposed for 1991. Defense is very
investment-intensive; 29.0 percent of the defense budget currently goes for investment,
compared with 4.7 percent of the outlays for

The Federal Government also invests directly in nondefense physical capital. This budget
proposes $18.2 billion for such projects, including the space investment described in Part
III-B, "Expanding the Human Frontier;"
major improvements in the air traffic control




III.A.

INCREASING SAVING, INVESTMENT AND PRODUCTIVITY

35

system described in Part III-G, "Improving the
Transportation Infrastructure;" and computer
purchases to improve Federal management.
This category also includes investments made
by the Army Corps of Engineers, the Tennessee Valley Authority, and the VA health care
system. Proposed outlays for such projects are
$5.0 billion in 1991, up 12.2 percent from 1990.

1950s. More than half of these grants are spent
for highways; the rest for community and regional development, mass transit, pollution
control facilities, and airports. For these types
of projects, Federal grants finance a large
share of State and local investment; for other
types, such as schools and prisons, Federal
grants finance little or nothing.

Direct Federal investment surged during the
1960s when the Apollo program geared up.
Thereafter, it grew in real terms roughly in
line with the growth of total real Federal outlays. Including R&D, this budget proposes an
increase of 20.8 percent in total outlays for
space investment from 1990 to 1991.

Capital grants to State and local governments grew rapidly in the 1950s and remained
high during the 1960s and 1970s. The initial
increase was largely for the interstate highway
system. Subsequently, grants for mass transit,
community and regional development and pollution control expanded. Since 1980, grants
have declined in real terms, with the largest
declines coming in the areas of community and
regional development and pollution control.
Grants for highways and other forms of transportation are now higher in real terms than in
1980. The budget would maintain current
spending levels for highways and provide increases in mass transportation and airport
grants.

Capital Grants to State and Local
Government
Of the $43.7 billion proposed to be spent on
nondefense physical capital in 1991, 58.5 percent is in the form of grants to State and local
governments, which make the actual investments. This has been the principal form of
Federal nondefense investment since the late




36

THE BUDGET FOR FISCAL YEAR 1991

FEDERAL INVESTMENT IN PHYSICAL CAPITAL
(Dollar amounts in billions)
1960

Current dollars:
Direct investment in physical capital:
National defense
Nondefense
Subtotal, direct
Grants to State and local governments
Total
Constant 1982 dollars:
Direct investment in physical capital:
National defense
Nondefense
Subtotal, direct
Grants to State and local governments
Total
Percentage of total Federal outlays in current dollars:
Direct investment in physical capital:
National defense
Nondefense
Subtotal, direct
Grants to State and local governments
Total

When the benefits of capital projects are
limited to the locality where they are built, it
is more efficient, as well as more equitable, for
State and local governments to make the decisions and provide the funds. If outside funds
are provided, it is more likely that the projects
will fail to meet the test of balancing expected
future benefits against the cost of investment.
At the same time, there is no guarantee that
Federal funding for capital projects will actually result in greater spending for such investments.
Contribution to Growth
The Federal Government rarely invests to
earn income, as businesses do. However, a
small part of its investment is recovered, in
whole or in part, by subsequent revenue that
is paid by the buyers or other beneficiaries of
the services that these investments help to



1970

1980

1985

1989

1990

est.

1991

est.

17.2
1.9

23.6
2.5

32.5
8.1

78.0
11.7

90.5
13.9

90.4
15.5

87.9
18.2

19.1
3.3

26.1
7.1

40.5
22.5

89.7
24.9

104.4
24.5

105.9
25.3

106.1
25.6

22.4

33.2

63.0

114.6

128.9

131.2

131.6

51.7
5.9

55.8
6.1

39.6
9.1

72.3
11.4

87.4
13.2

84.0
14.1

78.4
15.9

57.6
12.2

61.9
19.4

48.7
24.6

83.7
22.9

100.6
20.3

98.1
19.9

94.2
19.1

69.8

81.3

73.3

106.6

120.9

118.0

113.3

18.6
2.1
20.7
3.6
24.3

12.1
1.3
13.4
3.6
17.0

5.5
1.4
6.9
3.8
10.7

8.2
1.2
9.5
2.6
12.1

7.9
1.2
9.1
2.1
11.3

7.5
1.3
8.8
2.1

7.1
1.5
8.6
2.1
10.7

11.0

provide. Examples include TVA plant and
equipment and many Corps of Engineers
projects.
There are only a few studies that estimate
the impact of government physical investment
on productivity and economic growth. It is intuitively apparent that some public investments—particularly those on infrastructure
such as streets, highways, airports, and water
and sewer systems—provide direct productive
services and are complementary with private
capital. Comparisons over time and across
countries indeed seem to indicate that some
relationship may exist between additions to
such capital and growth.
The Federal Government owns a small, but
significant share of the Nation's nondefense,
nonresidential capital stock; according to Department of Commerce estimates, it is about 5

III.A.

INCREASING SAVING, INVESTMENT AND PRODUCTIVITY

percent. Unlike private businesses, the Federal
Government also pays for capital owned by
others. Its capital grants to State and local
governments have contributed to their 26 percent share of the nondefense, nonresidential
capital stock. The State and local share is so
much larger not only because of Federal
grants, but also because so many capital-intensive government activities—such as water and
sewer systems—are State and local responsibilities.
The charts below show the real nondefense
capital stock of the Federal and State and local
governments, net of depreciation, as well as

$ Trillions




37

the net investment or the annual change in
these stocks. The Federal nondefense capital
stock has grown at a steady but slow pace.
State and local capital increased rapidly in the
1950s and 1960s, with major investment in
highways, other infrastructure, and schools in
order to make up for low investment during
the Depression and World War II and to accommodate the rapid growth and dispersion of
the population during the postwar decades.
The rate of growth in the State and local capital stock declined from the mid-1960s through
the early 1980s. But from then to the present,
it has once again accelerated.

REAL NET GOVERNMENT
CAPITAL STOCK, EXCLUDING MILITARY
(In 1982 Dollars)

CALENDAR YEAR

38

THE BUDGET FOR FISCAL YEAR 1991

$ Billions

CHANGE IN REAL NET GOVERNMENT
CAPITAL STOCK, EXCLUDING MILITARY
(In 1962 Dollars)

END OF CALENDAR YEAR

REPRISE: TOTAL FEDERAL
INVESTMENT
In total, Federal investment for R&D, for
human capital, for physical capital, and for
commodity inventories and other outlays classified as investment proposed in this budget
for 1991 is $237 billion, up almost 13 percent




from 1989 despite a leveling in defense investment. The table below summarizes these investment totals. Part VI-A of this Section,
" Accounting for Debt and Unfunded Annuities/' compares the increase in Federal investment with the increase in Federal debt.

III.A.

39

INCREASING SAVING, INVESTMENT AND PRODUCTIVITY

SUMMARY OF FEDERAL INVESTMENT
I960

In billions of dollars:
Total Investment
R&D
Human Capital
Physical Capital
Other Investment
In billions of 1982 dollars:
Total Investment (excluding Other Investment)1
R&D
Human Capital
Physical Capital
As percent of outlays:
Total Investment
R&D
Human Capital
Physical Capital
Other Investment
1

1970

1980

1985

1989

1990

1991

31.4
7.3
1.7
22.4
_

56.5
15.2
8.2
33.2
-0.1

119.4
30.2
26.2
63.0

184.8
47.2
23.0
114.6

210.4
60.8
28.2
128.9
-7.5

231.8
62.2
28.9
131.2
9.5

237.0
65.0
31.4
131.6
9.0

110.4
33.2
7.4
69.8

148.0
44.4
22.4
81.3

140.9
36.5
31.1
73.3

169.0
42.4
20.0
106.6

190.0
47.8
21.3
120.9

185.9
47.1
20.9
118.0

182.1
47.2
21.6
113.3

34.1
7.9
1.8
24.3

28.9
7.7
4.2
17.0

20.2
5.1
4.4
10.7

19.5
5.0
2.4
12.1

19.4
5.2
2.4

—

—

—

—

18.4
5.3
2.5
11.3
-0.7

19.2
5.3
2.5
10.7
0.7

—

—

11.0
0.8

Other investment includes financial assets and commodity stockpiles for which there are no appropriate deflators.

SAYING
Without saving, no resources would be available for investment. Someone must forego additional current consumption in order for investment plans to be realized. Ultimately, the
rate of capital formation and the benefits that
flow from more investment depend on the willingness to save. The cost of capital links saving
and investment by serving as a rationing
mechanism that limits total investment to the
resources made available by saving.
In a closed economy, where investors are
unable to borrow from abroad, a low saving
rate is reflected in a high cost of capital because that is what it takes to restrict investment sufficiently to match the lack of saving.
In an open economy, where domestic investors
can borrow from foreign savers, domestic
saving is no longer the sole constraint.
The global integration of financial markets
has cushioned U.S. domestic investment partially from the effects of a sharp decline in the
domestic saving rate in the 1980s. This openness to foreign capital inflows has helped to



sustain our economic growth. However, this is
a second-best solution in comparison with increasing domestic saving. When foreign savers
provide capital, the future interest and dividend returns flow abroad rather than providing income for Americans.
This section reviews the sources of saving,
including both domestic and foreign. The total
amount of domestic saving equals the sum of
all the saving done by households, businesses,
and governments. The focus here is on the
behavior of households and the Federal Government. These are the sectors mainly responsible for the recent decline in the national
saving rate. The section ends with an international comparison of saving that emphasizes
the effects of tax systems on overall saving.
Trends in Domestic Saving

The table below summarizes postwar saving
trends. Gross domestic saving averaged 16.5
percent of GNP during the 1960s and 1970s,
and then fell by more than 2 percentage points

40

THE BUDGET FOR FISCAL YEAR 1991

to 14.1 percent in the 1980s. This decrease reflected both a widening of the Federal budget
deficit and a marked decline in the measured
personal saving rate. State and local governments ran surpluses, and thus helped to cushion the decline in the gross domestic saving
rate; this, however, was largely due to their
growing pension fund reserves associated with
future pension liabilities. Gross business
saving—the sum of undistributed corporate
profits and business depreciation allowances—
averaged 12.8 percent of GNP in the 1980s,
slightly higher than in the prior two decades.

ately greater decline, from an average of 8.2
percent of NNP (net national product) during
the 1960s and 1970s to 3.4 percent in the 1980s.
Two-thirds of this decline was due to the deepening Federal deficit. The remainder was
equally divided between a decline in personal
and in business saving. Gross business saving
has been sustained by the substantial increase
in depreciation allowances due to the shift to
short-lived capital goods discussed in the previous section. Net business saving—retained
earnings—has been on a downtrend.

Net domestic saving, which deducts depreciation from gross saving, showed a proportion-

GROSS DOMESTIC SAVING
(As percent of GNP)
Gross
domestic
savins
B

1960-69
1970-79
1980-89
1980-85
198 6
198 7
198 8
1989: Q1-Q3

State

=

Pers

?nal
saving

16.3
16.7
14.1
14.9
12.4
12.2
13.2
13.5

+
^

Business
saving

4.6
5.6
3.8
4.4
3.0
2.2
3.0
3.9

^

11.9
12.0
12.8
13.1
12.9
12.4
12.2
11.5

Federal
saving

^

-0.3
-1.7
-3.8
-3.9
-4.9
-3.6
-3.0
-2.8

and
local
saving

—
0.8
1.3
1.3
1.5
1.1
1.0
0.9

NET DOMESTIC SAVING
(As percent of NNP)

1960-69
1970-79
1980-89
1980-85
198 6
198 7
198 8
1989: Q1-Q3




8.6
7.9
3.4
4.0
1.7
1.7
2.9
3.3

p

=?
5.1
6.2
4.3
5.0
3.3
2.5
3.3
4.3

+

+

3.8
2.7
1.9
1.9
2.2
1.9
1.8
1.1

stf
-0.3
-1.9
-4.3
-4.4
-5.5
-4.0
-3.3
-3.1

•

H
—
0.9
1.4
1.5
1.7
1.3
1.1
1.0

III.A.

INCREASING SAVING, INVESTMENT AND PRODUCTIVITY

PERSONAL SAVING
Individuals and households save for many
purposes. For most people, the dominant
motive seems to be saving for consumption
during retirement, although some do not draw
down their assets and even continue to save
after retirement. Others save to buy homes, to
invest in their children's education, or to cushion unpredictable events such as unemployment or prolonged illness.
Over the years, many Federal programs
have been created that help people to meet
these needs, including programs that foster
private pensions, medicare, medicaid, unemployment insurance, mortgage guarantees, and
student loan guarantees. But the largest and
most significant program is social security,
which not only provides income during retirement, but protects against both inflation and
the "risk" of very long life.
Both the retirement income and the reduction in uncertainty provided by social security
diminish the need for personal saving. On the
other hand, to the extent that the program
encourages people to plan an earlier retirement, it increases the incentive for personal
saving. On balance, social security has probably reduced personal saving. Since there has
been no corresponding increase in saving by
the Federal Government, total domestic saving
has probably been lower over the years, although the statistical evidence is not conclusive.
The Mystery of the Personal Saving Decline
In the 1980s, personal saving declined to a
particularly low level despite favorable tax
changes and high real interest rates, which
should have encouraged saving. Personal
saving fell by all official measures compared
with previous decades, although the decline
was greater as measured in the national
income and product accounts (NIPA) than in
the flow of funds accounts (FOF), which include purchases of consumer durables in their
definition of personal saving.1
In some ways, the 1980s offered a favorable
climate for saving. The 1981 Economic Recov-




41

ery Tax Act reduced taxes on saving by lowering marginal tax rates for the first time in
almost two decades. The 1986 Tax Reform Act
lowered the top marginal tax rate from 50 percent to 33 percent, and phased out the tax
deductions for most consumer interest expenses. Furthermore, real interest rates were
high. These developments should have been
conducive to a higher rate of personal saving.
Other factors were evidently at work. In
part, lower personal saving in the 1980s reflected a demographic phenomenon—the entrance of the baby-boom generation into the
prime buying and borrowing phase of their
lives. This increased the demand for cars and
home appliances.
Another important reason for the decline in
the personal saving rate was undoubtedly the
increase in the value of household wealth.
Since 1982, household financial assets have
been substantially revalued by the surge in
stock and bond prices. In the 1970s, and to a
lesser extent in the 1980s, rising home prices
had a similar effect on household wealth. Neither the NIPA nor the FOF saving measure
takes account of the appreciation in asset
values. But for individuals, higher prices for
the assets they own, including their homes, are
financially equivalent to new saving.
Employers' contributions to pensions are included in personal income and saving. Such
contributions grew rapidly during the 1970s,
partly because many private pensions were not
adequately funded. Statutory changes required
a higher degree of funding, which raised personal income, saving, and the saving rate. But
in the 1980s, with the boom in stock prices,
employers' contributions to pension plans have
been scaled back considerably, lowering the
measured personal saving rate but adding to
business saving.
1
Both measures of saving reflect new purchases of housing
(housing purchases are classified as investment, not consumption,
so they are automatically included in saving which is defined in
both sets of accounts as the difference between income and consumption). Neither measure of saving, however, reflects the revaluation of housing or other assets, so if existing houses become more
valuable, the increase in wealth that this represents is not included in saving. In principle, asset revaluations should be reflected in
the saving rate, but accurately measuring such capital gains presents practical difficulties.

42

THE BUDGET FOR FISCAL YEAR 1991

PERSONAL SAVING RATES
AS A PERCENT OF DISPOSABLE INCOME
Percent

CALENDAR YEAR

To the extent that demographic factors were
responsible for the decline in personal saving
in the 1980s, there is reason to expect that
saving may recover somewhat in the 1990s.
These should be high-earning years for the
baby-boom generation as they enter their 40s
and 50s. If they follow the pattern of earlier
generations, these will also be their high
saving years as they prepare for retirement in
the next century. But relying on demographic
developments alone to raise the saving rate
would be unwise.
FEDERAL DISSAVING
The Federal Government has run a budget
deficit for most of the past 60 years. In 1979, at
the end of the business expansion of the late
1970s, the deficit had fallen to less than 2 percent of GNP. Over the next 4 years, it rose,
reaching 6.3 percent of GNP in 1983. The deficit was pushed up initially by the two business
recessions at the beginning of the decade, but
when the economy began to recover, the deficit



was slow to decline. In 1987 the deficit began
to show a significant decline, and by 1989 it
had dropped to just under 3 percent of GNP.
But this still represents substantial Federal
dissaving, especially coming after a lengthy
period of economic growth. Borrowing to finance the deficit, in effect, "uses up" part of
the limited supply of private saving.
Federal dissaving, combined with the decline
in private saving, has had significant economic
consequences. The insufficiency of total national saving was evident in the high real interest
rates charted in the business investment section above. High rates of interest kept the cost
of capital high, diminishing domestic investment, slowing the growth of the capital stock,
and, ultimately, lowering the future path of
GNP. These effects have occurred despite a
massive inflow of foreign saving (discussed
below), though the importation of savings mitigated the effect on investment. With the need
to expand potential capacity and to increase
domestic saving so evident, Federal deficit re-

III.A.

43

INCREASING SAVING, INVESTMENT AND PRODUCTIVITY

duction must be looked to for a substantial
share of the required improvement.

two. Given the sharp decline in U.S. net domestic saving, private investment would have
fallen much more than it did if capital had not
flowed in from abroad.

FOREIGN SAVING

Although it is possible for a country to run a
current account deficit for as long as foreigners are willing to add to their net holdings of
its assets, there is a tendency over time for
such imbalances to be corrected. Eventually,
the United States' reliance on foreign capital
will decline. When that happens, the United
States will have to increase its export earnings
to service the capital it has borrowed abroad.
During the transition to a higher level of net
exports, either consumption or domestic investment will have to grow more slowly than total
national output. The best way to manage this
transition would be to increase domestic
saving by both Government and the private
sector. That would have the advantage of cushioning domestic investment, while voluntarily
slowing the growth of consumption.

The United States current account deficit
widened from a small deficit of $7.0 billion in
1982 to a record deficit of $143.7 billion in
1987. It has narrowed in the past 2 years,
reaching an annual rate of $113.5 billion in the
first three quarters of 1989. The counterpart to
our current account deficit is a capital account
surplus represented by foreign capital inflows,
or foreign investment in the United States.
International capital markets channel resources from countries with excess domestic
saving over investment (e.g., Japan) to those
where domestic saving is low relative to domestic investment. The table below shows
trends in United States domestic saving and
investment, highlighting the role of the foreign
saving inflow in closing the gap between the

SOURCES OF U.S. NET INVESTMENT
(As percent of GNP)

U.S. net
saving

Inflow
of
foreign
saving

Net
private
domestic
investment

1960-69
1970-79
1980-89

7.7
7.1
3.0

-0.6
-0.2
1.6

7.1
6.8
4.6

1980-85
198 6
198 7
198 8
1989: Q1-Q3

3.6
1.5
1.4
2.4
2.5

0.9
3.2
3.3
2.4
1.9

4.5
4.7
4.7
4.9
4.4

INTERNATIONAL SAVING COMPARISONS
The United States national saving rate has
ranked near the bottom among the major industrial countries throughout the postwar
period. Personal saving is considerably lower
than in other countries, even after adjustments are made for differences in definition.



The rate of general government saving in
the United States also ranks low. The gap is
particularly wide when comparing the U.S.
saving rate with those of Japan and Germany.
In the international system of national accounts on which these comparisons are based,
some public physical capital formation is treat-

44

THE BUDGET FOR FISCAL YEAR 1991

ed as saving. This is especially important in
the comparison between the United States and
Japan. The Japanese Government invests ap-

proximately 6.7 percent of Japanese GNP in
public nonmilitary capital. The United States
only invests about 2.1 percent of GNP.

PERSONAL SAVING RATES: 1981-86
(As percent of disposable income)

Including
consumer
durables

Gross
saving

Including
saving of
social
security

Adjusted
for private
pensions,
life
insurance

Including
inflation
gains or
losses

United States
Italy
Japan
Canada
France
Finland
U.K
Sweden

13.2
24.4
21.6
18.7
15.6
12.1
10.7
6.3

22.5
31.9
26.1
30.1
22.7
21.5
19.2
14.8

12.8
24.7
24.6
19.6
16.1
12.0
10.7
10.8

7.8
23.3
18.3
14.0
14.6
N.A.
2.7
4.3

9.9
12.0
19.7
13.9
12.0
N.A.
8.4
N.A.

U.S. ranking

5/8

5/8

5/8

5/7

5/6

N.A.: Not available.

If the comparisons were made using the
United States' national income definitions,
which exclude public capital formation from
net saving, the United States and Japanese
saving rates would be much closer. Indeed, if
the Japanese had measured depreciation as
the United States does, the two countries' net
saving rates would have approached one an-




other in the late 1970s. Nonetheless, even on
this basis, a large difference between the
United States and the Japanese saving rates
persisted throughout the 1980s due to the
higher personal saving of Japanese households
and the widening of the United States Government's budget deficit at a time when the Japanese budget deficit was declining.

NET SAVING RATES BY SECTOR, 1980-87
(Net Saving as a percentage of Net National Income)
Total

Japan
Italy
Germany
Canada
France
U.K
United States
U.S. ranking

Government*

20.3
12.8
10.8
9.9
8.6
6.3
4.2
7/7

Households

4.1
N.A.
1.4
-3.9
N.A.
-1.6
-3.9
4/5

* Includes some public physical capital investment as saving.

13.5
N.A.
8.9
9.7
N.A.
5.0
6.2
4/5

Enterprises

2.7
N.A.
0.5
4.1
N.A.
3.4
2.0
4/5

N.A.: Not available.

III.A.

INCREASING SAVING, INVESTMENT AND PRODUCTIVITY

Although the gap between U.S. and foreign
private saving rates cannot be fully explained,
several features of the tax code make saving
more costly and borrowing cheaper in the
United States.
The United States taxes nominal capital
gains more heavily than the other industrial
countries, with the exception of Australia and
the United Kingdom, both of which index longterm capital gains. Indexing reduces the effective tax rate on real capital gains compared
with the United States.
Interest income is fully taxed in the United
States and dividends from equity holdings are
taxed at both the individual and the corporate
level, a less advantageous treatment than is
typically available elsewhere. For example,
Japan has historically allowed most interest
income to escape taxation.

It is instructive to compare the United
States saving rate with that of Canada because
the two countries are closely linked geographically, economically, and culturally. For most of
the postwar period, the rate of household
saving in Canada fell short of that in the
United States, but in the last decade, it leaped
ahead when significant differences emerged in
the way the two countries tax saving. Canada
indexes capital gains before taxes, which effectively lowers the rate of tax on real capital
gains compared to the United States. Moreover, since the early 1970s, Canada has allowed even more generous tax deductions for
retirement saving plans than the deductible
IRA plan that was in effect between 1982 and
1986 in the United States. The shift in the two
countries' relative saving behavior began at
about the time when Canada introduced these
new saving vehicles.

PERSONAL SAVING
AS A PERCENT OF DISPOSABLE INCOME
Percent




45

CALENDAR YEAR

46

THE BUDGET FOR FISCAL YEAR 1991

POLICY PROPOSALS
The analysis here has shown that the United
States saving rate is low by historical standards and relative to other countries. Low
saving has contributed to higher real interest
rates, which serve to ration the limited supply
of saving. The higher cost of capital as a result
of these interest rates has held down United
States domestic investment. Investment would
have been even lower had it not been for a
massive inflow of foreign capital to the United
States in recent years, partly induced by the
high level of interest rates available here.
While foreign investment in the United States
has helped to sustain capital formation and
productivity growth, it means that the United
States has taken on debt which must be serviced through interest payments. For all these
reasons, increased domestic saving is of major
importance for promoting higher rates of
growth and an improved standard of living.
A major step the Federal Government can
take to increase total national saving is to balance the Federal budget by 1993, as called for
by the G-R-H deficit targets, and to retire Federal debt in subsequent years by the amount of
the social security surplus. It is, of course, essential that this be achieved through specific
measures that, themselves, encourage—or at
least do not discourage—private saving, investment, and productivity growth. If this is done,
the Government will become a major source of
investment resources, instead of being a drain
on private saving. Nonetheless, the decline in
the saving rate was not limited to Government, and private saving needs to increase as
well.

reaching the G-R-H targets, financial markets
will respond with lower real interest rates.
Lower real interest rates, by lowering the cost
of capital, will encourage more investment.
PROTECTING SOCIAL SECURITY
Achieving the G-R-H targets will increase
national saving, but more needs to be done to
accelerate growth and thereby ease the burden
of future liabilities. The Administration proposes to protect the integrity of the social security surplus, as described in detail in Parts
VI-A and VII-A of this Section. Under this
proposal, the social security surplus will be
preserved for the benefit of future retirees
rather than spent to finance current Government programs.
If the Government uses the social security
surplus wisely, national saving and investment
will rise and the capital stock will be higher.
Estimates based on economic growth accounting suggest that by around the year 2030 the
capital stock could be over 20 percent higher
and real GNP could be 5 to 10 percent higher
if Federal debt is retired in the same magnitudes as the social security surplus. Higher
incomes would produce a higher tax base, reducing the burden on future workers when the
baby-boom generation reaches its retirement
years.

DEFICIT REDUCTION IN LINE WITH
THE G-R-H TARGETS

Retiring Federal debt will have other favorable effects. Real interest rates should be
lower, the inflow of foreign capital should be
lessened, the current account deficit should diminish, and United States competitiveness
with the rest of the world should be strengthened.

The President's budget meets the G-R-H
target for 1991 and beyond, balancing the Federal budget by 1993. Such an improvement in
Federal finances would have a number of positive effects on saving and investment. The
budget assumes that interest rates will fall
over the next 6 years. This assumption is
based partly on the projection of continued
progress in eliminating inflation from the
economy. It is also based on the expectation
that, when further progress is made toward

Finally, augmenting national saving while
protecting the social security surplus would
avoid intergenerational inequities that would
arise if the present generation does not provide
for more capital to help fund its retirement
benefits. Resources would be provided now
through saving and investment which could be
used to meet the burden of supporting the current working population in its old age. Unless
the integrity of the social security trust funds
is protected, there is a danger that workers'




III.A.

INCREASING SAVING, INVESTMENT AND PRODUCTIVITY

living standards could stagnate in the next
century. It is important that the projected surplus of social security not be used to finance
Government consumption.
CAPITAL GAINS
Lower tax rates on capital gains are needed
to promote saving, entrepreneurial activity,
risk-taking investment—and, thereby, higher
employment and an improved quality of life.
Lowering the tax rate on capital gains would
lower the cost of capital in vital areas of investment activity. The Administration proposes reducing the tax rates on capital gains
for long-term investments by providing a sliding scale exclusion on long-term capital gains.
A 30 percent exclusion would be provided for
investments held at least 3 years. There would
also be a 20 percent exclusion for capital gains
on investments held between two and 3 years,
and a 10 percent exclusion on investments
held between one and 2 years. For investments
held at least 3 years, the maximum tax rate on
capital gains would be reduced to 19.6 percent
for taxpayers in the 28 percent tax bracket.
The 3-year holding period requirement for the
full 30 percent exclusion would be phased in
over a 3-year period. In order to focus the proposal on productive investments, capital gains
on collectibles, such as antiques and precious
metals, would not be eligible for an exclusion.
A reduction in the capital gains rate would
help United States businesses in the face of
increasing global competition. Currently, the
tax rate on capital gains in the United States
is higher than in any other industrialized
country except Australia and the United Kingdom, and both of these countries index capital
gains for inflation, thereby limiting the tax to
real gains and effectively reducing the tax
rate.
Finally, a reduction in the tax on capital
gains from its current level is likely to produce
increased receipts for the Treasury.
FAMILY SAVINGS ACCOUNTS AND
ENHANCED IRAS
The Family Savings Account (FSA) is proposed by the Administration to stimulate pri-




47

vate savings. As discussed above, savings are
at low levels both in terms of historic American experience and relative to other countries.
The proposal would exempt from income tax
the interest income for nondeductible contributions to FSAs that are held for 7 years. Nondeductible contributions to the FSA are limited
to $5,000 for joint filers and $2,500 for those
not filing a joint return. FSA contributions are
limited to joint filers with incomes below
$120,000 and single filers with incomes below
$60,000. Withdrawals taken after 7 years are
made tax free, and those made before 3 years
are subject to a 10 percent excise tax penalty
on investment income. Withdrawals made
before expiration of the 7-year period are subject to income tax on the investment income.
The FSA would expand the current limits on
tax-favored savings. It does not change current
contribution limits on 40Iks, current law IRAs,
or Keoghs. Because the FSA would increase
the contribution limits on tax-favored savings,
it would provide an increase in the marginal
incentive to save.
An additional goal of the FSA proposal is to
make savings more attractive to a larger segment of the population than is reached under
current law. The liquidity of the FSA would
encourage saving for major expenditures, such
as housing and education.
In addition, the Administration proposes to
modify current individual retirement account
(IRA) rules to allow a waiver of the 10 percent
excise tax penalty for early withdrawals of up
to $10,000 if the withdrawn funds are used for
first-time home purchases. The amount withdrawn would be taxed at the taxpayer's marginal tax rate. To be eligible for the waiver,
the taxpayer would have to be a first-time
home purchaser, and the home purchased
must cost no more than 110 percent of the
median home price in the area.
Increases in the cost of homes have made it
increasingly difficult for first-time home
buyers to enter the housing market. A waiver
of the excise tax penalty for early withdrawals
for first-time home purchases should make
IRAs a more attractive savings instrument for
individuals seeking to purchase their first
home.




III.B. EXPANDING THE HUMAN FRONTIERSPACE AND BIOTECHNOLOGY, AND THE
SUPERCONDUCTING SUPER COLLIDER
Since the beginning of civilization, humankind has sought to explore the frontier and
increase its knowledge of the world. Humans
have endeavored to discover the innermost secrets of living cells, indeed, to discover what
particles make up all matter; and to explore
our world from the deepest oceans to the outermost boundaries of our solar system and
beyond. Today there are unprecedented opportunities to expand the frontier of knowledge

and to expand human presence and activity.
The budget places a priority on three of the
most exciting frontiers now being explored:
space, to unlock the secrets of the universe;
biotechnology, to unlock the secrets of life
itself and apply them for the benefit of all; and
high-energy physics, including the development of the Superconducting Super Collider, to
unlock the secrets of matter and energy.

EXPANDING THE HUMAN FRONTIER—FUNDING SUMMARY
(Dollar amounts in millions)
Budget Authority
1990
enacted

Understanding and Exploring Space: NASA
Improving Productivity and Quality of Life: Biotechnology
Unlocking the Secrets of Matter and Energy: High
Energy Physics and the Superconducting Super
Collider

1991
proposed

Dollar
change

Percent
change

12,323

15,239

+2,916

+24

3,364

3,579

+213

+6

1,139

1,315

+176

+15

UNDERSTANDING AND EXPLORING SPACE: NASA
The exploration of space has benefits for the
United States that go far beyond the quantifiable. There are specific payoffs in the form of
new materials, technological discoveries and
microgravity research. The eventual commercialization of space will stimulate economic
growth and improved life on Earth. But no
price can be put on the lifting of the spirit of
people everywhere, like that which occurred at
the time of the Apollo landings on the Moon.
No value can be calculated for the wonder en


gendered by the pictures of Jupiter, Saturn,
Uranus and, in August of 1989, of Neptune
sent back over millions of miles by Voyager.
And no quantitative measure of any kind can
capture the benefit of expanding human horizons, human dreams, and the human domain.
The key to developing space successfully will
be stable and sustainable funding for a balanced Federal program of science, applications,
and manned space activities, coupled with encouragement by the government of develop49

50

THE BUDGET FOR FISCAL YEAR 1991

ment by the private sector of the commercial
potential of space. The 1991 budget is concrete
evidence of the firm commitment by the President to a continuing, active and exciting American presence in space—indeed, to America's
leadership in space science and exploration.
The 1991 budget proposes to allocate $15.8
billion for space activities, including $15.2 billion for the National Aeronautics and Space
Administration (NASA), an increase of $2.8 billion or 22 percent. NASA's total budget of
$15.2 billion represents an increase of $2.9 billion or 24 percent over 1990. This is the largest
increase for any major agency of the Government. It represents a commitment to a brighter future.
THE U.S. CIVIL SPACE PROGRAM
The U.S. civil space program has made
major advances and achieved stunningly ambitious goals since it was created four decades
ago.
In unmanned planetary exploration, U.S.
spacecraft have made essentially a "grand
tour" of the major planets in our solar system
and have landed unmanned vehicles on Mars
to explore its surface. In astronomy, U.S. orbiting observatories have given us a window on
the stars and into the creation of the universe.
This window will be enlarged, by several
orders of magnitude, with the long-awaited
launch in 1990 of the first of the orbiting
"Great Observatories", the Hubble Space Telescope. Earth observations satellites have given
us a wealth of information about our planet—
information that will assist us in understanding and solving our most serious environmental problems.
In 30 years, the progress of manned space
flight has been truly amazing: the time from
the first suborbital flight by Alan Sheppard to
the first steps by humans on another heavenly
body—the Moon—was less than a decade. This
was followed by the development of the world's
only manned reusable space vehicle, the Space
Shuttle. This versatile vehicle can launch satellites, retrieve satellites for repair, and be
used as an orbiting laboratory. Today, the
United States, with its international partners,
is developing the Space Station Freedom,
which—when it is launched in the mid-1990s—



will be the world's first permanently-manned
microgravity and life sciences laboratory. It
will eventually have the capability to service
satellites in orbit and to serve as a way station
on the journey to the Moon and Mars. Despite
these remarkable successes, the United States
has reduced over time its funding of the space
program. The following chart illustrates the
historical pattern of Federal funding for
NASA.
As the figure shows, funding for space activities rose and fell precipitously during the
Apollo era, then remained level during the
1970s. Funding for space activities is now
rising again with the resumption of Space
Shuttle flights and with the development of
Space Station Freedom. Funding for space science has remained relatively stable over this
period, with some increases in recent years.
The benefits of space for the U.S. economy
and society are numerous and substantial. For
example, the satellite communications industry is a direct result of the development of
space communications technology. "Live via
satellite" would not be possible today without
the early Federal investment in space. As evidenced by a wide variety of other advances—
from new lightweight materials for aerospace
and other applications, to life-saving breathing
equipment used by firemen, to long-lived,
micro-miniaturized electronics now used in
medical equipment such as pacemakers—the
space program continues to create new business opportunities and to contribute to the
economy.
SPACE AND THE 1991 BUDGET
The 1991 budget provides major increases for
space activities—including research, development, and operations—to meet four broad objectives, all of which are important to maintaining the Nation's world space leadership.
These areas are: (1) building transportation infrastructure; (2) expanding the space frontier
through manned exploration; (3) using space to
increase our scientific understanding; and (4)
developing the commercial potential of space.
The following table shows the level of funding
proposed in the 1991 budget for each of these
four objectives, as well as for Space Station
Freedom (which supports all of the objectives)
and for operational activities.

III.B.

51

EXPANDING THE HUMAN FRONTIER

S Billions

IN REAL TERMS, NASA'S BUDGET HAS BEEN
REDUCED SINCE THE MID-1960'S
(Budget Authority in 1990 Dollars)

FISCAL YEAR

THE BUDGET CALLS FOR A 22 PERCENT INCREASE FOR FEDERAL CIVIL
SPACE ACTIVITIES
(Dollar amounts in millions)
Budget Authority
Objective

Building transportation infrastructure
Expanding the space frontier through manned exploration...
Using space to increase our scientific understanding
Space Station Freedom
Developing the commercial potential of space
Federal operational activities
Total, all agencies
Total, NASA




1990
estimate

1991
proposed

Dollar
change

Percent
change

7,182
859
2,718
1,928
61
243

8,236
1,267
3,311
2,627
106
258

+ 1,054
+ 408
+ 593
+ 699
+ 44
+ 15

+ 15
+47
+ 22
+ 36
+72
+6

12,991

15,805

+ 2,813

+ 22

12,322

15,239

+ 2,917

+ 24

52

THE BUDGET FOR FISCAL YEAR 1991

Building Aeronautics and Space
Transportation Infrastructure
The National Space Policy mandates that
the nation maintain a balanced and flexible
space transportation infrastructure. No other
space objective would be achievable without
safe, reliable space transportation. Historically, the Federal Government has developed,
built, maintained and operated the nation's
space transportation systems—both expendable launch vehicles and the Space Shuttle.
Today, however, that is changing. Commercial
firms are providing expendable launch vehicle

services for both government and commercial
payloads. The following table illustrates the
level of Federal funding proposed for fiscal
year 1991 to meet the space transportation objective.
The budget proposes funding for Space Shuttle production and operations of $4.2 billion,
an increase of $752 million, or 22 percent, over
1990. This funding will support the launch,
mission, and landing operations for 10 Shuttle
flights planned for 1991, plus the continued
acquisition of long-lead spare parts, and support for Shuttle payloads.

THE BUDGET INCLUDES FUNDING FOR 10 SHUTTLE FLIGHTS IN 1991
(Dollar amounts in millions)
Budget Authority
1990
estimate

Space Shuttle production/Shuttle improvements
Space Shuttle operations
Space transportation capability development
Expendable launch vehicle (ELV) services 1
Tracking and data acquisition
Aeronautics R&D 2
Facilities and program management
Total
1
2

1991
proposed

Dollar
change

Percent
change

1,120
2,319
504
98
1,096
450
1,596

1,302
2,889
683
131
1,002
512
1,716

+ 183
+571
+ 179
+ 33
-94
+ 62
+ 120

+ 16
+25
+36
+34
-9
+ 14
+8

7,182

8,236

+ 1,054

+ 15

Excludes ELV's being purchased in support of robotic science missions for exploration.
Excludes R&D for the National Aerospace Plane program.

The Space Shuttle.—The Space Transportation System (STS) is composed of the Space
Shuttle fleet, currently three orbiters with a
fourth under construction, and the associated
infrastructure (such as launch pads, communications and tracking, and orbiter processing
and assembly facilities). The Shuttle is the
most versatile space launch vehicle in the
world. It is a reusable, multipurpose vehicle
that launches and retrieves satellites, and provides an orbiting laboratory for microgravity
and life sciences. Techniques for manufacturing commercially-valuable products, such as
medical diagnostics and therapeutics, have
been tested successfully aboard the Shuttle.




However, the Shuttle is also very complex
and expensive to operate. For example, the
three main engines of the Shuttle have many
thousands of moving parts, each of which must
function perfectly during each launch. In order
to support its reusable elements, the STS requires a large infrastructure, both facilities
and personnel, to maintain and operate it.
Prior to the Challenger accident, funding for
the R&D associated with improvements in
space transportation was declining and funding for operations was increasing as the
number of Shuttle missions increased. The
Challenger accident made it clear that continued funding for R&D to maintain and improve
the safety, reliability and performance of the

III.B.

53

EXPANDING THE HUMAN FRONTIER

Shuttle is vital. This fact is reflected in the
1991 budget by the continuation of the Advanced Solid Rocket Motor program, which
will develop and produce a new, more reliable
generation of solid rockets, and by continued
funding of other necessary Shuttle improvements, such as the Advanced Turbopump for
the Shuttle main engine. Within the total for
Shuttle Production, the budget proposes $947
million for these elements, an increase of $165
million over 1990.
Expendable Launch Vehicles (ELVs).—The
National Space Policy requires that civil Federal agencies encourage, to the maximum
extent feasible, a domestic commercial launch
industry by contracting for necessary ELV
launch services from the private sector. This
policy not only encourages and supports the
growing commercial space launch industry,
but also ensures the availability of a balanced
and cost-effective mix of space launch vehicles.
NASA no longer maintains or operates its own
ELVs. In 1991, NASA will continue the purchase of ELV services for a number of important science payloads, including the Comet
Rendezvous/Asteroid Flyby and Cassini missions.
Aeronautics R&D— The goal of NASA's
aeronautical R&D program is to conduct research and develop technology to strengthen
U.S. leadership in civil and military aviation.
NASA also operates unique aeronautical research and testing facilities. The 1991 budget
reflects a strong program of fundamental research and technology, including the continuation of efforts aimed at resolving critical environmental issues associated with high-speed
flight. In addition, NASA will continue the
five-year wind tunnel revitalization program to
modernize NASA's major wind tunnels for productive use well into the next century.




Expanding the Space Frontier Through
Manned Exploration
The President has proposed that the United
States undertake an ambitious mission of
manned exploration of the solar system. This
will not be a journey of 10 or even 20 years,
but one that will continue for decades, perhaps
even centuries. This journey will require a
long-term commitment—of resources, both financial and human, and of national will.
The Government has taken the first step
toward expanded manned exploration with the
development of Space Station Freedom. The
1991 budget also funds a new initiative to support the robotic science missions and to develop the "pacing technologies" that will be
needed in the coming decade to enable the
next steps in the journey. Over the coming
months and years, the National Space Council
will be coordinating the development of the
overall strategy for pursuing the goal of space
exploration.
Space Station Freedom.—Space Station Freedom will serve a wide variety of purposes: it
will be a microgravity and life sciences laboratory, a testbed for new technologies in areas
such as life support and robotics, a platform
for astronomical and Earth observations, and a
node for on-orbit servicing of satellites. Freedom will also be the cornerstone of the President's exploration initiative in the next
decade. Assembling and operating Freedom in
space will produce advances in knowledge
about how man can live and work in space for
long, continuous periods of time. This knowledge is critical for any future journeys.
For 1991, the budget proposes a total of
$2,627 million to continue Space Station Freedom. This is an increase of $699 million, or 36
percent above 1990. It will provide for the critical transition from design to actual fabrication
of the first long-lead time hardware elements.

54

THE BUDGET FOR FISCAL YEAR 1991

CONSTRUCTION WILL BEGIN ON SPACE STATION FREEDOM IN
1991
(Dollar amounts in millions)
Budget Authority
1990
estimate

1991
proposed

Dollar
change

Percent
change

Space Station Freedom:
Research and development
Facilities and program management

1,750
178

2,431
196

+681
+18

+39
+10

Total, Space Station Freedom

1,928

2,627

+699

+36

Freedom is being developed with our international partners and is the largest international R&D project ever undertaken. Over the
past several months, the program has been revised as it became clear that the Congress
would not provide the resources that the President requested for 1990. The result of this reevaluation has been to delay the availability of
some capabilities (e.g., satellite servicing) until
the Space Station is completely assembled, and
to eliminate some high development cost items
(e.g., all A-C power system). The revised schedule calls for the first element launch in 1995,
permanently manned capability in 1997 and
completion of assembly in 1999. NASA is now
conducting an analysis of how Freedom can be
best used to support the President's exploration initiative.




Expanding the Space Frontier
Through
Manned Exploration: the Mission Back to the
Moon and to Mars.—The President has lifted
the sights of the space program with his call
for the establishment of a manned presence on
the moon and a manned mission to Mars. The
budget reflects the Administration's commitment to this mission by proposing an increase
of $408 million, or 47 percent above fiscal year
1990 levels, for space exploration activities.
The budget includes major increases for
launching robotic science missions, accelerating the development of the technology and advanced launch systems to support expanded
exploration, and proceeding with technology
development for the National Aerospace Plane
(NASP).

55

III.B. EXPANDING THE HUMAN FRONTIER

A 47 PERCENT INCREASE FOR EXPLORATION ACTIVITIES WILL SUPPORT THE
MOON/MARS INITIATIVE
(Dollar amounts in millions)
Budget Authority
1990
estimate

Expanding Exploration of Space:
Robotic Science Missions:
Life sciences
Unmanned Moon-Mars missions
Technology Development:
Space power (SP-100):
National Aeronautics and Space Administration
Department of Defense
Department of Energy
Subtotal, SP-100
Advanced Launch System:
National Aeronautics and Space Administration
Department of Defense
Subtotal, Advanced Launch System
Other Technology Development
Mission studies
National Aerospace Plane:
National Aeronautics and Space Administration
Department of Defense
Subtotal, National Aerospace Plane
NASA Facilities and Program Management
Total, Exploration Initiative

1991
proposed

Dollar
change

Percent
change

50
187

80
228

+30
+41

+ 60
+ 22

10
20
30

30
20
51

+ 20

+ 200

+ 21

+70

60

101

+41

+68

Ill

44
85

+44
-26

N.A.
-23

111
191
(15)

129
386
37

+ 18
+ 195
+ 22

+ 16
+ 102
+ 147

59
192

119
158

+60
-34

+ 102
-18

251
9

277
28

+26
+ 19

+ 10
+211

859

1,267

+408

+47

—

—

—

N.A.: Not applicable.

Robotic Science Missions.—Prior to initiating
a manned mission to the Moon or Mars, important information must be gathered about those
bodies—their surfaces, the atmosphere of
Mars—so that manned missions can be carried
out with maximum safety and effectiveness.
This information is best obtained with robotic
science missions. The 1991 budget proposes a
significant enhancement for the Mars Observer, scheduled for launch in 1992. This enhancement will support the modification of systems
and software to provide upgraded high-resolution image processing and allow more information on the Martian surface and atmosphere to
be sent back to Earth. In addition, the budget
provides funding to complete the definition
studies and cost analyses for a new mission,
the Lunar Observer, which would be initiated



in 1992 for a 1996 launch date. Modeled after
the Mars Observer, the Lunar Observer will
provide valuable information about areas of
the Moon never before examined.
Life sciences represent another critical area
of research that must be undertaken in order
to understand and potentially counteract the
effects of long-term space flight on humans.
The 1991 budget proposes $80 million for biological and space biomedical research. Within
this total, funding will be provided to complete
the definition for the Lifesat program. Lifesat
will be a series of reuseable satellites designed
to carry living specimens into orbit, to monitor
and study critical parameters such as radiation exposure, and to return the living specimens to Earth for analysis. Following the com-

56

THE BUDGET FOR FISCAL YEAR 1991

pletion of definition in 1991, Lifesat development will be initiated in 1992 with the first
launch in 1994.
Developing New Technologies for the
Future.—There are a number of technology
areas that must be investigated if future missions to the Moon and Mars are to be undertaken. These "pacing" technologies include
transportation, space power, and life support.
The 1991 budget proposes to increase ongoing
technology development programs in transportation and space power, and to make additional investments in new areas such as nuclear
propulsion and life support.
• Transportation.—The technologies inherent in the Shuttle and in the current generation of ELVs are now between 20 and
40 years old. In addition, both the Shuttle
and current ELVs emphasized performance over cost-effectiveness. Thus, there is
little chance of significantly reducing the
cost-per-pound to Low-Earth-Orbit without
major advances in launch vehicle technology. More cost-effective transportation systems would lower the cost of any future
exploration initiative. In addition, lower
cost, reliable transportation systems will
be needed if the private sector is ever to
fully exploit the benefits of space.




To address these issues, the 1991 budget
proposes $277 million in total ($119 million
for NASA and $158 million for DOD) for
the continued development of the National
Aerospace Plane (NASP), a joint NASADOD project that will develop and demonstrate technologies for hypersonic flight,
including single-stage-to-orbit. The 1991
budget also proposes $129 million for both
NASA and DOD to continue their technology development for the Advanced Launch
System (ALS). The ALS technology program will define concepts and develop
technology applicable to a new family of
launch vehicles. The long-term goal of the
program is to produce a family of lowercost, reliable and flexible launch vehicles.

• Space Power.—More efficient and highenergy power sources that are not dependent on sunlight will be necessary both for
long-term missions in space and for
manned bases on planetary surfaces. One
option is nuclear power. The SP-100 program being carried out jointly by NASA
and the Departments of Defense and
Energy is designed to test the concept of
the generation of electricity by a nuclear
reactor for space applications. The budget
proposes to increase funding for SP-100 by
68 percent, to a total of $101 million.
• Other Technologies.—There are a number
of other important technologies in which
investments must be made now to support
the exploration initiative. These technologies have the potential to significantly
reduce the cost and risk of future manned
exploration. Among these are propulsion,
including nuclear propulsion, life support,
and flexible structures (both in space and
on planetary surfaces). The 1991 budget
proposes funding of $386 million for these
technologies, more than double the 1990
level. Within this total, NASA will initiate
a new effort to seek innovative technological approaches to the challenges of
manned space exploration. In addition, the
agency will be reviewing its current technology programs with the intent of revising and refocusing these programs to support the President's goals.
Using Space to Increase Scientific
Understanding
Perhaps the greatest benefit derived to date
from our space activities is the United States'
strong and continuing tradition of world leadership in space science—most recently and vividly demonstrated by the Voyager Neptune encounter in 1989. The U.S. and the world space
science communities are anticipating an exciting new era of space science missions for planetary exploration, astronomy and Earth observations over the next decade. The budget proposes to increase funding for these activities by
$593 million, or 22 percent, over 1990 levels.

III.B.

57

EXPANDING THE HUMAN FRONTIER

USING SPACE TO INCREASE SCIENTIFIC UNDERSTANDING
(Dollar amounts in millions)
Budget Authority
1990
estimate

1991
proposed

Dollar
change

Percent
change

Other science programs
Facilities and program management
Total

861
278

985
382

+ 124
+ 104

+ 14
+ 37

415

-39
+ 25
+ 235
+ 221

N.A.
N.A.

415

376
25
235
636

506
658

559
749

+ 53
+ 91

+ 10
+ 14

2,718

Physics and astronomy
Planetary exploration
Earth observations:
Earth observation system precursors
Earth probes
Earth observation system (EOS)
Subtotal, Earth observations

3,311

593

22

—
—

-9
+ 53

N.A.: Not applicable.

This new era of space science advancement
has already begun with the successful
launches in 1989 of the Magellan mission to
Venus, the Galileo mission to Jupiter, and the
launch of the Cosmic Background Explorer
aboard an ELV. Activities planned in 1990 include the planned launches of the Hubble
Space Telescope and the Gamma Ray Observatory, two of the "Great Observatories", and the
international Ulysses mission to explore the
Sun.
The 1991 budget will also allow for the continuation of the development of important
projects such as the Advanced X-ray Astrophysics Facility, planned for launch in 1995,
the Comet Rendezvous/Asteroid Flyby and the
Cassini mission to Saturn. The budget will also
provide support for thousands of researchers
and students to acquire and analyze data from
previously launched missions.
Understanding and Observing Global Change
Earth Observations.—The budget proposes
over $1 billion for all agencies to extend U.S.
leadership in understanding global environmental change. This represents a 57 percent
increase over 1990. There are a number of
NASA activities that will make major contributions to the U.S. Global Change Research
Program (USGCRP). This coordinated multi-


250-298 O-1990-2


QL3

agency program is the world's most ambitious
global change research effort. At the Paris
Economic Summit, the President asked the
other industrialized nations to join the U.S. in
this endeavor. The complementary space-based
and ground-based research and observation
effort is designed to develop the knowledge
and data needed to support and improve policy
decision-making on issues related to global
change (e.g., global warming, ozone depletion).
(The USGCRP is also discussed in the sections
on Enhancing Research and Development, and
Protecting the Environment).
NASA is a major participant in the
USGCRP through its Mission to Planet Earth.
NASA will develop and launch a number of
satellites and instruments, including TOPEX
(to analyze surface ocean circulation) and the
Upper Atmosphere Research Satellite (UARS)
(to analyze the chemistry of the upper atmosphere). The 1991 budget proposes a major new
program, the Earth Observing System (EOS),
which is a series of space-based instruments
and platforms, developed by the U.S., the Europeans and the Japanese. EOS will be critical
to improving our understanding of Earth processes and global change since it will provide
the first opportunity to collect data simultaneously on a multitude of different features of
the planet's environment.

58
The 1991 budget proposes development of
two series of Earth-orbiting platforms, each of
which will have a number of instruments designed to collect a broad spectrum of environmental data related to global change (including global warming, drought and other phenomena). The first platform is planned for
launch in 1998. In addition, NASA will continue to develop a comprehensive data management system (EOSDIS) that will support a
wide range of research focused on studying
Earth as an integrated system, and will ensure
that scientists have timely access to Earth observations data.
In addition to EOS, the 1991 budget will initiate the development of Earth Probes, a series
of smaller instruments focused on specific,
high-priority data needs, including ozone depletion. The first Earth Probe will be launched
in 1994. Along with TOPEX and UARS, Earth
Probes will provide significant near-term scientific benefits, and will enable the testing and
validation of EOSDIS before the launch of the
first EOS platform.
Developing the Commercial Potential of
Space
The commercial space industry today consists primarily of communications satellite
manufacturers (which is a stable mature
sector) and launch service providers (which is
a new sector). There are also selected commercial efforts in areas such as microgravity. The
commercial space industry represents a promising outgrowth of the nation's space program.
The commercial space industry has grown
rapidly and has drawn hundreds of millions of
private sector dollars into private space endeavors. For example, there are now many
commercial launch providers and new launch
vehicles, based on new design concepts such as
air-launched systems and hybrid engine designs, being developed by firms willing to
shoulder the risks of space. In addition, states
such as Hawaii and Florida have started investing their own funds in the development of
commercial space launch infrastructure.
As overseer of the growing commercial space
transportation industry, the Department of
Transportation (DOT) is responsible for identifying and changing government policies and
regulations that inhibit the development of a
robust commercial launch sector and for regu


THE BUDGET FOR FISCAL YEAR 1991

lating and licensing commercial launches and
launch sites. DOT now cites over 33 U.S. and
foreign commitments to launch satellites on
U.S. commercial launch vehicles.
The 1991 budget will continue the Administration's strong support for the commercialization of space. NASA will allocate $229 million
to continue to procure all of its expendable
launch vehicle services from private launch
service providers. In addition, the budget will
provide $101 million for NASA's Office of Commercial Programs, including new funding for a
special initiative through its Centers for the
Commercial Development of Space (CCDSs) to
provide flight opportunities for innovative experiments in microgravity. The CCDSs are cooperative ventures between universities and
companies that investigate and develop new
commercial uses of space. The 1991 budget also
provides nearly a 7 percent increase, to a total
of $4.5 million, for DOT's Office of Commercial
Space Transportation.
Federal Operational Activities
The 1991 budget proposes $258 million for
the Department of Commerce satellite programs. This includes $174 million for the development and launch of replacement satellites for the current polar-orbiting and geostationary weather satellite systems and $47 million to operate those systems. The Administration is committed to operating the Land
Remote Sensing Satellites (Landsats) currently
in orbit (Landsats 4 and 5) as long as they
function, and to completing the development
and launch of the next satellite (Landsat 6).
For 1991, $37 million is requested for the
launch of Landsat 6. No funds are proposed for
the operation of Landsat 6 because these costs
will be borne by the contractor, the Earth Observation Satellite Company. No further funding is requested for Landsats 4 and 5 because
these satellites are expected to cease operating
in 1990.
The Administration is considering options
for continuing Landsat-type data after Landsat
6. No funds are required in 1991 for additional
satellites, consistent with the expected lifetime
of Landsat 6. The National Space Council will
conduct a review of the management and configuration of a follow-on system, and will
report expeditiously to Congress on the outcome of its deliberations.

III.B.

59

EXPANDING THE HUMAN FRONTIER

IMPROVING PRODUCTIVITY AND THE QUALITY OF LIFE
THROUGH BIOTECHNOLOGY
Biotechnology is an ancient practice that includes such familiar applications as the use of
yeast in baking bread and cultures in making
cheese. Recent breakthroughs in biotechnology, such as recombinant DNA techniques, cell
fusion, and gene therapy, offer unprecedented
opportunities for improving the nation's productivity, health, and well being. Uncertainties
in the returns on biotechnology investment,
however, stemming from market barriers and
unnecessary
regulation,
have
retarded
progress. Increasing Federal investment in
basic biotechnology research will spur further
advances, as will initiatives that improve the
payoffs on investments.




The budget proposes $3.6 billion, an increase
of $213 million over 1990, for biotechnology
research and development.
Advances in biotechnology hold much promise. They can help improve the availability and
quality of the food supply; prevent, identify,
and cure disease; and reduce the hazards of
industrial waste. Cell fusion, the merging of
the genetic material of two cells of different
species, can accelerate the selective breeding
process for producing hardier and more fruitful crops and livestock. Gene therapy, replacing defective genetic material with normal
DNA, may enable doctors to attack directly
the source of major diseases, including cancer.

SOURCES OF U.S. BIOTECHNOLOGY INVESTMENT, 1987
FEDERAL

60

THE BUDGET FOR FISCAL YEAR 1991

In drugs, foods, agriculture, waste management, and energy, biotechnological advances
offer the possibility of improvements that will
make a real difference in people's lives. In this
sense, biotechnology is an "enabling" technology: we may be able to make products safer or
more cheaply, and we may be able to produce
goods that we could not produce at all using
traditional methods.
In 1960, biotechnology as an industry was
nearly non-existent; in 1989, United States
businesses and government agencies invested
about $5 billion in biotechnology research, development, and manufacturing. The 1990s offer
room for still more growth, if investment is not
impeded through excessive regulation.
Biotechnology is a classic case of investing
for the future. U.S. industry is spending at
least $2 billion a year on biotechnology research and development, even though sales of
products manufactured using biotechnology
only reached the $1 billion mark for the first
time in 1989. It is clear that the private sector
believes the return on this investment will be
great. The budget reflects a similar belief for
Federal investment.
FEDERAL INVESTMENT
Twelve Federal agencies spend more than $3
billion annually for biotechnology research
and development, including the Departments
of Health and Human Services, Energy, Commerce, Defense, and Agriculture, as well as the
National Science Foundation, National Aeronautics and Space Administration, and the Department of Veterans Affairs. The budget
would expand this investment by $213 million
(or 6 percent).
Most of the support for basic biomedical research essential to the advancement of biotechnology has come from the National Institutes
of Health (NIH). The National Science Foundation (NSF), National Oceanic and Atmospheric
Administration (NOAA), and the Departments
of Energy (DOE), Defense (DOD), and Agriculture (USDA) also fund research and development projects related to biotechnology, and
Federal regulatory agencies (Food and Drug,
Environmental Protection) fund research relevant to their regulatory missions. Some service-oriented agencies, including the Depart


ment of Veterans Affairs and the National Institute for Standards and Technology, fund biotechnology research connected with their service roles.
National Institutes of Health (NIH)
The 1991 budget will maintain the nation's
commitment to pursue vigorously biomedical
research opportunities. NIH-sponsored basic
research helps form the foundation of knowledge which makes biotechnology possible. The
budget proposes an increase of $280 million for
NIH in 1991. Most of this increase will go
toward support for basic research.
Human Genome Initiative.—The 1991 budget
proposes an increase of 80 percent ($48 million
in budget authority) for NIH's human genome
initiative. Working with scientists at the Department of Energy, NIH will support research
to identify and map every one of the estimated
100,000 genes in the human body. This project
holds out the promise of benefitting humankind by identifying the genetic causes of diseases. Once these causes are identified, scientists may then be able to design therapies and
prevention strategies for genetic disorders. The
budget ensures that this tremendous opportunity will be pursued energetically in 1991.
DOE will work cooperatively with NIH
through DOE laboratories to accelerate the
mapping of the human genome by improving
gene sequencing techniques, developing new
instrumentation and exploring the unique capabilities of DOE facilities.
National Research Initiative for Agriculture
Although American farmers are among the
most productive in the world, they face significant challenges in remaining competitive
while addressing the public's concern about
food safety, nutrition and the environment.
Emerging biotechnologies may enhance our
ability to produce food and address these concerns, using innovative approaches now
beyond the reach of traditional agricultural
practice.
Thus, the 1991 budget will launch a national
research initiative more than doubling the size
of USDA's competitive research grants program, from $43 million to $100 million. This
will expand funds for plant and animal bio-

III.B.

61

EXPANDING THE HUMAN FRONTIER

technology to $50 million, to be available to
Federal research laboratories and to universities. Improved understanding of the basic biological processes that control plant and animal
development will provide the foundation for
the design of more economical production practices, to the benefit of consumers and producers alike. In addition, applying biotechnology
may allow farmers to deal with pests and disease in environmentally-safe ways, thereby reducing dependence on chemical control and enhancing the overall safety and quality of the
food supply. One important component of this
National Research Initiative is an effort to
map the genomes of important crop plants.
Like the Human Genome Initiative sponsored
by NIH, USDA's effort will permit scientists to
explore more fully the genetic potential available in plants.
INVESTMENTS BY OTHER SECTORS
The Federal Government is not the only investor in this promising field. Private firms
and state and local governments are also increasing biotechnology research.
Industry Investment
By 1975 the first firms were being formed to
commercialize biotechnological products, in
recognition of the potential of biotechnology.
More than 400 start-up firms active in biotechnology have been founded in the last 15 years.
Among established manufacturing firms, more
than 200 have diversified into biotechnology.
Two hundred additional firms support biotechnology with materials, instruments, equipment, and services. This community of firms
involved with biotechnology now provides the
United States with the world's strongest and
most diverse capability for innovation in this
expanding field.
State Investment
Over the last two decades, State governments and local groups have begun to focus
their economic development strategies on investment in high technology industries, including biotechnology. One 1986 survey of state
activity found that 33 States have allocated
funds for biotechnology through centers for excellence, university initiatives, incubator facilities for new firms, or grants for basic and ap


plied research in biotechnology. State biotechnology-related expenditures totaled approximately $110 million in 1987, the last year for
which data are available.
REGULATORY ACTIVITY
The Federal Government has the difficult
and challenging responsibility of regulating
new biotechnology products in a way that
avoids unnecessarily time-consuming and complex requirements while ensuring that new
products do not threaten public health or the
environment. In 1986, the White House Domestic Policy Council's Working Group on Biotechnology began a coordinated Federal effort
which laid the groundwork for achieving this
delicate balance in the regulation of biotechnology research and product development. The
results of this effort and the Administration's
proposals in other areas are discussed below.
POLICIES AND INITIATIVES TO SPUR
BIOTECHNOLOGICAL ADVANCES
The Administration is pursuing activities on
a number of fronts to encourage and accelerate
the advancement of biotechnology.
Continuing to Encourage Biotechnology
Industry Growth Through Cooperative
Research and Development Agreements
Over the last 3 years, scientists at the National Institutes of Health have entered into
more than 200 cooperative research and development agreements, or CRADAs, with private
industry. The majority of these agreements
have involved the development of biotechnology, as the following chart indicates. One
measure of the success of CRADAs is the
number of patents that have resulted. In 1987,
NIH filed 90 patents; in 1989, the Institutes
will file more than 200. Equally significant,
researchers and companies are entering into
these agreements with the purpose of finding
solutions to high-priority problems; for example, one NIH researcher is working on a gene
therapy for AIDS.
Other Federal agencies, such as the Centers
for Disease Control, Food and Drug Administration, and the Alcohol, Drug Abuse and
Mental Health Administration, expect to enter
into CRADAs in 1991. The following chart

62

THE BUDGET FOR FISCAL YEAR 1991

shows the number of CRADAs that have been
signed since 1986 and those that the Federal
Government expects to sign in 1991. The current rate at which the research community
develops CRADAs is expected to level off after

M

.

,

each laboratory reaches the number which it
can reasonably manage. As the early CRADA's
begin to terminate (most CRADA's have a two
to three year term), most laboratories will initiate new CRADA's to replace them.

MAKING BIOTECHNOLOGY RESEARCH DISCOVERIES
AVAILABLE FOR PRODUCT DEVELOPMENT

Number of
CRADA's Signed

Coordinating Federal Regulatory Activity
In June 1986, the Domestic Policy Council's
Working Group on Biotechnology published a
Federal Register notice entitled, "Coordinated
Framework for Regulation of Biotechnology."
This combined agency notice set out the basic
policies of the Federal agencies involved with
the review of biotechnology research and products. It was an attempt to coordinate the regulatory policies of the Federal Government and
ensure that these policies would safeguard
against abuses of the new technology without
unnecessarily restricting this young industry.
One of the major themes of the Coordinated
Framework is that regulation should focus on
the characteristics and risks of an organism or




product, not the process by which it was produced. In other words, since most scientists
agree that the use of genetic-engineering techniques presents no unique hazards, a product
should not be regulated more stringently
simply because it is genetically-engineered.
This principle has been reinforced by a
number of national and international groups
over the last few years, including the National
Academy of Sciences and the Office of Technology Assessment.
In addition, each agency identified the
changes in its regulatory processes needed to
implement the Coordinated Framework. The
Food and Drug Administration, for example,
found that no new procedures for geneticallyengineered products were required. On the

63

III.B. EXPANDING THE HUMAN FRONTIER

other hand, USDA has developed a new rule to
review genetically-engineered organisms and
products that could pose high risks as plant
pests. And the Environmental Protection
Agency is also developing new regulations to
tailor its rules and review procedures to microorganisms that are likely to pose risks.
This Administration, under the auspices of
the Council on Competitiveness, has reaffirmed the 1986 Coordinated Framework and
endorsed the continuing role of the Biotechnology Science Coordinating Committee in guiding agency efforts to implement the Framework. In addition, the President's Office of Science and Technology Policy will provide the
opportunity for comment by other Federal
agencies and by interested parties on key
issues of regulatory concern.
Speeding Up Regulatory Review Where
Appropriate
The 1991 budget proposes that the Food and
Drug Administration (FDA) establish a system
of user fees for the review of drugs and medical devices, including products that use techniques developed through biotechnology. By
substantially increasing the resources available to the FDA, user fees will enable that
agency to speed its review of biotechnology

products and, in turn, allow firms to bring
their products to the marketplace sooner. A
more efficient review process for biotechnology
products will better serve both industry and
consumers.
Accelerating the Patent Process for
Biotechnology
The swift granting of a patent encourages
both investment in biotechnology research and
the commercialization of related inventions. In
1988, the Patent and Trademark Office (PTO)
of the Department of Commerce instituted a
thirteen point plan to accelerate the award of
biotechnology patents. The 1991 budget includes additional resources to expand these efforts. The plan includes hiring 100 new biotechnology patent examiners over five years,
consolidating all biotechnology examining responsibilities and improving training for examiners. In addition, the PTO has joined with the
biotechnology industry to create the Biotechnology Institute. The Institute will bring additional technical expertise and training resources to the Patent Examining Corps. PTO is
on track to meet its goal of reducing the average biotechnology patent processing time to 18
months by 1992, bringing the pendency for
these patents in line with overall rates.

UNLOCKING THE SECRETS OF MATTER AND ENERGY:
HIGH ENERGY PHYSICS AND THE SUPERCONDUCTING
SUPER COLLIDER
HIGH ENERGY PHYSICS
The investigation of elementary particles is
a true scientific frontier. As scientists probe
further and further into the interior of atoms,
they discover new "building blocks" or elementary particles. Today it is known that protons,
neutrons, and various other particles are made
up of even smaller particles known as quarks.
Currently, investigations are underway at laboratories around the world to try to understand the forces between these quarks and to
construct theories to explain the numbers and
kinds of these quarks, as well as their physical
properties.




This research is accomplished using accelerators, machines that speed protons or electrons close to the speed of light and then allow
controlled collisions between particles in order
to probe the interactions that take place. The
higher the energy of the colliding particles, the
finer the probe into these particles. Our knowledge of elementary particles has taken giant
steps whenever a new accelerator has provided
higher energy particles.
Today, experiments in the United States are
carried out mostly by university groups working at the Nation's four large accelerator centers; the Stanford Linear Accelerator in California, the Brookhaven National Laboratory
on Long Island, the Cornell Electron Storage

64

THE BUDGET FOR FISCAL YEAR 1991

Ring accelerator in New York State, and the
Fermilab National Laboratory near Chicago.
Much of the work at Stanford involves studies of the force responsible for radioactive
decay. The particle that transmits this force is
called the Z-nought particle, and the accelerator at Stanford is being used to make detailed
measurements of the mass of this particle. At
Brookhaven, experiments are being conducted
to test the current theories that attempt to
explain the numbers and properties of the elementary particles, the so-called Standard

Model. At Cornell, experiments are being performed to investigate the properties of the bquark. At Fermilab, experiments are being
performed to try to discover a new type of
quark that has been postulated to exist. Today,
the machine at Fermilab is the world's most
energetic proton accelerator, pushing particles
to energies as great as one trillion electron
volts (1 TEV). It is expected to hold that distinction until the Superconducting Super Collider becomes operational in the late 1990s.

FUNDING FOR HIGH ENERGY PHYSICS AND THE SUPERCONDUCTING SUPER COLLIDER IS INCREASED BY 15 PERCENT
(Dollar amounts in millions)
Budget Authority
1990
enacted

Superconducting Super Collider
High energy physics 1
Total

1991
proposed

Dollar
change

Percent
change

218
921

318
997

+ 100
+76

+ 46
+8

1,139

1,315

+ 176

+ 15

1
Includes the General Science programs of the Department of Energy and the Elementary
Particle Physics program of the National Science Foundation.

THE SUPERCONDUCTING SUPER
COLLIDER

and technicians, and host an additional 500
visiting scientists from all over the world.

The Superconducting Super Collider (SSC)
will accelerate counter-rotating beams of protons to an energy 20 times greater than that of
the machine at Fermilab and then cause these
beams to collide head-on. At such energies, scientists believe that they can explore aspects of
matter that are unreachable using any existing facility: The SSC holds the potential for
new breakthroughs in science, technology and
education.

The 1991 budget provides $318 million for
the SSC, an increase of $100 million over the
1990 level. The budget strongly supports work
to complete the design, development and testing of the magnets that will propel the proton
beams around the tunnel. R&D on other SSC
technical systems will also continue.

The dominant feature of the SSC will be two
rings of superconducting magnets in a tunnel
53 miles in circumference. By comparison, the
largest existing U.S. circular accelerator (Fermilab) is 4 miles in circumference. Around this
tunnel there will be 6 areas for researchers to
conduct experiments on the colliding beams.
The SSC will employ 2500 scientists, engineers



The proposed site for the SSC is in Ellis
County, Texas, for which an Environmental
Impact Statement will be completed before
construction begins. The 1991 budget supports
a schedule for the SSC that calls for design
and construction within 10 years (by 1998) at
an estimated total cost of $5.9 billion. These
estimates are based on a 1986 conceptual
design report and are currently under review
as the development of a site-specific conceptual
design proceeds.

III.B.

EXPANDING THE HUMAN FRONTIER

In addition to the Federal support for the
SSC, contributions from non-Federal sources
are expected to fund one-third of the costs, or
about $1.8 billion. The State of Texas will contribute up to $1 billion for the construction of
on-site facilities and other SSC systems. Plans
for seeking cost-sharing agreements for foreign
contributions are also under development by
the Department of Energy.
The history of science shows that many
major advances in fundamental understanding




65
of natural processes have led to technologies,
products and processes that ultimately improve the quality of life for our citizens and
enhance the economic competitiveness of the
nation. The SSC is a critical part of the Administration's initiative to strengthen America's position as a world leader in science and
technology. It will be the symbol of the nation's commitment to scientific leadership in
this century and the next, and the concrete
manifestation of that leadership.




III.C. ENHANCING RESEARCH AND
DEVELOPMENT
RESEARCH AND DEVELOPMENT: AN INVESTMENT IN THE
FUTURE
Research and development (R&D) yields new
knowledge, products and processes that, over
the long term, result in economic growth and
improved quality of life for all Americans. Investment in research and development is a top
priority for an Administration that believes in
investing in the future. It is the key to enhancing American competitiveness, improving our
quality of life, and laying the groundwork for
building a better tomorrow.
The budget proposes to allocate about $71
billion in budget authority for research and
development, including R&D facilities, in 1991.
This is an increase of $4.5 billion, or 7 percent
over 1990 enacted levels. Civilian R&D will
increase by 12 percent while defense-related
R&D will increase by 4 percent. Within this
total, $12 billion will be allocated for basic research, an increase of $1 billion or about 8
percent over 1990.
The 1991 budget contains a number of new
and expanded programs and initiatives that
will contribute greatly to the Nation's R&D
enterprise. Examples include:

ments on space platforms to be developed
by the U.S., Europe and Japan over several decades.
• Agricultural
Research
Initiative.—The
budget proposes the first step of a new
program in agricultural research, designed
to enhance production efficiency, food
safety and environmental quality.
• Human Immunodeficiencg
Virus/Acquired
Immune Deficiencg Sgndrome.—An overall
increase of 18 percent in all aspects of the
Federal response to HIV/AIDS: research,
prevention, treatment, and income support.
• Moon-Mars Exploration.—A major new
effort of $1.3 billion to develop the enabling technologies and begin the robotic
science missions needed to carry out the
President's goal of manned exploration of
space beyond Earth orbit. This effort is the
first step toward a manned lunar base and
a manned mission to Mars.

• Doubling of the National Science Foundation budget.—An increase of over 14 percent which will continue progress toward
doubling the NSF budget by 1993.

• Space Station Freedom.—A 36 percent increase for the development of Space Station Freedom to a total of $2.6 billion. This
increase will provide for the critical transition from design to the initial fabrication
of long-lead hardware elements.

• Global Change.—An increase of 57 percent
for the U.S. Global Change Research Program (USGCRP), to a total of over $1 billion. This program places the United
States in a world leadership role in climate change research. A major portion of
this increase will be used to initiate the
Earth Observing System, a series of instru-

• Superconducting Super Collider (SSC).—An
increase of $100 million (or 46 percent) for
the SSC to a total of $318 million. This
will support continued work to complete
the design of the prototype magnets, and
transition from prototype to production.
The funding level maintains the 10-year
design and construction schedule.




67

68

THE BUDGET FOR FISCAL YEAR 1991

ENHANCING RESEARCH AND DEVELOPMENT
(Dollar amounts in millions)
Budget Authority
1990
Enacted

Major initiatives: 1
Doubling the NSF budget
Global Change
Agricultural Research Initiative
HIV/AIDS
Moon/Mars Exploration
Space Station Freedom
Magnetic Levitation Transportation
Superconducting Super Collider
Advanced Technology: Robotics
Science and Engineering Education

2,084
659
43
2,932
859
1,928
2
218
150
839

Government-wide totals:
Conduct of R&D:
Basic Research
Civilian
Defense 2
Applied Research and Development....
Civilian
..
Defense 2
Subtotal, Conduct of R&D
R&D Facilities
Total 3

..

1991
Proposed

2,383
1,034
100
3,463
1,267
2,627
10
318
192
1,061

Outlays

Dollar
change

Percent
change

+ 299
+375
+ 57
+ 531
+408
+699
+8
+ 100
+42
+222

+ 14
+ 57
+ 133
+ 18
+47
+36
+400
+46
+28
+26

11,398 12,366 +968
10,459 11,372 + 913
994
939
+ 55
52,313 55,773 +3,461
13,375 15,346 + 1,971
38,938 40,427 + 1,490

1990
Enacted

1991
Proposed

Dollar
change

Percent
change

+254
+ 258
+ 10
+749
+ 270
+764
+5
+105
+41
+ 148

+ 13
+43
+28
+31
+35
+53
+306
+ 56
+32
+ 20

+ 8 10,961 11,886 +925
+ 9 10,016 10,911 +895
945
+6
975
+ 30
+7 51,124 53,745 +2,622
+ 15 12,321 14,449 + 2,129
+ 4 38,803 39,296 +493

+8
+9
+3
+5
+ 17
+1

1,959
595
36
2,454
767
1,434
2
188
126
723

2,213
853
46
3,203
1,037
2,198
7
293
166
871

63,711 68,140 +4,429
3,023 3,059
+ 36

+7 62,085
+ 1 2,590

65,632 +3,547
2,738 + 149

+6
+6

66,734 71,199 +4,465

+7

68,370 +3,695

+6

64,674

1
Major initiatives include funds for research and development which also are included in the Government-wide
totals for R&D as well as funds from other non-R&D programs.
2
Includes military-related programs of the Departments of Defense and Energy.
3
Components may not add to totals because of rounding.

• R&D for Advanced Technology.—An increase of 28 percent for robotics R&D, and
continued support for R&D on high-performance computing, semiconductors, superconductivity and advanced imaging.
• Science and Engineering Education.—The
Administration is committed to improving
the quality of science and engineering education. The budget will propose over $1
billion for science and engineering education activities in five agencies.
• Magnetic Levitation
Transportation.—An
increase of nearly 400 percent in funding
to $10 million to explore the possibility of
stepped-up U.S. efforts in this emerging
technology.



• Intellectual Property.—The Administration
will aggressively pursue improved international protection of intellectual property.
The current negotiations in the Uruguay
Round of the General Agreements on Tariffs and Trade are an important forum for
this activity.
• R&E Tax Credit.—The Administration will
propose to make the Research and Experimentation Tax Credit permanent.
• Encouraging R&D by Transnational Companies.—The Administration will propose
to make permanent the rules for allocation by transnational companies of R&D

III.C. ENHANCING RESEARCH AND DEVELOPMENT

69

expenditures and will propose changes in
those rules.

level for R&D, or the best mix of R&D investments, the factors discussed in the following
sections provide a strong justification for greater investment in R&D and form the basis for
the initiatives proposed in the 1991 budget.

• New Product Liability.—The Administration has endorsed changes in product liability laws to help to restore balance to
the tort system, to increase competitiveness, and to reduce uncertainty—particularly for new products—while providing
incentives to produce safe products.
THE NEED FOR INCREASED NATIONAL
INVESTMENT IN RESEARCH AND DEVELOPMENT
Considerable evidence exists that further increases in national R&D investment will enhance our productivity and brighten our
future.
The contribution of R&D investment to increased productivity is discussed in Part III-A.
But historical comparisons indicate that, despite a positive rate of return on R&D investments, such investments have declined as a
share of the budget.
While it is not possible to determine analytically the "optimal" total national investment




REVERSING THE DECLINING SHARE OF
R&D EXPENDITURES IN THE BUDGET
While total Federal R&D expenditures have
remained roughly constant over the last 20
years as a share of GNP, their share of the
overall Federal budget has been greatly reduced. This decline in the relative budget
share is due, in part, to the rapid growth of
entitlements and other mandatory spending,
which finance consumption.
The chart below illustrates the historical
trends in Federal R&D expenditures relative
to GNP and total on-budget Federal outlays.
As a share of GNP, total real Federal R&D
expenditures have risen since 1980 after declining slightly during the 1970s. As a share of
Federal spending, however, R&D expenditures
have fallen from 9 percent in 1970 to 6.7 percent in 1990. The 1991 budget will help to
reverse this decline.

70

THE BUDGET FOR FISCAL YEAR 1991

FEDERAL R&D SPENDING AS A SHARE
OF GNP AND OF THE BUDGET
Percent

FISCAL YEAR

THE IMPORTANCE OF PRIVATE SECTOR
R&D

total national R&D is performed by private
industry, universities, and other entities.

Federal spending constitutes about 50 percent of the total national investment in R&D.
The Federal Government, however, is not the
principal performer of R&D in America. The
chart below shows that almost 90 percent of

Therefore, any successful R&D policy must
seek to stimulate and encourage greater R&D
investment by these non-Federal entities. The
1991 budget contains proposals designed to do
this.




III.C.

71

ENHANCING RESEARCH AND DEVELOPMENT

MOST R&D IS PERFORMED BY NON-FEDERAL ENTITIES

FDRL
EEA
110%
I D SR
NUTY
72.0%

OHRV
TE
6.0%

1/ Other includes nonprofit
organizations, state and local
governments, and Federally funded
research and development centers.

TREND IN FEDERAL INVESTMENTS IN
R&D
The 1991 budget provides a relatively larger
increase for civilian R&D (12 percent) than for
defense-related R&D (4 percent). The chart
below shows the historical trend in basic research, civilian applied research and development and Defense applied research and development. As the chart below shows, civilian applied R&D declined sharply from the late
1970s through the early 1980s.




U I E STE
NV R I I S
A D C LE E
N OLGS
110%

Defense applied research and development,
particularly systems development, increased
significantly in the 1980s, consistent with the
overall investment in national security. The
relatively larger increases in civilian R&D proposed in this budget will increase its share of
total Federal R&D to over 39 percent in 1991
(from about 34 percent in 1989).

72

THE BUDGET FOR FISCAL YEAR 1991

TRENDS IN FEDERAL FUNDING FOR R&D
$ Billions

(Budget Authority In 1989 Dollars)

FISCAL YEAR

INCREASING ECONOMIC GROWTH AND
IMPROVING OUR QUALITY OF LIFE
R&D investment provides both direct and indirect productivity benefits to society. Many
economic studies suggest that private (industrial) R&D spending has a very high social rate
of return; that is, benefit to the society as a
whole. This social return appears to be much
higher than the rate of return to the individual company funding the R&D, giving R&D
spending the character of what economists call
a "public good." For example, one researcher
estimated that private R&D investment yielded a social rate of return of 56 percent, and a
private rate of return of 25 percent for a specific group of innovations. Other studies have
indicated that academic research yields a
social rate of return of about 30 percent. This
differential between social rates of return and
capturable private rates of return is especially
great for basic research or pre-competitive, generic applied research that contributes to
many sectors. Therefore, increased Federal in


vestment in R&D is warranted to capture this
public good feature.
THE FEDERAL ROLE IN SUPPORTING
R&D
Traditionally, the Federal Government has
supported R&D in two areas, first, to meet its
own direct needs—where it is the principal
user (e.g., defense-related R&D)—and, second,
to meet broader national needs (e.g., basic research in all areas, measurements and standards R&D, health-related R&D). In instances
where the Federal Government is the ultimate
market for the R&D results, R&D funding decisions must be made on the basis of Government needs and requirements. Thus, funding
levels for defense R&D and civil space R&D
activities are determined in the context of
their respective national security and civil
space objectives and requirements. The actual
R&D activities, however, should be managed in
such a way as to encourage commercial applications of the R&D as well. The second catego-

73

III.C. ENHANCING RESEARCH AND DEVELOPMENT

ry of R&D, for which the Government is not
the principal market, includes both basic research and generic applied research. Federal
investment in such R&D is warranted to capture the public good benefit. The Administration believes that Federal support for this type
of R&D should be based on several fundamental criteria:
• there should be "externalities" associated
with the R&D (e.g., pollution clean-up,
basic research);
• there should be benefits to broad segments
of the economy simultaneously (e.g.,
health research, agricultural research);
and
• the private sector is without sufficient incentives to capture enough of the benefits
to make such R&D investments worthwhile. In such cases there should be private support (e.g., joint ventures or costsharing) commensurate with the expected
benefits to the private parties.




SUPPORTING BASIC RESEARCH
Basic research is the wellspring of fundamental knowledge that can eventually lead to
new products and processes. Support for basic
research, especially at universities, is an essential investment in the Nation's scientific and
technological future, including its future scientists and engineers. The level and trend of
basic research support has traditionally been
used as an indicator for the health and vitality
of the Nation's overall commitment to new research opportunities of the future. In 1991, the
budget proposes to allocate $12 billion for the
conduct of basic research, an increase of about
$1 billion or 8 percent above the 1990 enacted
level as shown in the table below. This level
continues to reflect the strong emphasis that
the Administration places on increased support for basic research across all fields of science and engineering.

74

THE BUDGET FOR FISCAL YEAR 1991

INCREASING FUNDING FOR BASIC RESEARCH

1

(Dollar amounts in millions)
Budget Authority

Department or Agency

1991

1990

Enacted

Proposed

Dollar
change

Outlays

Percent
1990
change Enacted

1991

Dollar
change

Proposed

Percent
change

Total

4,714
1,651
1,512

4,993
1,853
1,658

+ 279
+ 202
+ 146

+6
+ 12
+ 10

4,483
1,632
1,499

4,763
1,820
1,676

+ 280
+ 188
+ 177

+6
+ 12
+ 12

1,596
924
511
489

1,823
978
553
508

+ 226
+ 54
+42
+ 19

+ 14
+6
+8
+4

1,445
929
503
470

1,640
959
525
504

+ 194
+30
+22
+34

+ 13
+3
+4
+7

11,398

Health and Human Services
National Science Foundation
Energy
National Aeronautics and Space Administration
Defense-military
Agriculture
Other Agencies 2

12,366

+968

+8

10,961

11,886

+925

+8

1
2

Amounts reported in this table are included in totals for conduct of R&D.
Includes the Departments of Interior, Commerce, Veterans Affairs, Education, Labor, the Treasury, Justice,
Transportation, the Smithsonian Institution, Environmental Protection Agency, Tennessee Valley Authority, and the
Corps of Engineers.

NSF also supports:

DOUBLING THE NATIONAL SCIENCE
FOUNDATION BUDGET
As an indicator of his support for basic research, the President is committed to doubling
the budget of the National Science Foundation
(NSF) by 1993. Over 90 percent of NSF's
budget supports basic research primarily at
universities and colleges. These funds go directly to America's best researchers and to the
most talented young scientists and engineers.

• Innovative programs designed to improve
the quality of the Nation's science, mathematics and engineering education.
• A program to modernize academic research facilities.
• The U.S. presence on the Antarctic continent through the U.S. Antarctic Program.

DOUBLING THE NSF BUDGET

1

(In millions of dollars)
1990
Enacted

Budget authority
Outlays
1

2,084
1,959

Proposed
1991

2,383
2,213

2,673
2,532

1993

2,998
2,789

1994

3,350
3,121

1995

3,447
3,352

Base year for NSF doubling is 1987.

The 1990 enacted funding level for NSF provided an increase of 11 percent over 1989, less




1992

than the 14 percent increase proposed in the
February 9th "Building a Better America."

III.C. ENHANCING RESEARCH AND DEVELOPMENT

75

The 1991 budget proposes an increase of over
14 percent, which would restore the doubling
path for NSF.

be based on the best possible scientific information, and accordingly will host a conference
of top scientific, economic, and environmental
officials from around the world on this subject
in the Spring of 1990. There are significant
scientific uncertainties associated with many
of the Earth processes involved in global
change. An improvement in scientific understanding and predictive capability is important
to the development of sound and cost-effective
policy decisions.

UNDERSTANDING THE GLOBAL
ENVIRONMENT
Advancing U.S. Leadership in Global Change
Research
The United States and other nations of the
world are becoming increasingly concerned
about global environmental issues, particularly
global climate change. This concern has been
sparked by the belief that human activities
may be contributing to global-scale environmental impacts. The Administration believes
that continued U.S. leadership is essential in
furthering world understanding of global
change issues and is committed to providing
that leadership. The U.S. took a major step in
1989 with the establishment of the U.S. Global
Change Research Program (USGCRP). The
1991 budget provides a major expansion of this
unprecedented interagency research effort. In
1991, funding for global change research will
total $1,034 million, an increase of 57 percent
over the 1990 level.
The Administration believes that response
strategies for addressing global change should




The USGCRP, developed by the OSTP interagency Committee on Earth Sciences, is a comprehensive research effort that includes applied as well as basic research; is very broad in
scope (includes research on all Earth components such as oceans and atmosphere); and focuses on changes (e.g., global warming, ozone
depletion, drought) that occur on timescales of
decades to centuries. Our knowledge and technology (e.g., satellites, computers) have
reached the point where this type of global
study is possible. The USGCRP goals, objectives, science elements, and science priorities
were developed in collaboration with the National Academy of Sciences and other related
international science organizations.

76

THE BUDGET FOR FISCAL YEAR 1991

U.S. GLOBAL CHANGE RESEARCH PROGRAM
(Dollar amounts in millions)
Budget Authority
Department or Agency

National Aeronautics and Space
Administration
National Science Foundation
Energy
Agriculture
Commerce (NOAA)
Interior
Environmental Protection Agency....
Total

NASA's Mission to Planet Earth program
represents the principal space-based component of the USGCRP and includes several ongoing satellite and research programs and
three new initiatives: the Earth Observing
System (EOS), Earthprobes, and Attached Payloads on Space Station Freedom. The 1991
budget provides for launch of the first U.S.
EOS platform in 1998. Additional platforms
will be provided by the Europeans and the
Japanese. In order to begin gathering data and
making observations as soon as possible, the
budget also provides for the launch of Earthprobes beginning in 1993. Prior to beginning
the full-scale development of EOS, the National Academy of Sciences will undertake an independent review of the program as part of its
overall review of the USGCRP. The results
will be reviewed by the National Space Council.
The other six agencies constitute the earthbased component of the USGCRP. Many of the
ground-based process studies and field campaigns supported by these agencies are dependent on the data collected by EOS or provide
ground-based data needed to calibrate the
space data. Nearly all of these efforts have
some element of international coordination,
represent a broad spectrum of research activities, and can provide near-term incremental




1990
Enacted

1991
Proposed

Dollar
change

Percent
change

489
55
50
21
18
13
13

661
103
66
47
87
44
26

+ 172
+ 48
+ 16
+ 26
+ 69
+ 31
+ 13

+ 35
+ 87
+ 32
+ 124
+ 383
+ 238
+ 100

659

1,034

+ 375

+ 57

improvements to climate modeling prior to the
development of global data from space.
Understanding the Arctic
U.S. policy in the Arctic consists of four elements: protection of essential security interests; support for sound, rational development
of the region; promotion of scientific research
contributing to knowledge about the Arctic;
and promotion of mutually beneficial international cooperation in the Arctic. Federal Arctic
research is guided by a 5-year research plan
developed by the Interagency Arctic Research
Policy Committee (IARPC) (in consultation
with the Presidentially-appointed Arctic Research Commission and other interested
groups).
The 1991 budget includes $114 million for
Arctic research, an increase of about $8 million over the 1990 level. Within the total for
1991, five agencies, NSF, NASA, NOAA, Interior, and DOD/Navy will undertake a special
coordinated initiative to understand the dynamics of the Arctic oceans, including circulation, ecosystems, and seasonal sea ice. This initiative will constitute about $44 million of the
total for arctic research, an increase of about
15 percent over 1990. The table below shows
the Federal support for Arctic research by the
three major elements.

77

III.C. ENHANCING RESEARCH AND DEVELOPMENT

UNDERSTANDING THE ARCTIC
(Dollar amounts in millions)
Budget Authority
Category

Rational development1
Arctic as laboratory 2
National security 3
Total

1990
Enacted

1991
Proposed

Dollar
change

Percent
change

36
46
23

43
47
24

+6
+ 1
+ 1

+ 17
+ 2
+4

106

114

+8

+ 8

Note: The 1990 budget includes a one-time increase for DOD of about $21 million
specifically for upper atmosphere research and associated facilities. For the purpose of
comparison with 1991 levels, this funding has been excluded.
1
Includes the Departments of Interior, Commerce, Energy, Transportation, State,
and the Environmental Protection Agency.
2
Includes the Department of Health and Human Services, the National Aeronautics
and Space Administration, the National Science Foundation, and Smithsonian Institution.
3
Includes the Department of Defense.

PROMOTING ALTERNATE SOURCES OF
ENERGY
DOE supports a broad R&D program in
areas such as conservation, solar and other
renewable energy technologies (photovoltaics,
wind, geothermal). These programs are discussed more fully in Part III-F, "Protecting
the Environment." The 1991 budget contains
increased funding of about 8 percent above
1990, and 80 percent above the Administration's 1990 budget request, for solar, renewable
and conservation R&D programs. Of particular
interest is an initiative to assist U.S. photovoltaic (PV) manufacturers through a cost-shared
R&D program aimed at improving PV process/
manufacturing technologies.
For conduct of energy R&D programs in
total, the budget proposes total funding of
$2,450 million in budget authority, a decrease
of $124 million below 1990, and $2,393 million
in outlays, $277 million above 1990. Both
changes occur primarily in the Clean Coal
Technology Program, where a large number of
new technology demonstration projects funded
in prior years move into the construction
phase. Overall, the budget provides for continued R&D support across a broad spectrum of
programs in nuclear fission, nuclear fusion,
fossil energy, and supporting energy sciences.
The budget also includes a $17 million new



initiative to support enhanced oil and gas recovery research in university/industry geosciences consortia.
ENHANCING THE PRODUCTIVITY OF
THE NATION S AGRICULTURE
The budget proposes the first step of a major
new program in the Department of Agriculture (USDA), the National Research Initiative
(NRI), which will revitalize and strengthen agricultural research. Under the NRI, awards for
research grants will be made in response to
proposals selected for relevance and quality on
a merit-reviewed, competitive basis, thereby
assuring that the best science is supported.
Grants will be available to pursue investigations in plant science, animal science, human
nutrition, and natural resources. In 1991, as
the basis for the NRI, the size of the existing
USDA competitive grants program will be doubled, to a total of $100 million. This research
commitment will be expanded by $50 million
each year to the extent that funds are awarded
competitively and not earmarked for special
interest purposes.
In addition to the National Research Initiative, USDA supports over $1 billion in R&D
related to agriculture and forestry to ensure
the continued high productivity of U.S. agricultural and forest lands.

78

THE BUDGET FOR FISCAL YEAR 1991

USDA NATIONAL RESEARCH INITIATIVE
(In millions of dollars)
Proposed
1991

Budget authority
Outlays

43
36

100
46

1992

150
70

1993

200
108

1994

250
160

1995

300
210

PROTECTING THE PUBLIC HEALTH
THROUGH BIOMEDICAL RESEARCH

individuals and encourages the private sector
to develop treatments for these diseases.

Biomedical research increases knowledge
about the processes underlying health, disability and disease, and synthesizes this knowledge
into a useful form so that it can be applied to
improve health. Such advances can not only
improve the quality of health care but ultimately help to reduce its costs. Examples include drug treatment instead of surgery for
coronary artery disease and advanced laser
treatment for serious eye disease. Advances in
biomedical research are occurring at an unprecedented pace. The 1991 budget ensures
that the Federal investment continues to
foster these advances by proposing an increase
of almost 6 percent for basic research in the
Department of Health and Human Services
(HHS).

To ensure that this Federal research investment can be used to take advantage of important emerging research opportunities, the
budget proposes to give the NIH Director the
discretion to direct up to 1 percent of NIH
appropriations to such emerging activities.

The proposed increase for HHS, including
that for the National Institutes of Health, will
allow us to advance the state of knowledge and
improve treatment of high-incidence diseases.
This research lays the foundation for the development of effective prevention and treatment of such diseases. The Federal Government also uses its resources to investigate diseases that afflict relatively smaller numbers of




Additionally, the budget proposes to establish 10 endowed chairs to support, through private donations, 5-year appointments of distinguished non-Federal scientists at NIH. This
will enrich and strengthen research at NIH.
Human Immunodeficiency Virus/Acquired
Immune Deficiency Syndrome (HIV/AIDS)
The budget continues the Administration's
commitment to research on the Human Immunodeficiency Virus (HIV), the source of the
infection that causes Acquired Immune Deficiency Syndrome or AIDS.
In total, the 1991 budget proposes an 18 percent increase ($531 million) over 1990 for all
Federal HIV/AIDS programs, including a 7
percent increase in research, a 16 percent increase in prevention efforts, a 27 percent increase in treatment, and a 39 percent increase
in income support for individuals.

79

III.C. ENHANCING RESEARCH AND DEVELOPMENT

THE 1991 BUDGET PROPOSES AN 18 PERCENT INCREASE
IN FEDERAL FUNDING FOR HIV AND AIDS 1
(Dollar amounts in millions)
Budget Authority
1990
Enacted

HIV/AIDS
HIV/AIDS
HIV/AIDS
HIV/AIDS

Research
Treatment
Prevention
Income support

Total 2

1991
Proposed

Dollar
change

Percent
change

1,162
1,063
487
219

1,245
1,346
567
305

+ 83
+ 283
+80
+86

+7
+ 27
+ 16
+ 39

2,932

3,463

+ 531

+ 18

1
Funds are for programs in the Departments of Health and Human Services,
Defense, Veterans Affairs, Education, Justice, State, Labor and independent agencies.
Total also includes obligations for the Social Security Administration.
2
In addition to the spending identified above, the budget includes other initiatives,
most notably those dealing with drugs and infant mortality, that contribute to the
Administration's effort against HIV and AIDS.

The budget proposal for research would
enable the Federal Government to make continued progress against HIV and AIDS. To
date, five therapies for AIDS and AIDS-related
infections have been approved for use, and
many more are now being tested and evaluated in clinical trials. Over 35 clinical trials have
been initiated since January 1989 in a search
for additional therapeutic drugs. Federally
supported research efforts will continue to further our understanding of how HIV affects the
body, to develop effective means to disrupt its
progress, and to develop vaccines to prevent
this infectious disease.
Research is key to the fight against AIDS,
but it is only one component in the Federal
effort to combat this dreaded disease. Significant resources in the budget would also be
provided for AIDS treatment and prevention
and for the income support of those afflicted
with HIV and AIDS. In total, the 1991 budget
provides $1,346 million for HIV/AIDS treatment, a $283 million or 27 percent increase
over the 1990 enacted level. The largest single
component in this increase is Federal spending
for Medicaid, which would rise by 30 percent
over the projected 1990 level.
All 50 States now provide Medicaid coverage
for the drug AZT for treatment of people suffering from AIDS. AZT coverage is expected to



expand as the States take advantage of recent
Administration action enabling them to cover
AZT treatment for HIV-infected individuals
who do not yet exhibit any AIDS symptoms.
Several States are using Medicaid Home and
Community Based Waivers to provide special
services to AIDS patients, such as case management and home health care. These innovative practices help patients remain in their
own homes and receive care that is both focused on their special needs and is cost effective. Another waiver option being implemented provides special support to young children
who are HIV-infected at birth or who develop
AIDS after birth. Pursuit of these treatment
options helps meet the needs identified in the
report of the National Commission on AIDS.
Some have argued that a disproportionate
share of health-related research dollars are
being devoted to HIV/AIDS. It is true that
spending per death from HIV/AIDS, to the
extent that this is a relevant indicator, is high
compared to that for heart disease, cancer and
stroke, the three leading causes of death in the
country. HIV, however, often strikes down its
victims relatively early in life. More than 45
percent of AIDS victims are younger than 35,
and a growing number are children. As a
result, research spending per year of potential
life lost for HIV and the three killer diseases

80
is more comparable than that for spending per
death, as shown in the following charts. The
charts also show that HIV spending per year
of potential life lost is lower than that for
diabetes, a disease that is a major contributor
to disability as well as the Nation's sixth leading cause of death.
Deaths and years of potential life lost attributable to the three major killers and diabetes
are projected to grow, individually and collec-




THE BUDGET FOR FISCAL YEAR 1991

tively, by less than 10 percent over the 5 years
between 1989 and 1993. For HIV, in contrast,
deaths and years of potential life lost will soar,
rising by 150 to 350 percent, depending on the
forecast used. Given these projections and the
small past investment in HIV research relative to research on other diseases, the Administration believes that the priority given to
HIV/AIDS research in the budget is warranted.

III.C.

81

ENHANCING RESEARCH AND DEVELOPMENT

ALTHOUGH HIV RESEARCH FUNDING PER DEATH EXCEEDS
FUNDING FOR OTHER DISEASES. . .

& STROKE

*

...HIV RESEARCH FUNDING PER YEAR OF POTENTIAL LIFE LOST
PARALLELS FUNDING FOR OTHER DISEASES

2,500

& STROKE

Estimates are for 1989. Years of potential life lost calculated to age 65 based on deaths caused by each disease.




82

THE BUDGET FOR FISCAL YEAR 1991

ADVANCING THE FRONTIER OF SPACE
The budget proposes $15.2 billion for NASA,
of which $8.4 billion funds civil space R&D, an
increase of 32 percent over the 1990 levels. The
overall space activities of the Federal Government are covered in more detail in Part III-B,
"Expanding the Human Frontier."
LAYING
THE
GROUNDWORK
MANNED
EXPLORATION
OF
MOON AND MARS

FOR
THE

The 1991 budget includes $1.3 billion for a
number of programs in NASA, some carried

out jointly with DOD and DOE, that support
the President's call for manned exploration
beyond Earth's orbit. Included in this total are
increases for several current technology development programs that will enhance our ability
to pursue this mission—space power, the Advanced Launch System, and the National
Aerospace Plane. The budget also provides for
the initiation of robotic science missions. The
proposed increase of $408 million includes a
major new initiative to start the development
of the technologies needed to implement future
manned missions to the Moon and Mars.

LAYING THE GROUNDWORK FOR MANNED
EXPLORATION OF THE MOON AND MARS
(Dollar amounts in millions)
Budget Authority
1990
Enacted

Total

859

BUILDING SPACE STATION FREEDOM
The 1991 budget proposes $2.6 billion to continue the development of Space Station Freedom for launch in 1995. The Space Station is
vital to our understanding of microgravity environments, the ability of humans to live and
work in space for long periods of time, and to




1991
Proposed

Dollar
change

1,267

Percent
change

+408

+47

the conduct of science and complex operations
in space; Freedom will also provide a key stepping stone for further manned exploration.
The Space Station also represents an important opportunity for international cooperation
on a large-scale R&D project.

BUILDING SPACE STATION FREEDOM
(Dollar amounts in millions)
Budget Authority
Category

Research and development
Facilities and program management
Total

1990
Enacted

1991
Proposed

Dollar
change

Percent
change

1,750
178

2,431
196

+ 681
+ 18

+ 39
+ 10

1,928

2,627

+ 699

+ 36

III.C. ENHANCING RESEARCH AND DEVELOPMENT

83

In addition, the 1991 budget proposes $3.3
billion for space science, an increase of 22 percent to continue support for Earth observations, and for major flight projects such as the
Global Geospace Science mission, the Advanced X-ray Astrophysics Facility, the Galileo
mission to Jupiter, Magellan mission to Venus,
Hubble Space Telescope and Gamma Ray Observatory.

crease of 18 percent over 1990. The table below
shows the funding of R&D for civil departments and agencies with major responsibilities
in transportation, including NASA in aeronautics; the Department of Transportation (DOT)
in highways, mass transit, railroads, maritime,
aviation, and other transportation areas; and
the Corps of Engineers in water transportation. The 1991 budget continues support for
NASA's aeronautics research programs, including an initiative begun in 1990 to investigate the environmental barriers to advanced
supersonic flight. The budget also continues
current DOT programs with special emphasis
on the development of an advanced highway
driving simulator and intelligent vehicle/highway systems, and improvements in the area of
oil pollution response and cleanup, which will
incorporate lessons learned from the recent oil
spill in Prince William Sound, Alaska. In addition, DOT and the Corps of Engineers are involved in a federal cross-cutting R&D effort in
magnetic levitation transportation.

Finally, the budget proposes $101 million for
programs to promote the commercial use of
space, including the Centers for the Commercial Development of Space (CCDSs). The budget
also includes a new initiative through the
CCDSs to expand the flight opportunities for
experiments in microgravity, life sciences and
other areas with long-term commercial potential.
DEVELOPING TECHNOLOGIES FOR
IMPROVED TRANSPORTATION
For 1991, the budget proposes funding for
transportation R&D of $1,527 million, an in-

DEVELOPING TECHNOLOGIES FOR IMPROVED
TRANSPORTATION
(Dollar amounts in millions)

Department or agency

National Aeronautics and Space
Administration
Transportation
Corps of Engineers
Total
Federal agency cross-cutting effort
in magnetic levitation transportation

MAGNETIC LEVITATION
TRANSPORTATION
Magnetic levitation (maglev) is a new tranportation technology that relies on the use of




1990
Enacted

Budget Authority
1991
Dollar
Proposed
change

Percent
change

929
336
35

1,057
422
49

+ 128
+86
+ 14

+ 14
+ 26
+40

1,299

1,527

+228

+ 18

2

10

+8

+400

magnets for propulsion and levitation rather
than conventional steel-wheel-on-rail technology. The 1991 budget proposes $9.7 million for
maglev R&D, an increase of almost 400 percent. Of this total, $6.2 million is for the De-

84
partment of Transportation (DOT) and $3.5
million is for the Army Corps of Engineers.
Both agencies are pursuing a cooperative
public-private partnership in a plan designed
to facilitate private development of an operational maglev system in the United States.
The emphasis in DOT's plan is to examine the
economic feasibility of maglev projects and to
establish safety and operating criteria. The
Corps's plan emphasizes the development of
U.S. maglev technologies and associated sciences and industries.
This increase in funding is intended to explore the possibility of stepped-up U.S. efforts
in this important emerging technology. The
focus of the expanded program will be to determine the role of magnetic levitation transportation in the U.S. transportation system, the
economic feasibility, the appropriate safety
and operating standards, and the remaining
technologies that must be developed to achieve
an efficient and environmentally acceptable
U.S. system.
PROCEEDING WITH THE
SUPERCONDUCTING SUPER COLLIDER
The 1991 budget requests $318 million for
the Superconducting Super Collider, an increase of $100 million over 1990. This level will
support continued work to complete the design
of the prototype magnets and begin the transition from prototype to production. The funding
level maintains the 10-year design and construction schedule. This project is discussed
more fully in Part III-B "Expanding the
Human Frontier."
DEVELOPING
ADVANCED
TECHNOLOGIES TO MEET GOVERNMENT AND
CIVILIAN NEEDS
The Federal Government investment in
R&D in a number of technology areas will pro-




THE BUDGET FOR FISCAL YEAR 1991

vide benefits to both government and the private sector. This investment is driven largely
by agency mission needs. In instances where
the benefits are largely commercial, Federal
funding supports more generic R&D as opposed to that oriented toward more direct commercial applications. Support for such R&D is
an appropriate Federal role where it has a
broad national benefit; where it is generic and
pre-competitive, thus its benefits cannot be
fully or quickly captured by specific companies; and, where there is often a significant
level of participation and/or cost-sharing with
private sector partners commensurate with the
expected benefits. The 1991 budget includes
funds for two programs at the Department of
Commerce's National Institute of Standards
and Technology to encourage the development
and transfer to the private sector of a widerange of advanced technologies. The budget
proposes $10 million for the new Advanced
Technology Program (ATP) to support a
number of consortia doing generic, pre-competitive research into promising technologies.
The budget also proposes $5 million for grants
to the Regional Manufacturing Technology
Centers that will transfer advanced manufacturing technologies to medium and small-sized
businesses.
In addition to these broad-based efforts,
there are a number of specific advanced technologies that are supported by several agencies. In order to understand better the scope of
Federal activities and the level of coordination
among agencies, several of these technologies
were the subject of a special survey as part of
the 1991 budget process. These are described
below.

85

III.C. ENHANCING RESEARCH AND DEVELOPMENT

DEVELOPING ADVANCED TECHNOLOGIES

1

(Dollar amounts in millions)
Budget Authority
1990
Enacted

Robotics
High Performance Computing
Semiconductors
Advanced Imaging Technologies
Superconductivity

150
448
525
118
228

1991
Proposed
192
469
537
118
215

2

Dollar
change
+42
+21
+ 12
—

-13

Percent
change
+28
+ 5
+2
—

-6

1
2

Estimates are based on a one-time survey and exclude classified activities.
Columns should not be totalled due to possible omissions and overlaps in the
reporting of data.

Robotics.—The budget provides $192 million,
an increase of 28 percent to the six Federal
agencies for support of robotics R&D. Robots
are intelligent machine systems that do physical work. Current robotic systems work in relatively structured environments or in close contact with human controllers, so the focus of
Federal R&D in robotics is on the development
of systems that are more autonomous and capable of interacting with changing and uncertain environments. Robots could well lead to
improved performance of tasks for which
humans are not well suited, such as the handling of hazardous wastes and construction
and maintenance activities in extreme environments such as outer space. The application
of robotics could also lead to productivity
gains, quality improvements, and more flexible
manufacturing processes in a range of applications. NASA accounts for over two-thirds of
Federal robotics R&D, primarily through the
development of Space Station Freedom's Flight
Telerobotic Servicer.
High Performance Computing.—The budget
provides $469 million for Federal support for
R&D focused on high performance computing
(HPC). HPC includes the full range of advanced computing technologies as well as the
systems and applications software, networking,
and underlying research and human resource
infrastructure.
In 1989, a plan for advancing HPC was developed by the OSTP Committee on Computer
Research and Applications chartered under



the Federal Coordinating Council for Science,
Engineering, and Technology. The plan assigned primary responsibility for R&D on advanced HPC computing systems to the Defense
Advanced Research Projects Agency (DARPA);
for advanced software technology and algorithms to NASA; and for the national research
network jointly to DARPA and NSF. In addition, all agencies are expected to continue to
coi^tribute to the development of human resources.
Semiconductors.—The budget provides $537
million for research on semiconductor materials, development and application of semiconductor materials to meet agency mission needs,
and support of R&D on manufacturing processes. Major goals of federal development activity
include increasing the speed and throughput of
devices (through a combination of the shrinking of components and the use of newer materials such as gallium arsenide instead of silicon), developing devices that work in extreme
environments, and developing economically efficient energy conversion devices. The largest
single federal program is DOD funding of $100
million per year for SEMATECH, the semiconductor industry R&D consortium in Austin,
Texas. Federal support represents about half
of the venture's total funding. The consortium
focuses on R&D to improve semiconductor
manufacturing techniques. In addition, DOE is
initiating a cost-shared effort with industry to
apply synchrotron light source technology to

86

THE BUDGET FOR FISCAL YEAR 1991

the manufacture of next-generation computer
microchips.
Superconductivity.—The
Federal Government has traditionally supported the basic science that characterizes both high temperature
(HTS) and low temperature (LTS) superconducting phenomena. The researchers in the
U.S. credited with bringing the HTS materials
to worldwide attention were all supported for
many years by Federal agencies. At the time
of the discovery of the phenomenon of HTS,
the government was spending about $55 million annually on all aspects of superconductivity. The 1991 budget provides $215 million in
5 agencies (Defense, NASA, Energy, National
Science Foundation and the National Institute
of Standards and Technology in Commerce) for
superconductivity R&D. In 1991, superconducting magnet development for the Superconducting Super Collider is expected to proceed from
R&D into prototype production, resulting in a
reduction in DOE's contribution to Government-wide superconductivity research.
Advanced
Imaging
Technologies.—The
budget provides an estimated $118 million for
advanced imaging R&D. Advanced electronic
imaging systems include interactive graphics,
high definition displays, advanced signal processing, and advanced digital switching technol-

ogies. There is a wide range of potential end
uses (for example, military target sensor imaging, visualization of supercomputer computations, mapping displays) for these technologies.
Much of the previous Federal spending has
been for DOD R&D related to target sensor
imaging technologies. In 1991, the budget will
provide $12 million for the High Definition
Display Technology (HDDT) Program in
DARPA—in support of defense applications.
MAINTAINING NATIONAL SECURITY
R&D for national security provides for the
development, testing, and evaluation of weapons systems to meet new military requirements. At the same time, a strong research
and technology base allows continued investigation into promising new technologies and
guards against technological surprise by potential adversaries. In 1991, R&D to maintain national security will represent about 61 percent
of total Federal funding for the conduct of
R&D. The table below shows the R&D funding
for the Department of Defense and the atomic
energy defense programs of the Department of
Energy. These programs are discussed in more
detail in Part III—I, "Preserving National Security and Advancing America's Interests
Abroad."

MAINTAINING NATIONAL SECURITY
(Dollar amounts in millions)
Budget Authority
Department

Defense-military functions
Basic research
Applied research
Development
Energy-atomic energy defense programs
Total, Conduct of R&D

Major DOD R&D efforts will include the
Strategic Defense Initiative which will increase to $4.5 billion in 1991, continued devel


1990
Enacted

1991
Proposed

Dollar
change

Percent
change

37,226
924
2,403
33,899
2,651

38,714
978
2,458
35,279
2,707

+ 1,488
+ 54
+ 54
+ 1,380
+ 56

+4
+6
+2
+4
+2

39,877

41,421

+ 1,545

+4

opment of the Small ICBM, the LHX Helicopter, and the Advanced Tactical Fighter. The
DOD technology base (basic and applied re-

ENHANCING RESEARCH AND DEVELOPMENT

87

search) will be funded at $3.4 billion in 1991.
The Department of Energy R&D activities include the research, development and testing of
all nuclear weapons. The Department also conducts R&D on nuclear-powered directed energy
weapons for the Strategic Defense Initiative,
Naval reactor systems, and technology to
verify arms control treaties.

The "pipeline" of young people that feeds
the S&E workforce may not be adequate in
either numbers or quality to provide the workers that will be needed during the next decade
and beyond. Between 1980 and 2000, the
number of 18-24 year olds will decline by 19
percent while the overall population will increase by 18 percent. Even if the historic average holds, and 5 percent of 18-24 year olds
obtain S&E degrees, the resulting shortfall in
the S&E workforce could reach into the hundreds of thousands. Moreover, many students
with an expressed interest in science and engineering careers leave the pipeline before getting a degree in science and engineering. This
is particularly true for underrepresented minorities. Currently Black and Hispanic children constitute 25 percent of our school children; by the year 2000 this percentage will rise
to 47 percent. Yet it is these groups that are
now the most underrepresented in the S&E
workforce: in 1988, only 231 Black and Hispanic Americans earned doctorates in science or
engineering fields (excluding psychology or the
social sciences). Together, Black and Hispanic
Americans constitute 20 percent of the Nation's population but only 4 percent of employed scientists and engineers.

III.C.

STRENGTHENING SCIENCE AND
TECHNOLOGY EDUCATION
At a time when the number of American
students pursuing advanced science and engineering education is declining, the scientific
and engineering (S&E) workforce is becoming
more critical to the strength of the overall
economy. This is a disturbing trend.
Many jobs created in the future will require
people who are well-versed in mathematics
and science and who have greater facility with
higher order reasoning skills than most highschool and college graduates now have. Between 1976 and 1986, S&E employment grew
at an average annual rate of over 6 percent,
four times as fast as annual growth in the
total U.S. workforce and twice the yearly rate
of increase in total professional employment.




ONLY A SMALL PROPORTION OF STUDENTS RECEIVE
SCIENCE AND ENGINEERING (S&E) DEGREES
S&E Students
who are
underrepresented
minorities

Total sophomores in 1977
High school sophomores with S&E interest
High school seniors with S&E interest
College freshmen, S&E preference
College juniors, S&E major
S&E B.S. degrees
S&E graduate students
S&E M.S. degrees
S&E Ph.D. degrees

856,000
86,000
65,000
40,000
14,000
13,000
2,500
2,000
Under 400

Total S&E
student
population

4,000,000
730,000
590,000
340,000
214,000
206,000
60,000
46,000
10,000

Note: Science and engineering participation reported here excludes psychology and
the social sciences.

88

THE BUDGET FOR FISCAL YEAR 1991

This situation is compounded by an even
more serious factor. The performance of U.S.
precollege students in math and science is far
below that of students in other major industrialized nations. The quality of education, particularly science, mathematics, and engineering education, must be improved if America is
to be competitive in the future.
The Administration is moving aggressively
on a number of fronts to address the shortcom-

ings in the Nation's science and technology
education enterprise. The 1991 budget provides
the concrete manifestation of the Administration's commitment in this area. It should be
noted, however, that the responsibility for both
the quality and the quantity of the Nation's
S&E workforce belongs to every sector, not
just, and not primarily, to the Federal Government.

INVESTING IN SCIENCE, MATHEMATICS, AND
ENGINEERING EDUCATION
(Dollar amounts in millions)

Department or Agency

National Science Foundation
Education
National Aeronautics and Space
Administration
Energy
National Institutes of Health
Total

The 1991 budget proposes a total of $1 billion in direct spending in four agencies for
science, mathematics, and engineering education, an increase of 26 percent above 1990. The
direct spending programs include a variety of
measures to support teacher training, curriculum development, and direct assistance to students. In addition, there is a much greater
amount of funding for fellowships and other
forms of support that is provided indirectly
through research grants.
The 1991 budget provides $463 million to the
National Science Foundation for a range of
activities designed to improve education and
develop human resources for science and engineering. This is an increase of $106 million or
30 percent over 1990. NSF directly supports
high-leverage science, math, and engineering
education programs aimed at improving the
quality of teaching, the quality of students and



1990
Enacted

Budget Authority
1991
Ddlir
Proposed
change

Percent
change

357
136

463
230

+ 106
+94

+ 30
+ 69

42
17
287

51
25
292

+8
+8
+5

+ 21
+47
+2

839

1,061

+ 222

+ 26

the numbers of students entering and staying
in the S&E pipeline. Examples include: workshops for teachers, development of innovative
educational materials, research experiences for
high-school and college students in working research laboratories, and support for innovative
programs at many of the Nation's science museums. In addition, NSF supports many programs aimed specifically at recruiting and retaining underrepresented groups.
The Department of Education maintains
strong relationships with State educational entities and has the ability to reach thousands of
students and teachers through its large formula grant programs. The 1991 budget proposes
$230 million, an increase of $94 million or 69
percent over 1990, for the Dwight D. Eisenhower Mathematics and Science program, which
will be provided to States to develop and im-

III.C. ENHANCING RESEARCH AND DEVELOPMENT

89

plement improved programs for teaching math
and science.

almost 250,000 S&Es, about 8 percent of the
total S&E workforce. The Federal Government
also provides research support to industry and
academia that enables these sectors to employ
S&E's in increased numbers. Thus, the Federal
Government can have a significant leveraging
effect if it supports programs designed to increase the inflow into the S&E pipeline or to
decrease the attrition.

The 1991 budget proposes about $51 million
for the education activities of the National
Aeronautics and Space Administration, an increase of about 21 percent over 1990. These
activities involve over 1.8 million students and
teachers, and include "Spacemobile" presentations to elementary and secondary schools,
teacher workshops and internships at NASA
research centers around the country, grants
for undergraduate and graduate student research, and special efforts to ensure minority
participation in science and engineering education.
The 1991 budget provides $25 million, a 47
percent increase, for educational activities in
the Department of Energy. The Department
provides support for over 6,000 undergraduate
and graduate students, as well as high school
and university faculty through research fellowships. These fellowships provide research support for these individuals at DOE laboratories
or other locations. The proposed increase will
enable DOE to implement a new program, in
collaboration with the private sector, designed
to train high school faculty at DOE's national
laboratories in state-of-the-art science which
the teachers can then bring back to their students.
For the National Institutes of Health, the
research training grant program will be
funded in 1991 at a level of $292 million. This
level will support almost 12,000 graduate
trainees in research laboratories throughout
the nation. Training grants are provided to
institutions and are in addition to the many
thousands of graduate and post-graduate students supported through research grants to
faculty researchers.
In addition to these specialized, targeted activities, the Federal Government itself employs


http://fraser.stlouisfed.org/
250-298 O-1990-3
Federal Reserve Bank of St. Louis

QL3

IMPROVING R&D FACILITIES
The budget includes $3.1 billion for construction, repair and modernization of R&D facilities, an increase of $36 million or 1 percent
over 1990. R&D facilities are increasingly critical to advancing the frontiers of science in
many disciplines. Without the specialized R&D
facilities such as particle accelerators, telescopes, research ships and planes, the process
of gathering new knowledge would be greatly
diminished. General purpose laboratories and
research support facilities are also important,
particularly where such facilities are used for
the training of future scientists and engineers.
Agencies support the construction of R&D
facilities either for their own needs or at universities when needed to support ongoing or
new R&D programs that have been evaluated
for merit. The Federal Government also provides mechanisms (e.g., use allowances, depreciation recovery) that allow universities to recover over time part of the cost of R&D facilities on their campuses.
In the post-Sputnik era, the Federal Government invested large amounts of money to build
R&D facilities at universities primarily
through institutional grants. This Federal investment peaked in 1965 at $374 million (1982
dollars) and tapered off to $46 million (1982
dollars) by 1984. In addition to the Federal
investment, industry and universities themselves (through fund-raising efforts) provided
resources for R&D facilities.

90

THE BUDGET FOR FISCAL YEAR 1991

IMPROVING R&D FACILITIES
(Dollar amounts in millions)
Budget Authority
Department or Agency

Energy
National Aeronautics and Space Administration
Defense-military
Agriculture
National Science Foundation..
Health and Human Services
Other Agencies 1
Total

1990
Enacted

1991
Proposed

Dollar
change

Outlays
Percent
change

1,139

1,325

+ 186

+ 16

850
639
118
119
77
80

846
458
103
153
96
78

-4
-181
-15
+33
+ 19
-2

3,023

3,059

+36

1990
Enacted

1991
Proposed

Dollar
change

Percent
change

1,057

1,195

+ 138

+ 13

-28
-13
+28
+ 25
-3

628
545
148
64
77
70

720
489
128
75
60
71

+ 92
-56
-20
+ 11
-17

+ 15
-10
-13
+ 18
-22

+1

2,590

2,738

+ 149

—

—

—

+6

1
Includes the Departments of Transportation, Interior, Commerce, Veterans Affairs, Education, the Treasury, the
Environmental Protection Agency, Smithsonian Institution, Tennessee Valley Authority, and the Corps of Engineers.

Over the last several years, there has been
concern expressed by some that the Nation's
academic research facilities (many of which
date from that post-Sputnik investment) are
not able to support adequately the kind of advanced research needed to keep the U.S. competitive. This has contributed to the much
wider use of Congressional "earmarking" of
money in appropriations bills for facilities at
specific locations (generally universities). One
analysis has estimated that the 1990 appropriations bills contained over $130 million in
earmarked projects, and over the decade 1980
to 1989, over $900 million has been earmarked
for over 300 specific projects. In many cases,
the scientific merit of such facilities (i.e., how
they contribute to the overall S&T enterprise
or to specific agency missions) has not been
evaluated. It should also be noted that, for the
most part, these funds were not added—they
were reallocated from other important R&D
programs. In many cases this reallocation has
resulted in the less efficient use of existing,
productive R&D facilities.
The Administration will continue to oppose
the practice of "earmarking" of facilities funding in appropriations bills or other legislation.
Not only does this practice result in a less
optimal allocation of R&D resources, but, there




is no evidence that it improves the breadth,
depth or quality of the Nation's R&D infrastructure. In fact, a recent study appears to
indicate that the practice reinforces the existing geographic distribution of Federal R&D
dollars.
NSF initiated a new academic research facilities modernization program in 1990. This
$20 million program will be continued at the
same level in 1991. This will allow experience
to be gained in managing this kind of program,
and to evaluate its impact on U.S. science and
technology.
The Administration will continue to examine a wide range of options for increasing the
level of national investment in state-of-the-art
R&D facilities, in particular, the implementation of OMB Circular A-21, "Cost Principles
for Educational Institutions" to ensure that it
provides incentives for academic institutions to
invest in R&D infrastructure, and that Federal
R&D dollars are accounted for adequately. The
Federal Government, States, the private
sector, and academic institutions have a
shared responsibility in this area, and new and
innovative approaches will be needed at all
levels.

III.C. ENHANCING RESEARCH AND DEVELOPMENT

91

MAKING THE RESEARCH AND EXPERIMENTATION TAX CREDIT PERMANENT

onciliation Act of 1989, for the allocation of
foreign and domestic R&E expenditures for
companies with foreign operations. The proposal would also allow 100 percent of U.S. expenditures to be covered rather than the current 75
percent. This proposal would apply to all tax
years beginning after August 1, 1990, when the
current rules expire.

The budget proposes to make the 20 percent
research and experimentation (R&E) tax credit
permanent by allowing 100 percent of total
research expenses to be used for the computation of the credit for all years after December
31, 1989.
ENCOURAGING R&D INVESTMENTS BY
TRANSNATIONAL COMPANIES
The budget proposes to make permanent the
rules, as modified by the Omnibus Budget Rec-




A further discussion of the research and experimentation tax credit and allocation rules is
contained in Section Two, Part IV-B, "Receipts, User Fees, and Other Collections/'

92

THE BUDGET FOR FISCAL YEAR 1991

AGENCY R&D BUDGET TOTALS
In total, t h e 1991 budget proposes $71 billion
for research and development activities, including facilities. This is a n increase of $4.5
billion or 7 percent above 1990 levels. This

section has discussed t h e major R&D initiatives contained in t h e budget, including significant cross-agency issues. A complete list of
R&D funding by agency is shown below.

FUNDING OF RESEARCH AND DEVELOPMENT BY DEPARTMENTS AND
AGENCIES
(Dollar amounts in millions)
Budget Authority
Department or Agency

1990

Dollar
change

Percent
change

37,226
8,506
6,023

38,714 + 1,488
8,933
+428
6,058
+35

+4
+5
+1

37,064
8,055
5,599

6,382
1,766
1,108
503

8,414 +2,032
1,983
+218
1,184
+76
493
-10

+32
+ 12
+7
-2

5,773
1,744
1,084
469

acted

Conduct of R&D:
Defense-military
Health and Human Services
Energy
National Aeronautics and Space
Administration
National Science Foundation
Agriculture
Interior
Environmental
Protection
Agency
Commerce
Transportation
Agency for International Development
Veterans Affairs
Other Agencies 1
Subtotal, Conduct of R&D
R&D facilities
Total 2

Outlays

1991
Proposed

1990
Enacted

1991
Proposed

Dollar
change

Percent
change

37,547
8,568
6,019

+483
+ 514
+420

+1
+6
+7

7,547 + 1,774
1,944
+ 200
1,156
+72
499
+ 29

+31
+ 11
+7
+6

431
425
336

460
443
422

+29
+ 18
+ 86

+7
+4
+26

393
441
387

435
406
426

+42
-35
+39

+ 11
-8
+ 10

230
215
561

214
201
621

-16
-13
+60

-7
-6
+ 11

306
214
556

289
205
592

-17
-9
+36

-5
-4
+6

63,711
3,023

68,140 +4,429
3,059
+36

+7
+1

62,085
2,590

65,632 +3,547
2,738
+ 149

+6
+6

66,734

71,199 +4,465

+7

64,674

68,370 +3,695

+6

1
Includes the Departments of Education, Justice, Housing and Urban Development, Labor, the Treasury, the Nuclear
Regulatory Commission, Tennessee Valley Authority, Smithsonian Institution, and the Corps of Engineers.
2
Components may not add to totals because of rounding.




III.D. INVESTING IN HUMAN CAPITAL
Increases in the Nation's standard of living
depend mainly on the rate of improvement in
productivity. Productivity growth depends on
both physical investment in plant and machinery and, in critical measure, on investment in
human capital. Human capital is estimated to
account for three-quarters of the nation's productive capital stock, and human capital investment has made substantial contributions
to productivity and economic growth throughout our history.
Enhancing investment in human capital is a
key priority of the President and a major
policy emphasis of this budget. The documented deficiencies in American educational per-

formance are a threat to our future well being.
Although the primary responsibility for education in America rests with the States, localities, parents, and the private sector, the Federal Government has several important roles
to play.
This section highlights proposals which will
expand educational research, improve the
quality and usefulness of education statistics,
help more young children become better prepared for school, increase Federal resources for
programs targeted to those most in need, support educational reform, and strengthen job
training.

REFORMING AMERICAN EDUCATION
THE STATE OF AMERICAN EDUCATION
The failings of our educational system were
brought to the forefront of the Nation's consciousness by the report, "A Nation At Risk,"
commissioned by the Federal Government in
1983. The report highlighted declines in
achievement and the dangers they pose to the
future of our country. It prompted every State
to study educational problems and to improve
performance.

graduation requirements, improving teacher
compensation and training, and lengthening
the school day and school year. States also
substantially increased spending on schools.
But these changes have not been sufficient.
Whether measured by changes in achievement
within this country or by comparisons with
children in other countries, American children
still do not have adequate mastery of basic and
higher-order skills to become fully productive
citizens and members of the work force.

State initiatives that were prompted by the
report focused on changing promotion and




93

94

THE BUDGET FOR FISCAL YEAR 1991

GRADE 9 SCIENCE ACHIEVEMENT IN THE U.S. LAGS BEHIND
OTHER INDUSTRIALIZED COUNTRIES

Achievement
Scores

26-

Hungary

Japan

Canada

Finland

Sweden

Source: International Association for the Evaluation of Educational Achievement

Much of the problem of low educational
achievement is related to changes in our culture. Many parents seem less involved in their
children's education. Drug and alcohol abuse
and the damage they cause to the learning
environment have become facts of life in too
many communities. The National Assessment
of Educational Progress reports that children
devote more time to watching television than
doing homework; indeed, school-age children
watch television for nearly as many hours as
they spend in the classroom. All of these
changes, and others, make the schools' job
much more difficult, and help explain why
more spending on education, by itself, cannot
solve the problem.
In fact, the nation's spending on schooling at
all levels has risen dramatically. Over 6 percent of GNP is devoted to education. Total




England

U.S.

spending on education is estimated to be $353
billion in 1990, representing real increases of
29 percent since 1980 for elementary and secondary education and 36 percent for higher
education. During this period, elementary and
secondary enrollments were declining, so
spending per pupil was rising at even faster
rates.
More significantly, however, there is little
relationship at the national level between student achievement and spending. As the chart
shows, student achievement scores on tests of
the National Assessment of Educational
Progress have not improved significantly since
the early 1970's (although there have been important changes for certain groups). At the
same time, spending per pupil at the elementary and secondary level has risen steadily.

III.D.

95

INVESTING IN HUMAN CAPITAL

EDUCATION SPENDING RISES BUT ACHIEVEMENT STAYS LEVEL
$ Thousands

SCHOOL YEARS

The improvements necessary for American
education require cooperation between all
levels of government, full involvement of parents and participation of the business sector,
careful definition of where increased spending
may be beneficial, a much stronger focus on
accountability for results, and development
and use of good information from research and
statistics on what progress is being made and
where better strategies are needed.
THE FEDERAL ROLE IN EDUCATION
The principal Federal role in education is to
identify and inform the public of the strengths
and weaknesses of the system; to highlight
ways to make improvements; and, where possible, to encourage innovation and constructive
change. "A Nation at Risk" is an example of
how the Federal Government has carried out
this role in the past. In his first year in office,
President Bush exercised leadership by his frequent personal expressions of concern and
commitment, by transmitting to Congress the




Educational Excellence Act, by creating a
President's Educational Policy Advisory Committee and by convening the President's Education Summit With Governors. These initiatives are discussed further below.
The Federal Government also plays a limited, but important, role in education finance. It
supports educational research and statistics to
describe the educational system and its problems and help point the way toward improvement. Substantial funding is provided for programs targeted on aid for the disadvantaged
and the handicapped. Low income persons
seeking higher education overcome financial
barriers with Federal grants, and with subsidized loans and job assistance.
Just three months after assuming office,
President Bush forwarded to Congress a request for over $400 million in new funding for
a series of important new initiatives in education. In the 1991 budget, his first full budget,
the President proposes major increases for education programs. The 1991 budget requests for

96

THE BUDGET FOR FISCAL YEAR 1991

education activities are larger than any ever
passed by Congress.

• to establish a process for setting national
educational goals;

The President's Educational Policy Advisory
Committee

• to seek greater flexibility and enhanced
accountability in the use of Federal resources to meet the goals;

Recognizing the need for advice on educational issues, the President appointed a national advisory committee. This committee is
headed by the chief executive officer of a
major corporation and includes other business
leaders, university presidents, state officials,
the leaders of the teacher unions, representatives of other education interests and of parents, teachers, school administrators, and the
media.
Unlike many other Federal advisory bodies,
this one will not just write another report and
disband. The President's goal is to have a continuing source of diverse and expert advice
and comment on education issues, options for
addressing those issues, and insights into appropriate Federal involvement in education.
The Education Summit
There has rarely been a more dramatic example of how the Federal leadership role in
education can be carried out than the historic
President's Education Summit With Governors. The critical nature of the education problem and its significance to national policy was
underscored for the Nation when, on September 27-28, 1989, the President convened the
Cabinet and the Governors to address American education.
The President and the Governors defined
their central concern to be the "significant and
sustained educational improvement" of our
school children. They noted many encouraging
signs of change in education since 1983. They
agreed, however, that educational achievement
among all segments of the population is too
low to sustain the pace of improvement in the
quality of life that each generation of Americans has wanted and has achieved for the
next. They recognized that inadequate educational achievement also threatens our ability
to compete successfully in the rapidly changing world economy.
The President and the Governors reached
four primary agreements at the Summit meeting:



• to undertake a major State-by-State effort
to restructure the education system; and
• to report annually on progress in achieving the goals.
Areas identified in the Joint Statement for
consideration for national goals were:
• the readiness of children to start school;
• the performance of students on international achievement tests, especially in
math and science;
• the reduction of the dropout rate and the
improvement of academic performance, especially among at-risk students;
• the functional literacy of adult Americans;
• the level of training necessary to guarantee a competitive workforce;
• the supply of qualified teachers and up-todate technology; and
• the establishment of safe, disciplined and
drug-free schools.
The Summit commitment to flexibility and
accountability will require legislation. States
would be able to obtain waivers of certain statutory provisions in education, training and related programs if they can show that such
waivers would lead to higher achievement
levels for the target populations. Those Federal rules that are essential to assure service to
current target populations (the disadvantaged,
the handicapped, the unemployed) could not be
waived.
The President's 1991 budget policies reflect
careful examination of how best the Federal
Government can contribute to supporting the
Summit agreements; help States and the
schools achieve the national goals and improve
the achievement of our children; and measure
and report on progress.

III.D.

97

INVESTING IN HUMAN CAPITAL

The Federal Role in Education Finance
The primary responsibility for school policies, for the operation and improvement of the
schools, and for education finance, remains
where it has always been in America: at the
State and local level.

In elementary and secondary education, Federal spending has varied as a percent of overall spending but, consistent with the primacy
of State and local governments, has never exceeded ten percent.

ELEMENTARY AND SECONDARY EDUCATION FINANCE IS
PRIMARILY A STATE AND LOCAL RESPONSIBILITY
1

(End of School Year)

Sourca: National Center for Education Statistics, Digest of Education Statistics, 1086.

Notwithstanding its relatively limited role in
funding, the Federal Government does make
major investments across a range of programs
and activities that are critical to improving
education.




The 1991 budget proposes the highest spending levels ever for programs to prepare children for school and for discretionary education
programs.

98

THE BUDGET FOR FISCAL YEAR 1991

$ Billions

$1.2 BILLION INCREASE IN FUNDING FOR DISCRETIONARY
EDUCATION PROGRAMS IN 1991
(Budget Authority)

In the sections that follow, the key budget
policies in these areas are explained in more
detail.
MAJOR EDUCATION POLICIES IN THE
1991 BUDGET
Research and Statistics
For more than 100 years, a primary responsibility of the Federal Government in education has been to collect, disseminate and encourage the use of good information. The government also finances high quality research on
important issues and tests new ideas. The
money devoted to these functions is often overwhelmed in the public perception by the billions spent on operating programs. Nevertheless, these smaller investments can have the
greatest impact on education reform in the
long run.




Research and statistics have never been
more important, as the President and the Nation's Governors commit themselves to an intensive multi-year effort to improve educational achievement. This effort includes the establishment of national education goals and measurement of progress toward their achievement.
It is important to know how to educate and
train people better and how to find out which
new techniques lead to improved results.
The 1991 budget for the primary research
and statistics activities of the Education Department provides an increase of $34.5 million,
36 percent more than Congress provided in
1990. This includes a 50 percent increase for
statistics, from $40 million in 1990 to $60 million in 1991.

III.D.

99

INVESTING IN HUMAN CAPITAL

PROPOSED 36 PERCENT GROWTH FOR
EDUCATION RESEARCH & STATISTICS
$ Millions

FISCAL YEAR

Statistics improvements include $19 million
for the National Assessment of Educational
Progress, an increase of 10 percent over 1990.
This is one of the most important means to
measure and report educational achievement.
The remaining resources finance improvements and expansions in the collection of data
on trends in educational enrollments, staffing
and finances, and teacher supply and demand.
They also support longitudinal studies of student progress and technical assistance to
States and localities to improve their statistical systems.
Research and dissemination would increase
by $14 million from $55 million in 1990, to a
total of $69 million in 1991. Among the most
important investments proposed are: $5 million for new research on dropout prevention;
$22 million for support of a network of national research and development centers conducting research on educational technology, reading, effective teaching for the disadvantaged,
school leadership and other subjects; $7 million



for the Educational Resources Information
Center, a system which collects and disseminates information to teachers, administrators
and researchers across the country; and $20
million for regional education laboratories to
support local school improvement efforts.
Preparing Children to Learn
"The readiness of children to start school" is
the first national goal suggested by the President and the Governors at the Education
Summit. The most important influence on children's ability to learn when they enter school
is their home environment. No government or
other outside agency can substitute for a supportive homelife. Children who are disadvantaged or handicapped, however, may need
extra help because they are at special risk of
starting behind their peers when they enter
school. Accordingly, Federal programs to help
these children prepare for school have become
increasingly important. The 1991 budget continues and expands this emphasis on preschool

100

THE BUDGET FOR FISCAL YEAR 1991

preparation for the disadvantaged and handicapped.
Head Start—Head Start is the largest and
oldest Federal program designed to prepare
young children to succeed in school. Aimed at
giving an "equal place at the starting line" to
children who face extra challenges in keeping
up with their schoolmates, Head Start provides
comprehensive educational, medical, nutritional, social and other developmental services to
poor, preschool-age children. Because kindergarten is now almost universal for five year
olds, the majority of children served by Head
Start are four years old.

$ Millions

Since its inception in 1965, Head Start has
emphasized parental and community involvement. Head Start parents both receive services, such as parenting education, as well as
provide services by participating in local program administration, volunteering for program
work, and serving as paid staff. (Currently
almost one-third of Head Start's paid staff is
composed of present and former Head Start
parents, including many ex-volunteers who
have received credentials in early childhood
development.) In total, Head Start volunteers
number about 620,000 nationwide, more than
the number of children enrolled and eight
times the number of paid staff.

$500 MILLION INCREASE WOULD EXPAND
HEAD START FUNDING BY 36 PERCENT
(Budget Authority)

FISCAL YEAR

Over time Head Start has evolved from an
eight week summer program to a program that
uses a wide range of organizational and service
delivery models to meet the needs of poor children and their families in different communities. For example, projects can be center-based
or they can be home-based, depending upon




the community being served. Reflecting the
close ties that each Head Start project has to
its community, local sponsors are diverse,
ranging from community action agencies to religious organizations.
Research shows that Head Start children experience substantial immediate gains in cogni-

III.D.

101

INVESTING IN HUMAN CAPITAL

tive growth, school readiness and achievement.
To enable more children, as well as their families, to receive the benefits of Head Start, the
budget proposes to increase the program by
$500 million in budget authority, to a total of
$1,886 billion. This 36 percent increase over
the 1990 level would enable Head Start to
enroll up to 180,000 more poor four year olds.
As a result, the total percentage of eligible

children in this age group served could be as
high as 70 percent. Because 26 States and the
District of Columbia now fund their own preschool programs, and Federal funds support
preschool activities other than Head Start as
well, the percentage of poor four year olds benefiting from pre-kindergarten programs would
be even higher.

HEAD START COULD SERVE UP TO 70%
OF POOR 4-YEAR-OLDS
Percent

FISCAL YEAR

Other programs.—Increased resources for
Department of Education programs that benefit preschool children are also proposed in the
budget.
• Nearly 350,000 children attend pre-kindergarten and kindergarten programs funded
under the Chapter 1 Compensatory Education programs. The budget provides substantial increases for grants to school districts to support this and other programs
for the educationally disadvantaged, as
discussed in the sections that follow.




• Funding for Even Start would double, to
$48 million, allowing significantly increased participation in this program designed to provide basic education services
to parents together with their children
aged one through seven.
• Since 1987, the Department has provided
funds to States to develop systems to find,
and coordinate services for, handicapped
infants and their families. By 1991, every
State's system, by law, must be fully operational. The budget provides $83 million
for States to maintain these systems.

102

THE BUDGET FOR FISCAL YEAR 1991

• To pay part of the excess cost of education
and related services for handicapped children age three to five, the budget also provides $258 million under the Preschool
State Grants program.
Targeting Resources on Those Most in Need
One of the Federal Government's important,
long-standing commitments to education is its
support of programs that augment State and
local services for the disadvantaged. This commitment is of growing importance as more of
our population is made up of groups historically at risk of lower achievement in education.
The budget addresses the commitment by targeting additional funding on elementary and
secondary educational services for the disadvantaged and the handicapped, and by continuing to ensure that financial barriers to
access to higher education are reduced.
Elementary and secondary education.—The
largest program for remedial education serv-

ices for the disadvantaged is Chapter 1 Local
Education Agency and Concentration Grants.
Grants provide services to nearly 5 million
children each year. The 1991 budget request
for this program is $4.96 billion, an increase of
$366 million, 8 percent over 1990.
Funds to support State Program Improvement Plans for Chapter 1 schools that are not
succeeding in meeting their goals for the disadvantaged are nearly doubled over what Congress provided in 1990, from $12.5 to $24 million. Additional funding is also provided for
evaluation of these programs, to ensure that
this substantial investment is truly resulting
in increased achievement levels for the disadvantaged.
The chart below shows the combined funding for Chapter 1, the various smaller elementary and secondary programs, bilingual education and education of the handicapped.

$880 MILLION INCREASE IN ELEMENTARY AND SECONDARY SCHOOL
FUNDING FOR THE DISADVANTAGED IN 1991

$ Billions




(Budget Authority)

FISCAL YEAR

III.D.

103

INVESTING IN HUMAN CAPITAL

Student aid.—The other large program area
for Federal funding is postsecondary education
financial aid. The 1991 budget continues to
support over $18 billion in aid to almost 6
million students with budget authority of $9.5
billion. This aid, in the form of grants and
subsidized loans and jobs, helps make it financially possible for qualified students to obtain
a postsecondary education, regardless of family
income.
In recent years, some schools have taken advantage of the availability of Federal student
aid to enroll students who are not truly qualified for postsecondary education or for whom
they will not be providing a good education.
Many of these students are not equipped for
the job market when they leave school and
often drop out of school very early while the
school keeps the Federal aid. Some of these
dropouts have taken out large loans which
they cannot repay, and thus default. The Education Department is taking aggressive regulatory and administrative actions to stop these
schools from taking advantage of Federal aid
and of disadvantaged students. Additional legislative proposals will further strengthen the
Secretary's enforcement powers to prevent program abuses.
Much of the Federal student aid now supports vocational training, in addition to the
traditional support for students attending two
and four year colleges. The Administration is
considering means to rationalize support for
vocational training under the student aid programs, the Job Training Partnership Act, and
the Vocational Education Act.
The Educational Excellence Act
Shortly after taking office, President Bush
proposed eight education initiatives. In addition to providing renewed Presidential commitment to improved education, his goal was to
reinvigorate the education reform movement
by selectively adding Federal money in selected areas.
The President transmitted his bill, "The
Educational Excellence Act", on April 5, 1989.
This bill would give incentives to schools to
improve educational achievement, expand the
use of magnet schools, reward excellent teachers and students, promote the hiring of persons with proven subject matter knowledge



and management abilities to be teachers and
principals, increase the endowment funds of
the nation's Historically Black Colleges and
Universities, and provide special funding for
the school districts with the worst drug abuse
problems.
Congress did not complete action on the bill.
Appropriations were provided for 1990 for the
two largest programs, Merit Schools and
Magnet Schools of Excellence, contingent upon
passage of the authorizing legislation.
The budget assumes that Congress will pass
the Educational Excellence Act on a timely
basis. For 1991, the budget includes $401 million in budget authority for these programs.
Other Education Initiatives
Support for programs for the disadvantaged
absorbs the bulk of Federal education spending. Other Federal program activities are less
costly, but perhaps in the long run more important for educational improvement. The
budget for research and statistics and the Even
Start program have already been discussed.
Other key policies in the 1991 budget include:
Summit follow-up.—$20 million is requested
for activities related to implementing the
Summit Agreements. Uses may include activities to help States implement proposed legislation providing flexibility and enhanced accountability, and additional funding for development of measures of progress toward national educational goals.
Dropout demonstrations.—$45 million is requested for a program of dropout prevention
demonstrations. These projects will be carefully designed to build on the learning from $22
million in dropout demonstrations now coming
to an end. Coupled with evaluation of the prior
demonstrations, and $5 million in new dropout
research, these projects will help States learn
how to prevent young people from dropping
out of school and how to help them return to
school if they do drop out.
School principals.—Principals and other administrators play essential leadership roles in
school reform. A new $25 million program is
included in the budget that will improve the
abilities of school principals and other administrators. Under this program, talented persons

104

THE BUDGET FOR FISCAL YEAR 1991

preparing to become principals will receive
some short-term training and then spend a
year with a proven successful principal to
learn from this "mentor" how best to address
the complex problems of school administration.

Working Group on Education is coordinating
literacy initiatives across many agencies of
government, and is developing plans for close
cooperation with volunteer and private sector
literacy action efforts.

Mathematics and science education.—$230
million is proposed for the Dwight D. Eisenhower Mathematics and Science Education
programs, a 70 percent increase over what
Congress provided in 1990. These programs
provide funds to States to improve the knowledge and teaching abilities of mathematics and
science teachers. In addition, programs for science, mathematics and engineering education
in the National Science Foundation are proposed to be increased by $100 million, to $460
million, a 28 percent increase over 1990. Other
Federal agencies, such as the National Aeronautics and Space Administration and the
Energy Department, also have education initiatives. The Domestic Policy Council Working
Group on Education is providing coordination
across agencies.

Historically black colleges and universities.—
$95 million is provided to support the operations of historically black colleges and universities and graduate institutions. Most importantly, an additional $15 million is provided
for matching endowment grants for these institutions, triple the amount provided in 1990.
Encouraging the building of endowments is the
government's most effective contribution to
the future financial independence of these institutions.

Literacy.—$239 million is proposed for the
Adult Education programs of the Department
of Education, an increase of more than 25 percent over what Congress provided in 1990. In
1991, $200 million would be distributed to
States to help finance remedial education and
thus to improve the literacy levels of adults.
The Education Department will also create a
new Adult Literacy Clearinghouse to help
States, volunteer groups and the private sector
share knowledge of what works in literacy programs. Funding is also proposed to be doubled
from $3 million to $6 million in 1991 for the
VISTA (Volunteer in Service to America) Literacy Corps of the ACTION agency, which supports volunteer efforts to overcome the problems of illiteracy. The Domestic Policy Council

SUMMARY OF THE EDUCATION BUDGET
AND POLICIES FOR 1991
The 1991 budget for the Education Department asks Congress to provide $1.2 billion
more in 1991 than it did in 1990 for discretionary programs. This is a 6 percent increase. The
projected decline in interest rates, to which
guaranteed student loan subsidies are tied,
produces anticipated savings of nearly $700
million which help finance the discretionary
program increases. The combination of discretionary increases and loan subsidy savings results in a total Federal Education Department
budget of $24.6 billion, an increase of $500 million over total 1990 budget authority. This is
the largest education budget ever proposed.
The Presidential and State commitments to
educational improvement supported by this
budget represent a new beginning for national
education policy. There can now be some cautious optimism for improvements in education
in the 1990s and far into the next century.

IMPROVING JOB TRAINING OPPORTUNITIES
Learning does not end with graduation from
high school or college. It is a constant life-long
process. If giving every child the opportunity
for a basic education is essential in a democratic society, so is providing access to additional training beyond the classroom. Al-




though most job training is provided by employers for their employees, the government
also provides second chance job training for
those with poor skills who have not succeeded
in the traditional education establishment or
work environment.

III.D.

105

INVESTING IN HUMAN CAPITAL

THE CHANGING WORKFORCE OF THE
1990s
Emerging demographic trends, coupled with
higher job skill requirements, will challenge
the nation's ability to supply the highly skilled
workers needed to sustain economic growth in
the 1990s.
During the next decade the workforce is expected to grow more slowly than at any time
since the 1930s. While the labor force exploded
during the 1970s, growing 2.9 percent annually, in the 1990s labor force growth is expected
to drop to 1 percent each year. Such a slowdown in workforce expansion will tighten labor
markets and encourage employers to invest
more resources in their current employees as
well as increase commitments to new types of
entry-level training.
In addition, employers will find the workforce becoming older as the pool of young labor
force entrants shrinks. By the year 2000, the
average age of U.S. workers will climb to 39
years, compared with 36 years currently. The
number of young workers age 16-24 will drop
by almost 2 million, or 8 percent. While tomorrow's workforce will be more experienced, it
may also be less adaptable. Older workers are
less likely to move, change occupations, or to
undertake training than their younger counterparts. Industries that have grown by relying
on young, flexible workers are likely to find
them in short supply during the 1990s.
Employers will find other changes as they
recruit employees. Women will be almost twothirds of new labor force entrants, while minorities are going to account for about 30 percent, or twice their current share of the workforce. In addition, immigrants will represent
the largest share of the increase in the workforce since World War I. These trends can be
expected to encourage employers to offer employment and training to workers many traditionally have not hired.
Coupled with the changing demographics of
the labor force, the jobs of the future will
demand greater education and more complex
skills. Low skill jobs are declining. Of all new
jobs that will be created by the turn of the
century, more than half are expected to require some training beyond high school, and
almost one-third will be filled by college gradu


ates. Today, less than one-fourth of all occupations require a college degree. By contrast, on
average, jobs created during the 1990s will require 13.5 years of education, compared to 12.8
years for the current workforce.
Many young workers entering the workforce
lack basic reading, computing, and analytic
skills. Minority workers, who have been concentrated in lower skill occupations, will require greater training and education than in
the past to fill the higher skill jobs created in
the 1990s.
INDUSTRY'S ROLE
The responsibility for investing in the nation's current workforce rests primarily with
the private sector. Labor market trends in the
1990s are likely to prompt U.S industry to step
up its investment in human capital.
In total, U.S. industry already spends some
$30 billion annually on formal worker education and training programs. On average, private sector firms spend about 1.4 percent of
payroll on training programs, but expenditures
by larger firms can reach 2 to 4 percent. Currently, about one in ten American employees
receives some formal employer-provided training. In addition to expenditures for formal
training programs, employers spend anywhere
from three to six times as much—some $90
billion to $180 billion—for unstructured training. In fact, such training is the principal
means by which small business integrates
technical, economic, strategic, and regulatory
change into the workplace.
The substantial commitment of employers'
resources to worker training is expected to increase. Two-thirds of all workers who will
make up the U.S. labor force in the year 2000
are already working. To upgrade skills of current employees and new labor force entrants
alike, additional private sector training efforts
will be needed. Moreover, given the demographics of the new labor force entrants, training programs of the 1990s will have to embrace
more minority workers, who represent about
15 percent of the workforce but receive only 8
percent of all formal training.
Business has shown it is increasingly committed to human capital investment not only

106
in the plant, but in the schools as well. U.S.
firms already participate in many education
partnership programs in which they guarantee
jobs to qualified students upon graduation,
donate money and equipment, and offer on-site
teacher training. Business also demonstrates a
growing willingness to participate more actively in educational reform. In a 1989 survey of
the Fortune 500 companies, two-thirds of corporate executive respondents indicated their
companies would be willing to take additional
steps to help improve public schools. Sixtyeight percent responded that, if asked, they
would personally contribute their time in the
future to help the public education system.
To spur human capital investment, business,
labor and academia recently joined forces to
launch the Commission on the Skills of the
American Workforce. Funded by a grant from
the Carnegie Foundation, the 34-member commission will interview more than 2,000 business executives, employees, and policy officials
in seven industrialized nations to determine
the skills American workers need to compete
in the next decade. The Commission's report
will offer policy options for industry and government to improve worker skill levels.
Under the recently enacted changes to the
Federal minimum wage law, which include a
training wage, industry will continue to have
flexibility to hire unskilled young labor force
entrants. Set at 85 percent of the Federal minimum wage, the training wage may be paid to
16 to 19 year olds for up to three months. This
wage may be extended to six months if the
youth's job is part of a certified training program. The training wage was established to
preserve the opportunity for young workers to
enter the workforce and receive the training
necessary to further their vocational development. The lower wage will help encourage employers to develop training programs which, in
turn, will provide employment opportunities
and on-the-job instruction for unskilled youth,
helping them onto the first rung of the job
ladder.
THE FEDERAL GOVERNMENT'S ROLE
The Federal Government contributes about
one dollar in ten to the aggregate expenditures
on formal job training. Its role is limited and,
in general, targeted to serving those with the



THE BUDGET FOR FISCAL YEAR 1991

least skills through "second chance" programs.
This secondary training system comprises both
public and not-for-profit institutions that offer
federally funded, locally delivered basic skills
training and job training to those not being
served by the public schools or employers. Assistance is targeted on school dropouts, public
assistance recipients, the underemployed, and
the working poor, and complements private
sector efforts.
There is no doubt that the connection between skill acquisition and economic opportunity is powerful and growing. Education and
skills determine an individual's earning power,
and those with poor skills are condemned to
lower earnings and limited choices. Direct government support of training programs is intended to expand access to jobs by the disadvantaged and increase their earning capacity.
Over the last 15 years the Department of
Labor has spent approximately $57 billion on
job training and related programs, including
classroom and on-the-job training. However,
despite this large investment, it is not clear
from the available evidence that these training
programs have significantly increased participant wages.
The Job Training Partnership Act
The Administration has recently proposed
improving Federal job training assistance
through amendments to the major federal job
training program—the Job Training Partnership Act (JTPA). Enacted in 1982, the JTPA is
the latest in the evolution of job training programs. JTPA has strengthened the role of employers in second chance programs. Experience
shows that skill training in the context of a job
or a real job prospect has a positive effect on
improving employment opportunities.
Spending about $4 billion annually, the
JTPA programs train economically disadvantaged adults and youth, dislocated workers,
and other groups who face employment barriers, such as veterans, Native Americans, and
migrant and seasonal farm workers. JTPA's
current $1.7 billion block grant for training
youth and adults serves almost 900,000 new
participants each year through grants to
States and localities. Industry participates
through JTPA's Private Industry Councils,
which help design and administer training pro-

III.D.

107

INVESTING IN HUMAN CAPITAL

grams. Performance standards help ensure
program accountability. Other large-scale assistance under the current program structure
includes $700 million for subsidized summer
jobs and remediation for some 500,000 disadvantaged youth and $464 million for training
dislocated workers. More than $800 million is
provided for training the most disadvantaged
youth at over one hundred residential Job
Corps centers nationwide.
The 1991 budget and recent Department of
Labor initiatives seek to refine the Federal
Government's role in the second chance job
training system. These initiatives acknowledge
that the Federal Government plays a special,
limited role in overall training, and encour-




ages employers to become more involved in job
training. In June 1989 the Administration proposed amendments to JTPA that would sharpen its focus on the least skilled, while maintaining JTPA's successful public-private partnership. As noted above, potential labor shortages emphasize the pressing need to bring
America's most disadvantaged into the labor
force and equip them with marketable skills.
The Administration's "Job Training Partnership Act Amendments of 1989" would help accomplish this goal by revising eligibility criteria to ensure that the most disadvantaged receive services; providing more intensive and
comprehensive services to participants; and
improving coordination among Federal, State
and local human resource programs.

INCREASED SPENDING FOR FEDERAL JOB TRAINING PROGRAMS
(Budget Authority)

FISCAL YEAR

108
A keystone of the JTPA amendments is the
creation of two highly targeted State grant
programs, one targeted only on low-income atrisk youth, the other on low-income adults. Financed at $1.7 billion, the new at-risk youth
program will prepare almost 683,000 economically disadvantaged youth for the world of
work, while nearly 370,000 adults will be
served under the proposed $966 million adult
grant. This targeting is not without risks. Over
time it has become evident that it is far easier
to train and find jobs for those who have relatively good education and some previous training. Job placement rates are much higher for
high school graduates than for dropouts, and
recent studies of JTPA programs suggest the
majority of participants had high school diplomas. Thus, the JTPA amendments will target
the most difficult to serve. This may mean
higher per person costs and lower job placement rates, but those who need a second
chance to boost themselves into a job the most
will have the first opportunity to succeed.
Additional Federal Initiatives
Youth Opportunities Unlimited.—The Administration has proposed a new, $50 million
multi-year challenge grant program entitled
Youth Opportunities Unlimited (YOU). Targeting high-poverty inner cities and rural areas,
this program is designed to have communitywide impact, serving as a model in developing
a local coordinated human resource policy for
at-risk youth. YOU will require grantees to
provide matching funds and identify specific
goals for which the funds will be used, such as
high school completion by all youth in the
target area. In addition, the local grantees will
have to provide a comprehensive array of
youth services, coordinate services provided by
state and local job training, welfare, education,
housing and anti-drug programs, and include
participation by the private sector, school
boards, PICs, and local government. The program is intended to marshal a variety of resources to help assure that at-risk youth stay
in school and develop marketable job skills.
Job Opportunities and Basic Skills.—Resources from JTPA and YOU will augment the
education and employment resources that are
available to serve welfare families through the



THE BUDGET FOR FISCAL YEAR 1991

Food Stamp work and training program and
through the new Job Opportunities and Basic
Skills (JOBS) program enacted as part of the
Family Support Act of 1988. The budget includes $1,133 billion for these programs in
1991. Publication of the final JOBS regulations
on October 13, 1989, exactly one year after the
President signed the Family Support Act into
law, testifies to the high priority which the
Administration has placed on implementation
of JOBS. Coordination of JOBS with JTPA and
other education and training programs serving
the disadvantaged is required by law.
Under JOBS, recipients of Aid to Families
with Dependent Children with no children
under the age of three (or age one at State
option) are required to participate in education, employment and training activities intended to enable them to move toward selfsupport. Parents under age 18 who have not
completed high school are required to stay in
or return to school, regardless of the ages of
their children. To ensure that States actually
involve significant numbers of recipients in
employment and training activities, JOBS contains participation standards that increase
over time until, in 1995, 20 percent of those
not exempt from participation must be actively
participating.
Skills Commission—As part of the Administration's continuing interest in involving the
private sector in training, the Secretary of
Labor will appoint a "Commission on Achieving Necessary Skills". This blue ribbon panel
of business, labor, and education leaders will
develop national competency guidelines of
work readiness that identify skills employers
require and workers need on the job. While
these guidelines are not intended to be mandatory, they will provide a yardstick that local
schools, educators, and job training programs
can use to help develop curricula that prepare
students for productive work lives.
School to Work Conference— About half of
our youth go directly to work after high school
graduation. For them, the transition from
school to work is crucial if they are to launch
their careers successfully. This spring, the Secretary of Labor will convene a School to Work
National Conference of employers, unions, educators, and training professionals to review
and discuss the school-to-work issue and share

109

III.D. INVESTING IN HUMAN CAPITAL

effective programs. The conference may yield
suggestions on how business and education can
smooth this job-testing period for youth.
Family Clearinghouse.—While the human
capital investment employers provide is crucial
to maintaining a productive workforce, it
won't be effective if employees are forced to
leave the labor force because of conflicts between work and family. Assistance to workers
and employers in successfully achieving the
delicate balance of work and family responsibilities is being addressed by the Department
of Labor. A recently established clearinghouse
at the Department provides information to
anyone on examples of child care models. The
Department of Labor plans to expand this
clearinghouse over the next year to include
information on elder care, parental leave, and
flexible benefit packages. This information will
help employers and workers structure programs that will improve worker productivity
and efficiency.
Workplace Training.—The Secretary of
Labor is initiating a research and demonstration program to explore the extent to which
government can promote private training efforts. The demonstration will form partnerships with industry to encourage structured
training programs and build a voluntary
system for accrediting workplace training programs.




Over the next decade, demographic and
labor market forces will challenge U.S. firms
to equip their workers with new and better
skills. A slow-growing, aging workforce with
many educationally disadvantaged new entrants will require lifelong learning to sustain
productivity growth crucial to economic expansion and U.S. international competitiveness.
Government training programs such as the
Job Training Partnership Act can supplement
stepped-up private efforts to close the gap between the skills American workers bring to
their work and the skills needed for the increasingly complex jobs of the 1990s.

PROPOSALS FOR ENDING THE
SCOURGE OF DRUGS
Efforts to enhance the Nation's human capital will be undermined unless America ends
the scourge of drugs. Drug abuse diminishes
human capital because it impairs the capabilities of all who are affected. It reduces productivity and economic growth. Ultimately, it can
destroy the very quality of life that investment
in human capital is meant to advance. A strategy for combatting drug abuse, therefore, is an
essential complement to a program of investment in human capital. The next chapter describes the Administration's drug control strategy and proposals.




III.E.

ENDING THE SCOURGE OF DRUGS

"... the war on drugs will be hard-won, neighborhood by neighborhood, block by block, child by
child. If we fight this war as a divided nation,
then the war is lost. But, if we face this evil as a
nation unified, our children will have a brighter
future . . P r e s i d e n t Bush, September 5, 1989

Waging the war on drugs continues to be a
high-priority concern of the Administration,
the Congress, and the American people. If our
investment in human capital is to yield real
dividends, the negative effect of drug use must
be reduced. Drug use and its associated crime,
health, and social problems can offset many of
the gains realized by education and job training.
For individuals addicted to drugs, the cost to
themselves and their families is a tragedy. The
babies of drug addicts are the most tragic example of all—innocent casualties of the Nation's drug problem.
The costs of drug use extend beyond individuals and their families, however. One study
estimates that on-the-job drug use costs American businesses $60 billion a year in lost pro-

ductivity and drug-related accidents. Drug-related medical expenses alone may cost tens of
billions of dollars each year. No one can fully
measure the lost opportunities to our society
because some of its members are too caught up
in drugs to make a contribution.
The 1991 Federal drug control budget totals
$10.6 billion. This budget will provide $2.8 billion more outlays than the Congress enacted
last year—a 41 percent increase.
While the Federal Government will continue
to move forward in fighting this war, it requires a combined effort from State and local
jurisdictions, as well as private employers,
community organizations, and families. Many
have already responded and they have made a
difference. Several of the programs contained
in this budget are designed to complement and
encourage the continued participation of the
States, cities, neighborhoods, and individuals.
With each doing its part, contributing time
and resources, it is a war that can be won. The
Administration's drug strategy must be a truly
national strategy—not just a Federal strategy.

FEDERAL DRUG PROGRAMS—STEADY HIGH GROWTH IN SPENDING
(Dollar amounts in billions)

1981

Budget Authority
Outlays

1.4
1.4

1983

1.9
1.8

President Bush's National Drug Control
Strategy outlines a three-pronged plan of
attack against all fronts of the drug problem.
Attacking the Drug Market at the Source and
on the Street—Disrupting traffickers who distribute drugs is the major goal of this effort,
through expanded aid to foreign countries



1985

2.6
2.4

1987

4.6
3.6

1989

6.3
5.6

1990

9.5
6.9

1991

10.6
9.7

Percent
increase
1990-91

+12%
+41%

where drugs originate and traffickers get their
supplies, and through an effective criminal justice system in this country to deal with both
sellers and illegal users.
Treating the Drug User: Supporting Those in
Need of Help.—Assisting those who are using
drugs to stop is critical. Treating drug abuse is
ill

112

THE BUDGET FOR FISCAL YEAR 1991

difficult and there are no guarantees, but
there are many drug users who could benefit
from effective treatment.
Preventing Drug Use: School, Workplace and
Community Drug
Prevention.—Encouraging
people to not start using drugs is one of the
most important investments to be made. All
individuals, and especially young people, must
be provided with knowledge of the dangers
posed by drugs and the information necessary
to reinforce their resistance to drug use.
ATTACKING THE DRUG MARKET AT
THE SOURCE AND ON THE STREET
Every participant in the distribution of
drugs is breaking the law—from the manufacturer to the user. The strategy's goal is a
simple one—to make it as difficult as possible
to buy or sell drugs in this country by reducing
drug availability and deterring drug activity.
The Federal Government does this in a variety
of ways:
• disrupting and reducing drug production;
• interdicting drugs destined for the U.S.;
• targeting investigations on large drug trafficking networks;
• seizing the assets of drug dealers;
• investigating
ations; and

money

laundering

oper-

• assisting State and local law enforcement
agencies in their anti-narcotics efforts.
To this end, a total of $7,560 million in
budget authority (a 12 percent increase) is
sought for drug law enforcement.
At the Source
Most of the dangerous drugs consumed in
the United States are produced in other countries. For example, virtually all of the coca leaf
used to manufacture cocaine destined for this
country is grown in three nations: Peru, Colombia, and Bolivia. Heroin production also
takes place beyond U.S. borders. However, a
quarter of all the marijuana consumed is
grown in this country. A significant amount of
dangerous drugs also is manufactured in clandestine U.S. labs.



Foreign drug production and trafficking
threaten more than just the U.S. population.
Production capacity of cocaine and heroin has
grown worldwide. After flooding the U.S.
market with cocaine, the drug lords began to
search for new markets, and European nations
are discovering that cocaine availability has
increased. These same nations also have struggled with the problem of heroin for many
years.
Drug production and trafficking are also
problems for the source countries themselves.
The profits distort already fragile economies.
Few legitimate crops can compete with the
prices paid for coca leaves or opium poppies.
Drug exports provide these countries with
much-needed foreign exchange. Some traffickers have used their drug profits to purchase
arms and support terrorist activities that
threaten democratic institutions in source and
transit countries.
The Administration's international narcotics
policy is a long-term commitment. Last year,
the President approved a 5-year, $2 billion
plan for the cocaine source countries—Colombia, Peru, and Bolivia. This plan greatly increases military, law enforcement, and economic assistance levels to help these countries
fight the war against the cocaine industry.
The 1991 portion of the plan maintains high
levels of military and law enforcement assistance and calls for an increase in economic assistance to Peru and Bolivia, if these countries
meet certain performance measures in 1990
demonstrating that they are willing to take
significant steps against the cocaine industry
and the people who run it. The 1991 budget
includes the following proposals.
• The Administration requests an increase
of $175 million in economic assistance for
the Andean nations to complement military and law enforcement programs begun
in 1990. If the Andean countries show demonstrable progress in 1990, the total assistance package will reach $440 million in
1991.
• The Administration also plans to increase
anti-drug efforts in other parts of the
world. A $15 million increase is proposed
for drug control programs in countries
that produce marijuana and heroin, or

III.E.

ENDING THE SCOURGE OF DRUGS

113

serve as trans-shipment points for these
substances.

forcement Task Forces. This represents a
54 percent increase over 1990.

• The domestic production of illicit drugs
will not be tolerated. In addition to other
domestic law enforcement efforts, $35 million is requested for domestic marijuana
eradication.

• $50 million, a $25 million increase over
1990, is proposed to be targeted on high
intensity drug trafficking areas.

• Interdiction programs help secure our borders against illegal drugs entering the
country. The $2.4 billion proposed for air,
land, and maritime operations provides obstacles to drug smugglers, including seizure of illegal shipments, and can ultimately reduce the availability of drugs in
the United States.
On the Street
In addition to disrupting the entry of illicit
drugs and their distribution, a strong enforcement effort is necessary to deter both the sale
and purchase of drugs. Increased law enforcement efforts can raise the price of drugs,
reduce their availability and increase the risk
of arrest for dealer and user alike. Effective
law enforcement thus can reduce both drug
supply and demand.
For enforcement to be a deterrent, it must
be backed up by punishment that is swift and
certain. The 1991 resources requested for all
drug law enforcement programs, which constitute an $813 million increase over 1990 levels,
will provide an expanded but balanced criminal justice system where the consequences of
selling and using drugs include arrest, prosecution and punishment.
To reduce drug profits, Federal agents will
continue to seize the assets of convicted drug
dealers. In 1989, the Treasury and Justice Departments' seizures totalled $806 million.
Drug law enforcement proposals for 1991 include the following.
• A total of $330 million is requested for the
13 regional Organized Crime Drug En-




• An estimated $238 million from seizures
will be shared with State and local law
enforcement agencies—their fair share of
Federal seizures of drug dealers' assets.
• $700 million is requested for the Drug Enforcement Administration (DEA). The $151
million increase over 1990 represents one
of the largest annual increases in the history of the agency.
• Within the DEA budget request is a 30
percent increase for State and local task
forces to $42 million in 1991.
• $172 million, a $32 million increase over
1990, is requested for the FBI's anti-drugabuse activities.
• The budget proposes $182 million for the
U.S. Attorneys to prosecute drug dealers
and users. This is a $45 million increase
over 1990. A 30 percent increase, a total
request of $201 million, for the U.S. Marshals is also proposed.
• The budget contains a $79 million increase
for the Judiciary branch, for a total of
$403 million, to try accused drug offenders.
• In addition to the increased Federal law
enforcement presence in our cities, $492
million is requested for State and local law
enforcement grants, a 10 percent increase
over 1990.
• The Administration has proposed legislation to require States to adopt drug-testing
programs throughout their criminal justice systems as a condition for receipt of
Federal criminal justice funds.

114

THE BUDGET FOR FISCAL YEAR 1991

ATTACKING THE DRUG MARKET AT THE SOURCE AND ON
THE STREET
(Dollar amounts in millions)
1990

1991

Dollar
change

Percent
change

Budget authority total
International programs
State and local assistance
Interdiction
Other law enforcement*

6,747
419
670
2,029
3,628

7,560
690
810
2,373
3,687

+813
+271
+ 140
+344
+ 59

+ 12
+ 65
+ 21
+ 17
* +2

Outlays total
International programs
State and local assistance
Interdiction
Other law enforcement

4,898
268
368
1,702
2,560

6,849
417
648
1,982
3,802

+ 1,951
+ 149
+ 280
+ 280
+ 1,242

+40
+56
+76
+ 16
+49

"This category includes prison funding. Prison funding declines between 1990 and
1991 because 1990 included a prison construction build-up that need not be duplicated in
1991 to reduce prison overcrowding to acceptable levels. If prison funding were stripped
from the "other law enforcement" estimates, the 1990 and 1991 estimates would be
$2,128 million and $2,642 million, respectively. This represents a $514 million (24
percent) increase over 1990.

TREATING THE DRUG USER:
SUPPORTING THOSE IN NEED OF HELP
Illicit drug use is down, according to The
National Institute on Drug Abuse's (NIDA)
1988 National Household Survey (see the following chart). Along with this good news came




some bad. While overall cocaine use is down,
habitual cocaine use has increased dramatically in the last 3 years. Much of this increase is
attributed to the highly addictive form of cocaine, crack.

115

III.E. ENDING THE SCOURGE OF DRUGS

NATIONAL HOUSEHOLD SURVEY OF CURRENT
DRUG USE BY YOUNG ADULTS

Percent reporting use
in previous 30 deys
40-

9

^

- 25)

MARUUANA
30 -

20-

COCAINE
10-

1979
CALENDAR YEAR

The evidence suggests that while the total
number of drug users is getting smaller, those
who continue to use drugs are using them
more frequently and in greater quantities. As
a result, the problems associated with drug use
continue to grow. For example, cocaine-related
medical emergencies rose over 400 percent and
cocaine related deaths increased 150 percent
from 1984 to 1988. Health problems associated
with the use of other illegal drugs are increasing as well.
As their physical and mental health problems increase, more and more users are entering, either voluntarily or involuntarily, drug
treatment programs. Drug treatment must
continue to be available for those who can ben-




1982

1986

1988

efit from this assistance and users must be
matched with the most appropriate programs.
Helping an individual to stop using drugs is
particularly difficult, however. There is no one
"cure" for drug addiction and it is not certain
what types of treatment "work." A substantial
investment has already been made in treatment research and more will be learned from
those efforts. As new drugs and challenges continue to emerge, additional research into effective treatment methods is needed.
For 1991, the Administration requests $1,674
million for drug treatment activities, a 12 percent increase over 1990 in budget authority
and a 45 percent increase in outlays.

116

THE BUDGET FOR FISCAL YEAR 1991

TREATING THE DRUG USER: SUPPORTING THOSE IN NEED OF
HELP
(Dollar amounts in millions)
1990

Budget authority
Outlays

1,490
1,148

1991

1,674
1,667

D°llar
change

+184
+519

P

®rcent
change

+12
+45

• The President's 1991 budget contains $760
million for Alcohol, Drug Abuse and
Mental
Health
Administration
(ADAMHA) drug treatment grants and
technical assistance for the States, an increase of 11 percent over 1990.

• To further the effectiveness of existing
treatment programs, the Administration is
proposing an increase of $30 million for
treatment research and data collection by
HHS.

• In addition, the Administration requests a
total of $300 million for the Department of
Veterans Affairs to provide drug treatment services.

PREVENTING DRUG ABUSE: SCHOOL,
WORKPLACE AND COMMUNITY DRUG
PREVENTION

• The Administration also proposes to triple
assistance for the smallest victims of the
drug problem, "crack babies." This $6 million increase will be targeted at crack/
HIV-infected babies.
• To ensure that those seeking treatment
are referred to the most appropriate program for their particular needs, the Administration has proposed legislation to require that States prepare comprehensive
treatment plans prior to receiving Federal
funds.




The Administration has been and remains
committed to an aggressive drug abuse prevention program. Potential users must be convinced never to start using drugs. Recently,
based on evidence from high school seniors, it
appears that fewer students are being recruited into the ranks of users. The following chart
shows that reported drug use among high school
seniors has been on the decline—marijuana use
has been on a downward trend since 1979 and
cocaine use has fallen since 1985.

III.E.

117

ENDING THE SCOURGE OF DRUGS

HIGH SCHOOL SENIOR SURVEY OF CURRENT DRUG USE
Percent reporting use
in previous 30 deys

v

/ /

T rN ^ ANY ILLICIT DRUG
X

MARIJUANA'

\N

N.

""

V

^

X s

N

x

N

S

COCAINE

1976

76

78

80
82
GRADUATING CLASS

The fact remains, however, that one out of
every five members of the high school class of
1988 considers herself or himself to be a current user of illicit drugs. Also, the survey does
not include those young people who drop out of
school before their senior year. While the overall news is encouraging, much remains to be
accomplished.
Reducing the number of people recruited
into the ranks of drug users remains a priority. The downward trend must be maintained.
In addition, particular attention must be paid
to those at high risk of drug use. Programs




84

86

88

that reach beyond the schools and into the
entire community are needed. Successful drug
abuse prevention is a neighborhood, employer,
and family responsibility.
The Administration proposes a combination
of school and community prevention programs
aimed at reducing the number of individuals
who start to use drugs and convincing those
who have started to stop.
The 1991 budget requests an increase of 12
percent over 1990, or a total of $1,396 million
in budget authority, for drug prevention and
education activities.

118

THE BUDGET FOR FISCAL YEAR 1991

PREVENTING DRUG ABUSE: SCHOOL, WORKPLACE AND
COMMUNITY DRUG PREVENTION
(Dollar amounts in millions)
1990

Budget authority
Outlays

• The budget includes $496 million for drug
prevention programs in the Department of
Health and Human Services. Many of
these programs fund prevention demonstration projects and research for high-risk
youth populations. Drug prevention efforts
for pregnant women remain a priority.
• $593 million will fund the Education Department's Drug-Free Schools and Communities program. This represents a $54
million increase over 1990.
• Of the $150 million requested for drug programs for the Department of Housing and
Urban Development, approximately $75
million will be directed at preventing drug
abuse in and around housing projects.
• Federal efforts will continue to support a
drug-free Federal workplace. The Administration also will propose to strengthen
drug-free workplace requirements for Federal contractors and grantees.
• To help keep schools currently receiving
Federal resources drug free, the President
approved the Drug-Free Schools and Communities Act Amendments of 1989. Institutions of higher education and school dis-




1,246
827

1991

1,396
1,178

dollar
change

+150
+351

Percent
change

+12
+42

tricts will be required to certify that they
have adopted and implemented programs
to prevent the use of illicit drugs by students and employees.
CONCLUSION
The U.S. workforce must be drug free to
continue to contribute to long-term growth
and, ultimately, the Nation's standard of
living. The total proposed 1991 Federal drug
control budget is a coordinated and balanced
$10.6 billion effort. This plan will further work
toward reducing the problems of drug use on
all fronts. Federal programs are just one part
of the solution, however. Ending the scourge of
drugs will take more than providing funds and
services. Responsibility and accountability
must be encouraged for individuals, families,
communities, and State and local governments.
Hope and opportunity for the future will
depend upon a total commitment from all.
Meanwhile, the Federal Government will do
its share as evidenced by its $10.6 billion effort
in 1991.
For further discussion of the Administration's strategy, see the National Drug Control
Strategy, published separately.

III.F. PROTECTING THE ENVIRONMENT
Today, a consensus es emerging in our society: investments in maintaining and restoring
the health of the environment can now be seen
to be responsible investments in the future—if
they are made with due care, thought, and
foresight.

1990s and of the next century. And while the
country has indeed begun the task of addressing its national environmental problems, it has
become clear that some of the most pressing
environmental concerns are international in
scope.

Much has changed in the 20 years since
America intensified attention to its serious environmental problems. A web of basic protections to the Nation's air, water, and land has
been constructed; the most egregious examples
of destructive practices have been stopped; and
emissions by many sources of pollution have
been sharply reduced from uncontrolled levels.

The 1990s will be a crucial decade in determining the legacy this generation leaves to
future generations.

Today's environmental challenges are different. America's continuing growth, and the imperative of economic expansion, require an
even greater level of sophistication in protecting the environment. Understanding of the
nature of environmental problems has increased; but more research is needed. The
design of control strategies has improved; but
even more creative solutions are needed to address the environmental challenges of the

The 1991 budget includes a range of initiatives to address this new set of environmental
concerns.
Substantial increases are included for programs to improve the stewardship of America's
public lands and natural resources; to
strengthen enforcement of existing laws; to
prevent pollution at the source instead of
struggling to clean up the unfortunate results;
to redress the history of neglect at Federal
facilities around the country; to expand understanding of environmental processes and possible response strategies; and to expand American leadership in tackling international environmental problems.

THE BUDGET PROVIDES OVER $2 BILLION IN NEW SPENDING
TO PROTECT THE ENVIRONMENT
(Budget authority in millions of dollars)
Summary of Major Initiatives

America the Beautiful
Reforestation
Protecting America's Wetlands
EPA Operating Budget
Maintaining Environmental Infrastructure (DOI).
Superfund
Federal Facility Cleanup:
Department of Energy
Department of Defense
Other Agencies
Global Change Research
Natural Resources Research




Proposed Increase for Major Initiatives
L

1990

Increase

1991

372
1,936
488
1,530

630
(175)
460
2,166
579
1,740

+ 269
(+175)
+ 88
+ 230
+91
+ 210

2,190
1,402
116
659
710

2,791
1,520
175
1,034
814

+ 601
+ 118
+ 59
+ 375
+ 104

361
(-)

—

—

1

+2,032

Total has been adjusted to eliminate double counting.
119

120

THE BUDGET FOR FISCAL YEAR 1991

EXERCISING RESPONSIBLE STEWARDSHIP OF AMERICAS NATURAL RESOURCES
America the Beautiful
President Theodore Roosevelt began this
century by directing the Nation's attention to
the protection of valuable public lands—America's treasure trove of parks, wildlife refuges,
forests, and rangelands. It was Roosevelt who
identified "the conservation of natural resources and their proper use" as a national
problem of fundamental concern.
As the end of the century approaches, it is
appropriate that its final decade be one in
which conservation, enhancement, and protection of these irreplaceable national assets rises
to the forefront of national concerns. The 1991
budget reflects the President's support for appropriate expansion and proper maintenance
of the Nation's parks, refuges, forests, and
other public lands; his determination to in-

volve all Americans in strengthening the Nation's natural resource heritage; and his firm
commitment to providing responsible stewardship of the country's natural assets for the
benefit of generations to come.
The budget contains a new initiative,
"America the Beautiful", that underscores
these Presidential priorities. It would finance
expanded land acquisition for the national
parks, wildlife refuges, forests, and other
public lands. It would launch a new national
program of reforestation. And it would provide
substantial funds for enhanced recreation, and
protection and restoration of key natural resources, under a program called "Legacy
'99"—a reflection of the Administration's
desire to leave behind a legacy in which these
natural resource assets have been restored by
the end of the century. The budget supports
the America the Beautiful initiative by proposing a 75 percent increase in funding for these
activities above 1990 levels.

AMERICA THE BEAUTIFUL
(Budget authority in millions of dollars)
Funding Summary

Land Acquisition
Reforestation
Legacy '99
Total, America the Beautiful

Land Acquisition.—The President believes
that America's national system of parks, wildlife refuges, forests, and other public lands
should be expanded and passed on in better
shape than they are now.
In 1990, the Administration proposed new
funds for the first time in several years for
Federal acquisition of lands with particularly
high value for the environment and for recreation purposes. The $215 million program to
which the President and the Congress agreed
will preserve these lands for public purposes




1990

1991

Proposed
increase

146

250
175
205

+ 35
+ 175
+ 59

361

630

+ 269

215
—

and increase the value of the assets passed on
to future generations.
The 1991 budget proposes to expand this program of acquiring high priority lands by creating a new America the Beautiful fund. Funds
for land acquisition would be provided, as in
the past, through annual appropriations from
the Land and Water Conservation Fund. The
America the Beautiful initiative would fund
the purchase of $1 billion of key land and
water resources over the next 4 years.

III.F.

PROTECTING THE ENVIRONMENT

The America the Beautiful fund will also be
able to join in partnership with private parties
and State and local governments to maximize
the significance of the purchases it makes and
the overall value of land set aside for public
purposes.
Concurrent with the submission of this
budget, the Administration will propose to the
Congress a priority listing of lands to be acquired by the National Park Service, the Fish
and Wildlife Service, the Bureau of Land Management, and the Forest Service with the $250
million proposed for acquisition through America the Beautiful in 1991. This list has been
developed through a competitive rating
system, in which particular importance was
placed on the extent to which a potential acquisition parcel contains valuable wetlands, is
in proximity to population centers, has the potential to offer increased recreational opportunities to the public, is important for the protection of endangered species, or possesses other
characteristics which make its early acquisition for public purposes of special importance.
An explanation of the rating system will be
provided to the Congress with the list of priority acquisitions.
Reforestation: Planting Trees for America's
Future.—Recent years have witnessed growing
attention to global environmental trends, a
strong upsurge in the concern of the American
people about the national and international
environment, and an increased willingness on
the part of individual Americans to take personal responsibility for their environmental
future.
The 1991 budget contains funds for a major
reforestation initiative which will serve both to
address emergent environmental concerns and
to encourage the involvement of communities,
corporations, State and local governments and
individuals in creating solutions. The budget
proposes $175 million for the first year of a
multi-year initiative with twin objectives:
planting a billion trees a year on private land
across America; and launching a community
trees program, designed to plant another 30
million trees in communities across the country.
Trees are a remarkably valuable resource.
In addition to their obvious value as the source
of wood products and habitat for all manner of

http://fraser.stlouisfed.org/
250-298 Louis
Federal Reserve Bank of St. O-1990-4

QL3

121
wildlife, trees can be a "sink" for carbon dioxide emissions—and thus can help to address
any effect that increases in CO2 emissions from
human activities may have.
Trees are roughly 50 percent carbon. As
they grow, trees remove carbon from the air
and store it as plant tissue. A single forest tree
absorbs 26 pounds of carbon dioxide (CO2) a
year, and an acre of trees can remove 2V2 to
nine tons of CO2.
Trees are valuable as a source of energy conservation for homes and businesses. In the
summer, the shade provided by trees can
greatly reduce cooling requirements. In winter,
deciduous trees allow sunlight through to a
home, and closely placed, dense conifers near a
home can save up to 20 percent in fuel costs.
Trees can provide forest buffer strips which
reduce the flow of nutrients and pesticides associated with agricultural production into the
Nation's waterways. Planting timber on certain highly erodible and marginally productive
croplands can produce a higher return on
those lands than many other crops.
Currently, about SV2 million acres of public
and private lands are planted in trees and
seedlings annually. This is up from the approximately V2 million acres of 40 years ago.
Nevertheless, the U.S. experiences a net loss of
about 700,000 acres of forest land per year.
Much of America's 730 million acres of forests lies on Federal and State lands or on
lands owned by large, commercial forest products enterprises. The Federal government currently undertakes substantial reforestation activities on lands under its jurisdiction: last
year, nearly 200 million trees were planted on
National Forest lands; and another 27 million
trees were planted on Department of the Interior lands, principally those managed by the
Bureau of Land Management. Some of the
lands enrolled in the Conservation Reserve
Program (CRP) since 1986 have been forested.
But almost half of America's forest land is
private land that is not used by large enterprises in the forest products industry. This private, non-industrial forest land, due to low
levels of management and investment, tends to
be in poor condition. Thus, reforestation and
stand improvement investment on these lands

122
can yield an especially high level of CO2 sequestration and other benefits.
Most private landowners neither seek nor
receive technical advice concerning timber
management or reforestation practices; less
than a third of those who actually harvest
timber have a management plan before the
harvest.
The budget includes $110 million designed
primarily to improve the management and encourage the reforestation of these lands. Specifically, the government will provide costshared assistance through the Forest Service
and State forestry agencies to encourage small
lot owners to plant trees and undertake other
improved practices on private non-industrial
lands and marginal agricultural lands. The initiative also would provide grants to State forestry agencies to allow them to provide needed
materials, direct technical assistance, and
seedlings to private landowners, municipal arborists, and community groups.
The goal of the program is to achieve the
planting of trees on over one and one-half million acres of private land annually, and timber
stand improvement and other stewardship activities on another 180,000 acres.
The Community 6'Plant a Tree" Initiative.—
A second promising target of reforestation assistance is community trees. These include
street trees, trees in local parks, community
forests, and residential trees. Available information indicates that community trees are declining in number and in health. One recent
survey found that in most American cities,
only one tree is planted for every four removed. Moreover, because of their location in
population centers, studies indicate that community trees have up to 15 times as much
value in overall reduction of CO2 as forest
trees.
Thus, a second element of the President's
plan to promote reforestation, provided for in
the budget, will be to assist in the creation of
tree planting programs in every community in
America. The President is asking every town
and city, every school and university, every
company and indeed every citizen to join together in planting trees for America's future.
The budget contains $30 million in funding
needed to provide leadership, coordination and



THE BUDGET FOR FISCAL YEAR 1991

technical assistance to support this massive
volunteer effort. In addition, the Administration will submit legislation to the Congress to
establish a private, non-profit foundation to
lend further leadership and help build broadbased support for planting trees in communities across the Nation.
The Foundation will be capitalized with a
one-time appropriation of $35 million in funds
from the community tree initiative, with
which it will promote public awareness, solicit
financial and non-financial support, and, most
importantly, mobilize individuals, business,
governments, and community organizations in
cities and towns throughout America. The goal
of the plant a tree initiative is to plant 30
million trees in various communities every
year.
In total, the tree planting programs supported by the budget can have a substantial impact
on sequestration of CO2 emissions by the
United States. Initial estimates are that the
one billion trees a year envisioned in the President's reforestation initiatives could absorb 13
million tons of CO2 per year, and thus sequester up to 5 percent of annual U.S. CO2 emissions within 20 years. And they will help
greatly to improve wildlife habitat and water
and air quality, and to increase outdoor recreation opportunities.
Enhancing Recreation and Restoring Natural
Resources: Legacy '99.—A third component of
America the Beautiful, beyond land acquisition
and reforestation, is designed to focus Federal
funding and expertise on a wide range of
threatened natural resource treasures and key
recreational areas in need of improvement.
The Department of the Interior is committed
to accomplishing these improvements by the
end of the decade—its 150th anniversary as a
Department—and hence has designated the
effort "Legacy '99."
The budget includes $205 million, an increase of 40 percent above 1990, for improved
resource protection and restoration (including
wetlands conservation and endangered species
activities) and enhanced recreational opportunities in national parks, wildlife refuges, and
other public lands. Included in Legacy '99 are
funds for certain resources that are of special
importance:

123

III.F. PROTECTING THE ENVIRONMENT

• $15 million for vitally needed restoration
of natural water flows at Everglades National Park in Florida, as authorized by
legislation signed by the President in December.
• $15 million for a new partnership to restore wetlands that serve as critical migratory bird flyways. This effort, authorized
by the North American Wetlands Conservation Act also signed by the President in
December, will be conducted jointly by the
Department of the Interior, various State
governments, the Canadian and Mexican
governments, and a number of private
conservation organizations. It serves as a
model public-private partnership to protect the environment.
• $2 million to accelerate the acquisition of
water rights from willing sellers in order
to help restore the important Stillwater
National Wildlife Refuge in Nevada,

where thousands of birds have been dying
because of a lack of clean water.
Protecting America's Wetlands
The President has endorsed a national goal
of no overall net loss of wetlands. Over the
coming year, the White House Domestic Policy
Council Task Force on Wetlands will continue
soliciting public input and working to develop
a comprehensive set of recommendations to
achieve that ambitious national objective. The
Task Force is considering a broad range of
issues, including both regulatory and non-regulatory approaches to protecting the Nation's
wetlands resources.
The budget proposes an increase of $88 million, 24 percent above 1990, for wetlands research, protection, preservation, and enhancement. This follows a 32 percent increase in
1990.

FUNDING FOR WETLANDS RESEARCH, PROTECTION
AND ENHANCEMENT WILL INCREASE BY 24 PERCENT
(Budget authority in millions of dollars)
Wetlands Funding

1989

Department of the Interior
Department of Agriculture
Environmental Protection Agency
Army Corps of Engineers
National Oceanic and Atmospheric Administration
Total
1

1991
1

155
97
21
159

95
49
9
109

122
83
12
130

19

25

28

281

372

460

Includes about $100 million categorized as part of America the Beautiful.

Managing America's National Forests
Next year will mark the centennial anniversary of the establishment of America's first
National Forest, the Shoshone National Forest
in Wyoming. Today, the National Forest
system encompasses 191 million acres spread
over 42 States—some 10 percent of the United
States land mass.




1990

The centennial anniversary provides an excellent impetus for consideration of ways to
improve the management of this invaluable
national resource. The national forests are the
source of billions of board feet of timber harvest each year (estimated at over 11 billion in
1990), generating both many thousands of jobs
and an array of forest products for both the
domestic and export markets. Receipts from
timber sales from national forests provide

124
funding for roads and schools that local governments might otherwise be unable to afford.
In addition to their scenic beauty, the national forests provide recreational opportunities for millions of Americans, they enhance
water quality and protect watersheds, and
they provide habitat for wildlife—including
one-third of all listed threatened and endangered species. For this reason, the national forests have been called "temples of biological
diversity."
Managing the national forests to protect and
maximize these multiple benefits is a great
challenge. Because of the extensive preparations and management of sales required of the
Forest Service, including, in some cases, the
construction of roads into remote and often
steep back country, receipts from certain
timber sales do not equal the costs incurred by
the Forest Service in managing the sale. Such
"below cost" timber sales occurred on 74 of the
120 national forests last year.
The Administration is committed to achieving a careful balance in the management of
America's national forests—protecting jobs
and promoting the export of American products, while at the same time preserving the
forests' ability to serve as havens for biological
diversity, outlets for recreational opportunities, and repositories of many other important
functions.
The Forest Service proposes a timber sale
level of 10.6 billion board feet for 1991, a level
consistent with previous plans that recognizes
constraints placed on the program by the Congress.
At the same time, recreation demand has
been the fastest growing of all demands placed
on many National Forests. This is true in certain forests where the timber program has operated at a loss.
The 1991 budget attempts to recognize this
new reality. The budget proposes to eliminate
the below cost timber program on selected test
forests in which other opportunities exist. The
nine forests which will be the subject of this
demonstration program all are intended to test
the impacts of eliminating below-cost sales




THE BUDGET FOR FISCAL YEAR 1991

where forests are in reasonable proximity to
population centers, have experienced rapidly
increasing demand for recreation, and are able
to support economic activity other than logging (e.g., the communities in which they are
located are not entirely dependent on timber
and have the ability to diversify.)
The budget also proposes to increase the
recreation receipts available to communities in
these forests to maximize their ability to benefit from increased demand for hunting, fishing,
camping, hiking, and other outdoor recreation
activities. The budget provides $10 million to
improve recreation facilities in these forests.
This year's budget for the Forest Service
also differs from recent budget submissions in
two important respects. The Administration is
not re-proposing the change in the method of
calculating timber and mineral receipts which
had the effect of reducing funds that are
shared with State and local governments and
used to finance local schools and roads.
In addition, previous budgets had proposed
to lift the prohibition on the export of raw logs
taken from Federal lands, thereby increasing
demand for and production of logs. The Administration has revised its estimates of the
receipts generated by lifting this prohibition,
and recognizes the adverse environmental
impact which would result from its repeal.
Therefore, the Administration is no longer proposing to repeal the prohibition on such log
exports.
Mitigating the Environmental Effects of
Water Resources Development
There has been much debate concerning the
adverse environmental impacts of certain large
water resources development projects constructed over the years by the Army Corps of
Engineers and the Bureau of Reclamation. In
recent years, the Corps and Bureau have
become far more sophisticated in reducing
these effects in the design and execution of
projects. Nevertheless, substantial impacts
remain, particularly as the result of some of
the larger projects constructed in the past. The
budget contains funding that is almost triple
1990 levels to help address some of these impacts.

III.F.

125

PROTECTING THE ENVIRONMENT

MITIGATING ENVIRONMENTAL EFFECTS OF WATER
RESOURCES PROJECTS
(Budget authority in millions of dollars)

1990
Army Corps of Engineers:
Columbia River Juvenile Fish Migration
Tennessee-Tombigbee Mitigation
Other Environmental Mitigation Projects
Total

1991

10
14

16
20
27

+6
+ 20
+ 13

24

63

+ 39

—

The budget proposes $16 million for the construction of juvenile fish passage facilities on
the Columbia and Snake Rivers in Washington, Oregon, and Idaho. Currently, millions of
salmon are lost each year as they try to swim
past power facilities built along these rivers.
The budget will allow the Corps of Engineers
to proceed with fish bypass facilities at four of
its major hydroelectric dams on these rivers.
In addition, the budget provides funds for a
detailed mitigation analysis at the Corps' hydropower facilities on the mainstem of these
two rivers.

hancement, including wetlands, fisheries, and
water quality, non-structural solutions to
water resources problems, and improved management and operation of existing facilities.

The budget provides $20 million to begin the
acquisition of 88,000 acres needed to mitigate
environmental losses caused by the construction of the Tennessee-Tombigbee Waterway
Project in Alabama and Mississippi. An estimated 47,000 acres will be acquired with the
funds proposed for 1991.

Last February, the President announced the
postponement of oil and gas leasing in three
environmentally sensitive areas on the Outer
Continental Shelf off the coasts of Florida and
California. The President appointed an interagency Task Force to investigate environmental concerns surrounding the sales—Lease
Sales 95 and 91 off California, and Lease Sale
116 off Florida—and to report to him.

The budget also proposes funding for mitigation preconstruction engineering and design
work at several other previously completed
Corps projects, including Richard B. Russell
Lake in South Carolina and Georgia; and the
Missouri River Navigation project in Iowa, Nebraska, Kansas, and Missouri.
Consistent with the Bureau of Reclamation's
new direction, the budget places increased emphasis on environmental restoration and en-




In addition, the budget proposes termination
of certain projects in the Bureau of Reclamation, including the Garrison Diversion Unit in
North Dakota, an uneconomic and environmentally destructive project which would require in excess of $1 billion to complete.
Developing Energy Resources in An
Environmentally Sound Manner

The Task Force held several meetings and
public hearings around the country, and forwarded a report on these lease sales to the
President in early January. Pending the decision by the President on whether to proceed
with leasing in these areas, receipts from these
lease sales have not been incorporated into the
receipt estimates of the budget. A decision by
the President is expected shortly.

126

THE BUDGET FOR FISCAL YEAR 1991

PROVIDING THE TOOLS FOR
EFFECTIVE POLLUTION CONTROL
Increasing EPA's Operating Budget
The creation of the Environmental Protection Agency was an outgrowth of America's
environmental awakening 20 years ago. Today,
it is one of the most important and largest
regulatory agencies in the government.
The budget contains major increases to
strengthen EPA's capacity to implement new

programs, strictly enforce environmental laws,
expand its research programs, and assist the
States in carrying out environmental programs.
The 12 percent increase requested for the
EPA is one of the largest requested for the
operating program of any agency in the government. Funds provided in the budget would
bring the increase in total EPA staffing levels
since the beginning of the Administration to
1,630, an 11 percent increase.

EPA'S OPERATING BUDGET WILL GROW BY 12
PERCENT
(Budget authority in millions of dollars)
1990

Implementing Clean Air Act Changes
An increase of over $80 million is requested
to enable the Agency to implement the ambitious new proposals for revising the Clean Air
Act proposed by the President last year. The
EPA will use these funds to hire 245 new staff
to administer the Administration's proposed
emissions trading plan, streamline the permitting process, strengthen enforcement, and improve the Agency's ability to monitor emissions from various sources.
One of the cornerstones of the President's
proposed package is the harnessing to the
greatest extent possible of market forces in the
protection of the environment. That principle
lay beneath the proposal for an emissions trading scheme to allow the ambitious amount of
pollution reduction called for in the legislation




Increase

141
72
345

82
192
95
377

+ 82
+ 51
+ 23
+ 32

387
991

456
964

+ 69
-27

1,936

Implementing Clean Air Act changes
Enforcing Environmental Laws
Protecting Critical Habitats
Expanding Research
Improving States' Ability to Carry Out Environmental Responsibilities
Other Operating Programs
Total EPA Operating Program

1991

2,166

+ 230

to be achieved in the most cost-effective
manner possible.
Enforcing Environmental Laws
The need for government involvement in environmental protection, however, arises in part
from market failures—the failure of markets,
for example, to capture in product prices the
full social cost of disposal of waste products or
of pollution of public goods like air and water.
Therefore, some of the increased resources proposed for EPA's operating program will be designed to address these market failures.
Specifically, the budget calls for a 36 percent
increase in EPA's enforcement budget. This
will enable EPA to redouble its efforts to
ensure that responsible parties pay for cleaning up the pollution they create. The increase

III.F.

127

PROTECTING THE ENVIRONMENT

would allow for the addition of 292 enforcement personnel in 1991.
Preventing Pollution at the Source
The President will send to the Congress a
legislative package of pollution prevention initiatives. They will include a demonstration
program to allow modifications of existing statutory and regulatory requirements for generators of waste who can show that they can
achieve greater protection of human health
and the environment through pollution prevention and waste minimization efforts than
through traditional approaches.
In addition, the budget will accelerate the
government's investment in pollution prevention that is not cost-effective for any individual
firm to undertake. In terms of the overall cost
imposed on society by pollution, it clearly
makes more sense to minimize waste and prevent pollution at the source than to pay the
far greater cost of cleaning up problems after
they exist.
Protecting Critical Habitats
The budget provides $95 million, an increase
of 32 percent, for EPA's critical habitat programs, which seek to address pollution problems in the Nation's wetlands, estuaries, and
near-coastal waters. In 1991 EPA will pay particular attention to implementing recommendations of the Domestic Policy Council's Task
Force on Wetlands and to helping States develop strategies, in coordination with the National Oceanic and Atmospheric Administration
and other Departments, for protecting the Nation's coastal areas.
Promoting Recycling: A National Imperative

compliance with national and State environmental laws, and pose a danger to the health
and safety of nearby citizens. Yet Americans
continue to generate more waste per capita
than citizens of any other nation.
The Administration believes that all safe alternatives to managing municipal solid waste
must be pursued simultaneously: the development and siting of environmentally sound
landfills, the construction of resource recovery
facilities, and recycling and waste minimization to reduce the waste stream.
Last year, the EPA issued regulations that
will spur government procurement of recycled
paper and other items. Not only the Federal
government but all entities which receive Federal funds must develop an action plan to procure items made from recycled materials.
The Administration has previously endorsed
a goal of reducing the waste stream by 25 percent by 1992. This year, the Administration
will propose legislation to help achieve that
goal.
Revitalizing the Council on Environmental
Quality
The Council on Environmental Quality
(CEQ) was created 20 years ago with the passage of the National Environmental Policy Act
(NEPA). Its mission is a vital one: to ensure
that Federal policies are consistent with the
intent of the act, to provide coordination
among agencies on key issues such as wetlands
and global climate change, and to report to the
Nation on the state of the environment and
related indicators.

America faces a solid waste disposal crisis.
Scores of landfills across the country are out of




THE BUDGET FOR CEQ WILL NEARLY DOUBLE
(Budget authority in millions of dollars)
1990

Council on Environmental Quality....
1

1.46

1991
1

2.78

Includes President's Environmental Education Awards.

Increase

+1.32

128

THE BUDGET FOR FISCAL YEAR 1991

The President is committed to strengthening
the CEQ, and to ensuring that it has the capacity to serve as an effective source of environmental analysis and information in the
White House. Accordingly, the budget includes
an increase of 90 percent in the CEQ's budget
for 1991.
Promoting Environmental Education: The
President's Awards
The budget includes a new initiative, to be
administered by the CEQ, which is designed to
stimulate the introduction of environmental
education into elementary and secondary
school curriculums and to reward excellent
teachers. In 1991, the President will present a
cash award of $5,000 to the 100 teachers—2 in
each State—who design and implement the
most innovative and effective programs to
teach students about the environment.
Maintaining Environmental Infrastructure
(Department of the Interior)
In addition to funding increases for natural
resource protection and recreation enhancement programs under the Legacy '99 component of America the Beautiful, the budget proposes a $91 million expansion of the maintenance and rehabilitation efforts by the Depart-




ment of the Interior that preserve the basic
infrastructure of America's national parks,
wildlife refuges, and other public lands. This is
the Department's own, complementary part of
Legacy '99, and represents a 19 percent increase above 1990.
Proper care of infrastructure is critical to
effective protection of natural resources and to
the safety and enjoyment of visitors to Federal
areas. The proposed increase will be used for
the following purposes:
• to improve day-to-day operating maintenance of Interior facilities such as visitor
centers, campgrounds, roads, boat ramps,
administrative headquarters, and employee housing;
• to expand Interior's program of cyclic
maintenance, repair, and rehabilitation
construction projects to upgrade infrastructure on a periodic basis, and to prevent long term deterioration that could
threaten public safety and ultimately increase costs to the Federal taxpayer; and
• to accelerate the evaluation and repair of
potentially hazardous dams on Interior
lands in order to protect life, property, and
natural resources downstream.

MAINTAINING ENVIRONMENTAL INFRASTRUCTUREDEPARTMENT OF THE INTERIOR
(Budget authority in millions of dollars)
1990

Operational Maintenance
Cyclic Maintenance/Repair and Rehabilitation...
Rehabilitation Construction
Dam Safety
Total

1991

Proposed
change

244
129
51
64

274
141
56
108

+ 30
+ 12
+5
+ 44

488

579

+91

III.F.

129

PROTECTING THE ENVIRONMENT

CLEANING UP HAZARDOUS WASTES
Accelerating the Pace of Superfund Cleanups
The President is committed to an aggressive
program of cleaning up hazardous waste sites
in order to protect the public health. One of
his first acts in office was to order an intensive
management review of the Superfund program
to improve its effectiveness. Upon completion
of that review, EPA's Superfund staff was increased by 500 with a special emphasis on enforcement in order to ensure that polluters pay
for cleanups to the maximum extent possible.

increase of over $200 million for 1991 is targeted specifically to cleanups. If this increase is
approved, in addition to work ongoing at hundreds of sites around the country, long-term
cleanups at 16 new sites can be started in
1991; without it, no additional cleanups may
start.
Cleaning Up Federal Facilities

In 1990, the President requested an increase
of $300 million for Superfund in order to
pursue a more ambitious schedule for cleaning
up abandoned hazardous waste sites. Congress
cut the increase by almost two-thirds, to $105
million. This will have the unfortunate effect
of delaying cleanups.

Unfortunately, it is not only irresponsible or
uninformed private parties who have left
behind a legacy of hazardous wastes that need
attention. For over 40 years, the Federal government has failed to manage adequately and
dispose of properly the wastes that it generates
at various sites around the country. The result
is a startling array of expensive problems
which must be attended to. These problems are
discussed in more depth in Part VI-C, ''Cleaning Up Federal Facilities."

The President is again requesting a major
increase for Superfund in order to accelerate
the pace of cleanups. The Superfund program
has rightly been criticized in the past for devoting too many resources to ancillary activities; for this reason, the President's requested

The budget demonstrates the President's
commitment to addressing the problems posed
by these wastes responsibly and expeditiously
by proposing an increase of almost $800 million, or 21 percent, above 1990 levels for Federal facility cleanup efforts.

CLEANING UP FEDERAL FACILITIES
(Budget authority in millions of dollars)
1990

Department of Energy
Department of Defense
Four other agencies
Total

LAYING THE GROUNDWORK FOR A
CLEANER, SAFER FUTURE
Addressing the Problem of Global Climate
Change
In the Administration's first year, the
United States has taken a leadership position
in addressing the question of global climate
change.



1991

Increase

2,190
1,402
116

2,791
1,520
175

+ 601
+ 118
+ 59

3,708

4,486

+778

A number of policy initiatives undertaken
by the President which have merit for other
reasons will also have the effect of helping to
reduce emissions of carbon dioxide and other
gases which are building up in the atmosphere
and stimulating concern about potential climatic changes.
The President's proposed revisions to the
Clean Air Act, for example—by placing a per-

130

THE BUDGET FOR FISCAL YEAR 1991

manent cap on sulfur dioxide emissions and
allowing utilities freedom of choice in how to
achieve reductions required to meet the capped
level—provides a strong incentive for energy
conservation that estimates suggest will yield
a reduction of several percent in the annual
emissions of carbon dioxide from the American
electric utility sector. Reductions in volatile organic compounds (VOCs), carbon monoxide,
and nitrogen oxides (NOX) will also be beneficial since these compounds are chemically involved in producing greenhouse gases in the
atmosphere.
In the past year, the President announced
American support for a worldwide phaseout of
chloroflourocarbon (CFC) production to the
extent safe substitutes are available. And he
took the American commitment to reducing
CFCs a step further by signing into law legislation first proposed in the 1990 budget which
will place a fee on CFC production and will
have the effect, according to some estimates, of
reducing American CFC emissions even below
the levels allowed by international protocols.
The Department of Energy this year issued
new appliance standards which will help to
conserve energy, and is now preparing a National Energy Strategy (NES) which will also

address the role of energy conservation in
America's future.
The Administration approved an increase in
the corporate average fuel economy (CAFE)
standard for automobiles which, while improving America's energy security, will have the
added benefit of reducing CO2 emissions.
And this budget includes a major new reforestation initiative, described above, which has
the potential to sequester significant amounts
of U.S. CO2 emissions.
The area in which U.S. leadership in addressing global climate change questions is
perhaps most evident, however, is in advancing
the state of scientific knowledge of Earth processes.
The budget contains over $1 billion, an increase of 57 percent over 1990 levels, for the
U.S. Global Change Research Program, an
interagency research effort designed to improve scientific understanding and predictive
capability on global change issues. This increase will allow NASA to proceed with its
"Mission to Planet Earth", and provides for
the launch of the first U.S. Earth Observing
System (EOS) platform in 1998 as part of that
mission.

THE BUDGET INVESTS $1 BILLION IN GLOBAL CHANGE
RESEARCH
(Budget authority dollar amounts in millions)

1990

U.S. Global Change Research Program
By Agency:
National Aeronautics and Space Administration
National Science Foundation
Department of Energy
Department of Agriculture
Department of Commerce (NOAA)
Department of the Interior
Environmental Protection Agency




Total

1991

change

659

1,034

+375

489
55
50
21
18
13
13

661
103
66
47
87
44
26

+ 172
+48
+ 16
+26
+69
+31
+ 13

659

1,034

+57%

+35%
+87%
+32%
+ 124%
+383%
+238%
+ 100%
+ 375 +57%

III.F.

131

PROTECTING THE ENVIRONMENT

The program is discussed at greater length
in the chapter on "Enhancing Research and
Development." This billion dollar global
change research effort places the United
States in the pre-eminent international position in advancing the state of knowledge about
these critically important but imperfectly understood phenomena.
The President believes that continuing this
scientific leadership is an essential United
States responsibility, and that such leadership
can help improve the quality of the policy decisions made in response to global environmental trends. In the coming year, the United
States will host the Plenary Session of the
Intergovernmental Panel on Climate Change
(IPCC) in February; a meeting of the world's
top economic, scientific, and environmental officials to discuss ways to improve the analytic
ability to understand and respond to these
issues in the spring; and the first negotiation
session of the Framework Convention on climate change in the late fall. These and other
meetings will provide the opportunity for continuing American leadership in addressing
global change issues.
Encouraging the Development of Solar and
Renewable Energy Sources
One of the great challenges of the 1990s will
be to provide the American people with ample
supplies of secure, competitively priced energy
while protecting the environment. The Administration is committed to expanding American
knowledge of emerging technologies in solar
and renewable energy, and in developing the
most effective conservation technologies, in
order to help accomplish these twin goals.
The budget contains significant increases for
new research and development initiatives in
solar and renewable energy and energy conservation. The 1991 budget requests about $360
million for these activities—a sharp increase
over the $208 million requested in the 1990
budget, and about 10 percent above 1990 enacted levels.
A 30 percent increase above 1990 spending is
requested to advance the state of knowledge
about solar thermal technologies, including
high-photo solar detoxicification of chemical
wastes.



The budget provides over $43 million for
solar photovoltaics research, and proposes the
establishment of a new cooperative venture
with industry to improve photovoltaic process
or manufacturing technologies, in order to
lower costs and accelerate the commercial introduction of this environmentally clean
source of energy. Increased industry participation in the photovoltaic research and development program can improve the quality and
usefulness of the R&D work—while at the
same time lowering Federal costs by encouraging cost-sharing with industrial research consortia or individual companies.
For renewable energy research, the budget
requests $28 million—an increase of $12 million above 1990—for biofuels. The majority of
the increase will be devoted to new research
initiatives in ethanol fuels and the development of energy from municipal waste.
Promoting Energy Conservation
The 1991 budget request of $182 million for
energy conservation research represents a
near doubling of the amount requested in the
1990 budget. Much of the increase is for buildings-related research and development—including new initiatives to accelerate the development of building conservation standards,
and to replace lighting in Federal facilities
with more efficient equipment.
Investing in Agricultural Research to Protect
the Environment
The budget contains an increase of over $100
million in research activities related to protecting natural resources. Of particular note is a
$28 million increase devoted to the Department of Agriculture's efforts to better understand the causal linkage between production
practices and water quality degradation.
Protection of the Nation's water resources
from contamination by agricultural chemicals
and nutrients is a key priority of the Administration. The budget funds the second year of a
Water Quality Initiative proposed by the President to promote the development and adoption
of environmentally sensitive farm production
practices and of safer chemical and biological
pest controls. In total, the budget provides over
$300 million for this purpose.

132
Ultimately, farmers must be responsible for
changing production practices to avoid contaminating ground and surface waters. Federal
and State governments can provide valuable
information and technical assistance to producers, however, so that such environmentally
sensitive techniques can be implemented at
minimum cost. The proposed increase will




THE BUDGET FOR FISCAL YEAR 1991

allow the Soil Conservation and Extension
Services to expand their efforts to transfer to
farmers scientifically-based knowledge about
the vulnerability of natural resources to chemical pollution. Demonstration projects targeted
to
particularly
environmentally-sensitive
geographic regions will receive the highest
priority.

III.G. IMPROVING THE TRANSPORTATION
INFRASTRUCTURE
Investment in the Nation's transportation
system is vital for continued economic growth.
Transportation plays a major role in producing
almost every good Americans buy. The Nation's transportation system handles 3.4 trillion ton-miles of freight and 3.5 trillion passenger-miles each year. While most of this travel
is on highways, an ever growing portion is carried by aviation.

As the economy and population grow, so will
demand for transportation services. More jobs,
more shipped goods, and higher incomes will
result in a greater demand for travel services.
Americans are expected to become even more
mobile, with intercity automobile traffic
growth estimated at about 3 percent annually.
Airline passenger travel is estimated to grow
even faster, at more than 4 percent annually.

INCREASED DEMAND FOR COMMERCIAL AVIATION:
ENPLANEMENTS TO MORE THAN DOUBLE IN 20 YEARS

Millions
of Passengers
1,200

1,013

i.ooo

• i AIR CARRIER
ZZ2 COMMUTER

800-

600-

400-

200-

1987

1990

1995

2000

2005

2010

Sourca: Federal Aviation Administration. Data for futura yaara ara preliminary.

Responding to Infrastructure Needs and
Congestion
Failure to respond to increased travel demands would lead the transportation infrastructure to become increasingly more obsolete
and congested. For example, many parts of the




current aviation infrastructure need to be
modernized and expanded. The national airspace system is a patchwork of several generations' worth of equipment, some of which is
labor intensive, becoming technologically obsolete and lacking the flexibility needed to
handle burgeoning air traffic.
133

134

THE BUDGET FOR FISCAL YEAR 1991

Passenger enplanements in the U.S. have increased about 74 percent since 1978. Currently
21 major airports, mostly large hubs, are considered seriously congested. These airports account for 57 percent of all passenger enplanements. From 1990 to the year 2010, the
number of airline passengers is expected to
more than double. Without capacity improvements or changes in the time and location of
travel, 67 airports and 88 percent of all passengers could experience significant delays due to
congestion by the end of this decade.
Similarly, existing highway systems in many
metropolitan areas do not serve current traffic
flows well. Beltways, originally constructed to
move traffic around central cities, have
become congested suburb-to-suburb routes. The
length of the "rush hour" is becoming longer
in most large urban areas, and the number of
urban areas experiencing congestion is increasing.
RENEWING THE TRANSPORTATION
PARTNERSHIP
The Federal Government is a partner with
State and local governments and the private
sector in providing for much of the Nation's
transportation system.
For highways, the Federal Government has
historically played a major role in the development of the Interstate System, which is critical
to national defense and interstate commerce




inasmuch as it carries over 20 percent of all
highway traffic. One manifestation of that
leading role has been that the Federal Government finances 90 percent of the construction of
the Interstate System. In roads serving intrastate and regional traffic, there is far more of
a State and local role and responsibility.
In mass transit, the Federal Government has
provided funds to help ensure that the existing
transit infrastructure is maintained. The U.S.
railroad industry has made a dramatic turnaround after years of decline. In 1989, for the
first time, two of the Nation's 16 largest railroads earned a sufficient return on capital to
be considered revenue adequate under Interstate Commerce Commission standards.
In aviation, the Administration will continue
to work with airlines, airport operators, and
State and local governments to assure the
flying public of a safe and efficient aviation
system. For 1991, the Administration is proposing a 5-year aviation reauthorization that reflects this commitment and provides necessary
funding to modernize and expand the aviation
infrastructure. This is the cornerstone of the
1991 budget proposal for improving the transportation infrastructure.
MODERNIZING THE AVIATION SYSTEM
Significant investment is necessary to
ensure that the aviation system continues to
be safe, efficient, and reliable.

THE FEDERAL COMMITMENT TO THE FLYING PUBLIC
(In million of dollars)
1990

Budget Authority
Outlays

7,366
6,468

1991

8,578
7,221

Dollar
Change
+ 1,212
+753

Percent
Change
+ 16
+ 12

III.G.

135

IMPROVING THE TRANSPORTATION INFRASTRUCTURE

The President is proposing a total of $8.6
billion, a 16 percent increase, for aviation programs in 1991. As part of his multi-year plan,
the President proposes to continue modernization of aviation facilities and equipment and to
expand airport capacity, as well as increasing
funding for operations and R&D.
Keeping the Skies Safe and Secure
The Administration is requesting $4.1 billion, a $264 million or 7 percent increase over
1990, for the Federal Aviation Administration's (FAA) operations, including the air traffic control system and FAA's programs to
ensure safety and security in aviation. This
level of funding will add almost 500 air traffic
controllers, 300 safety inspectors, and more security specialists over estimated 1990 levels.
Additional staff are needed because of projected increases in aviation activity and because of
the aging of the aircraft fleet. The staffing
increases will result in the largest air traffic
control workforce in the history of the FAA
and more than double the staff devoted to detecting the problems of aging aircraft.
The budget also includes $190 million, a $20
million or 12 percent increase over 1990, for

aviation research and development. This funding will continue research in the critical area
of metal fatigue and corrosion to detect problems with aging aircraft. It will provide for the
creation of an explosives detection laboratory
that will improve devices used to detect explosives in checked and carry-on baggage. The
research budget will develop new ways to prevent in-flight fires and to minimize injuries
when fires occur.
Completing the National Airspace System
Plan
The current airspace system needs to be updated and expanded. The National Airspace
System (NAS) Plan was developed in the early
1980s as a blueprint to modernize and consolidate air traffic control facilities for greater operating efficiency and safety. Now that research and design is complete, nearly all of the
NAS Plan's original projects are under contract, and new systems are already installed
and working.
The President's 1991 budget continues this
modernization of the national airspace system
by increasing funding for FAA facilities and
equipment by $779 million or 45 percent over
1990.

THE COMMITMENT TO MODERNIZE EQUIPMENT
(In million of dollars)
1QQ0

Budget Authority
Outlays

1,721
1,188

The modernization projects include:
• Computer software and hardware that will
improve computer speed, capacity, and reliability to reduce delays;
• Radars and radar displays that will improve an air traffic controller's ability to
"see" aircraft and keep them safely separated;



iQqi
iyyi

2,500
1,579

Dollar
Change

+779
+391

Percent
Change

+45
+33

• Communications equipment to replace antiquated switching systems with modern
solid-state technology;
• Weather tracking system modernization
that will detect dangerous windshear conditions and warn aircraft away from violent storms; and

136

THE BUDGET FOR FISCAL YEAR 1991

• Navigational aids to improve the routing
of aircraft through the airspace system
and to make it safer for aircraft to land
during bad weather.
Reaping the Benefits of Modernization
The benefits of modernizing the system can
be measured by such means as the value of
hours saved by airline passengers. It is estimated that more than $114 billion in benefits
will be derived from the NAS Plan. The largest single recipient of benefits will be users of

the system, including passengers and airlines.
Some $86 billion in user benefits will be gained
by reducing airline delays and improving the
routing of aircraft. The FAA itself will realize
benefits from improving air traffic controller
productivity through the use of better equipment and by reducing maintenance requirements. There will also be some $4 billion in
safety benefits by reducing the number of accidents through improved weather-related equipment.

N A T I O N A L AIRSPACE S Y S T E M P L A N BENEFITS

REDUCED DELAYS &
IMPROVED ROUTING

75.0%

ACCIDENTS AVOIDED

3.0%

FAA PRODUCTIVITY
21.0%
Source: Federal Aviation Administration.

Expanding Airport Capacity
Unless action is taken, capacity problems at
the Nation's airports will increase as airline
travel continues to grow. Delays at airports
will increase unless additional airport capacity
is added or travel patterns shift to less congested hubs or times of the day. Some estimates



MILITARY BENEFITS

1.0%

show the current cost of delays to the economy
and to passengers is $5 billion annually.
The President's budget proposes a comprehensive program for expanding airport capacity by increasing Federal funding, removing
Federal restrictions on local airports' ability to
raise revenue, and encouraging more public/

III.G.

IMPROVING THE TRANSPORTATION INFRASTRUCTURE

137

private projects. These three aspects are summarized below.

account for between 5 and 30 percent of revenue at hubs.

Increasing Federal Funding for Capacitg
Projects— The President's budget provides $1.5
billion in new 1991 spending for Federal airport grants, a $75 million increase over 1990.
This amount will fund formula-driven grants
for airport development projects at large commercial airports, as well as grants to States to
improve smaller airports. It will also fund
almost a 60 percent increase in discretionary
grants to target high-priority capacity expansion projects.

Another advantage of PFCs is that, under
the Administration's proposal, they would free
a large portion of Federal airport grant funds
for capacity expansion projects. Airports collecting PFCs would forgo a portion of their
formula-driven Federal grant funds. Instead,
these funds would be allocated to capacity expansion projects and to smaller airports that
would not benefit from a PFC.

The Administration proposes to continue the
special pool of funds for capacity projects. This
pool increases funding for critical airport capacity projects, including building new runways, expanding current ones, purchasing land
for new runways, or building entirely new airports.
Removing Federal Restrictions.—The Administration proposes to remove an existing statutory restriction that prevents airports from
raising certain revenue—namely, by levying
passenger facility charges (PFCs). A PFC is a
charge levied on departing passengers by airports for the use of aviation facilities. PFCs
are common in other countries, being levied in
138 nations.
Currently, airports receive funds from a variety of sources: renting airport space to airlines and other tenants, aircraft landing fees,
revenue bonds, state and local assistance, and
Federal aid for construction projects. For airport construction projects, most large and
medium size airports primarily use revenue
bonds, while smaller airports generally rely on
Federal airport grants.

Encouraging More Public/Private Projects.—
The Administration is encouraging more
public/private airport projects as another way
to build capacity. For example, Alliance Airport, owned by the City of Fort Worth, is being
built on 418 acres donated by private developers. State and local funds, in addition to grants
from the Federal Government, have been committed toward the $250 million financing package needed to open the airport.
In addition, the Administration is exploring
other ways to increase existing capacity. One
such way is for airports to experiment with
"peak period" pricing to manage demand more
efficiently in tandem with airline efforts to
schedule peak-period flights more effectively.
Other ways to increase capacity include improving air traffic procedures, increasing use
by airlines of larger aircraft, and encouraging
general aviation aircraft to use smaller, reliever airports.
Financing the Aviation System

However, there are limits to dependence on
revenue bonds. Airports' ability to raise new
capital from bonds is limited due to the large
debt burden some have accumulated. Continued expansion of capacity requires additional
revenue sources.

The aviation system has traditionally been
financed in part through user fees deposited in
the aviation trust fund. In this way the aviation user is a partner in financing a safe and
efficient system. However, aviation users have
not been financing their share of the system's
costs. For example, a 1989 Congressional
Budget Office report pointed out that " . . . private sector users of the aviation system have
received more in capital and operating spending than they have paid in taxes."

Some estimates show PFCs could generate
about $1 billion per year for U.S. airports. This
would provide a new, stable source of additional revenue for airport development. PFCs
would have a great potential at hub airports.
A recent survey showed that a $3 PFC would

As noted previously, the 1991 budget provides major increases for expanded airport capacity, modernizing air traffic control equipment, and hiring more air traffic controllers.
To provide the necessary funding increases
and to continue the principle of user financing,




138

THE BUDGET FOR FISCAL YEAR 1991

the Administration proposes to increase aviation user fees accordingly. The passenger
ticket fee would be raised from 8 to 10 percent
and other aviation fees would be raised similarly.

the inception of the aviation trust fund. As
seen in the table below, outlays for FAA programs have exceeded aviation receipts for the
past ten years (and by over $2 billion a year
since 1986).

Federal Government spending on FAA programs has far exceeded aviation receipts since

SPENDING FOR AVIATION EXCEEDS RECEIPTS
(In billions of dollars)

1980

FAA Outlays
FAA User Fees

3.1
1.9

1982

2.9
1.2

Together with increased user fee collections,
the budget proposes to "spend down" the current level of balances in the Airport and
Airway Trust Fund. The uncommitted balances would decline from $7.6 billion at the
end of 1990 to $3.0 billion at the end of 1995.
The Administration believes that users of the
aviation system should finance their share of
aviation spending. This includes not only
equipment modernization, research, and airport grants, but also the salaries of air traffic
controllers and the other staff that help to
keep flying safe and secure.
IMPROVING THE NATION'S HIGHWAYS

1984

3.8
2.5

1986

4.7
2.7

1988

5.2
3.2

1990
Estimated

6.5
3.9

Proposed
1991

7.2
4.9

in 1991. This increase has funded the continued construction of the Interstate System,
which is now 98 percent complete, and a renewed emphasis on maintaining the physical
condition of existing roads.
Preserving the Highway Infrastructure and
Meeting Demand
The Nation's highways and bridges must be
maintained. While the physical conditions on
the Interstate System and other highways important to interstate travel deteriorated prior
to 1982, that pattern has largely been reversed, mainly due to the influx of funds from
the 1982 Federal gas tax increase.

Deteriorating highways and bridges are
widely perceived as an infrastructure problem.
In addition, rush hour traffic in metropolitan
areas clearly indicates capacity problems. In
1987, all units of government generated $66.3
billion for highway capital improvements, operations and maintenance, law enforcement
and safety, administration, interest and debt
retirement. Of this sum, $14.5 billion or 22
percent was Federal.

Capacity is also a critical aspect of highway
mobility. For the last two decades, highway
travel has grown steadily, leading to increased
congestion, particularly in large urban areas.
In 1987, 65 percent of urban Interstate rushhour travel and 17 percent of rural Interstate
rush-hour travel occurred under congested conditions. Much of this congestion is of local concern and can be addressed at the local level.

Federal highway spending has increased in
the past decade. Outlays for Federal-aid highways have grown by about 55 percent since
1981, from $8.8 billion in 1981 to $13.7 billion

For 1991, the President's budget
Federal-aid highway funding to cover
eral share of the cost to maintain the
condition of bridges and highways of




provides
the Fedphysical
national

III.G.

IMPROVING THE TRANSPORTATION INFRASTRUCTURE

importance and to continue completion of the
Interstate System. Under the 1991 budget proposal, the Federal government would be spending more out of the highway portion of the
Highway Trust Fund than it is collecting in
user fee receipts.
The Federal-aid highway program is authorized through 1991. During the coming year, the
Federal government will work with its partners—States, local governments and the private sector—to address the projected needs for
highways (and mass transit). The Administration will present its proposals in the context of
legislation to reauthorize these programs,
which require reauthorization for 1992 and
beyond.
Considering Innovative Solutions To Meet
Tomorrow's Needs
Highway capacity needs cannot be met
through new construction alone. Part of the
solution must lie in innovative technologies.
The 1991 budget includes more than a five-fold
increase over 1990 in Federal research and development funding for Intelligent Vehicle/
Highway Systems (IVHS), often referred to as
"smart cars/smart highways." IVHS will use
state-of-the-art electronics, communications,
and computer technology to improve traffic
control systems, warn drivers of dangerous situations, and make more efficient use of the
existing road system. The Administration is
working closely with auto manufacturers and
others in the private sector to ensure that they
are actively involved in the research and investment necessary for IVHS.
Market techniques that make it more economical for people to travel together have the
potential for enhancing the capacity of existing highway facilities. For example, in localities where highway congestion and a shortage
of parking exist, employers may offer discount
transit passes, flexible work schedules, and
preferential parking for carpools and vanpools.
While such techniques are not a complete substitute for expanding the highway infrastructure, they enable more efficient use of the existing system.
Europe and Japan have developed highspeed train systems that move above a guideway without contact, supported and guided by
magnets, achieve speeds of up to 300 miles per



139

hour, and are environmentally clean. These
magnetically levitated trains, or "maglev,"
might serve to augment existing air and highway transportation. The 1991 budget proposes
$10 million, $6 million for the Department of
Transportation and $4 million for the Army
Corps of Engineers, to initiate a new publicprivate program to assess the potential for the
large scale domestic application of maglev
technology.
STABILIZING MASS TRANSIT SERVICES
The 1991 budget, within the constraints imposed by the need to reduce the Federal deficit, targets Federal transit assistance on maintaining the transit capital infrastructure. Federal capital funds proposed in the 1991 budget,
together with State and local financing, are
sufficient to maintain the existing infrastructure.
The largest cost of maintaining the transit
infrastructure is in restoring existing rail facilities and equipment, particularly in older
rail cities like New York, Chicago, Philadelphia, northeast New Jersey, Boston, San Francisco, Pittsburgh, and Cleveland. Improved
capital infrastructure entails expanding State,
local, and private sector financing of major
new capital projects by means of public/private development projects, benefit assessment
districts, and other financing tools. It will also
involve greater private sector participation
through the contracting out of transit services
and significantly less emphasis on Federal operating subsidies. The Administration proposes
to terminate operating subsidies to cities with
populations over one million. The Federal contribution represents, on the average, less than
six percent of the operating budgets of the affected areas and does not constitute the best
utilization of limited Federal resources.
The Administration continues to foster innovative public/private ventures that provide efficient transit services and reduce reliance on
Federal subsidization. The Federal government
can be a catalyst for mass transit initiatives
undertaken by local governments and the private sector. It is the Administration's intent to
review the partnership of Federal, State, and
local governments and the private sector in
the context of the next highway and transit
reauthorization.




III.H. BRINGING HOPE TO DISTRESSED
COMMUNITIES
THE PROBLEM: UNEVEN PROSPERITY
The Nation's long economic expansion following the recession in the early 1980s has
been characterized by sustained economic
growth, low inflation, and growing employment and productivity. The economic expansion has also meant a growth in family income
and a decline in the poverty rate, from 15.2
percent in 1983 to 13.1 percent in 1988. This
decrease meant 3.4 million fewer Americans,
including 1.3 million children, were living in
poverty in 1988.
Yet not everyone has shared equally in the
economic recovery. Some communities have
suffered local economic shocks, such as plant
closings. Some old farm, mining, and mill communities have lost major employers as the
economy has restructured. Communities on the

Nation's Southern border have experienced an
influx of poor legal and illegal immigrants
seeking economic opportunities in this country
that are unavailable in their own.
The problem of uneven prosperity is perhaps
most acute and persistent in the heart of some
of the Nation's large, growing, and economically most vital metropolitan areas, where isolated inner city populations have not benefitted
from the opportunities that American society
offers. Service and manufacturing jobs have
moved toward the fringes of urban areas and
demand ever higher skills and education.
Those living in the older centers often have
not been well-served by schools and transportation systems, and thus have been denied the
chance to share in the general growth and
prosperity.

THE NEW PATTERN OF POVERTY
The poverty rate has been cut nearly in half
since the 1960s. Among the elderly this decline
has been particularly significant due in considerable measure to help from social security
and other income transfer programs. For many
families, poverty is a transitional state, but for
others poverty can extend over several generations, giving it a seemingly intractable character. Several demographic and socio-economic
changes help to explain this pattern.
Twenty-five years ago, nearly 30 percent of
the heads of poor families worked full-time, all
year round. Today that percentage is 16 percent. The poverty rate among these families
declined from 7.4 percent to 2.9 percent between 1963 and 1988.
Clearly, working families have made
progress. However, changes in family composition have increased the numbers of families
who do not work. In 1963, 32 percent of poor
families with children were headed by a
female; in 1988, this percentage had nearly




doubled to 61 percent. While families with
children and a female head have always experienced high rates of poverty, they now constitute a growing core of the persistently poor.
This is not because of a higher rate of poverty
among them but simply because of the increasing number of such family households in the
general population. In fact, the number of poor
female-headed families with children has increased almost every year since the mid-1960s.
Even as the current expansion was increasing
employment and median income, the number
of poor families with children and a female
head increased nearly 8 percent.
The concentration of social and economic
problems in the poorest neighborhoods has
raised fears that a new "underclass" culture
has come to dominate life in those areas.
While the meaning of this term is controversial, researchers have identified as "underclass" high-poverty neighborhoods characterized by excessive school dropout rates, a high
incidence of female-headed families, welfare
141

142

THE BUDGET FOR FISCAL YEAR 1991

dependency, and joblessness or irregular employment among adult males. By one measure
using the 1980 Census, 880 of these "underclass" dominated neighborhoods could be identified, with a combined population of 2.5 million. This was more than triple the population
living in such neighborhoods 10 years earlier.
Such neighborhoods are concentrated in a
relatively small number of our Nation's largest
cities. Over half of the urban poor living in
high-poverty tracts live in seven large cities—
New York, Chicago, Philadelphia, Baltimore,
New Orleans, Detroit, and Newark. Other research using more recent data to define underclass neighborhoods suggests that they may
still be growing. Although the majority of

households, even in these places, may subscribe to traditional American values of work
and family, the struggle to live by them is
made doubly difficult by the concentration of
social problems and the weakness of community support.
The persistence of poor communities is a
problem not only for the people who live there,
but for all of American society. The costs of
crime, drug use, and wasted human potential
translate into a lower quality of life and lower
productivity for the whole economy. In simple
budgetary terms, they mean enormous public
spending for welfare and to control crime and
drug use instead of tax receipts from productive employment.

NEW APPROACHES NEEDED
It is widely agreed that the poor must share
more in the benefits of the Nation's overall
economic prosperity. But how to achieve this
goal has proved elusive over a long period of
years. No single solution has been found to
exist.
America's determination to reduce poverty
has expressed itself in a wide range of Federal
efforts, including transfers of cash and noncash income to families and individuals, and
extensive training and education programs.
This budget continues and in some cases expands these efforts. As the two graphs below




show, Federal outlays for means-tested transfer programs, cash and in-kind, have grown
rapidly over the past 30 years. Although the
official poverty statistics overstate poverty by
excluding the value of in-kind assistance, it is
clear that, after a period of decline, poverty
began to increase in the late 1970s and early
1980s. Despite improvement since 1983, it persists at unacceptable levels. As discussed earlier, the characteristics of those in poverty have
also changed—a change that has made the
problem of poverty seemingly more intractable.

III.H.

BRINGING HOPE TO DISTRESSED COMMUNITIES

143

POVERTY RATE
Percent

Source: U.S. Burtau

of th« C«nsut.

FISCAL YEAR

In addition to direct transfer payments to
individuals, and programs of education, training and services to improve employment
among the disadvantaged, the Federal Government has tried, over the past three decades, a
variety of community and economic development programs to revitalize neighborhoods
with high concentrations of poverty. Examples
are the Economic Development Administration, Model Cities and Urban Development
Action Grants. Total outlays for these programs have been $150 billion over 30 years.
Yet they often failed to address the root causes
of poverty in the inner city—the lack of jobs
and entrepreneurial opportunities among poor
residents. Consequently, although many physical improvements in cities have resulted, the
problem of isolated inner-city poverty, with its
accompanying social problems, remains and in
some respects has worsened.




While there is no consensus about what is
and what is not effective in bringing about
long-term change in the lives of poor families
and distressed communities, lasting improvements are unlikely to occur unless people are
empowered to have more control over their
living environment. To restore a climate of opportunity in areas ravaged by drugs, crime,
and dependency, barriers to entrepreneurship,
job creation and productive economic activity
must be removed or reduced. These barriers
are widespread. Examples include financial
and other obstacles facing welfare mothers
trying to leave welfare for the workforce, regulations and tax burdens that can prevent new
small business growth, and dependency-creating kinds of programs of the past.

144

THE BUDGET FOR FISCAL YEAR 1991

FEDERAL ASSISTANCE TO LOW-INCOME INDIVIDUALS
$ Billions

(Outlays)

FISCAL YEAR

Along with jobs, housing is a central element in any strategy to deal with poverty.
And, expanding homeownership opportunities
is key to any housing strategy. A home can be
a platform to achieve dignity, self-reliance, and
stability. People who own private property
often become anchors in the community with
new reasons to show concern for property
values, local taxes, crime or drug abuse, and
neighborhood revitalization. Low-income families need expanded opportunities to entertain
the possibility of becoming homeowners. That
should not be the exclusive dream of the
middle class in America.
A subset of problems is posed by the homeless. Again, solutions are not self-evident or
simple; they must often combine housing with
services tailored to the widely-varying individual needs of the homeless. Federal efforts must
combine with those of State, local and private
sectors—both profit and non-profit—to create a
community-level capability to deal with these
problems.



Building on these principles, the President's
1991 budget offers a new initiative to aid communities and families left behind. Called
"Homeownership and Opportunity for People
Everywhere" or HOPE, its purposes are to: (1)
expand opportunities for low-to-moderate
income families to manage rental properties
and eventually to own their own homes; (2)
reduce or eliminate artificial barriers to the
development of low-cost housing; (3) help verylow-income families struggling against dependency to achieve economic self-sufficiency; (4)
address the needs of the long-term homeless
for housing, intensive social services, and
health care; and (5) create jobs and economic
opportunities in distressed inner-city and rural
areas.
Expanding Tenant Management and
Homeownership Opportunities
HOPE Grants.—To help low-income families
become homeowners with a stake in their communities, the Administration proposes a new

III.H.

BRINGING HOPE TO DISTRESSED COMMUNITIES

HOPE Grant Program. These grants will provide funds for resident management and homeownership in public housing, government-held
vacant and foreclosed properties, and financially "distressed" properties.
HOPE grants would enable public housing
residents to purchase their homes, would capitalize on the existing strengths and abilities of
non-profit organizations and community-based
housing development organizations, and would
increase the housing resources available to the
Nation's poor.
Public housing resident management and
ownership is already showing some promising
results. Kenilworth-Parkside, in Washington,
D.C., Carr Square and Cochran Gardens, in St.
Louis, and public housing communities in
Nashville, Boston, and Chicago are examples.
The expectation is that with tenants in control, there will be better maintenance, more
rents paid on time, a decrease in people on
welfare, and generally, a greater sense of
pride.
HOPE Grants would provide $2.15 billion
over 3 years with States, localities or nonprofit organizations required to provide $1 for
every $2 in Federal HOPE grant funds. These
grants can be used for rehabilitation, acquisition, technical assistance, capital reserves, security, and mortgage assistance, but not for
new construction. A total of $250 million
would be set aside to provide replacement
housing for public housing developments that
convert to low-income homeownership.
Urban Homesteading.—Another means to
promote homeownership is an existing Federal
program called Urban Homesteading. The 1991
budget increases funding for this program; it
almost doubles Urban Homesteading resources
in 1990 (with a proposed supplemental transfer) and almost quadruples program resources
in 1991, for a total of $50 million. The goal is
to make Urban Homesteading a more significant tool for stabilizing neighborhoods and providing affordable homeownership opportunities
for low-income families. This program turns
over single-family FHA, VA, FmHA, and RTCheld properties to cities who then provide the
properties at nominal cost to moderate-income
families. Urban Homesteading funds are used
to reimburse FHA, VA, FmHA, or RTC for the
value of the properties given to cities. Families



145
must renovate the properties through "sweat
equity," with federally supported financing
(e.g., Community Development Block Grant
funds), or with other available city funds.
The budget also includes a new initiative to
help tenant groups acquire multi-family properties currently held by FHA. A total of 10,000
vouchers will be provided to tenant groups
wishing to take over HUD-held rental properties and turn them into homeownership cooperatives. The tenant groups can use HOPE
Grant funds for rehabilitation if needed. The
vouchers will be used to help the tenants pay
their operating costs for 5 years.
Prepayment Strategy.—Over the next 15
years, owners of some 334,000 units of FHAinsured multifamily housing will become eligible to prepay their mortgages. These properties could be converted into condominiums/cooperatives or continue as rental properties, but
with much higher rents. In either case, the
properties would no longer serve low-income
people without their receiving some form of
assistance. The HOPE initiative proposes a
three-pronged approach to protect tenants who
could be adversely affected by much higher,
unaffordable rents resulting from these prepayments. To fund this initiative, the budget
includes $412 million in 1991 and $1,074 billion
over the 1991-1993 period.
One part of this initiative proposes to give
tenant groups first right to purchase and convert their buildings to homeownership, resident-owned structures, with Federal aid provided for such conversions. Tenants would receive the financial equivalent of 10 years of
housing vouchers; such monies could be used
for acquisition, rehabilitation, technical assistance and other uses. If tenants decide not to
buy the building, a second approach is to give
owners incentives not to prepay their mortgages through additional Federal subsidies to
help keep rents low. And third, if owners elect
to prepay and sever their relationship with
HUD, HUD would protect tenants with housing vouchers, thereby helping them afford
higher rents. The tenants could use these
vouchers either in the same project, if it remains rental, or in another location of their
choice. Owners would pay relocation fees for
the tenants.

146
IRAs for Homebuyers.—The Federal Government provides substantial support for homeownership through the tax code and Federal
credit programs. To expand homeownership
opportunities for young families and first-time
homebuyers, the Administration proposes the
use of Individual Retirement Accounts (IRAs)
for buying a home. As housing prices increase,
it is often difficult for first-time homebuyers to
accumulate the savings needed for a downpayment and closing costs. While moderate
income families are eligible to receive tax-deferred treatment for savings through IRAs,
they are not currently permitted to make IRA
withdrawals without penalty for what is likely
to be the biggest investment in their lives—
their homes.
The HOPE initiative will help achieve homeownership by allowing first-time homebuyers
to withdraw funds in their tax-deferred IRAs
without penalty. The maximum amount that
can be withdrawn from an IRA for a downpayment would be $10,000 and the maximum
house price would be 110 percent of the average area purchase price.
FHA reforms.—If FHA is to continue to
serve moderate income and first-time homebuyers, reforms must be put into effect that
ensure its long-term financial solvency. The
Administration's proposed reforms, many of
which have just been enacted into law, represent a critical first step in this direction. One
of these reforms targets FHA insurance more
to first-time homebuyers by eliminating investors from participating in the program. Maintaining the expanded loan limits enacted in
1990 (almost $125,000) will also ensure that
access to FHA insurance is not curtailed in
high-cost market areas.
A variety of other programmatic reforms are
also contemplated—including tighter mortgage
underwriting criteria that will help ensure
program integrity. A complete and independent actuarial study of FHA is currently underway. This report, along with others done by
the private sector and GAO, will show that
FHA needs to be significantly strengthened if
it is to continue to advance homeownership for
moderate-income families and first-time homebuyers while avoiding financial insolvency in
the long run. The Administration expects to
submit further changes to FHA to address its



THE BUDGET FOR FISCAL YEAR 1991

long-term financial problems after the completion of the actuarial study.
Reducing or Eliminating Barriers to LowCost Housing
Housing Opportunity Zones.—The
1991
budget proposes a Federal-local partnership to
remove barriers to, and create incentives for,
more affordable housing for low- and moderate-income families in distressed urban or suburban areas. It is similar in concept to the
Administration's Enterprise Zone proposal.
Under this proposal, HUD would designate 50
Housing Opportunity Zones to be chosen
through a competitive process from applications by local governments.
Applicants would be selected that best identify and institute plans to remove barriers—
such as unnecessarily lengthy and expensive
permit and fee processes, exclusive zoning,
overly restrictive building codes, rent controls,
and regressive property tax burdens. In exchange, they would be eligible for exemptions
from certain FHA processing requirements.
They would also have a preference in receiving
rental rehabilitation grants.
Criteria for the competition for designation
as Housing Opportunity Zones will include (1)
the extent to which city and county governments propose to reduce regulatory and other
burdens on housing production; and (2) the
degree to which new and rehabilitated housing
will be affordable by low- and moderate-income
families. Applicants could also offer low-priced
land, vacant city-owned property, low-interest
loans, or real estate tax abatements.
Low-Income Tax Credit—Nationwide, rental
vacancy rates remain very high—7.3 percent
in the third quarter of 1989. There is no general shortage of rental housing. But there are
local area exceptions. The low-income housing
tax credit, just extended through December 31,
1990, and proposed for further extension
through December 31, 1991 in the President's
budget, can be used to supplement the goals of
the Housing Opportunity Zones. The credit,
which provides real estate investors tax savings over a ten-year period, is designed to encourage the new construction or rehabilitation
of affordable rental housing in those areas
with rental housing shortages. Credits are alio-

III.H.

147

BRINGING HOPE TO DISTRESSED COMMUNITIES

cated to the States, and the States—not the
Federal Government—decide which areas and
projects will receive the credit. States with
Housing Opportunity Zones will have an incentive to target the credits to these zones.
Helping Poor Families and Elderly Become
Self-Sufficient
Operation Bootstrap.—Tenant-based housing
vouchers remain basic to the Administration's
low-income housing policy. They provide housing choice and mobility to families, which are
key elements in helping low-income renter
families exert greater control over their lives.
Starting in 1991, all housing vouchers (and the
quite similar rental certificates) provided to
welfare families and others with very low incomes must be combined with a local program
to help them escape from dependency.
For families capable of working, housing assistance should be seen as a tool for helping
them become part of the economic mainstream, rather than permanent support. The
Family Support Act, by requiring States to
enroll welfare recipients in the JOBS program,
provides an opportunity to combine housing
with employment counseling, training, education, child care, and the other services these
families need to become self-sufficient. HUD
has already conducted a demonstration in
which selected local communities have put together creative and successful programs linking housing subsidies with job training and
other services to housing tenants. The time
has come to replicate such local efforts in more
areas of the country.
Operation Bootstrap requires that local
housing authorities and their local governments must demonstrate to HUD that welfare
families and families with very low earnings
will have access to a comprehensive program
of services. HUD will monitor the progress of
each jurisdiction to ensure reasonable progress
towards full implementation of their Operation
Bootstrap programs.
Frail Elderly Housing-Services Voucher Demonstration.—The frail elderly will constitute
an increasing share of the elderly population
in coming years. Frail elderly are defined as
persons of at least 62 years of age who need
assistance with three or more simple activities
of daily living, such as eating or dressing. Not



surprisingly, frail elderly are more advanced
in age, usually in their seventies or eighties
and beyond. A nursing home may not be
needed or wanted but may be the only way to
get any care at all. While the more affluent
elderly can afford to pay for the in-home services they need, the very-low-income elderly
cannot. The purpose of this demonstration is to
test whether housing-services vouchers can
cost-effectively help the very-low-income frail
elderly continue to live in their homes and not
be moved to nursing homes.
The 1991 budget proposes a Service-Supported Housing Voucher Demonstration for the
Frail Elderly, funded at $44 million: $10 million for service payments linked with $34 million in housing assistance vouchers for 1,500
frail elderly households over 5 years. The service payments will cover 45 percent of the cost
of service provision. Local housing authorities
will be required to secure 50 percent of the
cost of the services from their States. The elderly individual will be required to pay 10 percent of the service cost. The co-payment requirement is designed to discourage the use of
unnecessary services.
Helping the Homeless
Fully Funding McKinney Act Programs for
the Homeless.—The President has promised to
fund fully the McKinney Act programs. The
budget more than meets this promise. In 1991,
"full funding" of McKinney implies funding of
$727 million; the budget includes $819 million.
Another $166 million is available in nonMcKinney programs targeted to the homeless,
bringing total spending to $985 million. Additionally, various Federal entitlement programs
and various State and local block grants are
available—and used—to help the homeless.
Special Homeless Initiatives.—Several initiatives are focused on target groups within the
homeless who have special service needs:
• AFDC Families in Welfare Hotels: The
budget proposes $143 million for the
McKinney Act Transitional Housing Demonstration program. This program is designed to develop innovative approaches to
providing housing and supportive services
to homeless individuals and families who
are capable of making the transition to

148

THE BUDGET FOR FISCAL YEAR 1991

independent living within 2 years. The
program provides interest-free advances to
States, localities or non-profit groups for
the acquisition and rehabilitation of facilities for transitional housing; funding for a
portion of operating costs of the housing;
supportive services and employment assistance programs; and technical assistance to
recipients in carrying out program activities. In 1991, the budget includes a new
initiative within this program to assist
homeless Aid for Dependent Children
(AFDC) families living in welfare hotels.

entrepreneurial activity in distressed areas
that have not fully participated in the Nation's
overall economic prosperity. State and local
governments have already taken the lead by
setting up their own enterprise zones but these
lack Federal incentives. Federal enterprise
zones will bolster such State and local efforts
by providing strong Federal tax incentives for
job creation and entrepreneurship in distressed
areas.

This initiative will test innovative approaches to moving these families out of
their emergency shelter accommodations
into more stable, transitional housing arrangements.

• A 5 percent refundable tax credit for the
first $10,500 of wages, up to $525 per
worker, to qualified employees for wages
earned in an enterprise zone business.
This credit phases out between $20,000
and $25,000 of total wages. In many cases,
this credit will cut the taxes of low-income
workers to zero. For some low-income families who already owe little in taxes, a refundable credit will not only eliminate
their tax liability—it will put money in
their pockets.

• A New "SHELTER PLUS CARE" Program to Help the Homeless Mentally III or
Recovering Substance Abusers: The longterm homeless are not very well served by
either the housing delivery system or the
social service network. These individuals
need intensive services and long-term supportive housing arrangements provided in
a more systematic manner than is now the
case. In 1991, the Administration proposes
that HUD provide $247 million in housing
assistance for over 8,900 homeless mentally ill or recovering substance abusers. The
housing assistance will take three different forms to accommodate different housing needs: (1) rental assistance to individuals for use in a wide range of housing
situations, including regular apartments,
group homes, or single-room-occupancy
units; (2) subsidies to non-profits who provide group home living arrangements; and
(3) subsidies to landlords of single-roomoccupancy buildings so they can charge affordable rents.
In order to receive any of these housing
subsidies, applicants would have to contribute an equal matching amount from
State, local or private sources for supportive services for these individuals.
Creating Jobs and Economic Growth in
Distressed Areas
Enterprise Zones.—It is essential in both
urban and rural America to create jobs and



Three Federal tax incentives are included in
the President's Enterprise Zone proposal:

Welfare recipients and other low-income
people on government support often face
very steep effective tax rates as they enter
the workforce. They pay income and social
security taxes on their earnings, and
suffer high effective marginal "taxes"
from losing their AFDC, Food Stamps,
Medicaid coverage and other government
support. They also face employment-related expenses, such as child care and transportation. The proposed wage tax credit is
designed to ease the financial transition of
welfare families into entry-level jobs opportunities that will help break the poverty trap.
• Expensing of investor purchases of newlyissued corporate stock for businesses located in enterprise zones. This is an up-front
deduction for up to $50,000 per year of
new equity investment, with a $250,000
lifetime limit. Corporations issuing the
stock must have less than $5 million of
total assets, and must use the stock proceeds to acquire tangible assets located
within the zones. This incentive is designed to make zones attractive to new
capital by giving an immediate tax saving

III.H.

149

BRINGING HOPE TO DISTRESSED COMMUNITIES

to individuals who invest in enterprise
zones.
• A zero capital gains rate for gains on investment in tangible property used in an
enterprise zone business, and located
within an enterprise zone for at least 2
years. This is another strong incentive for
potential local entrepreneurs and outside
investors to invest capital in the zone. It is
a more delayed reward for entrepreneurship than the up-front expensing deduction.
In summary, Federal tax incentives would
be available to investors and employees in 50
zones for up to a maximum of 24. years. The
estimated tax revenue effect of this proposal is
$520 million from 1991 through 1993.
These 50 zones will be chosen through a
competitive process after a comprehensive
evaluation by the Secretary of Housing and
Urban Development. Applicant localities must
commit to provide regulatory relief and improved services within the areas they nomi-




nate as Federal enterprise zones. Those states
and localities offering the strongest package of
incentives and initiatives would be selected for
zone designation. For example, some preference for Federal enterprise zone designation
could be given to States and localities that
offer relief from land use regulations. Similarly, States and localities could toughen community drug enforcement, begin new anti-crime
efforts, target improved job training and counseling to zone residents, or improve municipal
services and neighborhood infrastructure.
CONCLUSION
The HOPE initiative will not by itself solve
the problems of poverty. No single approach
can do so. But HOPE will help to contribute
an important escape route from poverty—by
providing the stability that comes from better
housing, particularly owning one's home. The
road away from poverty is likely to begin with
pride and self-reliance, and nothing is more
conducive to pride and self-reliance than responsibility for one's dwelling.




III.I. PRESERVING NATIONAL SECURITY AND
ADVANCING AMERICA'S INTERESTS ABROAD
The budget requests $326.9 billion in budget
authority and $321.4 billion in outlays for the
National Defense (050) and International Affairs (150) functions, $6.6 billion and $10.5 billion, respectively, more than in 1990. The purpose of this request is to preserve national security—through diplomatic, political, and military means; through advancing the U.S.
agenda on economic and trade issues; and
through advancing the cause of democracy and
human rights.

The Department of Defense (DOD) (051) portion of National Defense is $295.1 billion in
budget authority and $292.1 billion in outlays.
Although DOD budget authority increases by
1.3 percent in nominal terms, it declines by 2.6
percent in real terms. The proposed 1991 DOD
budget authority level is 16 percent below the
1985 level in real terms.

FUNDING SUMMARY FOR NATIONAL DEFENSE AND
INTERNATIONAL AFFAIRS
(Dollar amounts in billions)
Actual
iy 8 y
QQ
Q
i

National Defense (050):
Budget authority
Outlays
Department of Defense—Military (051):
Budget authority
Outlays
International Affairs (150):
Budget authority
Outlays
Total:
Budget authority
Outlays

CONTEXT
Remarkable changes have occurred during
the past year. The Berlin Wall has been
opened and democratic forces are on the move
in Eastern Europe. The Soviets are carrying
out unilateral reductions in conventional
forces stationed in these countries. Arms reduction negotiations are underway for both
strategic and conventional forces. These




Estimate

change
over 1990

1990

1991

299.6
303.6

301.6
296.3

306.9
303.3

+ 1.7%
+ 2.3%

(290.8)
(294.9)

(291.4)
(286.8)

(295.1)
(292.1)

(+1.3%)
(+1.9%)

17.3
9.6

18.6
14.6

20.0
18.2

+7.5%
+24.9%

316.8
313.1

320.2
310.9

326.9
321.4

+2.1%
+3.4%

events, and the promising results of the December meeting at Malta between President
Bush and Chairman Gorbachev, would seem to
bring a more peaceful world closer to realization. At the same time, Soviet financing of
arms through Cuba to Nicaragua and El Salvador and Soviet re-supply of the Kabul Regime
in Afghanistan remain as troublesome signs

151

152

THE BUDGET FOR FISCAL YEAR 1991

that regional stability and democratic interests
are far from secure.
Democracy and the private marketplace are
growing stronger throughout the world. Argentina, Brazil and Chile, as well as the Philippines and Panama, have replaced dictatorships
with democracies. A wide variety of countries
have moved away from socialism. It is particularly encouraging that the weaknesses of centrally directed economies in Africa and Asia
are being recognized by those countries. There
is less talk of a non-market oriented "New
Economic Order" in the United Nations. At
the same time, democracy in many developing
countries remains fragile and debt servicing
burdens continue to impede growth. Structural
impediments to imports and investments continue to pose problems.
Although these changes suggest new opportunities and adjustments in the U.S. defense

and international affairs programs, there are
reasons for caution. Soviet military capability
will remain formidable, even after announced
reductions. The strength of the NATO alliance
must be maintained; so must America's ability
to respond to any significant reversal in Soviet
policy. In addition, threats to U.S. national security outside Europe remain and may be increasing. There are dangers in regional conflicts, particularly in the Middle East and Central America, and in increased proliferation of
sophisticated weapons, including nuclear weapons, in developing countries. There are also
dangers in state-sponsored terrorism; in narcotics trafficking; in poverty, disease and the
plight of refugees; and in environmental
damage.
Defense and international affairs programs
must take advantage of the opportunities provided by recent changes. They must also address realistically the problems that remain.

NATIONAL DEFENSE
A strong defense preserves the peace.
Indeed, the restoration in the past decade of
the military strength of the United States has
helped preserve the peace, create more constructive relations with adversaries, and make
mutual arms reductions a serious possibility.
As a result, savings in the Defense budget are
now possible.
The national security objectives of the
United States remain unchanged. The U.S.
must be able not only to deter aggression and
protect American citizens, but also to repel or
defeat military attack. It must be able to take
on new challenges such as reducing the flow of
illegal drugs into the United States. It is also
in the U.S. interest to pursue verifiable strategic and conventional arms reduction agreements with the Soviets and to prevent the
transfer of militarily critical technologies to
potential adversaries.
While U.S. forces must continue to deter the
Soviets, they must also have increased utility
for dealing with other conflicts. Over the
longer term, the active armed forces of the
United States will probably be smaller and
more global in perspective. They will need a
degree of agility, readiness and sustainability



appropriate to the varied demands of likely
contingencies.
The assurance of future capabilities requires
investments in R&D and modernization; substantial reserve forces; and maintenance of the
quality, morale and training of military personnel. This will allow the United States to
hedge against an uncertain future; it will also
permit the reversal of Defense reductions if
that should prove necessary. In addition, the
Administration will work with the Congress to
make U.S. security assistance programs more
effective in building up the capabilities of
American allies and friends to meet changing
circumstances. (See International Affairs
below.)
The budget request for National Defense is
significantly less ($14.3 billion in budget authority and $5.5 billion in outlays) than the
amounts included in the President's February
1989 budget. Planning levels for the future
now assume only slight nominal increases, less
than would be required to offset projected inflation. Compared to the February 1989
budget, savings in the 1991-1993 period are
$63.6 billion in budget authority and $29.7 billion in outlays. These savings will be achieved

III.I. PRESERVING NATIONAL SECURITY AND ADVANCING AMERICA'S INTERESTS ABROAD

through a selective approach to the acquisition
of new equipment and supplies and through
reductions of civilian and military personnel.
Savings of about $2.3 billion in 1991 will also
result from implementation of the recommendations of the Defense Management Report
(described in Part VII). Although current planning projects lower active force levels, the
forces that remain will be well trained, well
equipped, and served by a more efficient support structure.

153

National Defense Budget
The following table shows budget authority
and outlays for the three national defense subfunctions: military functions of the Department of Defense, atomic energy defense activities, and defense-related activities of other
agencies.

NATIONAL DEFENSE
(In billions of dollars)
1989
Actual

Budget authority:
Department of Defense—Military
Operations
Investment
Atomic Energy Defense Activities
Defense-related Activities
Total budget authority
Outlays:
Department of Defense—Military
Operations
Investment
Atomic Energy Defense Activities
Defense-related activities
Total Outlays

Department of Defense—Military
The budget requests $295.1 billion in budget
authority and $292.1 billion in outlays for the
military functions of the DOD, $3.8 billion and


http://fraser.stlouisfed.org/
250-298 0 - 1 9 9
Federal Reserve Bank of St. Louis0 - 5

QL3

1990
Estimate

1991
Estimate

290.8
(164.9)
(125.9)
8.1
0.6

291.4
(163.5)
(127.9)
9.7
0.6

295.1
(170.2)
(124.9)

299.6

301.6

306.9

294.9
(167.7)
(127.2)
8.1
0.6

286.8
(160.5)
(126.3)
8.9
0.6

292.1
(166.8)
(125.3)
10.4
0.7

303.6

296.3

303.3

11.0

0.8

$5.4 billion more, respectively, than in 1990.
The following table provides a summary of
active and reserve military personnel and
forces.

154

THE BUDGET FOR FISCAL YEAR 1991

SUMMARY OF ACTIVE AND RESERVE MILITARY
PERSONNEL AND FORCES
1989
Actual

Military Personnel (in thousands):
Active
Army
Navy
Air Force
Marine Corps
Guard and Reserve
Army
Navy
Air Force
Marine Corps
Strategic Forces:
Intercontinental Ballistic Missiles:
Peacekeeper
Minuteman
Poseidon-Trident
Strategic Bomber Squadrons
General Purpose Forces:
Land Forces (Active/Reserve):
Army Divisions
Marine Divisions
Naval Forces (Total):
Total Naval Vessels
Aircraft Carriers
Battleships
Nuclear Attack Submarines
Amphibious Assault Ships
Sealift Fleet
Air Forces (Active/Reserve):
Air Force Fighter Wings (Equiv.).
Navy Attack Wings
Marine Corps Wings
Air Force B-52 Squadrons
Strategic Airlift Squadrons

OPERATIONS
Military Personnel
Active duty end-strength will decline by the
end of 1991 to a level of 2,038,800—37,605
below the estimated 1990 level, 91,429 less
than the actual 1989 level, and 81,300 less
than previously planned with savings of $1.7



1990
Estimate

1991
Estimate

2,130

2,076

2,039

770
593
571
197

744
591
545
197

728
585
530
197

1,171

1,155

1,152

776
152
199
44

757
153
201
44

757
150
202
44

50
950
576
21

50
950
608
19

50
950
656
19

18/10
3/1

18/10
3/1

16/10
3/1

566
14
4
96
65
69

551
14
4
91
64
68

546
14
2
86
66
66

25/12
13/2
3/1
3/0
20/5

24/12
13/2
3/1
2/0
20/5

24/12
13/2
3/1
2/0
20/5

billion. Pending the outcome of current conventional arms negotiations, deployment of
forces in Europe will not change in 1991. At
the same time, to continue to assure force
quality, readiness and training, the budget provides for a 3.5 percent pay raise, improved benefits, enlistment and re-enlistment bonuses,

III.I. PRESERVING NATIONAL SECURITY AND ADVANCING AMERICA'S INTERESTS ABROAD

special pay for critical skills, and continuation
of current training levels.
Strategic Forces
Deployed forces will continue to include the
Triad of land, air and sea based systems, as
well as air defense interceptors. Land based
missiles and strategic submarines will continue at the 1990 levels of 1,000 Minuteman and
Peacekeeper missiles and 35 Poseidon and Trident submarines with over 600 missiles. The
bomber force will, however, decrease by 19 aircraft, as older B-52's are phased out.
General Purpose Forces
The budget proposes reductions to planned
levels of ship maintenance and depot maintenance reflecting congressional action and
changes in schedule. Savings are $2.3 billion.
Several force structure adjustments are also
proposed.
• Land Forces at the end of 1991 will include 19 active and 11 reserve Army and
Marine divisions (plus 7 reserve brigades
and 5 reserve battalions to "roundout"
active divisions). This reflects a reduction
of two active divisions from force levels at
the end of 1990.
• Naval Forces at the end of 1991 will include 14 aircraft carrier battle groups and
15 tactical airwings (the same as in 1990),
but two of the four U.S. battleships will be
deactivated and the number of nuclear
attack submarines will decrease by five in
1991. The total number of Naval vessels
will decline from 551 in 1990 to 546 in
1991. Sealift forces will, however, remain
at about 1990 levels.
• Air Forces at the end of 1991 will include
24 active and 12 reserve Air Force fighter
wing equivalents (nearly 4,000 fighter and
attack aircraft), 2 squadrons of B-52's
dedicated to the delivery of conventional
weapons (35 aircraft), and 25 strategic airlift squadrons (nearly 400 C-5 and C-141
aircraft) to provide intercontinental airlift.
While airlift forces will remain at current
levels, one Air Force fighter wing equivalent and one conventional B-52 squadron
will be deactivated in 1990.




155

Special Operations Forces
These forces will include more than 41,000
military personnel by the end of 1991. Units
include Army ranger and special forces battalions; Navy sea, air, land (SEAL) teams; and
Air Force special operations wings. Through
1991, Army special forces battalions will increase from 13 to 15, and Air Force special
operations units will gain 7 additional aircraft.
INVESTMENT
Strategic Systems
To modernize all three components of the
strategic Triad, procurement for 1991 includes
the eighteenth Trident submarine and 52 Trident II missiles, 12 Peacekeeper missiles for
operational testing and special railroad trains
to provide mobility for Peacekeeper missiles,
five B-2 stealth bombers, and 100 advanced
cruise missiles. The budget requests funds for
continued development of the small intercontinental ballistic missile. It also requests an increase for the Strategic Defense Initiative to a
level of $4.5 billion. This is $0.9 billion more
than in 1990 but $1.0 billion less than previously planned.
Conventional Systems
To maintain well-equipped forces, the budget
provides for procurement in 1991 of 225 M-l
Abrams tanks, 600 Bradley Fighting Vehicles,
72 Blackhawk utility helicopters, 14 new ships
(including 2 SSN-21 attack submarines and 5
Aegis guided missile destroyers), 186 Air Force
fighters (including 150 F-16's and a final procurement of 36 F-15s), and six C-17 transport
aircraft.
Development will continue on the Army's
experimental light helicopter (LHX) and improved ground force systems, the Advanced
Air-to-Air Missile System replacing the Phoenix missile, P-7 anti-submarine warfare aircraft, and next generation tactical aircraft (the
Advanced Tactical Fighter and the Advanced
Tactical Aircraft).
Fifteen systems will be terminated with associated savings of $3 billion. Examples of terminations include the Apache (AH-64) helicopter, the Chaparral and Maverick missiles, the
Sea Lance torpedo delivery system, the Air

156

THE BUDGET FOR FISCAL YEAR 1991

Force Airbone Self Protection Jammer, and
the MK-19 Grenade Launcher. Production of
the M-l tank will end following 1991 procurement.
In addition, several 1990 programs are proposed for deferral to finance the 1991 M-l
tank program and to partially fund the F-15E
aircraft program. Proposed deferrals amount
to $1.4 billion and include fast sealift ships, the
MH-60G helicopter, and a 155mm Artillery
Projectile.
Reductions totalling about $5 billion are also
proposed in several programs to reflect congressional action in 1990, delays in program
execution, and changes in schedules. Programs
affected include the C-17 transport aircraft,
the Advanced Tactical Fighter, aircraft modification programs, the T-45 Training System,
the F-15E aircraft, and communications and
electronics programs.
Research and Technology
The budget requests $38.0 billion in budget
authority and $37.0 billion in outlays for research, development, testing and evaluation—
$1.2 billion and $0.4 billion, respectively, more
than 1990 levels. The request includes $3.4 billion to develop technology options for future
U.S. weapon systems and to guard against
technological surprise by adversaries.
Funded projects with high potential for increased military capability include research on
high-speed semiconductors (for use in advanced
communications systems and computers); R&D
by an industry consortium (SEMATECH) on
new methods of producing semiconductors;
design, in collaboration with NASA, of the National Aerospace Plane, which could revolutionize access to the lower boundaries of space;
and research on other launch-vehicle technologies that could dramatically lower the cost of
putting hardware into space. The budget also
provides for research on light-weight materials
with high strength, on significantly increased
fuel efficiency in aircraft engines, and on robotic systems capable of operating in dangerous
environments.
BASE CLOSURES
The budget requests $916 million for continued implementation of the Base Closure and



Realignment Act approved by Congress in
1989. An amount of $500 million was provided
in the 1990 budget. These funds will provide
for the construction of facilities and other onetime implementation costs at military bases to
accommodate the transfer of activities from
bases that will be closed or realigned.
DRUG INTERDICTION
The budget requests $1.2 billion for an aggressive Defense counternarcotics program,
$0.3 billion more than in 1990. The Department will continue its highly successful
demand reduction program for military personnel; expand National Guard assistance to
national counternarcotics efforts; fund efforts
to integrate the counternarcotics command,
control, communications and intelligence network of law enforcement agencies; expand efforts to detect and monitor airborne and maritime drug smugglers; provide additional support to law enforcement agencies (including
new efforts begun in 1990 along the southwest
border); and continue support of the President's Andean initiative (especially in Colombia).
INTELLIGENCE
Virtually all funding for the National Foreign Intelligence Program is included in the
Defense budget, although the exact level is
classified. The budget provides for obtaining
information on potential threats, improving capabilities to counter hostile intelligence services, monitoring prospective arms reduction
treaties, detecting changes in foreign military
technologies, increasing intelligence support
for the war on drugs, research on advanced
technologies, and covert action operations in
support of national security objectives in accordance with law.
ATOMIC ENERGY DEFENSE ACTIVITIES
These activities, conducted by the Department of Energy, include research, development, testing and production of nuclear weapons; production of special nuclear materials;
storage and clean-up of nuclear wastes from
defense programs; and design of reactors for
nuclear-powered Navy vessels. The nuclear
waste management program provides interim

157

III.I. PRESERVING NATIONAL SECURITY AND ADVANCING AMERICA'S INTERESTS ABROAD

storage for all defense nuclear wastes and supports research and development on the problems of isolating and permanently storing
these wastes.
The budget requests for these purposes are:
budget authority of $11.0 billion and outlays of
$10.4 billion, compared to $9.7 billion and $8.9
billion, respectively, for 1990. The budget provides for design of two new production reactors
and modernization of existing facilities. The
budget requests $2.4 billion, an increase of
$429 million over 1990, to implement the first
year of a 5-year plan for environmental restoration and waste management at defense facilities. Included are activities to bring existing
facilities into compliance with all Federal and
State environmental, safety, and health requirements and to clean up contamination
from prior activities.

DEFENSE RELATED ACTIVITIES
Defense related activities include civil defense and emergency preparedness activities of
the Federal Emergency Management Agency,
the efforts of the Selective Service System, and
the Maritime Administration's Ready Reserve
Force which provides for a standby fleet that
can be activated in wartime. The budget requests $760 million in budget authority and
$705 million in outlays for these purposes, as
compared with $609 million and $648 million,
respectively, in 1990.
5-YEAR PROJECTIONS
The following table shows estimates of
budget authority and outlays for each of the
major elements of the national defense function.

BUDGET AUTHORITY BY FUNCTION AND PROGRAM
(In billions of dollars)
-j^gg
Actual

050 National Defense:
051 Department of Defense—Military:
Military personnel
Operations and maintenance
Procurement
Research, development, test and evaluation....
Military construction
Family housing
Revolving funds and other
Offsetting receipts
Allowances
Subtotal, DOD—Military
053 Atomic energy defense activities
054 Defense-related activities
Total budget authority




78.5
86.2
79.4
37.5
5.7
3.3
0.9
-0.7
—

Estimate
199Q

1991

78.5
86.8
82.6
36.8
5.3
3.2
-0.7
-1.1
—

1992

Projection
1993

1994

1995

79.1
90.1
77.9
38.0
5.6
3.5
2.3
-0.9
-0.3

80.5
91.7
78.9
38.6
5.7
3.5
2.3
-1.0
-0.3

81.8
93.2
79.8
39.2
5.7
3.6
2.3
-0.9
-0.3

82.8
94.4
80.7
39.7
5.8
3.6
2.4
-0.9
-0.3

83.9
95.6
81.5
40.1
5.9
3.7
2.4
-0.9
-0.3

304.4
12.3
0.8

308.0
12.7
0.9

311.8
13.1
0.9

317.5

321.6

325.7

290.8
8.1
0.6

291.4
9.7
0.6

295.1
0.8

300.0
11.8
0.8

299.6

301.6

306.9

312.5

11.0

158

THE BUDGET FOR FISCAL YEAR 1991

OUTLAYS BY FUNCTION AND PROGRAM
(In billions of dollars)
Projection

Estimate
Actual

050 National Defense
051 Department of Defense—Military:
Military personnel
Operations and maintenance
Procurement
Research, development, test and evaluation.
Military construction
Family housing
Revolving funds and other
Offsetting receipts
Allowances
Subtotal, DOD—Military
053 Atomic energy defense activities
054 Defense-related activities
Total outlays

1990

80.7
87.0
81.6
37.0
5.3
3.3
0.8
-0.7

75.3
86.1
80.9
36.5
5.4
3.4
0.2
-1.1
—

—

294.9
8.1
0.6
303.6

286.8
8.9
0.6
296.3

1991

1992

78.8
88.3
79.3
37.0
5.5
3.5
0.8
-0.9
-0.2
292.1
10.4
0.7
303.3

80.2
90.2
79.5
37.7
5.5
3.5
1.6
-1.0
-0.3
296.9
11.5
0.7
309.2

1993

81.5
91.8
77.4
38.3
5.7
3.5
2.0
-0.9
-0.3
299.0
12.1
0.8
311.9

1994

82.5
93.2
77.7
38.9
5.5
3.5
2.2
-0.9
-0.3
302.3
12.6
0.8
315.7

1995

83.6
94.4
76.7
39.3
5.9
3.6
2.5
-0.9
-0.3
304.8
12.9
0.8
318.6

INTERNATIONAL AFFAIRS
The objective of International Affairs spending is to protect and advance the interests of
the United States and its people beyond its
shores. In a world of 171 nations and 5 billion
people—with U.S. interests, markets and investments in all parts of the globe—the task is
an enormous one.
Certain priorities, however, stand out. The
United States must make every effort to support the transition of Eastern European countries to democracy and free market economies.
It must work toward verifiable conventional
and strategic arms reduction agreements that
are in the overall interest of the United States.
It must use its political, economic and diplomatic strength toward achieving greater stability in such troubled regions as the Middle East
and Central America. Democratic outcomes
must be sought in Nicaragua, and democratic
outcomes implemented in Panama. Further,
while world attention tends to focus on the
drama of peoples rejecting totalitarianism,
there is an equal U.S. obligation to preserve



existing democracies under threat, such as in
the Philippines.
To respond to the historic opportunities that
political change offers—as well as to confront
both regional and worldwide threats—the
budget requests selective increases in the
International Affairs programs. Investing in
peace—through the support of democracy, free
markets, and solutions mutually arrived at—
reduces the risk of conflict and the enormous
sums that conflict entails. The investment is
thus critical to preserving national security, an
objective which is itself best served by a world
system based on democratic governments and
market-oriented economies.
A portion of this increased investment will
be directed toward international bodies such as
the United Nations and the World Bank. In a
more pluralistic world, the role of the major
international institutions is likely to be greater than during the bipolar super-power era.
These institutions can serve specific U.S. objectives: such is the case with the World Bank

III.I. PRESERVING NATIONAL SECURITY AND ADVANCING AMERICA'S INTERESTS ABROAD

and the International Monetary Fund which
supported Administration proposals on Third
World debt and the help of UN peacekeeping
forces in implementing the political settlement
in Namibia. Continuing realization of these
benefits from international institutions will require the United States to meet fully its obligations to them. The budget requests $3.2 billion to pay U.S. current and past obligations
owed these institutions under treaties and
binding agreements.

159

INTERNATIONAL AFFAIRS BUDGET
As the following table shows, budget authority for international affairs is requested to increase by $1.4 billion over 1990 to $20.0 billion.
Outlays are estimated to grow by $3.6 billion,
to $18.2 billion, reflecting in part the cessation
in 1991 of certain large receipts.

INTERNATIONAL AFFAIRS
(In billions of dollars)
150 International Affairs

Acfual

Budget Authority:
Foreign Aid
Security Assistance
Development and Humanitarian Assistance
Diplomacy
Conduct of Foreign Affairs
Public Diplomacy
International Financial Programs
Total Budget Authority
Outlays:
Foreign Aid
Security Assistance
Development and Humanitarian Assistance
Diplomacy
Conduct of Foreign Affairs
Public Diplomacy
International Financial Programs
Total Outlays

FOREIGN AID
The budget requests $14.9 billion in budget
authority and $14.2 billion in outlays for foreign aid, $1 billion and $3 billion, respectively,
more than in 1990. Much of the increase in
outlays in 1991 is due to the prepayment in
1990 of past loans for military goods and services; these prepayments reduce 1990 outlays by
$1.7 billion but will not recur in 1991.




Estimate

Eslfmate

13.0
(7.7)
(5.3)
3.9
(2.8)
(1.1)
0.4

14.0
(8.5)
(5.5)
4.3
(2.9)
(1.3)
0.4

17.3

18.6

14.9
(8.8)
(6.1)
5.3
(4.1)
(1.2)
-0.2
20.0

6.3
(1.5)
(4.8)
4.0
(2.9)
(1.1)
-0.7
9.6

11.2
(6.3)
(4.9)
4.1
(3.0)
(1.2)
-0.7
14.6

14.2
(8.8)
(5.4)
4.5
(3.2)
(1.3)
-0.5
18.2

The foreign aid component of international
affairs spending (security, development, and
humanitarian assistance) is important to U.S.
national security and to stability and prosperity worldwide. Our military and economic assistance promotes key U.S. foreign policy objectives through programs which, for example,
support democratic reform in Eastern Europe,
Central America, and Asia; combat international narcotics trafficking and production;
strengthen the security of key allies and
friends; and encourage economic growth in the

160
world's poorest countries. Several U.S. government agencies are involved in implementing
these programs, with the State Department
providing overall foreign policy guidance.
With recent changes in the communist world
and the growing appreciation of the advantages of a market-based system for allocating
resources, it is necessary to review U.S. foreign
aid programs and U.S. participation in multilateral institutions in order to ensure that
they meet the development and security needs
of the next decade. At the same time, it should
be noted that the foreign aid program has undergone significant changes in recent years.
The budget reflects an emphasis on Eastern
Europe, counter-narcotics, and the U.S. role in
the multilateral development banks (MDBs).
Assuring that U.S. foreign aid is used most
effectively in an era of rapid political and economic change will require close cooperation between the Administration and Congress.
Security Assistance
The budget requests $8.8 billion in both
budget authority and outlays for international
security assistance, $0.4 billion and $2.5 billion, respectively, more than in 1990. The large
outlay increase reflects a return to a traditional balance between budget authority and outlays following a surge in prepayments in 1990
as discussed above. Security assistance advances national security and foreign policy
goals by promoting the security and economic
stability of U.S. friends and allies.
Purchases of military goods and services are
supported through Foreign Military Financing
(FMF); economic stabilization is supported
through the Economic Support Fund (ESF);
and exchanges with members of friendly and
allied armed forces are promoted through the
International Military Education and Training
(IMET) program.
The largest component of the security assistance requested—$5.1 billion, or 61 percent—
provides military and economic support to
Israel and Egypt. Furthering their efforts to
achieve a lasting peace in the Middle East remains a high priority of U.S. foreign policy.
The budget requests over $2.1 billion to permit
payments associated with U.S. military bases
in NATO countries and the Philippines and to



THE BUDGET FOR FISCAL YEAR 1991

permit enhanced programs in Central America.
Of major concern is the fact that in 1990
Congress earmarked 88 percent of the principal security assistance accounts for 24 countries. Congressional earmarking will prevent
adequate programs in such key countries as
Pakistan, Thailand, the Philippines and El Salvador. Recent developments in Eastern Europe
and Panama underscore the need for flexibility
to take advantage of opportunities to exercise
U.S. leadership. The Administration once
again will ask for greater flexibility in managing security assistance, while working with
Congress to assure that our national security
priorities are addressed. The Administration
will also review in 1990 the role of security
assistance in relation to U.S. military forces in
meeting likely contingencies and threats.
Narcotics Control.—The budget requests
$528 million in budget authority and $270 million in outlays for international narcotics control (including both security assistance and development assistance funding). This activity
would grow by nearly 80 percent above 1990
levels. The requested funding will finance the
second year of the plan to reduce the flow of
cocaine from the Andean countries of Colombia, Peru and Bolivia. The major increment in
this program will be $175 million of new aid
for the economies of those countries that evidence a determination to attack seriously the
narcotics problem.
In 1990, the Administration's Andean
counter-narcotics initiative provided $141 million in military aid, principally to help Colombia's war against the "Drug Lords" of the Medellin and the Cali cartels. With extraordinary
courage and U.S. assistance, the Colombian
Government has relentlessly pursued drug
traffickers and their assets despite numerous
attacks by the drug cartel against public officials and innocent citizens. The 1991 request
will both continue U.S. military assistance and
assist coca-producing countries to substitute
other economic activities for coca production.
The budget also requests $150 million in other
narcotics control assistance to support antinarcotics law enforcement activities in the
Andean countries and elsewhere in the world.

III.I. PRESERVING NATIONAL SECURITY AND ADVANCING AMERICA'S INTERESTS ABROAD

Development and Humanitarian Assistance
The budget requests $6.1 billion in budget
authority and $5.4 billion in outlays for development and humanitarian assistance, $0.6 billion and $0.5 billion, respectively, more than in
1990. This funding is to encourage market-oriented economies through budgetary support,
capital projects and technical assistance; to
provide relief from major disasters; and to provide humanitarian assistance such as refugee
care. The request includes $1.9 billion in
budget authority for bilateral economic assistance programs administered by AID and $1.7
billion in budget authority for U.S. contributions to multilateral development banks such
as the World Bank.
Special Assistance for Eastern Europe and
the Philippines.—The major emphasis of the
increases in foreign aid in 1991 is support of
democracy abroad.
• The budget requests $300 million for a special assistance initiative for those countries in Eastern Europe that are moving
toward democracy and attempting to develop free market economies. Special legislation will be transmitted to spell out the
objectives of this program in relation to
legislation already enacted to provide for
an Enterprise Fund for Poland and Hungary and a Stabilization Fund for Poland.
• The budget also requests $200 million for
special assistance to the Philippines. The
funds would comprise the second contribution to a multilateral effort to back major
economic reform needed to underpin Philippine democracy.
Refugees.—The budget requests $451 million
in budget authority and $435 million in outlays for refugee programs, $82 million and $49
million, respectively, more than in 1990. The
request will help finance the admission of up
to 110,000 refugees into the United States, primarily from the Soviet Union and Southeast
Asia. These funds will also finance the U.S.
share of assistance to refugees in camps
abroad managed by international organizations such as the UN High Commissioner for
Refugees. Finally, $25 million in special emergency funds is proposed to allow for contingencies.



161

Multilateral Development Assistance.—The
budget requests $3.2 billion in contributions
over the next 3 years to the International Development Association (IDA), an agency of the
World Bank. This proposed funding, when
matched by $11.9 billion in contributions from
other countries, will permit IDA to provide an
average of $5.5 billion in annual long-term
lending on concessional terms during 1991-93
to the poorer developing countries. A substantial portion of these resources will support economic reforms in African countries where governments are moving toward market-oriented
economic systems. The budget request also includes $279 million to provide funds pledged in
past years to several of the multilateral development banks but which were not appropriated. The existence of these arrearages limits
the ability of the United States to exert leadership in these organizations. As with the arrearages to the United Nations and related
agencies discussed below, these arrearages constitute formal obligations that the United
States must honor.
Bilateral Development and Disaster Assistance.—AID's regular development assistance
program is continuing its transition toward
greater emphasis on economic performance in
allocating funds among recipients. In addition,
the budget requests a two-thirds increase in
AID funding for international disaster assistance in recognition of the more costly requirements of recent years.
DIPLOMACY
The budget requests budget authority of $5.3
billion and outlays of $4.5 billion for Diplomacy, $1 billion and $0.4 billion, respectively,
more than in 1990. The request includes funding for the conduct of foreign affairs and for
public diplomacy.
The conduct of foreign affairs—the day-today business of dealing with the governments
and peoples of other countries, including the
provision of U.S. contributions to a number of
international organizations—is carried out by
the State Department. Programs that convey
information about the United States and its
policies, termed "public diplomacy," are conducted by the United States Information
Agency (USIA). Public diplomacy also includes

162
support through the Board for International
Broadcasting for Radio Free Europe and Radio
Liberty, which provide radio broadcasts to the
peoples of Eastern Europe and the Soviet
Union.
While there are several initiatives planned
in support of Diplomacy, the successful
achievement of diplomatic objectives is determined more by the steady application of resources over time. For a number of these programs in 1990, language in appropriations legislation includes a restraint on the spending of
appropriated funds. The budget proposes legislative language to remove this restriction.

THE BUDGET FOR FISCAL YEAR 1991

and the individual organizations. The U.S. remains committed to continuing the progress
made towards fiscal restraints and greater
focus on essential programs that has occurred
within the international organizations over the
past several years.
Reconstruction of the Moscow Embassy.—
Soviet espionage has penetrated American Embassy facilities in Moscow. The budget requests
$270 million in budget authority and $10 million in outlays to construct, under extraordinary technical standards, a more secure building for diplomatic representation and negotiations in this key capital.

Conduct of Foreign Affairs

Public Diplomacy

The United States has formal diplomatic
representation in 141 countries. Including consulates and missions to international organizations, this representation is carried out at 253
diplomatic posts. During 1991 a number of
these posts will be conducting negotiations
critical to U.S. interests. Funds sought for the
basic salaries and expenses of the State Department are $1.9 billion in budget authority
and $1.8 billion in outlays, slightly more than
1990 in real terms. There are, however, two
special initiatives regarding international organizations and the construction of an embassy building in Moscow that require substantial
additional resources.

At a time of rapid change in the world,
public diplomacy programs are particularly
valuable in achieving U.S. foreign policy objectives. It is in the interest of the United States
for the peoples of other countries to know in
considerable detail the United States, its policies, and its people and culture. Public diplomacy meets these needs with a wide array of
activities, including information centers and libraries abroad, traveling exhibits, television
placements, and direct television and radio
broadcasts.

Payments to International Institutions.—The
United States remains committed to effective
participation in international organizations in
pursuit of U.S. interests. While democracy and
free markets can be encouraged through the
bilateral efforts of the United States, international organizations in a multi-polar world will
be of increasing importance in consolidating
gains, particularly with respect to transnational problems. The budget therefore requests
$1.4 billion in budget authority and $0.9 billion
in outlays for these institutions, an increase of
$712 million and $187 million, respectively,
over 1990. This request includes $794 million
for regularly scheduled payments and $620
million to eliminate arrearages in U. S. mandatory contributions to the United Nations
and related agencies. The arrearage payments
would be made over a 5-year period and they
would be directed toward special activities that
are mutually agreed upon by the United States



One of the most effective instruments of
public diplomacy has been the people-to-people
exchanges for which spending has grown by
147 percent since 1980. In view of this rapid
growth, the $154 million of budget authority
and $156 million in outlays for exchange programs continues these activities at about the
1990 levels.
Another potent public diplomacy instrument
is radio broadcasting through the USIA's Voice
of America (VOA), through Radio Free
Europe/Radio Liberty (RFE/RL), and through
Radio Marti which broadcasts to Cuba. A
decade ago the facilities of VOA and RFE/RL
were outmoded. As a result, the United States
began an ambitious plan to assure that all key
targeted audiences could receive a clear broadcast signal. As this effort nears its end, the
budget requests $125 million to continue the
major modernization for VOA radio broadcasting capacity. Progress payments for new transmitters in Morocco and Thailand are provided.
The sharp reduction in budget authority for

163

III.I. PRESERVING NATIONAL SECURITY AND ADVANCING AMERICA'S INTERESTS ABROAD

the Board for International Broadcasting from
$373 million in 1990 to $225 million in 1991
reflects completion of major funding for BIB's
radio transmitter in Israel.
INTERNATIONAL FINANCIAL PROGRAMS
This category of international affairs spending supports several major financial institutions or accounts. One of these, the ExportImport Bank, provides loans, guarantees, and
insurance to support U.S. export sales, primarily in developing country markets. For 1991,
the Bank will provide $500 million in loans
and $10.6 billion in guarantees and insurance.
The Administration also proposes to retain a
$114 million "war chest" grant fund to further
the U.S. negotiating objective of substantially
reducing foreign tied-aid practices; i.e., combin-

ing foreign aid grants with regular export
credits to win export sales.
International negotiations are also underway on an increase in International Monetary
Fund resources. This could lead to an increase
in the U.S. share of these resources, which is
called U.S. quota. Because the size of a larger
quota is still under negotiation, the budget
does not provide funds for it. Any quota increase would require an appropriation of
budget authority, but it would not lead to outlays and, therefore, would not increase the deficit.
5-YEAR PROJECTIONS
The table below shows estimated budget authority and outlays for the major elements of
the international affairs function.

INTERNATIONAL AFFAIRS: 1989-1995
(In billions of dollars)
1989
Actual

Budget Authority:
Foreign Aid
Security Assistance
Development and Humanitarian Assistance
Diplomacy
Conduct of Foreign Affairs
Public Diplomacy
International Financial Programs
Total Budget Authority
Outlays:
Foreign Aid
Security Assistance
Development and Humanitarian Assistance
Diplomacy
Conduct of Foreign Affairs
Public Diplomacy
International Financial Programs ,
Total Outlays




Estimate
199Q

1991

Projection

1992

1993

1994

1995

13.0
(7.7)

14.0
(8.5)

14.9
(8.8)

15.4
(9.4)

15.8
(9.5)

16.1
(9.6)

16.5
(10.1)

(5.3)
3.9
(2.8)
(1.1)
0.4

(5.5)
4.3
(2.9)
(1.3)
0.4

(6.1)
5.3
(4.1)
(1.2)
-0.2

(6.1)
4.5
(3.3)
(1.2)
-0.3

(6.3)
4.6
(3.4)
(1.2)
-0.3

(6.5)
4.7
(3.5)
(1.3)
-0.3

(6.5)
4.8
(3.5)
(1.2)
0.3

17.3

18.6

20.0

19.6

20.1

20.5

21.6

6.3
(1.5)

11.2
(6.3)

14.2
(8.8)

15.4
(9.8)

14.7
(8.8)

15.0
(8.7)

15.6
(9.2)

(4.8)
4.0
(2.9)
(1.1)
-0.7

(4.9)
4.1
(3.0)
(1.2)
-0.7

(5.4)
4.5
(3.2)
(1.3)
-0.5

(5.6)
4.7
(3.4)
(1.3)
-0.7

(5.9)
4.7
(3.5)
(1.3)
-0.7

(6.3)
4.8
(3.6)
(1.8)
-0.9

(6.5)
4.9
(3.6)
(1.3)
-0.8

9.6

14.6

18.2

19.4

18.8

18.9

19.7




Ill.J.

PRESERVING AMERICA'S HERITAGE

One might ask what "preserving America's
cultural heritage" may have to do with investing in America's future. To many the connection is not obvious. But the connection is important nonetheless. To the extent that investing in the future tends to emphasize technological advances—as it should—there is a need to
assure a counterbalancing attention to aesthetic values. To the extent that it implies a race
through time, there is a need for a balancing
appreciation of history. And to the extent that
America's traditional cultural values have
helped make America uniquely strong, it is
important that these values be preserved—in
order that they may be built upon as America
continues to advance.
Direct Federal expenditures and tax incentives for preserving America's cultural heritage are a relatively small part of the budget.
For a variety of reasons of political and cultural philosophy, they must remain so. But they
should never be viewed as so small that they
should be overlooked, nor so insignificant that
they might be dismissed.
The budget proposes $757 million in direct
funding of activities that preserve, pass on and
contribute to the American heritage, $63 million (9 percent) more than enacted in 1990.
This direct contribution complements what
was in 1988 $1.4 billion in tax expenditures to
encourage $866 million in private investments
to preserve historic buildings and landscapes
and $6.8 billion in private charitable contributions to further the arts, culture and the humanities.
THE IMPORTANCE OF THE HERITAGE
Only through the memory and understanding of our past, and the past of other countries
whose civilizations have contributed to ours,
and to the world, can we gain a true sense of
the present and the ways in which we might
influence the future. Yet large numbers of college graduates today cannot distinguish the
thoughts of Karl Marx from those in our own
Constitution. They have no sense of either
Plato's Republic or Martin Luther King's




"Letter from the Birmingham Jail." Bombarded by the cultural sameness of prime time television and "news" imagery that serves also as
entertainment, Americans often know little or
nothing of what they have inherited. And,
many of the buildings, books, paintings, sculptures, films and videos that record and express
the past rot unattended.
America is a nation of immigrants, whose
common heritage includes the thinking, art
and science of the homelands of those who
have come here and are still coming here. It
includes the multiple encounters of these immigrants—with the continent, with each other,
and with the "Native Americans." It includes
the historic buildings and environments that
dot our urban and rural landscapes and record
our history and how our forbears lived. It includes the communities, customs and folkways—the roots of our many pasts. The preservation, understanding and passing on of the
best of this heritage is essential if Americans
are to know what it is to be "American."
SUPPORT OF THE HERITAGE
As befits a highly diverse and pluralistic society, our support of the heritage has primarily come from private and local initiatives. This
is the tradition that built, and still maintains,
many of our greatest universities, museums,
concert halls, libraries, and historic buildings
and landscapes. But this tradition of private
and local support has been complemented,
from the beginning of the Republic, with
public support for education, and with the
advent of the income tax in 1913, tax deductions and credits to encourage private initiative.
Federal tax expenditures for historic preservation came to approximately $150 million in
1988, supporting private investments in this
area of approximately $866 million. A recent
National Park Service survey shows that 75
percent of these investments would not have
been undertaken were it not for the tax credits. For example, five under-used 19th century
commercial buildings in Red Wing, Minnesota,
165

166
were recently restored at a cost of $3 million
making use of Federal tax incentives; this restoration became the primary catalyst in revitalizing the town's historic district.
Private giving to the arts, culture and the
humanities has risen—from $3.2 billion in
1980 to $6.8 billion in 1988, according to the
American Association of Fundraising Counsel.
The economic prosperity of recent years has
created the conditions for more support than
ever before for preservation of our heritage.
The National Endowments for the Arts and
the Humanities and the Institute for Museum
Services support the diversity of America's cultural life in cities and towns throughout the
country. These efforts provide national leadership and help with undertakings that are less
appealing to private initiatives. The Smithsonian Institution and the National Gallery of Art
provide exhibitions which give Americans from
all parts of the country a sense of the history,
science, and art of this and other countries.
They also undertake research and fund scholarships. The Historic Preservation Fund Program supports historic preservation through
the States and the National Trust for Historic
Preservation, and the Advisory Council on Historic Preservation advises the President and
Congress on historic preservation matters.
Among the funds provided through this initiative are $19.4 million toward establishment of
a new National Museum of the American
Indian which, as the President stated in November, will help give our Nation "a new and
richer understanding of the heritage, culture,
and values of the peoples of the Americas of
Indian ancestry."
National Endowment for the Arts
The budget requests $175 million for the National Endowment for the Arts, $4 million
more than enacted in 1990. The Arts Endowment provides matching grants to assist the
best of our nation's artists and art institutions,
directly and through state and local art agencies and regional organizations. The Endowment supports a wide variety of projects that
preserve works of art and make them available to the public. It does this through its
museum, performing arts and media programs.
For example, the Endowment helped establish
the National Center for Film and Video Pres


THE BUDGET FOR FISCAL YEAR 1991

ervation to help stop the loss of this heritage;
over half of the films produced prior to 1950
are gone. The Endowment also assists the passing on and understanding of the cultural heritage through its arts education programs.
Much of the increase will support expansion
of programs to educate our students to appreciate, preserve and carry on our artistic heritage. The Endowment will also continue to preserve the folk and multi-cultural traditions
which make the arts in America so richly diverse.
National Endowment for the Humanities
The budget requests $165 million for the National Endowment for the Humanities, $8 million more than enacted in 1990. The Humanities Endowment provides matching grants to
assist humanities instruction in schools and
colleges; research and scholarships in the humanities, media and other programs that bring
the humanities to the general public; and preservation of humanities research materials. In
1989, the Endowment provided $12.3 million to
begin a multi-year program for the preservation of books. The Endowment provided this
project $13.3 million in 1990, and the budget
includes $14.8 million for 1991. In 1990, the
Endowment initiated a $4.1 million national
heritage program to improve conservation in
cultural collections and train conservators.
The increases help libraries preserve their
books and the precious knowledge contained in
them; aid scholars to gather and edit the
works of such Americans as George Washington, Frederick Douglass, Mark Twain, Jane
Addams, and Martin Luther King; and encourage schools, colleges and universities to develop programs that will pass on the words and
wisdom of those who have shaped this nation
to the next generation.
Institute for Museum Services
The budget requests $24 million for the Institute for Museum Services, $1 million more
than enacted in 1990. The Institute for
Museum Services provides general support
grants to all types of museums (including art,
history, science and technology museums),
zoos, planetariums, historic houses and botanical gardens. The IMS also makes specific
grants to help improve the conservation, care

III.J.

167

PRESERVING AMERICA'S HERITAGE

and management of museum collections, and
in 1990 began a new Conservation Assessment
Program to assist evaluations of museum collections and environments.
The increase is to help museums improve
their operations and better conserve their collections.
Smithsonian Institution
The budget requests $308 million for the
Smithsonian Institution, roughly $41 million
more than enacted in 1990. Since its founding
in 1846, the Smithsonian has in many respects
become the "Nation's Museum," as well as a
leader in basic research in such fields as astrophysics and tropical biology. Its eleven museums in Washington and the Cooper-Hewitt in
New York receive over 30 million visitors a
year. The Smithsonian preserves and exhibits
137 million objects, works of art and specimens
representing America's cultural, scientific and
technological heritage. Its Office of Folklife
Programs researches, conserves and presents
living folklife traditions from the United
States and abroad.
The budget includes $19.4 million toward establishment of a new National Museum of the
American Indian. The funds will be used to
plan for the construction of the Museum on
the Mall in Washington; to prepare a satellite
exhibition and education center in the Old
United States Custom House in New York; to
design a collections storage and research facility in Suitland, Maryland; to transfer collections and staff from the Museum of the American Indian in New York; to provide for initial
operating requirements; and to preserve and
repatriate Indian artifacts and remains. The
new Museum will house the Heye Foundation's collection of Indian artifacts from all
parts of the Western Hemisphere. When completed in the late 1990's, the Museum of the
American Indian will preserve and exhibit the
many and varied contributions of the first
"Americans."
The request also includes $1.5 million for the
Columbus Quincentennary Program which will
commemorate the voyages of Columbus and
the subsequent encounters between Europeans,
Africans and the indigenous peoples of the
Americas.



National Gallery of Art
The budget requests $49 million for the National Gallery of Art, $7 million more than
enacted in 1990. The National Gallery preserves and exhibits works of art from all cultures for the benefit of 6-7 million visitors annually. Its educational programs reached an
estimated 80 million people in 1989, providing
young people and adults with access to, and
understanding of, some of the great masterworks of civilization.
The increase includes $2 million for Circa
1492: Art in the Age of Exploration to celebrate
the 500th anniversary of Columbus' voyage to
America, an exhibition which will present
through works of art an image of the world as
it existed in the late 15th century. The exhibition will draw parallels between European
Renaissance achievements in geography, navigation and discovery and display the arts of
China, Japan, India and Africa of that period
as a way of understanding the encounter
among these cultures at the time of the discovery of the Western Hemisphere by the Eastern
Hemisphere.
Historic Preservation Fund Program
(Department of the Interior)
The budget requests $34 million for the Historic Preservation Fund Program of the National Park Service, $1.4 million more than
enacted in 1990. The Historic Preservation
Fund provides matching grants to States and
the National Trust for Historic Preservation
for historic preservation planning, projects and
activities. The increase will provide for additional surveys and inventories of historic properties for potential inclusion on the National
Register of Historic Places; advice and assistance to State and local planning and development agencies whose decisions affect historic
properties; and technical assistance to private
sector architects and developers seeking to
meet the Secretary of the Interior's standards
for historic preservation construction work to
qualify for tax credits.
Advisory Council on Historic Preservation
The Advisory Council on Historic Preservation (ACHP) advises the President and Congress on historic preservation matters, and formally comments on Federal, federally assisted,

168

THE BUDGET FOR FISCAL YEAR 1991

and federally licensed undertakings that may
affect historic properties. The 1991 budget requests $2.2 million, an increase of 18 percent
over the 1990 enacted level. The increase will




allow ACHP to meet increasing project review
caseloads and to undertake long-term improvements in the Historic Preservation Program.

FUNDING SUMMARY
(Budget authority in millions of dollars)
1989

National Endowment for the Arts
National Endowment for the Humanities
Institute for Museum Services
Smithsonian Institution
National Gallery of Art
Historic Preservation Fund Program (Department of the Interior)
Advisory Council on Historic Preservation
Total

1990

1991

169
153
22
246
39

171
157
23
267
42

175
165
24
308
49

30
2

32
2

34
2

661

694

757

IV. ADVANCING STATES AS
LABORATORIES




169




IV. ADVANCING STATES AS LABORATORIES
"It is one of the happy incidents of the federal
system that a single courageous state may, if its
citizens choose, serve as a laboratory; and try
novel social and economic experiments without
risk to the rest of the country/' Justice Louis D.
Brandeis, dissenting in New State Ice Co. v. Liebmann, 1932.

More than many realize, State and local governments are today performing the laboratory
function cited by Justice Brandeis in a wide
variety of areas—from education to transportation, from child care to the environment. In
many cases Federal funding is supporting demonstration projects; in other cases Washington
is granting waivers from normal Federal rules
to permit experimentation. But in numerous
instances States and localities are moving on
their own, with their own funds, to try new
and innovative approaches to problem-solving.
This blossoming of State and local innovation is welcome. As the intractability of some
problems, such as those associated with poverty, attests, national approaches tried over the
past 30 years have had a mixed record of success at best. Despite a level of Federal taxation
which, at about 19.5 percent of the gross national product, is higher now than has been
the historic norm in the past 40 years, the
Federal budget is under severe and well-recognized constraints. This is not to say that the
fiscal condition of State and local governments
is "easy", but their budgetary situation is not
dominated by large and persistent deficits as
has been the case with the Federal budget.
Much more than relative fiscal capacity is
important in consideration of "States as laboratories." Until quite recently a case could be
made in many areas of government policy and
action that a national approach, with national
rules and standards, was warranted. This was
so because some States departed widely from
national norms in such areas as racial segregation, and some were too poor to accomplish as
much as may have been judged appropriate. A
lot has changed in the past quarter century.
The "one man, one vote" decisions of the
Supreme Court have greatly altered State legislatures, giving greater representation to



urban areas. The civil rights revolution has
been one of the seminal events of the twentieth century; to cite just one aspect of the revolution, elected black officials in the South are
now commonplace. State government structures have been modernized. Income disparities among the States of earlier in this century
have narrowed, and the sustained economic expansion has raised the income levels of all the
States.
The U.S. Advisory Commission on Intergovernmental Relations, in a 1985 report entitled
"The Question of State Government Capability", made an unequivocal judgment: "This
study concludes that State governments have
been transformed in almost every facet of
their structure and operations."
Assessing the effects of the reductions in
some Federal grant-in-aid programs in the
early 1980's under President Reagan, Richard
P. Nathan and Fred C. Doolittle stated: "There
is evidence . . . that Reagan's federalism reforms have stimulated and are continuing to
stimulate state governments to increase their
efforts to meet domestic needs in the functional areas in which the national government
either was cutting grants-in-aid or threatening
to do so." In the case of "social programs" in
particular, Nathan and Doolittle cited a trend
toward some retrenchment in Washington and
then, based on their reporting on developments in numerous State and local governments, concluded:
"In conservative periods, the supporters of
social programs are likely to find that in many
instances their best strategy is a devolutionary
one. They may well find in particular areas of
domestic policy that the best approach is to seek
support from those States and major local governments which for various reasons are sympathetic
to proposals for increased social spending/'

The prevailing philosophy varies by State, of
course, which is the nature of a Federal
system. However, by almost any measure the
extremes among the States have narrowed.
Those concerned about the segments of our
population who have been left behind need no
171

172

THE BUDGET FOR FISCAL YEAR 1991

longer turn to Washington as the only source
of redress.
The President's budget continues and expands the many-sided effort of the Federal
Government to foster and finance experimentation in the States. In the areas of education
and low-income programs in particular, to be
described below, the President's program supports important innovations and experiments,
including steps to reduce Federal controls and
regulations in order to give State Governors
and legislatures greater latitude to try new
methods.
Apart from these efforts, the Administration's support of the principles of federalism is
expressed in Executive Order 12612, issued in
1987 and personally endorsed by President
Bush in a speech to the National Governors
Association in 1989. This is designed to make
sure that proposed policies and legislation conform with federalism principles, including
maximum discretion to State and local governments.
An additional initiative is a test, run jointly
by the Office of Management and Budget and
the National Governors Association, of using a
single Federal administrative grant for reimbursing State costs of administering Food
Stamps, Aid to Families with Dependent Children, and Medicaid. The test will be carried
out in five States beginning in April 1990.
The remainder of this section describes, in
various areas of governmental concern, several
of the many examples of innovation at the
State and local level—some aided by Federal
grants, some made possible by Federal statutory or administrative waivers and others entirely at local inititative. The picture is one of
much more innovative activity than is often
assumed in Washington. It is a picture of creative experimentation—not social engineering
but the natural flowering of variety inherent
in a healthy federal system.
It is a picture that merits highlighting—and
Federal Government support.
TRANSPORTATION
Toll Roads.—While certainly not a new phenomenon in the United States, toll roads are
now experiencing a resurgence in popularity.



As roadbuilding becomes increasingly expensive and congestion worsens, toll roads offer a
viable alternative to many States otherwise
unable to afford highway projects. At present
26 States have toll road facilities covering
almost 5000 miles, and more are contemplated.
According to the International Bridge, Tunnel
and Turnpike Association, 17 States are currently considering $8.6 billion worth of toll
road proposals totaling 902 miles.
In an example of strictly privately financed,
for-profit toll roads, Virginia's Commonwealth
Transportation Board in 1989 approved the
longest private toll road in the country, and
the first such road in Virginia in 173 years.
The road will be a 14 mile extension of the
existing and successful Dulles Toll Road, which
runs parallel to the toll-free access road to
Dulles International Airport.
Where once toll roads were largely concentrated in the East, Sunbelt States, including
Texas and California, are now beginning to
experiment with the concept as well. For toll
road users, transportation costs will be higher,
but travel should be safer and quicker.
In general, the Federal aid highway law prohibits spending Federal funds for new toll
roads. But as a demonstration, the 1987 reauthorization permitted Federal financing for up
to 35 percent of the cost of seven non-interstate toll road projects, and two more were
added in subsequent appropriation bills. These
nine projects are now in various stages of approval. In the next reauthorization, due to be
taken up in the 1991 session of Congress, the
Administration will look favorably upon innovative means of financing highways, including
toll roads.
Airport Financing.—The 1987 reauthorization of the Airport Grant Program included a
2-year pilot program allowing three States
more administrative control over airport
grants. Starting in 1990 Illinois, North Carolina and Missouri will assume sole responsibility
for distributing airport development funds and
master planning for all nonprimary airports in
their States, on the assumption that they are
closer than the Federal Government to airport
problems and are the best judge of priorities. A
report will be made to Congress on the results

IV. ADVANCING STATES AS LABORATORIES

of this demonstration, with the possibility of
expansion to the rest of the country.
States, and local airport authorities, are also
looking at alternatives to Federal funding for
airport construction and development projects.
One prominent alternative is the imposition of
a "passenger facility charge" or PFC. Although
PFCs are levied in 138 foreign nations, in 1973
Congress prohibited their use in the United
States. The Department of Transportation estimates that by imposing an average PFC of $3
per passenger, almost 60 major airports would
collect more than twice what they would receive in Federal airport formula grants.
Airports favor PFCs for several reasons: no
Federal appropriations uncertainties; an independent revenue stream controlled by the airports; and ability to finance additional airport
capacity. The Administration proposal for reauthorizing the Airport Grant Program will
include a provision abolishing the prohibition
on local airport fees.
High Speed Rail.—States and localities have
received $4 million from the Department of
Transportation's Federal Railroad Administration (FRA) to perform feasibility studies of
high-speed rail systems in their areas. In many
cases, this "seed money" has resulted in the
formation of special State/local commissions
and authorities to select franchisees for the
construction and operation of high-speed rail
systems. While no State has yet awarded a
franchise, several are well along in the process. The 1991 budget includes funding for research on magnetic levitation high-speed
trains, or "maglev."
No Federal financing for construction or operations of the high-speed rail projects is being
proposed or requested. Financing instead will
come from innovative sources, such as the
grant of real estate development rights along
the proposed Miami-Orlando-Tampa high
speed rail route in Florida. The Ohio High
Speed Rail Authority has eminent domain
powers and $2 billion in tax exempt bonding
authority to build a rail line linking Cincinnati, Columbus and Cleveland. Among other
projects under consideration are those that
would link Las Vegas and Los Angeles; Dallas,
Houston and San Antonio; and a 300 m.p.h.,
20-mile maglev link between Orlando Airport
and Disney World in Florida.



173
Mass Transit—As
the cost of subways
mounts and voters reject transit bond issues,
cities are turning again to buses and are innovating in several ways, ranging from use of
private service to new fuels. Buses are not
glamourous, but a bus that will last 12-15
years, carry 50 passengers, and provide a safe,
flexible route costs about $200,000; this compares with a cost of $10 million to $300 million
per mile to construct rail rapid transit. Studies
suggest that while businesses and developers
favor high-tech transit, the average taxpayer is
unwilling and unable to foot the bill.
Of necessity, cities have returned to the
drawing board to come up with new plans in
which expensive rail systems play a lesser role
and buses are more prominent. For example,
Dallas has scaled down the rail part of its
transportation package by about a third and
balanced the package with a much improved
bus system. It includes new busways for express bus service, inter-suburb bus hubs where
routes converge on a central point, and house
to house pick-up by mini-van. Another approach, used in the Northern Virginia suburbs
of Washington, D.C. and elsewhere, is to encourage use of carpools, vanpools, and buses by
reserving special traffic-free highway lanes for
these vehicles.
Private bus service has been successful in a
number of cities, sometimes for only a portion
of the total transit network. Several localities
have used the method of competitive contracting, with the public transit agency competing
against private bidders. Studies by the Federal
Urban Mass Transit Administration have indicated that private companies can deliver mass
transit services 20 to 50 percent less expensively than public agencies, largely because of a
difference in labor costs. As an example,
Denver was mandated by the Colorado legislature in 1988 to convert 20 per cent of its lines
to private service.
An alternative to commuting by personal
automobiles has attractions for a variety of
reasons, not least of which is reducing air pollution. Denver, Los Angeles, New York and
Seattle are testing UMTA-funded demonstration buses that run on compressed natural gas
or methanol.

174

THE BUDGET FOR FISCAL YEAR 1991

Drunk Driving.—The budget proposes to
double funding for the recently established
Drunk Driving Prevention program to $8 million. This program provides grants to States
that adopt specified measures to curb drunk
driving, such as suspension of drivers licenses,
and will test which enforcement measures are
most successful.
EDUCATION
Awareness of the serious deficiencies of
American public school education hit the
Nation with the force of an explosion in the
1980s. Publication in 1983 of the report entitled "A Nation at Risk" gave impetus to movements for reform that were beginning to crop
up in States and localities across the country.
A high point of the reform effort was the Educational Summit meeting of President Bush
and State Governors in Charlottesville, VA in
September 1989.
The problem of poor educational performance is a troublesome one for the Federal government because elementary and secondary
education are almost entirely the responsibility of State and local governments and school
boards. Federal grants to help finance and improve elementary and secondary education,
almost non-existent until the mid-1960s, have
risen to $10 billion in 1990, but this is only
about 7 percent of the national total. The bulk
of the Federal funds goes to programs aimed at
improving the education of children with disadvantages of various kinds. Beyond that, the
Federal government can contribute best by fostering, and in some cases helping to finance,
educational innovation in the States; helping
to evaluate, through improved statistics and
testing, the actual status of educational performance; and research and dissemination of
information on the myriad of experiments that
are going on at the State level, assessing what
works and what does not. The 1991 budget, for
example, contains $3 million to evaluate local
initiatives and disseminate the results.
Finally, the Federal government can remove
barriers to innovation and experimentation
that arise from its own rules and regulations,
many of them stemming from statutory requirements. As a follow-on to the Charlottesville Summit, the Administration will support
legislation to grant more flexibility to the



States in use of Federal funds, with safeguards
to assure that services are provided to the targeted populations. The flexibility would be conditioned on establishment of objectively measurable goals for improved performance.
What follows is a listing of a few of the
educational innovations and changes taking
place at the State and local level. Also included is a sampling of demonstrations and experiments proposed to be financed by the Federal
government in this budget.
Minnesota Choice Options.—The principal innovation, among several, permits students in
grades kindergarten through 12 to apply to
attend school in any school district in the
State. Other new options include permitting
11th and 12th graders to attend a postsecondary institution full or part-time and obtain
high school credit; establishment of Area
Learning Centers to provide year-round, individualized education for students aged 12 to 21;
and "Diploma Opportunities for Adults", an
opportunity for people 21 and over to complete
high school. The U.S. and Minnesota Departments of Education are conducting a joint
3-year study of the results of several of these
innovations, including the Statewide choice-ofschool option.
New Haven Model Schools— Dr. James
Comer of the Yale Child Study Center began
in 1968 to try to transform two elementary
schools in a low-income, predominantly minority neighborhood, principally through a comprehensive reform in the management of the
schools. When the experiment began the two
schools ranked 32nd and 33rd out of 33 New
Haven schools in reading and math achievement and had the city's worst behavior and
attendance problems. By the mid-1980s the
schools ranked third and fifth in fourth-grade
test scores, and one of the two led the city in
school attendance for four years in one 5-year
period.
Maryland Accreditation System.—In an innovation that is just beginning, all of the State's
1,200 public schools will by 1992 be evaluated
and rated on performance by a State team of
inspectors. There will be financial rewards for
schools that are rated superior and penalties,
including the possibility of takeover by the
State, for low-performing schools. In addition,

175

IV. ADVANCING STATES AS LABORATORIES

the State Board of Education has decided to
change the State's testing system to measure
better how students perform, and it has
opened the way to teacher certification of college graduates without formal teacher training
programs.
Washington "ECEAP"—Early Childhood
Education and Assistance Program.— This is a
variation on the federally financed Head Start
program for disadvantaged children. It involves special academic requirements for
teachers and school aides, and correspondingly
higher salaries, and it also places special emphasis on involvement of parents. Among the
earliest advocates, urging the State legislature
to fund the program, was the Washington
Roundtable, an organization of leading business executives concerned about the State's
future work force.
Rhode Island "Crusade for Higher Education99—Ho help induce at-risk children to stay
in school, the State will offer them tuition assistance at in-State colleges in return for a
written commitment to obey the law, avoid
early parenthood and refrain from drugs. The
agreement is to be offered to third-graders and
their parents. While all children are asked to
join, the scholarship assistance will be available only to those in financial need. There are
somewhat similar programs in New York, Louisiana and New Mexico.
Federally Financed
Experiments.—While
most innovation has sprung up spontaneously
at the State and local level, the Administration is moving on several fronts to give a further boost to new means of tackling the education problem. The following are several of the
grants proposed in the 1991 budget:
• Alternative Certification for Teachers and
Principals.—The budget proposes $25 million for grants to States to design and
carry out programs through which persons
can become teachers and principals in
ways other than the traditional certification routes.
• Dropout Prevention.—Special projects in
local school systems to reduce dropout
rates of secondary school students will be
financed by grants totaling $45 million,
supplemented by $5 million for related research.



• Emergency Drug Grants.—These grants go
to local school districts with the worst
drug problems to devise innovative approaches to reducing drug abuse. This is
one aspect of the President's drug program, and will total a minimum of $25
million.
• Training
of School
Principals.—The
budget proposes $25 million to support a
new initiative to improve the training of
principals-to-be. The program will include
a short period of residential training and a
year working with a successful "exemplar"
principal to learn, first-hand, how to
manage schools.
COMBATTING POVERTY
In no area of public policy is innovation and
experimentation more widespread than in the
often-frustrating effort to deal with the causes
and effects of poverty. The Social Security Act
of 1935 itself was the product of several decades of State innovation in development of
"mothers' aid" for widows with children and
programs for aid to the aged and blind. More
recently, State successes with welfare-to-work
demonstration programs were instrumental in
the enactment in 1988 of the most important
reform of Aid to Families with Dependent
Children (AFDC) since its inception in 1935.
State innovation is continuing to receive encouragement from the interagency Low
Income Opportunity Board established in 1987
in the White House and reestablished by President Bush early in his Administration.
The Federal contribution to experimentation
at the State level has been twofold—direct financing of some demonstrations and, probably
more important, the grant of flexibility to the
States under various statutes, including the
Social Security Act, to permit them to try new
approaches that would not be permitted under
the basic laws. This flexibility is provided in
the statutes themselves or through a process of
waivers. The Low Income Opportunity Board
screens and coordinates the grant of waivers
by various agencies under different statutes.
During the first half of the 1980's a combination of Congressional willingness to allow
States more flexibility, strong support by the
Administration, and State efforts to find ways

176
to help welfare families become independent
laid the groundwork for the Family Support
Act of 1988 (often called "welfare reform").
Both demonstrations and waivers were used to
test new approaches. In either case, the essential ingredients were States with ideas about
ways to do things better and determination to
follow an experiment through to its conclusion.
Not all of the welfare-to-work experiments produced encouraging results but enough did to
persuade the Administration and Congress to
change the underlying Federal law. As an example, States showed that welfare mothers, including those with preschool children, could be
required to participate in work-related activities, with some success in later placement in
gainful employment.
Currently the States are busy with the task
of implementing the new law. However, experimentation and innovation have not
stopped. With the support of the Low Income
Opportunity Board, a number of States are
continuing to test alternative ways of helping
to move welfare families toward self-support.
What follows is a sampling of ideas and
projects that are being tried across the country. It should be noted that some of these experiments are controversial, some may not
work, others may prove to cost too much for
the benefits produced. That is the nature of
"States as laboratories". As any scientist
knows, the road to success is marked by numerous laboratory failures. The sampling
below is meant to illustrate the breadth of initiatives, not to endorse specific projects or approaches.
Wisconsin " Learnfare", Linking AFDC and
School Attendance.—Under this controversial
experiment, made possible by a Federal
waiver, a welfare family with teenage children
has its AFDC benefit reduced if the child drops
out of school, defined as missing three days of
school in a month without a valid excuse. Supporters see this requirement as a necessary
step in breaking the cycle of welfare dependency by making certain that the children get an
education. But there are many critics. Some
welfare families reportedly have resorted to
various fraudulent excuses for their children
who are not in school, including forgery. However the experiment turns out, new knowledge



THE BUDGET FOR FISCAL YEAR 1991

of what works and what doesn't will have been
acquired.
Minnesota "Family Investment Plan9'.—In
December of 1989 the President signed bills
providing special authority for a demonstration of the effects of intensive social and educational services and expanded cash and noncash benefits for low-income families in several
localities in Minnesota. Among other features,
the "Family Investment Plan" will provide a
consolidated cash grant combining AFDC and
food stamps, and will extend medicaid and
child care assistance to non-AFDC households
eligible for food stamps.
New York "Child Assistance Program".—The
State began a demonstration in 1988 aimed at
replacing welfare payments with increased efforts by the parents to support their children.
New emphasis upon obtaining child support
from absent parents is combined with a supplemental benefit designed to increase incentives
for the custodial parent to seek and hold a job.
To enter the program a single parent must
have obtained a court order for child support,
a precondition which the State hopes will increase efforts by custodial parents to establish
paternity and obtain support orders. The supplemental benefits are calculated according to
a formula which, in comparison to AFDC, permits families to retain more of their benefit as
their earnings increase. The demonstration,
under way in several urban and rural sites,
will last 3 years and includes a rigorous evaluation designed to ensure that the effects of
the experiment will be known precisely.
Youth Opportunities Unlimited (YOU).—This
proposed Labor Department program, to be
tested in a maximum of 40 high-poverty inner
city and rural areas, involves "challenge
grants" to areas that offer a comprehensive
package of services and a specific objective for
low-income, at-risk youth, such as high school
completion. Job training will be a major component but not the only one. The local grantee
will have to enlist the support of the private
sector, local government agencies and school
boards. The Federal funds will total $50 million annually, and successful grantees can receive funds for up to 3 years.
Ohio "Project Learn99.—In a program directed specifically at teenage parents, the State

IV. ADVANCING STATES AS LABORATORIES

will offer a bonus under AFDC of $62 a month
to young welfare mothers (and fathers if
present) who remain in school or go back to
school. That is the carrot. The stick is a corresponding reduction of the grant for teenage
parents who refuse to stay in school.
New Jersey Unemployment Compensation —
This experiment does not involve poverty as
such but, rather, the problem of unemployment of persons who normally work. The State
identifed about 8,500 workers collecting unemployment compensation who had lost their jobs
because of layoffs, plant closings and similar
events and who were regarded as likely to
have difficulties finding a new job. One group
was offered intensive job search assistance
alone; a second group received training or relocation assistance in addition to job search; and
the third group was helped with job search
and also received a cash bonus if they found
full-time work within 12 weeks. None of these
approaches "paid for themselves" in the sense
of a net saving to the unemployment compensation system, but the first and third were
found to have net benefits to society as a
whole. The cash reemployment bonus idea is
now being tested in Pennsylvania.
Through the Low Income Opportunity Board
and other approaches, including proposed statutory changes as needed, the Administration
will continue to work with the States in seeking new approaches to the problem of poverty.
Whatever is done, it is already clear that experimentation at the local level is an indispensable element in finding out what works.
HEALTH
As is widely recognized, the health care
system in the United States is flawed in two
different and opposite respects: Its costs are
higher than in other nations and are rising
rapidly; and yet life expectancy, infant mortality, and other measures of health status are
less favorable in the United States than in
many other industrialized societies, and a sizeable minority of the population is not covered
by public or private health insurance. No one
actor in the health drama can create a solution, but as in other areas ideas are bubbling
up from the States.



177
Medicaid in Oregon.—One of the most innovative health care proposals in any of the
States comes from Oregon. The State proposes
to expand greatly the coverage of the medicaid
program (jointly financed by the Federal Government and the States) to cover the entire
State population whose incomes are below the
poverty line, but to limit the cost by assuring
only a "basic" or "adequate" package of medical services, with additional services to be provided only if funds are available. Health care
services would be ranked by a Health Services
Commission to establish a set of priorities.
The sponsor of the bill, who is a medical
doctor, has posed the issue in these terms:
Given a limit on resources, the choice is between expanding the eligible population and
placing some limit on the benefits, or holding
the benefits constant and limiting the eligible
population. He has chosen the former.
The Oregon plan will require a Federal
waiver of the normal medicaid rules, either
administrative or statutory. It is controversial.
Among other things, questions arise whether it
will be as cost-neutral as it purports to be. But
it clearly breaks new ground in seeking to deal
with a major problem. The Administration is
studying the plan.
" OB Access99 in California.—Infant mortality is higher in the United States than in most
other industrialized countries. A problem primarily of low-income mothers and their babies,
infant mortality, it has been found, requires
for a solution more than just making available
adequate nutrition or even offering prenatal
care. Personal contact and other services are
often required, to assure that the nutrition and
care are sought and actually delivered to those
who need it.
The California OB Access program (short for
Access to Obstetrical Care) is based on this
principle. It began in 13 counties with a high
incidence of poverty and involves a comprehensive package of services. The pilot program
revealed that the percentage of babies with
low birthweight was 35 percent lower among
OB Access participants than in the medicaid
population that was not served. As a result of
these findings the legislature enacted and the
Governor signed legislation making the program Statewide starting in 1987.

178

THE BUDGET FOR FISCAL YEAR 1991

Care of the Frail Elderly at Home—In most
cases elderly persons do not want to enter
nursing homes, even if they can afford it.
Their families, too, often prefer to have them
at home rather than in a nursing home. But
care of the frail elderly can be a time-consuming and exhausting task for the family
member or members who undertake it.

or regulations is often desirable, complete uniformity is neither necessary nor desirable. In
developing environmental programs, States
and local governments frequently have designed regulations that are responsive to their
communities' unique needs, and have experimented with creative ideas that may percolate
into constructive new national policies.

In an effort to find a midway solution between full-fledged, expensive professional care
in the home and no help at all for the family
members, New Jersey, with help from a Federal demonstration grant, is experimenting with
"respite care". It involves the use of professionals on a part-time basis whose purpose is
not principally to serve the frail elderly person
but rather to relieve the burdens of the family
members who are providing care. It can include periodic home visits, taking the elderly
person out of the home for a few hours and
other services.

Solid Waste.—Safe and efficient disposal of
solid waste will be one of the great environmental challenges of the 1990s. The development of effective waste management techniques is a task primarily of State and local
governments. To deal best with the growing
mountain of waste, communities usually require integrated plans involving source reduction, source separation, recycling, incineration
and landfills. In the past year, 134 new recycling laws have been passed by 38 States.

An important purpose of the experiment is
to ascertain whether this part-time assistance
can reduce or eliminate the need for long-term
care in a nursing home. Even if the demonstration shows only that respite care reduces
premature placement in nursing homes, it will
have proved valuable.
Medical Malpractice Liability.—States are experimenting with new approaches to the problem of rising insurance costs for medical malpractice. More traditional efforts at tort
reform, adopted in some degree by nearly all
States in the past 15 years, have had only
modest effects on the frequency and severity of
claims, according to a study by the Institute of
Medicine. The newer approaches are controversial, and they could prove costly to taxpayers. Under a 1989 law in Texas the State itself
will provide coverage for doctors whose caseload includes at least 10 percent charity cases;
such cases include those under medicaid and
other programs providing health care to the
poor. In West Virginia, a new law provides
that the first $1 million of liability to a pregnant medicaid client is taken over by a State
agency.
ENVIRONMENT
Although in some areas of governmental
policy the consistency imposed by Federal laws



Acting on the principle that reduction of the
waste stream is the preferred approach, the
coalition of Northeast Governors has formed a
"packaging task force" to encourage manufacturers to develop new packaging designs that
reduce the waste generated by their products.
Numerous States and localities have initiated "curbside separation" programs that facilitate recycling, clean and efficient combustion,
and the safe use of landfills. But separation is
not a panacea. New Jersey has implemented a
successful program that requires separation
only of materials such as aluminum and paper,
where markets exist for the recycled waste.
By contrast, the recent growth of newspaper
recycling has created gluts in the newsprint
supply that greatly exceed demand and discourage the entry of new entrants into the
recycling markets. To help alleviate this problem, Florida now imposes a 10 percent tax on
virgin newsprint and provides tax credits for
the use of recycled newsprint. California and
Connecticut require newspapers to use minimum percentages of recycled newsprint. These
efforts, backed by the support of the American
Newspaper Publishers Association, have
helped spur the growth of markets that is essential to the continued success of newspaper
recycling.
Modern incineration facilities can be cleaner
and safer than landfills, and are an important
alternative to them. There are now more than

179

IV. ADVANCING STATES AS LABORATORIES

100 municipal incinerators in operation, twothirds of which recover energy for local use,
and another 200 incinerators are planned. Baltimore, for example, burns 2,250 pounds per
day, recovering 55 megawatts of electricity
that is sold to the local utility. New scrubbing
and high temperature combustion technologies
permit safe emissions levels in compliance
with clean air requirements.
Even smaller communities have found that
they can economically promote sound environmental policy by developing comprehensive
solid waste plans. Winona, MN, a community
of 45,000, has had an integrated solid waste
plan since 1981. The county program includes
public education; mandatory curbside separation of six types of waste; recycling of tires and
appliances; composting; and incineration.
There are plans to build a modular incineration plant and to recycle the waste ash.
Within 5 years less than 10 percent of the
community waste stream will go to landfills,
and over 40 percent will be recycled.
Non-point Source Water Programs and Wetlands Protection— States and regions have
widely divergent causes of non-point source
water pollution and they have taken different
approaches to address the problem.
For example, the States that make up the
Chesapeake Bay watershed have joined forces
to reduce pollutants by 40 percent in order to
protect water quality and preserve the rich
living resources of the Bay. Maryland, Delaware, and Virginia have successfully tightened
pollution controls for cities and for farmland
runoff, strengthened wetland protection, and
instituted tighter land use control. The result
has been a cleaner bay and a resurgence of
aquatic life.
Iowa, a leading agricultural State, has taken
an aggressive approach to its groundwater pollution problems that aims at controlling pesticide and fertilizer contamination. The State
has increased pesticide and fertilizer fees and
devoted those resources to research on farming
with reduced use of chemicals.
Washington has dedicated taxes on tobacco
products and pollution control equipment to
finance water pollution control, wastewater
management, and groundwater runoff projects



in an effort to maintain the quality of the
Puget Sound.
Hazardous Waste Cleanup.—While Superfund, the Resource Conservation and Recovery
Act (RCRA), and other Federal programs have
made progress in preventing and cleaning up
toxic wastes, some States have added innovative cleanup efforts of their own. New Jersey,
for example, has induced polluters to clean up
sites by requiring environmental audits before
real estate can be sold.
RCRA requires the cleanup of leaking underground storage tanks, and 33 States have
passed laws to supplement the Federal law.
Ohio, Maine, Pennsylvania, Vermont, and New
Jersey have established insurance funds or
loan pools to assist tank owners with the
cleanup. Ohio has almost 80,000 tanks, and
many owners would presumably have delayed
or avoided the costly cleanup without the
State's assistance and encouragement.
CHILD CARE
Nearly every State has addressed the child
care needs of working families by one means
or another. For example, 28 States and the
District of Columbia subsidize parents' child
care expenses by providing deductions or credits on State income taxes. Thirteen States now
give tax breaks to employers who provide specified child care benefits for their employees,
such as information services, assistance with
child care costs, or on-site child care centers.
Twenty-six States and the District of Columbia
finance early childhood education programs,
and 11 of these States have lengthened the
hours of their pre-school programs. States, and
local school districts, have established a variety of before- and after-school programs for children of school age. Finally, almost all of the
States use a portion of their Federal social
services block grant (Title XX) for child care
and related activities.
Examples of child care developments in several States and localties follow.
Ohio.—The legislature in 1989 voted to more
than double child care spending. This funding
is targeted mainly at low-income parents, including teenagers who need child care assistance to complete school.

180
New York.—The State has the Nation's largest network of model employer child care centers, operated by State agencies and State universities.
Minnesota.—An increase of $18.5 million for
the 1990-91 biennium will go for such purposes
as subsidies for low-income working families to
help them pay for child care, child care subsidies for low-income college students, and training for child care providers.
California.—This State has the Nation's
most extensive "resource and referral" network—local service agencies that help parents
locate child care. There are 65 agencies in all,
at least one in each of the State's 58 counties.
Indiana.—The State cigarette tax was increased half a cent per pack, with the additional revenue designated for school-age child care.
Additionally, the Indianapolis Department of
Public Safety, whose concern is crime, conducts special seminars for "latchkey" children—those who are at home by themselves
after school. A Latchkey Task Force teaches
children first aid, what to do in case of fire or
weather emergency, and even how to prepare
nutritious snacks.
Florida.—The legislature last year doubled
appropriations for pre-kindergarten programs
and funded 6,000 additional child care slots for




THE BUDGET FOR FISCAL YEAR 1991

children of low-income working families. The
package included other elements such as training of child care workers.
Wisconsin—In 1989 the legislature added a
credit to the State income tax that benefits all
low-income working families with children,
whether or not they have documented child
care expenses. The credit increases with family
size and is refundable, so that it is available to
families who do not pay income tax.
CONCLUSION
Across the broad range of domestic policy,
the Administration will:
• continue to encourage the "States as laboratories;"
• work with Governors, mayors, county officials, and their various associations to
foster innovation and identify obstacles to
it;
• ensure sound evaluation of experiments
and publicize lessons learned; and
• together with State and local governments, facilitate the more general application of the "state of the art" where
innovation has shown the way to better
results.

V. REFORMING MANDATORY
PROGRAMS




181




V. REFORMING MANDATORY PROGRAMS
OVERVIEW
By 1994, mandatory program spending is
projected to constitute more than half of all
Federal spending for the first time in history.
Mandatory spending encompasses entitlements and a wide variety of other benefits,
services, and subsidies ranging from social
services to farm supports. The element
common to all mandatory spending is that it
tends to be "automatic." It is not normally
controlled through the annual congressional

appropriations process in the way other spending, termed "discretionary," is. Spending on a
discretionary program grows only if, after considering other spending priorities and the need
to reduce the Federal deficit, Congress takes a
positive action. Mandatory spending usually
increases automatically, due to inflation,
changes in the beneficiary populations served,
and other factors. In the absence of legislative
change, mandatory spending is projected to increase more than $200 million each month between 1990 and 1995.

MANDATORY OUTLAYS COULD SOON CONSTITUTE
MORE THAN HALF THE ENTIRE BUDGET
Percent

FISCAL YEAR

The sheer size of the mandatory program
universe dictates careful attention to this
spending, which if allowed to grow unexamined can limit the Nation's future in several
ways. First, spending on current consumption



absorbs resources that otherwise might be devoted to public or private investment. Second,
by adding to the deficit, mandatory spending
makes claims upon future generations to pay
for today's consumption. Third, because future
183

184
mandatory spending is usually "automatic,"
these programs tend to lock future voters and
their representatives into spending priorities
established in the past.
Much of mandatory spending is intended to
fulfill some of our most important commitments as a Nation, such as those to Social
Security recipients, low-income Americans,
and our Nation's farmers and veterans. Careful examination of this spending is needed to
ensure that critical needs are being met as
effectively and efficiently as possible, that programs do not have unintended adverse consequences, and that adjustments are made to
take into account trends that could threaten
the very existence of some of these programs.
Mandatory Program Highlights
Reforms to ensure the long term integrity of
the Social Security Trust Funds, to put mandatory housing and education loan programs on
a sounder financial footing, and to reduce the
costs of protecting farmers against crop losses
are discussed in Part VI of this Section. In the
pages that follow, reforms in mandatory spending for health programs and for income support and other subsidies are discussed. Highlights of mandatory spending covered in this
Part include the following:
• Full payment of Social Security benefits
and extension of Social Security protection
to employees of State and local governments who are not now covered by any
public retirement program.
• Full payment of benefits provided to lowincome families and individuals through
the Supplemental Security Income, Aid to
Families
with
Dependent
Children
(AFDC), and Food Stamp programs.
• Two measures to assist families trying to
achieve independence from welfare: full
funding of the Job Opportunities and
Basic Skills (JOBS) program, which serves
AFDC recipients, and expansion of child
support enforcement services to families in
welfare programs where these services are
not now an integral program component.
• Proposals to provide additional assistance
through the tax system to help low-income
families with children meet their child
care needs.



THE BUDGET FOR FISCAL YEAR 1991

• Increases in School Lunch Program subsidies for children from low-income families,
funded by reductions in subsidies now provided to children from families with incomes higher than three and one-half
times the poverty level.
• Full funding of the Social Services Block
Grant at $2.8 billion, a level that reflects
the recently enacted $100 million increase
in the authorization for this program.
• Proposals in Medicare and Medicaid to
provide more appropriate care, rather
than simply more care, to the aged, disabled and poor through expanded use of
so-called "managed care," with resulting
increases in funding for Medicaid over current law levels.
Other reforms are proposed to bring program practices closer to the more efficient
practices of the private sector, to reduce the
market-distorting effects of Federal subsidies,
to correct perverse incentives in program operations, and to target a greater share of assistance to lower income recipients.
Tables at the end of
overview of mandatory
budget and details on
proposed changes to
spending.

this Part provide an
spending under the
the Administration's
mandatory program

MANDATORY HEALTH SPENDING
As a Nation, we spend a greater share of our
gross domestic product (GDP) on health care
than any other industrialized country. Our
spending on health care also is growing at a
faster rate. In 1965, expenditures on health
care consumed 6.0 percent of our GDP or just
over $200 for every man, woman and child. By
1987, this share had grown to 11.2 percent and
nearly $2,000 per person. Twenty cents out of
every new dollar added to the economy is
spent for health care. At the current rate,
nearly 15 percent of our GDP will be devoted
to health care by the turn of the century.
Despite the large amounts spent on health
care, overall health in the United States is not
measurably better than in other industrialized
countries. Our Nation, for example, ranks
twenty-second in infant mortality among developed nations. Life expectancy in the United

V.

185

REFORMING MANDATORY PROGRAMS

States is below the average of the seven nations with the next largest market economies.
The situation portrayed by these statistics does
not have to be permanent. Health care reform

Percent of Gro66
Domestic Product

can ensure quality care for our Nation's citizens while freeing up valuable resources for
investment in the future.

UNITED STATES SPENDING ON HEALTH CARE
OUTSTRIPS SPENDING BY OTHER COUNTRIES

14

12-

10
8-

6.8

6.9

Japan

Italy

6.1

6-

2-

U.K.

Germany

France

Canada

Sweden

U.S.

Source: OECD, 1087 data.

Each year, the Federal Government pays for
a larger fraction of growing national spending
for health care, largely through mandatory
programs. Medicare pays for medical care for
the elderly and disabled. The joint Federal/
State Medicaid program pays the health care
costs of low-income aged, disabled and blind
individuals, and low-income pregnant women,
infants, children and families. The Federal
Employees Health Benefit program is the
world's largest multi-choice health plan.


http://fraser.stlouisfed.org/
250-298 0 - 1 9 9 0 - 6
Federal Reserve Bank of St. Louis

QL3

Between 1970 and 1995, the proportion of
budget outlays devoted to mandatory health
programs is estimated to triple. In 1970, spending on mandatory health programs totaled less
than $9 billion and represented about 5 percent of all budget outlays. Mandatory health
spending in 1995 is projected to total about
$233 billion, more than 15 percent of all Federal outlays.

186

THE BUDGET FOR FISCAL YEAR 1991

MANDATORY HEALTH BUDGET SHARE COULD MORE THAN
TRIPLE BETWEEN 1970 AND 1995
Percent

FISCAL YEAR

Medicare mandatory spending will total
$94.2 billion in 1990—over two-thirds of mandatory Federal health outlays—and is growing
at a particularly rapid pace, having doubled
every 5 years since 1975. Unless policies are
implemented to stem this growth, spending on
Medicare will exceed spending on Social Security retirement and defense soon after the turn
of the century.
These trends reflect a fundamental problem
that confronts private and public sector purchasers of health care services: the structure of
our nation's health care system and the way
we pay for health services have failed to keep
pace with the ongoing revolution in biomedical
technology. With each passing year, scientific
advances put a whole new range of complex
tools into the doctor's black bag. These tools
make it possible for physicians to help people
in new and better ways, but they entail potential risk and unnecessary cost if not used appropriately. Furthermore, widespread and
comprehensive health insurance coverage



blunts consumer and provider sensitivity to
cost. Consequently, there is very little pressure
on the health care system to conserve and substantial pressure for it to expand and absorb
resources unnecessarily.
Organization.—In large measure, our health
care delivery system has remained unchanged
since the end of World War II. Many physicians still practice as individual entrepreneurs,
not as members of coherent delivery systems.
With technological advances forcing an increasing level of complexity and specialization,
continued reliance on this model results in diminished accountability and growing fragmentation of care. The "cottage industry" structure also does not lend itself to development of
systems for coordinating complex care or for
developing and improving practice patterns
that can greatly benefit the patient.
Appropriateness of Care.—Increasingly, research is showing that more health care is not
necessarily better health care. Studies on variations in use of medical and surgical proce-

V.

187

REFORMING MANDATORY PROGRAMS

WITHOUT REFORM, SPENDING ON MEDICARE WILL EXCEED
BOTH SOCIAL SECURITY RETIREMENT & DEFENSE SPENDING
$ Billions

Not*: Outyaar dafanaa projection* ere extrapolations of FY 1991*06 Presidential policy.

dures strongly suggest that differences in use
are often more related to "practice style" than
to differences in patients' medical conditions.
A recent study conducted jointly by the RAND
Corporation and the University of California
at Los Angeles found the percentage of certain
surgical procedures done for inappropriate reasons to be as high as 32 percent. Other studies
have found no difference in health outcomes
for individuals enrolled in Health Maintenance Organizations (HMOs) and traditional
fee-for-service plans, despite the fact that
HMO members typically have significantly
lower rates of hospitalization than fee-for-service plan enrollees.
Payment Methods.—Our private and public
sector financing systems have failed to keep
pace with the changing nature of medical care.
Until very recently, the methods used to pay
hospitals and physicians were similar to methods first developed in the immediate post-war
era. Hospitals were paid on a cost basis and




physicians on a fee-for-service basis, severely
constraining incentives either had to conserve.
Use of cost- and charge-based payment contributed to price inflation, while use of "a la
carte" fee-for-service payment encouraged physicians and hospitals to provide additional care
even when that care was of marginal, doubtful
or, in some cases, negative value.
New Directions
While there is much in our health care
system that is rooted in the past, signs of
change are numerous.
Organization.—Perhaps the most fundamental change is the reorganization of the health
care delivery system itself. Growing dissatisfaction with the traditional system is leading
to increasing emphasis on so-called "managed
care" as an alternative to traditional fee-forservice care in the private sector. The hallmark of managed care is the coordinated delivery of medical services through an organiza-

188
tion that assumes responsibility for selecting
providers and for assuring the quality and appropriateness of care. Managed care shifts the
emphasis of incentives from more care to more
appropriate care.
The preponderance of evidence now available indicates that managed care is at least as
good or better than unbridled fee-for-service
care and that it can effectively constrain medical care costs. Accordingly, managed care is
increasingly prevalent in employer-provided
health insurance plans.
Of the 150 million Americans with employment-based health insurance coverage, more
than 30 percent receive care through managed
care plans, including HMOs and preferred provider organizations (PPOs). HMOs provide
comprehensive health services to members for
a fixed per capita payment made in advance;
this payment method eliminates the "do moreearn more" incentive of fee-for-service. In
PPOs, physicians continue to be paid on a feefor-service basis, but they are included in a
provider network based on efficiency and quality of care and are subject to ongoing review.
They provide care at reduced prices to plan
members in return for a minimum number of
patients and prompt payment.
Appropriateness of Care.—Last year, the Administration initiated a research program focused on evaluating the effectiveness of medical technologies. The 101st Congress responded
to this lead and recently passed legislation establishing a new Agency for Health Care
Policy and Research within the Public Health
Service. The mission of the Agency is to conduct and support research on the outcomes of
health care services and procedures to identify
the manner in which adverse health conditions
can most effectively be prevented, diagnosed,
treated, and managed clinically.

THE BUDGET FOR FISCAL YEAR 1991

that reflect costs incurred by efficient providers.
In the private sector, prudent purchasing
most frequently has been implemented
through selective contracting, typically by
HMOs and PPOs. In the Medicare program, a
wide variety of prudent purchasing reforms
have been implemented directly, starting with
enactment of the prospective payment system
for hospitals in 1983 and extending to physician, laboratory and other services subsequently.
The focus of the President's 1991 budget for
mandatory health spending is to build upon
these important developments in Federal
health benefit programs by:
• Encouraging managed care in Medicare
and Medicaid.
• Focusing on appropriateness of care
through implementation of a new program
to evaluate medical technologies and
strengthen existing quality assurance programs.
• Restructuring physician payment in the
Medicare program and extending use of
"prudent purchasing" principles to secure
the best value for Medicare beneficiaries
and taxpayers alike.
Medicare
Encouraging Managed Care.—The budget
contains two initiatives to encourage managed
care as the best means of assuring quality and
appropriateness of care.

Payment Methods.—Payment methods are
changing as well. Prudent purchasing methods
increasingly are used by public and private
sector payers.

A voluntary managed care option would be
offered to Medicare beneficiaries through a
new program to be called "Medicare Plus." Selected private health plans would combine a
PPO with supplemental ("Medigap") insurance. The Medicare Plus benefit package
would have standard elements, and plans
would compete to attract Medicare beneficiaries based on the quality of their provider
network and on price.

Newer methods can help to bring down the
inflated prices that resulted from the weakness
of market forces under the older cost- and
charge-based systems. As a result, hospital and
physician payment rates are being set at levels

To encourage greater use of HMOs, the
budget proposes to rebate to HMOs and their
Medicare enrollees the savings that Medicare
currently accrues. Under current law, the Federal cost of providing health coverage through




V.

REFORMING MANDATORY PROGRAMS

HMOs is 5 percent less than the expected cost
of providing regular Medicare coverage (called
the Adjusted Average Per Capita Cost or
AAPCC). The proposal would reduce the Part
B premium for Medicare beneficiaries enrolled
in HMOs by 5 percent of the minimum
AAPCC. HMOs, which currently receive 95
percent of the AAPCC, would instead receive
100 percent of the AAPCC less the amount of
the premium rebate. The lower premium
charged to Medicare beneficiaries should encourage more of them to enroll in HMOs, and
the higher payments to HMOs should prompt
more of them to serve Medicare beneficiaries.
Promoting Appropriate Care.—The President's budget emphasizes the importance of
quality health care by increasing funding for
the Agency for Health Care Policy and Research, maintaining support for the important
activities of Peer Review Organizations, and
implementing the new requirements of the
Clinical Laboratory Improvement Act. Funding
for these activities comes from a variety of
sources, although it is largely mandatory
spending from the Medicare trust funds. These
initiatives are presented together to describe
clearly the Administration's commitment in
this important area.
The President's budget increases funding for
the Agency for Health Care Policy and Research from comparable 1990 levels by $16 million, to $110 million. By strengthening the scientific foundations of medical practice, the
Agency's effectiveness initiative is designed to
improve quality while making health care
more affordable. The Agency will focus its efforts on four objectives:
• To increase our understanding of how
medicine is practiced and its effect on
health, data systems will be developed to
capture a wide array of data on clinical
practice and patient outcomes on a continuing basis.
• To learn which treatments are effective or
more effective than others, studies of specific medical treatments will be conducted.
• To assist physicians in making choices
among a range of alternative treatment
strategies, practice guidelines will be developed.



189
• To ensure that practicing physicians are
up to date on scientific advancements, educational strategies will be developed and
implemented.
At the same time, the budget continues current high levels of funding for Medicare's Peer
Review Organization (PRO) program. Over
$380 million will be spent in 1991 on review
activities conducted by PROs; more than 2 million hospital records will be reviewed to identify potential quality of care problems. The
scope of this effort is without parallel in any
other health benefit program. During 1991, the
Health Care Financing Administration will
pursue a variety of initiatives to further improve this program. These include a series of
demonstration projects to test new review systems, as well as development of a new medical
data system for hospitals that for the first time
will permit PRO reviewers (and eventually
others) to target patient care reviews more effectively based on statistical data related to
medical outcomes.
Funding for survey and certification activities under Medicare, Medicaid, and the Clinical Laboratory Improvement Amendments of
1988 (CLIA) would be increased by over 200
percent, from $165 million in 1990 to over $510
million in 1991. Funding would increase to
over $1 billion in 1992. Under this program,
the Federal Government has assumed a major
role in ensuring that hospitals, nursing homes,
clinical laboratories, and other facilities
comply with basic standards of quality. Over
350,000 providers and suppliers will be subject
to survey and certification review by 1991. To
finance the CLIA program, Medicare and Medicaid clinical laboratories annually will be assessed fees to cover program and administrative costs. Legislation will be proposed in 1991
to extend the fee policy to hospitals and nursing homes.
Reforming Physician Payment—The 101st
Congress, with strong support from the Administration, passed significant reforms of the
Medicare physician payment system in 1989.
These reforms, which are first effective in
1992, will set aggregate targets on the amount
physicians can be paid for providing care to
Medicare beneficiaries, pay physicians based
on a new fee schedule that reflects the relative
cost of producing services, and cap the amount

190
physicians can charge patients over Medicare
payment levels.
The aggregate target (known as the Medicare Volume Performance Standard or MVPS)
will serve as the keystone for subsequent Administration efforts to develop new forms of
managed care that provide incentives for physicians to provide high quality care in an efficient manner. Specifically, the legislation directs the Secretary of Health and Human
Services to develop a proposal under which
qualified physician groups can opt out of the
general performance standard and have their
fee updates based on their own performance
rather than that of physicians generally. The
study is due by July 1, 1990.
For 1991, the budget contains several proposals designed to facilitate transition to the new
physician fee schedule:
• Consistent with the Administration's emphasis on encouraging primary care, physician services for primary care would receive a full Medicare economic index
update. Payments for other physician services would be limited to 1990 levels with
no update.
• Payment for certain overvalued services
would be reduced in preparation for the
1992 implementation of the new resource
cost-based fee schedule.
Other physician payment reforms included
in the budget involve payment for surgical assistants and supervision of nurse anesthetists.
Extending Prudent Purchasing.—For prospective payment hospitals, the budget proposes to continue the strategy of using cost
data to determine an appropriate annual
update. Prospective Payment System (PPS)
rates would increase by an average of 4.1 percent. The Administration expects to work
closely with the Congress to develop suitable
adjustments in the update to account for the
varying situations of rural, inner city, and
other hospitals.
In addition, the budget contains a proposal
that would limit capital payments to urban
hospitals to 75 percent of incurred costs, a reduction of 10 percentage points from the current level. (Capital payments for rural hospitals would remain at 85 percent of incurred



THE BUDGET FOR FISCAL YEAR 1991

costs.) With hospital occupancy rates averaging
only 65 percent across the Nation, a 75 percent
level for capital cost reimbursement is appropriate. Higher rates of Medicare capital reimbursement would pay for substantial excess capacity. The Administration continues to believe that prospective payment provides the
most appropriate incentives in paying for capital-related costs; accordingly, the Administration intends to publish a proposed rule this
year to implement prospective capital payment
in 1992 as required by Congress. In the event
that prospective capital payment is further delayed, the Administration would favor an alternative adjustment to capital payments to
provide similar incentives, such as an occupancy rate adjustment.
The budget also reproposes reform of the indirect medical education adjustment (IME) for
teaching hospitals. The IME is intended to
compensate teaching hospitals for higher costs
related to differences in severity of patient illness not reflected in the diagnosis related
group (DRG) system and the higher cost of
care related to training. Studies conducted by
the Congressional Budget Office, the General
Accounting Office, the Inspector General of
the Department of Health and Human Services, and the Prospective Payment Assessment
Commission consistently show that the IME
adjustment has been set too high. The budget
proposes to reduce the adjustment factor to
4.05 percent, a level sufficient to compensate
teaching hospitals for their higher costs according to scientific analyses of the difference
in costs between teaching and other hospitals.
A new proposal included in the budget
would reform payments for direct medical education costs, which cover intern and resident
salaries and associated overhead. The reform
would encourage teaching hospitals to increase
training in primary care and would correct
current inequities in payment. Specifically, the
budget proposes to limit per resident allowances based on national average resident salaries, with differentials designed to encourage
training of primary care physicians.
The budget contains several other prudent
purchasing reforms for nonphysician services
provided under Part B of the Medicare program. Consistent with previous policy, the nationwide cap on payment for clinical laborato-

V.

REFORMING MANDATORY PROGRAMS

ry tests would be adjusted to better reflect the
amounts needed to purchase laboratory tests
from efficient providers. A similar nationwide
cap would apply for durable medical equipment. To offset inflation resulting from continued application of cost reimbursement for hospital outpatient departments (OPD), the
budget proposes to reduce OPD payments by
10 percent, with an additional 10 percent reduction on capital payments.
To assist States in developing effective strategies for sustaining rural hospitals, the budget
requests $1 million in discretionary funding
for expert technical assistance. Expert consultants will be available at State request on a
matching, sliding-scale fee basis.
Consistent with previous Administration
policy, the budget also proposes setting a permanent floor on Part B monthly premiums at
25 percent of program costs. This would extend
the policy that has been in effect since 1984.
Additionally, the budget proposes to extend
Medicare Hospital Insurance coverage to all
State and local government employees beginning October 1, 1990. All such employees hired
after March 1986 already are required to be
covered by Medicare Hospital Insurance. More
information about this proposal and its budget
effects is provided in "Receipts, User Fees, and
Other Collections."
If all Medicare reforms in the budget are
adopted, the growth in Medicare payments between 1990 and 1991 would be reduced by
about $5.5 billion. Still, mandatory expenditures on Medicare would grow by about $2.0
billion. Budget detail on Medicare reforms is
included in a table at the end of this Part.
Medicaid
Expanding Managed Care.—To improve
access to high quality health services for Medicaid enrollees, the budget encourages greater
use of managed care systems. Low-income individuals too often rely on hospital emergency
rooms for their primary care and suffer a lack
of continuity in the services they receive. Enrollment in a managed care plan would ensure
Medicaid beneficiaries access to an integrated
network of health care providers, including a
physician/case manager to serve as their primary source of care and coordinate any special



191
services they need. Moreover, careful selection
of providers and comprehensive quality review
would result in better care.
The budget contains three proposals to facilitate more extensive use of managed care
within the Medicaid program.
First, States would receive financial incentives to increase managed care enrollment. Beginning in 1991, States would receive a 3 percentage point bonus over their normal matching rate for expenditures associated with increased enrollment in managed care plans. Increased managed care expenditures would be
measured against indexed 1989 expenditures.
Beginning in 1993, application of the 3 percentage point bonus would also apply to the
1989 managed care base.
Beginning in 1993, the matching rate paid to
States for expenditures under traditional feefor-service delivery systems would be reduced
slightly, to no more than offset the cost of the
higher matching rates paid for managed care.
The decrease could be no more than 1 percentage point in 1993, 2 percentage points in 1994,
and 3 percentage points in 1995 and beyond.
Exceptions would be made for rural and medically underserved areas and for individuals in
nursing facilities.
Second, the budget proposes to make managed care a standard option for State Medicaid
programs. Barriers to managed care date back
to the mid-1960s, when virtually all medical
care was provided through fee-for-service systems. Currently, States cannot require recipients to enroll in a managed care system unless
they apply for waivers of legal requirements.
The waiver application process is long and
costly for States, and it must be repeated every
2 years. The Administration proposes to give
managed care systems equal standing with feefor-service care by allowing States to implement approved managed care systems without
obtaining a waiver. As an integral part of this
proposal, the Secretary would establish and enforce standards governing quality of, and
access to, care.
Finally, the budget proposes to ease restrictions that unnecessarily impede HMO participation in Medicaid. Publicly operated HMOs
and HMOs in medically underserved areas
could be exempted from the requirement that

192
they must have a non-Medicare/Medicaid enrollment of at least 25 percent in order to
enroll Medicaid beneficiaries. Exemptions
would be granted if annual, independent quality reviews show that the HMOs provide high
quality care. Existing State options to guarantee eligibility and restrict voluntary disenrollment of HMO plan members would be expanded. Recipients would still be able to disenroll
with cause, and effective recipient grievance
procedures would continue to be required.
Complementing Other Budget Initiatives.—
Federal mandatory Medicaid expenditures
under the President's budget would increase
by $4.8 billion, to $45.0 billion, a 12 percent
increase over the 1990 level. In addition to
supporting the managed care initiative, Medicaid funding is an integral component of the
Administration's infant mortality initiative.
Infant Mortality.—The 1991 increase in
Medicaid spending will fund the recently enacted mandatory expansion of Medicaid to
cover pregnant women, infants and young children from families with incomes up to 133 percent of the poverty level, which is consistent
with last year's Administration proposal. The
Administration continues to strongly encourage States to move toward coverage of pregnant women and infants with family incomes
up to 185 percent of poverty by exercising existing Medicaid options. State adoption of
other measures designed to increase program
coverage of low-income pregnant women also is
strongly encouraged.
To complement the expansion of Medicaid
coverage of low-income pregnant women and
infants, the budget advances a number of discretionary proposals to combat infant mortality. In HHS' Public Health Service (PHS), these
proposals include $579 million for the Maternal and Child Health Block Grant, which includes new grants totalling $25 million to encourage the establishment of "one-stop shopping" for health and related social services for
pregnant women and infants; an expanded
case management initiative to reduce infant
mortality totalling $36 million; tripling of
funding, to $9 million, for demonstrations of
innovative ways to provide social services to
babies born with HIV infection or dependent
on drugs; and increased funding of $10 million
for Community and Migrant Health Centers



THE BUDGET FOR FISCAL YEAR 1991

(C/MHC), a primary source of services for lowincome and minority pregnant women and infants. C/MHC funding would include a onetime increase of $2 million for the purchase of
vans to transport pregnant women for prenatal care.
The budget also requests increased funding
of $12 million for the Centers for Disease Control's infant mortality activities to enhance
State surveillance capabilities to (1) document
links between incidence of low birth weight
and birth defects on the one hand, and infant
deaths and key preventable parental risks, on
the other and (2) assess the effectiveness of the
maternal and child health and nutrition programs that are designed to prevent and treat
these risks. The budget also contains increases
for drug abuse research, treatment, prevention
and education activities targeted at high risk
groups including pregnant women and their
infants. Additionally, the Indian Health Services would expand outreach and health education activities that focus on fetal alcohol syndrome and infant mortality. Total HHS funding aimed at reducing infant mortality will
increase $588 million in 1991, to $5 billion.
In addition to the PHS initiatives, the
budget proposes $2.2 billion for the Department of Agriculture's Special Supplemental
Food Program for Women, Infants, and Children (WIC). With continued efforts to expand
competition among suppliers of infant formula,
participation in WIC in 1991 would increase to
4.7 million, 62,000 above 1990 levels.
Federal Employees Health Benefits:
Reforming the Program
The Federal Employees Health Benefit Program (FEHBP) is the largest multi-plan health
program in the world. It offers Federal employees a choice among 20 fee-for-service
health insurance plans and 300 health maintenance organizations and other prepaid managed care options. Administered by the Office
of Personnel Management (OPM), FEHBP
covers about 9 million people, including 2.5
million active employees, 1.5 million annuitants, and 5 million dependents.
By law, OPM must submit recommendations
for reform of the FEHBP to Congress in February 1990. At present, the Administration is

V.

193

REFORMING MANDATORY PROGRAMS

working on a reform package that would address problems inherent in the current FEHBP
system. These problems include, among others,
adverse risk selection and duplicative adminis-

trative operation in carrier plans. In the absence of reform, mandatory outlays for FEHBP
would more than double by 1995.

MANDATORY OUTLAYS FOR FEDERAL EMPLOYEES HEALTH BENEFIT
PROGRAM ARE PROJECTED TO DOUBLE BY 1995

$ Billions

876 -

6.5

EZ3 PROJECTED
• • ACTUAL

5.8
5.1
4.2

3.2

m

32 -

1-

1990

91

92
93
FISCAL YEAR

Independent of the broader FEHBP reform
recommendations under development, the
budget proposes to move the U.S. Postal Service toward self-sufficiency by having it assume
responsibility for additional annuitant health
benefit costs. Payments for health benefit costs
of postal annuitants who retired after 1971 but
before 1986 would be made by the Postal Service instead of OPM. Currently, the Postal Service contributes to the cost of health benefits
for annuitants who have retired since 1986,
but not for the cost of earlier retirees. Under
this reform, the government of the District of
Columbia also would assume costs for their
annuitants.




94

95

MANDATORY SPENDING FOR INCOME
SUPPORT AND OTHER SUBSIDIES
Spending on mandatory programs other
than health will total $423 billion in 1990. The
majority of these outlays, $383 billion or just
under one-third of the budget, are for income
maintenance programs, including Social Security, veterans Compensation and Pension, Federal retirement, unemployment compensation,
and means-tested assistance programs. The
rest subsidizes a wide range of activities, from
Guaranteed Student Loans to farm income
supports.
Modest changes are proposed in some programs; major reforms in others. Their net
effect is to allow the Federal Government to
better meet the needs these programs were

194

THE BUDGET FOR FISCAL YEAR 1991

designed to serve while freeing up scarce resources to allow funding of new priorities, such
as child care.
Enhancing Parental Choice in Child Care

side the child's home in an institutional setting. In families with an employed parent, 43
percent of children younger than six currently
are cared for by mothers who do not work
outside the home.

Most care provided to children of working
families is family care, not care provided out-

RELATIVES CARE FOR H A L F O F ALL CHILDREN
U N D E R A G E 5 W H I L E THEIR M O T H E R S W O R K
RELATIVE

When mothers do work outside the home,
care by relatives is the predominant child-care
arrangement for their children under age five.
Other informal arrangements such as "family
day care homes," which often involve friends
or neighbors of the child's parents, also are
widely used. Child care centers, including preschools, enroll only 22 percent of children
under age five whose mothers are employed.
The same informal, family-based arrangements that constitute the majority of preschoolers' care also predominate for school-age
children. Because many mothers' part-time
and other work schedules accommodate their
children's school hours, 75 percent of the



school-age children whose mothers are employed are in school most of the time their
mothers work. Fully 65 percent of those not in
school while their mothers work are cared for
by their fathers or other relatives.
When parents choose center care for their
preschool or school-age children, the centers
are often affiliated with religious organizations. Church-based care accounts for at least
one-third of all the care provided in centers.
Informal, often unpaid, arrangements are
prevalent for children with employed mothers
at all family income levels. For example, in
families with incomes of at least $30,000, fully

V.

REFORMING MANDATORY PROGRAMS

195

72 percent of the preschool children whose
mothers are employed are cared for in their
own or others' homes, a figure nearly identical
to the 71 percent for families with incomes
below $30,000. In short, the choice of informal
care is a matter of preference, not a matter of
family finances.

expand the range of choices available to parents, not limit them by biasing Federal support toward one kind of care. The Federal Government should not mandate State standards
or impose requirements for State standards,
which would increase the cost and reduce the
supply of care available to parents.

When families pay for child care, their cost
averages $2,350 annually for all of the children
in the family. Paid child care typically accounts for only a small fraction of such families' incomes, but it consumes an average of 22
percent of the incomes of poor working families.

New Federal assistance should be targeted to
families most in need.—Balancing the competing demands of work and family life is often
hardest for low-income families with young
children. In a period of fiscal constraint, scarce
Federal resources must be provided to these
families, who are most in need.

Respecting the many ways that American
families care for their children, the President
has based his child care policy upon parental
choice. The budget reproposes the two tax
credit initiatives for child care that were advanced last year: (1) a new refundable Child
Tax Credit for low-income working families of
up to $1,000 for each child younger than age
four, and (2) refundability of the current Child
and Dependent Care Tax Credit. These initiatives are based on the following four principles, which the President has stated must be
reflected in child care legislation:

The President has indicated that he is firm
in his commitment to these principles but
flexible in how they are implemented. Accordingly, Administration officials have been, and
will continue to be, willing to work with the
Congress to pass legislation that helps lowincome working families meet their child-care
needs, consistent with the President's principles.

Parents, who are best able to make decisions
about their children's care, should have the discretion to make these decisions.—New Federal
support for child care should go directly to
parents. They, rather than bureaucracies or
providers, should control the disposition of
funds and decide what kind of care their children receive.
Federal policy should not
discriminate
against parents who work at home.—Federal
policy now largely ignores the contributions
and sacrifices in income made by two-parent
families in which one spouse works at home to
care for their children. Federal policy must
correct this discrimination.
Federal policies should act to increase, not
decrease, the range of child care choices available to parents.—There is no such thing as
"one size fits all" child care. Some parents
want child care provided in an atmosphere of
religious values, while others seek the familiarity and informality of care by relatives,
friends, and neighbors. Still others may prefer
center-based care. Federal policy should



Child Nutrition: Targeting Spending Better
In 1990, the Federal Government will spend
nearly $7.2 billion for mandatory and discretionary nutrition programs that serve children, including the National School Lunch
Program, the School Breakfast Program, the
Child Care Food Program, the Summer Food
Service Program, the Special Supplemental
Food Program for Women, Infants and Children (WIC), the Commodity Supplemental
Food Program, and the Special Milk Program.
The Food Stamp Program also provides for the
nutritional needs of children, who made up
about half of the 18.8 million recipients of
$11.6 billion in Food Stamp benefits in 1989.
Although many of the beneficiaries of child
nutrition programs have very low incomes,
program rules provide some Federal subsidy to
children with family incomes that are not low.
For example, the National School Lunch Program provides 28 cents to participating schools
for every lunch served, whatever the income of
the children.
Additional Federal subsidies enable schools
to provide free meals to children with household incomes below 130 percent of the poverty
income guidelines, and subsidies of about 75

196
percent to children from households with incomes up to 185 percent. Nonetheless, half the
lunches served, representing Federal subsidies
of some $600 million in 1990, are for students
with household incomes above 185 percent of
poverty.
The budget proposes to improve the efficiency of school lunch and family day care meal
subsidies, but in a manner different from previous proposals. For the School Lunch Program, children from households with incomes
below 130 percent of the poverty line would
continue to receive meals that are completely
subsidized. More funds would be directed to
subsidies for children from households with incomes between 130 percent and 185 percent of
poverty; their subsidy would be increased by 20
cents per meal. The current level of subsidies
for meals provided to children with household
incomes between 185 percent and 350 percent
of the poverty line would be unchanged. Subsidies for students with household incomes
above 350 percent of the poverty line would be
discontinued. Schools would continue to receive additional commodities as they are available from USDA for meals to children at all
income levels.




THE BUDGET FOR FISCAL YEAR 1991

Children in family day care homes receive
subsidized meals, regardless of their income,
through the Child Care Food Program. Over 70
percent of children getting free meals are from
households with incomes above 185 percent of
poverty. Their Federal subsidies amounted to
about $315 million in 1990. The budget proposes to means test the program and provide
lower subsidies for children from families with
household incomes over 185 percent of poverty.
Child Support Enforcement: Extending
Services and Requirements and Increasing
Efficiency
Too often, women raising children whose fathers are not in the home receive no child
support. About 40 percent have not obtained a
court order for any support. Even among those
who have such an order, about half receive no
payments or only partial payments from delinquent fathers. Failure by absent parents to
provide support often leaves their children to
be served by programs such as Aid to Families
with Dependent Children (AFDC), the Food
Stamp Program, and Medicaid. While these
programs provide for the necessities, they are
not a substitute for the financial support children deserve from their parents.

V.

197

REFORMING MANDATORY PROGRAMS

IN M O R E T H A N H A L F O F ALL CASES, M O T H E R S RAISING CHILDREN
W H O S E FATHERS A R E N O T IN THE H O M E RECEIVE N O CHILD S U P P O R T
NO CHILD
SUPPORT ORDER
40.5%

NO SUPPORT
DUE
7.3%

NOTHING PAID
12.4%

FULL
PAYMENT
PARTIAL
PAYMENT
13-7%

The Family Support Act of 1988 is the most
recent major step taken to improve the financial security of children by increasing the support provided by absent parents. This Act requires States to adopt guidelines for judges to
follow in setting child support awards and to
use immediate wage withholding as the standard method for ensuring that the support that
is awarded actually gets paid. Under the Act,
child support enforcement services, funded
largely by the Federal Government, are available without cost to families applying for and
receiving AFDC, Foster Care, or Medicaid.
Thus child support enforcement resources are
coordinated with the provisions in the Social
Security Act that require applicants for AFDC,
Foster Care, and Medicaid to cooperate with
State efforts to establish paternity where it
has not been established, to seek child support
awards, and to obtain compliance with awards.
The budget proposes to provide free child
support enforcement services to applicants for
other means-tested benefits, such as Food



26.0%

Stamps and Supplemental Security Income,
and to require them to cooperate in securing
support for their children from absent parents.
As a result, these families with children will
have higher incomes and be less dependent
upon public assistance. Legislation will be proposed authorizing the extension of child support services on a program-by-program basis.
Programs outside the Department of Health
and Human Services will be included based
upon agreements between the head of the
agency administering the assistance program
and the Secretary of Health and Human Services.
Under current law, some States receive
more Federal child support matching funds
than they collect in child support for AFDC
families. For 1991, the budget proposes to require States to collect at least one dollar on
behalf of AFDC families for each dollar of Federal child support enforcement matching funds
claimed. This very modest performance requirement would increase, in phases, until, by

198
1999, States would be required to collect $1.50
on behalf of AFDC families for each dollar of
Federal matching funds claimed.
Under another proposal, States would develop fee schedules for child support services
that include free services for families below
150 percent of the poverty line, reduced-rate
services for families between 150 and 200 percent of the poverty line, and full rates for families above 200 percent of the poverty line.
Payment of most fees would be contingent on
how quickly a State provides services and how
much child support it collects for the families.
Emergency Assistance to Needy Families:
Assisting Families with Permanent Housing
Aid to Families with Dependent Children
(AFDC) provides a monthly grant to cover the
regular basic needs of recipient families. However, occasional unexpected expenses may
arise. For this reason, the Social Security Act
authorizes States to provide emergency assistance.
Over the last decade, some States and cities
have made increasing use of this category of
AFDC payments to deal with the temporary
housing needs of families. An example much
in the public eye has been "welfare hotels," in
which AFDC families have been housed, often
under extremely poor conditions, in hotels or
motels at enormous monthly charges. Although the Social Security Act directs that
emergency assistance should be, "furnished for
a period not in excess of 30 days in any 12
month period," emergency assistance funds
have been used to pay for stays of many
months.

THE BUDGET FOR FISCAL YEAR 1991

lies to move into permanent housing by paying
an initial month's rent or security deposit.
AFDC families experiencing a housing crisis
also would benefit from transitional housing
aid provided under the McKinney Act, which
is discussed in Part III of this Section.
Nutrition Assistance for Puerto Rico:
Consolidating Responsibility for Specialized
Assistance in HHS
The budget proposes replacing the Nutrition
Assistance for Puerto Rico component of the
Food Stamp Act with a fiscal assistance program for Puerto Rico under the Social Security
Act. This proposal would consolidate administration and policy oversight of the specialized
programs of public assistance for Puerto Rico
(including AFDC and Medicaid) in the Department of Health and Human Services. Under
the proposed program, Puerto Rico would have
broad authority to tailor assistance to lowincome families and individuals. The authorization for the program would be $825 million.
This level is $112 million less than the authorization for the prior program, reflecting the improvement in Puerto Rico's economic condition
since that program was enacted.
Foster Care: Restraining the Growth of
Administrative Expenses

The States and cities in which emergency
assistance has been used for such funding
agree that the practice is not an appropriate
way to deal with the housing needs of these
families.

Between 1981 and 1989, State claims for Federal reimbursement of administrative costs associated with implementing the Foster Care
maintenance payments program have grown
over 1,400 percent from $30 million to $474
million. This increase in State administrative
costs has out-paced growth in both the number
of children served over the period (48 percent
increase) and the level of maintenance payments financing care of foster children (131
percent increase). The escalation in Federal reimbursement for administrative costs has not
been correlated with improvements in the
quality or quantity of services to children.

The budget assumes that the Department of
Health and Human Services will publish regulations that will limit inappropriate uses of
emergency assistance. Emergency assistance
funds would remain available for measures to
avoid the need for long-term stays in "welfarehotels," such as preventing evictions by paying
past-due rent or utility bills and assisting^ fami-

The 1991 budget proposes to limit each
State's annual increase in administrative payments to no more than 10 percent to check the
excessive growth in Federal reimbursements.
Although the 10 percent limitation is more
than double the current rate of inflation, it
still would reduce the rate of growth in State
administrative claims, which are projected to




V.

REFORMING MANDATORY PROGRAMS

jump by 34 percent between 1990 and 1991.
The majority of funds appropriated for Foster
Care should fund maintenance services for this
vulnerable population of children rather than
an ever-increasing percentage of State administrative overhead expenses.
Federal Employee Retirement Programs:
Bringing Practices More into Line with
Private Pension Programs and Social
Security
In 1990, approximately 2.2 million civilian
retirees and survivors will receive payments
from the Civil Service Retirement System
(CSRS) or the Federal Employees' Retirement
System (FERS). Approximately 1.6 million retirees and survivors will receive military retirement payments.
Without reforms, between 1990 and 1995
outlays under these and several smaller Federal employee retirement programs are projected
to increase from $52.5 billion to $70.0 billion.
To control the rate of these increases, some
Federal retirement program practices should
be brought closer to private pension and Social
Security practices.
Until several years ago, Federal retirees received their benefits in the same way most
private pension beneficiaries do, in monthly
payments. More recently, employees have had
the option upon retirement of withdrawing in
a lump sum all funds they contributed during
employment and receiving an actuarially-reduced monthly benefit based upon the government's contribution. About 85 percent of all
recent retirees have taken advantage of this
generous option, which will provide lump sum
payments averaging about $27,500 in 1991.
Bringing retirement spending increases under
control should begin by moving Federal retirement back into line with private pension practice and eliminating this lump sum option.
Three other retirement reforms are proposed. First, beginning in 1992, the budget proposes to apply to CSRS benefits the same inflation adjustment used to index FERS benefits—
the Consumer Price Index (CPI) minus 1 percentage point. This would bring CSRS closer to
private pension practice, where a full CPI adjustment each year is rare. A similar change
will be proposed for military retirement.
Second, the 1991 COLA would be frozen for



199
civilian and military retirees, except for permanently disabled annuitants, who would receive a cost of living adjustment. Even t with
the 1-year freeze, the increases in Federal retirement benefits over the past several years
would remain ahead of most private pension
programs, few of which are fully indexed to
the CPI.
Finally, legislation will be proposed to cap
the Federal Government's potential liability
for postal and District of Columbia retiree benefits. Retirement contributions for current employees of the Postal Service and the government of the District of Colmbia participating
in CSRS would increase from 7 percent of
basic salary costs to 11.67 percent in 1991 and
14 percent in 1994. This proposal would (1)
reduce inappropriate Federal subsidies to the
Postal Service and D.C. government for retirement COLA benefits, (2) curtail the growth in
the retirement fund's unfunded liability, and
(3) move the Postal Service closer to self-sufficiency.
Veterans Compensation: Avoiding the
Inheritance of Large Estates by Remote Heirs
of Incompetent Veterans
Compensation for veterans disabled in the
service of their country dates from the days of
the American Revolution. Under the current
program, veterans who incurred or aggravated
illnesses or injuries during military service, as
well as survivors of veterans or service persons
whose deaths occurred while on active duty or
as a result of a service-connected illness or
injury, may apply for cash benefits as compensation for lost earnings capacity. The budget
proposes a full COLA increase for the 2.2 million veterans receiving compensation benefits.
As a rule, veterans who are mentally incompetent and therefore unable to manage their
own affairs, and who have no dependents, are
assisted by fiduciaries. In many cases these
veterans have sizable estates that end up benefiting not the veteran or his family but remote
heirs. The budget proposes legislation to
reduce the likelihood that remote heirs of incompetent veterans without dependents continue to inherit large estates comprised of
assets that were accumulated from Federal
payments to those veterans. Proposed legislation would stop payments to those veterans

200
after their assets reach $25,000. Should the
assets subsequently be reduced to $10,000,
monthly payments would be resumed. In this
way, funds would continue to be made available to these veterans to spend at the rate that
they and their fiduciaries see fit, while minimizing vulnerability for abuse in inheritance.
Veterans Pensions
The Veterans Pension program provides
means-tested payments to low-income, wartime-service veterans who are over 65 or who
have permanent and total disabilities unconnected to their military service. In January
1991, the 550,000 veterans on the Pension rolls
will receive a full COLA estimated to be 3.9
percent.
Less Restrictive Benefit Reduction Practices
for Hospitalized Veterans.—Currently, when a
veteran is furnished domiciliary care by the
Department of Veterans Affairs (DVA), the
veteran's pension is reduced to $90 monthly
after the end of the second full calendar
month of care. The pension of a veteran being
furnished hospital treatment or nursing home
care is reduced to that amount after three
months. Full payment is resumed upon discharge. The veteran is not entitled to amounts
withheld.
These reductions can make it difficult for
the veteran to return to the community. In
some instances, veterans have been unable to
meet continuing obligations, such as mortgage,
rent, or car payments, and may have lost their
homes or personal possessions. This proposal
would increase to 12 full months the period
before a pension would be reduced. It would
also allow up to $10,000 of withholdings to be
returned to the veteran upon release from
DVA care. Enactment of this proposal would
increase outlays by $13.5 million in 1991.
Using IRS Data to Verify Eligibility.—Currently, the tax code authorizes disclosure of
limited taxpayer information for certain specified purposes, such as improving the accuracy
of benefit payments made under programs authorized by the Social Security and the Food
Stamp Acts. To promote the integrity of the
Pension program, the budget proposes to
extend the Secretary of the Treasury's authority so that he can disclose to the DVA information needed to confirm veterans' eligibility.



THE BUDGET FOR FISCAL YEAR 1991

Veterans Medical Care Reimbursement:
Collecting from Insurers of Veterans with
Service-Connected Disabilities for Treatment
of Non-Service-Connected Conditions
When veterans without service-connected
disabilities receive medical care from the DVA,
costs of this care are recovered from the veterans' health insurers. The budget proposes to
extend this authority to recover the costs of
care for health conditions not related to service from the insurers of veterans who have
service-connected disabilities. Under this proposal, insurers would pay their fair share for
insured veterans who choose to use the DVA
for their non-service-connected care.
Social Security
Extending Social Security Coverage to State
and Local Employees Not Covered by Public
Employee Retirement Programs.—States and
local governments can decide whether or not
their employees should be covered by Social
Security. In some cases where these governments have not elected Social Security coverage, a part of their workforce does not participate in any public employee retirement plan.
The budget proposes to make Social Security
coverage mandatory for those State and local
workers who are not participating in a public
employee retirement system. As a result, these
employees would begin earning protection
against disability and credits for their retirement. Additional information on this proposal
and its budget effects can be found in Section
Two, "Receipts, User Fees, and Other Collections."
Covering Adopted Children of Surviving
Spouses.—Current law is unnecessarily restrictive in granting Social Security entitlements to
adopted children of surviving spouses. The
budget proposes to provide benefits to adopted
children if they had been living with, and receiving at least one-half of their support from,
the worker before his or her death.
Offsetting Tax Refunds for Overpayments.—
The budget proposes permanent authority to
collect Social Security and Supplemental Security Income overpayments by withholding the
amount due from Federal income tax refunds
if recovery through a benefit adjustment or a
direct payment by the overpaid individual has

V.

REFORMING MANDATORY PROGRAMS

not been successful. The proposal would apply
only to amounts owed by former beneficiaries,
not to amounts owed by current beneficiaries.
It would provide the Social Security Administration with an inexpensive and effective overpayment collection alternative that is available to other Federal agencies. As a result,
about 25 percent of Social Security overpayments that are not currently collectible would
be recovered.
Improving Pre-Effectuation Review Requirement—State Disability Determination Services, under contract to the Federal Government, made determinations on individuals' initial and continuing eligibility for Social Security disability benefits. Current law requires the
Secretary of Health and Human Services to
review 65 percent of these determinations. The
budget proposes to reduce the percentage of
disability allowances and continuances requiring review from 65 percent to 50 percent of all
allowances and 25 percent of all continuances.
The proposal would reduce incorrect benefit
payments by allowing the Secretary to focus
Departmental review efforts on error-prone
cases.
Conform Rail Social Security with OA SDL—
Under current law, certain groups, including
divorced
spouses of railroad
workers,
widow(er)s of railroad workers, and children of
deceased railroad workers are not covered
under Social Security. The President's budget
proposes extending full Social Security coverage to these groups.
Railroad Retirement: Restoring Private Sector
Control Over a Private Industry Pension
The Railroad Retirement Board pays benefits to 903,000 annuitants. Benefits are divided
into two basic parts: Social Security equivalent
benefits and rail pensions. Rail Social Security
benefits are financed through a complex reinsurance process with the Social Security Administration. Rail pensions are financed on a
pay-as-you-go basis through employer and employee payroll contributions, interest income,
and general fund subsidies. The total estimated mandatory outlays in 1991 are $4.1 billion.
The Board's actuaries project that under
mid-range assumptions about railroad employment, the rail pension fund will be bankrupt
in 2013. According to normal private sector



201
standards established under the Employee Retirement Income Security Act (ERISA), the rail
pension fund has an unfunded liability of $14
billion.
The problem is not new. In 1946, 1951, 1974,
1981, 1983, and 1987, Congress enacted legislation to deal with funding shortfalls. Each act
proved to be a short-term fix that provided
additional Federal subsidies. Since 1983, Congress has given the rail pension fund a total of
$3.3 billion in direct Federal subsidies. As of
today, these subsidies have contributed over 50
percent of the rail pension fund reserves.
Moreover, the general fund finances 100 percent of railroad retirement windfall benefits,
($354 million in 1991).
Rail employment drives the rail pension
fund's balance. The rail sector has consistently
overestimated employment projections, resulting in overly optimistic estimates of rail pension fund balances. These projections give the
misleading impression of a system with no
short-term cash flow problems, thus lessening
the financial impact on the sector. Rather
than initiating real reforms, railroad payroll
taxes have been increased incrementally based
on these faulty projections.
Rail labor and management need the freedom to independently negotiate retirement
benefits and contribution rates as part of their
wage and compensation package. As long as
this private industry pension remains part of
the Federal Government, the rail sector has
little incentive to address the system's longterm financial insolvency.
Fundamental reform is needed, recognizing
the basic incompatibility of a private industry
pension within the Federal Government. Railroad retirees and their dependents would be
better served by a retirement system that
relied solely on private funds and was privately administered. Therefore, the budget proposes legislation that will (1) extend full Social
Security coverage to all rail retirees, (2) cover
new rail employees under an ERISA-based
pension system administered by the rail sector,
and (3) establish a financially stable pension
system for current retirees that relies on rail
sector support.

202
Trade Adjustment Assistance: Treating
Dislocated Workers Equally
Legislation will be proposed for 1991 to consolidate the separate program of Trade Adjustment Assistance (TAA) with the Economic Dislocation and Worker Adjustment Assistance
program that provides enhanced services for
displaced workers under Title III of the Job
Training Partnership Act. At present the two
programs operate separately and provide different benefits to workers who face similar
problems. The consolidated program would
eliminate inequities among displaced workers.
Following the consolidation, displaced workers who have lost their jobs due to imports or
other more general causes of dislocation will
be served by a single program. All such workers will be eligible for the same job search
assistance, training, and relocation assistance,
regardless of the particular cause of their job
loss.
The unification of the two programs would
provide early access to services and thus speed
the adjustment of workers and their return to
productive employment. The single program,
which would be simpler to administer than the
two separate programs, would save administrative costs, and would permit the concentration
of resources on adjustment benefits.
Workers collecting TAA benefits during the
week including September 30, 1990 would continue to collect the balance of their TAA cash
benefits.
Farm Supports: Increasing the
Responsiveness of American Agriculture to
Market Mechanisms
Over the past decade, Federal commodity
price and farm income support programs have
been less predictable and more costly than at
anytime in the past. In the early to mid-1980s,
the strong dollar, which greatly reduced U.S.
export market shares, and legislated minimum
domestic prices, which were higher than the
world market price, combined to make the
U.S. less competitive in world markets. Further, income support guarantees (established
through target prices for various commodities)
were above the cost of production, creating an
incentive to increase production. Higher production combined with smaller export markets



THE BUDGET FOR FISCAL YEAR 1991

resulted in the default of large crop surpluses
to the Federal Government. Even so, with
rising costs of inputs and money, returns to
farming actually declined, and farmers continued to leave the sector.
Current Strength
of America's
Farm
Sector.—The Food Security Act of 1985 was
designed (1) to restore U.S. competitiveness by
reducing price support levels over time and
establishing marketing loans, and (2) to
expand exports by authorizing a number of
export promotion programs, including Targeted Export Assistance, the Export Enhancement Program, and intermediate-term export
credit guarantees.
Since the enactment of the 1985 farm bill,
there have been major improvements in the
U.S. farm economy. Today, net farm income is
at an all-time high, reaching the record level
of $48 billion in 1989. Land values are increasing once again, and exports have rebounded.
Cropland used in 1989 for crops is estimated
at 330 million acres, about 12 million above
the year before. Another increase is likely in
crop year 1990, reflecting strong prices, lower
stocks, and relaxed acreage reduction requirements in commodity programs.
The farm balance sheet continues to improve, as well. The debt-to-asset ratio, so crucial for a capital-intensive sector such as production agriculture, is expected to fall to 17
percent in 1989, continuing a decline that
began in 1985. This means a financially stronger farm sector. With farmland prices generally
on the rise, the sector's equity position reflects
steady gains, too, reaching close to $650 billion
this year. Total outstanding debt has declined
28 percent since 1983. The condition of agricultural lenders has improved substantially. The
volume of delinquent loans has continued to
shrink for all major lenders, including the
Farm Credit System, the Farmers Home Administration, and commercial banks.
And exports have rebounded strongly. The
combination of renewal in overseas demand
and an aggressive export marketing effort has
helped eliminate the large stocks that hung
over commodity markets in 1985 and held
prices down. Wheat and corn stocks have
fallen to roughly one-third of their levels at
season's end 4 years ago. The value of U.S.

V. REFORMING MANDATORY PROGRAMS

agricultural exports in 1989 was up for the
third year in a row, reaching the highest
annual level since 1981.
In the context of the Uruguay Round of multilateral trade negotiations, U.S. trading partners have agreed that the stated objective of
the negotiations is to achieve a substantial,
progressive reduction in agricultural support
and protection to correct and prevent distortions in world agricultural markets.
Reducing Reliance on Government Price Supports.—Unfortunately,
the successes of the
1985 farm bill have come at great cost to the
taxpayer—particularly in the form of increased direct payments to farmers to support
income. In 1980, such payments amounted to
roughly $3 billion. By 1986, price and income
support payments to farmers carried out
through the Commodity Credit Corporation
(CCC) had reached $26 billion. Drought-driven
reductions in supply and expanded demand
have reduced support payments since then.
Nevertheless, the total cost of the 1985 Act
will be about $80 billion.
Further action is required to move toward a
more market oriented system, consistent with
stated U.S. posture in international negotiations. It is clear that, under the current
system, a return to normal weather and good
crop yields would translate into substantially
higher levels of Federal price and income support outlays in the years ahead.
The completion of the Uruguay round of the
GATT negotiations and the reauthorization of
the farm bill are critical steps that will occur
in 1990. The Administration will work closely
with Congress to achieve greater market orientation in farm programs in the 1990 reauthorization bill, and to reduce the cost of farm
programs, while keeping farm income high. At
the same time, our representatives are committed to achieve agreement in the international arena to ensure that equitable subsidy
reductions take place worldwide.
The budget proposes to achieve $1.5 billion
in savings from the current level of Government price and income support payments. The
Administration is prepared to work closely
with the Congress, and the Agriculture Committees in particular, to develop market-oriented farm legislation that allows producers to



203
decide what crops to grow, while also achieving the budget savings needed in the commodity programs. This will need to be done in a
way that maintains a safety net for farmers to
protect them from conditions beyond their control.
Options for Achieving Support Payment Savings.—The 1985 farm bill legislated a steady
decline in target prices (income support) and
loan rates (price supports). With the expiration
of the 1985 Act in the 1991 crop and fiscal
years, the budget projects baseline levels of
target prices and loan rates unchanged from
their 1990 levels. Substantial savings could be
achieved if the declining schedule of target
prices and loan rates set in the 1985 Act were
to be continued or even accelerated. At the
same time, the program should seek to eliminate incentives to produce one crop over another strictly because of the differential in
Federal benefits being provided.
Savings also could be achieved by reducing
the number of acres eligible for payments or
targeting benefits to smaller farmers in greatest need. Farmers need more flexibility in deciding what crops to grow and to free production decisions from the Federal subsidy program. Currently, farmers who take acres out
of production of program crops cannot substitute other program or non-program crops to
boost their incomes. This should be changed.
Farmers should be allowed to plant other crops
or even the same program crop on nonsubsidized acres and bring those crops to the
market. Planting flexibility could produce revenues to offset any loss resulting from lower
direct Federal payments, thus allowing farmers to keep incomes strong even as Federal
subsidies are reduced.
While reducing overall payments is essential
to meeting budget goals, the Administration
also is concerned about the distribution of
those subsidy payments. The number of farms
has dropped by 50 percent, and commercial
farms today are much larger and more specialized than they were in the 1930s, when support
payments were first introduced. A significant
portion of benefits goes to larger, wealthy
farmers. In an era of limited resources, this is
hard to justify.

204
In 1987, for example, 30 percent of the $22.4
billion in commodity related subsidies paid to
individuals went to the 4 percent of farm operators with average net total cash incomes of
more than $100,000 per year, and with net
worths of nearly $850,000. This should be
changed. One option for achieving savings of
approximately one-half billion dollars would be
to eliminate direct payments to farm operators
with adjusted gross incomes of over $100,000
per year. This income level, after all, represents three times the average for an American
family of four. Up to a billion dollars could be
saved by withholding direct payments to farm
entities with gross sales of $500,000 per year or
more. Clearly, some reductions in Federal payments can be achieved simply by eliminating
payments to the wealthiest, least needy farmers.
Enforcing the Cap on Income Support Payments to a Given Individual—Some farmers
are also finding ways to evade limitations in
the 1985 farm bill that are intended to prevent
excessive Federal subsidy payments to any one
individual. The Act limits the amount of




THE BUDGET FOR FISCAL YEAR 1991

income support payments to $50,000 per
"person" and limits total Federal subsidy payments to $250,000 per "person" each year. Yet
these generous ceilings have been routinely exceeded because a "person" is defined as an
individual or a business entity, such as a corporation or a trust. The following charts show
an example of a farm business structure used
to receive an exceptionally high level of payments in 1988. After the law was changed to
tighten payment eligibility, this farm reorganized, as shown, in 1989, to again assure it
would receive close to a million dollars in
direct payments. These types of practices need
to be reformed.
The Administration will work closely with
Congress to develop regulations under current
law and any necessary legislation as part of
the 1990 farm bill to close these loopholes and
to eliminate excessive payments to wealthy
farmers. Failure to do so will result in a loss of
public confidence and support for the farm
program. The taxpayers rightly expect these
abuses to be curbed.

V.

205

REFORMING MANDATORY PROGRAMS

EVADING THE $50,000 PAYMENT LIMITATION:
ORGANIZATION OF A LARGE FAMILY FARMING OPERATION

1988
Brother-in
Father 2

Son 2a

Son 2b

Daughter 2

Law 2

Father 3

Brother 2

Foundation 2

A

B

c

D

E

F

G

H

•
V

CCC PAYMENT ENTITIES

LETTERS IN PAYMENT ENTITY
TRIANGLES CORRESPOND
TO OWNERS IN THE ABOVE
BOXES




TOTAL PAYMENTS: $912,089;
maximum possible for acreage in
CCC Program for crops produced.

Daughter l b

206

. z z

THE BUDGET FOR FISCAL YEAR 1991

1989
Church B

Father 2

Trust

I

A

Church C

Employee 4

Trust

Trust

J

R

Employee 5

Secretary

Trust

Trust

Employee 13

Employee 21

Trust

Trust

s

b




TOTAL PAYMENTS: $801,619;
maximum possible for acreage in
CCC Program for crops produced.

V.

REFORMING MANDATORY PROGRAMS

Power Marketing Administrations: Requiring
Sound Business Practices in Repayment of
Debts
The Federal Government's ownership of five
power marketing administrations (PMAs) can
be traced from Federal policies aimed at settling the Western United States and from the
days of the New Deal. Currently, PMAs sell
about 6 percent of the Nation's electric power
(50 percent of its hydroelectric power), generated at 123 Federal dams, mostly in the West
and South.
PMAs are able to sell power at prices which
are among the lowest in the United States, in
part because the public utility districts that
are their principal customers receive millions
of dollars of hidden subsidies in the form of
generous interest rates and long delays in repayment of Federal debt. These subsidies directly discourage energy conservation. For example, Bonneville Power, the largest PMA,
supplies about half the electric power used in
the Northwest. The region enjoys the lowest
power rates in the nation, and, as a consequence, average monthly retail usage is about
42 percent above the national average.
The budget proposes to reform debt repayment practices at four of the five Power Marketing Administrations (PMAs) managed by
the Department of Energy, to ensure that the
billions of dollars invested in the PMAs is
repaid in a timely manner.
The Federal Government has invested over
$16 billion in the PMAs to build the dams,
powerhouses, transmission lines, etc. used to
generate and distribute electric power. In principle, PMAs are required to operate in a business-like manner. For example, they must recover all of their operating costs and capital
investment. But in practice the PMAs have
not paid back most of the taxpayer's investments and the interest rates on their debt are
well below current market levels. For example,
about 80 percent of this investment remains
unpaid due to the ability of the PMAs to defer
repayment of principal. Interest rates on
project debt are typically 2 to 3 percent, even
though the Treasury's cost of money may be
much higher.
Federal law requires PMAs to operate on
sound business principles. In addition, statutes



207
authorizing PMA funding require, "the amortization of the capital investment over a reasonable period of years." Accordingly, the budget
proposes to enforce a payment schedule in
which an equal amount of a PMA's outstanding debt is paid each year—so-called "straight
line" amortization. Such a schedule would
achieve full repayment within the required
period.
In addition to requiring regular principal
payments by adopting fixed straight-line amortization schedules, the budget would also require PMA's to pay current market interest
rates on their debt. Adoption of these repayment and interest rate reforms would produce
$966 million in additional Treasury collections
in 1991.
In addition, the budget proposes to modify
the accounting practice whereby Bonneville
Power books funds borrowed from the Treasury to finance customer conservation as an
asset instead of as an operating expense. Few,
if any, other utilities in the country make it a
common practice to record conservation expenditures as a capitalized asset. By following
this practice Bonneville understates the subsidy it is receiving from the Federal government
each year and overstates the value of the capital assets it controls.
The budget also proposes to transfer the
assets of two of the PMAs, the Alaska Power
Administration and the Georgia-Alabama portion of the Southeastern Power Administration, to local customer groups on terms that
will protect the interests of both the current
customers and the Federal taxpayers. Such
customer groups have already expressed an interest in the purchase of these assets. The
sales of these assets is estimated to result in
receipts to the Treasury of $1.3 billion in 1991.
The sales would recoup much of the Federal
investment in these PMA's.
Finally, the Administration proposes to offer
non-Federal ownership in a major upgrade to
an existing transmission line running from
South Central Oregon to Northern California.
The line would be owned and operated by a
consortium of Pacific Northwest non-Federal
utilities and local utility districts as well as
the Bonneville Power Administration.

208

THE BUDGET FOR FISCAL YEAR 1991

PROPOSED MANDATORY PROGRAM SPENDING
(Outlays in billions of dollars)
1990

Agriculture:
Federal crop insurance corporation fund
Commodity Credit Corporation
Other
Commerce and Housing Credit:
Deposit insurance
Mortgage credit
Other
Education, Training, Employment and Social
Services:
Guaranteed student loans
Social services block grant
Foster care and adoption
Other
Medicare and Health:
Medicare
Medicaid
Other
Social Security and Income Security:
Social security
Family support payments—AFDC and child
support enforcement
Job opportunities and basic skills training
Supplemental security income
Child nutrition
Food stamp program
Other nutrition assistance
Federal employee retirement
Other retirement and disability
Unemployment compensation
Other
Social Security Integrity and Debt Reduction
Fund
Veterans Benefits and Services:
Compensation
Pensions
Other
Other Mandatory Spending
Total Mandatory Outlays

1992

1993

1994

1995

1.0
8.4
2.7

0.3
10.4
2.5

—

—

11.2
2.6

10.0
1.7

8.5
1.3

7.4
0.9

10.9
4.7
2.6

8.9
3.9
2.0

3.7
3.3
0.9

3.7
3.4
0.4

1.8
3.7
0.1

0.8
3.7
-0.1

3.8
2.8
1.4
2.5

3.2
2.8
2.3
2.9

2.8
2.8
2.1
4.3

2.6
2.8
2.4
4.3

2.4
2.8
2.7
4.3

2.3
2.8
3.0
4.4

94.2
40.2
2.8

96.2
45.0
2.8

107.7
49.8
3.8

119.5
54.7
4.6

132.5
59.8
5.3

146.6
65.1
6.0

246.0

262.2

278.3

295.0

311.8

328.7

12.1
0.3
11.4
5.0
15.3
0.5
52.5
4.8
16.4
4.7

12.6
0.9
13.2
4.8
15.4
0.4
53.8
5.1
16.6
5.5

13.1
1.0
13.9
5.1
16.0
0.4
55.1
5.3
17.2
5.6

13.5
1.0
14.6
5.4
16.7
0.4
57.9
5.4
17.8
5.6

13.8
1.1
16.5
5.8
17.6
0.4
60.8
5.4
18.5
5.7

14.3
1.3
16.4
6.1
18.5
0.4
63.6
5.5
19.3
5.8

—

—

—

14.1

53.6

101.8

10.6
3.5
1.7

11.5
3.7
1.2

11.7
3.6
1.1

13.2
3.8
1.1

12.1
3.6
1.1

10.8
3.5
1.1

-0.2

-0.6

-0.3

-0.8

-1.5

-1.3

562.5

589.7

622.1

674.7

751.9

838.8

Notes: Negative entries result from offsetting collections.




1991

—

—

V.

209

REFORMING MANDATORY PROGRAMS

MANDATORY PROGRAM REFORMS: CHANGE FROM BASELINE
(Outlays in millions of dollars)
1991

Agriculture:
Federal Crop Insurance Corporation fund
Commodity Credit Corporation
Other
Child Care:
Child tax credit (refunded portion)
Refundable DCTC (refunded portion)
Child Nutrition:
Increased school lunch subsidy for children
130-185 percent of poverty
Reduced school lunch subsidy for children
above 350 percent of poverty
Means-test day care center meal subsidies
Family Support Payments:
Child support enforcement:
Increased paternity establishment and
child support enforcement
Partial recovery of costs from cases middle
and upper income cases
Reimbursements capped at level of AFDC
collections
AFDC:
Concurrent collection of quality control
penalties
Federal Employees Health Benefit Program:
Postal Service annuitants
Other reforms
Federal Employee Retirement:
Civilian retirement lump sum reform
Civilian and military retirement COLA
freeze and CPI-1 percent
Other
Federal Housing Administration
Food Stamp Program:
Reauthorization
Effects of increased child support enforcement
Employment and training
Foster Care:
Limit growth of administative costs
Prior year claims
Guaranteed Student Loans:
Guarantee agency reinsurance at 90 percent...
Reinsurance fee at 0.5 percent
Delay disbursements to first-time student
borrowers
No commissioned sales people



1992

1993

1994

1995

-507
-3,133
-7

-539
-4,441
-4

-558
-4,849
-4

-576
-5,457
-4

128
29

1,286
554

1,436
553

1,568
538

1,742
505

48

55

55

56

56

-220
-242

-244
-310

-259
-353

-270
-392

-283
-433

30

30

30

30

30

-30

-35

-40

-45

-50

-10

-15

-20

-25

-30

-23

-23

-17

-5

1

-726
—850

-803
-901

-881
-955

-975
-1,012

-1,046
-1,073

-1,489

-1,981

-1,973

-1,961

-1,946

-1,449
-13
-307

-2,345

-3,724
-13

-4,490

-626

-3,008
-9
-430

-405

-318

15,281

16,083

16,803

17,682

18,556

—251
— 1,523
-7

— 50
—18

- 6

-16

-70

-70

-70

-70

-21

-21

-22

-22

-290

-478

-659

-807

—1
—18

-4
-25

-19
-26

-53
-27

-96
-26

—16
—

-64

-80
-4

-74
-7

-73
-8

—121
544

-1

210

THE BUDGET FOR FISCAL YEAR 1991

MANDATORY PROGRAM REFORMS: CHANGE FROM BASELINE—Continued
(Outlays in millions of dollars)

1991
Credit checks on borrowers age 21 and older....
Graduated repayment options
Allow States to garnish defaulter wages
Restrict "ability to benefit" eligibility
Medicaid:
Expand managed care
Effect of floor on SMI premium
Medicare:
Increase HMO payments to 100 percent of
AAPC
Reform Direct Medical Education payments
Hospital Insurance (HI):
Set rural hospital capital reimbursements
at 85 percent
Set urban hospital capital reimbursements
at 85 percent
PPS update at 4.1 percent
Set indirect Medical Education factor at
4.05 percent
Limit payments for intern/resident-to-bed
ration
Eliminate return on equity payments to
skilled nursing facilities
HI premium
Supplementary Medical Insurance (SMI):
Extend prior authorization authority to
carriers
Physicians:
Reduce payments for overpriced procedures
Update primary care services only
Reduce payments for overpriced localities
Cap payments for technical component
of diagnostic tests
Extend and make permanent payment
limits on new physicians
Eliminate duplicate payments for physician assistants
Limit radiology fee schedule to 90 percent of national average
Limit payments for technical radiology
component
Limit anesthesia payments to 90 percent
of national average
Limit payments for supervised anesthesia
Reform payments for assistants-at-surgery
Limit payments for surgical global fees



1992

-4

1993

-11

-23

1994

1995
-44
-12
-14
-37

-2
-7

-6
-20

-38
-6
-10
-33

25
0

95
65

25
150

0
255

0
380

180

255

275

300

325

-205

-215

-240

-250

-270

-170

-210

-230

-250

-270

-1,360
-640

-1,720
-820

- 1 880
-890

-2,050
-920

-2,220
-1,020

-1,030

-1,300

-1,420

-1,540

-1,680

-10

-10

-10

-10

-10

-70
2

-80
2

-80
3

-80
3

-90
3

-64

-66

-68

-70

-71

-110
-450

-180
-800

-210
-1,050

-240
-1,175

-260
-1,300

-50

-80

-100

-110

-120

-20

-30

-30

-40

-50

-50

-80

-100

-110

-120

-5

-10

-10

-10

-10

-110

-205

-235

-265

-295

-40

-70

-70

-80

-90

-50

-100

-110

-120

-140

-70

-120

-130

-150

-170

-120
-50

-160
-90

-180
-100

-200
-110

-220
-120

—
—

- 1

—

- 1

V. REFORMING MANDATORY PROGRAMS

211

MANDATORY PROGRAM REFORMS: CHANGE FROM BASELINE—Continued
(Outlays in millions of dollars)
1991

Outpatient Departments:
Set outpatient reimbursement rate at 80
percent
Reduce outpatient payments by 10 percent
Durable Medical Equipment:
Establish enteral-parental fee schedules....
Update for fee schedules below caps only..
Limit oxygen payments to 95 percent of
fee schedule
Pay rental items at 120 percent of allowed charges
Set national payment limit at 100 percent of median
Lower national limit on lab payments/
update for labs below caps only
Extend ESRD Medicare secondary payer
Set floor on SMI premium at 25 percent of
program costs
Subtotal, Medicare
PMA—debt repayment reforms
Public Health Service Commissioned Officers
Accrual to the commissioned corps retirement fund
Railroad Retirement:
Return pension program to private sector
COLA proposal
Finance 25 percent of windfall benefits from
rail pension fund
Rural Housing Insurance Fund
Social Security:
Tax refund offset
Eliminate advance tax transfers
Pre-effectuation review requirements
Coverage of adopted children
Conform Railroad SSEB with OASDI
Social Security Integrity and Debt Reduction
Fund
Special Assistance to Puerto Rico:
Reauthorization
Reform

1992

1993

1994

1995

-100

-130

-150

-170

-200

-570

-770

-900

-1,050

-1,210

-10
-20

-15
-30

-20
-30

-20
-40

-20
-40

-20

-30

-40

-40

-40

-90

-140

-160

-170

-190

-110

-200

-220

-250

-270

-60
-30

-110
-40

-130
-40

-150
-50

-170
-50

-673

-1,751

-3,129

-4,808

-5,468

-8,227

-10,306

-12,546

-15,196

-966

-942

-942

-899

-867

183

190

198

205

211

—

—

-37

—

-70

—

-95

—

-121

—

-145

80

78

75

71

68

-5

-107

-213

-335

-467

-79

-97

-27

-18

-18

—

—

-2

-5
1
64

—

62
—

—

—

—

—

-5
1
66

-6
2
68

-8
2
69

14,100

53,600

101,800

937
-114

937
-112

937
-112

937
-112

937
-112

-55

-110

-165

-165

-165

Trade Adjustment Assistance:
Cash benefits
Training

-119
-21

-163
-58

-163
-74

-162
-75

-166
-76

Veterans:
Limit inheritance of benefits by remote heirs..

-157

-175

-180

-184

-187

SSI—fee for Federal administration of State
supplement




212

THE BUDGET FOR FISCAL YEAR 1991

MANDATORY PROGRAM REFORMS: CHANGE FROM BASELINE—Continued
(Outlays in millions of dollars)
1991

Pensions for hospitalized veterans
Eligibility verification
Third party medical reimbursement
Require housing downpayment
Include housing resale losses in net-value
Eliminate Manufactured Home Loan. Program
File MHLP claims upon receipt of resale
price
Other Mandatory Changes
Total changes from baseline*
Adjustments for:
Food Stamps and Assistance to Puerto Rico
Social Security Integrity and Debt Reduction
Fund
Total mandatory program savings

1992

14
-61
-392

1993

1994

1995

14
-149
-537
-6
-46

14
-207
-676
-22
-74

15
-215
-764
-32
-123

15
-215
-775
-44
-122

-2

-4

-6

-8

-5

-4

-3

-2

-1

-74

-74

-37

-79

-122

2,287

-2,881

7,432

43,905

88,709

-16,218

-17,020

-17,740

-18,619

-19,493

—

—

-14,100

-53,600 -101,800

-13,901

-19,901

-24,408

-28,314

—

-81
—

-32,584

* Does not include the following amounts for the Postal Service fund, which are not included in the baseline
(in millions of dollars): 1991, $1,721; 1992, $692; 1993, $126; 1994, $ - 9 2 ; 1995, $ - 3 7 6 .




VI. ACKNOWLEDGING INHERITED
CLAIMS




213




I

VI.A. ACCOUNTING FOR DEBT AND
UNFUNDED ANNUITIES
Federal policies in the past have produced
liabilities for the present, and Federal policies
in the present are producing liabilities for the
future. This is not unnatural. A healthy government extends beyond generations—as do
both its liabilities and the returns on its investment. It is important, however, to assess
the pattern of overall liabilities with a view
toward ensuring that the burdens left to the
future are reasonable.
Debt is the most explicit and legally binding
obligation of the Federal Government. The
Government owes $2.2 trillion of principal to
the people who have loaned it the money to
pay for past deficits. This year it will pay an
estimated $176 billion of net interest. The
present deficit is continuing to increase the

amount of debt, although less rapidly than several years ago.
Annuity programs have also created large
and growing obligations on future taxpayers.
The Government spent $382 billion in 1989 for
social security, medicare, and Federal employee retirement programs, and the budget estimates it will spend $433 billion in 1991. Although these obligations may be changed by
law, and some modest changes are proposed
for some of them in this budget, they are substantially a moral obligation to the people who
are counting on them for future support. These
programs are projected to become much larger
relative to the economy in future decades than
they are now. This section of the budget assesses these inherited claims.

DEBT
Debt has expanded vastly since World War
II as households, businesses, and governments
have borrowed to finance the accumulation of
assets and other expenditures. As depicted in
the following chart, total credit market debt
(public and private) grew at about the same
rate as GNP from around 1950 through 1981.
The share of Federal debt fell sharply, while
the shares of household and business debt rose
considerably, but the overall total maintained
a stable proportion of GNP.
During the past few years, however, total
debt increased as a percentage of GNP every
year. Federal debt as a percentage of GNP rose
most markedly, returning to the levels of the
early 1960s, before starting to decline recently.
But household and nonfinancial business debt
also increased faster relative to GNP than in
the postwar period as a whole. The following
discussion describes the build-up of household,
business, and Federal debt and evaluates its
significance. It also documents the decline in
the relative size of the Federal debt estimated
to occur under the policies that are proposed
in this budget.



HOUSEHOLD DEBT
The household sector is the second largest
borrower in the economy, with an estimated
total debt of $3.4 trillion by the end of 1989.
Over two-thirds of household debt is home
mortgages; over one-fifth is installment credit.
Total household debt has grown faster than
disposable personal income, especially in the
1980s. The ratio of debt to income is estimated
to reach a high of 88 percent in 1989, up from
73 percent a decade earlier. This ratio has
been on an upward trend for decades, setting
new highs in 27 of the past 40 years. Increased
reliance on credit cards as a substitute for currency and checks, and the lengthening maturities on automobile and other loans, have raised
the ratio but have not increased the burden of
the debt in the same proportion.
Whether the consumer is overextended depends not only on income flows, but also on
the assets that can be drawn upon to meet
monthly payments. Households' extensive
holdings of homes, land, and consumer dura215

216

THE BUDGET FOR FISCAL YEAR 1991

CREDIT MARKET DEBT RELATIVE TO GNP
Percent

CALENDAR YEAR

bles make them the largest owners of physical
capital in the country. Indirectly, households
own almost all of the Nation's physical capital
through their holdings of financial assets. For
every dollar of tangible assets owned by the
household sector, it also holds $1.90 of financial assets. The fastest growing financial assets
in this decade have been stocks, pension funds,
life insurance reserves, and the debt of other
sectors. In total, households hold $21 trillion of
assets, more than five times larger than their
total liabilities.
NONFINANCIAL BUSINESS DEBT
The debt of nonfinancial businesses has been
growing at about the same rate as that of
households. By the end of 1989, it reached $3.5
trillion, of which $2.1 trillion was owed by corporations. Noncorporate nonfarm businesses
had $1.3 trillion of debt, with the remainder
accounted for by farms.
The debt of the noncorporate nonfarm sector
is dominated by the debt of real estate partner


ships. Almost all of the increase in the debt of
this sector is due to the value of mortgages,
which account for three-quarters of the sector's
debt. Debt has been increasing twice as fast as
total assets, implying a substantial increase in
leveraging. In contrast, the farm sector has
had an absolute decline in debt since 1983,
although at the same time there has been a
large drop in land prices and net worth. Nevertheless, the ratio of total farm liabilities to
net worth has been declining since the mid1980s and is now close to its level in the early
part of the decade.
Among corporations, debt growth has been
stimulated by the increasing acceptance of
below-investment-grade bonds. These have
greatly expanded the ability of corporations to
substitute debt for equity, fueling a boom in
merger and acquisition activity. Since the end
of 1982, $567 billion of equities have been retired, while corporations have added $1,114 billion of debt. On a book value basis, the ratio of
debt to equity is now near a record high. How-

VI.A.

ACCOUNTING FOR DEBT AND UNFUNDED ANNUITIES

ever despite the net retirement of shares, the
more-than-tripling of stock prices since 1982
has raised the market value of outstanding
equity by almost as much as the increase in
debt. As a result, the debt/equity ratio measured at market value is at a level substantially
below its peak in the 1970s.
The rapid rise in corporate debt has raised
concerns that the sector has become more vulnerable to high interest rates or recession,
which would make it more difficult for debtladen firms to avoid bankruptcy or default.
The interest coverage ratio, which measures
the weight of interest payments on corporate
cash flow, is now 19 percent; that is abnormally high for this point in an economic expansion. In previous cycles, the ratio fell until a
cyclical peak was reached, and rose only when
earnings had declined. The burden of interest
payments is now as heavy on firms as it ever
was at the trough of previous recessions.
This might suggest that debt-laden firms
have left themselves highly exposed if the economic environment becomes less favorable.
However, this conclusion needs to be tempered
by the fact that mergers and acquisitions, as
well as leveraged buyouts, have tended to
occur in relatively less cyclical industries.
These industries typically have smaller-thanaverage declines in production and cash flow
during recessions.
FEDERAL DEBT
Federal debt held by the public has tripled
since 1980, reaching $2,189 billion at the end of
1989. Its growth was particularly rapid
through 1986, increasing at an annual rate of
16 percent. The rate of increase was cut in half
from 1986 to 1989, and further deceleration is
projected for the next several years.
At the end of World War II, Federal debt
equalled more than 100 percent of GNP. From
then until the 1970s, Federal debt grew gradually, but, due to inflation, it declined significantly in real terms. Because of an expanding
economy as well as the inflation, Federal debt
decreased almost every year as a percentage of
GNP. With households and businesses both
borrowing heavily, Federal debt also decreased
as a percentage of total credit market debt.


http://fraser.stlouisfed.org/
250-298 O - 1 9 9 0 - 7
Federal Reserve Bank of St. Louis

QL3

217

During the 1970s, large budget deficits
emerged as the economy was disrupted by oil
shocks and recessions. The nominal value of
Federal debt more than doubled and, despite
high inflation, the real value of Federal debt
increased by about a fifth. The debt to GNP
ratio stopped declining by the middle of the
decade.
The growth of Federal debt accelerated
during the 1980s. Budget deficits were high.
With inflation successfully reduced, the growth
in nominal debt meant a growth in real debt
as well. The ratio of Federal debt to GNP rose
from 27 percent in 1980 to a peak of 43 percent
in 1988 before starting to decline in 1989,
though the 43 percent peak was still well
below the ratio that existed from 1945 to 1960.
The ratio of Federal debt to total credit
market debt also increased up to 1986, though
to a lesser degree, before starting to decline.
Under the policies proposed in this budget,
the total Government budget would be balanced in 1993, and debt would begin to be
retired. By 1995, the Federal debt would be
virtually the same in nominal terms as in
1989. In real terms, it would be a fifth less.
Federal debt as a percentage of GNP would
have declined from a peak of 43 percent to 29
percent—its 1970 level. And net interest would
be a much smaller drain on the budget, accounting for only 9.2 percent of total outlays.
The net effect of Federal borrowing depends
partly on how the Government uses the borrowed funds. To the extent that borrowing finances additional investment with a high rate
of return, the combination of more debt and
more capital is productive. It is impossible to
definitely attribute specific outlays to the borrowing. The funds from borrowing and general
taxes are mixed together.
However, the data do not reveal that any
upsurge in Federal investment accompanied
the upsurge in Federal borrowing. Investment
rose in absolute terms but was about the same
proportion of total Federal outlays at the end
of the 1980s as at the beginning; and investment outlays, while significant, were a modest
proportion of total outlays.

218

THE BUDGET FOR FISCAL YEAR 1991

TRENDS IN FEDERAL DEBT
(Dollar amounts in billions)
Debt held by the public 1
Current
dollars

1950
1955
1960
1965
1970
1975
198 0
198 1
198 2
198 3
198 4
198 5
198 6
198 7
198 8
198 9
1990 estimate
1991 estimate
1992 estimate
1993 estimate
1994 estimate
1995 estimate

219.0
226.6
236.8
260.8
283.2
394.7
709.3
784.8
919.2
1,131.0
1,300.0
1,499.4
1,736.2
1,888.1
2,050.2
2,188.9
2,298.7
2,357.3
2,383.0
2,365.2
2,300.4
2,188.7

Debt held by the public as
a percent of:

Pn„e+a„f

1982
dollars 2

921.0
839.0
761.3
772.4
682.7
686.2
837.0
841.9
919.2
1,085.1
1,201.5
1,344.4
1,516.2
1,600.1
1,686.1
1,727.7
1,744.2
1,716.5
1,668.5
1,596.9
1,502.1
1,386.2

Credit

GNP

82.1
58.6
46.7
38.8
28.6
25.9
26.6
26.3
29.3
34.0
35.3
37.9
41.5
42.6
42.8
42.5
41.9
40.0
37.7
34.9
31.9
28.6

market
debt 3

Net interest
asoa percent
f total
outlays

54.3
43.1
33.5
26.9
20.8
18.4
18.7
18.8
20.2
22.5
22.7
23.2
23.6
23.3
23.1
22.8
—
—
—
—
—

—

11.3
7.1
7.5
7.3
7.4
7.0
8.9
10.1
11.4
11.1
13.0
13.7
13.7
13.8
14.3
14.8
14.7
14.0
12.9
11.9
10.6
9.2

1
The relationship of Federal debt held by the public to gross Federal debt and debt subject to limit, which include
the debt held by trust funds and other Government accounts, is explained in Section Two, Part IV-F, "Technical
Perspectives on Expenditures, Off-Budget Activities, Capital Outlays, and Borrowing."
2
Debt in current dollars deflated by the GNP deflator for the fiscal year with FY 1982 = 100.
3
Source: Federal Reserve Board flow-of-funds accounts, modified to be consistent with budget concepts for the
measurement of Federal debt.

FOREIGN CAPITAL INFLOW
Some of the debt owed by Americans is held
by foreigners, but this debt is only part of the
claims of foreigners on the United States. Debt
instruments such as Treasury and corporate
bonds comprise about one-third of all foreign
assets in the United States. The indirect holding of debt through bank deposits accounts for
another third. The remaining third consists of
direct investment in physical capital and corporate equity.




Both foreign assets in the United States and
U.S. assets abroad have increased steadily in
the postwar years. However, as discussed in
Part III-A, there was a surge of foreign capital
into the United States during the 1980s. This
was a necessary consequence of the shortfall of
domestic saving compared to domestic investment. Before 1985, U.S. assets abroad exceeded
foreign assets in the United States. The official
statistics show that foreign assets have been
larger since that time, and the excess of foreign assets has increased steadily. By the end
of 1988, the book value of foreign assets in the

VI.A.

ACCOUNTING FOR DEBT AND UNFUNDED ANNUITIES

United States exceeded U.S. assets abroad by
$533 billion.
Measurement problems probably exaggerate
the difference between U.S. assets abroad and
foreign assets in the United States. The most
serious problem is that direct investment
assets (real estate, plant, and equipment) are
recorded at book rather than market value.
Book value is much closer to market value for
foreign direct investment in the United States
than it is for U.S. investment abroad because
the foreign investment is more recent. Unreported capital inflows to the United States, on
the other hand, lead to an understatement of
the assets held by foreigners. On balance, the
U.S. net international investment position appears understated. However, there is no doubt
that the trend has been downward in recent
years.
OVERALL EFFECTS
Borrowing may be thought most appropriate
when it finances additional capital investment.

If that investment has a rate of return as high
or higher than the interest rate, the burden of
servicing the debt is matched over time by the
benefits from the investment. As a result, the
borrower can service the debt without being
burdened. This not only makes the debt more
secure, but it also ensures that the borrower's
future well-being is improved or at least not
depressed by having borrowed in order to pay
for the spending.
Part III-A discussed the recent trend of investment. The accelerating growth of debt in
the United States has not been matched by
accelerating investment. The growth of capital
services has remained in line with its postwar
trend. Federal investment has at best been
roughly stable as a share of total Federal outlays. Thus for the economy as a whole the
above-normal growth in debt does not seem to
have financed additional capital investment
beyond what might have been expected. This
has led to some concern that the future output
and living standards of the Nation may be

U.S. NET INTERNATIONAL INVESTMENT POSITION
$ Billions




219

CALENDAR YEAR

220

THE BUDGET FOR FISCAL YEAR 1991

reduced. Although there is reason for this concern, sound policies now can increase saving

and productivity, while making future debt
service manageable.

UNFUNDED ANNUITIES
The Federal Government has established a
number of programs for the elderly, which consume a high and rising share of the budget.
The budget estimates that the Government
will spend $433 billion in 1991 for social security, medicare, and Federal employee retirement. This is 35.1 percent of total outlays and
7.3 percent of GNP. Reforms to mandatory
programs are discussed in Part V.
Federal responsibilities will grow over the
next 20 years, but probably not much faster
than the economy. As the baby boom generation retires in the following 20 years, however,
from 2010 to 2030, the growth of outlays for
these programs will accelerate in relation to
the past, to total Federal outlays, and to GNP.
Under present projections, the claim of these
programs on the Nation's resources will then
rise to a permanently higher level.
Estimates of the size of these claims differ
substantially depending on demographic and
economic assumptions and on the time horizon
and method of estimation. Estimates made a
few years from now will undoubtedly differ
from those today. Based on intermediate assumptions, the social security actuaries have
estimated that the present value of retirement
and disability benefits over the next 75 years
is $16.5 trillion, and the present value of hospital insurance is $1.8 trillion. Based on different
assumptions and methods, the present value of
civil service and military retirement benefits is
estimated at $1.0 trillion.
Actuarial Deficiency of Annuity Programs
Some provisions have already been made to
pay for these liabilities, but they differ both in
their basic nature and in their degree of adequacy. Every year, the Department of the
Treasury reports on the actuarial deficiency
for each of these programs. Many of the estimates are made on the basis used by private
pension plans to assess their actuarial liability.
This method calculates the present value of
future benefits for current employees, and subtracts from it the present value of assets and



future contributions on behalf of or from current employees only.
Calculated this way, the actuarial deficiency
for social security in September 1989 was $6.1
trillion. But this calculation is not useful for
social security. A private firm can go out of
business, but the Federal Government is ongoing and so is the social security program.
The continuing contributions by future employees and their employers finance the benefits for current employees when they retire.
With an on-going program, future social security payroll taxes, the income tax receipts on
social security benefits, and the interest on the
Treasury securities held by the trust funds will
cover most of the cost of future benefits. From
the perspective of the trust funds, the present
value of their income over the next 75 years is
$15.6 trillion, leaving an actuarial deficiency of
$850 billion in September 1989.
It is, of course, very difficult to foresee economic and demographic conditions 75 years
ahead. Other reasonable assumptions would
yield different estimates; based on the range of
assumptions now used by the actuaries, the
deficiency ranges from an actuarial surplus of
$2.3 trillion to an actuarial deficit of $3.7 trillion. Indeed, if the conditions of the last 75
years, including the inflation and slow productivity growth of the 1970s, were to be repeated
in the years ahead, the deficiency would probably be even larger. Clearly, strong economic
growth and low inflation are crucial to social
security—especially given the size of the program relative to the economy and the budget.
If future economic and demographic conditions are exactly as assumed by the actuaries
in their intermediate assumptions, the actuarial gap of $850 billion over the next 75 years
would seem to be a problem of manageable size
in relation to the size of the economy over that
extended period.
For medicare, the Treasury shows an actuarial deficiency based on intermediate assump-

VI.A.

ACCOUNTING FOR DEBT AND UNFUNDED ANNUITIES

tions of $252 billion in 1988, almost a third as
much as social security despite the much
smaller current size of hospital insurance compared with social security. In this program, the
aging of the population is augmented by the
rapid increase in health costs to increase the
actuarial gap.
The estimates of actuarial deficiency that
Treasury reports for Federal employee retirement programs incorporate only the benefits
that have actually been earned to date and the
contributions that have actually been made by
agencies and employees into the civil service
and military retirement funds. For 1987, the
latest year with data, the deficiency of the civil
service retirement and disability fund was
$369 billion; for 1988, the deficiency of the
military retirement fund was $389 billion.
Together, they appear almost as large as the
deficiency for social security. But the appearance is very misleading. Deficiency estimates
are also made for these funds on essentially
the same basis as the method which sets social
security's deficiency at $6.1 trillion; that is,
they assume that future contributions will be
made and future benefits will be earned by
present Federal employees. On this basis, the
estimates of actuarial deficiency are $486 billion for civil service and $498 billion for military retirement.
Most basically, these Federal employee pensions are mature systems. Unlike social security, the ratio of beneficiaries to workers in Federal employee retirement systems is steady or
even declining. There should be no problem
paying these benefits as they come due, though
these annuities are, in the accounting sense,
underfunded.
Costs of An Aging Nation
The United States is an aging Nation. The
median age is at an all-time high, yet if the
current Census projections prove to be correct,
it will never again be as low as it is now. Life
expectancy has risen dramatically in this century and is continuing to rise. As recently as
1930, life expectancy at birth was 60 years; by
1970 it was 71 years, and by 1988 it was 75
years. In 1930 only 5.4 percent of the population was 65 years or older; by 1970 it was 9.8
percent, and by 1988 it was 12.4 percent.



221

Between now and 2010 the number of people
over 65 will rise at only half the postwar pace
as the small prewar depression generation retires. However, as the postwar baby boom generation reaches 65 between 2010 and 2030, the
number over 65 will increase by two-thirds,
from 39 million to 66 million. Assuming the
Census intermediate projections, they will
comprise about 22 percent of the population.
The cost of retirement has been increasing
as the Nation ages. Its duration has been
stretched not only because people are living
longer after age 65 but also because a growing
proportion has been retiring before age 65. At
age 65, men could look forward to 13 additional years of life in 1970, 15 years now, and 17
years in 2030, according to the middle Census
mortality figures. For women, the years after
age 65 increased from 17 to 19 to 22. At the
same time, the proportion of men who retire
before 65 has risen from 17 percent in 1970 to
33 percent in 1989; this increases the number
collecting benefits and reduces the number
paying taxes.
The cost of medical care is rising at an even
faster rate, in part because of the advances in
technology that have helped extend life. The
elderly are the most intensive users of medical
services. Those over 65 use over a third of all
medical care, 3 times their proportion of the
population. People over 85 are still more intensive users; these elderly people are projected to
rise from 1.2 percent of the population now to
2.7 percent in 2030.
The burden of the annuity and medical care
programs will therefore become significantly
greater starting around 2010. The number of
social security beneficiaries per 100 covered
workers, an indicator of the burden, will increase from 30 now to an estimated 51 in 40
years. One of the greatest economic and social
challenges our Nation will face is how well we
prepare for the forthcoming increase in the
cost of the elderly population.
Options
The options for dealing with this demographic shift are limited. One alternative would be
to meet the claims of the annuity programs by
levying the taxes each year that are needed to
pay that year's promised benefits. Such pay-as-

222

THE BUDGET FOR FISCAL YEAR 1991

you-go finance was approximately the way
social security operated until a few years ago.
This method, however, would eventually force
large increases in Federal taxes relative to
workers' incomes. It could create a major conflict in the future between a large generation
of retirees expecting to receive the benefits
and a relatively small generation of workers
who are producing the output and paying the
taxes to provide the benefits.
A second alternative would be to reduce the
benefits, to include a larger proportion of benefits in taxable income, or to raise the normal
retirement age in line with life expectancy,
while continuing to permit early retirement
with reduced benefits. Under current law, the
normal age of eligibility for social security benefits is already scheduled to increase from 65
to 67 between 2000 and 2027. Health may improve along with longevity, and the demand
for experienced workers may be strong as
growth in the labor force slows.
A third—and preferred—alternative is to
expand investment and thereby economic
growth so that in the future the Nation can
meet inherited claims with moderate tax rates.
Ways to increase economic growth over the
rates that would otherwise prevail are discussed in Part III. The following section discusses the benefits of funding annuities and
using the social security surplus to promote a
higher rate of capital formation.
FUNDING ANNUITIES
Funding is the act of setting aside resources
to pay future pension claims. Current funding
on an accrual basis requires setting aside adequate resources to finance the increase in the
present value of future claims earned during
the same period. If a private pension plan is
being funded, the employer and sometimes the
employee save out of income each year in
order to build up pension fund assets. These
assets are invested, earn income, and can be
drawn upon to pay future claims. Such funding adds to national saving, although a part is
offset to the extent that there are decreases in
other personal saving for retirement. The resulting increase in the rate of capital accumulation increases economic growth and helps to
provide the resources to support retirement



benefits without overburdening future workers.
For a Federal program, in contrast, "funding" may have two quite different meanings—
accounting and economic. In an accounting
sense, it means that a program is accumulating funds in an account earmarked for the
payment of future benefits. As explained
below, such funding does not mean that the
program's accumulation of assets adds to national saving and investment. Funding in an
economic sense only occurs if the balance for
the budget as a whole is improved by the
"funding"; the Federal deficit must be reduced
or a surplus increased so as to provide additional national saving.
Some examples will illustrate the implications of funding in the accounting sense and in
the economic sense.
First, take the case of a Federal employee
retirement program which is not funded in
either sense, such as military retirement
before 1985 (or the Public Health Service commissioned officers currently). While employees
worked and accumulated rights to retirement
benefits, nothing was recorded in the budget.
When they retired, each year's benefits were
financed from the general fund.
Second, take the case of a Federal employee
retirement program which is fully funded in
the accounting sense, such as the new Federal
employee retirement system (FERS). While
employees work, employer and employee payments made to the civil service retirement and
disability fund are adequate (along with future
interest earnings) to cover the future benefits
earned by the employee during the same
period. Agency outlays would be higher than
under the first case, reflecting the full cost of
the agency's workforce. These payments would
not show up as an increase in outlays for the
budget as a whole, however; they would be
offset by a deduction for the amount collected
by the retirement fund. The budget as a whole
would appear the same as under the first case;
only benefit payments from the fund to current retirees would show up as outlays.
What are the implications of funding in the
accounting sense? Acknowledging the full cost
of its workforce provides the agency with the
information and incentives to select the most

VI.A.

ACCOUNTING FOR DEBT AND UNFUNDED ANNUITIES

efficient combination of labor and other resources to get the job done. It also provides the
President and the Congress with the appropriate cost information and incentive to allocate
budget resources among programs. But there is
no reason to suppose that it has any more
effect on the Federal deficit than the first case.
Finally, there is social security. The social
security trust funds currently receive earmarked taxes from the public that exceed outlays. If the social security surplus reduces the
total budget deficit, it reduces Federal dissaving, adding to national saving and investment.
This will not happen as long as the social
security surpluses simply finance additional
Federal spending. Without a mechanism to
prevent this, the social security surplus in
effect reduces the need for other taxes or
allows higher levels of other expenditure, so
that Federal dissaving or saving is unchanged.
There is a large reserve in the social security
trust fund but national saving and investment
are unchanged, the capital stock is not raised,
and productivity is not improved. No funding
occurs in an economic sense; no provision is
made in the present to ensure that future taxpayers can pay for inherited claims.
SOCIAL SECURITY
Social security consists of two trust funds—
the old-age and survivors insurance (OASI)
trust fund and the disability insurance (DI)
trust fund—which together are estimated to
spend $265 billion in 1991 in providing income
to retirees, disabled workers, their dependents,
and survivors.
When the OASI trust fund neared insolvency in 1983, Congress enacted sweeping changes
in financing and benefits. These reforms, recommended by a bipartisan commission and
supported by President Reagan, were designed
to ensure the solvency of the social security
program over the long-run as well as through
the 1980s.
The Social Security Amendments of 1983
were successful. A deficit of $8 billion in 1982
was converted to a surplus that rose to $52
billion by 1989. In 1991, social security income
(primarily payroll tax receipts) is estimated to
exceed social security outgo (primarily benefits) by $80 billion, and the trust funds are



223

estimated to hold $299 billion in reserves by
the end of the year.
In earlier times, when social security was
financed on a pay-as-you-go basis, a reserve of
this size would have been more than adequate.
It would protect the trust funds against shortterm adverse events, like a recession. But one
effect of the 1983 reforms is that social security financing was moved away from the traditional pay-as-you-go approach and toward a
form of "accrual funding."
The new approach to social security financing is driven primarily by the demographic
trends discussed above. The large number of
people born in the two decades after World
War II, the baby boomers, are now entering
their prime working years. For the next 20
years, while they work and pay social security
taxes on their wages, the trust funds should
grow dramatically. Current income will not
only pay for current social security benefits
but will also provide a huge surplus. The
budget estimates a social security surplus of
$137 billion in 1995; the latest trustees' report,
using intermediate economic and demographic
assumptions, projects an annual surplus averaging just above 2 percent of GNP from the
late 1990s until 2015.
But while the baby boomers are providing
surpluses to build up trust fund reserves today,
they are also earning social security retirement credits. And when they begin leaving the
workforce around 2010, they will claim the
benefits that are being promised to them
today. The reserve that is currently building is
needed to pay retirement benefits in the succeeding decades.
The influence of these demographic trends
on social security is evident in the trust fund
income, outgo, and balances projected by the
actuaries for the latest trustees' report. As depicted in the first of the two accompanying
charts, under intermediate assumptions the
trust fund income excluding interest will
exceed outgo every year until 2018. After 2018,
as more and more baby boomers reach retirement age, outgo exceeds non-interest income
by increasing amounts and by 2030 exceeds all
income. The trust fund balances continue to
rise so long as total income exceeds outgo.
They reach a peak relative to GNP of 30 per-

224

THE BUDGET FOR FISCAL YEAR 1991

cent in 2020, and peak in dollar amount a
decade later, but then decline as outgo exceeds
the total of all income. The decline is rapid,
and the trust funds are projected to become
depleted in 2046. The demographic changes are
permanent, under the actuaries' projection of a,

stable fertility rate, and the elderly continue
to increase slowly relative to the working age
population. As a result, the social security deficit continues to grow larger and larger as a
proportion of GNP to the end of the projection
period in 2065.

SOCIAL SECURITY OUTGO AND INCOME
RELATIVE TO GNP
Percent
MM OUTGO
IZZ NON-INTEREST
INCOME
CD INTEREST
INCOME

on

u s

P

mk mk

IH

FTol

6-

«
*

3-

lUf

H

IIt

1990

2000

2010

ai
2020

2030

I

2040

Not»: Thar* i« no interest Incoma aftar 2046 ^ » e « u t * tht balaneas »rt u i * d up.




WJM

2060

rai

2060

VI.A.

ACCOUNTING FOR DEBT AND UNFUNDED ANNUITIES

225

SOCIAL SECURITY ASSETS RELATIVE TO GNP
Percent

Note: Balances are used up after 2045.

More pessimistic or optimistic assumptions
would alter the projected income and outgo
streams, but the basic trends remain. Under
more optimistic assumptions (such as faster
economic growth and higher birth rates), the
actuaries estimate that the trust funds would
remain solvent throughout the 75-year projection period, but outgo would exceed non-interest income during the peak years of retirement. Under more pessimistic assumptions,
the trust funds would still build a huge reserve
but the ultimate size would be much smaller,
the pace of depletion would be accelerated, and
the trust funds would run out of reserves in
2025.
A PROPOSAL FOR ECONOMIC FUNDING
In view of the need for real resources to pay
the future claims for annuities—and health
care—for the elderly, and particularly in view
of the sharp increase in the burden of these
payments on the working population between
2010 and 2030, the President proposes to phase



in the funding of social security in the economic sense. Fiscal policy would follow the
Gramm-Rudman-Hollings deficit reduction
path to 1992. Thereafter:
• The social security trust funds would continue to build up reserves exactly as at
present. But, in addition a new Social Security Integrity and Debt Reduction Fund
would be created and used to reduce Federal debt held by the public, thereby increasing saving and investment and assuring the future capacity to pay social security obligations.
• In 1993, $14.1 billion—an amount equal to
15 percent of the currently expected social
security surplus, including interest earnings—would be paid into this fund from
the general fund. The payment would be
counted as an outlay for purposes of the
budget and the G-R-H deficit calculation.
• In 1994, the amount paid into the fund
would be $53.6 billion, equal to 50 percent

226

THE BUDGET FOR FISCAL YEAR 1991

of the currently expected social security
surplus. In 1995, $101.8 billion, equal to 85
percent, and in 1996 and thereafter, an
amount equal to all of the currently expected social security surplus, would be
paid into the new fund and used for debt
retirement.
• G-R-H targets would be set to balance the
budget as newly defined from 1993 on. If
the targets were met, the entire currently
expected social security surplus (or the
phased-in portion) would be added to Federal saving, through retirement of Federal
debt held by the public.
• The surpluses used to calculate the
amount paid into the fund were those projected under intermediate II-B assumptions for the OASI and DI trust funds in
the 1989 annual report of the Social Security Board of Trustees. The projections
would be updated by the annual report in
the year 2000 and every 5 years thereafter.
This proposal would truly preserve the trust
fund buildup for its intended purpose—the
payment of benefits to the baby boom generation. It would be more effective than proposals
to exclude social security from the G-R-H deficit calculation. Those proposals would create a
temptation to raid social security by increasing
benefits, decreasing receipts, or using the surplus for other purposes. Raiding social security
would not increase the G-R-H deficit, so G-R-H
would not be a constraint and the future capacity to meet social security obligations would
be eroded. Further advantages of this proposal
are explained in Part VII-A, "Reforming the
Budget Process/'
This proposal would use the current surpluses of the social security trust funds for Federal
debt reduction, raising capital formation, as
discussed in Part III-A. Estimates based on
economic growth accounting suggest that the
capital stock could be increased by 20 percent
and real GNP could be 5 to 10 percent higher
by 2030. To the extent GNP and incomes are
higher, the burden on future workers is lower.
MEDICARE
Medicare consists of two trust funds—the
hospital insurance trust fund (HI) and the sup


plementary medical insurance trust fund
(SMI)—that pay for the acute care costs of the
aged and disabled. In 1990, about 30 million
aged and 3.3 million disabled will be covered.
Hospital Insurance
HI is estimated to spend $63 billion in 1991
for the hospital and related care of most individuals age 65 or older and of the permanently
disabled. HI spending grew 11 percent annually in the 1980s and is projected to grow from 8
to 10 percent annually in the 1990s. It is financed primarily through social security payroll tax contributions paid by employers, employees, and the self-employed. HI has had a
surplus for many years, and in 1991 its income
is estimated to exceed outlays by $26 billion.
The balance in the HI trust fund is estimated to be $127 billion at the end of 1991 and to
increase to $239 billion by 1995. These balances are much more than the minimum recommended by the HI trustees, which is 50 percent of estimated annual outlays. However, the
most recent long-range published projections
by the HI actuaries indicate that the present
annual surpluses of the trust fund are temporary. Under intermediate assumptions, HI outlays are projected to exceed income by the late
1990s, and the trust fund will be depleted
shortly after the turn of the century. Subsequently, as the postwar baby boom generation
begins to retire, the deficit will grow even
larger. By around 2050 the financing scheduled
under current law will cover less than half the
projected cost.
These projections demonstrate that the HI
program is paying benefits that cannot be sustained over time at existing tax rates. The payment of benefits at such high levels is made
possible only by the temporary presence of the
baby boom generation in the taxpaying work
force. Part V, Reforming Mandatory Programs,
discusses several proposed reforms that would
reduce the growth of spending.
Supplementary Medical Insurance
SMI is estimated to spend $47 billion in 1991
for physician services and other medical expenses of the aged and disabled. Unlike the HI
program, SMI financing is established annually. Actuarial soundness depends only on
whether assets are sufficient to cover liabilities

VI.A.

ACCOUNTING FOR DEBT AND UNFUNDED ANNUITIES

expected to be incurred by the end of the year.
However, program costs are growing rapidly,
and the Federal share is high.
The annual growth rate in spending was 16
percent in the 1980s, and it is expected to
remain high. Spending has doubled from 0.4
percent of GNP in 1980 to an estimated 0.8
percent in 1990. Even if current growth rates
moderate somewhat, SMI spending is projected
to grow to 3.9 percent of GNP by the middle of
the next century.
Congress initially established that the financing would be divided evenly between premiums paid by the beneficiaries and payments
from general revenue. However, the general
revenue subsidy increased from 50 percent of
program cost in 1973 to about 75 percent in
1983, at which time Congress set a floor on the
premiums equal to 25 percent of cost. The increase in the general revenue share to 75 percent cost $10 billion in 1989. Unless Congress
extends the floor or makes it permanent, as
proposed in this budget, the general revenue
share of SMI spending will grow to about 88
percent by the year 2000.
FEDERAL EMPLOYEE RETIREMENT
AND RELATED PROGRAMS
The Federal Government is much the largest
employer in the country. It operates several
systems of retirement, disability, and medical
care for its former employees. The largest are
the civil service and military retirement and
disability funds; next largest are the payment
of health benefits for annuitants and the Defense Department medical care program for
retired military personnel and their dependents.
The major Federal retirement and medical
care programs are more mature than social
security and medicare. The ratios of beneficiaries to workers are already near their expected peaks, so these programs are not facing the
upsurge of demographic pressure that will increase social security and medicare outlays relative to the economy 20 years from now. Even
so, they represent major claims on future resources. This budget proposes reforms to
reduce the growth rate of Federal civilian and
military pensions, both in 1991 and later,
which are described in Part V.



227

Civil Service Retirement and Disability
The Civil Service Retirement and Disability
Fund covers about 90 percent of all Federal
civilian employees, including civilian employees of the Department of Defense. Total outlays in 1991 are estimated to be $32 billion.
The fund operates two distinct civilian pension systems. The old Civil Service Retirement
System (CSRS) includes civilian employees who
were hired before 1984 and chose not to transfer to the new Federal Employees Retirement
System (FERS). The new system covers employees hired since 1984, plus any previous
hires who chose to transfer. The old system
will gradually phase out of existence, but the
phase-out may take a century to complete. The
income, outlays, and assets of both systems are
commingled, so that the one retirement fund
constitutes a single pool of financial resources
for the two systems.
Employees covered by the old system do not
pay social security taxes or earn social security
credits. Their pension is designed to provide
the equivalent of social security plus an employee pension. In contrast, employees under
the new system are covered by both social security and the new pension system. Their civil
service pensions will be significantly lower, because the pensions will only supplement their
social security benefits and because they can
receive partial employer matching of tax deferred contributions to a thrift savings plan.
The fund as a whole is relatively mature,
i.e., benefit payments are stable compared to
the payroll base. The most recent actuarial
report projects a ratio of benefit outlays to
covered payroll equal to 36.1 percent in 1990.
Assuming constant employment, it is 36.9 percent in 2010, 34.7 percent in 2020, and gradually declines in subsequent decades as retirees
under the old system are displaced by retirees
under the new system.
The old CSRS requires that the agency and
the employee each pay an amount equal to 7
percent of the employee's salary toward the
accruing cost of future retirement benefits;
currently these contributions finance less than
two-thirds of the total cost. The new FERS
charges the full accrual cost, not just part, and
the agency contribution is reflected in agency
budgets.

228
Military Retirement and Disability
Military service pensions were financed
before 1985 from annual general fund appropriations. Starting in 1985, the Military Retirement and Disability Trust Fund was created
and took over responsibility for the pensions
and disability payments of career military retirees, their survivors, and their dependents.
Estimated outlays in 1991 are $22 billion.
The fund has three major sources of income:
(1) The Board of Actuaries of the fund determines what percentage of basic pay is necessary to fund fully all future benefits incurred
in the current period. This percentage is
charged to the payroll of the Defense Department (or other employing agency) and paid to
the fund. (2) The general fund makes an
annual payment to the fund of an amount adequate to gradually pay off the unfunded liabilities for pension rights earned before the fund
was created. (3) All balances in excess of current cash requirements are invested in Treasury securities, which earn interest.
This income greatly exceeds current disbursements. In 1989, the surplus was $14 billion. By charging the employing agency for the
current accruals rather than the cash pension
benefits, the fund improved internal cost accounting and trade-offs between military personnel and other types of expenditure; it also
created incentives that induced the Congress
to reform military pensions.
The military pension system, like the civil
service pension system, is relatively mature.
The most recent actuarial report projects that
the accrual cost of military pensions in 1990
will equal 43.9 percent of basic pay for active
duty personnel and 13.4 percent for reserve
personnel. This percentage will gradually decrease as more and more military personnel




THE BUDGET FOR FISCAL YEAR 1991

are subject to the reformed system enacted in
1986.
Other Pension Plans
Well over 90 percent of all Federal civil and
military career personnel are members of one
of the major pension plans discussed above. In
addition, the Government operates a number
of other pension plans for specialized groups,
such as the foreign service, Federal judges, and
Coast Guard military personnel.
The budget proposes that the Public Health
Service Commissioned Officers Retirement
Fund be converted to an accrual-based system.
This funds retirement benefits to officers, their
dependents, and survivors; it also funds medical benefits to dependents, identical to those
provided to other uniformed services. The proposed change will increase budget authority
for Commissioned Corps retirement, but will
not affect outlays or benefits.
Medical Care for Retirees
Most Federal civilian retirees, as well as employees, purchase medical care insurance
through the civil service employees health benefits program. The Government and the insured individual both pay a share of the premiums. The Office of Personnel Management
pays the Government share for retirees, except
that the Postal Service makes separate payments for its retirees. Agencies are not
charged the accruing liability before the employees retire. Estimated outlays for annuitants in 1991 are $3.1 billion.
The medical system for military personnel
also cares for retired military and their dependents. Virtually all Federal military and
civilian personnel are now required to pay
medicare (hospital insurance) premiums, and
Federal employees and retirees are covered in
the same way as all other participants.

VLB. RECOGNIZING FEDERAL
UNDERWRITING RISKS
The Federal Government is the Nation's
largest source of credit and underwriter of
risk. The credit and insurance commitments
made in the past have produced claims on
today's budget, and the loans and insurance in
this year's budget are potential claims on
future budgets.
Too little attention was paid in the past to
the scope and scale of these commitments, and
often the Government's potential exposure was
understated or ignored. Events of the past few
years, including insolvency of the Federal Savings and Loan Insurance Corporation and
many insured thrifts, the bailout of the Farm
Credit System, and mounting losses in mortgage insurance programs, provide hard evidence of the magnitude of the threat. This
budget reexamines and begins to restructure
Federal credit and insurance programs.
Scale of Commitments
At the end of 1989, the face amount of federally assisted credit and insurance outstanding
was $5.8 trillion. This is 2V2 times the value of
the Federal debt held by the public. In contrast to Federal debt, which is a direct liability
of the Government, assisted credit (except for
direct loans) and insurance are contingent li-

abilities; they generate Government expenditures only if the assisted parties default or
become insolvent. The face value far exceeds
the actual risk of loss, and does not even bear
a constant relationship to it over time or from
program to program.
Most loan guarantees will not default, and,
to the extent that they do, the Government
holds some collateral. Most insured banks and
thrifts will not fail, and, to the extent that
they do, the Government's loss will be limited
by the assets that they own. Most other events
insured against will not occur. Governmentsponsored enterprise (GSE) bailouts may not
be necessary and, if they do occur, the Government outlays will be much less than the GSE
debt because of the GSEs' assets.
Unfortunately, however, defaults and insolvencies are happening with growing frequency.
In 1989, loan defaults and write-offs were $14.4
billion, and insurance losses were $67.2 billion,
of which 96 percent was spent to cover losses
at over 400 insolvent banks and savings institutions. By way of comparison, only 7 years
earlier in 1982, loan defaults and writeoffs
were $3.7 billion, and insurance losses $4.6 billion.

FEDERAL CREDIT AND INSURANCE OUTSTANDING
(Dollar amounts in billions)

Program

1970

1975

1980

1985

1988

1989

Percent
increase
1970-89

Direct Loans
Loan Guarantees
GSE Loans
Deposit Insurance
Other Insurance
Total




51
125
24
445
216

74
189
49
837
187

164
299
151
1,465
831

257
410
370
2,227
1,021

222
550
666
2,819
1,259

207
588
763
2,927
1,286

306
370
3,096
558
495

861

1,337

2,909

4,285

5,516

5,771

570

229

230
Outstanding federally assisted credit and insurance have grown faster in the past quarter
century than the budget as a whole. This rapid
growth—combined with rising losses—suggests
the need to pay closer attention to the risks of
these commitments.
The fastest growing category of Federal
credit assistance has been provided by Government-sponsored enterprises. The GSEs are privately owned, but because they are federally
established, they are perceived by financial
markets to be quasi-governmental. The largest
GSEs support housing credit; others channel
capital to agriculture and education. Some
GSEs are thinly capitalized, and these pose a
bailout risk for the Government.
By far the Government's largest commitment is to Federal deposit insurance. After the
GSEs it has been the most rapidly growing.
The Government also insures $963 billion of
private pensions against insolvency. A variety
of smaller programs insure against crop loss,
flood damage, and other hazards.
Federal loan guarantees have also grown
rapidly. The largest amounts are for home
mortgages insured by the Federal Housing Administration or guaranteed by the Department
of Veterans Affairs. Increasing amounts of student loans are guaranteed by the Department
of Education, and smaller guarantee programs
are scattered throughout the Government.
Direct loans outstanding have declined in
recent years as credit programs have shifted
toward using loan guarantees.
Assessing the Risks
The General Accounting Office expressed
concern about the potential costs posed by
these contingent liabilities in a recent report,
Federal Credit and Insurance: Programs May
Require Increased Federal Assistance in the
Future. Without making specific recommendations, the report discussed the need for strong
financial management systems and observed
that fees and premiums often do not offset
program costs.
But controlling the risks in Federal lending
and insurance depends chiefly on credit poli-v
cies—not just good management. The financial
environment is changing rapidly. Unfavorable
trends are apparent in several sectors assisted



THE BUDGET FOR FISCAL YEAR 1991

by Federal programs. The programs themselves encourage private risk-taking. Policies
must cope with these issues.
Until recently, financial services were provided by insulated sub-industries (commercial
banks, thrift institutions, securities firms),
partly protected from competition by Federal
and State regulation. Only the largest, most
creditworthy customers dealt with capital markets. Other borrowers dealt with financial intermediaries, which had a relative advantage
in assessing credit risk and handling workouts.
These barriers buffered banks and thrifts from
change and helped to maintain profits.
Federal credit programs and Governmentsponsored enterprises originally were created
partly to overcome credit barriers and expand
some groups' access to credit and partly to
subsidize that credit. They were designed to
tap national capital markets and funnel additional, cheaper funds primarily into housing,
agriculture, and education.
Rapid Change.—But the financial service industries are rapidly restructuring. New information technologies and financial innovation
shifted relative advantages and led inevitably
to deregulation. Previously distinct product
lines were blurred, and many geographic barriers were eliminated. Sharp swings in inflation, interest rates, and exchange rates accelerated the changes. Many depository institutions failed to adapt, affecting the deposit insurance funds for years to come.
The GSEs and credit programs accelerated
this transformation of financial services, especially during the past decade. This is clearest
in housing, where the GSEs were innovators.
They developed multi-class mortgage-backed
securities to tap global capital markets. Broadening the range of mortgage investors reduced
the cost of mortgage credit to the borrower.
But lower mortgage rates also squeezed the
profit margins of traditional mortgage lenders,
adding to the difficulties already faced by savings and loans.
Unfavorable Trends.—Moreover, the cost of
fulfilling Federal housing and agriculture
credit commitments is likely to increase in the
near term. In the case of housing, fewer people
will be entering their home buying years in
the next two decades. Reduced demand may

VI.B.

231

RECOGNIZING FEDERAL UNDERWRITING RISKS

slow the increase in housing prices. Mortgage
default rates tend to increase when appreciation slows, increasing Federal mortgage insurance losses. In agriculture, where nearly onethird of farm income is derived from Government programs, further consolidation of farms
is likely. This, in turn, could increase losses on
Federal farm loans.
Moral Hazard.—Finally, a major issue is
raised by the incentive that Government insur-

ance provides for additional risk-taking. For
example, deposit insurance allowed insolvent
thrifts to keep their deposit base and even increase it. Many thrifts used the opportunity to
follow a rapid growth, high-risk strategy,
which greatly added to the cost of resolving
the thrift crisis. Such "moral hazard" increases the long-term cost of these programs
and reduces their net benefit to society.

FEDERAL CREDIT AND GOVERNMENT-SPONSORED
ENTERPRISES
The Federal Government's credit subsidies
shift credit and other resources toward certain
favored economic sectors—especially housing,
agriculture, and education. Federal credit subsidies are both direct and indirect. Direct subsidies include below-market interest rates and
easier terms on direct loans and guarantees of
private loans than the private market would
offer. Indirect subsidies include Federal backing for Government-sponsored enterprises,
which lowers their cost of funds. By pricing
credit below private alternatives, the Government subsidizes borrowers and risks absorbing
some of the eventual losses. It also expands the
scope of credit beyond what the private market
would provide.
The Government has assisted and assumed
some risk on an enormous volume of credit. By
the end of 1989:
• In housing, $1,097 billion or 41 percent of
outstanding home mortgages have been
guaranteed by Federal agencies or securitized by GSEs. Another $1,247 billion or 47
percent (not including securitized loans) is
held by banks and thrifts with deposit insurance; thrifts also receive massive advances from the Federal Home Loan
Banks, a GSE. Of all housing mortgages,




88 percent have explicit or implicit Federal support.
• In agriculture, the Farmers Home Administration accounted for $20 billion or 15
percent of all farm debt outstanding. The
Farm Credit System financed another $35
billion or 26 percent, and commercial
banks financed 32 percent, backed by deposit insurance and soon by Farmer Mac,
a GSE that will begin to guarantee securities in 1990. In total, 73 percent of all farm
debt had Federal support.
• In education, nearly all student loans are
federally guaranteed. Furthermore, Sallie
Mae, a GSE, financed $22 billion, or 43
percent, of the guaranteed student loans
outstanding.
• Business was also assisted by $72 billion of
Government credit. The Federal role is focused on financing exports, rural utilities,
and small and minority businesses.
In 1989, the Federal Government participated in $129 billion or 17.8 percent of all funds
loaned. Federal subsidies, taking into account
expected future defaults, are estimated to be
$1.8 billion for direct loan obligations in 1991
and $9.5 billion for the much larger guaranteed loan commitments.

232

THE BUDGET FOR FISCAL YEAR 1991

$ Billions

TOTAL FEDERAL A N D FEDERALLY
ASSISTED CREDIT OUTSTANDING

2,600

2,000-

1,600 -

1,000

500-

1970

FISCAL YEAR

SUMMARY OF FEDERAL DIRECT LOANS AND GUARANTEED LOANS
(In billions of dollars)
Estimated

Actual
1988

Direct Loans:
Obligations
Loan disbursements
Change in outstandings
Outstandings
Guaranteed Loans:
Commitments
New guaranteed loans
Change in outstandings
Outstandings




1989

1990

1991

1992

1993

1994

1995

27.2
33.7
-13.4
221.8

16.2
26.0
-14.6
207.2

18.4
26.7
-2.3
204.9

13.4
22.1
-2.3
202.6

13.0
19.6
-0.3
202.3

12.4
17.5
2.5
2048

12.1
16.9
-3.5
210.3

11.7
16.2
-4.3
197.0

100.7
96.4
40.3
546.0

105.4
96.3
41.7
587.7

118.6
99.8
43.1
630.8

129.8
104.6
42.6
673.4

122.2
105.4
43.0
716.4

122.7
107.0
38.6
755.0

124.2
109.6
41.3
796.3

125.7
112.3
41.4
837.7

VI.B.

233

RECOGNIZING FEDERAL UNDERWRITING RISKS

Federal backing of credit allows loans to be
made with less regard to risk. GSEs have
much less capital than purely private institutions would need. Originators and servicers for
Federal mortgage insurance programs may operate with very limited capital; loans that they
make with partial Federal guarantees can
become fully guaranteed de facto if they fail.
On the other side, borrowers obtain Federal
credit with much less equity of their own at
stake than would be required to get a private
loan. These features increase the risk of default. Defaults imperil not only taxpayers, but
also others. Waves of foreclosures in housing
and agriculture in the early and mid-1980s
harmed many related businesses and other
nondefaulted borrowers.
Structural reforms and better incentives for
evaluating credit risk can preserve the benefits
of Federal credit programs while avoiding excessive Federal risk. The budget contains a
number of reforms for specific programs. In
some cases, borrowers will be required to
invest more equity in order to give them greater incentive not to default in the face of adverse economic conditions. In others, the
degree of Federal guarantee is limited, shifting
some risk to the credit originators or primary
insurers so that they will underwrite loans
more carefully. In still other cases, the budget
replaces direct lending by private loans with
partial guarantees. Finally, in some cases, Federal credit fees are increased to reflect more
fully the riskiness of loans and to eliminate
unintended subsidies. The buyer's equity, the
lender's stake, and GSE capital all protect the
taxpayer from large losses and bailouts.
Having private money at risk changes the incentives, encouraging participants to avoid excessive risk and default.




HOUSING
The Federal Government supports two systems of housing finance. One is based on the
mortgage insurance programs of the Federal
Housing Administration (FHA) and Department of Veterans Affairs (VA). A secondary
market for these and other mortgages has developed under Government sponsorship. Private firms package FHA and VA mortgages as
securities guaranteed by the Government National Mortgage Association (Ginnie Mae),
which is part of the Department of Housing
and Urban Development (HUD). Two GSEs—
the Federal National Mortgage Association
(Fannie Mae) and the Federal Home Loan
Mortgage Corporation (Freddie Mac)—provide
a similar secondary market for conventional
and some FHA and VA mortgages.
The second system of Government support is
provided through Federal insurance of deposits
in banks and particularly in thrift institutions,
which specialize in mortgage lending. The Federal Home Loan Bank system, another GSE,
provides additional support by making loans to
member thrift institutions.
The Government also provides direct loans
for rural housing through the Farmers Home
Administration (FmHA) and for housing for
the elderly and handicapped through a program operated by HUD.
Combining all forms of Federal support, the
Government's role is pervasive. The proportion
of all housing credit with explicit or implicit
Federal backing increased from 74 percent in
1970 to 88 percent in 1989, primarily due to
expansion by Freddie Mac and Fannie Mae.

234

THE BUDGET FOR FISCAL YEAR 1991

HOUSING CREDIT
H O U S I N G DEBT O U T S T A N D I N G
$ Billions
2,800 -

2,400 NOT FEDERALLY ASSISTED

2,000 -

FEDERAL CREDIT
AGENCIES AND GSEs

1,600

1,200

GNMA, FN MA AND FHLMC MBS

800

400
1870

80

CALENDAR YEAR

PERCENT OF TOTAL
Percent

100-

NOT FEDERALLY ASSISTED

4030-

COMMERCIAL BANKS AND THRIFTS
(EXCLUDING HOLDINGS OF MBS)

2010
1 1

1970




i

76

80

CALENDAR YEAR

85

88
EST.

VI.B.

RECOGNIZING FEDERAL UNDERWRITING RISKS

Growth and Transformation of Housing
Finance
Federal sponsorship helped to expand and
restructure housing credit markets so that
they became fully integrated with broader
credit markets. Fannie Mae and Freddie Mac
securitized a large and growing share of mortgages for national and international capital
markets. Periodic shortages of mortgage financing, which were once frequent because of
regulatory ceilings on deposit interest rates, no
longer occur now that these regulations have
been repealed. Access to credit is rarely a
problem for creditworthy buyers who can meet
minimum downpayment requirements, and
mortgage rates are no longer much higher
than capital market rates.
From the taxpayer's point of view, these are
troubled times for housing finance. The thrift
industry's deposit insurance fund went bankrupt and was bailed out by the Federal Government. Now the Federal Housing Administration (FHA) has begun losing money for the
first time in its 50-year history. GAO recently
reported that FHA's three component funds
lost $4.2 billion in 1988. Losses appear to have
continued in 1989. Unless structural reforms
are implemented, the largest FHA fund may
soon be bankrupt.
In the 1980s, VA default losses also increased. VA eventually tried to control its
costs by acquiring fewer foreclosed properties.
This exposed its servicers to losses, and when
they, in turn, defaulted, exposed Ginnie Mae
to losses on VA mortgages in pools that it had
guaranteed. Two years ago, Ginnie Mae had
virtually no loan portfolio or property inventory. Today, it manages a $12 billion portfolio.
FmHA has avoided taking large default losses
but only by restructuring loans and offering
deep interest subsidies.
The budget threat posed by mortgage credit
programs and secondary market enterprises
comes primarily from default losses. FHA and
VA recently have experienced between 12 and
15 defaults each year per 1,000 mortgages outstanding. In 1989, Fannie Mae averaged 11 defaults per 1,000 mortgages in its portfolio, and
3 defaults per 1,000 on its mortgage-backed
securities. Freddie Mac averaged just 2 defaults per 1,000 mortgages that it securitized.
In recent years, FHA losses on defaulted loans



235
have averaged about 40 percent of the original
amount of the mortgages; VA losses have averaged about 35 percent. Default losses have
been high for several reasons.
Higher Loan-to-Value Ratios.—The downpayment required for an FHA or VA loan is
smaller than for a non-Government mortgage.
VA, in fact, requires no downpayment. In
recent years, FHA and VA buyers have been
permitted to finance their mortgage insurance
premium payments as part of the loan, which
further reduces the buyer's cash investment as
a proportion of the loan. This is critical, because the less money people have invested in a
home, the more likely they are to default later.
When personal financial problems arise or
home values fall in a local market, FHA and
VA buyers have a much weaker financial incentive than other buyers to hold onto their
homes. This is one reason why default rates on
Government mortgages are several times those
on other mortgages.
Reduced Appreciation of Homes— For most
of the last 40 years, steadily rising home prices
largely offset the default risk implicit in low
downpayment requirements. New homebuyers
quickly saw the value of their houses rise and
with it their stake in the property. In the
1980s, however, nationwide housing prices
rose, on average, at a slower rate than other
prices. In some regions, prices actually fell.
This reduced the incentive of buyers to hold
onto their homes.
Guarantees.—Government
Providing Full
credit guarantees shield lenders from the costs
of default. FHA covers losses up to the full
amount of the loan. VA will pay up to 40
percent of the loan amount, with a maximum
of $36,000 on loans up to $144,000. For loans
that exceed $144,000, VA will pay 25 percent
of the loan amount up to $46,000. Such protection is far greater than that provided by private mortgage insurers. This reduces a lender's
incentive to underwrite carefully.
Even where programs offer only partial
guarantees, inadequately capitalized lenders
and servicers can turn these into full guarantees de facto. FHA's multi-family coinsurance
program covers 85 percent of the default loss,
leaving 15 percent for the lender. The lenders
often securitize these loans and obtain a

236
Ginnie Mae guarantee for the full face amount
of the new security. Many lenders are thinly
capitalized and thus vulnerable to default. If a
lender defaults, all losses are fully absorbed by
the Government. Thus, an 85 percent Government co-insured mortgage is converted to a 100
percent guarantee.
Expansion of Federal Commitments.—The
Federal Government has been enlarging its
role in housing credit in locations where others
have cut back. Private insurers and secondary
market guarantors, such as Fannie Mae and
Freddie Mac, tended to pull back from depressed regional markets such as Texas in the
mid-1980s. As it became more difficult to
obtain private mortgage insurance, business in
high-risk areas shifted to FHA, VA, and
FmHA.
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac expanded rapidly during the 1980s. However, any budget
threat that they pose is remote. They are
partly protected from the risk of defaults by
private mortgage insurance, FHA and VA
guarantees, and other sources. The law also
limits their purchase of higher loan-to-value
ratio loans. When defaults occur, their losses
average no more than 20 percent of the mortgage amount. Still, it is important to note that
the Government does have some potential
long-run risk.
Both Fannie and Freddie are highly leveraged. At the end of 1988, each held capital
equal to less than 1.5 percent of assets including mortgage-backed securities. Their ties to
the Government provide an implicit Federal
guarantee which allows them to operate with
less capital than a fully private corporation
would need. With such a small margin, the
taxpayers are more at risk.
Although the Government is not legally
liable for Fannie and Freddie, it is widely believed that Government assistance would be
provided if either were unable to support its
debt. Failure to do that could disrupt mortgage
markets and trigger the failure of mortgage
lenders. Both the Federal deposit insurance
funds and Ginnie Mae would be threatened.




THE BUDGET FOR FISCAL YEAR 1991

Potential Future Costs
Slower household formation over the next
two decades may reduce housing appreciation
and may increase the number of mortgage defaults. This, in turn, could increase the cost of
the Government's mortgage credit programs.
Given the initial ratio of loan amounts to
the market value of the underlying collateral,
future default losses can be projected based on
projections of future economic conditions, especially housing appreciation and mortgage interest rates. Such projections show that, under
current policies, the FHA and VA programs
could generate large budget outlays over the
next 20 years even with moderate inflation, no
recession, and lower, stable interest rates.
• FHA as now operated could lose tens of
billions of dollars over the next two decades. More than half of this loss would be
the result of commitments outstanding at
the end of 1990.
• VA and the Farmers Home Administration could each sustain additional losses
totalling several billion dollars.
• Under the same economic conditions,
Freddie Mac and Fannie Mae would operate profitably.
A protracted, but plausible, slump in the
housing market would deepen losses. Cumulative FHA losses over a decade could be $10
billion higher compared with the more optimistic scenario.
In a severe housing slump, it is unlikely that
Fannie and Freddie would maintain their current policies; they could act to contain losses.
FHA and VA, on the other hand, would be
under pressure to provide additional credit in
markets where other sources contracted. Thus,
additional risk would be shifted to the public
programs, including Ginnie Mae as guarantor
of securities backed by FHA and VA. This
could result in larger losses in those programs.
Banks and thrifts also might pick up some
portion of this risk, exposing the deposit insurance funds to additional losses.
Reducing Potential Losses
Federal housing credit programs worked
well in the environment of rising house prices

VI.B.

RECOGNIZING FEDERAL UNDERWRITING RISKS

and low interest rates that characterized much
of the post-World War II period. Since 1980,
market conditions have not been as favorable
to guarantors of mortgage credit. This trend
will probably continue. The programs can
serve the same public purpose, but only if they
are designed and operated to protect the Government from potentially great losses. The options available to reduce excessive Federal risk
include:
Limiting the Guarantee.—The Government
could limit its losses by reducing the guarantee
to less than 100 percent of the loan, provided
safeguards ensure that the Government will
not assume the whole risk again if a private
co-guarantor fails. By so doing, the Government directly caps its costs. Even more importantly, a partial guarantee exposes mortgage
lenders to default losses, which makes them
more careful in their underwriting.
Increasing Equity.—For borrowers, increasing the downpayment would significantly
reduce the likelihood of default by requiring
that home owners have enough at stake to
make default costly. For institutions, higher
capital reduces the risk of insolvency in times
of economic stress, thereby protecting the Government from potential bailouts.
Increasing Premiums.—Another way Government can limit its costs is by increasing
premiums or fees to the levels needed to cover
expected default losses. Prior to the 1980s,
FHA's premium was set at what then appeared to be an actuarially sound level. In retrospect, it is clear that the low claims rates of
those years resulted mainly from very favorable housing market conditions. If FHA is to
operate effectively in the future as an insurance program as opposed to an explicit subsidy
program, the FHA premium would have to be
set at an actuarially sound level.
The Administration's Proposals
The President will propose additional reforms to the FHA single-family mortgage insurance program to restore it to actuarial
soundness, while maintaining its benefits for
first-time homebuyers. These new reform proposals will complement those proposed by the
Administration and enacted in 1989. The proposals will be developed folllowing an independent actuarial study of the program, to be



237
completed by March 1990, and a careful review
of the potential impacts of the kinds of reforms
described above.
The budget proposes minor changes to improve the VA home loan mortgage program.
To ensure that it can meet the housing needs
of veterans well into the next decade, the
budget proposes to strengthen the financial
condition of the VA program by: (1) requiring
veterans to make a small downpayment of 4
percent on the amount of the loan above
$25,000; (2) charging a 1.75 percent loan fee,
which may be financed, to all veterans except
those with service-connected disabilities above
30 percent; and (3) increasing risk-sharing with
lenders to reduce VA property acquisitions and
encourage sound lending. The VA will sell
loans made to finance the sale of foreclosed
properties with partial recourse to the Government. The amount of the guarantee will be
calculated so as to make claims unlikely.
Under a law enacted last year, VA will also
release from indebtedness veterans who have
defaulted and lost their homes.
The budget proposes to increase the variety
of housing assistance available to rural families through the FmHA. The proposal breaks a
pattern of expensive direct loans by adding
loan guarantees and housing vouchers to the
program. With these new authorities, FmHA
can better match Federal assistance to recipients' needs and regional housing markets.
Changing FmHA programs will improve the
financial position of the rural housing programs and lessen the costs borne by the taxpayer by: using private lenders for credit
screening, loan origination, and servicing of
guaranteed loans; shifting a portion of rental
assistance from subsidized credit for developers
to housing vouchers that families can use to
pay part of the rent for a unit they find in the
private market; providing an average 5 percent interest rate reduction for one-half of all
homeownership guarantees to help low- to
moderate-income borrowers afford private
credit; improving servicing of existing loans by
adding staff in States with exceptional work
backlogs; and charging a one percent fee to
homebuyers for new loan guarantees, which
will be used to offset future default losses.

238

THE BUDGET FOR FISCAL YEAR 1991

The budget also proposes to increase the fee
paid by issuers of Ginnie Mae's mortgagebacked securities. The proceeds would increase
Ginnie Mae's reserves to offset future costs.
The budget also proposes a fee on new debt
and securities issued by Fannie Mae and Freddie Mac. The fees would reimburse the Government for the borrowing advantages these enterprises enjoy as a result of their special relationship with the Government and would reimburse the taxpayer for a portion of the risk
that might inhere in this special relationship.
Further reforms will depend on the results of
the ongoing study of Ginnie Mae under a HUD
contract and a Treasury Department study of
GSEs mandated by Congress.
AGRICULTURE
The experience of the 1980s, when farm
income plummeted and once-manageable debt
became burdensome, is a case study of how
Federal credit subsidies can go wrong. When
the agricultural boom of the 1970s ended in
the bust of the 1980s, the Federal Government
had to bail out the Farm Credit System, create
two new GSEs to assist agricultural lending,
write off billions in loans of the Farmers Home
Administration, and cover the cost of closing
insolvent commercial banks heavily involved
in agricultural lending.
The Federal Government continues to play a
dominant role in farm credit. Of the $136 billion in outstanding farm debt at the end of
1989, the insured commercial banks had
loaned 32 percent of the total; the Farm Credit
System, 26 percent; individuals and others, 20
percent; the Farmers Home Administration, 15
percent; and insurance companies, 7 percent.
The Federal Government, therefore, is in-




volved in nearly three-fourths of all farm
loans.
Subsidized agricultural credit is provided
through the Farmers Home Administration
(FmHA) and three GSEs. FmHA is the "lender
of last resort" to farmers. It makes subsidized
direct loans and 90 percent guarantees of private bank loans to family-sized farmers. One
GSE, the Farm Credit System (FCS), is a nationwide system of borrower-owned agricultural bank cooperatives that lends to agricultural
producers and cooperatives that serve them.
Its debt is widely perceived to be backed by the
Federal Government. A second GSE, Farmer
Mac, was created in 1987 to guarantee securities backed by pools of agriculture real estate
loans. Farmer Mac has a $1.5 billion line of
credit at the Treasury, and is also viewed as
being implicitly guaranteed by the Federal
Government. In addition, commercial banks
with Federal deposit insurance hold substantial amounts of farm loans.
In the mid-1980s, farmers and their lenders
faced the most serious financial crisis since the
1930s. Losses mounted at FmHA, the FCS, and
among banks that lend heavily to farmers.
Since then, farm income and land values have
recovered, loan delinquency rates and chargeoffs have fallen, and the balance sheets of
farm lenders have improved. The FCS has returned to profitability. There has been a sharp
drop in the number of agricultural bank failures and a reduction in FmHA losses. Outstanding farm debt has declined 30 percent
since 1983, largely due to debt write-downs and
write-offs from foreclosure, but also because
most farmers now are more conservative about
borrowing. The debt to equity ratio of the agricultural sector has declined from a high of 31
percent in 1985 to an estimated 22 percent at
present.

VI.B.

RECOGNIZING FEDERAL UNDERWRITING RISKS

239

FARM CREDIT
F A R M DEBT OUTSTANDING
$ Billions
220-

FARM CREDIT SYSTEM 1
1 11

1970




i

75

i

1

i

11

i

i1 i

•

80
CALENDAR YEAR

PERCENT O F TOTAL

CALENDAR YEAR

85

89
EST.

240
Farmers Home Administration (FmHA)
As lender of last resort, FmHA takes on
risks the private market would avoid. Writeoffs of $7 to $9 billion are expected in FmHA's
farm direct loan portfolio over the next 3
years. In addition, guaranteed loan claims
have averaged $100 million for the last 3
years. The FmHA agricultural credit revolving
fund has an estimated negative net worth of
$28 billion.
The 1985 farm act directed that $500 million
per year be shifted from direct to guaranteed
loan authority. FmHA's loan guarantees outstanding are currently estimated to be $5.2 billion. Under proposed budget policy, $2.8 billion
in guarantees would be made annually.
FmHA direct and guaranteed loans typically
equal the full value of the collateral backing
them. Borrowers therefore have no equity in
the asset being financed, which raises the risk
of default. This risk is compounded by a statutory requirement that FmHA subordinate its
lien position to facilitate extension of private
loans to borrowers.
The budget proposes to continue the shift
from direct to guaranteed loans in 1991, and to
return FmHA to its traditional role as a temporary source of credit; farm operating direct
loans will be extended for a maximum of 7
years. FmHA was not intended to indefinitely
sustain farm operators who are not commercially viable.
To help smooth the transition to private financing, $400 million in FmHA guarantees
will be accompanied by interest rate buydowns
averaging three percent. Guarantee origination fees will not be increased in 1991. However, FmHA will no longer guarantee 90 percent
of the face value of most loans. Instead, the
program will employ a risk-adjusted scale.
Higher-risk borrowers will get higher guarantee percentages to offset lender exposure; guarantees will vary between 70 and 90 percent.
Farm Credit System (FCS)
The FCS crisis of the 1980s shows how the
Federal Government's implicit guarantee of a
GSE can become explicit and require direct
taxpayer assistance. Under the FCS's cooperative structure, bank shareholders and boards
of directors are also its customers for loans,



THE BUDGET FOR FISCAL YEAR 1991

which encourages lax loan standards. During
the agriculture downturn of the mid-1980s,
many FCS banks gave priority to making lowcost loans to agriculture and helping borrowers
at the expense of their own long-term profitability.
The Agricultural Credit Act of 1987 provided
the infusion of capital and equity that certain
FCS banks needed to remain operating. The
FCS Financial Assistance Corporation (FAC)
was established to buy preferred stock in financially troubled FCS banks. It can finance
these purchases by issuing up to $4 billion of
federally guaranteed bonds, with the Federal
Government paying some or all of the interest
on the bonds for the first 10 years after their
issuance. FAC authority to issue debt ends in
September 1992. Until then the solvency of the
FCS is essentially guaranteed.
The 1987 Act also created the FCS Insurance
Corporation, a Federal agency, which was intended to preclude future taxpayer bailouts of
the FCS. Beginning in 1990, FCS institutions
will pay annual premiums to the Insurance
Corporation, based on the volume and risk of
their outstanding loans. This will create a lossreserve against default on FCS bonds.
The capital structure of the FCS was also
bolstered by the 1987 Act. It requires FCS to
build up a genuine capital surplus from earnings, with permanent capital standards based
on portfolio risk, like commercial lenders. By
1993 the FCS institutions are required to have
minimum permanent risk capital equal to
seven percent of loan assets; without it, they
cannot pay dividends or retire borrower stock.
The combination of federally guaranteed
FAC debt, the new minimum capital requirements, and the FCS Insurance Corporation
should ensure the FCS's continuing viability.
However, the FCS remains a clear example of
the potential costs of the implicit Federal backing of Government-sponsored enterprises. The
FCS mandate to make only agriculture loans
still leaves it vulnerable to the fortunes of the
agriculture sector.
Federal Agricultural Mortgage Corporation
(Farmer Mac)
Farmer Mac was created to provide a secondary market for long-term agricultural real

VI.B.

241

RECOGNIZING FEDERAL UNDERWRITING RISKS

estate loans in order to increase credit availability and decrease the interest rate. Farmer
Mac will guarantee timely payment of interest
and principal on securities representing pools
of farm real estate loans. Commercial banks
have been reluctant to make long-term, fixed
rate farm ownership loans due to the risk of
varying interest rates and their experience
with the collapse of farm real estate values in
the 1980s. Farmer Mac will provide banks a
ready market for these loans, thus reducing
their exposure and capital requirements. The
FCS may also pool its loans.
Like the FCS, Farmer Mac is a private corporation, and its obligations are not explicitly
guaranteed by the Federal Government, but its
operations create a Federal contingent liability. If the Corporation's reserves were ever exhausted, its Treasury line of credit could be
tapped to honor claims on guarantees; and if
this were insufficient, further Government
support would be expected. The Government's
risk is reduced by the requirements that the
poolers retain at least a ten percent subordinated interest in loans sold and the liability
for the first losses upon default. In addition,
poolers will pay origination and annual fees to
Farmer Mac, which will capitalize a reserve
fund against guarantee claims.
Farmer Mac underwriting standards are one
key to controlling Federal exposure. The law
requires a maximum loan-to-value ratio of 75
percent for any loan pooled. This margin of
borrower's initial equity will provide a strong
incentive not to default. Given this ratio and
the required risk participation by private
poolers, Farmer Mac will incur no principal
loss as long as the collateral value upon liquidation is 65 percent or more of original value.
The first Farmer Mac guaranteed securities
are expected to be issued in the first quarter of
calendar 1990. About $1 to $2 billion a year of
commercial bank and FCS loans might be
pooled into Farmer Mac securities. Farmer
Mac securities will attract more national and
international capital into U.S. agriculture. The
more competitive environment will reduce
income margins for all agricultural lenders,
while the best borrowers will have many credit
sources to choose from.



EDUCATION
The Federal Government helps students and
their parents meet the costs of postsecondary
education by creating an extensive private
market for student loans. Guaranteed student
loans (GSLs) now provide more student aid
than all other Education Department aid put
together.
The GSL program operates primarily by providing about 13,000 participating private lenders with a 100 percent guarantee against the
risk of default. In contrast to most other areas
of Federal credit activity, it is unlikely that
any significant market for student loans would
exist in the absence of the Federal guarantee,
because of the lack of collateral for such loans.
The GSL program also differs from other
Federal guaranteed loan programs in that it
operates through an intermediary set of State
and non-profit private entities termed guarantee agencies. Guarantee agencies insure lenders against default loss; the Government then
reinsures the agencies. Guarantee agencies
may charge borrowers a one-time insurance
fee of up to 3 percent to cover their insurance
costs. The agencies also operate as debt collectors, retaining a percentage of collections to
defray their costs and returning the remainder
to the Government. The Government provides
general operating support to the agencies
through an administrative cost allowance
equal to one percent of insured loan volume.
The GSL program has grown rapidly, roughly doubling in annual loan volume since 1982
and quadrupling since 1979. Cumulative loan
commitments since the beginning of the program exceeded $100 billion by the end of 1989;
loans outstanding at the end of 1989 were $49
billion.
The gross cumulative default rate was 14
percent in 1989. Default rates have been fairly
constant, so the increase in loan volume has
led to a corresponding increase in the amount
of defaults. Gross default costs, which were a
few hundred million dollars in the early 1980s,
soared to $1.9 billion in 1989 and are expected
to top $2 billion in 1990 and beyond.
Default rates vary depending on the backgrounds of students and the kinds of schools
they attend. A central goal of the student loan

242
program in the 1980s was to make loans available to lower-income students. At the same
time, it is well documented that students from
lower-income families default more frequently
than the average student. In addition, a GAO
study concluded that average default rates are
much higher, regardless of the students' incomes, at vocational schools than at colleges
and universities. High defaults at such schools
suggest a number of possible problems with
the preparation of students for school, school
recruitment practices, and the quality of education. The Education Department is actively
addressing these issues.
The dramatic increase in default losses has
led to a variety of legislative and regulatory
initiatives. Notable among these are: deducting
the amount of delinquent debt from Federal
income tax refunds; imposing due diligence default collection requirements on lenders and
guarantee agencies; garnishing wages of Federal employees who are in default; referring defaulted loans to the Department of Justice for
litigation; and requiring schools with high institutional default rates to reduce these rates,
with the possibility of program termination if
rates are not reduced.
An additional part of this effort is increased
risk-sharing with guarantee agencies. Currently, these agencies are reinsured at 100, 90, or
80 percent depending on their default rates.
However, the average reinsurance rate is 97
percent, so guarantee agencies bear only about
3 percent of default risk. The budget proposes
to increase this to 10 percent, replacing the
current 100/90/80 rate structure with a single
90 percent reinsurance rate. This should make
the guarantee agencies more careful monitors
of loan origination and servicing. The budget
also proposes to replace the current experience-rated reinsurance fee with a single 0.5
percent fee.
Other budget proposals that would reduce
Federal subsidies and taxpayer costs in the
GSL program include: (1) delaying disbursement of all loans to first-time borrowers for 30
days from the student's first day of classes, in
order to reduce the high rate of default by
students who withdraw in the first few weeks
of class; and (2) checking the credit histories of
GSL applicants who are age 21 or older, re


THE BUDGET FOR FISCAL YEAR 1991

quiring a co-signer for borrowers found to have
negative credit records.
Student lending is supported by extensive
secondary market activities, most notably by
the Student Loan Marketing Association
(Sallie Mae), a GSE. This federally established,
stockholder-owned, for-profit corporation was
chartered in 1972 and now plays a dominant
role in GSL financing. At the end of 1989,
Sallie Mae owned 43 percent of all outstanding
GSLs, and its annual purchases plus collateralized advances to lenders represent about 50
percent of annual GSL lending.
The Federal Government bears most of the
risk associated with GSL defaults directly
rather than through Sallie Mae. Sallie Mae's
transactions in GSL loans haye little or no
bearing on the likelihood of default, and its
own debt is backed by its ownership of 100
percent guaranteed GSL loans. As long as
Sallie Mae focuses on GSL financing and maintains a good match between the duration of its
assets and liabilities, it poses little financial
risk to the Government.
LOANS TO BUSINESS
In contrast with its dominant credit role in
housing, agriculture, and education, the Federal Government has a relatively small role in
providing credit for business. Federal credit is
focused on export financing, rural utilities, and
small and minority businesses; it amounts to
only 0.2 percent of business liabilities. Bank
loans outstanding (other than mortgages) supported by Federal deposit insurance are another 15.9 percent of business liabilities.
The Export-Import Bank provides direct
loans, loan guarantees, and export credit insurance to foreign borrowers who purchase
U.S. exports. The objective is to offset foreign
official subsidized credit, so that U.S. exporters
can compete strictly on the basis of the quality
and price of the goods and services they offer.
Interest rates on Eximbank's direct loans are
the lowest permitted under the Arrangement
on Export Credits of the Organization for Economic Cooperation and Development.
Total program activity declined from $12.6
billion in 1980 to $6.3 billion in 1989. Direct
loans, which accounted for 36 percent in 1980,

VI.B.

243

RECOGNIZING FEDERAL UNDERWRITING RISKS

only account for 12 percent now. Total Eximbank program activities assist 2 percent of
U.S. merchandise exports and 4 percent of U.S.
capital goods exports.
Eximbank has sustained large losses over
the past decade, and these losses will continue
through the next decade. In the late 1970s, a
subsidy war among the developed countries'
export credit agencies resulted in Eximbank
lending at well below Treasury borrowing
rates; this resulted in operating losses of $2.3
billion between 1981 and 1988. In addition, of
the $9.9 billion in loans outstanding at the end
of 1988, $2.7 billion was delinquent. Total outstanding rescheduled loans at the end of 1988
were $1.8 billion. Since 1985, GAO has called
on the Bank to establish a loan loss reserve; it
estimates that the Bank had a cumulative deficit of between $3.8 billion and $6.3 billion by
the end of 1988. For the first time, the 1991
budget will display a loan loss reserve in ExImBank's financial statements: $4.8 billion
against ExImBank's $12.2 billion of loans and
potential claim recoveries.
The Rural Electrification Administration
(REA) provides subsidized direct and guaranteed loans to electricity and telephone suppliers serving rural areas. Currently, about $39
billion in REA loans are outstanding. REA's
original mission to bring service to rural areas
is essentially complete: 99 percent of all rural
households have electric service and 96 percent have phone service.
Almost all of REA borrowers can afford private credit. Many have excellent bond ratings,
and many are subsidiaries of major utility
companies. Because of the strong financial position of REA borrowers, defaults have been
relatively few. However, in the last several
years, REA has had to advance over $1 billion
to lenders for guarantee claims on behalf of
defaulting power supply borrowers. These defaults are not expected to decline in the near
future.
By statute, REA borrowers must eventually
meet their credit needs from their own resources or non-Federal lenders. To help
achieve this goal, the budget proposes that
most REA direct loan borrowers shift to private financing aided by partial REA guarantees. Power supply borrowers will be eligible
for 90 percent guarantees; electric distribution



and telephone borrowers will be eligible for 70
percent guarantees. A one percent guarantee
fee will be charged to offset potential default
costs and administration. Direct loans will still
be available for those few borrowers unable to
afford private credit.
The Small Business Administration provides
direct loans, loan guarantees, and guaranteed
surety bonds to small businesses, and disaster
loans to businesses and homeowners. About
$16 billion of SBA-backed credit is outstanding.
Approximately one-half consists of direct loans
or guaranteed loans assumed by SBA when the
borrower defaulted and the primary lender
claimed reimbursement.
SBA direct lending (including disaster assistance) has declined dramatically in the 1980s,
from over $3 billion in 1980 to less than $230
million in 1989. SBA's guaranteed business
loan approvals and guaranteed surety bonds
have remained fairly stable at approximately
$3 billion and $1 billion a year, respectively.
The average maturity of SBA guaranteed
loans is 11 years at interest rates slightly
above the prime rate. Absent these guarantees,
many lenders are unwilling to make small
business loans with terms beyond 3 years. As a
result, SBA assists about one-third of all longterm credit for small business.
On average, SBA guarantees cover 81 percent of the credit extended. However, recent
statutory changes will increase this coverage,
reducing the incentive for lenders to be careful
and thus adding to the future cost of the program. SBA loses about 12 cents for every
dollar loaned. In 1991, the Administration proposes to convert most SBA direct business
lending to guaranteed loans. Losses tend to be
higher for direct loans than for loan guarantees. In addition, higher fees are proposed to
help cover the cost of guarantee programs.
CREDIT REFORM
Federal credit programs have a dual nature.
They are partly like commercial credit. Direct
loans are expected to be repaid, with interest;
loan guarantees require the borrower to pay a
fee. However, they are unlike commercial
credit in one fundamental respect. The Government lends and guarantees credit for social

244
reasons, not in order to make a profit or even
to cover its costs. Direct loans are made at
below-market interest rates; loan guarantees
are made without charging a fee high enough
to cover expected defaults. Federal credit programs generally provide borrowers more favorable terms than they would otherwise obtain
in the private market.
This results in a financial loss to the Government and a subsidy to the borrower. A
credit subsidy is a method for the Government
to achieve its policy objectives, just like the
purchase of goods and services, transfer payments, and grants of other Federal programs.
The present budget treatment of credit obscures the subsidy. Direct loans result in outlays when they are disbursed and offsets to
outlays when interest is received and principal
repaid; loan guarantees result in offsets to outlays when fees are collected and outlays in the
case of default. Recorded budget outlays are
very different in both amount and timing from
the value of the subsidy. Budget accounting
therefore gives policymakers the wrong information about the true cost of credit programs
and the wrong incentives for credit decisions.
The Administration proposes to remedy this
by measuring credit activity on an expenditure
basis equivalent to other Federal spending.
The budget would separately show the credit
subsidies, defined as the discounted or present
value of the additional payments that the federally assisted borrower would have to make
for a purely private loan. The subsidy would be
included in the outlays of the program, the
agency, and the function that conduct the
credit program. The remaining cash flows
would be reported only in a separate budget
function created for this purpose alone. To the
extent feasible, the credit subsidies would require annual appropriations. Agencies would
continue to operate credit programs in the




THE BUDGET FOR FISCAL YEAR 1991

same way as they do now. This proposal for
credit reform is the same as in the last two
budgets; however, the budget accounts in this
budget do not show the reform and will not do
so until it is enacted.
The Congressional Budget Office and the
General Accounting Office have both endorsed
the basic concept of credit reform. (See Credit
Reform: Comparable Budget Costs for Cash and
Credit, Congressional Budget Office, December
1989.) Different approaches to credit reform
are possible. The Administration would use
private financial market equivalents in order
to estimate the subsidy, both because they are
comparatively objective and because the subsidy defined in this way is the best estimate of
the effect of the credit program on resource
allocation. The Administration's proposal
would not affect the definition of the budget
deficit, unlike variants that would exclude the
non-subsidy cash flows. Such variants have
conceptual merit but require strong safeguards
to prevent a portion of the subsidy from also
being excluded from the budget. Experience
with credit reform as proposed by the Administration would help to establish such safeguards.
The accompanying tables show the estimated subsidies for most credit programs in 1991.
Subsidies add up to $1.8 billion for direct loan
obligations and $9.5 billion for guaranteed loan
commitments. The degree of the subsidy differs
widely from program to program, ranging from
virtually nothing up to 36.9 percent of the face
value for loan guarantees (with one small exception) and up to 72.7 percent for direct loans.
On average, it is 4.5 percent for loan guarantees and 31.8 percent for direct loans. The wide
variation adds emphasis to the need for the
budget to measure the subsidy rather than the
cash flow in accounting for program expenditure.

VI.B.

245

RECOGNIZING FEDERAL UNDERWRITING RISKS




ESTIMATED SUBSIDY COSTS FOR 1991 DIRECT LOAN
OBLIGATIONS
Present Value of the Subsidy
Agency and Program

Funds Appropriated to the President:
Overseas Private Investment Corporation
Agriculture:
Agricultural credit insurance fund
Rural development insurance fund
Rural development loan fund
Rural housing insurance fund
Public Law 480 export credits
Rural Electrification Administration:
Electric and telephone revolving fund
Rural Telephone Bank
Education:
College housing and academic facilities
Housing and Urban Development:
Federal Housing Administration
Housing for the elderly and handicapped
Nonprofit sponsor assistance
Interior:
Bureau of Reclamation
Bureau of Indian Affairs
State Department:
Emergencies in the diplomatic service
Veterans Affairs:
Loan guaranty revolving fund
Guaranty and indemnity fund
Specially adapted housing loans
Education loan fund
Vocational rehabilitation
Small Business Administration:
Business loans
Disaster loans
National Credit Union Administration:
Central liquidity facility
Share insurance fund
Export-Import Bank
Tennessee Valley Authority:
Power program
Total, direct loan subsidies
1
2

?erc?I}t o f
direct loan
obligations

Millions of
d

u

12.6

2.9

20.7
19.9
51.3
50.6
72.7

137.2
68.9
15.4
729.2
540.0

29.9
8.0

60.3
10.0

33.1

1.7

3.1
20.0
22.0

4.7
56.5
0.1

43.0
20.0

2.1
2.1

38.3

0.3

11.0
11.0
11.0
9.1
9.7

80.6
0.8
i

42.6
27.8

2.1
79.2

3.0
50.0
7.8

7.5
7.5
30.0

0.6

0.4

2

1,839.5

31.8

Proposal to merge obligations with loan guaranty revolving fund.
Weighted average.

*

0.1

246

THE BUDGET FOR FISCAL YEAR 1991

E S T I M A T E D S U B S I D Y C O S T S F O R 1991 G U A R A N T E E D
LOAN COMMITMENTS
Present Value of the Subsidy
^ f f o f
direct loan
obligations

Agency and Program

Funds Appropriated to the President:
AID private sector loans
AID housing and other credit
Overseas Private Investment Corporation
Agriculture:
Agricultural credit insurance fund
Commodity Credit Corporation: Export credits
Rural development insurance fund
Rural housing insurance fund
Rural Electrification Administration
Rural Telephone Bank
Education:
Guaranteed student loans, Stafford
Guaranteed student loans, PLUS/SLS
Health and Human Services:
Health professions graduate student
Housing and Urban Development:
Federal Housing Administration
GNMA secondary mortgage guarantees
Interior:
Indian loan guaranty and insurance fund
Veterans Affairs:
Loan guaranty revolving fund
Guaranty and indemnity fund
Small Business Administration:
Business loans
Export-Import Bank
National Credit Union Administration:
Share insurance fund

1

d

u

0.7
30.7
12.2

0.9
30.7
22.6

3.8

104.5

14.0
4.8
25.7
11.7
5.6

749.0
7.7
152.4
128.6
11.2

36.9
7.2

3,735.3
189.0

21.0

38.9

1.2
1.9

900.0
1,520.0

21.0

9.4

6.6
8.3

34.7
1,257.7

10.2
1.4

450.2
151.3

100.0

0.5

1

Total, guaranteed loan subsidies

Millions of

4.5

9,494.5

Weighted average.

INSURANCE
The Federal Government insures individuals
and firms against certain hazards not covered
by private insurance. Government insurance
programs have been developed in part because
some risks are both h a r d to predict and catastrophic in size. It is difficult or impossible for
private firms to develop actuarially sound prem i u m structures and reserves t h a t would



permit t h e m to insure such risks. The Federal
Government is uniquely suited for this insurance role by its size, sovereign powers, and
ultimate responsibility for t h e general welfare.
The largest Federal insurance commitment,
by far, is t h e protection of deposits against
losses resulting from t h e failure of b a n k s and

247

VI.B. RECOGNIZING FEDERAL UNDERWRITING RISKS

other depository institutions. The next largest
program insures payment of private pension
benefits when their sponsoring firms fail. The
scale and range of Federal insurance commitments are summarized below. The table shows
the face value of the insurance, which is far
larger than any reasonable estimate of the
probable loss to the Government. The probable
loss as a percentage of face value is likely to
differ widely from program to program.

lion more in claims than it collected in premiums from 1981 through 1988.
Some of these costs were unavoidable given
the nature of the hazards, but other costs reflect remediable flaws in the way the programs
were designed and managed. In many cases,
premiums charged to an insured group have
borne little relationship to probable future
losses.
Outstanding Issues

Apart from these formal insurance programs, the Federal Government frequently
provides ad hoc disaster or bailout assistance.

Given the huge scale of the Government's
insurance commitments and the potential
budget threat they pose, the Federal Government's role as an insurer must be under continual review. Outstanding issues that have received only limited consideration include the
proper scope of Federal insurance programs,
how the costs of these programs should be
shared, and how best to manage and control
the Government's potential liability for losses.

Recent Losses
The largest Federal insurance programs all
have experienced substantial losses in recent
years. The Federal Savings and Loan Insurance Corporation had net outlays of $23.5 billion during the past 5 years, and its liabilities
exceeded its assets by about $80 billion when it
was replaced with a new insurance structure
in August 1989. The Federal Deposit Insurance
Corporation's reserves declined in 1988, for the
first time in its history, and again in 1989. By
the end of 1988, the Pension Benefit Guarantee Corporation had assumed responsibility for
plans with assets that were about $1.5 billion
less than the present value of liabilities for
future benefits and expenses. The Federal
Crop Insurance Corporation paid about $2 bil-

What to Insure.—A fundamental issue is
what risks the Government should insure. The
Government insures against certain hazards,
but has no program for other, superficially
similar, hazards. For example, Federal flood
insurance protects against some of the losses
from storms such as Hurricane Hugo, but
there is no Federal insurance against losses
from other disasters, such as the Loma Prieta
Earthquake.

FACE VALUE OF MAJOR FEDERAL INSURANCE PROGRAMS
(In billions of dollars)
Program

Deposit insurance
Pension Benefit Guarantee Corporation
Veterans life insurance
Federal crop insurance
Flood insurance
Overseas Private Investment Corporation
Nuclear risk insurance
Aviation war risk insurance
Maritime war risk insurance
Total




1980

1985

1987

1988

1989

7.8
100.0
53.1
17.0

35.5
1.2
13.7
5.8
58.5
47.7
25.0

1,464.6
405.5
32.6
2.7
88.5
5.4
89.5
185.0
21.7

2,226.8
598.1
28.3
6.6
128.8
6.1
70.5
183.0

2,652.4
701.5
27.4
15.5
158.7
9.5
87.5
162.2
9.0

2,818.8
755.5
22.9
21.2
168.8
8.9
72.5
199.0
10.8

2,926.9
819.7
26.6
13.3
179.3
8.8

660.9

1,024.7

2,295.5

3,248.3

3,823.7

4,078.4

4,213.1

1970

1975

444.5

837.3

—

37.7
0.8
—

—

—

—

227.7
10.9

248
Federal insurance is not always needed to
confer Federal responsibility. A portion of
losses not covered by private insurance may
fall on the Government through other channels, including tax writeoffs and disaster relief.
During 1989 and 1990, the Loma Prieta earthquake and Hurricane Hugo led to supplemental appropriations for disaster assistance of
almost $4 billion. The issue is often whether it
is more equitable and less costly for the Government to provide prior insurance protection,
either on a voluntary or a mandatory basis, or
to address the same hazards through other
means.
Government and Private Roles.—A second
issue, closely related to the first, is the proper
relationship between Government and private
insurance. For some forms of risk, most notably as guarantor of deposits, the Government
is virtually the sole insurer. In other cases,
such as nuclear power accidents until recently,
the Government was a supplementary insurer
or reinsurer, i.e., it stood behind private insurance companies.
Managing Government's Risk.—The recent
losses in the major Federal insurance programs highlight the issue of how Government
can best manage the taxpayers' exposure to
potential losses. Insurance encourages people
to take risks they would avoid if they were not
protected from the full cost of their actions.
This so-called "moral hazard" should be balanced by controls or offsetting incentives. For
example, Federal deposit insurance protection
is accompanied by regulations that banks and
thrifts must follow.
The nature of the risks that give rise to
Federal insurance makes it difficult to control
costs and to determine the level of premiums
and reserves needed to cover future losses. As
a result, most Federal insurance programs violate the basic insurance principle that premiums and reserves be based on reliable forecasts
of potential costs.
When Government insurance is underpriced
relative to its long-run cost, those who are protected receive a subsidy. Subsidized insurance
increases moral hazard, which encourages additional risk-taking. This partly undermines
the purpose of the program* and increases
future insurance losses that must be covered
by Federal outlays.



THE BUDGET FOR FISCAL YEAR 1991

DEPOSIT INSURANCE
A healthy economy requires a healthy financial system. As managers of more than $3 trillion in deposits, the Nation's banks, savings
and loans, and credit unions are central to this
system. Depositor funds are fully insured up to
$100,000 per account. Measured in terms of
actual risk of loss as well as the face value of
insured liabilities, this is by far the Government's largest set of insurance programs.
Deposit insurance and its related policies are
designed to encourage savings by assuring depositors that their funds will be protected, and
to reinforce the stability of the financial
system.
The Federal Government insures different
types of deposits through separate insurance
funds. The Federal Deposit Insurance Corporation (FDIC) administers the Bank Insurance
Fund for bank deposits and the Savings Association Insurance Fund for savings and loan
(thrift) deposits. Credit union depositors are
protected by the National Credit Union Share
Insurance Fund.
Recent Experience
In the past decade, Federal policies proved
inadequate to deal with a series of rapid
changes in the financial industries and their
environment. These changes began with the
extremely high and volatile interest rates of
the late 1970s and early 1980s.
Interest Rates and Innovation.—Thrift institutions were badly harmed by rapidly rising
interest rates because their liabilities had a
much shorter maturity than their assets. They
had to pay higher interest on current deposits
than they earned on the fixed-rate mortgages
that they had issued in previous years. Government regulation contributed to the problem
by requiring that thrifts specialize in fixed-rate
home mortgages. In this period, State and Federal regulators were slow to grant thrifts permission to originate adjustable rate mortgages
and to eliminate other legal barriers to more
diversity in both the type and location of their
investments.
In the early 1980s, innovation in capital
markets also contributed to the problems of
many depository institutions. Housing finance

VI.B.

RECOGNIZING FEDERAL UNDERWRITING RISKS

was transformed by unbundling of services and
the development of secondary mortgage markets. The thrifts' share of mortgage originations fell from 44 to 37 percent between 1980
and 1989, and banks are now originating more
mortgages than thrifts. Increased competition
from mortgage bankers also added to the
thrifts' problems.
A rapid restructuring of financial services is
still underway. Today's division of labor between banks, thrifts, and other financial intermediaries continues to reflect as much the separate history and regulatory treatment of each
class of financial institution as it does market
forces. In a less regulated environment,
market forces will continually redefine the
roles of depository institutions, almost regardless of what Government does.
Moral Hazard.—In the course of these
changes, hundreds of institutions saw most of
their equity capital wiped out. Some failed and
were sold or closed. However, because of the
limited resources of the FSLIC, hundreds of
thrift institutions continued to operate with
little or no capital.
With little of their original investment left,
many owners and managers of these firms
took wild gambles. Some expanded their liabilities manyfold in a short time; people were
willing to place their savings in these thinly
capitalized or insolvent thrifts because of the
above-market rates of interest they were offering and the Government insurance protection.
Of the 50 costliest cases resolved by FSLIC in
1988, three-quarters had grown at a rate of
more than 20 percent annually between 1983
and 1985. Most of the new insured deposits
were invested in high-risk ventures. Rarely did
these strategies succeed. Thus, a relatively
small initial insolvency and slow rate of deterioration was transformed into large portfolios
of bad loans and massive losses. Localized
slumps in agriculture, energy, and real estate
added to the losses. By the time some institutions were closed, the cost of paying off depositors had mounted enormously.
Premiums and Coverage not Matched.—Contrary to basic principles of insurance, Federal
deposit insurance premiums do not vary with
the known level of insured risk; all institutions
pay the same fixed percentage of deposits. The

250-298 O-1990-8


QL3

249
result has been that healthy, prudently managed firms subsidize those that take more risk.
Compounding this problem, large institutions receive greater protection against failure
than small ones while paying premiums on a
smaller proportion of their liabilities. The insurers have used mergers and financial assistance to prevent failure, especially for very
large institutions. In part this practice reflected fear that closing one of the largest banks
could precipitate a wider financial crisis. However, this practice indirectly extends guarantees to deposits over $100,000 and to other
creditors. Large banks pay lower effective premiums because insured deposits are a smaller
share of their funds; they obtain a higher
share from deposits over $100,000, foreign
branches, and other borrowing. The effective
extension of insurance coverage to deposits
over $100,000 and uninsured creditors decreases the incentive of uninsured parties to
monitor risk-taking, allowing depository institutions to take more risk and increasing the
insurance funds' exposure to loss.
Lack of Accurate Information.—Better information on the risks posed by thrifts' rapid expansion into new forms of investment might
have prevented some losses. However, traditional accounting practices and inadequate
Government supervision often meant that the
dangers were not known to creditors, regulators, or the public until massive losses already
had occurred. Market value accounting information would have enabled regulators to close
thrifts more quickly and brought the problem
to public attention sooner.
Extent of Losses.—So great were the demands on the limited reserves of the Federal
Savings and Loan Insurance Corporation
(FSLIC) that several hundred insolvent institutions were permitted to continue operating for
long periods. In calendar year 1988, 205 thrifts
were closed by the FSLIC; but at the end of
the year, over 300 insolvent thrifts remained
open. Huge deposit insurance losses have resulted from FSLIC's inability to close these
failures down. Ultimately, the FSLIC fund was
completely drained. At the time of its dissolution, potential liabilities exceeded assets by at
least $80 billion. This figure includes the unfunded cost of past thrift closures as well as
the estimated $50 billion cost of closing insol-

250

THE BUDGET FOR FISCAL YEAR 1991

vent thrifts still open. Some believe that this
cost will eventually be higher.

Financial Condition of the Deposit Insurance
Funds

The impact of the savings and loan disaster
must also be measured in other terms. Resources that were used to construct still-empty
office buildings and failed resort hotels, or
were wasted in even more improbable ways,
might instead have been used for productive
investment. The funds used to close insolvent
institutions and protect depositors could instead have reduced the Federal deficit.

The deposit insurance funds accumulate reserves in years when premium income and
other receipts exceed losses. The adequacy of
reserves cannot be known for sure, because
future losses are uncertain. However, one indicator is the ratio of reserves to insured deposits. This ratio is shown below for all three
deposit insurance funds for selected years.

Commercial banks were also affected by the
more turbulent environment of the 1980s, failing at rates not seen since the Depression. In
1988, 200 FDIC-insured institutions failed and
were closed, while another 21 banks received
Federal assistance to continue operating. This
took its toll on the FDIC's insurance fund. Reserves fell from $18.3 billion at the end of 1987
to $16.3 billion in 1988 and to $14.3 billion in
1989.

The final cost of dealing with the current
backlog of failed thrifts will not be known for
some time. However, Government spending
could exceed original estimates if more institutions fail, if premium income is reduced by
slower industry growth, or if interest rates on
borrowings are higher than estimated. Future
commercial bank closing costs are also uncertain, but widespread losses on loans for commercial real estate, leveraged buyouts, and foreign borrowers could cause insurance losses to
exceed current estimates.

RESERVE RATIOS FOR FEDERAL DEPOSIT INSURANCE
(Dollars amounts in billions)
Fund

1970

1980

Federal Deposit Insurance Corporation:
Insured deposits
Reserves
Reserve ratio (percent)

312.6
4.2
1.35%

925.0
10.7
1.16%

Federal Savings and Loan Insurance Corporation:
Insured deposits
Reserves
Reserve ratio (percent)

131.9
2.9
2.16%

487.3
6.1
1.26%

723.3
898.0
977.2
7.5
- 8 . 9 -27.4
1.04% -0.99% -2.80%

—
—
—

52.3
0.2
0.32%

103.0
1.1
1.09%

National Credit Union Administration:
Insured deposits
Reserves
Reserve ratio (percent)

1985

1987

1988

1989

1,400.5 1,605.7 1,682.8 1,806.0
19.5
18.3
16.3
14.3
1.39% 1.14% 0.97% 0.79%

148.7
1.6
1.08%

158.8
1.8
1.16%

958.9
(*)
(*)
161.9
2.0
1.22%

1
FIRREA dissolved the FSLIC and created the Savings Association Insurance Fund to insure thrifts formerly insured
by FSLIC. SAIF does not yet have reserves, but it is not responsible for either currently insolvent thrifts or those that
may become insolvent through August 1992. These costs will be handled by the Resolution Trust Corporation.




VI.B.

RECOGNIZING FEDERAL UNDERWRITING RISKS

FIRREA Reorganization and Financing
Provisions
In addition to providing resources to dispose
of the backlog of failed savings institutions,
the Financial Institutions Reform, Recovery,
and Enforcement Act of 1989 (FIRREA) requires owners to have more of their own capital at risk, and strengthens supervision and
enforcement.
Reorganization.—FIRREA
abolished
the
FSLIC insurance fund and established three
entities in its place. First, the Resolution Trust
Corporation (RTC) will dispose of currently insolvent thrifts and those that may fail during
the next 3 years. RTC will receive $50 billion
to resolve these cases from funds raised by the
Treasury and the Resolution Funding Corporation, a new nonbudgetary financing entity. The
FDIC manages the RTC under the general direction of the RTC Oversight Board, chaired by
the Secretary of the Treasury. The Administration's budget proposals for the RTC are described in Section Two, Part III.
Second, most of the assets and liabilities resulting from past FSLIC takeovers (resolved
through December 1988) have been transferred
to the FSLIC Resolution Fund, under FDIC
management. Treasury funds will cover its obligations if other income is inadequate.
Third, the insurance fund for thrift institutions formerly insured by the FSLIC, named
the Savings Association Insurance Fund
(SAIF), will be managed by the FDIC. The
FDIC will also manage the deposit insurance
fund for banks, renamed the Bank Insurance
Fund (BIF).
FIRREA dissolved the Federal Home Loan
Bank Board, which previously oversaw FSLIC,
and transferred its responsibilities for regulating and supervising thrift institutions to a new
bureau of the Treasury Department, the Office
of Thrift Supervision (OTS). Oversight of the
Federal Home Loan Bank system, a Government-sponsored enterprise that lends to thrift
institutions, was transferred to a new independent agency, the Federal Housing Finance
Board.
New Premium and Reserve Requirements.—
FIRREA increased deposit insurance premiums, with a designated reserve ratio for both
the BIF and the SAIF equal to 1.25 percent of



251
insured deposits. The FDIC may set the ratio
as high as 1.50 percent if it determines that
there is a significant risk of substantial future
losses. The incremental funds to meet this
higher ratio must be set aside as supplemental
reserves, and any earnings on this portion of
the fund must be distributed to member institutions.
In order to accumulate these reserves, premiums have been raised. Thrift insurance premiums have increased sharply and will temporarily exceed bank premiums to help pay the
costs of dealing with thrift failures. FIRREA
provides the FDIC with authority to raise the
premiums of either fund by up to 7.5 basis
points per year after 1994, up to a maximum
level of 32.5 basis points, if the reserve ratio is
less than the designated ratio. Premiums must
be rebated if the reserve ratio exceeds the
target ratio after taking into consideration expected income and expenses.
New Capital Standards.—It is difficult to
know the appropriate level of deposit insurance reserves and the premium charges
needed to maintain these reserves. These
depend not only on unforeseeable economic
events but also on public policies that help
control the threat to the insurance funds. Capital requirements are an important part of this
policy. Higher capital standards ensure that a
firm has enough of its own funds at stake to
discourage excessive risk-taking and to postpone insolvency and losses to the insurance
funds. Adjusting capital standards for the
degree of risk-taking enhances this effect, and
can thereby substitute for higher insurance
premiums and reduce the need for reserves.
FIRREA raised capital standards for thrifts.
It requires that the OTS prescribe standards
that are not less stringent than those set by
Federal regulators for national banks. The Act
also requires that thrifts achieve and maintain
core capital equal to three percent of assets
and tangible capital equal to one and one-half
percent of assets. Prior to January 1, 1992, up
to one-half of core capital may consist of qualifying supervisory goodwill, which is an intangible asset resulting from past acquisitions of
other thrift institutions. All of core capital
must be tangible by January 1, 1995.

252
Each of the Federal banking and thrift regulators has developed new capital regulations
that link required capital levels to the risk
associated with each type of asset. These riskbased capital requirements are modelled after
an international accord adopted in 1988 by the
Basle Committee on Banking Regulations representing 12 nations.
Need for Additional Reforms
FIRREA was a major first step in deposit
insurance reform. Although many who supported the Act believed that additional reforms
were required, the need for fast action to deal
with the thrift crisis, the complexity of the
issues, and the controversial nature of some
reform ideas all suggested that more time and
study were needed. Thus, FIRREA provides
that the Secretary of the Treasury, in consultation with others, study a wide range of additional reforms. A final report to Congress on
the findings will be completed no later than
February 1991.
Reform Principles
Three tests can be applied to any deposit
insurance reform proposal: (1) does it discourage excessively risky behavior? (2) does it encourage rapid adaptation to ever-changing
market conditions? and (3) does it provide a
reasonable balance between the need to limit
taxpayers' liability and the need to protect
small depositors?
Providing Incentives to Reduce Risk.—The
central purpose of deposit insurance must be
to strengthen the financial system and thereby
promote stability, saving, and efficient use of
capital. Effective deposit insurance policies
will reduce excessive risk-taking. This will
lower the burden of premiums on well-managed firms and reduce the cost to the Government.
Moreover, rapid change means that removing perverse incentives should be the Government's first line of defense against excessive
risk-taking. Too great a reliance on tighter
controls and larger penalties to reduce excessive risk may ask too much of regulators and
carry a heavy price for the industries. It requires Government regulators to monitor effectively and control risk-taking in thousands of
firms with a vast total size in a period of rapid



THE BUDGET FOR FISCAL YEAR 1991

innovation. Even if successful, closer supervision imposes burdens on well-behaved as well
as poorly-managed firms.
For these reasons, a good case can be made
for redistributing the potential cost of failures
so that the owners and unsecured creditors
will be at greater risk. The result should be a
system with a better balance of Government
regulation and self-regulation. Federal insurance should be priced (through a combination
of premiums and capital requirements) in a
manner that reflects all sources of risk, prospective as well as current. In addition, the
facts about an institution's financial condition
should be made clear to depositors, creditors,
and stockholders so that the market may
impose penalties on poor performers.
Promoting Adjustment to Change.—Given
the environment of rapidly changing market
forces, Government should support adaptation.
Attempts to delay change and protect weaker
firms only undermine stronger firms and
prove costly to the Government. Rapid innovation is a healthy development, leading to more
efficient uses of capital. As part of the process
of adaptation, some depository institutions,
like other business firms, must be permitted to
fail—and their owners, officers, and creditors
should bear losses when they do.
In addition, the methods of handling troubled institutions must be evaluated in light of
the long-run effect on industry adjustment to
change. In particular, where thrifts and banks
are engaged in similar activities, they should
be subject to a common set of rules. Risk-based
capital can encourage efficient adjustment to
change by not penalizing firms whose comparative advantage lies in safer activities.
Limiting Federal Liability.—Reducing the
scope of Federal insurance is perhaps the most
straightforward way to reduce the moral
hazard produced by the current broad blanket
of protection. The thrift crisis demonstrated
how the incentives set up by broad Federal
protection induce excessive risk-taking by failing firms and remove the discipline that depositors and other creditors otherwise would
impose on their managers. It may be possible
to achieve the goals of deposit insurance at
reduced cost by lowering the Government's
level of exposure to losses.

VI.B.

RECOGNIZING FEDERAL UNDERWRITING RISKS

Federal liability for losses could be limited
in several ways. One is simply to restrict protection only to deposit accounts up to $100,000.
Some methods of assisting troubled institutions extend guarantees to uninsured depositors, unsecured creditors, or shareholders.
When this happens, the Government's cost is
increased and market discipline is undermined. In addition, it may be desirable to require some depositors to share some portion of
the losses through deductibles or similar features that are standard with most private insurance.
Many other specific steps can be taken to
reduce Government exposure and promote
stronger industry self-discipline. Reform proposals range from relatively small rule
changes to major structural revision. Among
the more modest reforms are: market-value accounting standards, which would reveal at all
times the true level of each institution's net
worth; risk-based pricing of insurance; and removing regulatory barriers to asset and geographic diversification, product and services
integration, and innovation.
Larger structural reforms would narrow or
even break the linkage that now translates
potential depositor losses into Federal Government liabilities. The Government's liability for
losses could be limited either by narrowing the
range of investments funded by insured deposits or by limiting the level of deposits or the
types of depositors and creditors protected.
This could include changing the role of the
Government from that of primary insurer to
that of catastrophic insurer, standing behind a
private insurance mechanism that might lack
the reserves needed to cope with a major financial crisis.
The Need for Accountability
To the extent that the Federal Government
remains at risk when financial institutions
fail, public policy must ensure adequate accountability to the public for the consequences
of current and past policies. One way to
strengthen accountability is to improve methods of recording, forecasting, and reporting insurance commitments and potential losses.
Future budgets may contain more detailed estimates of these potential liabilities, recorded
in a more timely manner.



253
PENSION TERMINATION INSURANCE
The Pension Benefit Guaranty Corporation
(PBGC) was created in 1974 to guarantee payment of retirement pensions when private
sector defined benefit plans terminate without
enough assets to pay the promised benefits.
Two programs were established: one for singleemployer plans, the vast majority of insured
plans, and a second for multi-employer plans.
The present value of insured benefits is now
$820 billion.
Government pension insurance may cause
some firms or unions to fund their pension
plans less fully than they would otherwise.
The PBGC originally was required to pay benefits in the event of any plan termination, up to
a legal limit, and firms had some leeway in
choosing to terminate. The Government's minimum funding standards had little effect on
chronically underfunded plans. Troubled firms
avoided funding their pension plans, and the
cost of the program far exceeded initial estimates.
Congress responded by restricting the conditions under which plans could be terminated
and by raising the insurance premium. Guarantees of multi-employer plan benefits were
restricted in 1980, and became available only
after a plan had been reformed to improve its
financial condition. In the mid-1980s, guarantees of benefits from single-employer plans
were generally restricted to firms that had
become insolvent.
Congress also raised the premium for single
employer plans to $2.60 in 1978 and again to
$8.50 in 1986. In 1987, a higher, risk-based premium was enacted. It not only increased the
basic single-employer premium to $16 per covered participant but added a variable-rate premium equal to $6 per $1,000 of unfunded
promised benefits. The total premium, capped
at $50 per participant, now averages $19.
These changes have improved PBGC's financial position. The agency has a positive cash
flow that should continue into the next century, barring unforeseen events. The reforms,
however, did not eliminate PBGC's long-term
deficit. As of September 1989, the long-term
deficit of the single-employer program was $1.1
billion. This deficit is the difference between
existing assets and the present value of all

254
expenses and benefits that will be due under
the plans PBGC has taken over. It does not
count over $2 billion of liabilities now being
contested in a large case before the Supreme
Court. Depending on the outcome of that case
and future claims, the positive cash flow of the
PBGC could turn negative sometime early in
the next century, and the PBGC's long-term
deficit could climb.
Most PBGC-backed pension plans are overfunded, thanks in large part to the rise in
stock market prices in the 1980s. They have
assets worth $1,000 billion backing promised
benefits whose present value is $820 billion.
About 20 percent of all plans, however, are
underfunded. The bulk of the underfunding is
in a few dozen firms, with a heavy concentration in three industries: steel, automobiles, and
airlines.
Although the 1987 reforms require firms
with underfunded plans to increase contributions, Government funding standards and the
tax system still sometimes allow plan funding
to lag pension promises. When a firm with an
underfunded plan becomes insolvent, PBGC's
liabilities and long-term deficit increase. Prior
to insolvency, as the firm's prospects become
uncertain, there is a period of moral hazard,
when the firm may slow the pace of funding,
requesting Government waivers of required
contributions.
Potential Future Losses
One indication of PBGC's exposure to additional claims is the shortfall of assets in underfunded plans relative to the present value of
PBGC-guaranteed benefits. PBGC's exposure to
such terminations is now between $20 and $30
billion. Approximately $6 billion of this is associated with a few financially weak firms that
have a comparatively high probability of insolvency.
It is difficult to predict how many insurance
claims PBGC will face in the future and the
extent of the funding shortfall of future terminated plans. If the claims continue at the pace
of the past 8 years, the PBGC's long-term deficit could be between $1.5 billion and $6 billion
by the year 2004, depending on the outcome of
the large contested claim before the Supreme
Court. That case will clarify PBGC's power to
restore a terminated pension plan to a sponsor



THE BUDGET FOR FISCAL YEAR 1991

it deems to have abused the pension insurance
system.
Assuming no premium increase, the future
PBGC long-term deficit could exceed this projection. Claims rates may surpass those of the
past 8 years, when the economy experienced
uninterrupted growth. The value of pension
plan investments may not grow as rapidly as
during the stock market boom since 1982. Defined benefit plans may not be as popular as in
the past; a faster shift toward defined contribution plans, such as the (401)k plans, would
slow the growth of PBGC insurance premium
receipts. An adverse ruling on the current litigation over the PBGC's right to restore plans
to their sponsors could increase the temptation
to underfund. Some plan benefits, such as payments to employees when a plant is shut
down, are not predictable enough to be included in pension funding standards and in the
calculation of PBGC premiums. Finally, PBGC
premiums may remain below the level needed
to eliminate the PBGC's future deficit because
they are determined politically.
Additional reforms might be considered to
reduce PBGC's long-term deficit. These include
charging higher premiums for underfunded
plans; giving a higher preference in bankruptcy to PBGC's claim or to the claims of underfunded pensions; eliminating PBGC's coverage
of benefits that cannot be funded in advance,
such as those sometimes provided following a
shutdown; and enhancing PBGC's rights to
return responsibility for plans to firms that
have regained their financial health.
OTHER FEDERAL INSURANCE
The Federal Government operates insurance
plans to protect against some other types of
risk. Some of these plans are comparable to
insurance available in the private sector;
others, such as disaster insurance, are not
readily available elsewhere; and some offer indemnification, which is coverage without insurance premiums.
Life insurance for veterans has generally operated on a true insurance basis, with premiums adequate to cover expected claims. Because private firms can provide this service,
direct Government insurance is being phased
out. In its place the Government will continue

VI.B.

RECOGNIZING FEDERAL UNDERWRITING RISKS

to operate the Servicemen's Group Life Insurance Fund, which collects premiums and
makes payments to the private carriers that do
the actual insuring.
Most other Federal programs offer disaster
insurance of one sort or another, and disaster
insurance commonly has two basic problems.
The first is that everyone assumes that in the
event of a disaster the Federal Government
will grant relief whether people are insured or
not. If people believe they will be reimbursed
for disasters without paying for insurance,
they will not buy coverage voluntarily even
when it is subsidized. The second problem is
that the existence of insurance may encourage
people to undertake more risky behavior. This
is especially a problem when insurance premiums are subsidized.
Federal Crop Insurance illustrates the difficulty in selling disaster insurance, even when
it is heavily subsidized. Federal crop insurance
was expanded in 1980 in order to protect farmers from the economic risk of crop loss and
obviate the need for disaster relief. The program has failed in its mission.
Despite the fact that the program receives
roughly $1 billion per year in taxpayers'
money, historically only about one-third of eligible commodity production was insured. Federal spending covers about two-thirds of total
crop insurance program costs, including premium subsidies, administration, and excess
losses. Yet even with this heavy subsidy, disaster relief bills costing $7 billion were enacted
in 1983, 1986, 1988, and 1989.
It is widely recognized that participation in
crop insurance programs is so low in part because farmers have come to rely on this Federal agriculture disaster assistance. Since 1980,




255
about $5 billion has been spent by the Federal
Government to subsidize crop insurance, while
distributing an even greater amount in disaster aid. At the same time, administrative costs
have run out of control. Between one-quarter
and one-half of all outlays associated with the
program are attributable to administrative
costs of insurance delivery. Further, the Federal crop insurance program, in its current form,
is subject to considerable fraud and mismanagement. Several sources have reported cases
in which growers have taken out insurance
with no intention of planting or harvesting a
crop in that year.
The budget proposes to eliminate Federal
crop insurance. At the same time, to avoid the
uncertainty that can arise over the timing and
amount of disaster assistance (which requires
legislation in response to each disaster), permanent authority is proposed for the Secretary
of Agriculture to provide disaster relief under
specified conditions. Equitable treatment of
farmers would be assured by establishing comparable standards for compensation across
crops and regions.
Government flood insurance illustrates the
promotion of risky behavior. Protecting people
from flood losses encourages development in
flood plains. Insurance is therefore available
only to individuals who live in communities
that enforce appropriate land use and building
standards. In 1990, a new premium system will
be introduced, based on a community's effectiveness in regulating flood plain development.
Finally, the Government provides some coverage without insurance premiums, as is now
proposed for crop losses. It indemnifies air and
maritime carriers in case of loss from the operation of their aircraft or ships during a war.




VI.C. CLEANING UP FEDERAL FACILITIES
PROMOTING FEDERAL FACILITY COMPLIANCE
The President is committed to cleaning up
environmental contamination from past practices at federally owned facilities across the
country, and to ensuring that Federal agencies
meet or exceed all environmental standards
required by relevant laws and regulations.
Agencies have the responsibility to operate
within these laws, and citizens have the right
to insist that Federal agencies be good neighbors.
Federal facility compliance with environmental laws is both a moral and legal responsibility and a practical necessity. Such compliance is necessary to ensure that Federal activities do not create future problems. Unfortunately, environmental safeguards previously
employed were in many cases either ignored or
inadequate to provide long-term protection.
Consequently, this Administration has been
left with the responsibility of cleaning up a
legacy of contamination from Federal facilities
that has developed over the last 40 years. The
major increases in this budget signal a commitment to that cleanup.
New statutes, tighter standards, increased
knowledge of health effects, and a Bush Administration policy that all activities must
comply with environmental standards has
made cleaning up a difficult task in an era of
limited resources. Nevertheless, the Administration is moving aggressively to address the
highest priority risks posed by Federal facilities.
If the government can learn one thing from
past mistakes, it is that neglect of this responsibility now will only lead to considerably
more expensive and complicated cleanups in
the future.
The budget contains major increases in funding for several agencies that will result in significant progress towards the goal of bringing
Federal facilities into compliance with environmental laws.
The proposed increase of almost $778 mil


lion, or 21 percent above 1990 levels, represents a dramatic acceleration of Federal environmental cleanup efforts. It comes on the
heels of a $785 million increase (27 percent
over 1989) in 1990.
Magnitude of the problem.—The President's
1991 request for Federal facility compliance is
only 1 year in a long-term commitment. Cleanup of past contamination, which comprises the
majority of Federal facility compliance costs, is
estimated to cost at least $56 billion, and possibly as much as $100 billion, depending on
cleanup standards and the extent of contamination. The Department of Energy faces the
largest cleanup liability, between $48 and $86
billion, which will require at least 25 to 30
years to address. The Department of Defense
(DOD) anticipates $7 to $13 billion in cleanup
costs alone over the next 10 years.
In addition to the cleanup of contamination
from past activities, Federal agencies will have
to take corrective actions to come into compliance with current environmental standards.
They will also incur annual costs to manage
and dispose of waste from their ongoing operations.
Again, the largest costs for both corrective
actions and waste will be borne by the Department of Energy (DOE), principally because
waste generated by DOE is often radioactive.
DOE estimates needs of about $0.9 billion for
corrective actions over the next 5 years, after
which most of the problems will have been
corrected. Funding for waste management will,
however, be necessary over the long terni.
DOE estimates that waste management activities will cost from $2 billion to $2.5 billion per
year. It is estimated that these types of costs
for Federal agencies, other than DOD, will be
small by comparison.
The cumulative Federal Government cost
over 30 years for all these activities will be in
the range of $140 billion to $200 billion in
constant dollars.
257

258

THE BUDGET FOR FISCAL YEAR 1991

SPEEDING THE CLEANUP OF FEDERAL FACILITIES
(Dollar amounts in millions)

1989

Budget authority:
Energy
Defense
Interior
Agriculture
Transportation
NASA
Total budget authority
Outlays:
Energy
Defense
Interior
Agriculture
Transportation
NASA
Total outlays

1991

1990-91
Dollar
change

1990-91
Percent
change

1,657
1,155
36
5
44
26

2,190
1,402
40
20
26
30

2,791
1,520
65
30
48
32

+601
+118
+25
+10
+22
+2

+27
+8
+63
+50
+85
+7

2,923

3,708

4,486

+778

+21

1,077
1,115
30
1
19
16

2,056
1,486
30
13
30
19

2,552
1,582
44
26
44
28

+496
+96
+14
+13
+14
+9

+24
+6
+47
+101
+45
+47

2,258

3,634

4,276

+642

+18

MEETING ENVIRONMENTAL
REQUIREMENTS
Both Federal environmental statutes and a
Presidential executive order require Federal
agencies to comply with the same Federal,
State and local pollution control standards
that apply to a private person. Just as private
sector businesses must meet stringent air and
water emissions limitations, so must Federal
agencies.
While ongoing air and water compliance
problems still exist at some Federal facilities,
the major Federal facility pollution control
problem is cleanup of hazardous waste that
was disposed of prior to establishment of stringent Federal regulations governing safe dispos-




1990

al. To rectify these problems, Federal agencies
such as the Environmental Protection Agency
(EPA), and the Departments of Justice (DOJ),
DOD and DOE have made major strides since
January 1989 in accelerating the process for
cleaning up old sites under the Comprehensive
Environmental Response, Compensation and
Liability Act (CERCLA, sometimes called "Superfund"). In addition, these agencies are
working to bring operating facilities into compliance with the Resource Conservation and
Recovery Act (RCRA).
Essential to the achievement of cleanup
under CERCLA are Federal Facility Interagency Agreements (IAGs) between EPA and a Federal Agency. These IAGs set out the schedule
and plans for achieving and maintaining com-

VI.C. CLEANING UP FEDERAL FACILITIES

pliance. At present, comprehensive cleanup
agreements have been reached at 30 major facilities. Another 10 agreements are in the final
stages of negotiation.
IAGs are useful in expediting compliance because they encourage states to become involved in agreeing to a satisfactory cleanup
process, they often address environmental requirements from more than one environmental
statute, they allow for the identification and
implementation of cleanup actions which can

259
be started in the near term while long-term
planning and engineering work proceeds, and
they can address the full range of hazardous
substances, chemical and radioactive wastes in
one document.
These interagency agreements allow fines
and penalties against Federal agencies for certain types of violations and they specifically
allow citizens and states to sue the Agency to
enforce the IAG.

AGENCY EFFORTS TO CLEAN UP FEDERAL FACILITIES
Department of Energy
The Department of Energy faces the largest
environmental clean-up problem among the
Federal agencies. The problem has been driven
by two major factors:
• In the past, DOE's management practices,
culture, and environmental practices
became insulated from the increasing attention paid to environmental concerns,
due in part to the secrecy of its national
security mission.
• The enactment of RCRA and CERCLA legislation in the 1980s clarified and extended
the requirements DOE faced for cleaning
up its facilities. Prior to these laws, many
activities at DOE sites were not subject to
any cleanup requirements.
Between 1985 and 1988, the previous Administration took a series of actions to begin to
address the problem. Most significantly, the
position of Assistant Secretary for Environment, Safety and Health (ES&H) was created
to oversee the Department's compliance with
environmental regulations. Spending for
ES&H activities began to increase sharply
across the Department. However, because the
Department was then only in the early investigation stage, the full extent of the cleanup
problem could not be known.
Department of Energy 5-Year Plan—In
March 1989, Secretary Watkins directed the
Department to prepare an environmental restoration and waste management 5-year plan as
a means of gaining a better understanding of
the specific cleanup and compliance actions re


quired in the near term, as well as the cost of
those actions.The Plan encompasses four categories of program activities: corrective activities, environmental restoration, waste management operations, and applied R&D.
• Corrective activities include those actions
required to bring currently operating and
standby facilities into compliance with applicable local, State and Federal requirements and internal DOE requirements
with respect to air, water, and solid waste.
They cover the full range of potential releases to the environment from DOE facility operations.
• Environmental restoration refers to the assessment and cleanup of inactive facilities
and sites. Environmental Restoration consists of two sets of activities: (1) remedial
actions to halt or prevent potential releases from inactive waste sites and (2) decontamination and decommissioning of
older facilities no longer in operation.
• Waste management operations refer to the
ongoing activities throughout DOE that
are directed toward the management of
radioactive, hazardous, mixed and sanitary
wastes. The regulatory requirements of
waste management activities derive from
the type of waste being managed, with
EPA, DOE and the Nuclear Regulatory
Commission all having a role in determining standards and practices.
• Applied R&D is a program to resolve
major technical issues and advance beyond
current technologies for environmental

260

THE BUDGET FOR FISCAL YEAR 1991

restoration and waste management operations. The main focus of the program is
on better and less costly techniques for
waste cleanup. Major initiatives will focus
on waste minimization, development of improved environmental restoration technologies, application of robotics and automated systems technologies, and adaptation of
existing technologies.
The Plan proposes an integrated, life-cycle
approach to corrective activities, environmental restoration, and waste management operations (emphasizing waste minimization).
The work in the 5-year plan is divided into
the following priorities:
Priority 1.—Activities necessary to prevent
near-term adverse impacts to workers, the
public, or the environment.
Priority 2.—Activities necessary to comply
with existing compliance agreements (in place
or in negotiation) between DOE and Federal,
State, and local agencies.
Priority 3.—Activities required for compliance with external environmental regulations
that were not captured by Priority 1 or 2.
Priority 4.—Activities that are not required
by regulation but would be desirable to undertake.
Cost of the 5-Year Plan— The current 5-year
projections of DOE's costs estimate that spending will increase from $2.2 billion in 1990 to
$3.6 billion in 1995. The $2.2 billion for 1990
signed into law by the President represented
an increase of $530 million over 1989.
• Corrective activities represent the smallest
component of the costs. Most of these
funding requirements are in the near term
(1990-92), reflecting the need for prompt
action to bring operational facilities into
compliance with existing standards.




• Funding for environmental restoration will
more than triple if the plan is implemented. This reflects the gradual transition
from the investigation and feasibility studies required under CERCLA and RCRA to
actual remediation projects. Because the
ultimate configuration of the restoration
projects has not yet been determined, this
category of cost estimate has the greatest
degree of uncertainty.
• Funding for waste management activities
comprises the largest portion of the cost
estimates (a total of 60 percent). This reflects the cost of constructing and operating waste management facilities.
• Applied R&D program: To accomplish the
goals for improved waste management and
waste site clean-up, DOE plans to increase
the investment in applied R&D and better
focus those funds. The objective of this
program will be to accelerate the conception, creation, development, and deployment of the next generation of environmental clean-up and waste management
technologies. DOE plans to allocate 10 percent of its resources for waste activities to
fund this new R&D effort.
Accelerating
the Cleanup
Effort—The
budget provides $2.8 billion for 5-year plan activities. This is a 27 percent increase over 1990
funds. At this significantly increased level,
DOE will be able to perform the necessary
corrective activities that will lead to full compliance with State and Federal environmental
regulations. DOE can also continue to make
important progress in its remedial investigations and feasibility studies, so that the full
scope of the problem can be known and solutions planned. In addition, active waste management and environmental remediation
projects can stay on track and proceed according to schedule.

261

VI.C. CLEANING UP FEDERAL FACILITIES

FUNDING FOR THE DEPARTMENT OF ENERGY 5-YEAR PLAN IN THE 1991
BUDGET
(In millions of dollars)
1990

Total budgetary resources 1
Defense (budget authority)
Nondefense (budget authority)
Total:
Budget authority
Outlays
1

1991

1992

1993

1994

1995

2,264

2,882

3,444

3,718

3,776

3,770

1,933
257

2,362
429

2,819
486

3,020
518

3,137
458

3,161
437

2,190
2,056

2,791
2,552

3,305
3,053

3,538
3,444

3,595
3,720

3,598
3,718

Includes funding from uranium enrichment revenues. These are not included in budget authority.

Full Implementation of Compliance Agreements.—The proposed budget assures that all
highest priority activities are fully funded.
This includes approximately 1,600 separate
projects throughout the DOE complex and at
individual commercial sites where DOE has responsibility for carrying out environmental
restoration. This level of activity will ensure
that DOE comes into full compliance with environmental laws, regulations and requirements.
Single New Appropriation Account.—Finally,
as a means of formalizing the commitment of
Congress and the Administration to fund
clean-up work adequately, the President's 1991
budget includes a proposal to establish a separate appropriation account for funding all
cleanup and restoration activities. The Administration is committed to ending the practice of
trading off funds for environmental projects
with production and other programmatic activities. A separate appropriations account will
ensure that funds meant for cleanup and environmental restoration will be spent according
to the priorities set among all cleanup projects,
not according to what is left over after other
DOE needs have been satisfied.
This year, DOE will put in place a central
management system that will allow the agency
to track progress towards meeting milestones.
This system will also provide a means for
tracking expenditures of dollars to actual
"problems solved".




Department of Defense
Since 1984, the Department of Defense has
spent about $2.7 billion on necessary environmental restoration. To date about 9,000 out of
the nearly 16,000 site inspections have been
completed. DOD has identified 3,000 sites that
require remedial action (cleanup). Remedial actions have been completed on about 11 percent
of the identified sites requiring cleanup.
Based on DOD's current knowledge of the
sites and existing environmental standards,
the Department now estimates the total remaining cost of cleaning up all Defense sites to
be between $7 and $13 billion in constant 1990
dollars.
In addition to its cleanup program, DOD has
been strengthening its environmental compliance program. Environmental compliance
projects provide for upgrading currently operational facilities and the cleanup of newly generated waste. Projects include installing air
pollution control equipment on boilers, treating waste water before discharging into waterways, finding ways to reduce the amount or
toxicity of hazardous wastes, removing asbestos, and reducing radon emissions in family
housing units.
The budget proposes $1.5 billion for continuation and expansion of the defense cleanup
and environmental compliance program. This
represents an increase of $118 million over
1990 program, reflecting a commitment to
speeding up the cleanup process in order to

262
ensure timely compliance with environmental
statutes and protect the health and safety of
the American people.
Department of the Interior (DOI)
The budget proposes $65 million, a 63 percent increase above 1990, for environmental
compliance and hazardous waste cleanup activities in the Department of the Interior. This
will allow the Department to continue its site
inventory, conduct as many assessments and
investigations as possible, and keep identified
remedial actions on schedule. Assessments and
investigations of potentially contaminated sites
will increase 81 percent, from 137 in 1990 to
248 in 1991. The budget also fully funds 297
remedial actions in 1991, compared with 195 in
1990.
Each bureau within DOI has a program to
ensure environmental compliance and to fund
cleanup activities. DOI hazardous waste sites
vary widely in nature and scope. These include
unauthorized landfills on public lands, old
mining operations located on patented or
Bureau of Land Management land, polluted
irrigation drainage that, in some cases, may be
from Bureau of Reclamation water projects,
and underground storage tanks on lands managed by the Bureau of Reclamation, the
Bureau of Land Management, the National
Park Service, and the Fish and Wildlife Service. About 80 percent of DOI sites potentially
requiring cleanup are in the West.
DOI is continuing its inventory of lands and
facilities with potential problems, and conducting assessments and investigations of hazardous waste sites.




THE BUDGET FOR FISCAL YEAR 1991

Department of Agriculture (USDA)
The budget proposes $30 million, an increase
of 50 percent above 1990, for hazardous waste
cleanup activities in USDA. USDA operates a
centrally managed Hazardous Waste Management program, which is responsible for coordinating and monitoring all hazardous waste
compliance actions. The Forest Service and the
Agricultural Research Service (ARS) account
for over 95 percent of all hazardous waste compliance activities within USDA. Problems consist mainly of leaking underground storage
tanks, potential discharge of toxic wastes from
abandoned mines, and potential contamination
from past discharge of chemicals from research
facilities.
Department of Transportation (DOT)
The budget provides $48 million, an 85 percent increase above 1990, for hazardous waste
cleanup and compliance activities in the Department of Transportation. The Federal Aviation Administration (FAA) and the Coast
Guard account for nearly all of DOT's cleanup
and compliance needs. Most of the work involves replacement of underground storage
tanks.
National Aeronautics and Space
Administration (NASA)
The budget requests $32 million, an increase
of 7 percent above 1990, for cleanup and compliance activities in NASA. NASA cleanup
projects include soil and groundwater remediation, upgrade of various facilities, leaking underground storage tanks, and addressing facility deficiencies and corrective action requirements.

VII. MANAGING FOR INTEGRITY
AND EFFICIENCY




263




VILA. REFORMING THE BUDGET PROCESS
The process by which Congress deals with
the budget each year is flawed in several respects. It consumes too much time and works
poorly; and it is not achieving the deficit targets established by Congress itself in the
Gramm-Rudman-Hollings law.
The President cannot by himself do much to
reform the budget process. The formulation of
the Presidential budget is not at issue. The
problem lies in the legislative consideration of
the budget The President can suggest reforms,
but in full awareness that these fall within
congressional prerogatives.
An exception is amending the constitution,
which is addressed below. But amendments requiring a balanced budget and providing for a
line-item veto would require several years, at
best, to complete the process of ratification. In
the meantime, it is important to pursue reform
through legislative action.
MAKING THE PROCESS WORK BETTER
Joint Budget Resolution.—At present the
annual budget resolution is a concurrent resolution, which does not require the signature of
the President. A joint resolution, which needs
approval of the President, would guarantee
Presidential involvement in budget negotiations early in the process. The ensuing legislation—appropriations bills, revenue measures
and reforms of mandatory programs in reconciliation bills—would reflect those negotiations
and thus there should normally be less conflict
between the executive and legislative branches
over these bills in the later stages of each Congress.
There will always be problems of interpretation of budget resolutions and a joint resolution will not make the later budget process
completely smooth. But it would at least
assure a negotiation each year and should
settle the basic boundaries for later legislative
action.
Budget Measurement and "Scorekeeping".—
The budget process has been plagued by differences between the Administration and Con-




gress in measurement of the budgetary impact
of various legislative provisions. The Bipartisan Budget Agreement reached in April 1989
made significant progress in resolving many of
these issues, and a recent agreement between
OMB, the Department of Defense, and the
Congressional Budget Office (CBO) has resolved most differences in scorekeeping for defense.
In some cases, different assessments of the
impact on outlays or receipts of specific legislative proposals or amendments reflect honest
differences of judgment. But other issues involve definitions or similar matters, such as
whether certain outlays are "mandatory" or
"discretionary." The Administration, the CBO
and the Congressionmal committees concerned
should build on their recent cooperative work
and seek further progress in resolving the remaining differences.
Biennial Budgeting.—If the budget process
could cover 2 years instead of 1, there would
be a large saving of congressional time and
better opportunities for improved program
management in the executive branch.
Numerous Members of Congress and such
expert outside observers as the first Director of
the Congressional Budget Office have proposed
biennial budgeting. But progress has been
slow. For example, in the 1985 defense authorization act Congress mandated 2-year budgeting
for the Department of Defense, starting with
the budgets for 1988 and 1989. But in practice
this mandate has not been followed by the
Appropriations Committees, which continue to
enact annual appropriations.
A reform that stops short of 2-year appropriations for all sectors of the government
could still be useful. The Bipartisan Budget
Agreement reached in late 1987 covered the 2year period of 1988 and 1989. While it was
reached too late to affect the congressional
budget process in calendar year 1987, it helped
to make the process in calendar 1988 far
smoother. This was the case even though by
their nature such executive-legislative branch
265

266
agreements cover only broad budget categories
and cannot settle most details of the budget.
It is important that any biennial budgetary
process be linked with improved discipline in
the supplemental appropriations process (discussed below). If these are not linked, biennial
budgeting could easily degenerate into budgeting by near-continuous supplemental.
MAKING THE PROCESS MORE
EFFECTIVE IN REDUCING THE DEFICIT
Enhanced
Rescission
Authority.—The
Budget and Impoundment Control Act of 1974
severely restricted the President's powers to
"impound" funds appropriated by Congress.
The provision in that law under which the
President can "rescind" all or parts of appropriations items has, from the President's perspective, been essentially unworkable. Such rescissions are not effective unless affirmatively
approved by both houses of Congress within 45
days, and the great majority of proposed rescissions in the 15 years since the Act was passed
have been killed by simple inaction.
Congress has approved rescissions totaling
$19.6 billion of $57.8 billion submitted by
Presidents Ford, Carter, Reagan and Bush, but
$11.7 billion of the approved rescissions, or 60
percent, were in 1981, President Reagan's first
year. In the last 4 years only eight rescissions,
totaling $183 million, have been approved out
of 164 submitted with a total of $16.1 billion.
The President strongly supports a form of
enhanced rescission authority called "legislative line item veto" proposed by a group of
Senators headed by Senators Coats and
McCain in late 1989. This would require an upor-down vote in Congress on Presidential rescission proposals. In the absence of a line-item
veto amendment to the constitution, enhanced
rescission would give the President a realistic
opportunity to seek to eliminate from appropriations bills special interest items that he
deems unworthy, while offering Congress full
protection through the provision for a vote on
each rescission.
At present the entire government, with its
myriad programs and agencies, is financed by
only 13 appropriations bills. If the President
finds in these multi-billion-dollar bills items
that he regards as not in the general interest,



THE BUDGET FOR FISCAL YEAR 1991

his only choice is between vetoing the entire
bill or sending to Congress a rescission with
little hope that it will be approved. The public
interest would be better protected if the President had more effective authority to be selective in approving appropriations bills.
Restraining Supplemental Appropriations.—
If abused, the use of supplemental appropriations can undo much of the effect of budgetary
discipline exercised during the budget process.
It is generally acknowledged that supplement a l are sometimes needed to respond to emergencies, such as natural disasters or fast-breaking developments abroad. However, this necessity should not be permitted to develop into a
huge loophole that opens the way to spending
above the limits originally established for a
fiscal year. Until recently the executive branch
shared some of the blame with Congress for
over-liberal use of supplemental.
Supplemental appropriations are one reason
that deficits since enactment of the GRH law
have invariably been higher than the target
levels. Enacted supplemental totaled $39.8 billion in 1985-88 inclusive, of which $12.3 billion
were congressional additions to Administration
proposals.
In 1989 Congress acted with commendable
restraint on supplemental, including provision of offsets. It would be desirable to ensure
such restraint in the future through formal
congressional procedures.
• Supplemental should be required to meet
a "dire emergency" standard, both in their
submission by the President and their approval by Congress.
• There should be provision for automatic
offsets for both budget authority and outlays in all supplemental. The basic rule
should be an offset through a uniform
across-the-board reduction in discretionary
accounts in the same appropriations act
that is the subject of the supplemental
(that is, accounts in the jurisdiction of the
same appropriations subcommittee). This
rule would apply unless an alternative full
offset were provided in the supplemental.
Otherwise, the automatic across-the-board
offset rule should be waived only by a supermajority vote.

VILA. REFORMING THE BUDGET PROCESS

Closing Loopholes in Gramm-Rudman-Hollings.—The principal loophole is that spending
increases or revenue reductions enacted after
the final sequester order date of October 15 of
each year do not count against the G-R-H deficit
target or sequester trigger point and are not
penalized in any way. This problem is readily
solved by having a second sequester trigger
date, preferably early in the next calendar
year. The sequester calculations would have to
use the same economic and technical assumptions as in the original calculations and only
the deficit effect of new policy actions (including regulations as well as legislation) would be
added to the calculation. If the new estimate of
the deficit were above the trigger point (i.e.,
$10 billion above the deficit target for that
year), a sequester would be imposed or the
original sequester increased in magnitude.
Reinforcing Sequester.—As the G-R-H law
now stands, it can be relatively painless for
Congress to fail to meet the deficit target and
allow a sequester to be ordered in October.
Later legislation can cancel the sequester (with
or without real budget savings to reduce the
deficit). While it is widely agreed that sequester is not the preferred means of cutting
spending, the savings from sequester are real
and reduce the deficit. A desirable change
would require a supermajority vote to cancel
(or restore) sequester savings once achieved.
BUDGETARY TREATMENT OF SOCIAL
SECURITY
At present and for several decades in the
future the income of the old age, survivors and
disability insurance trust fund will exceed its
outlays for benefit payments, resulting both in
sizeable annual trust fund surpluses and a
large accumulated reserve balance. The reserve balance—which will grow to several trillion dollars under current economic assumptions—is intended to be available to finance
the benefits of the "baby boom,, generation
when it retires in the next century.
Since the inception of the social security
system in the late 1930's trust fund reserve
balances have been invested in special issues
of U.S. Government securities. When, as at
present, there are annual social security surpluses, these investments reduce, dollar for
dollar, the Treasury's need to borrow in the



267
public financial markets. In that sense, social
security surpluses are "financing" part of the
deficit in the non-social security portion of the
budget.
This situation has led to proposals in Congress to remove social security from the calculation of the budget deficit or surplus for purposes of Gramm-Rudman-Hollings. Some of
these proposals would require a balance in the
remainder of the budget, not immediately but
at a later point. The effect of these proposals
would be to produce large surpluses in the
unified budget as now calculated and a reduction in the publicly held national debt. This
may well be desirable.
Apart from the social security question, the
Gramm-Rudman-Hollings law is silent on what
is to happen with the budget after it reaches
balance in 1993. Some proposals for excluding
social security from the budget, as noted
above, would extend G-R-H by requiring gradual
achievement of balance in the non-social security portion of the budget.
However, there is a danger in these proposals. If social security were taken out of the
G-R-H budget calculations altogether, given the
large size of the annual surpluses and the prospective huge reserve balances, there would be
great temptation to spend the reserves and/or
reduce social security receipts. Such changes,
by reducing the social security reserves, would
jeopardize the benefits of those who are working now and who will retire in the next centuryThere is a parallel problem in simply allowing G-R-H to expire after 1993, while retaining
the present unified budget concept. As surpluses developed in the budget, chiefly as a consequence of the excess of social security receipts
over outlays, Congress would be likely to
"spend" those surpluses on any number of possible programs and projects, leaving at best a
balance in the budget as presently defined.
The total budget would grow and the social
security surplus would still be financing a
large deficit in the rest of the budget. The
capacity to finance future benefit payments,
however, would be reduced—and the necessity
for either a future social security tax increase
or a future social security benefit cut would be
increased.

268
To address this problem the Administration
is proposing an alternative to simply removing
social security from the budget and the deficit
calculation. The G-R-H law would be extended
beyond 1993 and would require a balance in
the unified budget for all future years. The
social security trust fund would be retained in
the budget totals as it is now, with its reserve
balances building up. But a new "Social Security Integrity and Debt Reduction Fund" would
be created. Starting in 1993 with a 3-year
phase-in, an amount equal to the projected
annual social security surplus would be paid
each year into the new fund and would count
as an outlay in the budget. The budget would
have to be balanced including this outlay. The
new fund would use its annual receipts to
retire outstanding publicly held debt.
This proposal has several useful practical
consequences:
• The social security trust fund would be
protected and would not be a victim of
raids on the reserves, which would build
up exactly as under present law for the
protection of future retirees.
• The national debt held by the public (i.e.,
outside the government) would be reduced
by substantial amounts each year, with favorable effects on interest rates, investment and the future capacity to fund
social security obligations.
• The total budget each year would be balanced. There would be no "surplus" to
create a temptation for additional spending.
FUNDAMENTAL CHANGE—AMENDING
THE CONSTITUTION
Balanced Budget Amendment—Changes in
the constitution should never be proposed
lightly. But several developments of recent
years suggest that only a change in the constitution to require an annually balanced budget
would guarantee the kind of fiscal discipline
that the well-being of the economy demands.
• The Federal Government has had only one
balanced budget in the last 30 years. Earlier in our history there was an unwritten
law that the annual budget should be balanced except in time of war or depression.
v



THE BUDGET FOR FISCAL YEAR 1991

That law is no longer honored, and only a
change in the constitution is likely to
assure a return to habitually balanced
Federal budgets.
• Recent research in the economic discipline
known as "public choice" has demonstrated the imbalance that exists in modern
democracies between the forces demanding
higher spending for particular purposes
and the general taxpayer interest in
spending restraint. This imbalance leads
to ever-higher spending and chronic deficits.
• While the Gramm-Rudman-Hollings law
has been useful in bringing greater fiscal
discipline, it has clearly not yet achieved
its statutory goals. In every year since enactment, the deficit has been higher than
the target established in the law.
A balanced budget constitutional amendment would help to remedy the problem. It
should include safeguards against achieving
the balance through higher taxes. Because
such an amendment would halt the steady
build-up of the national debt, it would protect
the interest of future generations, who are not
now able to represent themselves.
Line-Item Veto.—This essential tool is available to the Governors of more than 40 States,
and there have been no serious complaints
that it unduly increases executive power at the
expense of the legislature. As noted above in
the discussion of enhanced rescission authority, the President, as representative of the general interest, should have the power to strike
from legislation provisions that reflect only
narrow local or special interests, especially in
an era where the pressures for higher spending have produced a long string of deficits in
the budget.
To be fully effective the line-item veto
should not be limited to appropriations bills
but should also apply to provisions of authorizing bills that create entitlement or other mandatory spending, and to revenue bills. At
present about 47 percent of total spending is
mandatory (not counting an additional 15 percent for interest, which, of course, would
always have to be paid).

VILA.

REFORMING THE BUDGET PROCESS

As with any other veto, a veto by the President of an item in a spending or revenue bill
would be subject to override by a two-thirds
vote in each house of Congress. The available




269
evidence suggests that the public strongly
favors granting the President line-item veto
authority. The time has come to amend the
constitution and achieve this change.




VII.B. RESTORING A BASIS FOR CONFIDENCE
REDUCING INVESTMENT IN LOW-RETURN PROGRAMS
Total budget authority for domestic discretionary programs, which are defined as those
controlled through the annual appropriations
process, is proposed to increase from $160.5
billion in 1990 to $167.4 billion in 1991. Outlays are estimated to increase from $184.2 billion in 1990 to $194.4 billion in 1991. These
changes are the net result of many proposed
increases and decreases. This section discusses
significant reductions in domestic discretionary programs except for proposed reductions in
credit programs, which are discussed above in
"Acknowledging Inherited Claims." Proposed
increases and decreases in defense and international affairs programs are discussed above
in "Preserving National Security and Advancing America's Interests Abroad." Proposed increases and decreases in mandatory programs
are discussed above in "Reforming Mandatory
Programs."
REDUCTIONS DUE TO NON RECURRING
EVENTS
For a number of domestic discretionary programs, the budget authority proposed for 1991
is below the 1990 level because the 1990 level
includes funds for events or payments that are
not expected to occur in 1991. These include
funding in 1990 for the decennial census, disaster assistance related to the California earthquake, the partial or full payment in 1990 to
settle various Indian land and water rights
claims, and restitution payments to Alaskan
Natives.
For the Bureau of Indian Affairs, funding is
lower primarily due to the one time payment
in 1990 to convert contracts awarded to tribes
from a fiscal year to a calendar year basis.
Excluding the contract conversion funding, the
1991 request represents a $20 million increase
in funding over the 1990 enacted level. In addition, adoption of the President's proposal to
expand Federal prison construction to reduce
severe prison overcrowding increased 1990




budget authority by about $1 billion above
normal levels. The increase, in combination
with the 1991 budget request, will reduce
prison overcrowding to acceptable and manageable levels. The 1991 budget proposes a
more normal level of activity.
New budget authority for the Strategic Petroleum Reserve decreases in 1991, with no
reduction in petroleum acquired, because of a
one-time earmark in 1990 for this account of
$120 million of receipts from the Naval Petroleum Reserve. These funds will not be spent in
1990, because the additional receipts will not
be realized until the end of the fiscal year.
They will be available to finance oil purchases
in 1991, thereby reducing the need for new
budget authority in that year.
The budget also includes an apparent reduction of $99 million in energy supply R&D,
which actually represents a shift of environmental restoration and waste management
funds to a new account in 1991. After adjusting for this shift, the 1991 request of $2.1 billion is actually an increase of $154 million
above the 1990 level.
OTHER SIGNIFICANT PROPOSED
REDUCTIONS
Mass transit—Discretionary budget authority for mass transit programs is proposed to be
reduced to $1.2 billion, $751 million below the
1990 level. Operating subsidies for urbanized
areas with population over one million are proposed to be eliminated. These subsidies constitute less than 6 percent of the operating budgets of the affected areas. In addition, funding
proposed for construction of the Washington
Metrorail is reduced to $38 million, a $47 million reduction from the 1990 level. The Federal
Government has met its commitment to help
finance 89 miles of Metrorail, and no further
rail capital contributions are warranted.
271

272
Transportation passenger subsidies programs.—The 1991 budget proposes to terminate or phase down transportation related passenger subsidy programs. Proposed for termination are grants to Amtrak, which receives a
Federal subsidy to cover operating losses, capital costs, and other expenses. While Amtrak
has made significant progress in recent years
in reducing costs and increasing revenues, it
continues to run annual deficits of approximately $600 million. The Administration will
work with Congress, Amtrak, and other interested public and private parties to determine
how best to obtain needed capital from the
private sector and make Amtrak services more
cost-effective. In addition, a phase down is proposed for subsidies to air carriers under the
essential air service program, from $31 million
in 1990 to $24 million in 1991. The number of
people benefiting from the program is extremely small and the subsidies per passenger
are substantial.
New subsidized housing construction.—The
Administration's proposal to substitute rental
housing assistance for very-low-income families
in place of new construction reduces 1991
budget authority by about $600 million below
the 1990 level with no reduction in the number
of new low-income families assisted. Public
housing construction costs at least twice as
much as rental assistance, whether it is in the
form of rental certificates or housing vouchers.
By emphasizing more cost-efficient low-income
housing, the proposed 1991 level would subsidize about 4 percent more households (about
82,000) than in 1990 at less cost.
Sewage
treatment
plant
construction
grants.—More than $52 billion has been spent
by the Federal Government to build municipal
sewage treatment plants, far exceeding the $18
billion estimated in the Clean Water Act of
1972. Over 90 percent of the treated sewage
flow in America is now treated at the secondary level. Since the program has largely accomplished its objectives, Congress agreed to
phase out the program by the end of 1994,
with Federal funds in the interim used to capitalize State revolving funds, thus allowing
them to have the ongoing ability to make
needed sewage treatment investments. While
the budget proposes to reduce funding by $349
million below the 1990 level to continue this
phaseout, the request reflects a slower phase


THE BUDGET FOR FISCAL YEAR 1991

out than proposed in previous years, to allow
adequate capitalization of the new State revolving funds. The request of $1.6 billion is
$400 million above the Administration's 1990
request of $1.2 billion.
Duplicative student aid and other education
programs.—The Department of Education operates over 200 programs. No funding is proposed in 1991 for 14 programs, and significantly reduced funding is proposed for seven additional programs. Two student aid programs,
funded in 1990 at a total of $194 million, unnecessarily duplicate aid to be provided in 1991
under other programs funded at a $9.4 billion
level. No funds are requested for grants to
public libraries, funded at $83 million in 1990,
because the principal purpose of this Federal
aid, to increase access to public library services, has long since been achieved. The request
for impact aid "b" payments is reduced from
$124 million in 1990 to $25 million in 1991 to
eliminate payments to schools for federally
connected children who live in private housing
and who pose little financial burden to the
district. Funding is preserved for children from
low-rent housing projects, whose families are
poor. The budget proposes phasing down the
program of low interest, long-term loans for
general college facilities from $30 million in
1990 to $5 million in 1991. Other programs
proposed for termination or reduction are
small demonstration programs that have long
since achieved their purpose, duplicate larger
programs, or are low priority.
Grants to States for special services.—The
Administration proposes to discontinue community services block grants (CSBG) and maintain and expand grants to States for special
services, which States could use to fund services to homeless people. Proposed 1991 funding
is $42 million, $347 million below the 1990
level. Special McKinney Act services for homeless people, which are currently funded within
the CSBG program, would be funded at 192
percent of the 1990 level under the Administration's request. Community action agencies
(CAAs), provide services on a reimbursable
basis, as do other providers. CSBG provides
CAAs with less than 13 percent of their operating budgets. The Administration proposes to
fund CAA administrative costs through allocations included in the appropriations for the

VII.B.

RESTORING A BASIS FOR CONFIDENCE

various Federal programs that are partially
administered by CAAs.
Low-income
home
energy
assistance
(LIHEAP).—The
Administration
proposes
funding of nearly $1.1 billion for LIHEAP in
1991, $343 million below the 1990 level. Now
that fuel prices have moderated, despite a temporary surge of heating oil prices in late 1989,
the needs of low-income households should be
met increasingly through general purpose
income maintenance programs and less by a
program specializing in energy assistance.
Moderating fuel prices have enabled indexed
entitlements to catch up with fuel prices. For
example, since 1982, social security and supplemental security income benefits have increased 37 percent, yet weighted fuel prices
are at the 1982 level. In addition some Federal
programs provide direct assistance for housing
and utility costs. The Department of Housing
and Urban Development, for example, provides
housing and utility assistance to over 4 million
low income households, and open-ended Federal matching is available to States who wish to
provide heating supplements to the 3.8 million
households receiving aid to families with dependent children. The food stamp program
also provides indirect assistance; households
with disproportionately high energy and other
shelter costs receive an estimated $1.5 billion
in additional food stamps.
Reducing direct expenditures by the Federal
Government in strictly local economic development—The Administration proposes to terminate the Economic Development Administration, funding only close-out costs in 1991, and
to reduce funding for the Appalachian Regional Commission and the Neighborhood Reinvestment Corporation. The 1991 request for
these three programs is $95 million, a $294
million reduction from the amounts appropriated in 1990. Decisions to undertake economic
development projects with only local benefits
should be made and paid for by private investors or State and local governments. The goals
of these programs can be better met at the
Federal level through the Administration's national policies of fostering economic expansion
and job creation; and, in the case of highly
distressed areas, through incentives such as
those in the Administration's Enterprise Zone
proposal.


250-298 O - 1 9 9 0 - 9


QL3

273
Highway demonstration and other highway
projects.—The 1991 budget proposes no appropriation for highway demonstration projects
and other special interest highway projects.
Congress appropriated $236 million in 1990 for
these projects. Demonstration projects were
originally intended to demonstrate new highway construction techniques, but Congress has
increasingly used them to fund locally-oriented
projects in specific States or districts. The Administration believes that States should decide
which projects should be funded.
Reduction in Postal rates for Government
mail.—Government mail is relatively inexpensive for the Postal Service to collect, sort, and
deliver. The budget proposes to recognize the
Government's efficiency in preparing mail by
establishing a separate cost-based Government
mail subclass. This would reduce the Federal
Government's postage costs, saving $220 million per year.
Fossil energy research and development
(R&D)— Budget authority of $202 million is
proposed for fossil energy research and development. Funding requested for the oil and gas
R&D activities within the account is essentially at the 1990 appropriations level but with
increased emphasis on cost-shared geosciences
R&D with industry and university consortia.
The Administration has supported sharp increases in the clean coal technology program,
with outlays increasing in 1991 by $118 million, or 78 percent, to a total of $270 million.
Because coal technologies are moving into
commercial readiness, there is less need for
some of the activities formerly funded in the
fossil energy R&D coal program. Accordingly,
the budget proposes reductions in coal-related
R&D ($165 million), management overhead
($36 million), and miscellaneous activities ($5
million). In addition, savings from completion
of current construction projects ($10 million)
are expected.
Energy conservation.—The States have received more than $3.4 billion in oil overcharge
funds from the settlement of cases involving
violation of price controls that existed in past
years. Of this total, $2.6 billion has been allocated for the same energy conservation activities that are funded by Department of Energy
grants and for low-income energy assistance
payments. By late 1989, only an estimated

274
$925 million of the $3.4 billion in overcharge
funds available to the States had been expended. Thus, the budget proposes only $15 million
for experimental conservation grant activities,
designed to encourage States to develop more
innovative energy conservation programs. This
account also supports a broad range of conservation technology research and development
activities, which would be increased above the
1990 enacted level. Nevertheless, because of
the excess remaining oil overcharge funds,
grants to States are reduced. Thus the account
shows a reduction of $185 million below 1990,
to $183 million.
Housing for the elderly or handicapped
fund.—Budget authority proposed for the housing for the elderly or handicapped fund is $228
million, $185 million below the 1990 level. Although the Administration is proposing less
funding for these direct loans, total new units
provided would remain at about the 1990 level
of 7,689 units. The budget proposes to help
meet elderly and handicapped housing needs
by allowing non-profit groups to lease existing
housing units to qualified individuals rather
than rely solely on new construction. Leased
housing provides greater flexibility than new
construction at less cost, and would account for
43 percent of the total 7,000 new units recommended for elderly and handicapped housing
in 1991.
Community development block grants.—The
Administration proposes to reduce budget authority for community development block
grants in 1991 to $2.8 billion, $163 million
below the 1990 level. About half of this decrease is in the Secretary's discretionary fund,
where Congress funded many special interest
projects in 1990. The Administration proposes
to better target the slightly reduced grants
toward those most in need.
Health professions training subsidies.—Federal health professions training subsidies provided over the past 30 years have increased
the supply of all health care professionals. The
Administration's request for 1991 complements
State, local and private financing of health
professions training for disadvantaged students. Approximately 30 traditional categorical
health professions grants and loans ($238 million in 1990 budget authority including Health
Education Assistance Loans default payments),




THE BUDGET FOR FISCAL YEAR 1991

would be replaced with a mixture of grants
and loans targeted to disadvantaged health
professions students ($75 million in 1991
budget authority). Targeting Federal assistance to disadvantaged health professions students complements increases in health programs for low-income persons, such as efforts
to reduce infant mortality, discussed in "Reforming Mandatory Programs."
National Park Service (NPS) construction.—
The budget proposes to increase funding by
$16 million over the 1990 level for rehabilitation construction projects whose primary purpose is to protect natural resources or to enhance recreation opportunities. This increase,
from $29 million to $45 million, is included in
the President's "America the Beautiful" initiative. At the same time, the Administration is
not requesting funds for various low-priority
new construction projects added by Congress
last year. As a result, total funding proposed
for the construction account is reduced from
$248 million in 1990 to $100 million in 1991.
Customs Service and Coast Guard major
equipment purchases.—Funding proposed for
both the Customs Service's operation and
maintenance and the Coast Guard's acquisition, construction and improvements account
is below the 1990 enacted level because 1990
purchases of equipment are not repeated in
1991. For example, the 1990 appropriations for
Customs Service included $104 million to purchase and refurbish aircraft. Similarly, the
Coast Guard's capital acquisition budget is
slightly below the 1990 level because purchases
of aviation assets in 1990 are not necessary for
1991. Additional operating funds are proposed
for those new assets available in 1991.
Railroad Retirement Board subsidies.—Rail
industry pensions are partly funded by general
fund subsidies, called windfall benefits, that
will amount to $340 million in 1990. The windfall appropriation subsidizes industry pension
costs, which should be borne by the rail sector.
The Administration proposes to decrease the
general fund appropriation for windfall benefits by 25 percent, and instead use rail industry pension funds to finance the difference. No
benefit reductions are involved.
Rehabilitation loan fund.—The budget proposes to terminate the rehabilitation loan fund

VII.B.

RESTORING A BASIS FOR CONFIDENCE

in 1991 and to transfer the unobligated balance available to the assisted housing account
in support of the HOPE initiative. The fund
has $87 million in budget authority in 1990.
Termination is proposed because the program
duplicates funding provided by other more efficient rehabilitation programs.
Payment to the Postal Service fund.—The
budget proposes to reform the reduced postage
rate program for charitable and benevolent organizations, which is financed by subsidies
from the general taxpayer. These reforms
would reduce the subsidy by $80 million by
terminating abusive practices such as promoting commercial activities through taxpayer
subsidized mailings. This proposal will implement reforms recommended in a recent Postal
Rate Commission report to Congress.
Justice Assistance.—Although justice-related
activities are given a high priority in the 1991
budget, reductions are proposed in three lower
priority programs, saving $73 million in budget
authority. They include the Office of Justice
Programs, the Immigration Emergency fund of
the Department of Justice, and the State Justice Institute. These programs have served
their original purposes, largely duplicate other
programs, or can be performed by States using
their resources.
Cooperative State Research Service and Extension Service.—The Administration is committed to expanding the competitive research
program in the Department of Agriculture
(USDA) and proposes a new $100 million initiative in the 1991 budget. In past years many of
the research dollars provided to the Cooperative State Research Service and the Extension
Service have been earmarked by Congress for
low-priority, special interest purposes. The Administration does not repropose these earmarked funds.
Rental rehabilitation grants.—Budget authority of $70 million is proposed for this grant
program in 1991, a reduction of $58 million
from the 1990 level. This reduction is consistent with efforts to provide State and local governments with more flexibility in using Federal assistance for both rental and homeowner
housing rehabilitation. In addition to $70 million in budget authority for rental rehabilitation grants, the Administration is requesting
$2.8 billion for community development block




275
grants and $250 million for a new HOPE
grants program. HOPE grants will help fund
rehabilitation of rental units being converted
to ownership.
Bureau of Indian Affairs (BIA) construction.—The Administration proposes to reduce
funding for BIA construction to $103 million in
1991, $57 million below the 1990 enacted level.
No funding is included for constructing lowpriority new facilities and uneconomic irrigation projects. Such construction does not address the backlog of rehabilitation work that
needs to be performed on existing facilities.
The 1991 budget also does not include repayment of funding ($23 million) to support fire
fighting activities transferred to the operating
account. All funding for fighting forest fires is
requested in the fire fighting account under
the Bureau of Land Management.
Railroad assistance programs.— In 1990 Congress appropriated $50 million for various railroad assistance programs or projects, including
the Northeast Corridor Improvement Program
(NECIP) and local rail service assistance program (LRSAP) grants. The budget proposes to
terminate funding for NECIP and LRSAP. At
the end of 1985, responsibility for additional
construction on the Northeast Corridor was
transferred to Amtrak, and the original purpose of the LRSAP, to address the financial
crisis afflicting American railroads in the
1970's, no longer exists.
Bureau of Reclamation construction.—The
Administration is requesting $609 million in
budget authority for Reclamation's construction program in 1991, $43 million below the
1990 enacted level. Funds for several low-priority new starts added by Congress in 1990 are
deleted, and no major new construction starts
are proposed. In addition, the budget proposes
to terminate the uneconomic Garrison Diversion Unit, North Dakota, which would require
in excess of $1 billion to complete and entail
extensive mitigation of environmental damage.
However, the request supports increased funding for high-priority activities, including dam
safety work and environmental damage mitigation at existing projects, and continues funding for most currently budgeted water projects
on an efficient construction schedule.

276
Fish and Wildlife Service (FWS) construction.—The 1991 budget fully funds the Fish
and Wildlife Service's request for construction,
which is $36 million below the 1990 enacted
level of $69 million. This proposed level represents a significant increase over the funds requested by the President in 1990. This puts
FWS on track toward maintaining its infrastructure. Historically, Congress has increased
construction funding primarily for lower priority projects, which are not funded in the 1991
budget.
Abandoned mine land (AML) reclamation
grants.—Funding for State AML reclamation
grants is usually about $120 million. In 1990
Congress added $30 million to this program,
for a total budget authority of $150 million.
However several States have not adopted the
necessary procedures and practices to enable
them to fully obligate Federal funds for reclamation of mining sites. Therefore, high unobligated balances have been carried in this program, negating the need for a higher appropriation level. Budget authority of $117 million
is proposed for 1991.
Bureau of Mines operating programs.—The
1991 budget request for mining and materials
is $146 million, $32 million below the 1990 appropriated level. Mining and materials research that is long-term or high-risk is funded.
In addition, applied research funding is provided for those activities that benefit society but
would not be undertaken without Federal support. In 1990 Congress provided funding for
many lower priority projects that the 1991
budget does not propose to continue. The 1991
request is also lower because one-time transfers in 1990 are not continued.
Small Business Administration (SBA) salaries and expenses.—The $326 million in budget
authority requested for SBA administrative ex-




THE BUDGET FOR FISCAL YEAR 1991

penses is $19 million below the 1990 enacted
level, mainly due to the Administration's proposal to begin eliminating Federal support for
small business development centers. Increasing
State and private sector support for these entities has reduced the need for continued Federal grant support.
Public telecommunications facilities program
(PTFP).—PTFP was created in 1962 to provide
Federal assistance for the construction of
broadcast facilities in an effort to increase
access to public radio and television. Since it
has achieved its purpose, the Administration
proposes to terminate this program in 1991,
saving $20 million in budget authority. Over
95 percent of the United States currently receives public broadcast programming, and the
program's grants are now used for facility upgrades rather than to extend coverage.
Interstate Commerce Commission (ICC).—
The ICC has regulated portions of the interstate transportation industries for the past
century. The budget proposes to terminate the
ICC because legislative changes since 1980
have largely deregulated many of these industries and have significantly reduced the ICC's
jurisdiction and workload. The Administration
is proposing to complete motor carrier deregulation and to transfer regulatory authority
over railroads to the Departments of Transportation and Justice. Savings of $13 million are
expected from this proposal.
Congregate services program.—The Administration proposes to terminate the congregate
services program, which is funded at $6 million in 1990. In its place the Administration
proposes a $44 million demonstration that will
link housing vouchers and supportive services
for the frail elderly. This proposal is discussed
further in Part III-H.

277

VII.B. RESTORING A BASIS FOR CONFIDENCE

SIGNIFICANT PROPOSED REDUCTIONS IN DOMESTIC DISCRETIONARY
PROGRAMS
(In millions of dollars)
(In descending order of budget authority savings)
Budget Authority
1990

Funding for one-time events:
Federal prison construction
Federal-aid highways (earthquake)
Decennial census
Federal Emergency Managment Agency disaster relief
Small Business Administration disaster loan
fund
Funds appropriated to the President for unanticpated needs for natural disasters
SPR petroleum
Miscellaneous payments to Indians
Energy supply R&D
Bureau of Indian Affairs operating programs....
Other significant proposed reductions:
Rural Electrification Administration
Farmers Home Administration
Mass Transit
Transportation passenger subsidy programs
New subsidized housing construction
Sewage treatment plant construction grants
Grants to States for special services
Low-income home energy assistance
Reducing the role of the Federal Government
in local economic development
Highway demonstration and other highway
projects
Reduction in Postal rates for government
mail
Fossil energy research and development
Energy conservation grants
Housing for the elderly or handicapped fund
Community development block grants
Health professions training subsidies
Federal Crop Insurance Corporation administrative expenses
National Park Service construction
Perkins loans capital contributions and State
student incentive grants
Customs Service and Coast Guard major
equipment purchases
Railroad Retirement Board subsidies
Impact aid "b" payments
Other small education programs
Rehabilitation loan fund
Public library grants
Payment to the Postal Service fund



1991

1,397
1,000
1,235
1,198
393
230
436
192
2,184
724

Outlays

Change

374

1990

1991

Change

236

-1,023
-1,000
-999

206
113
1,397

863
125
289

+ 657
+ 12
-1,108

270

-928

1,240

1,165

-75

—

-393

658

-230
-208
-140
-99
-4

72
282
187
2,161
705

59
392
58
2,129
701

-13
+ 110
-129
-32
-4

66
863
3,498
609
1,237
2,363
390
1,372

-137
-697
3,353
91
1,434
2,339
150
1,079

-203
-1,560
-145
-518
+ 197
-24
-240
-293

—

—

228
52
2,085
720

—

-658

65
1,023
1,911
636
579
1,948
389
1,393

-2,028
-622
1,160
24
1,600
42
1,050

-2,093
-1,645
-751
-612
-579
-349
-347
-343

389

95

-294

342

358

+ 16

236

—

-236

47

76

+ 29

—

417
368
413
2,915
238

-220
202
183
228
2,752
75

-220
-215
-185
-185
-163
-163

384
341
392
2,995
214

-220
324
326
414
3,046
145

-220
-60
-15
+ 22
+ 51
-69

223
248

73
100

-150
-148

184
103

142
139

-42
+36

194

—

-194

234

159

-76

-111
-99
-99
-91
-87
-83
-80

568
340
128
84
5
83
453

587
241
46
96
-46
49
373

+ 19
-99
-82
+ 12
-51
-34
-80

674
340
124
101
—

83
453

563
241
25
10
-87
—

373

278

THE BUDGET FOR FISCAL YEAR 1991

SIGNIFICANT PROPOSED REDUCTIONS IN DOMESTIC DISCRETIONARY
PROGRAMS—Continued
(In millions of dollars)
(In descending order of budget authority savings)
Budget Authority
1990

Change

1990

1991

Change

661

588

-73

411

497

+ 86

752
128
160
160
50
653
69
150
178
30
20

Justice assistance
Cooperative State Research Service and Extension Service
Rental rehabilitation grants
Bureau of Indian Affairs construction
Business loan and investment fund
Railroad assistance programs
Bureau of Reclamation construction
Fish and Wildlife Service construction
Abandoned mine land reclamation grants
Bureau of Mines operating programs
College housing and academic facilities loans....
Public telecommunications facilites
Small Business Administration salaries and
expenses
Interstate Commerce Commission
Congregate services program
Total, Significant proposed reductions in
discretionary programs

1991

Outlays

693
70
103
104

-59
-58
-57
-56
-50
-43
-36
-33
-32
-25
-20

758
27
94
25
79
665
41
150
172

714
77
104
63
70
616
54
141
156

-44
+ 50
+ 10
38
-9
-49
+ 13
-9
-16

—

—

24

20

-4

-19
-13
-6

342
44
5

330
28
5

-12
-16

12,695 -15,154

27,239

22,596

-4,644

345
44
6
27,849

—

609
33
117
146
5
—

326
31
—

—

—

STRENGTHENING MANAGEMENT OVERSIGHT
The Federal Government spends 21 percent
of gross national product—more than a trillion
dollars, and more than all countries' economies except the United States, the U.S.S.R.,
and Japan. In 1989, the Government processed
188 million tax returns, collected $991 billion
in revenues, and paid out $227 billion to just
over 39 million social security beneficiaries. Its
financial systems managed $2.4 trillion in cash
flow and processed more than 900 million payments to five million civilian and military personnel; Federal procurement systems provided
for approximately 22 million transactions
worth roughly $200 billion.
The scale of the Federal Government makes
its management difficult and complex. There
are diseconomies of scale. At the same time,



American citizens have the right to expect
that their Government will not tolerate recurrent scandals in housing programs and procurement for the national defense. They have
the right to better assurance that Federal activities will not pollute the neighborhoods in
which they operate or the ecosystem itself.
They have the right to expect that their hard
earned tax dollars will go to broad national
purposes and not to those who can muscle legislators or officials for special breaks. Americans also have the right to first rate service
delivery, systems to provide for Government
efficiency and integrity, and a skilled and well
motivated Federal workforce. Better provision
for these rights and expectations will improve
the basis for confidence in democratic institutions.

VII.B.

279

RESTORING A BASIS FOR CONFIDENCE

A review of management problems over the
years underscores the areas of especially high
risk: where there are large numbers of transactions and cash flows; where delegations are
broad and inadequately supervised; where
there is excessively decentralized program execution; where information and systems are inadequate for decision-making and oversight;
where there are programs which, by their very
nature, risk physical and environmental
damage; where there are programs in startup
or targeted for termination; and where there is
inadequate attention to management by the
political leadership.
The systems which should provide appropriate oversight and control have, for a variety of
reasons, suffered from an ironic combination of
under-attention (producing laxity) and over-attention (producing confused accountability).
Short-term budget and deficit reduction objectives have tended to override the longer term
consistency essential to real management improvement. In addition, obstacles to multi-year




procurement and longer term investment tend
to favor temporary "quick fixes" over longer
term solutions.
At the same time, systems without technically qualified and highly motivated people to
design and operate them are of little help. As
the Civil Service 2000 and the National Commission on the Public Service reports affirm,
there are needs to provide better pay (particularly in certain areas) and to link pay and
grade to performance so as to attract and
retain in Federal Service the Government's appropriate share of highly qualified people.
INVESTMENTS IN MANAGEMENT
IMPROVEMENT
The budget requests $22.1 billion in budget
authority and $19.9 billion in outlays, $2.9 billion and $2.4 billion, respectively, more than in
1990—to improve service delivery, management integrity, management and control systems, and personnel management.

INVESTMENTS IN MANAGEMENT IMPROVEMENT
(In millions of dollars)
1990

Enacted
Net Total1
Budget authority
Outlays
Selected Improvements in Service Delivery:
Budget authority
Outlays
Assuring Greater Integrity:
Budget authority
Outlays
Improved Management and Control Systems:
Budget authority
Outlays
Pay Reform:
Budget authority
Outlays

1991

Proposed

1990-91

Increase

19,237
17,471

22,098
19,860

2,861
2,389

17,191
16,155

19,442
18,076

2,251
1,921

740
703

813
772

73
69

2,311
1,618

2,770
1,939

459
321

328
328

328
328

—
—

1
Budget authority and outlays totals for 1990 and 1991 adjusted for duplication of
items included under Service Delivery and Systems.

280
Selected Improvements in Service Delivery
The budget requests $19.4 billion for key
Federal services, $2.3 billion more than in
1990. Included are improved Internal Revenue
Service, social security and civil aviation services, and improved economic statistics programs.
Internal Revenue Service.—Roughly 113 million Americans pay taxes. The budget requests
$6.1 billion and over 120,000 staff in 1991 for
the Internal Revenue Service (IRS), $635 million more than in 1990. These amounts will
help the IRS to ensure timeliness in processing
tax returns and issuing refunds, as well as
provide improved assistance and service to taxpayers,
Social Security.—Over 39 million Americans
receive Social Security payments. The budget
requests $4.2 billion for operating the Social
Security Administration, $330 million more
than in 1990. These amounts will help the
Social Security Administration to continue replacing and upgrading obsolete computer systems and enhance the level of service assistance provided to beneficiaries by claims representatives.
Civil Aviation.—Over 53 million Americans
use commercial air services. The budget requests $8.6 billion in budget authority for the
Federal Aviation Administration (FAA), $1.2
billion more than in 1990. The budget will
allow the FAA to increase the number of air
traffic controllers, safety inspectors, and security personnel and procure equipment to modernize the National Airspace system.
Improved Economic
Statistics.—Improved
economic statistics will assist both business
and government in making sound business and
economic policy decisions. Consistent with the
Presidentially-approved recommendations of
the Economic Policy Council, the budget requests $507 million for selected Federal economic statistics programs, $52 million more
than in 1990. These increases are designed to
improve economic statistics programs in the
Economic Research Service and the National
Agricultural Statistics Service of the Department of Agriculture, the Bureau of Economic
Analysis and the Bureau of the Census of the
Department of Commerce, and the Bureau of
Labor Statistics of the Department of Labor.



THE BUDGET FOR FISCAL YEAR 1991

While a range of economic statistics programs
are affected, specific goals include improved
estimates of Gross National Product, service
sector activity, and international transactions.
Assuring Greater Integrity
Rebuilding the Public Trust.—In one of the
most obvious areas of high risk, the Administration proposed, and Congress enacted, the
HUD Reform Act of 1989. Under the Act, the
Department of Housing and Urban Development will allocate housing funds through an
open process based either on "fair sharing" or
"competition," as well as public notification of
funding decisions. The Act places strict limitations on HUD's use of discretionary funds and
gives HUD the authority to impose civil penalties to enforce program compliance. The Act
also provides HUD with a statutorily authorized Chief Financial Officer as well as a Comptroller of the Federal Housing Administration.
The budget requests an increase of $76 million,
10 percent more than 1990, and 670 additional
staff who will assist in implementing this legislation. The budget also requests an increase of
$32 million for HUD automated data systems,
including financial management systems, 44
percent more than in 1990. Finally, the HUD
Inspector General will receive an increase of
$8 million to improve monitoring and review
of HUD programs, including the use and development of improved data systems and additional audits.
Strengthening the Savings and Loan Industry.—The Administration moved quickly in
early February 1989 to respond to the crisis in
the savings and loan industry and the exhaustion of the Federal Savings and Loan Insurance Corporation's funds. The Administration
proposed comprehensive reform, and Congress
enacted the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989
in August. The legislation imposes a number of
new requirements on the industry and its regulators to assure the safety and soundness of
nearly $1 trillion of insured deposits; it also
establishes a Resolution Trust Corporation
(RTC) to handle the merger, sale or liquidation
of 500-600 insolvent S&Ls (using $50 billion
provided in the legislation). The legislation creates an Oversight Board—chaired by the Secretary of the Treasury and including the Sec-

VII.B.

RESTORING A BASIS FOR CONFIDENCE

retary of HUD and the Chairman of the Federal Reserve—to ensure that Federal interests
are protected.
Cleaning up Hazardous Waste Dumps.—The
Environmental Protection Agency will in 1990
increase enforcement and tighten oversight of
the Superfund toxic waste response program.
EPA will impose a 120-day deadline on negotiations with polluters and exercise its authority
to order cleanup if settlement is not reached.
Increased enforcement has already resulted in
$1 billion in polluter-financed clean-up activities for 1989, nearly double that in 1988. The
budget provides for a $210 million increase in
1991 to clean up additional hazardous waste
sites. This investment builds on the actions of
the Administration to provide 480 additional
staff at the Department of Justice and EPA (a
nearly 40 percent increase) to strengthen Superfund enforcement in 1990.
Improving the Integrity of Student Aid Programs.—To reduce guaranteed student loan defaults and other losses from inadequate program management, the Department of Education is pursuing a three-pronged strategy of
strengthened regulations, administrative actions, and changes in law. New regulations
give the Secretary, beginning in 1991, the authority to take "limitation, suspension and termination^ actions against schools with the
highest default rates (generally schools with
gross default rates of over 60 percent). The
Administration has also proposed legislation to
tighten "ability to benefit" criteria, authorize
guarantee agencies to garnish wages in the
event of default (up to 10 percent of pay), and
prohibit schools from recruiting with commissioned sales representatives. Most importantly,
the Department is conducting increased monitoring and compliance reviews to identify
poorly run school aid programs in order to
prevent defaults and other losses from occurring. Added support from the Inspector General should also help address these problems.
Improving Pension Oversight.—The Administration is concerned about the current level
and depth of Federal oversight of private pension plans through the Pension and Welfare
Benefits Administration. It is critical that pension plan assets are properly administered and
protected so that promised benefits can be paid
to retirees. The budget therefore requests an



281
increase of 133 investigative and legal support
staff and an additional $9.3 million in the Department of Labor to strengthen oversight.
The additional staff will enable the Department to increase reviews and investigations by
more than 50 percent and reporting enforcement investigations by 80 percent.
The Inspectors General.—The President's
Council on Integrity and Efficiency reports
that in 1988, Inspectors General enabled the
Government to recover or put to better use
over $21 billion in Federal funds and they
were responsible for nearly 4,300 successful
prosecutions and 2,500 debarment and suspension actions against persons or firms doing
business with the Government. The budget includes $715 million and 9,892 staff for the Inspectors General of the 14 Cabinet Departments and 44 independent agencies—$70 million and 437 staff more than in 1990.
Over the two-year period 1990 to 1991, the
budget specifically adds 67 staff and $6.9 million for the Department of Energy to deal with
procurement fraud; increase environmental
audits; audit contract pre-awards, incurred
costs and closeouts; and increase investigations
and analysis. It also includes resources for additional audit coverage of international program activities at the Department of Agriculture; increased audit and investigation coverage of the Pell Grant, education for the handicapped, and student loan programs at the Department of Education; increased auditing and
investigative work at the Department of the
Interior; enhanced ADP capabilities at the Department of the Treasury; additional personnel
to provide adequate coverage of the Superfund
and underground storage tank programs at
EPA; and additional audits of contractors at
NASA.
Internal Controls and Audit Follow-up.—The
Federal Managers Financial Integrity Act
(FMFIA) requires annual reports from agency
heads to the President and Congress on material weaknesses in internal controls over
agency operations, and the Inspector General
Act Amendments of 1988 require semi-annual
reports of follow-up on audit findings. While
the 1988 internal control reports showed 383
material weaknesses outstanding out of 2,199
reported since 1983, many agency heads had,
in fact, paid little attention to these reports.

282
For example, some of the problems at HUD
had surfaced as early as 1983, but were evidently not attended to.
The budget requests $3 million and 41 staff
to establish or augment offices better to coordinate and manage FMFIA internal control and
audit follow-up at the Departments of Agriculture (Farmers Home Administration), Housing
and Urban Development, Interior and Veterans Affairs, and at NASA. Further, consistent
with recommendations of the General Accounting Office, OMB will in 1990 issue instructions
to implement the recommendations of the Internal Control Interagency Coordination Council (ICICC) to link internal control review and
reporting to the budget; promote senior management involvement in the internal control
process; identify in annual reports agency actions to correct weaknesses; and validate the
accomplishment and effectiveness of corrective
actions.
OMB has identified with the agencies more
than 100 high risk areas, and a central tracking system has been established to monitor
corrective actions. Deputy Secretaries and
Deputy Administrators have been told that it
is their personal responsibility to ensure that
management integrity is maintained and
strengthened and that their agencies' progress
must be reported regularly to OMB and the
White House. OMB is also revising its instructions to agencies to require budget information
sufficient to ensure necessary resources to correct high risk weaknesses.
Improvements in Automated Systems Integrity.—The Administration will also continue to
emphasize the security and integrity of automated information systems. The Computer Security Act of 1987 called for a comprehensive
training and awareness program for all employees involved in Federal computer systems,
a process for planning adequate security in
sensitive computer systems, and revitalized
standards for Federal computer security. In
1989, agencies initiated awareness and training programs and identified and prepared security plans for more than 27,000 sensitive
computer systems. The budget requests a doubling of resources for the Federal computer
security standards program.



THE BUDGET FOR FISCAL YEAR 1991

Improved Management and Control Systems
Presidential Priority Systems.—The budget
requests nearly $2 billion to design, acquire,
and operate program information systems
which the Administration has established as
Presidential Priority Systems, $402 million
more than in 1990. These systems include the
Social Security Administration's Information
Technology System, Patent and Trademark automation, the Department of the Treasury's
tax system modernization, government-wide financial management systems, the General
Services Administration's FTS 2000 system,
systems under the Department of Transportation's National Airspace Plan, the Integrated
Border Information System, the Department of
Commerce's Advanced Weather System, and
the Securities and Exchange Commission's
EDGAR System.
Management Support Systems.—The budget
requests $558 million for management support
systems enhancement, $54 million more than
in 1990. These funds will permit continued improvement of financial systems throughout the
government so as to provide more accurate
and timely information to agency managers
and central agencies. The funds will also assist
linking these systems electronically in a government-wide network. Initiatives include extending standardization of data and systems;
providing systems to improve the management
and control of Federal property; and providing
more efficient and effective financial support
services through a Federal finance center network.
Credit Management Systems.—The budget requests $860 million for credit management, an
increase of $58 million over 1990. Agencies
have for some years been encouraged to emphasize guarantees over direct loans to meet
program goals, and between 1984 and 1989, the
percentage of the Government's credit portfolio attributable to guarantees increased from
63 percent to 74 percent and from $387 billion
to $588 billion in aggregate. If the Federal government is to achieve expected administrative
savings and reduced defaults from this change
in emphasis, effective management controls
must be implemented.
In response to this challenge, the Office of
Management and Budget and the Department

283

VII.B. RESTORING A BASIS FOR CONFIDENCE

of the Treasury have upgraded the effort to
implement the comprehensive credit management and debt collection program known as
the "Nine-Point Program." Agencies were required to comply, to the extent permitted by
law, in 1989. Future emphasis will be on improved loan origination and servicing, and improved management control of guaranteed
loans. The Administration is currently tightening standards for lender eligibility and program operations. For example, it will be required in the future that participating lenders
be certified as eligible for making Federal
guaranteed loans and that credit agencies
review performance and recertify lenders biennially.
Pay Reform
The budget allows agencies to use up to $328
million to begin Federal pay reform. The Administration will seek legislation to authorize
geographic differentials for all personnel of up
to 8 percent in New York, Los Angeles and
San Francisco; 5 percent increases in starting
salaries nationwide at GS-5 and GS-7 levels
for college entry-level occupations; the extension of current authority to hire at pay levels
above the minimum step to all grades; and
bonuses to recruit, retain or relocate critical
skill workers.
The budget will, at the same time, continue
pay demonstrations such as in the Federal
Aviation Administration to demonstrate the effects of pay on retention at high volume facilities which have experienced staffing difficulties; in the Defense Department at China
Lake, California, to improve the recruitment
and retention of technical personnel; and in
the National Institute of Standards and Technology to attract and retain top scientists
through rewards for performance.
With some exceptions, the current General
Schedule pay system does not allow differentials for different living costs and comparable
wages in different areas. While the Intelligence Authorization Act of 1989 established a
special provision to permit a 25 percent differential and relocation allowance for transferable FBI employees stationed in New York, the
problem of recruiting good people to the Federal Government extends beyond the FBI and
beyond New York. In addition, large entry


level pay disparities between the Federal and
non-Federal sectors make the Government
non-competitive in attracting as qualified a
workforce as the public is entitled to. Further,
rigidity in the current systems prevents the
Government from recruiting, retaining and relocating critical skill workers.

ILLUSTRATIVE SAVINGS FROM
MANAGEMENT REFORM
(In millions of dollars)
1991
Anticipated

Management Reform in Defense
Improving Identification and Collection
of Tax Debt
Improving Collections of Non-Tax Debt....

2,300
3,000
200

Defense Management Reform
The budget includes 1991 management savings in the Department of Defense's operations
of $2.3 billion. These savings will result from
implementation of the recommendations in the
Defense Management Report, which the President transmitted to Congress in July 1989. Personnel reductions of approximately 8,000 civilians and 8,000 military are expected in 1991 as
a result of these reforms. In addition, Defense
estimates these savings will increase to an aggregate of $39 billion by 1995.
Most of the recommendations in the Defense
Management Report, themselves based on recommendations of the Packard Commission,
have been incorporated in the President's
Management by Objectives program. They include organizational streamlining, reduced regulatory and reporting guidance, and more
flexible civilian personnel policies. Specific reforms reflected in the budget include operational and financial improvements to logistics
and supply systems, reductions in consultants,
standardization of ADP and accounting systems, and efficiencies in civilian personnel administration. Duplicative functions are slated
for streamlining or elimination, and some military support positions are scheduled to be replaced with civilian personnel.

284
Enhanced Collection of Taxes and Tax Debt
Tax debt currently owed the Government
from present and past tax years increased
from $59 billion in 1988 to $61 billion in 1989.
While this debt represents just over 6 percent
of the $991 billion in Federal receipts the Government collected in 1989 (mostly related to
tax year 1988), outstanding tax debt is still too
high and requires reduction.
To slow the growth in tax debt, the budget
therefore includes funding for the first phase
of a 3-year tax collection initiative, the overall
objective of which is to increase collections by
$2.25 billion over the 1991-93 time period. The
first phase will generate $759 million in revenues over this interval from 1,050 additional
collection personnel to be hired in 1991. Treasury and IRS will develop plans during 1991 to
achieve the balance of the 3-year objective
through a combination of management improvements, reprogramming, and resource
growth.
Funding for the first phase of this accounts
receivable tax collection initiative is part of a
$191 million budget request in 1991 to increase
revenues; this funding is expected to realize a
return of $537 million in that year. The funds
will be used to expand service center correspondence audits, examinations and information verification, in addition to debt collection
initiatives.
The Internal Revenue Service (IRS) also
plans to reallocate existing resources so as to
provide additional revenues of $2.5 billion in
1991. These management improvements include accelerated closure of tax shelters, expedited closures and settlements of large cases,
and better targeting of tax collections involving employee pension plans.
Enhanced Collection of Non-Tax Debt
Delinquent debt owed the Departments of
Agriculture, Education, Housing and Urban
Development and Veterans Affairs, and the
Small Business Administration and other
agencies, is projected to increase from $32 billion in 1988 to an estimated $40 billion in 1989.
The budget requests an additional $55 million to accelerate collections, an investment
which will impose management controls and
realize a return of $200 million in 1991. Addi


THE BUDGET FOR FISCAL YEAR 1991

tional staff positions are planned for account
servicing in the Department of Agriculture's
Farmers Home Administration (522) and the
Department of Veterans Affairs (300). Over 400
positions have been allocated to HUD field offices to improve portfolio management.
Government-wide initiatives involve more
rigorous implementation of the Nine-Point
Program (referred to above). This includes prescreening of applicants to ensure that delinquent debtors do not receive new credit, increased referral of delinquent debts to the IRS
for offset against any tax refunds due, and
increased use of private collection firms and
litigation. Legislation is proposed to allow
agencies to retain a portion of the collection
fees charged delinquent borrowers as an incentive.
NON-BUDGETARY MANAGEMENT
INITIATIVES
Federal-State Relations
Federalism
Executive
Order.—Executive
Order No. 12612, "Federalism," was issued in
1987 to "restore the division of governmental
responsibilities between the national government and the States that was intended by the
framers of the Constitution." In his speech to
the National Governors' Association in July
1989, the President personally endorsed the
Executive Order. The Order requires "assessments" of proposed policies with significant
Federalism impacts. Pursuant to the Order,
OMB reviews the assessments to ensure that
these policies are consistent with Federalism
principles and provide maximum administrative discretion to State and local governments.
Flexibility and Accountability for Education
and Training Programs.—At the President's
Education Summit with the Governors, held
September 27-28, 1989, the participants agreed
to seek greater flexibility for States and localities in the use of Federal education and training funds in return for commitments by the
States for enhanced accountability. The goal is
to shift the focus of Federal, State and local
funds and regulations from process to results:
i.e., significant and sustained improvement in
achievement for all and especially for the disadvantaged, handicapped and unemployed.

285

VII.B. RESTORING A BASIS FOR CONFIDENCE

Single Administrative
Grant Pilot Program.—The National Governors' Association
and the Office of Management and Budget are
cooperating in a program to test the use of a
single administrative grant to reimburse
States for the costs of administering the Food
Stamp Program, Medicaid, and the Aid to
Families with Dependent Children (AFDC) program. This single grant would replace separate
administrative grants to each of these programs. A single administrative grant should
simplify state accounting, cost allocation, and
reporting procedures, and reduce the cost of
administering these programs. The concept
will be tested in five states beginning in April
1990.
Regulatory Review and Reduced Paperwork
Regulatory Review.—Regulations will continue to be a primary means by which the Federal Government establishes national policy.
While some additional regulations will be
needed, others will fail to solve, or even exacerbate, the problems they are designed to fix.
Executive Order No. 12291 requires agencies,
subject to OMB review, to ensure that the benefits of regulation outweigh the costs.
OMB will review over 2,000 draft regulations
in the 1990-91 time period. OMB is developing
specific guidance to help agencies ensure that
their analysis of proposed regulations provides
decision-makers with relevant information
upon which to base decisions and not simply to
justify decisions already made.
Reducing Paperwork.—Americans spent an
estimated 1.7 billion hours (or 850,000 work
years) in 1989 solely for the purpose of collecting, reporting, and maintaining information in
response to Federal requirements. OMB reviews over 3,000 agency paperwork requirements a year with a view to eliminating unnecessary paperwork and improving the use of
information.
To understand the concerns of the man-onthe-street and improve channels for public
input, the Internal Revenue Service is increasing its testing of new tax forms through taxpayer interviews; these interviews resulted in
numerous improvements in tax forms and instructions in 1989. In addition, the Immigration and Naturalization Service is completing
a comprehensive review of its information col


lection activities; during 1990, a plan will be
developed to simplify and consolidate over 400
forms and documents with implementation initiated in 1991. Agencies are also now required
to disclose on Federal forms the time it is expected it will take to respond, and invite comment on problems directly to OMB. OMB, for
its part, is working closely with the Small
Business Administration to reduce paperwork
burdens on small business.
Most recent paperwork increases have
stemmed from legislative requirements over
which the Executive branch has had little control. Examples include legislative requirements
regarding enforcement of environmental and
immigration laws. In order to evaluate paperwork burdens before the Administration's legislative positions are developed, the departments and agencies have been asked to track
and report to OMB on major paperwork requirements in proposed legislation.
Procurement Reform
The Federal procurement process continues
to wallow in red tape. Only tax reporting and
record keeping impose a greater paperwork
burden on the public. Detailed specifications
for everyday items—33 pages for hammers, 27
pages for bedsprings—favor those few suppliers willing to meet these specialized requirements. Less competition and higher costs
result. In addition, influence peddling and
"old-boy networks" have undermined public
confidence in governmental integrity.
These have been longstanding problems and
none will be solved overnight. However, new
initiatives are directed at correcting them.
Regulatory streamlining reviews by the Department of Defense and OMB's Offices of Federal Procurement Policy and Information and
Regulatory Affairs will help eliminate unnecessary and overly-burdensome regulations and
paperwork. New legislation is being proposed
to require agencies to look first to those commercial products that the market has to offer,
giving the Government the benefit of lower
costs and greater innovation. And finally, new,
rigorous conflict of interest and disclosure
rules for consultants and lobbyists will help
dismantle the "old boy" network.

286
Professional Status for the Contracting
Workforce.—The Office of Personnel Management (OPM) has designated Federal contracting positions as professional level in accordance with the recommendations of both the
Packard Commission and the Defense Management Report. Government contracting officials
award roughly $200 billion in Federal procurements each year. Their responsibilities range
from off-the-shelf minicomputers to Trident
submarines. Since Federal contracting officers
face corporate Vice Presidents, it is an anomaly that they have for so many years been
denied professional status. In addition, OPM
will shortly promulgate new standards to give
agencies greater flexibility in hiring into this
new contracting profession top flight graduates
from the nation's colleges and universities.
The country can afford no less.
Cash and Credit Management
Cash.—The Federal Government's annual
cash flow of $2.4 trillion dollars requires the
use of cost-effective modern technology if it is
to be managed well. Currently, the Department of the Treasury estimates that 45 percent of Federal disbursements and 8 percent of
collections are made electronically; the 1991
goal is 47 percent and 9 percent, respectively.
Treasury and OMB are working with agencies
to encourage use of electronic funds transfer/
direct deposit, lockboxes, credit cards, debit
cards, and preauthorized debits. Pilot programs have been undertaken to demonstrate
electronic transfers. In addition, major changes
to the Prompt Payment Act have imposed
more rigorous limits on agency payment practices: grace periods have been eliminated and,
in December 1989, OMB issued a directive
which imposes additional penalties on agencies
which fail to pay interest on late payments.
Credit.—The Secretary of the Treasury reestablished in October 1989 the Federal Credit
Policy Working Group of the Economic Policy
Council. The Working Group has been charged
with reviewing and developing Federal policy
for direct and guaranteed loan portfolios, Government Sponsored Enterprises, loan asset
sales, and credit subsidy cost identification.
The group is chaired by OMB and includes the
program assistant secretaries from loanmaking departments and agencies. The Working Group will review the financial exposure of




THE BUDGET FOR FISCAL YEAR 1991

Government Sponsored Enterprises (which account for over $800 billion in lending for housing, agriculture and education); determine the
financial information needs of credit agencies
(particularly "early warning" systems for
emerging problems); and investigate the resource needs of credit agencies (focusing on the
type, amount, and training of personnel required to manage credit programs effectively).
Total Quality Management
The Administration is undertaking a sustained effort to implement "Total Quality
Management" (TQM) in the 19 largest Federal
agencies. TQM is a strategic approach used in
the best private sector service firms which has
proven effective in improving customer service.
In 1990, active quality and productivity improvement efforts are underway in 265 government programs employing approximately
830,000 people. These programs have operating
budgets of over $50 billion in total. These quality improvement efforts are resulting in more
responsive, cost-effective, and timely service
that better meets the needs of the public.
Privatization
The Administration is committed to ensuring consideration of private sector service delivery in areas that are not inherently governmental. Private providers have over the years
saved the Government millions of dollars, and
provided better service than in-house Governmental operations in a wide variety of areas.
The feasibility of leasing prisons from the private sector will be tested in 1990. The budget
requires study of approximately 27,000 staff
positions in 1991 to determine where private
firms can best help the Government. The Administration will continue private participation in asset disposition and meeting infrastructure needs. The renewed privatization
program will be carefully targeted to ensure
real and appropriate results of benefit to the
American taxpayer.
Drug-Free Workplace
Congress passed the Drug-Free Workplace
Act at the end of 1988. The statute requires
that, as a precondition for receiving a contract
or grant from a Federal agency, contractors
with contracts of $25,000 or more and all

VII.B.

RESTORING A BASIS FOR CONFIDENCE

grantees certify that they will maintain a
drug-free workplace. Each employer must publish a policy statement; establish an ongoing
drug awareness program; report convictions
for violations occurring in the workplace; and
either require those convicted to complete a
rehabilitation program or take appropriate
sanctions against them, up to and including
dismissal. Two common rules, one for contractors and one for grantees, were published in




287
January 1989, effective for all new contract
and grant awards after March 18, 1989.
In 1990, the Administration will propose regulations to ensure better that Federal grantees
and contractors have drug-free workplaces.
The Administration will also publish information in the Federal Register on model employer
programs and components of employer programs.




VII.C. MANAGING BY OBJECTIVES
BACKGROUND
In "Building a Better America," President
Bush directed the establishment of a Presidential Management by Objectives (MBO) system.
Its purpose is to track the implementation of
selected major policy initiatives and priorities
of the Administration from the time of their
formulation and announcement to their ultimate outcomes. (It does not apply to all Presidential priorities; rather, it applies to those
judged most appropriate for tracking through
an MBO system.) The goal of the President's
MBO system is to enable the Administration
to attain its primary objectives in a timely and
efficient manner and to ensure communication
between the agencies and the White House on
progress, needed assistance, and resources for
the selected objectives.
The President approved specific objectives
for each of the Cabinet departments and participating agencies, as well as Governmentwide crosscutting objectives, in July 1989. The
departments and agencies have prepared strategies for achieving these objectives and have
identified milestones for measuring progress.
Quarterly reports provide the President with a
comparison of actual versus planned progress
against the milestones and an assessment of
both achievements and problems that require
corrective action. The budget requests resources for the Presidentially approved objectives within overall spending constraints.
DEPARTMENT AND AGENCY
OBJECTIVES
Department of Agriculture.—Objectives are
(1) to expand our agricultural markets, both
foreign and domestic; and (2) to encourage agricultural production and land management
policies that are environmentally sound and
ensure the long-term viability of the Nation's
natural resources base.
• Agricultural Markets.—The Department is
pursuing reform of agricultural trading
practices and reduced barriers to agricultural markets in the Uruguay Round of


250-298 O-1990-10


multilateral trade negotiations and in bilateral trade negotiations in order to
expand opportunities for American farmers to compete in international markets.
• Environmentally Sound Agricultural Production and Land Management—The Department will develop and disseminate agricultural production technologies that
protect soil and water. The budget requests $1.2 billion to fund the Department's research program, which contributes to an understanding of how farming
practices can be changed to accommodate
environmental concerns while promoting
efficiency. The budget requests $190 million for the Department's role in a coordinated Federal effort to prevent water quality degradation by agricultural chemicals
and nutrients.
Department of Commerce.—Objectives are (1)
to conduct a fair, accurate, and efficient 1990
Census; and (2) to manage better ocean and
coastal environment activities through improved understanding, monitoring, and prediction.
• 1990 Census.—The preparations of the Department's Bureau of the Census for the
1990 Census are on schedule. The final apportionment counts are scheduled for delivery to the President in December 1990.
The budget requests $238 million, primarily for data processing and publication.
• Ocean and Coastal Environment.—Firstyear funding for this effort was provided
in the 1990 Commerce Appropriations Act.
The budget requests $17 million for this
initiative, almost triple the 1990 appropriation.
Department of Defense.—Objectives are (1) to
allocate scarce Defense resources to the most
urgent national security requirements; (2) to
implement recommendations of the Defense
Management Report; (3) to improve Defense
medical services and readiness; and (4) to
strengthen the Defense technology base.
289

QL3

290
• Resources for National
Security.—The
budget requests $295.1 billion for 1991,
$3.8 billion more than enacted in 1990. Defense will modernize both strategic and
conventional forces, maintain force readiness, and strengthen the technology base.
Changes will reflect recent developments
in Eastern Europe as well as potential regional threats. Savings in 1991 will be
achieved through reductions below current
levels of civilian and military personnel,
selective acquisition of equipment and supplies, and management savings described
below.
• Defense Management—The President forwarded the Defense Management Report
to Congress in July 1989. Recommendations included reform of the Defense acquisition system, streamlined and reduced
procurement systems, and improved and
standardized automated management information systems. The budget reflects
$2.3 billion in management reform savings
in 1991 and $39 billion in savings over the
1991-1995 period.
• Medical Services.—The objective is to
bring the cost of providing health care
under control. Improvements in coordination between the military direct care
system and the Civilian Health and Medical Program of the Uniformed Services
(CHAMPUS) will be sought through an integrated and managed health care approach.
• Technology Base.—Proposals to improve
management of Defense research and development resources (with emphasis on
eliminating redundancy in the DOD laboratory structure) will be forwarded to the
Deputy Secretary of Defense by May 1,
1990. In addition, a science and technology
investment strategy that can concentrate
on high leverage technologies will be developed.
Department of Education.—Objectives are (1)
to implement the President's four principles
for education (excellence, targeting of those
most in need, choice and flexibility, and accountability); (2) to increase minority participation and retention in college degree granting
programs; and (3) to improve academic
achievement of elementary and secondary



THE BUDGET FOR FISCAL YEAR 1991

school students, especially for low-income, minority, and handicapped children. For discretionary programs of the Department, the
budget requests $19.7 billion, an increase of
$1.2 billion over 1990.
• Education Summit with Governors.—The
President's September 1989 Education
Summit with Governors in Charlottesville,
Virginia, enhanced the Department's potential to accomplish all three objectives.
Agreements were reached to establish national educational goals, to seek greater
flexibility and accountability in education
and training programs, to undertake
State-by-State efforts to restructure education systems, and to report annually on
progress. The budget requests $60 million
for education statistics programs, 50 percent more than in 1990, to help develop
measures of progress.
• Principles for Education.—The Educational Excellence Act, which authorizes seven
initiatives to carry out the principles contained in "Building a Better America,"
was transmitted to Congress on April 4,
1989. By the end of the session, the Senate
had reported its version and the House
had begun hearings. Renewed efforts to
obtain enactment are planned for the next
session. In addition, the Department will
emphasize improved achievement for the
disadvantaged in the $5 billion compensatory education program of grants to local
school districts.
• Minorities in Higher Education.—The Department has launched a study of trends
in minority participation and retention in
higher education that will form the basis
for development of specific goals and
action plans by the Spring of 1990. The
Department is also surveying institutions
of higher education to develop and disseminate information on good practices
that affect attendance and retention.
• Elementary and Secondary Achievement.—
The National Goals to be established as a
result of the Summit will focus Federal,
State, and local efforts on achievement
gains for all students. In addition, the Department plans close monitoring and
annual reporting on Federal programs for

VII.C.

MANAGING BY OBJECTIVES

the disadvantaged and an annual assessment and report on education of the
handicapped and their preparation for
higher education or employment.
Department of Energy.—Objectives are (1) to
support the Nation's nuclear deterrent into
the next century (with protection of the environment and safety and health being placed on
a par with production); (2) to provide cleanup
of waste at Department of Energy (DOE) facilities across the Nation; (3) to enhance U.S.
energy security and environmental quality
through the development and execution of an
integrated market-based National Energy
Strategy; and (4) to construct the Superconducting Super Collider (SSC) accelerator on
schedule and within established estimates of
cost (with one-third of the cost to come from
non-Federal sources).
• Nuclear Production.—The Department has
prepared and is following a comprehensive
plan for improving the safety of its tritium
production reactors at the Savannah River
Site. It plans to restart the first of those
reactors by the end of 1990. Initial design
contracts have been signed for two new
production reactors to assure safe tritium
production into the next century, and
safety inspection teams have been sent to
most of the Department's nuclear weapons
plants. The budget requests $8.6 billion,
$879 million more than in 1990, to make
further safety improvements, to meet production requirements, and to continue
design (including final choice of reactor
technologies) of new production capacity.
• Clean-up.—The Department has issued for
public comment a Five-Year Plan for Environmental Restoration and Waste Management against which progress will be
measured. The budget requests $2.8 billion
in implementation of the Five-Year Plan,
$600 million more than in 1990, to assure
full compliance with environmental laws,
regulations, and requirements, and to
meet DOE commitments.
• Energy Strategy.— The Department has
held a series of public hearings on a National Energy Strategy that will rely upon
market principles to the greatest extent
possible. The Strategy will seek a national
consensus on energy policy that will be




291
aimed at reconciling our need for additional energy supplies with sound environmental and safety requirements. Enactment in
July 1989 of legislation deregulating natural gas prices and progress in revising the
Clean Air Act are important steps in implementing the strategy. The budget requests $1.0 billion for R&D programs involving renewable and fossil energy,
energy conservation, clean coal technology, and oil and gas geoscience.
• Superconducting Super Collider (SSC).—
The SSC project will proceed with design
and with the magnet industrialization program. The budget requests $318 million for
these efforts.
Department of Health and Human Services.—
The objectives are (1) to improve the health of
the American people; (2) to strengthen families
and assure family obligations; and (3) to enhance the quality of services that the Social
Security Administration delivers to the public.
• Health.—The Department has taken steps
to ensure the integrity of the Nation's biomedical research grant system. The budget
requests an increase of $279 million for
basic research, which will maintain the
Nation's commitment to basic biomedical
research at sustainable levels. The budget
also requests an increase of $588 million to
combat infant mortality; an increase of
$531 million for HIV research, prevention,
and treatment (Government-wide); and an
additional $48 million for HHS human
genome mapping.
• The Family.—The Department has published regulations implementing the new
Job Opportunities and Basic Skills training program and certain child support enhancements of the Family Support Act of
1988. These initiatives will help additional
families become self-sufficient and help
children receive the cash and medical support they deserve from non-custodial parents. The budget requests an additional
$30 million to strengthen families by extending child support services to additional recipients of public assistance.
• Social Security Administration
(SSA).—
The SSA continues its emphasis on improving the quality of services to the

292

THE BUDGET FOR FISCAL YEAR 1991

public (e.g., reducing the time to issue
emergency social security benefits from 15
to 5 days and deploying nationwide tollfree telephone access). The budget requests
$4.2 billion for operating the Social Security Administration, $330 million more than
in 1990, to continue SSA investment in
service improvements.
Department of Housing and Urban Development.—Objectives are (1) to help achieve an
end to housing discrimination; (2) to help end
homelessness, particularly for families with
children and handicapped individuals; and (3)
to expand economic development opportunities
in distressed inner cities and rural areas, increase opportunities for the poor to improve
their housing conditions, and increase homeownership opportunities for first-time home
buyers.
• Discrimination.—The budget requests $60
million to provide for more effective enforcement to end housing discrimination
on the basis of race, handicapped status,
or family status. The funds will allow
HUD to administer more effectively the
recently strengthened Fair Housing Act
(amended in 1988). The amendments significantly expanded HUD's enforcement
role and authority in prohibiting discrimination in all forms of housing.
• The Homeless.—The budget requests $985
million for programs for the homeless, including full funding of the McKinney Act
as promised by the President. The funds
will provide the homeless with a wide
range of emergency, transitional, or permanent housing, along with supportive
services. New program initiatives give special emphasis to those homeless with
mental or drug abuse problems.
• Economic Development, Housing, and
Home Ownership.—The budget requests
$1.2 billion for HOPE—Homeownership
and Opportunity for People Everywhere.
Through HOPE, the Federal Government
will provide almost $4.2 billion in new
budget authority over 3 years and several
billion dollars in tax expenditures to aid
homeownership, low-income rental housing, and enterprise zones.



Department of the Interior.—Objectives are
(1) to promote responsible stewardship for the
Nation's parks, wildlife refuges, and public
lands; (2) to improve the use and management
of the Nation's water resources; and (3) to
reform the delivery of key social, financial,
and natural resources to Native Americans.
• Stewardship of Public Lands.—The budget
requests $630 million for a major Interior/
Agriculture initiative to improve the stewardship of parks, refuges, and other public
lands. Called "America the Beautiful," the
initiative includes an expansion of the
Federal Government's program for acquisition of additional park, refuge, and public
lands; rehabilitation of facilities; enhanced
recreation; wetlands and other natural resource protection; and a tree-planting initiative.
• Stewardship of Water Resources.—The
budget requests $11.5 million for planning
studies directed at the improved use and
management of the Nation's water resources, including first-year funding of
$1.0 million for new Bureau of Reclamation studies of drought response, water
system management and optimization, environmental recovery, and management of
irrigation drainage. In addition, the
budget requests $18 million for the Geological Survey's water quality assessment recommended by the National Academy of
Sciences.
• Native Americans.—The Administration is
reviewing Native American programs to
identify and seek reforms so as better to
assist Native Americans. The budget requests about $5 million for short-term
trust fund and credit management improvements and other administrative
changes to begin addressing internal management weaknesses in Indian programs.
The budget also requests $313 million for
Indian education, including increases for
higher teacher salaries, a new preschool
development program, and improved
school evaluations; and full funding ($52
million) to settle Indian water rights
claims and make restitution payments to
Alaskan Natives.

VII.C. MANAGING BY OBJECTIVES

293

Department of Justice.—Objectives are (1) to
combat and deter criminal and unlawful behavior more effectively; (2) to reduce barriers
to equal opportunity through vigorous enforcement of the Voting Rights and Fair Housing
Acts and against criminal civil rights violations; and (3) to reduce significantly the level
of illegal immigration.

efforts to provide the basic skills and workplace training needed by entry-level workers
through enacting and implementing amendments to the Job Training Partnership Act;
and (2) to make it easier for families to meet
their child care needs through passage of a
child care initiative that is consistent with the
President's principles.

• Deterrence of Crime.—The FBI will
strengthen its capacity to investigate narcotics traffickers, organized crime groups,
white-collar crime (such as defense procurement fraud), and hostile intelligence
activities within the United States. The
budget requests $1.64 billion, $141 million
more than in 1990, to provide resources for
FBI investigative programs. In addition,
the drug investigative and white-collar
crime programs are increased by $23 million and $24 million, respectively. To address the problem of prison overcrowding,
the 1990 and 1991 funding levels for prison
construction provide $1.9 billion to construct 30,000 new beds.

• Workplace Skills and Training.—In June
1989, the Department transmitted to Congress the Administration's bill to amend
the Job Training Partnership Act (JTPA).
The amendments are designed to sharpen
the focus on preparing the least skilled for
jobs, while still retaining JTPA's publicprivate partnership in these programs.
The budget requests $1.7 billion for a new
Title II-B State grant program to help prepare nearly 683,000 low-income youth ages
16 to 21 for the world of work; it also
includes $966 million for JTPA's new Title
II-A State grant program, which will provide job training services to 370,000 disadvantaged adults in 1991. In addition, the
budget requests $50 million for a new program called Youth Opportunities Unlimited (YOU). This multi-year challenge grant
program will assist localities on a matching basis to develop coordinated human resource policy focused on at-risk youth in
inner cities and rural areas.

• Equal Opportunity.—To fulfill the Justice
Department's responsibility under the
Voting Rights Act, the Department's Civil
Rights Division in 1989 brought over 110
cases to Federal Court and reviewed more
than 3,400 proposed redistricting plans.
The budget requests more than $1.8 million dollars and 16 additional positions so
the Division can handle the increased
workload expected to follow the 1990
Census. The budget also requests $2.5 million for 47 additional positions for enforcement of the Fair Housing Act.

• Child Care.—The President has proposed a
child care initiative based on parental
choice. The Administration will continue
to work with Congress to enact legislation
that helps low-income working families
meet their child care needs, consistent
with the President's principles.

• Immigration.—It is the Department's goal
in 1990 to apprehend 650,000 illegal aliens;
complete 24,000 employer inspections and
investigations and 750,000 educational contacts; and arrest 10,000 alien smugglers.
The budget requests $289 million for the
Border Patrol to maintain an effective
border interdiction system, with emphasis
on the Southwestern border. In addition,
$5 million is requested for employee and
labor relations, including implementation
of a public outreach campaign to support a
rigorous employer sanctions program.

Department of State.—Objectives are (1) to
promote U.S. national security and international security by political and diplomatic
means; (2) to advance the cause of democracy,
solidify our democratic alliances, and promote
human rights and satisfaction of humanitarian
needs; (3) to advance the U.S, agenda on economic and trade issues; and (4) to strengthen
the total security environment for U.S. diplomatic personnel, facilities, and national security information worldwide.

Department of Labor.—Objectives are (1) to
assist private and State and local government

• International Security.—The Department
works to achieve this objective in a wide




294

THE BUDGET FOR FISCAL YEAR 1991

variety of ways. An example involves full
implementation of the Tripartite Agreement on Namibia and Angola, signed December 22, 1988. Actions completed include repatriation of refugees to Namibia,
registration of voters for the November
constituent elections, registration of political parties, and the return of nearly 19,000
Cuban troops to Cuba (with the rate of
return running ahead of schedule). The
budget requests $382 million for the administrative resources needed to promote
U.S. national security by political and diplomatic means.
• Democracy.—The Department has focused
its efforts in this area on (a) supporting
Eastern European regimes that are decentralizing political and economic authority,
(b) promoting debt relief while providing
support to democratic forces in the developing world, and (c) working with international agencies to promote human rights
and international cooperation on humanitarian issues, including refugees. In the
past months, the Department has reviewed the provisions of the Comprehensive Plan of Action (CPA) for Indochinese
refugees and contributed $4 million to the
United Nations to implement the CPA.
The budget requests $476 million to meet
the humanitarian needs of refugees
around the world.
• World Economy.—A key area for advancing the U.S. agenda on economic and trade
issues is the Department's work in the
Paris Club. In 1989, the United States rescheduled in this forum $2.25 billion of
debt owed by 22 low- and middle-income
countries. Of this total, $1.8 billion owed
by 10 low- and middle-income countries
has been rescheduled on standard terms,
and the remaining $450 million owed by
12 low-income countries has been rescheduled on exceptional terms provided under
the Toronto Summit. The budget requests
$143 million to support the Department's
administrative costs in advancing its objectives in the Paris Club and for other economic and trade issues.
• Security for U.S. Personnel and Facilities
Abroad.—The Department is in the process of revising its standards for overseas



facilities to match more closely security
requirements to the needs in specific countries. This approach will ensure that
standards will be applied abroad to address specific post requirements, thereby
reducing costs. The budget requests $364
million for security programs.
Department of Transportation. —Objectives
are (1) to improve overall transportation safety
and security by supporting those programs
that reduce transportation fatalities and accidents; (2) to keep the National Airspace
System modernization moving forward to
ensure that aviation user demands can be
safely and efficiently accommodated; and (3) to
develop by 1990 a national transportation
policy to guide the long-term allocation of
public and private resources.
Security.—
• Transportation Safety and
Among many efforts to enhance safety and
security, the Department in 1989 issued
requirements for rear seat lap/shoulder
belts in all new cars and light trucks,
called on the Nation's Governors to join a
national highway speed control campaign,
and conducted training for police officers
in 10 major metropolitan areas in how to
identify drivers under the influence of
drugs. The Department has required airlines to install explosive detection systems
to screen baggage at major international
airports and hosted an International Conference on Aging Aircraft to identify actions to maintain the continued airworthiness of older aircraft. The budget requests
$1.6 billion in funding for direct safety and
security programs, an 8 percent increase
over 1990.
• National Airspace System.—In September
1989, the Department issued the 1989 National Airspace System (NAS) Plan for
modernization of the air traffic system.
The NAS Plan is the most expensive capital program ever undertaken by the Federal Aviation Administration (FAA). The
FAA has made substantial progress in implementing the Plan through replacement
of obsolete equipment and deployment of
added capabilities. The budget requests
$2.5 billion, a 45 percent increase over
1990, to accelerate modernization of the
system and enhance capacity.

VII.C.

MANAGING BY OBJECTIVES

• National Transportation Policy.—In July
1989, the Department launched a nationwide effort to develop a national transportation policy. In response to the concerns
expressed in this process, the budget emphasizes research and development, targeted infrastructure investments, user fees,
and an enhanced partnership among the
Federal Government, State and local governments, and the private sector. The
policy will be released early in 1990.
Department of the Treasury.—Objectives are
(1) to secure enactment of an acceptable Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) and use the resources
made available to the Resolution Trust Corporation (RTC) to achieve the elimination of the
current backlog of insolvent thrifts within the
next 3 years; (2) to make perceptible progress
in implementing the Administration's initiative to reduce the debt burdens of developing
nations; (3) to secure enactment of the Administration's proposal to reduce the capital gains
tax rate; and (4) to modernize the U.S. tax
administration and collection system.
• Savings and Loan Recovery.—The President signed FIRREA into law in August
1989. FIRREA provided $50 billion: $20 billion was made available in 1989, and another $30 billion will be provided in
1990-91, to resolve problem savings institutions and stem operating losses. The
Oversight Board of the RTC sent the Congress in December 1989 a strategic plan
describing the general approach to be
taken.
• Developing Country Debt—The International Monetary Fund (IMF) and the
World Bank have agreed on guidelines for
the use of IMF and Bank resources to support debt and debt service reduction.
Mexico and the Philippines reached agreements in principle with their commercial
bank advisory committees; Venezuela,
Uruguay, and Costa Rica have made
progress in negotiations with their commercial bank lenders.
• Capital Gains Tax Rate.—The House of
Representatives passed a restructured version of the President's proposal for a capital gains tax reduction. No provision was
made by the Senate nor finally in the 1989



295
Omnibus Budget Reconciliation Act. The
Administration will again seek enactment
in 1990. The new proposal provides a 30
percent, 20 percent, and 10 percent exclusion of capital gains on all capital assets
(except collectibles) held by individuals, respectively, more than 3 years, 2 years, and
1 year.
• Internal Revenue Service (IRS) Modernization.—The IRS has completed a Strategic
Business Plan for information systems
which contains an overall tax system modernization development strategy. The
budget requests $248 million for tax
system modernization, $97 million over
1990. These funds will allow faster verification of taxpayer information, development of automated systems to eliminate
manual handling of information, and integration of old and new equipment.
Department of Veterans Affairs.—The objective is to ensure that the Department's health
care delivery systems provide cost-effective,
high-quality care on an equitable basis to the
Nation's veterans.
• Health Care.—The Department has proposed legislation to establish a commission
to study its medical care program and recommend improvements (including facility
mission changes and realignments). The
budget requests $12.3 billion, $1.0 billion
above the 1990 level, to provide operating
expenses for the VA medical care system.
Environmental Protection Agency. —Objectives are (1) to work with Congress to achieve
enactment of the President's Clean Air Act; (2)
to reinvigorate the Superfund Program
through aggressive enforcement; (3) to maintain U.S. leadership in addressing global environmental issues; and (4) to promote pollution
prevention within both the public and private
sectors.
• Clean Air Act.—The President transmitted
his Clean Air Act reauthorization proposal, the first such proposal since 1977, to
Congress in July 1989. The bill is ready for
floor action in the Senate and has been
reported from subcommittee in the House.
The budget requests an increase of $82
million and 247 workyears to implement
the President's proposals in a timely

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THE BUDGET FOR FISCAL YEAR 1991

manner and carry out the bill's emphasis
on market-based solutions.
• Super fund.—EPA has completed its 90
Day Study on ways to improve the Superfund program and is quickly implementing
the study's recommendations using an additional 500 workyears provided in 1990.
The Agency's new emphasis on enforcement has already resulted in achieving the
goal of 50 percent responsible party cleanups; EPA's current goal is to achieve over
60 percent for 1990 and 1991. The budget
requests a $210 million increase for Superfund to restore the 1990 congressional reduction and ensure that sufficient funds
are available for sites ready for cleanup.
• Global Environmental Issues.—EPA has
been active in efforts to strengthen the
Montreal Protocol on Substances That Deplete the Ozone Layer, urging other nations to support the President's call for a
worldwide phaseout of chlorofluorocarbon
(CFC) production by 2000 if safe substitutes are available. EPA has also participated with other agencies in helping to
define the potential impact of global climate change. The budget requests $13 million more than enacted in 1990 as EPA's
portion of a $1.0 billion interagency Global
Change Research Program.
• Pollution Prevention.—To promote recycling, EPA has recently proposed a rule
under the Clean Air Act which, if adopted,
would require municipal waste combustors
to reduce the waste stream by 25 percent
before incineration. The Agency has also
established a pollution prevention clearinghouse. The budget includes a $23 million increase over 1990 to carry out pollution prevention projects and implement an
Administration legislative proposal.

1989—Magellan to Venus and Galileo to
Jupiter. In 1990, NASA plans to launch
two of the "Great Observatories," the
Hubble Space Telescope and the Gamma
Ray Observatory. The budget requests $1.7
billion to continue the development of the
Comet Rendezvous and Cassini/Saturn
missions and the Advanced X-ray Astrophysics Facility and to support other
NASA space science.
• Man in Space.—NASA has safely and successfully increased the Space Shuttle
flight rate, re-establishing the U.S.
manned presence in space. The budget requests about $11 billion for additional
Shuttle flights in 1991, continued development of Space Station Freedom, and development of technology necessary for a
major new initiative for human exploration of the Moon and Mars.
• Mission
to Planet
Earth
(Global
Change).—The budget provides for initiation of Mission to Planet Earth; this
effort will provide the long-term data
needed for making sound environmental,
energy, agricultural, and economic policy
decisions. As part of the U.S. Global
Change Research Program, NASA plans to
develop and launch a series of satellites
for space-based observations and research.
The budget requests $1,034 million for this
major program, which will include the
Earth Observing System, to improve our
understanding of earth processes and
global change.
GOVERNMENT-WIDE OBJECTIVES

National Aeronautics and Space Administration.—Objectives are (1) to advance U.S. scientific leadership in the world's knowledge of the
solar system and universe; (2) to advance the
role of man in space and preserve U.S. preeminence in critical aspects of manned space
flight; and (3) to advance scientific knowledge
of the Earth and its environment.

Government Management and Integrity.—The
objective is to improve the effectiveness and
integrity of programs and services for the
public and the proper stewardship of public
resources through (1) installing and operating
a Government-wide network of financial management systems; (2) developing quality data
bases which integrate program results, budget,
and accounting data; (3) increasing priority of,
and attention to, internal controls and audit
follow-up; and (4) employing audit as a key
management tool.

• Scientific Knowledge.—NASA successfully
launched two major scientific missions in

• Financial
Management
Systems.—All
major agencies have programs underway




VII.C. MANAGING BY OBJECTIVES

to improve financial systems, but it is unlikely that the original 1992 deadline will
be met. The Chief Financial Officer Council is developing a revised implementation
plan that is both realistic and has sufficient resources behind it to be implemented. An initiative to expand information
and data standards is underway to provide
the foundation for electronically linking
agency, OMB, and Treasury systems to
provide a Government-wide network. The
budget requests $558 million for financial
systems enhancements in 1991, an increase of $54 million over 1990.
• Information
Systems.—Work has just
begun on developing improved program information systems. An initiative to identify models that can serve as prototypes for
future management information efforts is
underway. The goal is to integrate program results, budget, and accounting data
by 1993.
• Internal Controls and Audit Follow-up.—
The Government's internal control program has been strengthened through detailed reviews and identification of highrisk areas in all major agencies. Procedures to expedite correction of material
weaknesses in high-risk areas are being
installed.
• Audit Follow-up.—Increased attention has
been placed on audits and the timely correction of audit findings. The budget requests $715 million, an increase of $70 million and 437 full-time employees over 1990,
for Inspectors General.
Drug Control.—Objectives are (1) to develop
a National Drug Control Strategy; (2) to reduce
the supply of illegal drugs; and (3) to reduce
the demand for illegal drugs.
• National Drug Control Strategy.—The Administration delivered to Congress a comprehensive National Drug Control Strategy in September 1989. The Strategy calls
for better coordination and management
of Government drug control efforts at all
levels; vigorous prosecution of drug offenders by a criminal justice system that backs
up arrests with punishment that is swift
and certain; increased Federal funds to
expand the availability of drug treatment



297
as well as to improve the effectiveness of
treatment programs; and implementation
of firm drug prevention programs and
policies in schools, communities, and workplaces. To implement these programs, $9.5
billion has been provided for anti-drug
abuse programs in 1990. The budget requests $10.6 billion for drug control programs, an increase of $1.1 billion, or 12
percent, over 1990.
• Reduced Supply.—The President initiated
in 1990 a program aimed at disrupting cocaine production in the Andean nations of
Bolivia, Colombia, and Peru and increased
domestic law enforcement efforts (including a $447 million State and local grant
program to enhance street-level drug enforcement). The budget requests $7.5 billion for supply reduction, including an increase of over $200 million to implement
the second year of the 5-year Andean
strategy; $700 million for the Drug Enforcement Administration; and a $50 million program to provide law enforcement
assistance to high-intensity drug trafficking areas.
• Reduced Demand.—The National Strategy
emphasizes encouraging individuals not to
start using drugs and assisting those who
are using drugs to stop. The budget proposes $3.1 billion for drug treatment and
prevention activities. These programs include: $760 million for drug treatment
grants and technical assistance; $300 million for the Department of Veterans Affairs to provide drug treatment services;
$180 million for treatment research and
data collection; $496 million for drug prevention programs in the Department of
Health and Human Services; $593 million
for the Drug-Free Schools and Communities program and other Department of
Education programs; and approximately
$75 million for drug use prevention activities by the Department of Housing and
Urban Development.
Research and Development—Objectives are
(1) to develop a long-range R&D investment
policy; (2) to encourage private investment in
R&D; (3) to increase the supply of engineers
and scientists through appropriate Federal ac-

298
tions; and (4) to manage direct Federal investments in R&D more effectively.
• Long-Range R&D Investment Policy.—The
President's Science Advisor is preparing a
long-range research and development
strategy. The budget requests $71 billion
in budget authority for federally supported
R&D, 7 percent more than in 1990. Of
these funds, $12 billion is for basic research; basic research is a long-range investment the Government makes to
ensure continued economic growth.
• Private Sector Investment in R&D.—With
the signing of the 1989 Omnibus Budget
Reconciliation Act, the President extended
through 1990 the Research and Experimentation (R&E) tax credit of 20 percent
of a company's R&E expenditures over a
newly prescribed base amount. The Act
also changed the basis of the credit to
allow more firms to take advantage of it
(including new firms and firms beginning
new lines of business that were previously
ineligible). The budget proposes to make
the R&E tax credit permanent.
• Supply of Engineers and Scientists.—The
budget requests $463 million for the National Science Foundation's programs in
math and science education and human
resources programs at all levels. The
budget request would allow the Department of Education to increase its support
for the Dwight D. Eisenhower math and
science teacher training program by 69
percent ($94 million). The budget also includes $51 million for NASA education activities (a 21 percent increase over 1990)
and $25 million for Department of Energy
programs to improve science and engineering education (a 47 percent increase over
1990). These programs are in addition to
the training provided to thousands of graduate students through Federal competitive
grants programs.
• Management of Federal R&D.—The Administration has taken action to improve
the coordination of cross-agency R&D
issues. Government-wide R&D plans have
been developed for global change research,
high performance computing, and superconductivity. The budgets for these programs—as well as estimates for Govern


THE BUDGET FOR FISCAL YEAR 1991

ment-wide R&D in advanced imaging systems, robotics, and semiconductors—are
discussed in Part III-C.
Adult Literacy.—The objective is to increase
adult literacy through individual and cooperative program activities of Federal agencies in
coordination with State and local, private
sector, and volunteer activities.
• Adult Education Programs.—A working
group of the Domestic Policy Council is
coordinating literacy activity across the
Government. The Department of Labor
will convene a committee of business, education, and labor representatives, which
will be charged with defining the skills
needed to cope with new technologies and
providing for workplace literacy. The
budget requests $239 million, an increase
of 25 percent over 1990, for the Department of Education's Adult Education program (the largest Federal grant program
to States to support remedial education for
adults). The Education budget includes $5
million for a National Clearinghouse to
help States, localities, volunteer groups,
and the private sector learn from one another and from Federal demonstration and
research activities. The budget also requests $6.1 million for the ACTION agency's VISTA Literacy Corps, a doubling
over the 1990 level.
Credit and Cash Management.—The objective
is to protect the value of Federal credit and
cash programs through (1) sound budget presentation; (2) cost-effective management; and (3)
aggressive collection of delinquent and defaulted debt. The budget requests $860 million, an
increase of $58 million over 1990, to improve
cash and credit management.
• Budget
Presentation.—Valuations
of
agency loan portfolios will be conducted in
1990 and 1991 to determine real values
and estimate actual subsidies.
• Credit Management.—The Administration
is continuing to encourage agencies to emphasize guarantees over direct loans; between 1984 and 1989 outstanding guaranteed loans increased from $387 billion to
$588 billion. If the Federal Government is
to achieve the expected administrative
savings and reduced defaults from this

VII.C. MANAGING BY OBJECTIVES

change in emphasis, effective management
controls must be implemented. The Administration is currently tightening standards for lender eligibility and program operations; it is also establishing a system of
incentives and penalties to encourage
proper lender performance.
• Federal Revenues and Debt Collection.—To
slow the growth in tax debt, the budget
includes funding for the first phase of a 3year tax collection initiative, the overall
objective of which is to increase collections
by $2.25 billion over the 1991-93 time
period. The first phase will generate $759
million in revenues over this interval from
1,050 additional collections personnel to be
hired in 1991. Treasury and IRS will develop plans during 1991 to achieve the balance of the 3-year objective through a combination of management improvements,
reprogramming, and resource growth.
The budget also requests an additional $55
million to accelerate collections of non-tax
debt, an investment expected to improve
management controls and to realize a
return of $200 million in 1991. Additional
positions are planned for account servicing
in the Department of Agriculture's Farmers Home Administration, the Department
of Veterans Affairs, and the Department
of Housing and Urban Development. Government-wide initiatives include prescreening of applicants to ensure that delinquent debtors do not receive new credit
and that delinquent debts are referred to
the IRS for offset against any tax refund
due the debtor.
International Trade and Export Development.—Objectives are (1) to improve the U.S.
trade position through securing freer and
fairer trading conditions in international negotiations; and (2) to define, articulate, and implement the U.S. Government's role in export
development.
• Free and Fair Trade.—The United States
Trade Representative (USTR) is seeking to
open world markets and liberalize trade
through the Uruguay Round of multilateral trade negotiations and through the
active pursuit and implementation of regional and bilateral initiatives (e.g., the
U.S.-Canada Free Trade Agreement). The



299
budget funds USTR to conclude the Uruguay Round negotiations in December
1990 and to submit proposed trade agreements to Congress for approval.
• Export Promotion.—In 1989, the Department of Commerce conducted 3,000 export
promotion conferences and notified U.S.
exporters of over 100,000 export opportunities. These and other programs have encouraged over 600 firms to export for the
first time and almost 2,000 firms to enter
new overseas markets. The budget requests $159 million for the Department's
export promotion efforts, $10 million over
1990. Program expansions include funding
to examine trade opportunities in Eastern
Europe and to monitor the economic integration of the European Community.
The Public Service.—The objective is to improve the quality of the Federal Civil Service
through more effective recruitment, retention,
evaluation, and compensation practices.
• Pay and Evaluation.—In response to the
President's proposals, the Congress has recently enacted legislation to increase
senior-level pay and tie this to performance. The Office of Personnel Management
(OPM) will propose in 1990 legislation to
enact a reformed white collar pay system
that is responsive to occupational and geographical labor market differences. OPM
will continue to delegate authorities to
agencies in order to streamline agency
personnel practices and enhance the quality of employees. OPM will also encourage
more agency attention to employee development and training, including executive
and supervisory training.
• Recruitment.—OPM is continuing its efforts to provide greater flexibility in Federal personnel practices at the department
and agency levels, as through the greatly
streamlined staffing process used by the
U.S. Forest Service in summer appointments. The budget includes proposals to
provide five percent increases in starting
salaries Nationwide at the GS-5 and GS-7
entry-level occupations for college graduates, and bonuses to recruit, retain, or relocate critical skill workers.

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• Federal Health Benefits.—A reform of the
Federal Employees Health Benefits program will be proposed in 1990 in order to




THE BUDGET FOR FISCAL YEAR 1991

provide the most cost-effective mechanism
for allocating health care risks and benefits.


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