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IV. INVESTING IN THE FUTURE
Part Two-1
IV.A. INVESTING IN HUMAN CAPITAL AND
REFORMING AMERICAN EDUCATION
HIGHLIGHTS
Investments in children and young students
will help members of the next generation
maximize their human potential and further
increase the Nation's human capital. As discussed in this chapter and in Chapter IV.B.,
the budget includes several initiatives to assist
the next generation. They are summarized
below:
Preparing Young Children for School
• Head Start gives poor and handicapped
children a better chance to become healthy
and ready for school. The budget requests
an additional $100 million over the 1991
funding level. This brings the total to
$2.05 billion, which will allow 633,000
youngsters to take advantage of this prov-
en child development program. Head Start
funding is supplemented by funding support for early childhood development in
the new Child Care and Development
Block Grant program.
• The Supplemental Feeding Program for
Women, Infants, and Children (WIC) helps
low-income pregnant women and young
children get the nutrition they need. Recent studies indicate that each dollar invested in WIC saves several in Medicaid
spending. The budget increases WIC by
$223 million, to $2.6 billion, 18 percent
over 1991.
• Infant mortality is a critical problem, particularly in many large urban areas in the
United States. Early and regular prenatal
care reduces infant mortality, prematurity,
Table A - l . HIGHLIGHTS OF SPENDING ON EARLY CHILDHOOD,
EDUCATION, AND TRAINING
(Budget authority in millions of dollars)
Actual
1990
Preparing young children for school:
Head Start
WIC
Targeted infant mortality
Immunizations
Reforming Elementary and secondary education:
Proposed Educational Excellence Act
(Certificate program support fund—non-add)
Precollege math and science education
Increasing access to higher education:
Pell grants
Presidential achievement scholarships
Guaranteed student loans
Improving workforce skills:
Job Training Partnership Act adult initiative1
Adult education
Total
1
1,552
2,126
Enacted
1991
Proposed
1992
1,952
2,350
57
218
2,052
2,573
171
258
333
515
690
200
661
4,804
5,374
4,348
4,210
5,775
170
5,893
1,070
193
1,088
241
1,088
251
14,613
16,005
19,582
187
Amounts for 1990 and 1991 are estimates of activity in those years comparable to the 1992 initiative.
Part Two-3
Part Two-4
and low birth-weight. To address this
problem, the budget includes a new $171
million initiative for prevention activities
targeted to the 10 cities with the highest
infant mortality rates. Federal support for
infant mortality prevention will increase
by $676 million, 9 percent over 1991.
• Immunizations help assure that children
will not fall victim to many contagious diseases. The budget would increase Federal
support for categorical immunization
grants by $40 million, an 18.2 percent increase over the 1991 enacted level.
Reforming Elementary and Secondary
Education
• Encouraging excellence in education. Reform of the education system will insure
that the Nation's children are better prepared to enter adult life. The budget includes $690 million for a new Educational
Excellence Act to support bold new initiatives by States and localities to reform
and improve American education.
• Expanding opportunities for educational
choice is one element of the Educational
Excellence Act that will make schools
more responsive and stimulate improvements in educational performance. The
proposed Act broadens opportunities for
educational choice through a new $200
million educational certificate support
fund, to encourage State and local efforts
to expand parental choice in education.
• Improving mathematics and science education is a key to maintaining the Nation's
competitive edge in the rapidly changing
world economy. The budget proposes to invest $1.9 billion in math and science education, which includes $661 million, a 28
percent increase over 1991, for precollege
level activities.
Increasing Access to Higher Education
• Pell grants increase opportunities for students from low-income families to attend
college. The Administration's proposals for
the reauthorization of the Higher Education Act shift more of the Pell grant aid
to the lowest income students to encourage
and enable them to pursue postsecondary
study.
THE BUDGET FOR FISCAL YEAR 1992
• For the first time, the budget includes
supplementary awards for Pell grant recipients tied to academic achievement.
These Presidential Achievement Scholarships ($170 million) will be given to outstanding low-income students (Pell grant
recipients) based on superior high school
and college performance.
• In response to mushrooming default costs,
weaknesses in the guarantee structure,
and management problems, the Administration is overhauling program management and proposing a range of legislative
improvements to restore integrity to the
guaranteed student loan program, to reduce administrative costs, and to reduce
government risk.
Improving Workforce Skills
• The Job Training Partnership Act (JTPA)
provides services to improve the skills of
adults and make them more employable.
The budget includes $1.1 billion for a new,
better targeted JTPA program that will
provide basic skills and occupational training, job placement, and support services
to more than 400,000 severely disadvantaged adults.
• Improving the literacy skills of adults is
essential for America to remain competitive internationally and to increase productivity. The budget provides $286 million for Department of Education literacy
activities, including $251 million for programs in the Adult Education Act.
THE STATE OF EDUCATION TODAY
There is near universal agreement that the
educational system in this country, as presently organized and operated, is failing to
produce a sufficient number of graduates prepared to meet the demands of the changing
workplace. The signs of trouble abound:
• The SAT scores of college bound seniors
in 1990 remain a full 50 points below the
scores of college bound seniors 20 years
earlier.
• Results from the National Assessment of
Educational Progress (NAEP) indicate that
too many American students read only at
a surface level, getting the gist of material
IV.A.
Part Two-5
INVESTING IN HUMAN CAPITAL AND REFORMING AMERICAN EDUCATION
EDUCATION SPENDING RISES BUT ACHIEVEMENT STAYS LEVEL
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SCHOOL YEARS
without developing a deeper understanding of textual material; do not communicate effectively in writing; do not grasp
the four basic arithmetic operations in elementary and junior high school; lack the
specialized knowledge needed to address
science-based problems; and do not understand the context or significance of events
that have shaped American history.1
• Results from the Second International
Mathematics
Study, which obtained
achievement test results from eighth-graders in 20 countries and from students in
their final year of high school in 15 countries, showed that U.S. students performed
poorly in every grade and in every aspect
of mathematics tested.2
These results may reflect the many differences between the school policies in the U.S.
and those of other industrialized nations. For
1 The National Assessment of Educational Progress, "Accelerating
Academic Achievement: A Summary of Findings from 20 Years of
NAEP," September 1990.
2 Cited in Linn and Dunbar, "The Nation's Report Card Goes
Home: Good News and Bad About Trends in Achievement," in Phi
Delta Kappa, October 1990.
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example, the typical American school year is
short, a remnant of a 19th century agrarian
past: 180 days of instruction, beginning in September and ending in June. By contrast, the
Japanese Ministry of Education (which sets
the minimum for all schools) requires 210 days
of instruction; local Japanese school systems
add, on average, another 30 days. West German schools are in session for 226-240 days;
those in South Korea, for 220 days. The United
Kingdom, France, Finland, Luxembourg, and
the Netherlands all have school years that are
longer than in the U.S.3 High school students
in other industrialized nations often spend 8
hours a day in class, while American students
typically spend only 6 hours. By ninth grade,
more than 47 percent of Japanese students receive an additional 5 hours of instruction per
week outside the regular school day.
Moreover, recent studies have shown that,
on average, American students do not work
very hard. In a study of the educational experiences of a nationally representative sample of
3 Cited in Michael J. Barrett, "The Case for More School Days,"
the Atlantic Monthly, November 1990.
Part Two-6
eighth graders, one out of five students reported they usually or often do no homework;
almost half reported they are bored at school.4
NAEP found that 56 percent of 12th graders
reported reading 10 or fewer pages a day for
all curriculum areas and that 71 percent spent
an hour a day or less on homework.
Educational achievement is not simply a result of what students learn in school; home
support and parental involvement is essential.
Watching television has become an important
pastime for most American families, so much
so that students spend nearly as much time
watching television each week as they do in
school. In 1989, public high school students
spent, on average, 25.7 hours in class per
week, while children ages 12 to 17 spent an
average of 22 hours each week watching television. Younger children spent even more time
watching TV, with children ages 2 to 5 watching nearly 26 hours each week. This pattern
has obvious and disturbing implications for the
Nation's educational performance that are confirmed by NAEP findings which show that students who watched an average of 6 or more
hours of television each day performed considerably below their peers who reported less TV
viewing.
The existence of these problems has not
dulled public support for education. Each year,
public expenditures per pupil rise, while gains
in achievement do not, as the chart on education spending illustrates.
THE NATION RESPONDS
Report after report has documented the
failings of the education system, beginning
with A Nation At Risk published in 1983.
Groups from all parts of American society—
parents and teachers, the business community,
public officials at every level of government—
are calling for change. Signs that the system
is beginning to respond can be found in communities throughout the country.
States, which today provide more than half
the funding for public education, are undertaking a variety of interesting reforms. Some examples of State activities include:
4 Data from the National Center for Education Statistics's National Educational Longitudinal Survey of 8th graders.
THE BUDGET FOR FISCAL YEAR 1992
• Missouri's Parents as Teachers program,
which is being replicated in many States,
aims to educate parents to stimulate their
preschool children's intellectual development. The program begins with prenatal
training, includes home visits, periodic
screening of the children, and group meetings of parents and community-based advisory committees.
• New Jersey has been a pioneer in the use
of alternative certification of principals
and teachers, in order to utilize in education the skills and knowledge of individuals who have pursued other careers.
• At least seven States, led by Minnesota,
have passed laws allowing interdistrict
choice, which enables students to attend
the public school of their choice outside
their own districts.
• Connecticut and South Carolina are two
States that have adopted comprehensive
education reforms, including revamped
curricula to emphasize the mastery of
more demanding skills by children in all
grades and augmented training for teachers and administrators.
• "Schools for the 21st century" is the State
of Washington's 6-year pilot grant program
designed to determine whether increasing
local
decisionmaking
authority
will
produce more effective learning.
• Tennessee, Arizona, Utah, and California
are some of the States that have adopted
career ladder programs which encourage
teachers to take on new and different roles
and to receive compensation tied to those
differentiated roles.
• Kentucky is completely revising the way
its schools are funded. At the same time
the State is restructuring the curriculum,
establishing performance goals for elementary and secondary education, and adopting measures for determining whether
those goals have been met.
Individual school systems are also seeking
ways to engage students in learning, to keep
them in school, to improve their performance,
and to encourage and expand parental involvement in education. Some systems, such as
Dade County (Miami), Florida and Rochester,
IV.A.
INVESTING IN HUMAN CAPITAL AND REFORMING AMERICAN EDUCATION
New York are moving toward school-site management and away from centralized decisionmaking. In those communities, principals and
staffs at individual school buildings are given
increased control over key decisions affecting
education. In the Chicago, Illinois school system, numerous local school boards elected by
the community make decisions about key aspects of school operations. Milwaukee, Wisconsin, and parts of the New York City school
system, have given parents increased choice
in the selection of the schools their children
attend.
In response to the President's challenge,
businesses and individual business leaders
have become more involved in elementary and
secondary education. The business community
has had a long-standing relationship with
America's colleges and universities, but has recently increased efforts to improve the quality
of precollege education. Corporate activities
run the gamut from helping a school in a single community to substantial investments in
projects to change the entire educational system.
Another encouraging development is the increasingly innovative use of technology in education. During the 1980s, schools rapidly increased their use of computers, television and
other electronic telecommunications to deliver
instructional services. These new technologies
have shown promise as an adjunct to teaching
in a variety of subject areas and as a means
5 See U.S. Congress, Office of Technology Assessment, "Power
On! New Tools for Teaching and Learning," 1988.
Part Two-7
of engaging students at differing skill levels.5
The growing research and development in this
field includes a research center funded by the
Department of Education dedicated exclusively
to exploring, validating and disseminating
ways to improve learning through technology.
NATIONAL EDUCATION GOALS
The President has encouraged revitalizing
American education through an emphasis on
results: improved performance of students and
enhanced accountability for those results by
school officials. No longer does the debate focus
solely on how much is spent on education, how
many children sit in a classroom, or on the
age of the school building. Attention has
turned to preparing children for the classroom,
determining what children should know and
can do, and how to measure the performance
of the education system.
In September 1989, President Bush convened an Education Summit Conference with
the Nation's Governors at Charlottesville, Virginia. Their joint statement declared "the time
has come, for the first time in U.S. history,
to establish clear, national performance goals,
goals that will make us internationally competitive." The President and the Governors developed six ambitious national education goals
that President Bush announced in his 1990
State of the Union address; the Governors
unanimously endorsed these goals at the February 1990 National Governors' Association
meeting.
Part Two-8
THE BUDGET FOR FISCAL YEAR 1992
National Education Goals
1. By the year 2000, all children in America will start school ready to learn.
2.
By the year 2000, the high school graduation rate will increase to at least 90 percent.
3. By the year 2000, American students will leave grades four, eight, and twelve having
demonstrated competency in challenging subject matter, including English, mathematics, science, history and geography, and every school in America will ensure that all
students learn to use their minds well, so they may be prepared for responsible citizenship, further learning, and productive employment in our modern economy.
4.
By the year 2000, U.S. students will be first in the world in science and mathematics.
5. By the year 2000, every adult American will be literate and possess the knowledge and
skills necessary to compete in a global economy and exercise the rights and responsibilities of citizenship.
6. By the year 2000, every school in America will be free of drugs and violence and offer a
disciplined environment conducive to learning.
The goals are interrelated: reaching any one
is linked to the achievement of the others. The
goals are ambitious: meeting them will require
increased performance at every level of the
education system and the effort of every level
of government.
In order for the goals to be meaningful,
progress toward achieving them must be measured accurately and reported to the American
people on a timely basis. To oversee the development and implementation of a measurement
system for the national goals, the President
and the Governors have established the National Education Goals Panel. This group of
Governors, Administration officials, and Congressional representatives is charged with developing and issuing a "report card" to the Nation on progress toward the national education
goals. The first report card will be issued in
September 1991.
THE 1992 BUDGET POLICIES
Most of the Federal programs that help
States raise the quality of education and help
students overcome financial barriers to postsecondary education are in the Education Department, Education Department funding for
1992 would be increased in budget authority
by $2.5 billion, and in outlays by $2.6 billion.
Most funding for education comes from State
and local governments. There are several
areas, however, in which the Federal Government can and will provide leadership and resources to stimulate the reforms necessary for
States to achieve these ambitious national education goals.
States and school districts must give parents
more responsibility for determining where
their children are educated. Selection of the
school attended by a child and the kind of
educational program that a child receives are
crucial decisions that should involve parents
and students. The budget contains several proposals that will expand choice and provide that
stimulus to change.
Federal funds, which make up only a small
fraction of total expenditures on education, can
be focused in ways that promote change. The
budget provides funds to (a) stimulate reform;
(b) support research and evaluation of education programs to determine which approaches are most successful and the conditions under which a program or reform works;
and (c) disseminate the results of efforts to
reform and improve education.
The Federal Government has a critical role
to play in collecting the statistics necessary
to determine whether the goals are being met.
The very promulgation of the goals has stimu-
IV.A.
Part Two-9
INVESTING IN HUMAN CAPITAL AND REFORMING AMERICAN EDUCATION
Table A-2. HIGHLIGHTS OF THE EDUCATION DEPARTMENT BUDGET
(In millions of dollars)
Actual
1990
Enacted
1991
Proposed
1992
Elementary and secondary education:
Proposed Educational Excellence Act
(Certificate support fund—non-add)
Compensatory education1
Education block grant
Math and science State grants
Drug-free schools
5,222
457
127
539
6,076
449
202
606
690
200
6,224
449
242
632
Services for the disabled:
Special education1
Vocational rehabilitation
2,202
1,780
2,616
1,889
2,730
2,003
937
193
1,011
241
1,011
251
Postsecondary education:
Pell grants and Presidential Achievement Scholarships
Guaranteed student loans
Student support services
4,804
4,348
242
5,374
4,210
334
5,945
5,893
395
Assessment, statistics, research and improvement
Other
95
3,679
130
3,959
261
2,945
24,625
23,110
27,097
24,839
29,620
27,494
Vocational education
Adult education
Total budget authority
Total outlays
1 Amounts
in 1990 and 1991 adjusted for comparability.
investments in early childhood development are listed in Table A-l.
2 Additional
lated debate about whether and, if so, how
to measure learning by individual students in
ways that permit comparisons across students,
classes, schools, school districts, States, and
ultimately, other countries. How to measure
performance in education, whose performance
to measure, and what information to make
public are decisions that differ from State to
State, and often, from district to district and
from school to school.
At present, NAEP provides the most comprehensive, standard measure of what American students know. NAEP, which is funded
by the Department of Education, has provided
data about what students know for over 20
years, but those data have been available only
on a national basis. For the measurement of
the national goals, a more disaggregated system of measurement is needed.
Efforts to improve the quality and content
of American education have fostered the idea
that every parent ought to be given, at regular
intervals, an objective appraisal of their child's
educational progress. The information in such
appraisals should permit not only parents, but
employers, taxpayers, elected officials, and the
students to identify areas of educational
strength and weakness. Although American
students are tested frequently in schools today,
those tests do not provide such information.
The President's Education Policy Advisory
Committee is deeply engaged in this debate.
Two major foundations have funded development of national tests that may help meet this
need. Ultimately, agreement on some set of
integrated measures is essential to track
progress being made toward achievement of
these goals.
In addition to these broad themes, the budget targets funds to support the efforts of States
and localities to achieve the six national education goals.
Part Two-10
THE BUDGET FOR FISCAL YEAR 1992
GETTING CHILDREN READY FOR SCHOOL
American children must be healthy and
ready to learn if they are to make the most
of the opportunities school offers. The budget
enhances support for activities aimed at preventing illness and disease among young children, for research on child development, for
direct early childhood development services
and for support for low-income parents in caring for their children. Examples include:
• $2.05 billion for Head Start to continue
the policy of increasing the number of lowincome children and their families receiving comprehensive developmental services,
screening and immunizations, nutritional
and social services. By 1992, Head Start
is expected to serve an estimated 58 percent of all eligible four year olds. In addition, 26 States and the District of Columbia finance their own preschool programs,
most of which are focused on disadvantaged children.
• $2.6 billion for the Special Supplemental
Program for Women, Infants and Children
(WIC) to provide nutrition assistance and
education to low-income women, infants,
and children up to age five. The budget
provides sufficient funding to serve virtually all eligible pregnant women and infants, as well as additional funds targeted
at one- and two-year olds.
• $732 million for the new Child Care and
Development Block Grant, the first Federal
grant program to require that parents be
given the option of receiving a certificate
which can be used to select the child care
of their choice. This can include care by
the child's relatives, in the family's community, and in sectarian settings. The
grant is described more fully in Chapter
V.A. States will use 25 percent of the
grant funds to increase the availability of
early childhood development and beforeand after-school programs and to improve
the quality of those programs.
• Almost $10 billion for new and expanded
refundable tax credits to low-income working families with children. The tax credits,
which are described more fully in Chapter
V.A., are refundable so that if the credit
due exceeds the Federal income tax liability, the difference is paid to the family.
• $300 million for new child care grants for
families at risk of welfare dependency.
• $293 million for preschool services to children with disabilities. States use these
funds and funds from special education
basic grants, to provide services for an estimated 360,000 children ages three to
five.
• $128 million to support State systems to
identify and arrange services for handicapped infants and their families.
• $124 million in the Department of Health
and Human Services for research and
demonstrations designed to increase the
efficiency and effectiveness of social and
support services for at-risk children.
• $145 million for biomedical research
through the National Institute on Child
Health and Human Development to expand knowledge and improve treatment of
diseases afflicting children, including pediatric AIDS, Sudden Infant Death Syndrome, and childhood accidents and injuries.
IMPROVING ELEMENTARY AND SECONDARY EDUCATION
The Federal Government has limited ability
to affect the policies which determine what is
taught, by whom and for how long. The budget
does, however, include funds for initiatives designed to stimulate educational change and to
maintain support for services to children most
at risk of failure.
Among the host of Federal education programs, none focuses directly on the key issues
IV.A.
INVESTING IN HUMAN CAPITAL AND REFORMING AMERICAN EDUCATION
States must address in order to achieve the
national education goals. For example, the reform which is increasingly seen as holding the
greatest promise for significant change in education is educational choice. A number of
States and school districts are experimenting
with a variety of choice options; many more
need encouragement to do so. The budget provides $690 million for a new Educational Excellence Act, which would provide those incentives. Major provisions of the Act:
• Authorization for $200 million for an Educational certificate program support fund.
This program will provide incentive grants
to local school districts with qualified certificate programs that enhance parental
choice. Funds will be available only to
school districts with Federal compensatory
education programs for the disadvantaged
that also have operational certificate programs. Qualified programs will, at minimum, provide for public and private school
choice. Districts that receive funds will be
able to use them for a range of educational
services.
• Other education choice provisions of the
new Educational Excellence Act include:
new resources for nationally significant
demonstrations of innovative approaches
to choice; re-direction of the Education Department's block grant funds to support
choice programs; support for magnet
schools. The budget also continues support
for the Education Department's new center and clearinghouse for information on
choice programs.
• Additional authorizations are included to
support new programs to: reward schools
that raise overall student achievement; reward States with alternative methods for
certifying and training teachers and school
administrators; recognize and reward excellent teachers; create a new approach to
training of excellent school administrators;
increase the endowments of Historically
Black Colleges and Universities; stimulate
adult literacy; and to provide a new performance-based initiative in science and
mathematics (discussed later in this chapter).
• Flexibility and accountability. At the 1989
Education Summit, the President and the
Part Two-11
Governors agreed to seek legislative authority to give States more latitude in how
they use Federal programs funds for education in return for enhanced accountability for results. Congress failed to enact legislation to increase flexibility in the use
of Federal funds in 1990. The Educational
Excellence Act will contain a new effort
to enact this focus on flexibility and results.
The budget continues support for existing
programs, designed primarily to enhance the
educational performance of students who are
most in need of additional assistance and to
enhance the skills of students who do not intend to move into postsecondary education.
• $6.2 billion for compensatory education to
improve the skills of over five million educationally disadvantaged children. Federal
policy and new funding will emphasize improving the performance of the lowest
achieving children.
• $2.7 billion for the education of four million children with disabilities, an increase
of $114 million over 1991.
• $1 billion for the support of vocational
education, with emphasis on the integration of academic and job-related skills at
the secondary and postsecondary levels
and improved program accountability.
• $632 million for the Drug Free Schools
and Communities Act including $50 million, a $25 million increase over 1991, for
emergency grants to school districts hardest hit with drug problems. These activities are discussed more fully in Chapter
V.B., "Ending the Scourge of Drugs."
• Several agencies, including The Department of Education, the National Science
Foundation, the Department of Energy,
and the National Endowment for the Humanities, support the training of new
teachers and the upgrading of skills for
existing teachers. Federal funds provide
scholarships and loans to persons interested in entering the teaching profession
and are used to provide residential summer workshops, and university-based
courses for current classroom teachers.
The budget will include $20 million for
a new legislative authority to establish
Part Two-12
partnerships between school districts and
universities to provide school-based teacher training.
• Support for various education research and
statistics activities including the development of new techniques for student assessment, the expansion of the National Assessment of Educational Progress (NAEP),
and U.S. participation in international assessments—all central to the measurement of progress toward the national education goals.
The Federal Government, particularly the
Departments of Education and Labor, play a
significant leadership role in efforts to discourage dropouts and to encourage those who have
dropped out to return to school. The budget
includes:
• $29 million for the support of carefully designed and evaluated dropout demonstration projects to provide information on the
strategies that are most successful in preventing at-risk children from dropping out
THE BUDGET FOR FISCAL YEAR 1992
of school and in encouraging those who
have left to return to school.
• $874 million for the Job Corps program,
which annually provides basic education
and vocational skills training for about
65,000 high-risk economically disadvantaged youth.
• $1.3 billion for the Labor Department's
new year-round youth education and job
training program and $25 million for a
new Youth Opportunities Unlimited (YOU)
demonstration program. The new programs, targeted on severely disadvantaged
youth, will offer comprehensive services
and will provide incentives to communities
to coordinate programs.
• Continuing support for data collection activities related to the issues of school completion and school dropouts. A longitudinal
study of a nationally representative sample of students who were in the eighth
grade in 1988 is designed to influence
school policies and practices aimed at reducing school drop-outs.
MAKING U.S. STUDENTS FIRST IN THE WORLD IN MATH
AND SCIENCE
Improvement is essential in all fields of education, but in none is it more critical to the
future of the economy than mathematics and
science. Since early 1990, the interagency
Committee on Education and Human Resources (CEHR) of the Federal Coordinating
Council on Science, Engineering, and Technology has been examining what steps might
be taken to address the national education
goals related to math and science education.
The decline in student interest in math and
science has been documented by a series of
longitudinal surveys by the Department of
Education; the decline in achievement has
been documented through tests conducted by
the International Association for the Evaluation of Educational Achievement. Data from
these sources present a composite picture of
the various problems encountered as students
progress through the education pipeline.
The Committee began with an examination
of the science and engineering "pipeline".
There are two interrelated pipeline problems:
a sharp drop in the number of students pursuing education in math, science, and engineering (a problem of quantity); and poor student
achievement in math and science at the
precollege level (a problem of quality). Students who have poor experiences in math and
science tend not to pursue higher levels of education in these fields.
• By Grade 5: U.S. students score roughly
in the middle on international science
tests.
• By Grade 9: U.S. students score at the
bottom on international tests on science
and advanced mathematics; minority students demonstrate especially poor proficiency in math and science; 75 percent
of junior high school science teachers do
not meet qualifications standards recommended by the National Science Teach-
IV.A.
INVESTING IN HUMAN CAPITAL AND REFORMING AMERICAN EDUCATION
Part Two-13
REVITALIZING MATH, SCIENCE AND ENGINEERING EDUCATION
REQUIRES GREATER INVESTMENT IN THE EARLY STAGES
STUDENTS
OF THE "EDUCATION PIPELINE"
ers Association and the National Association of Teachers of Mathematics.
• By Grade 10: Fewer than one in five students expresses interest in pursuing education in natural science or engineering.
• By Grade 12: Fewer than one in 10 students tested is prepared for college level
science courses.
• At the College Undergraduate Level: Only
60 percent of the incoming freshman who
begin pursuit of a career in the natural
sciences and engineering actually earn a
B.S. degree.
phasizes precollege education, and, within
precollege education, places priority on teacher
preparation, curriculum reform and systemic
organizational reforms. The budget reflects
these Committee priorities.
The budget includes $1.9 billion for all levels
of math and science education, a 13 percent
increase over 1991. Within that total, is a 28
percent increase over 1991 for precollege programs. The specific allocation of funding by
educational level and by Federal agency is
shown in Table A-3.
PRECOLLEGE
• At the Graduate Level: Fewer than 10,000
U.S. students per year eventually earn
Ph.D degrees in the natural sciences and
engineering; 24 percent of Ph.D degrees
awarded in those fields go to foreign students.
The budget increases the current Federal investment on programs to enhance student
learning, teachers, instruction, and curriculum
materials, and broad school system reform.
The Committee on Education and Human
Resources developed a set of strategic and implementation priorities which are illustrated in
the following chart. The proposed strategy em-
As part of the new Educational Excellence
Act proposal, the budget includes a $40 million
Education Department grant program for incentives to school districts to improve student
Performance-Based Initiative in Math and
Science
Part Two-14
THE BUDGET FOR FISCAL YEAR 1992
T H E 1992 B U D G E T E S T A B L I S H E S A S T R A T E G I C F R A M E W O R K FOR
P R O G R A M S T O I M P R O V E MATH, S C I E N C E A N D E N G I N E E R I N G EDUCATION
Increasing priority
Table A-3. FUNDING INCREASES FOR MATHEMATICS, SCIENCE, AND
ENGINEERING EDUCATION ACTIVITIES
(Budget authority; dollar amounts in millions)
Enacted
1991
By educational level:
Pre-college
Undergraduate
Graduate
Total
By agency:
Agriculture
Commerce
Defense
Education
Energy
Environmental Protection Agency
Health and Human Services
Interior
National Aeronautics and Space Administration
National Science Foundation
Total
Proposed
1992
Dollar
change
Percent
change
515
417
784
661
477
803
+146
+60
+19
+28
+14
+2
1,716
1,941
+225
+13
20
7
416
235
64
7
486
41
68
372
22
8
416
330
74
13
513
42
67
456
+2
+1
+10
+14
—
—
+95
+10
+6
+27
+1
-1
+84
+40
+16
+86
+6
+2
-2
+23
1,716
1,941
+225
+13
IV.A.
INVESTING IN HUMAN CAPITAL AND REFORMING AMERICAN EDUCATION
performance in math and science. Districts
showing significant increases in student performance in math and science would qualify
for a grant and could decide to use the funds
for any purpose that will effectively promote
continued improvements in math and science
learning.
Teacher Preparation and Enhancement
Increasing the supply of well-qualified teachers is the highest priority for precollege activities. The budget includes $359 million to support workshops, courses, summer research appointments, partnerships with national research labs, equipment loans, and other innovative programs. The Energy Department laboratories are pioneering in the effort to bring
teachers into the Nation's research laboratories to learn about the latest developments in science and how to incorporate new
knowledge into classroom instruction. The goal
of these Federal efforts is to enhance the skills
of all precollege math and science teachers by
1995.
Curriculum Reform, Dissemination and
R&D
The budget includes $137 million for research to develop and disseminate new curricula and standards, and new educational technologies to enhance student learning. Funds
will be used to support: projects involving partnerships between publishers, schools and
school systems, and academic curriculum development teams; improvements in the use of
computers, computer networks, videoconferencing, and laser videodiscs in the classroom; and a diffusion network to disseminate
information about exemplary education programs available for adoption by schools, colleges, and institutions.
Organization Reform and System
Operation
The budget includes $58 million to support
efforts to foster education reform. One initiative provides support and incentives to accelerate State adoption of the effective types
of teacher preparation and enhancement, curriculum and research, assessment, standards,
and student incentive programs that are discussed above.
Part Two-15
Student Incentives and Opportunities
One way to increase enrollment in science
and mathematics is to stimulate the natural
curiosity of young students about math and
science. The budget includes $48 million for
activities such as science fairs, research experiences at university and college campuses, national labs, research facilities, museums, and
national parks, as well as direct student financial assistance, and cooperative education.
UNDERGRADUATE
Recent studies of undergraduate science and
engineering education document the need to
attract, and to graduate, a sufficient supply
of well-trained scientists and engineers to meet
future needs. For the next several years, there
will continue to be fewer traditional college
age (18-24 years old) students in the population. More of these students will be from
groups (i.e., women and minorities) that traditionally have been under-represented in
science and engineering disciplines. Over the
next decade, improvements at the precollege
level should increase the number of undergraduates pursuing science and engineering.
In the short term, however, specific improvements at the undergraduate level are needed.
The budget focuses on improving the quality
of the undergraduate academic experience,
particularly in the first 2 years of a 4-year
undergraduate sequence through improvements in curricula, faculty enhancements, and
student incentives.
Curriculum Development and Laboratory
Improvement
In a number of critical fields, undergraduate
course curricula have changed little in the past
20 years, remaining narrowly focused while
some of the most exciting research spans several disciplines. The budget provides $124 million for the support of activities to help undergraduate curricula and laboratories keep pace
with changes in scientific research.
Faculty Development and Enhancement
Faculty often devote the majority of their
time to preparing classroom and lab experiences for undergraduates, making it difficult
to stay abreast of advances in research and
Part Two-16
teaching methods. They need opportunities to
confer with other experts in their fields, and
exposure to new research developments, better
teaching methods and instrumentation. Because of the resources at the national labs,
the Federal Government is in a unique position to provide these opportunities. The budget
provides $42 million to support research experiences for undergraduate faculty at leading
research universities and national labs, workshops, conferences, and courses.
THE BUDGET FOR FISCAL YEAR 1992
Higher Education Act, the budget provides
$230 million for activities focused on students
in science and engineering fields.
GRADUATE
Student Support and Opportunities
Graduate training to develop productive researchers and advance science is essential to
the country's scientific, strategic, and economic
growth. The budget includes $803 million for
graduate education, 42 percent of all money
the Federal Government spends on math and
science education.
The largest share of Federal support for undergraduate math, science, and engineering
education is used to attract and retain science
and engineering students. Funded activities
range from scholarships to cooperative education to student research programs. In addition to the $20 billion in student financial aid
generated by the broad-based programs of the
Graduate education is the traditional focus
of mission-oriented Federal agencies. Federal
money is often the major source of funds for
study in specialized fields, such as nuclear engineering and human genome research. Most
of the support for graduate education goes into
pre- and post-doctoral traineeships and fellowships.
INCREASING ACCESS TO POSTSECONDARY EDUCATION
The Federal Government, through the programs of title IV of the Higher Education Act
(HEA), provides 68 percent of all of the funds
for direct grants, loans, and subsidized jobs
available to postsecondary students. The largest source of support for higher education is
actually the funding provided by States directly to institutions. That funding, however,
is provided primarily on a per capita basis (resulting in lower tuitions), so that low-income
and high-income persons benefit equally. The
Federal Government, therefore, provides additional aid that makes access to higher education possible for lower income students. Incremental changes in the law over the years
have weakened the ability of HEA programs
to provide that access to students with the
lowest incomes.
The Administration's proposals for reauthorization of the Higher Education Act mark a
fundamental break with the pattern of recent
changes. Under these proposals, grant aid
would be refocused to deliver more aid to the
poorest students; additional aid will be sought
to reward academic excellence; services that
help low-income and minority students prepare
for, enter, and stay in postsecondary education
would be made more widely available and
more effective; and, the integrity of the guaranteed student loan (GSL) programs would be
restored. If ongoing analysis demonstrates the
feasibility and cost effectiveness, a proposal
may be made to replace the current GSL program with a Federal direct loan program.
PELL GRANTS
For the Pell grant program, the budget requests $5.8 billion, an increase of $401 million
or 7 percent over 1991. Reauthorization proposals would raise the maximum Pell award
to $3,700, an increase of $1,300 or 54 percent
over the 1991 level. The average award would
be raised to $1,909, an increase of $425 or
29 percent over the 1991 level. These increased
expenditures and award levels would be provided in ways that counteract the past liberalizations in need analysis and Pell grant rules
that have shifted funds from the lowest income
Pell applicants to others from higher income
levels.6
6Mortenson, Thomas G., "Pell Grant Program Changes and
Their Effects on Applicant Eligibility 1973-74 to 1988-89", for the
American College Testing Program, spring 1989.
IV.A.
INVESTING IN HUMAN CAPITAL AND REFORMING AMERICAN EDUCATION
There is evidence (a) that "aid in the form
of grants has the largest effect on the enrollment behavior of students from low-income
families"7 and (b) that low-income persons are
particularly sensitive to increases in college
costs.8 The higher spending and award levels
help shift resources to the poor, but equally
important to improving conditions are the proposed changes in eligibility and award rules.
Among the most significant changes is an
award rule that would, subject to other rules,
have the Pell grant meet 79 percent of objectively measured need, less the expected family
contribution, for students with family incomes
under $10,000, compared with 30 percent of
need for family incomes over $30,000. Under
current law, Pell grants can meet up to 60
percent of cost of attendance for eligible students, regardless of family income.
Students from somewhat higher income families may also need help to pay for higher education, especially at higher cost private
schools. The Administration's proposals recognize this need as well, and increase annual
loan limits for the heavily subsidized Guaranteed student loans.
Recognizing and Rewarding Academic
Achievement
The budget proposes $170 million for new
Presidential Achievement Scholarships for
high achieving Pell grant recipients. This reauthorization proposal would, for the first time,
use title IV HEA aid to provide incentives to
students to raise their academic standards and
performance. Under this proposal, awards
would be given to outstanding first year Pell
grant recipients, based on superior high school
performance. Pell recipients could qualify for
additional awards based on their postsecondary academic performance. This $500 award
is in addition to the basic Pell grant, which
is provided solely on the basis of need.
The reauthorization proposals would specify
that once in a postsecondary institution, no
individual may continue to receive HEA aid
unless his class standing is above the lowest
10 percent. Although this standard should not
7 Leslie, Larry L. and Paul T. Brinkman, "The Effects of Student
Financial Aid, " in The Economic Value of Higher Education, 1988.
8 McPherson, M. and M. Schapiro, Measuring the Effects of Federal Student Aid: An Assessment of Some Methodological and Empirical Problems, forthcoming.
Part Two-17
be very hard to meet for the vast majority
of aid applicants, it will exclude some who can
now receive aid despite extremely poor performance. Coupled with rewards for high
achievement, this provision adds weight to the
determination that aid applicants understand
the value not only of attendance but of improved performance in higher education, and
that aid should be delivered to those most likely to benefit from and succeed in postsecondary
education.
STUDENT SUPPORT SERVICES
Federal funds support services for low-income and minority elementary and secondary
students to help them prepare for higher education, and to help such students stay in higher education. For these support services, the
budget includes $395 million, an increase of
18 percent over 1991. Reauthorization proposals would change the way both types of services are funded, so that they reach more students and provide aid more effectively.
Federally funded pre-college services are
now provided to institutions that, in general,
have been receiving the funds for many years.
However effective individual projects may be,
there is no evidence that the programs, as a
whole, are affecting average college going rates
among low-income and minority groups.
Reauthorization proposals would provide
this aid to State higher education agencies,
which would then provide the funds to institutions of higher education that form ties with
schools with compensatory education programs. These schools have the highest concentrations of low-income students and are receiving $5.7 billion in Federal aid for their
educationally disadvantaged students. The
new support services program will make it possible to devise strategies that capitalize on
both resources to aid the students who need
it most.
For students in postsecondary schools, reauthorization proposals would require that any
school whose students benefit from Federal
HEA aid must have basic support services in
place for these students. Federal aid for 2- and
4-year schools would be reserved for those in
the weakest financial situation that need this
help in order to provide quality services.
Part Two-18
THE BUDGET FOR FISCAL YEAR 1992
Table A-4. PELL GRANT PROGRAM REFORMS
Current
law
Pell grants:
Budget authority (in millions of dollars)
Maximum award (in dollars)
Average award (in dollars)
Families with income under $10,000:
Amount of aid (in millions of dollars)
Share of aid (percent)
Share of recipients (percent)
Average award (dollars)
Presidential Achievement Scholarships:
Budget authority (in millions of dollars)
Average award (in dollars)
RESTORING
INTEGRITY
TO
THE
GUARANTEED STUDENT LOAN (GSL)
PROGRAMS
The Federal Government helps students and
their parents meet the costs of postsecondary
education by creating an extensive private
market for student loans operated through an
intermediary set of State and non-profit private entities termed guarantee agencies. Annual loan volume in the GSL program has
roughly doubled since 1982 and quadrupled
since 1979. Loans outstanding at the end of
1990 totalled almost $53 billion.
Unfortunately, gross default rates have also
grown rapidly, climbing from 12.5 percent in
1980 to 16 percent in 1990, although the net
default rate, which takes collections into account, has remained at 10 to 11 percent. In
the summer of 1990, the Higher Education Assistance Foundation (HEAF), one of the largest
guarantee agencies, collapsed—another sign of
trouble in the GSL program. In addition, Senate hearings on the student aid programs
called attention to a range of statutory and
administrative weaknesses in the GSL program.
Legislative changes to improve the GSL program were proposed by the Administration and
largely incorporated into the Omnibus Budget
Reconciliation Act of 1990. These include, most
importantly, eliminating from GSL loan eligibility students at schools with unacceptably
high default rates (35 percent in 1991 and
Proposed
change
5,374
2,400
1,484
5,775
3,700
1,909
3,268
63
56
1,708
3,846
67
58
2,191
—
—
170
500
1992, 30 percent in 1993 and subsequent
years). Savings from these reforms are projected to be $1.7 billion over 5 years. The budget proposes to extend this eligibility limitation
to all title IV aid programs.
Problems in the administration of the current GSL program are being addressed by a
combined Department of Education IOMB
management review team, with representatives
from other Federal agencies and the private
sector. The Team's recommendations will be
used to restructure the loan program management, including improving oversight and compliance of schools, lenders and guarantee agencies.
Loan Program Restructuring
The GSL program requires extensive legislative restructuring. The budget is based on a
wide-ranging set of legislative changes. While
these changes would continue the current policy of using banks to provide private capital
for the student loans, that aspect of the programs is also the subject of analysis. Whether
it would be desirable to propose changes to
that feature of the programs remains to be
determined.
The proposed legislative changes include:
Reduce Federal Government Risk.—
States would be required to back the guarantee agencies with full faith and credit assurance. In the case of a guarantee agency collapse, States would assume some of the finan-
IV.A.
INVESTING IN HUMAN CAPITAL AND REFORMING AMERICAN EDUCATION
cial risk (the difference between the Federal
reinsurance level and the insurance paid to
lenders and part of the administrative costs).
States would be allowed to charge schools a
fee to help cover full faith and credit assurance
obligations; the fee schedules would be subject
to Education approval. If States do not choose
to back a guarantee agency, a risk-based premium would be assessed on schools in the
State. States would also be required to pay
a share of default costs if the default rate of
schools in the State exceeds 20 percent. Risksharing will encourage States to help improve
program management, to impose necessary
controls on State licensure, and to improve or
decertify schools that cannot provide quality
education.
Lenders with default rates above 20 percent
would have their special allowance payments
reduced by .25 percentage points (currently
3.25 points over the plus 91-day Treasury bill
rate). This will penalize only lenders with unacceptably high default rates.
Stabilize Guarantee Agencies.—Guarantee agencies would be required to maintain
minimum reserve levels and the Secretary
would be permitted to take over a failing guarantee agency. Federal payments for administration would be limited to actual costs, rather
than the current flat fee. Management improvements include new requirements for financial management plans and improved data
reporting to the Government.
Meet Minimum Quality Standards.—
States would be required to ensure that
schools meet certain minimum quality standards before granting licenses to operate; accrediting agencies would monitor the quality
of the schools they review, and schools with
Part Two-19
default rates over 25 percent by 1994 would
eliminated from the student aid program.
Control Costs at Vocational Schools.—
Students in short-term vocational programs
are among those with the highest default
rates. The maximum allowable cost of attendance at less than 1-year vocational programs,
financed by HEA aid, would be limited to local
community college costs. Additional analysis of
appropriate Federal policies for vocational
training address issues beyond the Higher
Education Act is also underway and may lead
to further proposals.
Other Default Prevention Proposals.—
Other proposals include: eliminate eligibility
for less than 600 hour programs, foreign
schools and correspondence schools, which tend
to have high default rates; require credit
checks for borrowers age 21 and over, require
a co-signer if the borrower has a negative credit history; no commissions for school recruiters
that recruit unprepared students; require 60day delayed disbursement for first year students at schools with default rates over 30
percent; and, require lenders to offer graduated repayment schedules.
Improve Default Collection.—Proposals
include: authorize wage garnishment of defaulters; expand the successful IRS program
that offsets loan debt against tax refunds; repeal statute of limitations for collection of defaulted loans; authorize data matches with
State employment security offices and Federal
agencies to locate defaulters; repeal bankruptcy discharge of default responsibility, except upon showing hardship by the debtor;
and, require "skiptracing" information to help
find defaulters.
IMPROVING WORKFORCE SKILLS
Seventy-five percent of the people who will
constitute the American workforce in the year
2000 are adults today, and, by some estimates,
20 to 30 million lack the basic literacy skills
necessary to function effectively in society. Improving the skills of adults is a responsibility
shared by the public sector, by employers and
unions, by private training institutions and by
individuals (both as participants in adult edu-
cation programs and as volunteers helping others to improve their skills). State governments
have begun to play a substantial role in the
development of adult education systems linked
closely to economic development. Employers
and labor unions have undertaken significant
efforts to enhance the skills of workers already
on the job.
Part Two-20
The Federal Government provides direct assistance for training to prepare persons for
entry into the labor market and subsidizes,
through the tax system, employer training of
workers. Federal funds also support research
to analyze, understand and disseminate information about successful practices and to gather information about literacy and skill levels
in the adult population. Examples of these activities in the budget include:
• $286 million in Department of Education
adult literacy activities: $251 million for
activities funded through the Adult Education Act and $35 million for activities
funded through the Library Services and
Construction Act. Funds will be used by
States and localities to support literacy
programs for adults who lack a high school
diploma or whose basic skills are not sufficient for successful functioning in daily
life.
• $60 million for the Even Start program,
an intergenerational approach to the problem of literacy which integrates in one program early childhood education services
for at-risk children and adult education for
their parents who lack a high school diploma.
• $1.1 billion for the Administration's proposed JTPA adult State grant program.
The restructured program would offer assessment, basic skills and occupational
training, job placement, and support services to more than 400,000 severely disadvantaged persons age 22 and older. At
THE BUDGET FOR FISCAL YEAR 1992
least 50 percent of enrollee would come
from groups that face particular barriers
to employment, in addition to being economically disadvantaged.
• Up to $1 billion for the Job Opportunities
and Basic Skills (JOBS) program for
States to use to provide training, remedial
education, and work programs for AFDC
recipients.
• Two Department of Labor commissions:
the Secretary's Commission on Achieving
Necessary Skills (SCANS), charged with
identifying the skills that workers need to
close the gap between educational achievement and workplace requirements; and
the National Advisory Commission on
Work-Based Learning formed to advise the
Secretary on issues relating to training the
American workforce, including the design
of a voluntary system to accredit business
training programs and certify credentials
for skilled trainees.
• An initiative in the proposed Educational
Excellence Act, to support innovative adult
literacy activities.
• A research center on adult literacy, supported by the Departments of Education,
Labor, and Health and Human Services.
• The first national survey ever undertaken
to determine the literacy skills of a representative sample of adults. Results from
this assessment will be available in early
1993.
IV.B. FOCUSING ON PREVENTION AND THE
NEXT GENERATION
• access to health care;
HIGHLIGHTS
A well-known proverb states that "an ounce
of prevention is worth a pound of cure." This
conventional wisdom is supported by data
which suggest that many of America's most
common and deadly diseases are preventable,
and that a greater investment in America's
children might yield considerable savings in
spending on social programs later in life. Prevention makes both social and economic sense.
The budget contains initiatives which recognize the value of investment in prevention
and in children, including increased funding
for:
• childhood immunizations;
• infant mortality reduction (including a
new initiative targeted at 10 high risk
cities);
• breast and cervical cancer prevention;
• smoking cessation;
• physical fitness and nutrition programs;
• injury prevention;
• family planning;
• lead poisoning prevention;
• substance abuse prevention; and
• evaluations of prevention and children's
programs designed to ensure that Federal
investments get the highest possible payoff.
The budget proposes funding these initiatives at the levels shown on Table B - l
below.
BACKGROUND
The current generation of Americans enjoys
the longest life expectancy (75 years) of any
in the country's history, yet still faces disease,
death, and disability from preventable illnesses. About half of the 2.2 million deaths
which occur in the U.S. every year (see Table
B-2) are potentially preventable, as are many
of the illnesses that afflict millions of Americans. One national goal is to avoid having people become sick from preventable illnesses and
Table B - l . THE BUDGET PROVIDES INCREASES FOR PROGRAMS
FOCUSED ON PREVENTION AND THE NEXT GENERATION
(Obligations in millions of dollars)
Childhood immunization
Infant Mortality Initiative
(Targeted Infant Mortality Initiative—non-add)
Breast and Cervical Cancer Prevention
Smoking Cessation
Physical Fitness and Diet
Accident and Injury Prevention
Access to Preventive Health Care
Family Planning
Lead Poisoning Prevention
Substance Abuse Prevention
1991
Enacted
1992
Proposed
Percent
Increase
218
7,335
57
269
90
122
1,683
5,410
399
8
1,442
258
8,011
171
410
97
139
1,907
6,026
420
41
1,515
+18.3
+9.2
+300.0
+52.4
+7.8
+13.9
+13.3
+11.4
+5.3
+412.5
+5.1
Part Two-21
Part Two-22
THE BUDGET FOR FISCAL YEAR 1992
injuries, and to reduce the number of years
of potential life lost (YPLL, also shown on
Table B-2) due to preventable conditions. By
not waiting for people to require treatment,
prevention can both improve lives and reduce
medical treatment costs.
To ensure that the next generation enjoys
the same 75-year life span, and hopefully improves upon it, this generation has a responsibility to ensure that young people get as good
a start in life as society can offer. As the next
generation of Americans grows up, they should
enjoy the benefits of efforts to prevent many
of the diseases and deaths that afflict this generation. The budget therefore places a priority
on prevention activities, especially those which
will help ensure a healthy, productive future
for the nation's children.
The budget also places a priority on children's programs because child-oriented funding
can help prevent future problems for both the
individual and society. In placing this high priority on children's funding, the Administration
is attempting to modify the funding trends of
the past three decades shown on the chart
below.
Federal investments in children have not
kept pace with increases in other Federal
spending. The Administration's emphasis on
children, as discussed in this Chapter and in
Chapters IV.A., V.A., and V.B., covering investments in education, increasing choice and
expanding opportunity, and ending the scourge
of drugs, makes a clear and strong commitment to the nation's young and to ensuring
a better future for the next generation.
Table B-2. LEADING CAUSES OF DEATH AND ILLNESS IN AMERICA,
1991
Cause of Death
Heart Disease
Cancer
Stroke
Injuries
Lung Diseases
Pneumonia and Influenza
Suicide/Homicide
Diabetes
AIDS
Infant Mortality
Liver Diseases
Additional Causes of Death
Total
YPLL
Prevalence
730,815
512,821
145,989
96,914
89,629
81,151
55,939
48,869
47,500
38,131
26,174
333,596
1,330,000
1,863,000
237,000
2,229,000
144,000
178,000
1,493,000
160,000
1,301,000
2,650,000
226,000
739,000
21,010,000
7,076,000
2,516,000
59,161,000
13,967,000
126,224,000
2,207,528
12,550,000
Death
0)
6,221,000
140,000
o
Hospitalizations
2
3,552,000
1,441,000
717,000
2,475,000
535,000
1,101,000
2,475,000
419,000
135,000
0)
900,000
61,000
N/A
N/A
N/A
N/A
N/A = Not applicable.
Prevalence figures not available for suicide/homicide and infant mortality since prevalence is a less applicable
concept for these causes than for the others shown. Hospitalization data similarly unavailable for infant mortality.
2 Injury hospitalization data include figures for suicide/homicide, which are not collected separately.
Source: Public Health Service and Centers for Disease Control projections.
NOTE: Prevalence figures are estimates of the number of persons in the United States who have a particular
disease or who will experience serious injury some time during a given year. Years of potential life lost before age
65 (YPLL), prevalence, and hospitalization data are provided in addition to cause of death figures since these three
sets of data provide a broader sense of the impact a particular disease has on society. These additional indicators
illustrate, for example, that while some diseases (e.g. diabetes) cause fewer deaths than others (e.g. cancer), those
diseases causing fewer deaths nonetheless affect the lives of a great many Americans. These indicators also show
that since some causes of death, such as infant mortality and AIDS, affect the young disproportionately, they
produce a high number of potential years of life lost. Taking a variety of such indicators into account is thus
important when considering prevention activities.
IV.B. FOCUSING ON PREVENTION AND THE NEXT GENERATION
BILLIONS
Part Two-23
FEDERAL SPENDING TO BENEFIT CHILDREN HAS GROWN
LESS QUICKLY THAN SPENDING ON ADULTS
CHANGES IN BEHAVIOR, EARLY DETECTION AND INTERVENTION
COULD PREVENT:
ESTIMATED « OF DEATHS OR DISABILITY PREVENTED
Source: HHS Office of Dieeeee Prevention end Heelth Promotion.
Part Two-24
PERCENT
THE BUDGET FOR FISCAL YEAR 1992
THE PERCENTAGE OF ADULT AMERICANS W H O SMOKE
CONTINUES TO DECLINE
Preventing deaths and illnesses: Research suggests that better control of fewer
than 10 factors—such as diet, prenatal care,
exercise, the use of tobacco, alcohol and illegal
drugs, and the use of seat belts—could prevent
between 40 and 70 percent of all premature
deaths, a third of all cases of acute disability,
and two-thirds of all cases of chronic disability
(see examples in Behavior Change chart,
above).1 Many of these factors involve freelymade individual choices. Since the preservation of individual choice is a cornerstone of
American democracy, for disease and injury
prevention to succeed they must necessarily
become personal as well as national priorities
in the U.S.
Changing voluntary behavior: The nation
has witnessed the effects of changes in behavior across society as the incidence of one of
the leading contributors to preventable deaths,
smoking, has declined from 40 percent in
adults in 1965 to 28 percent in 1990. This
dramatic behavior change was brought about
through a complex combination of actions by
1 Department of Health and Human Services Secretary Sullivan's
speech for the Public Health Faculty/Agency Forum, Crystal City,
VA, December 6, 1990.
individuals, private industry, health providers,
and all levels of government (see chart above).
This focus on behavioral change is also a key
ingredient of the strategy to rid America of
illicit drugs.
The favorable health effects of these and
other behavior changes have been enormous.
During the 1980's, death rates declined for
three of the leading causes of death among
Americans: heart disease, stroke, and motor
vehicle crashes. Much of this progress is attributable to changes in behavior. The more than
40 percent decline in heart disease mortality
since 1970 reflects dramatic increases in high
blood pressure detection and control, the decline in cigarette smoking, and increasing
awareness of the role of blood cholesterol and
dietary fat. Stroke death rates, which have
dropped by more than 50 percent in the same
period, also reflect gains in hypertension control and declines in smoking. Increased use
of safety belts, lower speed limits, and declines
in alcohol abuse have helped reduce traffic fatalities by one-third over the past 15 years.2
2 James O. Mason and J. Michael McGinnis, "Healthy People
2000: An Overview of the National Health Promotion and Disease
IV.B. FOCUSING ON PREVENTION AND THE NEXT GENERATION
Fostering prevention-oriented behavior
changes: Two general types of actions are
available: 1) education of the general public,
health professionals, private businesses, insurance companies, and government about the
benefits, including cost savings, of health-promoting behaviors; and 2) provision of preventive services to those unable to afford them.
Some interventions that work to reduce preventable illness, injury, and deaths include:
• Immunizations—The very model of prevention, immunizations were largely responsible for the dramatic decreases in reported cases of vaccine preventable diseases such as polio (from 18,308 in 1954
to 5 in 1989) and measles (from 481,530
in 1962 to 18,193 in 1989). Research has
shown that savings from each dollar spent
on polio and measles-mumps-rubella vaccinations range from $10 to $14.3
• Infant Mortality Prevention—Numerous
studies indicate that early and regular
prenatal care is associated with reduced
infant mortality, prematurity, and low
birthweight. One recent evaluation of the
Special Supplemental Food Program for
Women, Infant, and Children (WIC) found
that for each dollar spent on nutritionally
at-risk pregnant women and infants,
spending on the Medicaid program fell by
between $1.77 and $3.13 during the first
60 days after birth.4
• Breast and Cervical Cancer Screening—
Controlled intervention trials show that
screening 66 to 80 percent of women for
breast cancer every one to two years will
reduce breast cancer mortality by 30 percent. Papanicolaou ("Pap") test screening
is an effective method of reducing cervical
cancer mortality and morbidity; case-control studies have shown that screened
women are two to ten times less likely
Prevention Objectives," Public Health Reports 105 (September/October 1990) pp. 441-446.
3 Craig C. White, et al., "Benefits, Risks, and Costs of Immunization for Measles, Mumps, and Rubella," American Journal of Public Health, Vol. 76, no. 7 (1985) pp. 739-744.
4 United States Department of Agriculture, Food and Nutrition
Service, Office of Analysis and Evaluations, "The Savings in Medicaid Costs for Newborns and Their Mothers from Prenatal Participation in the WIC Program" (Washington, D.C., October 1990) p.
44.
Part Two-25
to develop cervical cancer than those not
screened.5
• Smoking Cessation—Over 40 controlled
clinical trials have examined various combinations of smoking cessation counseling,
educational literature, and nicotine replacement therapy. Studies have shown
that these efforts can succeed in helping
up to 40 percent of smokers quit.6
• Physical Fitness and Healthy Diets—Research shows that regular physical activity
can help prevent or manage coronary
heart disease, hypertension, non-insulin
dependent diabetes, osteoporosis, and obesity. People who are active have lower
rates of colon cancer and stroke, as well
as fewer back injuries. Moreover, changes
in diet have been shown to reduce the risk
of cardiovascular disease and stroke.7
• Injury Prevention—The potential savings
from reducing injuries, net of the cost of
injury control programs, is in the billions
of dollars for interventions for which data
are available. Substantial injury reduction
has been found for the use of air bags,
raising the legal age for driving to 17, and
motorcycle helmet laws.8
• Access to Primary Health Care—Comprehensive primary health care services
include diagnosis and treatment as well
as education designed to encourage
healthy behavior. Recent studies have
shown that increased access to primary
care services in low-income communities
improved health and reduced use of emergency services.9
• Family Planning—A 1985 study by the Institute of Medicine found that "the reduc5 U.S. Congress, Office of Technology Assessment, The Costs and
Effectiveness of Cervical Cancer Screening in Elderly Women—
Background Paper, OTA-BP-H-65 (Washington, D.C.: U.S. Government Printing Office, February 1990) p. 1. Also see Sullivan, op.
cit.
6 Department of Health and Human Services, Office of Disease
Prevention and Health Promotion, unpublished document (Washington, D.C., 1990).
7 Department of Health and Human Services, Public Health
Service, Healthy People 2000: National Health Promotion and Disease Prevention Objectives (Washington, D.C.: U.S. Government
Printing Office, September 1990) p. 95.
8Dorothy P. Rice et al., Costs of Injury in the United States: A
Report to Congress (San Franscisco: Institute for Health and Aging,
University of California and Injury Prevention Center, The Johns
Hopkins University, 1989) pp. 111-136.
9Healthy People 2000, p. 534.
Part Two-26
THE BUDGET FOR FISCAL YEAR 1992
tion in infant mortality in the United
States over the past 20 years is due in
part to effective family planning."10
The budget recognizes those interventions which "work" and includes funding
increases for them. Interventions that will
help ensure a healthy next generation are included, as are those with more immediate benefits. For those promising interventions for
which there is not yet evidence of effectiveness,
the budget includes evaluation funding.
The Federal Government shares responsibility with other sectors of our society, including
state and local governments, private industry,
and individual members of society, in fostering
true preventions—those that "work." Like
these sectors, the Federal Government seeks
to focus its resources on preventive interventions that will most effectively reduce the leading causes of death and illness shown on Table
B-2. The Federal Government also has a special responsibility to target its resources to the
neediest Americans.
Funding increases are requested for:
• Immunizations—The budget will increase
Federal support for Centers for Disease
Control (CDC) categorical immunization
grants by $40 million, an 18.3 percent increase over the 1991 enacted level (see
Institute of Medicine Committee to Study the Prevention of
Low Birthweight, Preventing Low Birthweight (Washington, D.C.:
National Academy Press, 1985).
10
Table B-3).11 In addition, other Federal
programs also are used to purchase immunizations, many of them for low-income
children. Total Federal resources available
for purchasing immunizations will increase by 10 percent to $1.1 billion.
• Targeted Infant Mortality Prevention—The
budget increases Federal support for infant mortality prevention activities by
$676 million Governmentwide, an increase
of 9.2 percent over 1991 enacted levels (see
Table B-4). Of this, $223 million is for
WIC, to enable further increases in participation, as shown on the following chart.
A substantial portion of 1992 WIC participation will rely on the nearly $530 million
in rebates that State WIC agencies receive
from manufacturers of infant formula annually. Over the past several years, States
have expanded WIC participation through
competitive bidding for infant formula; in
1991, these rebates will lower the average
price of a can of infant formula to State
WIC programs from about $2.05 to $0.75—
or by $1.30 per can. In 1992, competitive
bidding will support over 1,000,000 participants each month, over one-fifth of
WIC's total expected caseload of- 4.9 million participants per month.
11 Since many of the Federal activities contained in this Chapter
serve many closely related purposes (such as smoking cessation
program attached to a prenatal care clinic), portions of the same
program may be included in more than one of the detailed tables.
Table B-3. INCREASING EMPHASIS ON CHILDHOOD IMMUNIZATIONS
(Obligations in millions of dollars)
1980
1985
1990
1991
1992
Proposed
Categorical Grants:
PHS Childhood Immunization Grants
Other Federal Financing Sources:
Medicaid EPSDT Screening
Maternal and Child Health Block Grant
Preventive Health Block Grant
32
54
187
218
258
N/A
N/A
N/A
60
478
89
110
554
84
165
*554
92
210
554
107
Total Resources Available for Immunizations
N/A
681
935
1,029
1,129
N/A = Not available.
1 Reflects HHS' plans to reprogram $34 million.
Part Two-27
IV.B. FOCUSING ON PREVENTION AND THE NEXT GENERATION
Table B-4. THE BUDGET EXPANDS PROGRAMS TO REDUCE INFANT
MORTALITY
(Obligations in millions of dollars)
1989
HHS:
Public Health Service:
Services
Research
Training
Health Care Financing Administration:
Services .
Research
Agriculture:
Services
Research
Total Federal Spending
Total Federal Spending by Function:
Services
Research
Training
Selected spending categories (non-add):
Nutrition
Smoking cessation
Drug abuse prevention
Surveillance
Although the U.S. infant mortality rate
reached an all-time low of 9.9 deaths per
1,000 live births in 1989, the rate of
progress has slowed during the last decade. Infant mortality is most severe in
some of the Nation's cities, several of
which have infant mortality rates rivaling
those of developing nations. More troubling is that the infant mortality rate for
black babies is more than twice the rate
for white babies.
Recognizing that infant mortality is most
severe in certain cities and communities,
the budget is launching a new $171 million program of infant mortality prevention which will target efforts to 10 cities
with exceptionally high rates of infant
mortality. By supporting additional prenatal care in existing health clinics in
hard-hit areas and helping local communities support new clinics where none exist
now, this $171 million initiative will target
Federal resources to areas most in need
1990
1991
1992
Proposed
901
245
20
985
308
21
1,106
338
37
1,220
375
39
2,800
0
3,100
1
3,500
3
3,800
4
1,924
5
2,121
5
2,345
5
2,568
5
5,894
6,540
7,335
8,011
5,625
250
20
6,206
314
21
6,951
346
37
7,588
384
39
1,930
2,127
2,351
2
123
44
2,754
4
128
51
—
52
6
—
107
33
and where the greatest returns can be
reaped. To get an early start on this new
initiative, the Department of Health and
Human Services expects to devote $57 million to this special effort from current appropriations.
The budget proposes to raise the Medicaid
medically needy income level for pregnant
women and young children. States would
have the option to expand Medicaid coverage to pregnant women and children
under six who "spend down" to the categorical eligibility level (currently 133 percent of the poverty level). This proposal
is estimated to increase federal expenditures by $5 million in 1992 and $160 million from 1992 to 1996. With greater access to the health care delivery system,
these pregnant women are more likely to
deliver healtheir babies.
• Breast and Cervical Cancer Prevention—
The budget increases Federal support for
breast and cervical cancer screening for
Part Two-28
THE BUDGET FOR FISCAL YEAR 1992
WIC PARTICIPATION HAS SOARED SINCE FY86
PARTICIPATION
(IN THOUSANDS)
4,800
4,200
3,eoo
3,000
2.400
1,000
1,200
•00
1986
1987
1988
1989
1990
1991
1992
Table B-5. THE BUDGET SUPPORTS BREAST AND CERVICAL CANCER
PREVENTION
(Obligations in millions of dollars)
1990
HCFA (Medicare and Medicaid)
PHS (CDC Screening Grants and NIH Research and Education Activities
Total Federal
low-income women and the uninsured by
$141 million, an increase of 52 percent
over the 1991 enacted levels (see Table
B-5). This increase includes an additional
$21 million for state grants to provide
breast and cervical cancer screenings for
low-income uninsured women, a 72 percent increase over the 1991 enacted level.
With the recent enactment of the Omnibus
Budget Reconciliation Act of 1990 (OBRA
1990), Medicare now covers mammography
screening tor Medicare-eligible women. An
estimated 4 million women will benefit
1991
1992
Proposed
30
230
350
14
39
60
44
269
410
from this expansion in 1992, which will
help reduce the number of deaths from
breast cancer through early detection
while avoiding unnecessary suffering.
• Smoking Cessation—The budget increases
support of smoking cessation by $7 million
over 1991 enacted levels (see Table B-6).
This will double funding for CDC's Office
of Smoking and Health, which will enable
CDC to expand its smoking cessation education activities for specific target populations (e.g. low-income persons, teenagers).
Part Two-29
IV.B. FOCUSING ON PREVENTION AND THE NEXT GENERATION
Table B-6. THE BUDGET INCREASES SUPPORT FOR SMOKING
CESSATION
(Obligations in millions of dollars)
1989
HHS: NIH and ADAMHA (Evaluation of smoking cessation
interventions, health effects of smoking)
CDC (Prepare Surgeon General's report, support national
information campaign)
Total Federal
1990
1992
Proposed
1991
74
80
85
89
4
5
5
8
78
85
90
97
Table B-7. THE BUDGET WILL HELP TO PROMOTE PHYSICAL FITNESS
AND HEALTHY DIETS
(Obligations in millions of dollars)
1989
HHS:
FDA (Shellfish safety)
CDC (School Health Education Activities)
OASH (President's Council on Physical Fitness, ODPHP) .
NIH (Exercise and Fitness Research)
Total Federal
• Physical Fitness and Healthy Diets—The
budget increases Federal funding for
health education, disease prevention, and
physical fitness activities (see Table B-7).
In addition, the Departments of Health
and Human Services and Agriculture recently published updated dietary guidelines that include important information
to help Americans reduce their incidence
of cancer, heart disease, etc. In a companion action, the Food and Drug Administration (FDA) is working on revised nutrition
labels that will contain improved information about fat and cholesterol, vitamins
and minerals, dietary fiber, and calories.
FDA will also propose new labels for fresh
seafood and vegetables. In addition, the
budget proposes to improve and expand
Federal regulation of seafood, particularly
high-risk shellfish, to prevent potential illness from seafood harvested from contami-
1990
1991
p
^
s e d
23
35
6
27
24
46
7
28
34
51
6
31
49
51
6
33
91
105
122
139
nated waters. For a complete discussion
of this initiative, see Chapter IX.C.
• Injury Prevention—Recognizing the importance of injury prevention activities such
as seat belt research and education and
highway and aviation safety, the budget
proposes to increase Federal support of injury prevention by $224 million (see Table
B-8). This 13 percent increase over 1991
enacted levels includes a $218 million increase for Department of Transportation
funding of highway, aviation, and maritime safety and injury prevention activities. The budget also includes an additional $2 million in HHS to develop information campaigns aimed at increasing the
use of child safety seats, seat belts, helmets, and other protective equipment and
to highlight the role of alcohol in injury
prevention among certain high risk groups
(e.g. teenagers).
Part Two-30
THE BUDGET FOR FISCAL YEAR 1992
Table B-8. THE BUDGET SUPPORTS PREVENTION OF INJURIES
(Obligations in millions of dollars)
1989
HHS/Public Health Service (Primarily CDC Injury Prevention Grants and NIH Research)
Transportation (Safety-related funding: NHTSA, FAA, Coast
Guard)
Consumer Product Safety Commission
Total Federal
• Improving Access to Primary Care Health
Services—To put primary health care services within the reach of people who currently do not have adequate access, the
budget includes an additional $616 million
for programs that support primary and
preventive health care (see Table B-9).
Additionally, Federal Medicaid expenditures for pregnant women, infants, and
children will increase by an estimated
$270 million in 1992 due to expansions
enacted in OBRA of 1990. These expansions include continuous Medicaid eligibility for infants below 133 percent of poverty and phased-in Medicaid coverage of
all poor children. Also included is a new
outreach program to bring more low-income children into Medicaid.
• Family Planning—Recognizing the importance of these services, the budget contains an additional $21 million for HHS
family planning grants and Federal Medic-
1990
1991
1992
Proposed
46
49
58
62
1,401
35
1,527
35
1,588
37
1,806
39
1,482
1,611
1,683
1,907
aid payments, a 5.3 percent increase (see
Table B-10).
• Preventing Lead Poisoning in Young Children—The budget includes an additional
$33 million for lead poisoning prevention,
a five-fold increase over current Federal
efforts (see Table B - l l ) . HHS will award
$15 million in grants to assist states identify low-income children at risk of lead poisoning through screening and refer children with high blood levels for medical
treatment. To prevent children from returning to contaminated environments,
the budget request for the Department of
Housing and Urban Development also proposes to assist low- and moderate-income
private residential property owners abate
lead-based paint by providing $25 million
annually, for four years, in grants to
States and localities. States and localities
will administer low-interest loans to homeowners with young children living in highrisk dwellings (homes with peeling, chip-
Table B-9. THE BUDGET EXPANDS PRIMARY/PREVENTIVE HEALTH
(Obligations in millions of dollars)
1989
HHS:
PHS (Community/Migrant Health, Maternal and Child
Health Block Grant, Homeless Health Care, Preventive
Health BG)
HCFA (Medicare and Medicaid)
Total Federal
1990
1991
1992
Proposed
1,135
3,085
1,180
3,470
1,260
4,150
1,346
4,680
4,220
4,650
5,410
6,026
Part Two-31
IV.B. FOCUSING ON PREVENTION AND THE NEXT GENERATION
Table B-10. THE BUDGET INCREASES SUPPORT FOR FAMILY PLANNING
(Obligations in millions of dollars)
1989
Public Health Service Family Planning Grants
HCFA: Medicaid
Total Federal
ping, or otherwise defective paint). The
budget also includes $500,000 in grants
to support inter-agency cooperation and
development within State and local governments.
• Preventing Substance Abuse.—As part of
the $1.5 billion for substance abuse prevention in 1992, the budget includes an
additional $51 million for programs in
HHS and the Department of Education.
HHS will administer $221 million in
grants, a 13 percent increase over 1991,
for community prevention networks and
programs targeted to high risk youth and
pregnant women. The Department of Education will distribute $50 million, twice
the amount in 1991, for emergency grants
to schools hit hardest by substance abuse.
See Chapter V.B for a complete discussion
of the substance abuse initiatives in the
budget.
1990
1991
1992
Proposed
138
195
139
230
144
255
150
270
333
369
399
420
of all children entering school have received their immunizations, immunization
levels among 2-3 year olds from low-income urban families may be as low as
50-70 percent. To ensure that low-income
children receive Federal immunization
support, the budget includes a $10 million
infant immunization initiative to investigate and evaluate the potential effectiveness of linking eligibility for participation
in low-income assistance programs (WIC,
Medicaid, AFDC) with documented immunization of young children.
To ensure that Federal investments are
getting the highest possible payoffs, increases in funding for evaluation are included in the budget. These include:
• Infant Mortality: Measuring Progress and
Enhancing Accountability—An integral
part of the $171 million infant mortality
initiative targeted to 10 cities with exceptionally high rates of infant mortality will
be a comprehensive evaluation and monitoring component. As a part of this initiative, grantees in the 10 cities will set
specific goals for reducing infant mortality.
The budget includes funds to assess the
progress of grantees in reducing infant
mortality, and to assist grantees that do
not meet those goals.
• Immunizing Young Children from Low-Income Families—Although oyer 95 percent
• Smoking and Pregnancy—The relationship
between smoking and infant mortality is
Table B-ll. THE BUDGET WILL HELP PREVENT LEAD POISONING
(Obligations in millions of dollars)
1QQ1
Total Federal
—
4
8
—
15
26
4
H-1
HHS (CDC Lead Screening Grants)
HUD (Lead Paint Abatement in High-Risk Homes)
1992
Proposed
CO
1990
Part Two-32
well-documented; an estimated 10 percent
of infant deaths and 25 percent of lowbirthweight infants are attributable to
smoking during pregnancy. To integrate
smoking cessation efforts into the overall
delivery of prenatal care services better,
the budget includes $3 million in demonstration grants through the Maternal
and Child Health Block Grant.
• Making HIV Prevention More Effective—
Although funding for HIV prevention activities has grown from $484 million in
1989 to $637 million in 1992 (an increase
of over 30 percent), the effects of the myriad Federal, state, and local HIV prevention activities have not yet been well documented. To increase understanding of the
effect that prevention efforts are having
in slowing the spread of HIV, and to identify improvements that can be made to
strengthen existing efforts, the budget will
continue to emphasize evaluation of HIV
prevention projects.
• Improving Our Understanding of Head
Start—Research shows that Head Start
children experience substantial immediate
gains in cognitive growth, school readiness, and achievement but that these results apparently lessen over time. Also,
the impact of the wide range of available
Head Start services is not well understood.
The budget places a priority on evaluation
and research projects designed to assess
the effect of individual Head Start service
components and alternative program configurations.
• Studying the Effects of WIC on Children—
While several studies describe WIC's effects on pregnant women and newborns,
THE BUDGET FOR FISCAL YEAR 1992
there are currently few measurements of
the effect WIC has on children. To learn
more about the effects on children aged
one to five, the budget continues funding
for the "WIC Child Impact Study," which
began in 1990. The study should produce
preliminary results in 1993.
While the Federal contribution to this
effort is sizeable, it is only part of the
story, the balance of which includes:
• States, which spend billions of their own
funds for public health activities (an estimated $6.6 billion in 1988), and for the
Federal-State financed Medicaid program
(an estimated $31 billion in State funds
in 1990). States also spend approximately
$10 billion per year on AFDC benefits, and
large sums on education programs (over
$159 billion in 1988).
• Local governments, which spent an estimated $2.3 billion for public health activities in 1988.
• Employers, which paid $135 billion in
private health insurance premiums, a portion of which was for preventive services.
• Health insurers, which paid $155 billion
in benefits, some of which supported preventive services.
The focus of this entire initiative is on
individual behavior and personal responsibility. The pieces of the initiative are intended to be sensitive to private prerogatives,
using education and access to enable individuals to take actions to improve their own
health. By fostering a climate of personal responsibility, America can take large steps toward meeting the national goals of healthy,
productive lives for all citizens.
Part Two-33
IV.B. FOCUSING ON PREVENTION AND THE NEXT GENERATION
This initiative is one of a number within
the budget which expressly favor the interests
of the next generation. Government-wide funding for children is projected to rise from $79.3
billion in 1991 to $86.9 billion in 1992 as
shown on Table B-12.
Spending just for mandatory programs will
increase by 38 percent over 1992-1996 (see
Table B-13).
Table B-12. SPENDING ON SELECTED PROGRAMS SERVING CHILDREN
INCREASES 9.5 PERCENT IN 1992
(In millions of dollars)
1990
Nutrition:
WIC
Child Nutrition
Other Nutrition
Health:
Targeted Infant Mortality
Medicaid
Community/Migrant Health
Immunizations
Maternal/Child Health
Other Health
Education and Social Services:
Head Start
Handicapped Education
Compensatory Education
Educational Excellence Act (proposed)
Precollege Math and Science Education
Child Care Block Grant
Foster Care
Social Security
Supplemental Security Income
Aid to Families with Dependent Children and Child Support
Other Education and Social Services
Refundable Tax Credits
Total Children's Funding
1991
Proposed
2,126
4,887
7,985
2,350
5,577
9,138
2,573
6,066
9,825
—
8,200
227
187
554
222
J 34
10,300
238
218
*554
264
139
12,000
238
258
554
266
1,552
2,055
5,368
—
333
—
1,375
8,375
1,261
12,165
2,453
6,287
1,952
2,467
6,225
—
515
732
2,611
9,048
3,531
14,008
2,642
6,941
2,052
2,730
6,424
490
661
732
2,309
9,716
2,497
15,162
2,186
9,973
65,612
79,345
86,851
Reflects HHS' plans to reprogram $34 million from MCH Block Grant to Targeted Infant Mortality in 1991.
Overall resources supporting this initiative will total $57 million in 1991 and $171 million in 1992, including funds
from other public health grants.
280-000 0 - 9
1 - 2 (PART 2)
Part Two-34
THE BUDGET FOR FISCAL YEAR 1992
Table B-13. SPENDING ON SELECTED MANDATORY PROGRAMS
SERVING CHILDREN WILL INCREASE 38 PERCENT OVER 1992-1996
(In millions of dollars)
Estimate
Proposed
Nutrition:
Child Nutrition
Other Nutrition
Health:
Medicaid
Education and Social Services:
Foster Care and Adoption Assistance
Social Security
Supplemental Security Income
Aid to Families with Dependent Children and
Child Support
Refundable Tax Credits
Total Mandatory Children's Funding
1993
1994
1995
1996
6,066
9,825
6,629
10,348
7,184
10,710
7,759
10,977
8,268
11,258
12,000
13,700
15,600
17,700
19,900
2,309
9,716
2,497
2,557
10,320
2,180
2,896
10,886
3,013
3,196
11,108
3,049
3,480
12,033
3,058
15,162
9,973
15,777
11,351
16,244
13,000
16,729
16,952
17,164
18,146
67,548
72,862
79,533
87,470
93,307
IV.C. ENHANCING RESEARCH AND
DEVELOPMENT AND EXPANDING THE
HUMAN FRONTIER
Since the beginning of civilization, mankind
has sought to explore the frontier and increase
its knowledge of the world. Today's frontiers
are in space, communications, transportation,
energy, manufacturing and materials, and biotechnology. This chapter discusses a range of
programs and issues that are related to these
frontiers: Federal research and development
activities; space; and biotechnology. These endeavors are among America's most important
investments in the future.
The budget proposes to allocate about $76
billion for research and development, including
R&D facilities, in 1992. This is an increase
of over $8 billion, or 13 percent over 1991 levels. Within this total, the budget proposes over
$13 billion for basic research, an increase of
$1 billion, or 8 percent, over 1991.
The budget also proposes to allocate over
$16 billion for major space activities. This is
an increase of $2 billion, or 15 percent, over
1991 enacted levels.
The budget proposes several crosscutting investments that will build the base for the continuing expansion of the frontier of knowledge:
Table C-l. ENHANCING RESEARCH AND DEVELOPMENT AND
EXPANDING THE HUMAN FRONTIER—HIGHLIGHTS
(Dollar amounts in millions)
Budget Authority
1991
Enacted
Basic Research
Doubling the NSF budget
Increasing Basic Biomedical Research at NIH
Human Genome Project
Agricultural Research Initiative
Superconducting Super Collider
Applied Research
High Performance Computing and Communications
Energy R&D
:
Advanced Manufacturing and Materials
HIV/AIDS
Moving Fusion Energy from Science to Engineering
Aeronautics R&D
Expanding R&D at the National Institute of Standards
and Technology
Maintaining National Security: Defense R&D
Expanding the Geographic Frontier: Space Exploration
Space Transportation Infrastructure
Space Science
Mission to Planet Earth (Global Change)
Mission From Planet Earth
Expanding the Human Frontier through Biotechnology
1992
Proposed
Dollar
change
Percent
change
2,316
4,634
135
73
243
2,722
4,968
169
125
534
4406
+334
+35
+52
+291
+18
+7
+26
+71
+120
489
676
1,316
1,152
275
482
638
903
1,310
1,210
337
543
+149
+227
-6
+58
+62
+61
+30
+34
215
37,783
248
43,247
+33
+5,464
+15
+14
4,801
1,774
954
2,199
3,788
5,517
2,141
1,186
2,470
4,107
+716
+367
+232
+271
+319
+15
+21
+24
+12
+8
—
+5
+23
+13
Part Two-35
Part Two-36
THE BUDGET FOR FISCAL YEAR 1992
a new initiative to advance America's high performance computing capacity; an increased emphasis on mathematics and science education;
and a further installment in the U.S. effort
to lead the world to a greater understanding
of global change.
Lastly, the budget proposes to allocate $4.1
billion as the Federal investment in biotechnology. This is an increase of $319 million
or 8 percent over 1991 enacted levels.
HIGHLIGHTS
The budget contains a number of new and
expanded programs and initiatives. Examples
include:
BASIC RESEARCH
An 18 Percent Increase for the National
Science Foundation (NSF).—The budget proposes an increase of 18 percent overall for
NSF, including a 16 percent increase for basic
research. This will continue the Administration's commitment to double NSF's budget between 1987 and 1994. This increase is targeted
primarily toward individual investigators at
universities, who are essential to the U.S. scientific enterprise. In addition, a new program
is proposed to provide state-of-the-art research
instrumentation to academic researchers.
Increasing the Investment in Basic Biomedical Research at the National Institutes of
Health.—The budget proposes an increase of
$334 million, or 7 percent over 1991, for basic
research supported by the National Institutes
of Health (NIH). The overall increase of $498
million for all of NIH would allow an increase
of 9 percent in funding of research project
grants. This would permit over 600 additional
grants to be funded.
Human Genome Project.—The budget proposes an increase of $35 million, or 26 percent,
to a total of $169 million in the Departments
of Energy and Health and Human Services
(National Institutes of Health).
National Agricultural Research Initiative.—
The budget proposes a 71 percent increase
($52 million) to a total of $125 million as the
next installment in a new program in agricultural research, which will be competitive,
based on merit, and designed to enhance production efficiency, food safety and environmental quality.
Superconducting Super Collider (SSC).—The
budget proposes a $291 million increase for
the SSC to a total of $534 million. This will
support continued work toward the transition
from prototype superconducting magnets to
production and to begin construction of facilities. The funding level maintains the 10-year
design and construction schedule.
APPLIED RESEARCH AND
DEVELOPMENT
High Performance Computing and Communications.—The budget proposes an increase of
$149 million, or 30 percent, (to a total of $638
million) for a new interagency program to help
establish American pre-eminence in the fields
of high performance computing and communications. This major initiative, involving eight
Federal agencies (in addition to the private
sector), will focus on the underlying research
and the academic training needed to significantly accelerate the availability of the next
generation of high performance computing systems and digital communications networks.
The goal is to assist in the development of
computing capability with roughly 1,000 times
improvement over current systems by 1996.
Energy R&D.—The budget proposes an increase of $227 million, or 34 percent for investments in targeted high-payoff technologies and
strategies to increase the efficiency of energy
use, to develop alternatives to petroleum and
to advance new electricity technologies. This
investment is guided by the National Energy
Strategy.
Advanced Manufacturing and Materials
R&D.—The budget includes over $1 billion for
R&D on advanced manufacturing technologies,
including an increase of 15 percent for
nondefense-related manufacturing R&D. In addition, the budget proposes $84 million for the
IV.C.
ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
National Science Foundation for a new initiative in materials synthesis and processing,
which will take advantage of new opportunities in electronic and biomaterials. The budget
also proposes $93 million for R&D on all aspects of superconductivity.
HIV /AIDS,—The budget proposes a 5 percent increase to $1.2 billion for biomedical and
behavioral research on Human Immunodeficiency Virus/Acquired Immune Deficiency Syndrome. (The budget also proposes a total increase of $558 million, or 15 percent, for HIV/
AIDS research, treatment, prevention and income support.)
Aeronautics R&D.—The budget proposes an
increase of $61 million, or 13 percent, for aeronautics R&D in NASA, not including high-performance computing. The increase will support
continued high-priority R&D on environmental
issues associated with supersonic flight, as
well as a new initiative in high-temperature
propulsion materials. This work is intended to
enable an informed decision by industry on future high-speed civil transports. In addition,
a new program to address the phenomenon
of aging aircraft will be initiated. Technology
development for the joint NASA/DOD National
Aerospace Plane program will be continued,
leading to a future decision on a flight research vehicle.
Expanding R&D at the National Institute of
Standards and Technology.—The budget proposes a 15 percent increase to a total of $248
million for NIST. The long-term budget projection will result in a budget for NIST that is
approximately doubled by 1996. The 1992 proposal will continue an effort begun in 1991
to expand NIST's ability to perform generic
applied research and technology development
and to address a growing number of important
standards and measurement issues. In addition, the budget proposes $36 million for the
Advanced Technology Program.
Defense R&D.—The budget proposes a total
of $43 billion for R&D for national security.
This amount includes more than $40 billion
for R&D supported by the Department of Defense, and nearly $3 billion for defense-related
R&D supported by the Department of Energy.
R&E Tax Credit.—The budget proposes to
make the Research and Experimentation tax
Part Two-37
credit permanent, and to reformulate the credit to increase its effective rate.
Encouraging R&D by Multinational Companies.—The budget proposes a 1-year extension
in the rules for allocation by multinational
companies of R&D expenditures incurred outside the U.S.
SPACE EXPLORATION
Space Transportation Infrastructure. —The
budget proposes $5.5 billion, an increase of 15
percent, for the critical elements of space
transportation, including the Space Shuttle
and expendable launch vehicles. The budget
also proposes a major new program, jointly
funded by NASA and DOD to develop a new
launch system. This new capability was recommended by the Advisory Committee on the
Future of the U.S. Space Program.
Space Science.—The budget proposes $2.1
billion, an increase of $367 million, or 21 percent, over 1991. This will support a broad
range of space science activities, including astronomy, unmanned planetary exploration, advanced space communications research, and
life sciences. These increases are consistent
with NASA's space science strategic research
plan and the recent recommendations of the
Advisory Committee on the Future of the U.S.
Space Program.
Mission to Planet Earth and the U.S. Global
Change Research Program (USGCRP).—The
budget proposes a total of $1.2 billion for the
USGCRP, a $232 million or 24 percent increase over the 1991 enacted level. The 1992
increase will be used to continue a broad range
of research efforts, including NASA's Mission
to Planet Earth/Earth Observing System
(EOS) and high priority, ground-based programs such as the World Ocean Circulation
Experiment. EOS is a program designed to develop and fly a number of Earth-orbiting instruments that will collect important data
from space on critical global change issues
such as global warming, deforestation and
desertification. During 1991, an external engineering review will be conducted on the implementation of the EOS program.
Mission from Planet Earth.—The budget
proposes a total of $2.5 billion, a 12 percent
increase, for activities that will eventually lead
Part Two-38
THE BUDGET FOR FISCAL YEAR 1992
to exploration of the Moon and the planets,
including Space Station Freedom. In 1992, activities will focus on continued development of
the Space Station and increased investments
in long-lead exploration technologies such as
nuclear power, nuclear propulsion and life support.
BIOTECHNOLOGY
edented opportunities for improving the Nation's health, food supply and environment. In
medicine, biotechnology is responsible for a
generation of new products that will prevent
and treat disease. Significant agricultural advances and environmental techniques are also
underway. Twelve Federal agencies are working on biotechnology-related R&D and are developing priorities for future Federal investments.
The budget proposes nearly $4 billion for biotechnology R&D.—Biotechnology offers unprec-
ENHANCING RESEARCH AND DEVELOPMENT
Research and development (R&D) yields new
knowledge, products and processes that, over
the long term, result in economic growth and
an 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. Investments in research and development form the foundation
for the exploration of all of the new frontiers
of today and tomorrow.
It is not possible to determine analytically
the "optimal" level for total national investment in R&D or the best mix of R&D investments. However, the evidence that increased
R&D investment adds to the productivity of
the Nation, and that Federal investments are
important, provides ample justification for increased Federal investment in R&D as well
as for Federal action to increase the level of
private R&D investment.
BACKGROUND: INCREASED INVESTMENTS IN R&D PROVIDE BENEFITS
TO THE NATION
THE 1992 FEDERAL R&D BUDGET:
OVERVIEW AND TRENDS
R&D investment provides both direct and indirect productivity benefits to society. In addition to the economic benefits associated with
R&D, many studies suggest that private (industrial) R&D spending has a very high social
rate of return. 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." One researcher estimated a social rate of return of 56 percent
and a private rate of return of 25 percent for
a specific group of innovations. Several decades
of econometric research have demonstrated
that private sector R&D investments are a
strong positive stimulus for private productivity. There is also evidence that Federal R&D
spending stimulates private R&D. This appears to be especially true for basic research
or pre-competitive, generic applied research
that contributes to many industrial sectors.
The budget proposes to allocate about $76
billion for R&D, including R&D facilities. This
is an increase of over $8 billion, or 13 percent,
over 1991 levels. Within this total, $13 billion
will be allocated for basic research, an increase
of $1 billion, or 8 percent, and $12 billion for
applied research, an increase of $903 million,
or 8 percent, over 1991. Federal civilian R&D
will increase by 10 percent while defense-related R&D will increase by 14 percent.
The ratio of Federal R&D outlays to GNP
has been holding steady in recent years at
about 1.2 percent, after a sharp drop in the
1970s due to the end of the Apollo project and
slower growth in defense. During the 1980s,
defense R&D recovered considerably. Federal
civilian R&D (excluding defense and space activities) has been nearly level for 30 years at
about 0.4 percent of GNP. The budget provides
increases and incentives designed to increase
Federal R&D investment as a percent of GNP.
IV.C.
Part Two-39
ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
Table C-2. THE BUDGET PROPOSES AN $8.4 BILLION INCREASE
IN FEDERAL INVESTMENT IN RESEARCH AND DEVELOPMENT
(Dollar amounts in millions)
Budget Authority
1991
Enacted
1992
Proposed
Dollar
change
Outlays
Percent
change
1991
Enacted
1992
Proposed
Dollar
change
Percent
change
Government wide totals:
Conduct of R&D:
Basic Research
Civilian
Defense1
Applied Research and Development
Civilian
Defense1
12,320
11,296
1,024
13,320
12,278
1,041
+1,000
+982
+17
+8
+9
+2
11,597
10,623
973
12,414
11,362
1,052
+818
+739
+79
+7
+7
+8
51,791
15,031
36,760
58,758
16,552
42,206
+6,967
1,521
+5,447
+13
+10
+15
51,839
14,045
37,794
55,650
15,503
40,147
+3,811
+1,458
+2,353
+7
+10
+6
Subtotal, Conduct of R&D ....
R&D Facilities
64,111
3,082
72,078
3,545
+7,967
+464
+12
+15
63,436
2,845
68,065
3,264
+4,629
+419
+7
+15
67,192
75,623
+8,431
+13
66,281
71,329
+5,048
+8
35,176
9,273
6,149
40,479
9,836
6,410
+5,303
+564
+260
+15
+6
+4
36,142
8,704
5,810
38,421
9,235
6,273
+2,279
+531
+463
+6
+6
+8
7,271
1,828
1,224
584
433
517
407
8,602
2,112
1,261
562
491
538
435
+1,330
+284
+37
-22
+59
+22
+28
+18
+16
+3
-4
+14
+4
+7
6,974
1,675
1,152
572
418
454
373
7,767
1,897
1,198
567
450
499
411
+793
+222
+46
-5
+33
+45
+38
+11
+13
+4
+8
+10
+10
385
219
645
413
219
720
+28
+7
337
215
611
445
219
684
+108
+4
+73
+32
+2
+12
Total, Conduct of R&D and Facilities2
Conduct of R&D by Agency:
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 Agencies3
1 Includes
—
—
+75
+12
-1
military-related programs of the Departments of Defense and Energy.
2
Components may not add to totals because of rounding.
3
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.
As a percentage of total Federal domestic
discretionary spending, total civilian R&D has
declined from a peak of 25 percent in the Apollo years to about 13 percent in recent years.
Excluding space R&D, civilian R&D has remained relatively constant at about 10 percent
of the domestic discretionary budget. Again,
the budget seeks to increase this share.
Part Two-40
THE BUDGET FOR FISCAL YEAR 1992
THE 1992 BUDGET WILL INCREASE THE RATIO OF FEDERAL
CIVILIAN RESEARCH AND DEVELOPMENT OUTLAYS TO GNP
(OUTLAYS)
Sources: National Science Foundation, Office of Management and Budget.
P OF C BA T
THE BUDGET WILL INCREASE INVESTMENT IN CIVILIAN
RESEARCH AND DEVELOPMENT AS A PERCENTAGE OF
DOMESTIC DISCRETIONARY SPENDING
IV.C.
ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
The Federal Government currently accounts
for about 44 percent of the total U.S. investment in R&D. Industry, academia, and nonprofit organizations make up the remaining 56
percent. In 1991, it is estimated that total U.S.
R&D expenditures, Federal and non-Federal,
will be $152 billion, an increase of 4 percent
Part Two-41
over 1990, with Federal investments accounting for most of the increase. In total, the U.S.
investment in R&D is about 3 percent of GNP.
Trends in industry R&D funding, including initiatives to spur increased industry investment
through the tax credit for research and experimentation, are discussed later in this chapter.
EXPANDING THE FRONTIER OF KNOWLEDGE THROUGH
BASIC RESEARCH
Basic research provides the new knowledge
that leads to new products and processes.
Basic research, especially at universities, is an
essential investment in the Nation's scientific
and technological future, including its future
scientists and engineers. For this reason, the
budget places a major emphasis on increasing
basic research. In total, the budget proposes
an increase of 8 percent, or $1 billion, above
1991 for Federal basic research support.
The strength of U.S. investment in basic research is illustrated by several recent achievements:
• The NASA/NOAA Antarctic Ozone Expedition, combining satellite, aircraft, and
ground-based research, discovered and
documented the problem of the "ozone
hole" in the Antarctic, and is currently investigating similar phenomena in the Arctic environment.
• An NSF-supported Presidential Young Investigator discovered a way to make largepore molecular sieves. These molecular
sieves are critical as catalysts for a wide
variety of industrial processes, particularly
petroleum processing and chemical separation. The new large-pore sieves have the
potential to revolutionize the industrial
processing of chemicals.
• NIH scientists successfully transferred genetically engineered cells to human subjects, paving the way for the world's first
attempts at human gene therapy. The first
gene therapy experiments involved placing
a normal gene that helps the immune system develop normally into the white blood
cells of a young girl who lacked this vital
gene. It is hoped that this inserted gene
will enable the formation of a working immune system.
• NASA's Cosmic Background Explorer
made unprecedented measurements of
background radiation, giving scientists
critical new evidence on the origin of the
universe.
• Biomedical researchers have discovered
the long-sought gene for cystic fibrosis, a
fatal disease of children and young adults,
opening the way to a host of new therapeutic approaches.
Key Indicators of the Vitality of Basic
Research
Most basic research is performed in universities, and more than half of the R&D that
universities perform is basic. The vitality of
the "academic research enterprise" has been
nearly impossible to measure. However, in recent years, scientists and policymakers have
expressed serious concerns about its current
and future vitality. Many experts argue that
over the past several years, and despite large
real increases in Federal funding, the activity
level and research productivity of university
researchers have not appeared to increase.
Funding Trends.—The historical trend in
Federal support for basic research shows that
during the 1980s such support increased overall by 50 percent in real terms, with significantly larger increases in health-related basic
research. The figure below shows that real
support for basic research has continued to
climb in the early 1990's, particularly in health
and space.
Measuring the Direct Economic Benefits.—Until recently, there has been no way
Part Two-42
THE BUDGET FOR FISCAL YEAR 1992
THE 1992 BUDGET PROPOSES EXPANDED
SUPPORT FOR BASIC RESEARCH
(BUDGET AUTHORITY)
1990$
BILLIONS
HEALTH
ALL OTHER
c
1978
1980
1982
1984
T
SPACE
1986
1988
DEFENSE
1990
1992
Sources: National Science Foundation, Office of Management and Budget.
to gauge reliably the impact of academic R&D
on industrial innovation.
Recent work (Mansfield), however, indicates
that in several key industrial sectors, notably
information processing, drugs and instruments, a significant proportion of new products
and processes would not have reached the
market had it not been for the contribution
of recent academic R&D. A recent, but very
preliminary, estimate of the average social rate
of return to past investments in academic R&D
was calculated to be 28 percent. It is important
to note, however, that this figure must be
viewed with caution as it is based on a large
number of assumptions and simplifications.
In any case, the contribution of academic
research to industrial innovation in several important sectors appears to be considerable,
even apart from its more traditional benefits
to the education of students, and to the acquisition of knowledge for its own sake.
Support for University Researchers.—
One indicator of the Federal Government's
commitment to research is the total number
of research grants made to individual researchers, a figure that has been growing for two
decades. Since most grants are for periods
ranging from 2-7 years, in any given year only
a portion (less than 25 percent) of an agency's
grants are competitively renewed, or become,
for that year, "new grants". Thus, rather than
using the number of total grants as an indicator, some advocates prefer to use a measure
based on just this "new grant" ratio. This indicator, or "funded rate of new grants" is defined
here as the number of awards as a percent
of the number of proposals. By this measure,
the funded rate for new grants for the two
largest Federal supporters of university research, the Department of Health and Human
Services (National Institutes of Health) and
the National Science Foundation, have declined over the 1980's from about 40 percent
to about 30 percent (adjusted to exclude both
multiple submissions by any one individual
and for awards for research centers, which
may serve many investigators).
A partial explanation may be that since
1970, for HHS, the total pool of biomedical
IV.C.
ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
researchers (extramural) has grown by 140
percent, outpacing the 75 percent growth in
principal investigators funded by HHS. In fact,
it has been estimated that about 80 percent
of all the American scientists in all fields who
ever lived are alive today.
Funding rates for new grants have also
dropped because of increases in the amount
of money per grant (both direct and indirect
cost components) and the average length of
grants. Increasing award sizes, award lengths,
or both, may tend to provide increased stability and productivity for a given investigator,
but these actions also depress the number of
subsequent new grants that are made.
While individual investigator awards are
still the predominant form of support, awards
to groups of investigators (either small groups
or larger centers) have been increasing, driven
primarily by the need for interdisciplinary approaches to scientific problems. Each of these
group or center awards is counted as a single
grant, even though many researchers may be
served. Thus, considering only the absolute
numbers of awards is somewhat misleading.
A more appropriate consideration should be
the total number of researchers supported. By
this measure, there are many more researchers supported by research grants today than
at any previous time.
Although support for university researchers
is most often cited as the key indicator of the
health of overall Federal support for basic research, a number of other measures that have
traditionally been used to measure research
output (new knowledge). None of these is, by
itself, a definitive indicator of the vitality of
academic research, and none is universally accepted as an adequate output measure, since
the "amount" of new knowledge contained in
a research finding has no natural unit of measure. Taken together with information on support for researchers, these measures provide
some insight into the overall strength of academic research. Several such measures are (1)
numbers of publications, (2) "quality" of publications as measured by citation indices, (3)
patents and (4) Nobel and other prizes.
Publications and Citations.—As an indicator of overall productivity, the number of
science articles published by U.S. academic researchers (which produce about two-thirds of
Part Two-43
all U.S. science and engineering articles in
major journals) has increased markedly. By
this measure, the U.S. is maintaining its large
share of world scientific and engineering literature. In all fields, the U.S. has a greater
percentage of world publications than does any
other country.As an indicator of the impact
that publications have on other research, citation data are often used. The level of citation
of U.S. papers by foreign researchers suggests
that U.S. researchers continue to exert a substantial impact on foreign publications, and
thus on the world's store of scientific knowledge.
Patents.—University patenting increased
greatly during the 1980s, due in part to the
1980 change in U.S. law that allowed universities and small businesses to retain title to
inventions developed with Federal funds. U.S.
universities received 2 percent of patents
awarded to U.S. inventors in 1988, more than
double the share in 1978.
Nobel and Other Major Prizes.—The U.S.
continues to dominate the Nobel lists, and
Americans often win other major, internationally-recognized prizes such as the Fermi
Award in physics, the Wolf Award in chemistry and the Lasker Award in medicine. However, care must be taken with this measure
as these selections are often made on the basis
of research done many years (10-30) before.
Thus, this indicator may have more value with
respect to past support for research than
present or future support.
The budget recognizes that support for principal investigators is an important measure of
the vitality of the Nation's basic research effort. Thus, this support is the major theme
underlying the initiatives in basic research
proposed for 1992.
1992 Budget Initiatives in Basic Research
The budget proposes a number of major increases or new programs reflecting the President's support for basic research. These increases are intended to bolster basic research
funding, especially that which supports individual investigators, and to provide those researchers with state-of-the-art equipment.
Overall, the budget proposes over $13 billion
for basic research, an increase of $1 billion,
or 8 percent, over 1991.
Part Two-44
T H E B U D G E T F O R F I S C A L Y E A R 1992
Table C-3. THE BUDGET INCREASES FUNDING FOR BASIC RESEARCH1
(Dollar amounts in millions)
Budget Authority
Department or Agency
Health and Human Services
1991
Enacted
1992
Proposed
Dollar
change
Outlays
Percent
change
1991
Enacted
1992
Proposed
Dollar
change
Percent
change
+7
5,101
5,477
+376
+7
4,786
5,097
+311
(4,634)
(4,968)
(+334)
(+7)
(4,372)
(4,622)
(+250)
National Science Foundation
1,719
1,987
+268
+16
1,560
1,784
+223
Energy
1,726
1,759
+32
+2
1,650
1,654
+3
(National Institutes of Health)
National Aeronautics
+6
+14
—
and Space Ad1,698
1,960
+262
+15
1,612
1,800
+188
+12
Defense-military
992
1,010
+17
+2
942
1,021
+79
+8
Agriculture
563
598
+36
+6
539
553
+14
+3
Other Agencies 2
521
529
+8
+2
507
506
-1
12,320
13,320
+1,000
+8
11,597
12,414
+818
ministration
Total
1Amounts
—
+7
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, the Agency for
International Development, the Smithsonian Institution, Environmental Protection Agency, Tennessee Valley Authority, and the
Corps of Engineers.
Doubling Basic
Research
Support
Through the National Science Foundation.—The President remains committed to
doubling the budget of the National Science
Foundation (NSF) between 1987 and 1994. The
budget proposes an overall increase of 18 percent, which would restore the doubling path
for NSF. Over 70 percent of NSF's budget supports basic research, primarily at the Nation's
colleges and universities. These funds go directly, through a competitive, merit-based
process, to the best researchers and to the
most talented young scientists and engineers.
Individual investigators are a key element in
maintaining the U.S. preeminent position in
science and basic research. NSF also plays a
major role in the governmentwide initiative to
improve the quality of science, mathematics
and engineering education, particularly at the
pre-college level.
In addition to the large proposed increase
aimed primarily at individual investigators,
$50 million is proposed to fund a new initiative
to provide new, state-of-the-art instrumentation to university researchers. This initiative
will be implemented through a competitive,
merit-based program, and will be targeted toward instrumentation costing more than
$200,000, but less than $4 million. The Federal funding for this initiative will be matched
at least 50:50 by non-Federal sources.
Increasing the Investment in Basic Biomedical Research at NIH by 7 Percent.—
The budget proposes a $334 million increase
for basic biomedical research supported by the
National Institutes of Health (NIH), the primary source of basic biomedical research discoveries in the world. The overall increase of
$498 million, or 6 percent, for all of NIH will
allow an increase of 9 percent in the funding
for research project grants awarded to individual investigators. This will permit over 600
additional grants to be funded.
Unlocking the Secrets of Human Heredity—the Human Genome Project.—The
budget proposes a 26 percent increase for the
third year of this 15-year effort to decode the
information locked in the chemical building
blocks that form human genetic inheritance.
This $35 million increase reflects a commitment to develop "maps" of human chromosomes and human DNA sequence data that
will allow scientists to develop new diagnostic
tests, therapies, or cures for some of the 4,000
known disorders in which genes are the dominant cause. Such diseases include cystic fibrosis, sickle cell disease, and muscular dystrophy. The genome project also will produce
increased knowledge about how specific genes
function and malfunction, and will help increase understanding of diseases characterized
IV.C.
ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
by gene-governed chemical reactions, such as
heart disease, cancer, and AIDS.
This project is being conducted jointly by the
Departments of Energy and Health and
Human Services. The budget requests a total
of $169 million for the project, $59 million at
Energy and $110 million at Health and
Human Services.
Concurrent with the project's efforts to advance the state-of-the-art in genetic "mapping,"
the project is also exploring safeguards that
may be necessary as new genetic information
is put to practical uses, addressing issues related to privacy of such information and fairness in its use.
This landmark project will allow the next
generation to benefit from the knowledge
gained through this investment. Future scientists will have tremendous amounts of new
information about the structure of human genetic make-up available to assist them in their
search for therapies and cures for the diseases
that afflict this generation. The 1992 budget
ensures that this project is able to forge ahead
expeditiously.
Improving the Productivity of the Nation's Agriculture (the National Research
Initiative).—The budget continues the commitment to the National Research Initiative
(NRI), first proposed in the 1991 budget, by
proposing $125 million, an increase of $52 million, or 71 percent, over the 1991 enacted level.
In 1991, $100 million was proposed as the initial installment, to be expanded by $50 million
each year to the extent that funds were awarded competitively and not earmarked for specific sites or institutions. Six categories of research will be funded: natural resources and
the environment; nutrition, food quality and
health; plant systems (including mapping of
plant genomes); animal systems; markets,
trade, and policy; and processes antecedent to
adding value and developing new products.
Agriculture in the 1990s must emphasize the
environment, more rational use of natural resources, the quality and nutrition of food, and
economically stabilized production systems
which benefit producers as well as consumers.
The NRI responds to the major issues facing
agriculture such as food safety, water quality,
global climate change, pest management, sci-
Part Two-45
entific human capital development, and farm
income. The NRI will allow U.S. agriculture
to broaden the science and technology base to
meet demanding needs and exploit new opportunities more effectively. These imperatives coincide with recent advances in biological
sciences and other new tools in science that
present unique research opportunities to improve agriculture nationally.
Federal funding for the NRI is necessary because: (1) the issues and opportunities are national in scope; the Nation as a whole is the
beneficiary, not just individual states or industries; (2) the NRI undertakes research that
does not, in general, produce specific patentable or marketable products, but knowledge
that will be broadly applicable; (3) the need
is urgent; the issues to be addressed require
action now and cannot be delayed or taken
up piecemeal; and (4) there are broader benefits, which are difficult to quantify, related to
protection of the environment and public
health.
The Administration is concerned about recent Congressional action which placed a cap
of 14 percent on the recovery of indirect costs
associated with grants made under the NRI.
This action threatens the viability of the initiative.
Unlocking the Secrets of Matter and Energy—The Superconducting Supercollider
and High Energy and Nuclear Physics:
• The Superconducting Super Collider.—The
Superconducting Super Collider (SSC) will
provide a collision energy 20 times greater
than the current capability, resulting in
new fundamental knowledge of matter and
energy. The SSC Laboratory, under construction in Ellis County, Texas, will comprise a 54-mile circular tunnel in which
superconducting magnets will accelerate
counter-rotating proton beams. The SSC
will employ 2,500 scientists, engineers,
and technicians, and host an additional
500 visiting scientists.
The budget provides $534 million for the
SSC, an increase of $291 million over the
1991 level. Much of the current effort focuses on research and development of the
superconducting magnets. Work on other
SSC components is also progressing. The
Part Two-46
THE BUDGET FOR FISCAL YEAR 1992
first segment of tunnel will be under construction by the end of 1992.
nological advances emanating from the
SSC.
Even though the budget proposes a substantial increase for the SSC, this funding
will not come at the expense of other
science programs. In particular, the budget proposes a 16 percent increase in basic
research, principally for individual investigators, at the National Science Foundation.
• High Energy and Nuclear Physics.—Research in high energy and nuclear physics
is directed at understanding the nature of
matter and energy at the most fundamental level and the basic forces which
govern all processes in nature. Much of
the research program is aimed at verifying
and explaining the particles, or "building
blocks", that comprise the interior of
atoms and the forces acting on them.
The total cost of the SSC has been estimated at $8.2 billion. One-third of the
total is expected to be contributed by nonFederal sources. The State of Texas has
committed up to $1 billion for construction
of on-site facilities and other SSC systems,
as well as the land required for the SSC
laboratory.
Research is conducted at universities and
national laboratories. Experiments usually
involve controlled collisions between particles travelling at speeds approaching the
speed of light and examination of the
interactions that occur.
Foreign partners are expected to contribute substantially to the construction and
operation of the SSC, as well as to the
experimental program. During 1992, follow-up delegations will continue discussions already underway with Japan,
Korea, Europe and Canada.
Existing high energy accelerator facilities
include the Tevatron at Fermi National
Laboratory near Chicago, the Stanford
Linear Collider at Stanford University in
California, and the Alternating Gradient
Synchrotron at Brookhaven National Laboratory on Long Island. Improvements to
the Tevatron will be completed in 1992
which will greatly enhance the capability
of the machine. Additional improvements
in the form of a new Main Injection Ring
at Fermilab will be initiated in 1992.
The SSC holds the potential for new
breakthroughs in science, technology and
education. Although the primary purpose
of the SSC is to acquire new knowledge,
such knowledge has always resulted in developments in technology and practical
products which profoundly affect the quality of life for all Americans and which enhance the economic competitiveness of the
Nation. U.S. world leadership in high energy physics will be maintained far into
the next century by the scientific and tech-
Construction will continue on two nuclear
physics facilities. The Continuous Electron
Beam Accelerator Facility in Newport
News, VA is on schedule and nearing completion. At Brookhaven National Laboratory, construction is well underway on
the Relativistic Heavy Ion Collider.
Table C-4. THE BUDGET PROPOSES A 35 PERCENT INCREASE FOR
AN AMBITIOUS PROGRAM IN HIGH ENERGY AND NUCLEAR PHYSICS
(Dollar amounts in millions)
Budget Authority
1991 Enacted
Superconducting Super Collider
High Energy and Nuclear Physics
Total
1992 Proposed
Dollar change
Percent
change
243
906
534
1,015
+291
+109
+120
+12
1,149
1,549
+400
+35
IV.C.
ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
APPLIED
R&D:
EXPANDING
THE
FRONTIER OF TECHNOLOGICAL DEVELOPMENT
Traditionally, the Federal Government has
supported a broad spectrum of applied civilian
R&D in support of agency missions. Unlike
basic research, where the Federal role has bee
stable and widely acknowledged, the appropriate Federal role in applied civilian R&D has
been the subject of debate and has changed
significantly over time. Past Federal investments in civilian R&D have led to major technological advances (e.g., computers, new aircraft) while others have been major failures
(e.g., synfuels plants).
The Administration believes that appropriate Federal investments in applied civilian
R&D can result in high payoff to the economy,
and the budget provides for R&D funding increases across a wide range of technology
areas. In total, the budget proposes about $17
billion, an increase of $1.5 billion or 10 percent.
The principal strategy for the Federal applied civilian R&D programs is to invest in
R&D areas that support agency mission requirements, but also where some of the R&D
has broad applications in the private sector
("dual use" technologies), even though these
commercial applications would not necessarily
by funded by the government. In such cases,
the Government's role is to support generic
or enabling technologies at the pre-competitive
stage of R&D:
• generic or enabling technologies have the
potential to be applied to a broad range
of products or processes across many
firms;
• pre-competitive R&D is the stage of the
R&D process where the results can be
shared widely within and between industrial sectors, without reducing the incentive for individual firms to develop and
market commercial products and processes
based upon the results.
There are a number of different mechanisms
that agencies may use to support generic applied research and technology development.
These include: cost-sharing of individual
projects; creation of R&D consortia (often in-
Part Two-47
volving government, industry and university
laboratories; and more informal government/
university/industry collaboration). Overall, the
budget provides increased funding for all major
civilian applied research and development
areas.
Increased investments in applied civilian
R&D will support technology development
across a number of agencies and programs in
support of both agency mission needs and a
broad technology base for potential future commercial applications. This increased emphasis
on federally supported technology development
should not be confused with industrial policy.
The Administration remains opposed to efforts
to target specific industries (e.g., consumer
electronics) for R&D assistance to develop new
products (e.g., high-definition television).
1992 Budget Initiatives in Applied
Research and Development
High Performance Computing and Communications.—The budget proposes $638 million for Federal support for R&D focused on
high
performance
computing
and
communciations. High performance computing
systems (i.e., hardware, software, networks,
etc.) are likely to have a significant positive
impact
on
productivity.
For
example,
supercomputers have been credited with bringing the Ford Taurus, currently the best-selling
American-made car, to market much sooner,
with higher quality, and at significantly lower
cost than would have been possible without
them. While the supercomputer industry has
grown from $89 million in worldwide revenues
in 1980 to over $1.1 billion in 1990, it is still
a very small market (less than one percent
of the worldwide computer market) and traditionally limited to very complex public and
private high-risk, high-return ventures (e.g.,
oil and gas exploration, defense and aerospace
systems, etc.). A similar situation exists with
high-capacity, high-speed digital networks. Because of the small scale of the market and
the high-cost of research, high performance
computing has not attracted the private sector
R&D investments typically seen in the broader
computer industry.
The Federal Government has played a significant role in the development of the
supercomputer and network industry. A lead-
Part Two-48
1080$
,LUONS
THE BUDGET FOR FISCAL YEAR 1992
THE 1992 BUDGET PROPOSES INCREASED. FUNDING
FOR CIVILIAN APPLIED RESEARCH AND DEVELOPMENT
(BUDGET AUTHORITY)
Sources: National Science Foundation, Office of Management and Budget.
Table C - 5 . THE BUDGET INCLUDES INITIATIVES IN SEVERAL KEY
AREAS OF APPLIED R&D
(Dollar amounts in millions)
Budget Authority
Initiative
High Performance Computing and Communications
Advancing New Energy Technologies
Enabling New Products and Processes: Advanced Manufacturing and Materials
HIV/AIDS Research
Moving Fusion Energy from Science to Engineering
Improving the Air Transport System: Aeronautics R&D
Expanding Applied R&D at the National Institute of Standards
and Technology
ing computer industry executive has stated
that "If it weren't for the U.S. government,
there would be no U.S. supercomputer industry." The role of government R&D in develop-
1991
Enacted
1992
Proposed
Dollar
change
Percent
change
489
676
638
903
+149
+227
+30
+34
1,316
1,152
275
482
1,310
1,210
337
543
-6
+58
+62
+61
+5
+23
+13
215
248
+33
+15
—
ing innovative computer technologies has its
roots in the World War II research that became the foundation for the UNIVAC system.
Many of today's commercial high performance
IV.C.
Part Two-49
ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
computing system and network advances are
attributable to research supported by" Federal
agencies.
Through the Office of Science and Technology Policy's Federal Coordinating Council
on Science, Engineering, and Technology
(FCCSET), eight agencies have developed a
new integrated research initiative in High Performance Computing and Communications
(HPCC). The program focuses on the underlying research and the human talent needed to
develop the next generation of supercomputer
systems (including hardware, software, and
networks).
The goal of the proposed initiative is to
meet, by 1996, the needs of Federal research
agencies to investigate and understand a wide
range of fundamental scientific and engineering computational problems and, at the same
time, allow the private sector to "leap frog"
over the expected incremental improvements
in conventional supercomputers.
Investments in research and technology development are planned in four HPCC program
components:
• High Performance Computing Systems
(Hardware): Undertaking research in scalable computer processors, memory, input/
output devices and operating systems
needed for scalable teraflop (trillion oper-
ations per second) supercomputers. The
budget proposes $157 million.
• Advanced Software Technology and Algorithms (Software): In the long-run, the return to both the Government and the economy generally of software investments
may be even greater than that of hardware investments. The computational
model used to simulate the solid rocket
booster failure blamed for the Space Shuttle Challenger disaster takes roughly 14
hours to run on a typical research lab
minicomputer. Using a parallel processor
significantly reduced this time, but optimized software brought it to under five
seconds. This component has a large share
of the initiative because there is a great
need for adequate and affordable software
to address unique fundamental scientific
and engineering problems. The software
usually represents five times the hardware
costs. The budget proposes $265 million.
• National Research and Education Network
(Networks and Communications): The goal
of the National Research and Education
Network (NREN) is to enable rapid access
by the Nation's educational and research
institutions to a broad range of Federal
resources, including libraries, databases,
and scientific facilities (e.g., computers,
telescopes, accelerators). The focus of this
element would be on integrating and up-
Table C-6. THE BUDGET PROPOSES A 31 PERCENT INCREASE FOR
HIGH PERFORMANCE COMPUTING
(Dollar amounts in millions)
Budget Authority
Agency
Defense (DARPA)
National Science Foundation
Energy
National Aeronautics and Space Administration
Health and Human Services (National Library of Medicine)
Environmental Protection Agency
National Institute of Standards and Technology
National Oceanic and Atmospheric Administration
Total, All agencies
Dollar
change
Percent
change
19S1
Enacted
1992
Proposed
183
169
65
54
14
1
2
1
232
213
93
72
17
5
3
3
+49
+44
+28
+18
+3
+4
+1
+2
+27
+26
+43
+33
+21
+400
+50
+200
489
638
+149
+30
Part Two-50
grading existing federally supported research networks and on research in
gigabit (billion bit per second) network
switches, protocols, software, and security
mechanisms. These improvements would
be used to enable the transition of the existing Federal research network into a national gigabit research and education network. The budget proposes $92 million.
• Basic Research and Human Resources (Research/Training): This component would
focus on fundamental "leapfrog" advances
in HPCC technology and the training of
students in the computational sciences.
The budget proposes $124 million.
Advancing New Energy Technologies.—
A major element of the Administration's National Energy Strategy (NES) will be increased
investment in energy technology R&D. The
budget includes $903 million, an increase of
$227 million or 34 percent, for increased investments in R&D in support of NES R&D
initiatives Governmentwide. The budget proposes $653 million for Department of Energy
NES-related R&D, an increase of $134 million
or 26 percent. Over the five year period 1992
through 1996, DOE would invest $3.5 billion
in NES R&D initiatives discussed in this section.
The NES R&D strategy is based on several
key elements:
• an emphasis on R&D areas that, if successful, could lead to significant displacement of petroleum;
• selection of R&D areas based on high R&D
payoff potential—i.e., the potential to
achieve significant cost and performance
improvements;
• a comprehensive, interagency R&D program that includes both technology enhancements (e.g., more efficient engines)
and more fundamental system changes
(e.g., the potential for high speed rail and
Maglev systems to displace automobile
and air travel);
• a collaborative, cost-shared, Governmentuniversity-industry effort. This implementation approach would rely upon industryled, joint Government-industry R&D planning and management and 50:50 cost
THE BUDGET FOR FISCAL YEAR 1992
sharing, with the research performed by
industry or universities (except in situations where Government labs have unique
research and testing capabilities). The formation of industry R&D consortia would
be encouraged where feasible (e.g., in the
pre-competitive R&D stage). This implementation approach would maximize the
involvement of the ultimate technology
users, enhancing the technology transfer
process, and would minimize Government
overhead costs.
The Department of Energy (DOE) estimates
that the NES R&D Initiative could lead to a
reduction in oil consumption of 5-8 million
barrels per day by the year 2030, depending
on the success of the proposed R&D programs.
The NES R&D strategy is intended to foster
a new, results-oriented approach, and not
merely more-of-the-same traditional Government-funded energy R&D programs. The Federal Government has had a substantial, broadbased energy R&D program since the 1973 oil
embargo. From 1980 through 1990, the Government has invested about $21 billion in energy technology R&D. This investment has had
relatively little payoff, for a combination of
reasons: (1) the inherently high risks of some
R&D, (2) poor R&D choices (e.g., synfuels,
breeder reactors), and (3) lack of significant
private sector financial and management involvement linking R&D to successful commercial deployment. The NES energy R&D initiative will take better advantage of the Nation's tremendous university and private sector
technical talent, while avoiding the mistakes
of past Government managed, crisis-born energy R&D programs.
The specific components of the NES R&D
initiative are shown in Table C-7. These include:
• Improved Vehicle Propulsion Technology
through research on high temperature diesel and gas turbine engines. Conventional
spark-ignited and diesel engines have efficiencies of up to 31 percent. More efficient
engines, including gas turbines, could
achieve efficiencies approaching 40 percent.
• Electric Vehicles, including a new joint
auto industry-government consortium to
Part Two-51
IV.C. ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
Table C-7. THE BUDGET PROPOSES A 34 PERCENT INCREASE FOR
NATIONAL ENERGY STRATEGY R&D INITIATIVES
(Dollar amounts in millions)
Budget Authority
Initiative
1991
Enacted
Displacing Oil in the Transportation Sector
Surface Transportation Efficiency
Improved Vehicle Propulsion Technology
Electric/Hybrid Vehicles
Intelligent Vehicle/Highway Systems
High Speed Rail/Magnetic Levitation
Telecommuting
Air Transportation Efficiency
Energy-Efficient Aeronautics R&D
Efficient Air Traffic Control R&D
New Transportation Fuels
Fuels from Biomass
Alternative Fuel Utilization
Advanced Oil Recovery
Increased Energy Efficiency in Buildings and Industry
Targeted Industrial Energy Efficiency R&D
Targeted Buildings Energy Efficiency R&D
Advanced Electricity Technology
Photovoltaics
Superconductivity
Advanced Light Water Reactor R&D
Advanced Reactor Concepts
Total, All activities
Total, Department of Energy
develop battery technology for electric vehicles. Improved batteries that could extend vehicle range to 120-200 miles could
enable electric vehicles to capture as much
as 20 percent of the market by 2030. Fuelcell-powered electric vehicles offer the potential to achieve up to 50 percent efficiencies.
• Intelligent
Vehicle I Highway
Systems
(WHS'), is intended to increase highway
safety, reduce congestion and decrease
highway fuel consumption. IVHS uses
state-of-the-art electronics, communications, and computer technology to improve
traffic control systems, warn drivers of
dangerous situations, and generally make
more efficient use of the existing road system. IVHS can reduce congestion, improve
traffic flow, reduce idling at traffic signals,
1992
Proposed
Dollar
change
Percent
change
302
162
39
30
23
12
58
51
16
35
89
33
14
42
129
84
45
245
47
19
29
150
432
260
42
42
60
24
92
59
17
42
113
44
17
52
157
102
55
314
51
22
63
178
+130
+98
+3
+12
+37
+12
+34
+8
+1
+7
+24
+11
+3
+10
+28
+18
+10
+69
+4
+3
+34
+28
+43
+60
+8
+40
+161
+100
+59
+16
+6
+20
+27
+33
+21
+24
+22
+21
+22
+28
+9
+16
+117
+19
676
519
903
653
+227
+134
+34
+26
and allow drivers to choose more efficient
routes to their destination. DOE projections show a potential 30 percent decrease
in average on-the-road fuel efficiency due
to increasing congestion under current
trends. Unless corrected, this could substantially offset any gains from more fuelefficient vehicles. A study by Mobility
2000, a expert group of Federal and State
highway officials and corporate and academic technical experts, estimated that
IVHS has the potential to save up to 20
million gallons per day of gasoline.
• High Speed Rail and Maglev (magnetically-levitated trains), which may offer
transportation and energy efficiency improvements. Current efforts include investigations into the economic and technical
feasibility of high-speed rail and maglev
Part Two-52
as well as research on potential applications that would enhance the capacity of
the existing transportation network. This
work is being performed by the Departments of Transportation and Energy and
the Army Corps of Engineers. High speed
rail and Maglev transportation, may have
potential for trips of 200-600 miles in
length, competing with both long distance
automobile travel and short-haul air travel.
• The National Research and Education Network, part of the High Performance Computing and Communications Initiative,
also will help advance technology to facilitate increased telecommuting, reducing
both business travel and daily commuting.
The flex-place workforce has grown over
the past decade from 300,000 to 3.6 million. It is estimated that there are about
46 million potential telecommuters. Additional R&D can aid the emergence and
spread of telecommuting networks, by
linking cable and fiberoptic networks and
enhancing the capability from digital data.
In the absence of major system change,
the Department of Energy projections
show that total vehicle miles traveled
(VMT) could increase by 50 percent by the
year 2030. About 50 percent of VMT is
work-related.
• Energy-efficient Aeronautics R&D, including technologies such as hybrid laminar
flow and large structure composite materials will reduce aircraft friction and lower
aircraft weight. The Department of Energy
projects that U.S. air travel will double
in the next 20-30 years. New technologies
could save millions of gallons of aviation
fuel per year.
• Energy-efficient Air Traffic Control R&D,
a part of the national effort to modernize
the air traffic control system, will permit
more direct routing of flights.
• Advanced Transportation Fuels from Biomass will demonstrate use of lignocellulosic feedstocks to provide alcohol fuels on
a scale which can verify technology and
commercial costs. The production of ethanol from food crops currently costs $1.20
per gallon or more, requiring large Federal
tax subsidies. The goal of this R&D ini-
THE BUDGET FOR FISCAL YEAR 1992
tiative is the production of ethanol from
non-food crops at $0.60 per gallon.
• Alternative fuels utilization will continue
vehicle testing activities that will provide
the database to facilitate greater use of
alternative fuels.
• Advanced Oil and Gas Recovery Technologies will improve reservoir understanding for targeted drilling and develop
better instrumentation, chemical injectants and reservoir interpretation techniques. Currently, up to two-thirds of oil
resources" remain in the ground after conventional prpduction is completed. It is estimated that up to 25 billion additional
barrels could be recovered through advanced recovery ^techniques by the year
2030.
• Improved Energy Efficiency in Buildings
and Industry includes targeted R&D to
provide cost-effective efficiency improvements and reduce oil consumption.
• Advanced Light Water Nuclear Reactors
will incorporate passive safety features in
a standardized design. This will reduce the
time needed to license new plants, while
assuring that safety issues are adequately
addressed. The Department of Energy is
currently supporting first-of-a-kind engineering work that will assist companies
in their efforts to have the Nuclear Regulatory Commission certify the safety of
new standardized designs.
• Advanced Reactor Concepts will have safety features that go beyond even the standardized designs currently before the Nuclear Regulatory Commission. High Temperature Gas Cooled Reactors use specially-coated fuel elements that will not
fail even under the high temperatures that
could occur during an accident. Liquid
metal reactors use liquid sodium as the
heat exchange medium. Researchers have
demonstrated that both reactor types can
shut themselves down safely under conditions that would be extremely serious for
present-day reactors. The Department of
Energy continues R&D support for both
of these advanced concepts.
The NES R&D Initiatives are supported by
increased investments in related areas of basic
IV.C.
ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
research. Basic research in areas such as advanced materials, superconductors, geo- and
biosciences, and catalysis research may help
accelerate development of petroleum substitutes and energy conservation technologies.
Enabling New Products and Processes—
Advanced Manufacturing and Materials
R&D.—The budget proposes $1,310 million for
both advanced manufacturing and materials
R&D, two key enabling technologies.
• Advanced Manufacturing.—The budget
proposes over $1 billion for research and
development on advanced manufacturing
technologies. This includes an increase of
over 15 percent for nondefense-related
manufacturing R&D. Advanced manufacturing R&D includes activities within two
broad areas: (1) efforts designed to use
technology to improve the efficency or
quality by which a product is brought from
design to completion; and (2) activities directed at expanding the technical capability to bring a product (which is new and
fundamentally different in character from
existing products) from design to completion. An example of the latter is the effort
to fabricate high-temperature superconducting wires.
Improvements in U.S. manufacturing technology can increase productivity and quality, leading to competitive products which
increase market share while supporting a
high standard of living. While industry
has the central role in R&D to improve
manufacturing technology, an appropriate
role in such R&D exists for the government as well. The Federal role in advanced manufacturing R&D lies in supporting (1) generic manufacturing technologies and (2) those technologies which
are directly applicable to the procurement
needs of government programs. About half
of advanced manufacturing R&D proposed
in the 1992 budget falls into each of these
categories.
• Materials R&D.—Materials R&D forms
the foundation for many advances in other
technological areas such as aeronautics,
computers, biotechnology, and manufacturing. The Federal Government funds a substantial amount of materials R&D, mainly
in the area of materials science. However,
Part Two-53
additional work is needed in fundamental
research on the synthesis and processing
of novel materials. The budget proposes
$84 million for a new initiative in the National Science Foundation intended to
strengthen the competitive position of the
U.S. in developing and using next-generation materials and processing methods.
The 1992 program will focus on two areas
recognized as having a high potential payoff: electronic and photonic materials, and
biomolecular materials.
A class of materials that has received
much attention is superconductors. 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 budget provides
$93 million in 5 agencies (Defense, NASA,
Energy, National Science Foundation and
the National Institute of Standards and
Technology in Commerce) for superconductivity R&D.
Protecting the Public Health Through
Biomedical and Behavioral Research
"Progress in the war against disease depends
upon a flow of new scientific knowledge. New
products, new industries, and more jobs require
continuous additions to knowledge of the laws of
nature, and the application of that knowledge to
practical purposes. This essential, new knowledge
can be obtained only through basic scientific research." 1
Since Vannevar Bush made this statement
in 1945, federally supported research has
helped Americans live longer, healthier lives
by improving the quality of medical practice
and by developing new preventive measures.
The U.S. leads the world in biomedical research—both the pace of new discoveries and
America's continued dominance of scientific
Nobel prizes attest to that pre-eminence.
Vannevar Bush. Science, the Endless Frontier: A Report to the
President. U.S. GPO, July 1945, p. 1.
Part Two-54
THE BUDGET FOR FISCAL YEAR 1992
The budget assures that the next generation
will reap similar benefits by seeking substantial increases in the country's investment in
biomedical and behavioral research and development. In the Department of Health and
Human Services alone, this increase amounts
to $564 million, or 6 percent, over 1991 funding levels.
Advances in biomedical and behavioral research can improve the quality of health care
while helping to control health care costs. One
example includes the research-induced changes
in medical practice which reduced coronary
heart disease death rates and the duration of
heart diseases-related hospital stays—saving
hundreds of thousands of lives and billions of
dollars. Current path-breaking research, such
as the first human gene therapy experiments
conducted at the National Institutes of Health
(NIH), proffers the hope of similar advances
in human health and cost efficiency in the future. Research at the Alcohol, Drug Abuse, and
Mental Health Administration (ADAMHA) into
the causes of human addiction to drugs and
alcohol offers hope of finding ways to reduce
the human and societal toll caused by substance abuse.
The Federal investment in biomedical and
behavioral research is large. In total, the budget proposes $9.8 billion for the Department of
Health and Human Services, an increase of
6 percent over 1991. While most of this research is basic, considerable sums are invested
in applied research and development as shown
in Table C-8. This research helps ensure that
basic research discoveries are translated into
marketable therapies. Indeed, NIH funding of
clinical trials, through which promising new
therapies, preventive interventions and cures
are examined for safety and efficacy, will total
over $725 million in 1992. For example, since
pharmaceutical companies traditionally have
been slow to develop anti-drug abuse medications, the 1992 budget contains a $55 million
initiative for medications development in
ADAMHA, a 39 percent increase over 1991.
This Federal investment in biomedical and
behavioral research has increased as a proportion of GNP from 0.12 percent in 1970 to 0.16
percent in 1992.
Although most of HHS funds are utilized
for basic research which advances knowledge
for combatting many diseases, some research
can be loosely classified as related to one specific disease or another, as shown on table
C-9. By comparing these data with the data
in Table B-2 in Chapter IV.B., it can be seen
that this investment by disease roughly corresponds to the toll these afflictions take in
terms of death, illness, and human suffering.
Relating Research Investments to Selected
Diseases.—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
is high compared to that for heart disease,
cancer, and stroke, the three leading causes
of death in the country. HIV, however, often
strikes early in life. More than 45 percent of
AIDS victims are younger than 35, and a
growing number are children. As a result,
some suggest that research spending per year
of potential life lost before age 65 for HIV and
Table C-8. HEALTH R&D IN THE DEPARTMENT OF HEALTH AND
HUMAN SERVICES
(Dollar amounts in millions)
Budget Authority
Basic Research
Applied research
Development
Total Conduct, HHS R&D
1991
Enacted
1992
Proposed
Dollar
change
5,101
3,161
1,012
5,477
3,283
1,076
+376
+123
+65
+7
+4
+6
9,273
9,836
+564
+6
Percent
change
Part Two-55
IV.C. ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
the three killer diseases is more comparable
than that for spending per death, as shown
in the following chart. In addition, a comprehensive assessment of relative funding levels must consider other factors, such as morbidity and quality of life. The charts also show
substantial investments in diabetes, a disease
that is a major contributor to disability as well
as the Nation's seventh 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 collectively, by less than 7 percent over the 4 years
between 1990 and 1993. In contrast, deaths
and years of potential life lost due to HIV will
increase much more quickly, rising by 40 to
80 percent. These projections further support
the priority given to HIV research in the 1992
budget.
The Budget Includes a Major Investment to
Confront Human Immunodeficiency Virus I Acquired Immune Deficiency Syndrome (HIV!
AIDS).—Since the greatest hope for devising
better treatments, or even a cure or vaccines,
for HIV/AIDS will come from advances in
knowledge, the budget continues to place a priority on biomedical and behavioral research related to HIV/AIDS. As shown in table C-10,
governmentwide HIV/AIDS funding will increase by $558 million or 15 percent. This includes a 5 percent increase for research and
a 24 percent increase for treatment.
The budget would enable the Nation to continue making progress in the battle against
HIV/AIDS. Additional candidate therapies will
be screened and tested, education programs
will continue to discourage behaviors that lead
to transmission of the virus, and treatment
and income support funds will continue to be
made available to those already afflicted. Indeed, the largest increase related to HIV/AIDS
will come from Federal spending for Medicaid
and Medicare, which are projected to increase
by a total of 29 percent over 1991. Additional
research and education are the best methods
for erisuring that future generations will not
bear so heavy a burden, and the 1992 budget
therefore makes substantial efforts in these
areas.
Moving Fusion Energy From Science to
Engineering.—Fusion energy offers the potential to be a clean plentiful fuel for the production of electricity for the longer term. Compared with the burning of fossil fuels, fusion
would produce no sulphur or carbon dioxide.
The Fusion Program Advisory Committee
(FPAC) of the Department of Energy has recommended a long-range goal-oriented plan for
an operating Demonstration Power Plant by
2025 and an operating Commercial Power
Plant by 2040.
The budget proposes $337 million for fusion,
an increase of $62 million (23 percent) over
the 1991 level. Funding is included for R&D
and design work at the Plasma Physics Laboratory at Princeton University leading to a
Burning Plasma Experiment to improve the
scientific base for magnetic fusion. Over the
next year, the Department will be seeking
international participation in this endeavor
prior to committing to a specific construction
project. Inertial confinement fusion alter-
Table C-9. HHS RESEARCH FUNDING ATTRIBUTED TO SELECTED
CAUSES OF ILLNESS
(In millions of dollars)
Budget Authority
Cancer
Heart Disease
Stroke
Diabetes
Injuries
HIV/AIDS
1991 Enacted
1992 Proposed
1,566
663
76
262
45
1,122
1,653
711
84
277
46
1,185
Part Two-56
THE BUDGET FOR FISCAL YEAR 1992
RESEARCH INVESTMENTS IN SELECTED DISEASES
(BUDGET AUTHORITY)
DOLLARS
DOLLARS
86,000
2,600
• 1 1 9 0 1 RESEARCH FUNDING PER 1991 DEATH (LEFT SCALE)
CZ2 1991 RESEARCH FUNDING PER YEAR OF
POTENTIAL LIFE LOST IN 1991 (RIGHT SCALE)
30.000
26.000
20.000-
16.000
10,000-
6.000-
CANCER
DIABETES
HEART
DISEASE
STROKE
HIV
SOURCES: OMB and agency ataff aatimataa. Public Haalth Service and Cantara for Dlaaaaa Control projection*.
Table C-10. THE BUDGET PROPOSES A 15 PERCENT INCREASE IN
FEDERAL FUNDING FOR HIV/AIDS1
(Dollar amounts in millions)
1991
Enacted
HIV/AIDS:
Research
Treatment
Prevention
Income Support
Total 2
1992
Proposed
Dollar
change
Percent
change
1,152
1,614
630
305
1,210
1,999
637
414
+58
+385
+7
+109
+5
+24
+1
+36
3,701
4,259
+558
+15
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 related to
drugs and infant mortality, that contribute to the fight against HIV and AIDS.
natives will also be pursued in the research
program.
The budget proposes that the United States
continue international participation in the engineering design phase of the International
Thermonuclear Engineering Reactor. This 6year collaboration among four equal partners
(U.S., European Community, Japan, and the
Soviet Union) is a model for international cooperation in science and technology. Such a
IV.C.
ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
joint project has the advantages of sharing
knowledge and personnel, reducing the financial burden for each party, and optimizing the
use of special facilities and capabilities for the
common goal of achieving energy from fusion.
Improving the Air Transport System—
Aeronautics R&D.—The goal of NASA's aeronautics research and technology program is
based on a strategy that calls for developing
a broad technology base in support of the commercial aviation industry; enhancing the safety
and capacity of the national airspace system;
and helping assure U.S. aeronautical superiority for national security. Aeronautics R&D
has traditionally been a highly successful close
cooperative effort between the Federal Government and the private sector.
Technologies are being pursued which offer
major advances in vehicle performance and capabilities. Research efforts have been expanded in high-payoff areas associated with
a broad range of future vehicle applications
including subsonic and high-speed transport
aircraft.
The budget proposes $543 million for aeronautics R&D (excluding High Performance
Computing), an increase of 13 percent over the
1991 enacted level. The budget proposal reflects the need to continue to address critical
technology barriers to and strengthen technology development necessary for future aviation advances. Work in focused high-speed research has been expanded to include a focus
on enabling propulsion materials necessary to
develop future aircraft. In addition, the budget
includes funding for a new program focused
on advanced subsonic aircraft. This program
will develop nondestructive evaluation technology to help ensure the safe operation of
aging transport aircraft now in- the National
Airspace System and will also provide the
technology base for application and certification of fly-by-light and power-by-wire control systems.
In addition to the work proposed above, the
budget includes $72 million as NASA's share
of the joint NASA/Defense National Aerospace
Plane Program (NASP). Defense will provide
$233 million in 1992. This program is focused
on development of hypersonic technology leading to a future decision on a flight research
vehicle.
Part Two-57
Expanding Civilian Applied R&D at the
National Institute of Standards and Technology (NIST).—The budget proposes $248
million, a 15 percent increase over 1991, for
NIST. NIST carries out R&D which supports
standards development and advances measurement techniques, both of which are critical to
improving product quality, allowing for effective use of new technologies, and improving
public safety. In addition, NIST performs generic applied research and technology development, often in collaboration with industry,
which has potential benefit to broad segments
of the economy. The budget proposal continues
an effort begun in the 1991 budget to expand
NIST's ability to perform generic applied research and technology development and to address a rapidly growing number of important
standards and measurement issues.
NIST in-house research covers a broad spectrum of technologies such as electronics, manufacturing, materials science, chemical science
and information systems. The 1992 increase
will support new projects in many areas including: expedited development of measurement standards for intelligent machines; development of standards for fiber-optic systems
and high-temperature superconductors; expanded research into intelligent processing of
materials; analysis of the thermophysical properties of refrigerants that are alternatives to
chlorofluorocarbons; methods to measure the
performance of high density recording on magnetic films; and development of seismic design
and construction standards to reduce vulnerability to earthquakes.
The budget also includes $36 million for the
Advanced Technology Program (ATP). This
program provides a minority share of funding
for industry-led high risk R&D on pre-competitive, generic technologies. In a broad sense,
the goal of the program is to help bridge the
gap between more fundamental R&D and commercial R&D. ATP is an important, but experimental, program whose results cannot be predicted with certainty. Another experimental
program is the Manufacturing Technology
Centers. The budget proposes $10 million for
this program to support the continuation of
the five existing Manufacturing Technology
Centers and the start of a sixth center. These
centers are intended to enhance U.S. manufacturing by transferring Federal advanced manu-
Part Two-58
THE BUDGET FOR FISCAL YEAR 1992
facturing technologies and practices to the private sector. Three of the centers will undergo
a review in 1992.
MAINTAINING NATIONAL SECURITY:
DEFENSE R&D IN THE 1992 BUDGET
For all defense-related R&D, including R&D
supported by the Departments of Defense and
Energy, the budget proposes $43 billion, an
increase of over $5 billion, or 14 percent, above
1991. Defense-related R&D will comprise 60
percent of overall Federal R&D funding in
1992.
Department of Defense.—A strong defense
R&D program is a key element of United
States national security strategy. This is underscored by the fact that R&D funding will
grow from $35 billion in 1991 to over $40 billion in 1992 while the defense budget overall
will decline in real terms. Not only does the
Defense R&D program provide for the development of major weapon systems but it also provides important general benefits to U.S. technological capabilities.
Technology Base.—The budget proposes $3.9
billion for the technology base—programs for
basic and applied research that provide future
defense options and that advance technologies
with broad applications. It also helps guard
against technological surprise by potential adversaries. Investment in the technology base
provides a broad range of options for future
military capabilities that may be necessary. It
is essential for the U.S. to maintain the technological superiority in fielded weapon systems
and the commitment to development and exploitation of advanced technologies. Examples
are anti-submarine technologies for detecting
increasingly quiet submarines, improving torpedo warheads and delivery mechanisms, and
developing nonconventional methods of acoustic detection. As discussed in the section of
this chapter on high performance computing
and communications, Defense will play a lead
role in developing the technology to increase
computer performance by several orders of
magnitude. This continues the pathfinding efforts of the Department of Defense that have
led to today's advanced parallel processors. In
addition, DOD technology-base R&D programs
have led to civilian applications. These include
CATSCAN imaging technology for improved
medical diagnosis, advanced structural materials for commercial aircraft (aluminum alloys
and composites) and such common devices as
microwave ovens. The basic research portion
of the DOD technology base supports a wide
range of scientific disciplines, including oceanography, materials, mathematics and biochemistry.
Development.—The budget proposes nearly
$37 billion for development programs, an increase of over $5 billion, or 16 percent. Within
this total, the budget proposes $2.2 billion to
fabricate prototype systems and subsystems
that support defense missions. Some of these
also have potential commercial applications.
Defense will provide major support to
SEMATECH, the semiconductor industry consortium, to advance the manufacturing of integrated circuits. In space, defense is providing
significant support for the National Aerospace
Table C - l l . 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
Dollar
change
1991
Enacted
1992
Proposed
Percent
change
35,176
992
2,754
31,429
2,608
40,479
1,010
2,861
36,609
2,768
+5,303
+17
+106
+5,180
+161
+15
+2
+4
+16
+6
37,783
43,247
+5,464
+14
IV.C.
ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
Plane Program and for development of a new
space launch system.
The budget proposes nearly $5 billion for
preliminary work on subsystems and supporting technology for defense against ballistic
missiles under the Strategic Defense Initiative.
These efforts are directed toward a defense
against limited attacks from anywhere in the
world against U.S. territory, deployed U.S.
forces or our allies.
Part Two-59
1992. The complete DOE environmental restoration and waste management progam is discussed in detail in Chapter IV.E.
In addition, DOE develops nuclear reactor
systems to power Naval vessels. The budget
proposes $678 million for Naval reactors R&D,
an increase of $26 million over 1991.
ENCOURAGING INCREASED PRIVATE
SECTOR R&D INVESTMENTS
The largest portion of Defense R&D funding
is allocated to the development of a new generation of advanced weapons systems and improvements to currently-deployed systems. The
budget proposes over $29 billion for these activities. New weapons systems under development include the B-2 bomber, the Advanced
Cruise Missile, the Advanced Tactical Fighter,
the SSN-21 attack submarine and advanced
armored vehicles. In addition, current systems,
such as the M - l tank, the F/A-18 fighter and
the F-16 multi-role aircraft will be upgraded.
The budget proposes permanent extension of
the research and experimentation tax credit
and a one-year extension of the tax rules governing the allocation of foreign and domestic
R&D expenditures.
Department of Energy.—The budget proposes $2.8 billion for Department of Energy
(DOE) Atomic Energy Defense programs, an
increase of $161 million, or 6 percent over
1991. The largest component of these R&D activities is the research, development and testing of nuclear weapons. The budget proposes
$1.8 billion for that activity, including associated R&D facilities, an increase of $27 million
over 1991. The DOE nuclear weapons R&D
program will increase efforts to improve the
safety of nuclear weapons and to develop new
technology to verify arms control treaties. In
addition, the DOE weapons laboratories are
increasing efforts to promote the transfer of
non-sensitive defense-funded technology to the
private sector. The budget proposes $32 million to support for such technology transfer
activities.
From the early 1960s through the mid1980s, total real industrial R&D expenditures
increased significantly, mostly in development.
Since the mid-1980s, however, the rate of
growth in industrial R&D spending has leveled
off, dropping from a rate of 7 percent average
annual
percent
real
growth
between
1980-1985 to 2 percent between 1985-1990.
For 1990 and 1991, both the National Science
Foundation and the Battelle Memorial Institute project that industrial R&D will, at best,
keep pace with inflation. The tax incentives
can help boost private R&D investment.
The environmental cleanup of atomic energy
defense facilities is one of the fastest growing
programs in DOE. Technology development activities play a major role in the clean-up effort,
resolving major technical issues related to effective waste management and cleanup and
advancing technologies to attain and maintain
compliance with current laws and regulations.
The budget proposes to increase this investment in technology development by 60 percent,
from $206 million in 1991 to $330 million in
Industry is the largest supporter of R&D in
the Nation, providing about 50 percent of the
total national R&D investment. It also performs much of the R&D funded by the Federal
Government. In total, over 70 percent of all
R&D is performed by industry.
R&E Tax Credit
The Research and Experimentation (R&E)
tax credit was originally adopted in 1981 to
encourage increased private R&D spending.
The credit was never made permanent, but
was renewed in 1986, 1988, 1989 and 1990
at a lower rate than originally granted. Reducing the rate of the credit, combined with reductions in corporate income tax rates and the
actual calculation of the credit, have the effect
of reducing the incentive effect of the original
credit by more than 50 percent.
R&E tax credits prior to 1989 reduced the
cost of increments to R&D for most qualifying
firms by about 6 to 9 percent. In 1989 the
incentives provided by the credit were im-
Part Two-60
1990$
BILLIONS
THE BUDGET FOR FISCAL YEAR 1992
INDUSTRY SUPPORT FOR RESEARCH AND DEVELOPMENT
HAS LEVELED OFF IN RECENT YEARS
60
60
IPSO
1870
188Q
188B
18BO
0.88
1.03
1.13
1.44
1.37
% OF GNP
40DEVELOPMENT
30-
i . .
APPUED
RESEARCH
20
BASIC
RESEARCH
x
10OI i i i
1960
i i i i
1965
i i i i i i i i i i i i i i i i i i » i i i
1970
1975
1980
1986
1991
Sources: National Science Foundation, Office of Management and Budget.
proved. The version of the R&E credit enacted
in 1989, and extended in the 1990 Omnibus
Budget Reconciliation Act, reduces, for most
qualifying firms, the cost of increments to
R&D by 20 percent. Bailey and Lawrence have
estimated that this version of the R&E tax
credit should increase corporate R&D spending
in the 1990s by about 4 percent. Making the
credit permanent would help reverse the recent trend toward leveling off of corporate
R&D spending.
The budget proposes two changes in the tax
code designed to provide additional incentives
for industry to increase its R&D expenditures.
The budget proposes to make the 20 percent
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, 1990. In addition, the
budget proposes to extend for one year the
rules, as modified in 1989 and extended in
the Omnibus Budget Reconciliation Act of
1990, for the allocation of foreign and domestic
R&D expenditures for companies with foreign
operations. The proposal would allow 100 per-
cent 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 expired.
ENHANCING THE R&D
INFRASTRUCTURE
Adequate research facilities and equipment
are essential to the effectiveness of national
research efforts—collectively an enterprise
that supports the search for a basic understanding of nature, the missions of government
agencies, the improvement of industrial products and processes, and the training of future
generations of scientists and engineers. To sustain a strong national research capability and
to enable expansion of research capacity, R&D
infrastructure must be maintained and replenished.
Overview of Trends and Status of
National R&D Infrastructure
The Federal Government directly funds the
cost of facilities and equipment necessary for
IV.C.
ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
the conduct of R&D at Federal facilities. Private industry and universities have primary
responsibility for the R&D infrastructure
under their respective jurisdictions. However,
since the Federal Government does support
basic research at universities, it provides substantial funding for university R&D facilities
and equipment:
• For new facilities and equipment, Federal
agencies provide direct funding where they
are directly related to federally funded research.
• For repair and renovation, the Federal
Government provides indirect funding,
through the payments to universities of
use and depreciation allowances for research facilities as part of the indirect
costs associated with research grants.
University Research Facilities.—The National Science Foundation reported in its 1990
facilities survey that there were an estimated
116 million net assignable square feet (NASF)
of science/engineering (S/E) research space at
the Nation's 525 research-performing institu-
Part Two-61
tions in 1990, representing 42 percent of the
total 276 million NASF of S/E space at these
institutions. (This figure excludes academically-administered Federally Funded Research and Development Centers (FFRDCs).)
There were no significant changes from 1988
to 1990 either in the overall amount of academic research space or in its distribution
among institution types or research disciplines.
Federal Support for University Research
Facilities.—The Federal Government has provided a significant level of support for university research facilities. This includes direct
support for facilities in support of federally
funded research and indirect cost recoveries.
In 1988-89, the latest period for which estimates are available, private institutions initiated $738 million of new construction and public institutions initiated $1.73 billion of new
construction. The Federal Government provided an estimated 11 percent and 16 percent
of these funds, respectively.
Expenditures for the repair and renovation
of research facilities totalled an estimated $1
billion in 1988-1989, with private institutions
FEDERAL SUPPORT FOR UNIVERSITY INFRASTRUCTURE THROUGH
INDIRECT COST PAYMENTS HAS GROWN SHARPLY
$ MILLIONS
Part Two-62
accounting for one-third of this total ($311 million). Direct Federal funding accounted for 9
percent of repair and renovation activity at
private institutions, and 4 percent at public
institutions.
Indirect Federal support for academic research facilities, through the recovery of use
and depreciation charges and operations and
maintenance charges on Federal grants,
reached almost $1 billion in 1988 (the latest
year for which data are available). Almost 20
percent of these charges was for facility depreciation (which was then intended to be applied
by the institutions to renovation or new construction). The remaining 80 percent was for
recovery of operations and maintenance costs.
Over the period 1982-1988, the level of indirect cost recoveries of facilities charges increased over 70 percent in real terms.
However, because indirect cost recoveries are
generally credited to the general funds of the
institutions, there is no way to determine if
the use/depreciation recoveries were actually
applied to research facility construction or repair.
The NSF survey reported an estimated $12
billion in "needed, but unfunded capital
projects" at universities. Each academic institution must provide a certification that its research facilities are adequate (to perform the
research proposed) as a condition of accepting
research grants. This backlog reported by NSF
has not had an apparent effect on the ability
of universities to accept Federal research
funds. However, the perception of such a large
"backlog" has led to increased calls from the
institutions and many members of Congress
for a major expansion of Federal support for
academic research facilities. There has been
Congressional action in two areas:
• "Earmarking" of Federal funds to construct new facilities at particular institutions. The Office of Science and Technology Policy, as part of its continuing
evaluation of the state of university research facilities, estimates that about $427
million was appropriated for such projects
in 1991. (The issue of earmarking is discussed in more detail in a later section
of this chapter.)
THE BUDGET FOR FISCAL YEAR 1992
• Providing direct grants for academic research facilities repair and renovation
through the National Science Foundation,
funded at $20 million in 1991.
The 1992 budget does not contain funding
for either of these practices. Earmarking which
does not involve merit review of any kind, is
an inefficient use of scarce resources. Further,
it has the effect of weakening the Nation's
overall R&D effort. Funds earmarked for academic research facilities by Congress in 1991
and previous appropriations bills not only were
without the benefit of merit-based review, but
most often came at the expense of needed increases in support for academic researchers
and in other key activities at Federal laboratories. The Administration will continue to
support direct Federal funding for academic
research facilities where such facilities are an
integral part of merit-based, competitive research projects. For example, the budget proposes $25 million for academic research facilities associated with the National Research Initiative of the Department of Agriculture.
Special programs for facilities repair and
renovation are not warranted because the Federal Government directly supports only a small
proportion (less than 10 percent) of this activity. Further, the large amounts of funds recovered as indirect costs represent a considerable,
and continuing, investment in academic research facilities.
1992 BUDGET PROPOSALS FOR
RESEARCH FACILITIES
The budget proposes nearly $4 billion for
construction, repair and modernization of R&D
facilities and for major research equipment, an
increase of $464 million or 15 percent. The
major increases in 1992 are due to the initiation of construction of the Superconducting
Super Collider and the new instrumentation
initiative in NSF. This initiative, funded at
$50 million in 1992, will provide state-of-theart instrumentation to university researchers
through a merit-based competitive process.
The Federal funding will be matched 50:50
from non-Federal sources. In addition, although total funding for R&D facilities in the
Department of Agriculture (USDA) is proposed
to decline, there is a total of $25 million for
IV.C.
Part Two-63
E N H A N C I N G R&D A N D EXPANDING THE H U M A N FRONTIER
Table C-12. IMPROVING R&D FACILITIES
(Dollar a m o u n t s in millions)
Budget Authority
Department or Agency
Energy
1991
Enacted
1992
Proposed
Outlays
Dollar
change
1,199
1,623
+424
Percent
change
+35
1991
Enacted
1,161
1992
Proposed
Dollar
change
Percent
change
1,442
+281
+24
+18
National Aeronautics and Space
857
885
+28
+3
722
850
+ 128
Defense-military
461
538
+76
+17
463
482
+19
+4
National Science Foundation
111
153
+42
+38
155
124
-32
-20
Agriculture
156
128
-27
-18
148
122
-26
-18
Health and Human Services
186
130
-56
-30
111
153
+42
+38
Other Agencies 1
113
88
-24
-22
86
93
+7
+8
3,082
3,545
+464
+15
2,845
3,264
+419
+15
Administration
Total
1 Includes
the Departments of Transportation, Interior, Commerce, Veterans Affairs, Education, the Treasury, the Environmental
Protection Agency, Smithsonian Institution, Tennessee Valley Authority, the Corps of Engineers and the Agency for International
Development.
a facilities program associated with the USDA
National Research Initiative.
EARMARKING OF R&D FUNDING
The hallmark of the Federal Government's
support for R&D has been the awarding of
R&D grants and contracts through a competitive process. This merit-based approach is intended to maximize the potential return on
these investments by selecting only the highest
quality research for support.
This merit-based approach, however, has
been increasingly eroded in recent years due
to the Congressional practice of "earmarking",
i.e., requiring that R&D funds be awarded to
particular institutions or even to particular researchers. This practice is most visible in the
area of new university buildings. However, the
practice of earmarking is actually much more
pervasive, reaching down to individual research projects.
As part of an ongoing study of the state
of American science, the Office of Science and
Technology Policy recently completed a detailed analysis of earmarking in the 1991 appropriation bills. The major findings of the
study follow.
• The study identified 492 such earmarks,
totaling $810 million. Of these 325 (totaling $182 million) were in Agriculture,
where specific earmarking by Congress
has historically been customary.
• In other areas, R&D earmarking may be
on the rise, with 48 separate actions in
Energy and 20 to 30 each in Defense, Interior, General Services Administration
(GSA), and the Environmental Protection
Agency. In Defense, $253 million was applied to R&D earmarks, which were exempted from a previously enacted legal requirement for competition. Also noteworthy is the $61 million in a GSA appropriation for R&D facilities construction at
21 universities and other private institutions. Neither GSA nor the Treasury-Postal Appropriations subcommittee, where
these items originated, normally have responsibility for such facilities.
• The R&D earmarks have put an extra burden of at least $332 million on the R&D
programs proposed in the President's 1991
budget, because the earmarks were made
in programs where the overall funding
level was the same or less than the President's 1991 request. The most serious impacts appear to be in Energy and Agriculture. The other $475 million of R&D
earmarks were covered, at least in part,
by increases in the R&D accounts, which
presumably means that a corresponding
burden was applied elsewhere in the budget.
Part Two-64
THE BUDGET FOR FISCAL YEAR 1992
the Congressional reports and bills. Therefore,
it did not identify the sponsorship of the earmarks and does not provide a basis for judgments on the merits of the earmarked items
or on the motivations of the earmarking. A
more in-depth case-by-case review, with agency
or Congressional staff directly involved, would
be needed to determine to what degree each
earmark was (1) a response to advocacy by
a particular institution; (2) a parochial initiative in Congress or by a Federal agency;
or (3) a recognition by Congress of a significant
national or programmatic need.
• At least 25 of the earmarks appear to call
for the establishment of new centers, institutions, or other organizations. In most of
these cases, continued Federal support in
future years seems clearly implied. Thus,
the 1991 earmarks have put a built-in burden on the 1992 and future budgets, an
effect that will be compounded if additional earmarks are made in future years.
As the Office of Science and Technology Policy has noted, the study was based only on
a review of the often meager information in
Table C-13. CONGRESSIONAL EARMARKING OF R&D FACILITIES AND
RESEARCH IN 1991 APPROPRIATIONS BILLS
(Dollar amounts in millions)
Agency
Defense
Energy
Agriculture
Commerce
Interior
Health and Human Services
Education
General Services Administration ....
Environmental Protection Agency ..
National Aeronautics and Space
Administration
Total, All Agencies
Facilities
Research Projects
Total
Number
Number Amount Number Amount Number Amount In Law Reports
8
15
54
2
2
1
107
104
97
3
1
*
—
—
21
4
61
37
4
18
111
428
20
33
271
12
23
1
5
147
81
85
11
17
3
8
—
—
16
30
—
—
381
382
28
48
325
14
25
2
5
21
20
253
186
182
14
18
3
8
61
67
1
5
21
1
4
18
1
3
492
810
65
427
16
16
—
4
—
12
32
325
10
25
1
—
—
19
Source: Office of Science and Technology Policy.
*Less than $500,000.
1
EXPANDING THE GEOGRAPHIC FRONTIER: SPACE
EXPLORATION IN THE 1992 BUDGET
The exploration of space provides tangible
benefits to the Nation in the form of new materials, scientific and technological discoveries
that will stimulate economic growth and improve life on Earth. Space also provides large
intangible benefits to the Nation with activities that lift the spirit of people everywhere.
Our will to explore the unknown frontier of
space, both with robotic probes and manned
missions, is one measure of the vision and maturity of the Nation.
The key to the successful exploration of
space is stable and sustainable funding of a
balanced program of science, applications and
manned space activities. The budget provides
clear evidence of the President's continued
commitment to his long-term space goals, and
IV.C.
Part Two-65
ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
Table C-14. THE BUDGET CALLS FOR A 15 PERCENT INCREASE
FOR MAJOR SPACE ACTIVITIES
(Dollar amounts in millions)
Budget Authority
Objective
Space Transportation Infrastructure
Space Shuttle
New Launch System
NASA
Defense
Space Science
Mission to Planet Earth
NASA
Other Agencies
Mission From Planet Earth
Space Station Freedom
Space Exploration Initiative
NASA
Energy
Defense
Other NASA Programs1
Total, All Agencies
Total, NASA
1991
Enacted
1992
Proposed
Dollar
change
Percent
change
4,801
4,737
64
24
40
1,774
954
652
302
2,199
2,044
155
37
109
9
4,600
5,517
5,167
350
175
175
2,141
1,186
773
413
2,470
2,214
256
94
142
20
5,157
+716
+430
+286
+151
+135
+367
+232
+121
+111
+271
+170
+101
+57
+33
+11
+557
+15
+9
+447
+629
+337
+21
+24
+18
+37
+12
+8
+65
+154
+30
+122
+12
14,328
13,868
16,471
15,721
+2,143
+1,853
+15
+13
1 Includes funding for all other NASA activities including space research and technology, aeronautics,
commercial programs, personnel, construction, and tracking.
to active American leadership in space science
and exploration.
SPACE TRANSPORTATION
INFRASTRUCTURE
The budget proposes to allocate a total of
$15.7 billion for the National Aeronautics and
Space Administration (NASA). This represents
an increase of 13 percent over the 1991 enacted level. The strategy behind the 1992
budget has been guided in large part by the
findings and recommendations of the Advisory
Committee on the Future of the U.S. Space
Program (the Advisory Committee). This Committee was asked to examine the goals, strategies and programs of the current civil space
program and recommend changes where necessary. The budget provides increases for space
activities, including research, development,
and operations, to support critical elements of
space transportation (that provides the enabling infrastructure for all other space activities), a robust program of space science, to
meet two major "missions"—a Mission to Planet Earth" and a "Mission from Planet Earth".
The foundation of U.S. all space activities
is space transportation. Without adequate
transportation, no scientific or exploration activities would be possible. Over the last several
years, it has become increasingly evident that
the robustness and the flexibility of the U.S.
space launch capability would not be sufficient
to carry the Nation into the next century. At
the present time, the U.S. has one manned
space transportation vehicle, the Space Shuttle, and a fleet of expendable launch vehicles
with a broad range of payload capability. Several classes of these expendable vehicles are
provided on a commercial basis to the Federal
Government to meet its needs. In addition,
DOD owns a very large expendable launch vehicle, the Titan IV.
280-000 0 - 9
1 - 3 (PART 2)
The strategy reflected in the budget is
founded on two underlying principles: (1) enhance the reliability, operability and schedule
Part Two-66
predictability of the Space Shuttle; and (2)
begin now to develop new launch capability
that will relieve the burden now being carried
by the Shuttle;
Space Shuttle.—The budget recognizes the
importance of the Shuttle to the entire civil
space program. The Shuttle is the world's most
versatile space transportation vehicle, with the
capability to launch and retrieve satellites and
to serve as an orbiting laboratory for microgravity and life sciences. However, the Shuttle
is also complex and expensive to operate.
Thus, its use should be limited to payloads
that require manned presence or other unique
Shuttle capabilities. This strategy recognizes
the Shuttle for what it is—a precious resource
that should be conserved—and should result
in a planned level of activity that is both realistic and prudent.
As a consequence, the planned Shuttle flight
rate has been established at 9 missions per
year in 1992 and 1993, and 10 missions per
year thereafter. This will allow Shuttle activity
to increase from the current level, but will result in a more stable and attainable flight
schedule, limit operational pressures on the
system, reduce long-term risk exposure, and
facilitate implementation of cost containment
measures. These objectives are consistent with
the recommendations of the Advisory Committee.
Even so, it is clear that the Shuttle will
be essential to the civil space program for at
least the next decade. Therefore, investments
in R&D to maintain and improve the safety,
reliability and performance of the Shuttle are
of a high priority. These investments include:
• The Advanced Solid Rocket Motor
(ASRM).—This program is intended to develop a newer, more capable, more reliable
and safer generation of solid rockets. A
new state-of-the-art ASRM production facility is under construction at Iuka, Mississippi. Advances in production learned
from the ASRM are expected to be useful
for solid rockets in other applications (e.g.,
new unmanned launch vehicles). The
budget proposes $350 million to continue
the facility construction and motor development.
THE BUDGET FOR FISCAL YEAR 1992
• Assured Shuttle Availability (ASA).—With
many operational systems, there is a need
to establish a well-planned program that
is structured to make continued improvements and to incorporate new technology
where it is cost-effective to do so. Both
the military services and commercial
transport operators routinely provide for
such programs for their fleets of aircraft
and ships. Up to now, however, no such
structured program has existed for the
Shuttle. Improvements and upgrades were
approved and funded on an ad hoc basis.
The budget proposes $122 million to initiate a new program, Assured Shuttle Availability (ASA), that will provide a formal
funding mechanism and process for identifying and incorporating high-priority improvements into the Shuttle. Included in
this activity will be the ongoing work to
develop an Alternate Turbopump for the
Shuttle main engine.
New Launch System.—The continued investment in the Shuttle is coupled with the
recognition that a new launch system will be
needed by the early part of the next century—
for a range of payloads including Shuttle-sized
and larger payloads up to and including a
"heavy-lift" capability. More capable and more
cost-effective space transportation systems will
benefit all space programs, including national
security, space science and space exploration.
Future space exploration will require a new
heavy-lift launch vehicle. In addition, a new
launch system will provide a strong technology
base for improvements in the capabilities,
technology and cost-effectiveness of the U.S.
commercial space sector.
The budget proposes $175 million for NASA
and $175 million for DOD to continue advanced engine development and to initiate a
program that will culminate in the development of a new space launch system. This new
capability was recommended by Advisory Committee on the Future of the U.S. Space Program. It is expected that NASA and DOD will
jointly manage and fund this program on a
50:50 basis. The program will involve development of both new propulsion systems and new
vehicle systems. The two agencies will work
together to develop a strategic plan, including
budget, program and management options, for
Part Two-67
IV.C. ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
Table C-15. THE BUDGET INCLUDES FUNDING FOR 9 SHUTTLE FLIGHTS
AND INVESTMENTS TO IMPROVE THE SHUTTLE
(Dollar amounts in millions)
Budget Authority
Space Shuttle
Space Shuttle operations
Advanced Solid Rocket Motor
Assured Shuttle Availability
Production and Capability development
Expendable launch vehicle (ELV) services
Tracking and data acquisition
Total
Dollar
change
1991
Enacted
1992
Proposed
4,737
2,790
401
1,546
229
849
5,167
3,024
350
122
1,671
342
943
+430
+234
-51
+122
+125
+113
+94
+8
+49
+11
5,815
6,452
+637
+11
—
Percent
change
+9
+8
-13
—
proceeding with new vehicle development and
will report to the National Space Council.
MISSION TO PLANET EARTH: THE U.S.
GLOBAL CHANGE RESEARCH PROGRAM
SPACE SCIENCE
World leaders are taking an increased interest in the economics and social implications
of global environmental changes, both natural
and human-induced. In virtually all these issues, the salient feature is the significant scientific uncertainty associated with predicting
the behavior of the coupled ocean-atmosphereland Earth system. The potentially large costs
associated with addressing environmental
changes (e.g., "greenhouse effect", global climate change, and ozone depletion) require that
policy decisions be based on adequate scientific
knowledge.
The budget proposes $2.1 billion, an increase
of 21 percent over 1991, for NASA's space
science programs, including astronomy, life
sciences, planetary exploration, Earth science
(other than Mission to Planet Earth), materials research, and other space-based research
and flight programs.
Several exciting flight programs have been
launched in the past year, including the
Galileo mission to Jupiter and the Magellan
radar mapping mission to Venus. There are
over 30 minor and major flight programs that
are planned for launch over the next five
years, including Mars Observer, the Advanced
Communications Technology Satellite, the
Gamma Ray Observer, and the Advanced XRay Astrophysics Facility.
The implementation of this broad research
program is based on a long-range, prioritized
strategic science plan that was developed in
cooperation with NASA's external science advisory group and is consistent with recent recommendations of the Advisory Committee on
the Future of the U.S. Space Program. These
programs represent nearly 20 percent of the
NASA budget total.
To provide this knowledge, the U.S. Global
Change Research Program (USGCRP) was initiated in the 1990 budget. The 1992 USGCRP
budget again proposes a major expansion of
this unprecedented interagency research effort.
Funding for global change research will total
$1,186 million, a $232 million, or 24 percent,
increase over the 1991 enacted level. By 1992,
funding for the USGCRP will have nearly doubled since 1990. These activities include a
broad range of monitoring, modeling, and fundamental research efforts focused toward producing a predictive model of the Earth "system". The U.S. provides 50 percent of the estimated worldwide total of $2 billion spent on
global change research.
Part Two-68
THE BUDGET FOR FISCAL YEAR 1992
The USGCRP has been developed through
the interagency Federal Coordinating Council
on Science, Engineering and Technology's
Committee on Earth and Environmental
Sciences (CEES). The program is driven both
by a prioritized science planning framework
that has been endorsed by the U.S. and international scientific communities, and by key scientific questions related to global change policy
issues such as the "greenhouse effect", global
climate change, and ozone depletion.
• Earth Observing System (EOS): EOS is a
series of space platforms and remote sensing instruments for monitoring a variety
of Earth processes, a large data management system, and support to individual researchers to analyze the data. Data collection will continue for a period of roughly
15 years. The Japanese and Europeans
will make major contributions by developing instruments and platforms which are
integral elements of the MTPE concept.
To further ensure that the USGCRP continues to be relevant to policymakers, the CEES
established a set of integrating themes (i.e.,
climate modeling, global water, carbon, and energy cycles, ecological systems, and sea level
change) that were based on the recent Scientific and Impacts Assessments of the Intergovernmental Panel on Climate Change
(IPCC). In order to improve the Earth system
modeling capabilities and support the development and implementation of a comprehensive
approach to greenhouse gas emission reductions, the IPCC assessments concluded that a
significant reduction in scientific uncertainties
would have to be achieved in the following
areas:
• Precursors: A variety of satellite and research programs that will be flown or undertaken in the next several years designed to improve our understanding of a
broad variety of terrestrial, atmospheric,
and oceans processes. These are important
precursors to EOS but will not provide the
critical simultaneity of data collection provided by EOS.
• sources and sinks of greenhouse gases,
which affect predictions of future concentrations;
The Earth-based component of the USGCRP
is composed of agency activities that support
global or very large scale Earth-based observations (e.g., ship, aircraft, and ground-based research campaigns), and that support fundamental research on important geophysical
processes. Many of these Earth-based programs are dependent on the data collected by
MTPE or provide ground-based data needed
to calibrate MTPE remote sensing instruments. The balance between global spacebased observations, global Earth-based observations, and the process studies is essential
to the ultimate development of an integrated
Earth system model. Within the Earth-based
component of the USGCRP:
• clouds and radiative balance, which
strongly influence the magnitude of climate change at global and regional scales;
• oceans, which influence the timing and
patterns of climate change;
• land-surface hydrology, which affect regional climate change and water availability;
• polar ice sheets, which affect predictions
of global sea level changes; and
• ecological dynamics, which are impacted
by and respond to climate change.
Using the science priorities and the integrating themes, the CEES developed a balanced
and integrated research effort for resolving the
highest priority scientific uncertainties. The
space-based component of the USGCRP is comprised of NASA's Mission to Planet Earth
(MTPE) which includes three elements:
• Earth Probes: This series of very small,
simple, and relatively inexpensive satellites will collect data on specific concerns: global ozone, ocean surfaces, and
tropical rainfall. There will be five Earth
Probe missions between the 1993-1997.
• NSF and NOAA will provide the continental or global scale Earth-based observations by supporting international programs such as the World Ocean Circulation Experiment, the Global Energy
and Water Experiment, Joint Global
Ocean Flux Studies, and the Tropical
Ocean-Global Atmosphere Program.
Part Two-69
IV.C. ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
Table C-16. U.S. GLOBAL CHANGE RESEARCH PROGRAM
(Dollar amounts in millions)
Budget Authority
Department or Agency
National Aeronautics and Space Administration
Earth Observing System
Remotely Piloted Aircraft
Precursors/Earth Probes
National Science Foundation
Energy
Agriculture
Commerce (NOAA)
Interior
Environmental Protection Agency
Smithsonian
Defense
Total, Budget Authority
• NSF, NOAA, NASA, DOE, DOI, EPA,
USDA, Smithsonian, and DOD will all
support the prioritized and important fundamental geophysical process studies and
modeling efforts that are reflected in the
USGCRP integrating themes.
In 1990, the National Academy of Sciences'
National Research Council conducted a review
of the USGCRP and endorsed it "as a sound
national program to reduce the scientific uncertainties associated with global change issues." The NRC also was asked to examine
many of the underlying EOS assumptions (i.e.,
the environmental parameters being collected,
the need for data simultaneity, and the data
management approach). For EOS, the NRC endorsed the science but suggested that other
flight alternatives should be examined for
some of the EOS remote sensing instruments.
In response to this recommendation and similar recent recommendations made by the Advisory Committee on the Future of the U.S.
Space Program, an external engineering review will be undertaken during 1991 to look
at alternative approaches to flying EOS instruments.
One area that has received special emphasis
is Arctic research, though U.S. activities in the
Arctic go beyond the range of programs included in the USGCRP.
1991
Enacted
1992
Proposed
Dollar
change
652
191
—
461
87
66
39
47
37
22
5
0
773
336
5
432
119
77
53
78
46
26
8
6
+121
+145
+5
-29
+32
+11
+14
+31
+9
+4
+3
+6
954
1,186
+232
Percent
change
+19
+76
—
-6
+37
+17
+36
+66
+24
+18
+60
—
+24
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) and updated biennially.
The budget includes $134 million for Arctic
research, an increase of about $12 million over
the 1991 level. Activities included in the
USGCRP account for approximately 50 percent
of this increase. Within the total for 1992, $60
million is proposed to implement the four integrated programs covering the western Arctic:
oceans research, geodynamics, studies of the
Bering Sea and land mass, and monitoring and
data collection activities. Approximately $6
million of this amount is for ship and aircraft
support in five agencies, NSF, Transportation,
NOAA, Interior, and DOD/Navy. These programs support bilateral and multilateral environmental, space, oceans, and social science
agreements and cooperative activities.
Part Two-70
THE BUDGET FOR FISCAL YEAR 1992
Table C-17. UNDERSTANDING THE ARCTIC
(Dollar amounts in millions)
Budget Authority
Category
Resource development1
Arctic as laboratory2
National security3
Total
1991
Enacted
1992
Proposed
49
48
25
56
50
28
+7
+2
+3
+14
+4
+12
122
134
+12
+10
Dollar
change
Percent
change
1 Includes the Departments of Interior, Commerce, Agriculture, Energy, Transportation, State, and the
Environmental Protection Agency.
2 Includes the Department of Health and Human Services, and the National Aeronautics and Space
Administration, the National Science Foundation, and the Smithsonian Institution.
3 Includes the Department of Defense. The 1991 enacted level includes a one-time increase for Defense of about
$13 million specifically for upper atmosphere research and associated facilities, including the High Frequency
Active Auroral Research Program (HAARP). For the purposes of comparison with 1992 levels, this funding has
been excluded.
Landsat.—Acquisition of data from land remote sensing satellites is an important element in understanding global change. The
Admininstration is committed to operating the
Land Remote Sensing Satellites (Landsats 4
and 5) as long as they are the only operational
Landsat satellites, and to completing the development and launch of the next satellite
(Landsat 6). The budget proposes $17 million
within the Department of Commerce, sufficient
to cover the operation of Landsats 4 and 5
through August of 1992 (when Landsat 6 is
expected to become operational). Landsat 6
will be operated by, and at the expense of,
the Earth Observing Satellite Company.
MISSION
FROM
PLANET
EARTH:
MANNED SPACE FLIGHT AND SPACE
EXPLORATION
These activities include the Space Station
Freedom and the space exploration initiative.
Together these programs support the goal of
expanding human presence and activity beyond Earth's orbit into the solar system. The
strategy underlying these activities is composed of two major elements: (1) modify Space
Station Freedom to focus on two principal objectives: life sciences and microgravity, and to
reduce its operational complexity; and (2) support the "long pole" technology building blocks
that will be needed for future manned exploration of the solar system.
Space Station Freedom.—NASA is completing a major review of the design of Space
Station Freedom (SSF). The functions of the
Space Station will be focused primarily in two
major areas: life sciences and microgravity research. The former will provide needed experience in studying the effects of weightlessness
and radiation exposure, as a precursor to future missions to the Moon and Mars. The latter will provide the initial benefits from SSF
and will lay the groundwork for a new spurt
of commercial space activity.
It is expected that the reconfigured design
will result in significant advantages over the
current program:
• it will place the program on a more sustainable budget path;
• it will simplify the design and permit development in stages, holding closely to current schedules for early utilization;
• it will require less dependence on the
Space Shuttle. The restructured program
will require fewer Shuttle assembly flights
in the near-term, and opportunities to use
expendable launch vehicles to support operations will be investigated;
Part Two-71
IV.C. ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
Table C-18. SPACE STATION FREEDOM
(Dollar amounts in millions)
Budget Authority
1991
Enacted
Space Station Freedom:
Research and Development (excluding FTS)
Flight Telerobotic Servicer1
Total, Research and Development
Total, Space Station Freedom
Dollar
change
Percent
change
1,794
106
2,029
(55)
+235
(-51)
1,900
2,029
+129
+7
144
185
+41
+28
2,044
2,214
+170
+8
Facilities and Program Management
1
1992
Proposed
+13
(-48)
Proposed to be moved in 1992 to Space Research and Technology.
• it will reduce the requirements for extravehicular activity (EVA) for assembly, operation, and maintenance, by more careful
consideration of operational requirements
in the design, and by emphasizing prelaunch integration and verification of
flight systems.
• participation of the European Space Agency, Japan, and Canada will, of course, be
continued.
The budget provides $2,029 million for SSF
development, an increase of 7 percent over the
1991 enacted level. This amount will support
continued progress on development.
A major change has been made in the Flight
Telerobotic Servicer (FTS) project. FTS was intended to be one of several systems that would
provide early robotic assembly and servicing
capability to the Space Station. However, the
Space Station design review has revealed that
the importance of having FTS available in the
earliest stages of Space Station operations has
been greatly diminished. FTS no longer represents a "critical path" item. Even so, the FTS
robotic technologies, particularly the end-effector technologies, are of great importance in the
long-term for the Space Station and the space
program generally. Therefore, the budget proposes $55 million to focus the FTS project on
technology development, and proposes to move
the FTS program to the Space Research and
Technology area as part of a broader Automation and Robotics activity.
Space Exploration Initiative.—The President remains firmly committed to his longterm goal, articulated in 1989, of manned and
unmanned exploration of the solar system. The
budget reflects this commitment by proposing
$256 million, an increase of 65 percent, for
exploration activities in NASA and the Department of Energy and for related activities in
the Department of Defense. For 1992, the
budget is based on a strategy of supporting
activities focused on key, long-lead technologies that will be necessary for any future
exploration endeavors. These technologies are:
space surface nuclear power, space nuclear and
conventional propulsion, and life sciences and
life support technologies.
The technology strategy appears consistent
with the evolving approach for space exploration under development by the Space Exploration Initiative Synthesis Group. In addition,
the Synthesis Group will identify at least two
fundamentally different exploration architectures. For the next few years, the Federal Government will develop these architectures in
parallel with the technologies which can make
exploration affordable. Only after the technology and architecture groundwork has been
firmly laid, will the Administration propose
specific new manned and unmanned exploration missions. This suite of exploration technologies will be expanded over time, consistent
with the "go-as-you-pay" philosophy recommended by the Advisory Committee.
For space surface nuclear power, the budget
proposes to continue the joint NASA/DOD/
Part Two-72
THE BUDGET FOR FISCAL YEAR 1992
DOE SP-100 program, and, in the Department
of Energy, to conduct R&D concurrently on
radioisotopic thermoelectric generators (RTGs).
The focus of 1992 efforts will be on design
studies and technology efforts directed at lunar
operations using either SP-100 for higher
power levels (10s to 100s of kilowatts) or RTGs
for lower power levels. Nuclear rocket propulsion appears to offer significant advantages
over conventional chemical propulsion, includ-
ing reduced trip times and reduced mass (thus
lower cost). For life sciences and support technologies, the budget again proposes to initiate
the Lifesat program. Lifesat will be a series
of reusable 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. First launch is planned for 1996.
EXPANDING THE HUMAN FRONTIER THROUGH
BIOTECHNOLOGY
Biotechnology holds great promise for new
life-enhancing discoveries in the fields of medicine, foods, and environmental cleanup.
The budget proposes $4,107 million for biotechnology R&D, an increase of $319 million,
or 8 percent, over 1991. Increasing the Federal
investment in biotechnology R&D will spur
further advances in this rapidly growing field.
In addition, the Administration recently completed a comprehensive review of all other aspects of Federal Government policy affecting
biotechnology. The results of this review will
be released in a forthcoming report from the
President's Council on Competitiveness. Much
of the material contained in this section is
drawn from the forthcoming report.
SIGNIFICANT ACHIEVEMENTS/NEW
TRENDS
The biotechnology revolution began in the
1970s and 1980s when scientists learned new
techniques to alter precisely the genetic constitution of living organisms. The newer, most
innovative biotechnologies are tremendously
diverse and include gene transfer, embryo manipulation and transfer, plant regeneration,
and perhaps the most widely known, recombinant DNA technology (rDNA) or "genetic engineering."
Table C-19. THE BUDGET PROPOSES AN 8 PERCENT INCREASE
IN FEDERAL INVESTMENTS IN BIOTECHNOLOGY
(Dollar amounts in millions)
Budget Authority
Department or Agency
Health and Human Services
Agriculture
Energy
National Science Foundation
Defense
Other Agencies1
Total, All agencies
(Directly-related activities—non-add)
(Broader science-based activities—non-add)
(Scale-up activities—non-add)
1991
Enacted
1992
Proposed
Percent
change
3,296
119
110
130
118
17
3,557
139
140
132
123
17
+261
+20
+30
+2
+5
3,788
4,107
+319
+8
1,663
1,998
25
1,810
2,144
32
+147
+146
+7
+9
+7
+28
includes the Department of Veterans Affairs and the Environmental Protection Agency.
Dollar
change
—
+8
+17
+27
+2
+4
—
IV.C.
ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
American researchers developed much of the
basic science of biotechnology and the United
States continues to lead in the commercialization of most emerging biotechnology products.
The new techniques have spawned an industry
that has seen rapid growth. Since 1975, more
than 400 start-up firms active in biotechnology
have been founded. In addition, more than 200
established firms have diversified into biotechnology and there are more than 200 supply
firms that support biotechnology with materials, equipment and services in the U.S.
alone. Just a decade and a half after its beginnings, the U.S. biotechnology industry produced pharmaceuticals, diagnostic tests, and
agricultural products worth close to $2 billion.
Human Health
Biotechnology enables the identification, development and manufacture of disease-fighting
substances and provides new techniques for
delivering medicines to diseased parts of the
body. Remarkable new medicines based on biotechnology are beginning to appear daily. The
Food and Drug Administration (FDA) has approved a biotechnology-based vaccine for preventing hepatitis B and eleven other drugs for
treating various diseases. More than 1000 clinical trials of new drugs and biologies are underway. A majority of these are for cancer or
cancer-related conditions and more than 15
percent are for AIDS or HIV-related conditions. In addition, molecular genetics and biotechnology techniques have enabled the development of a new generation of methods for
identifying the genetic causes of disease and
aiding medical diagnoses.
Agriculture, Foods, and Animal
Husbandry
Scientific advances from biotechnology have
not been limited to medicines. Biotechnology
is expected to play a major role in improving
U.S. agriculture and protecting the environment. Biotechnology offers modern tools for agriculture that can improve nutrition, taste, appearance, and productivity of plant, animal
and other food products. Enhancements of certain characteristics in vegetables are expected
to provide increased resistance to insects, thus
reducing the need for chemical pesticides.
Companies are field testing a variety of crops
Part Two-73
with enhanced resistance to specific viruses,
insect pests, and safer herbicides.
An important boost for agricultural biotechnology is research funded through the Department of Agriculture's National Research
Initiative. Included within the plant systems
category is funding for a plant genome mapping program to locate genes which control
economically important traits in crop plants
and forest species. Results will help scientists
more rapidly and precisely transfer genes to
address environmental concerns and improve
food quality and safety.
A group of research experts recently convened by the National Institutes of Health
(NIH) recommended approving the use of bovine somatotropin (BST), a genetically engineered version of a naturally-occurring growth
hormone, in the production of milk. When administered to dairy cattle, BST can increase
milk production by as much as 20 percent.
Environment
Biotechnology holds great promise for the
environment including products that will clean
up the ecosystem, provide alternatives to
chemicals, and perform other tasks such as
mineral recovery. Bioremediation is a process
that involves the use of microorganisms for
cleanup of the environment. Certain microorganisms will feed on and degrade hazardous
or toxic chemicals and produce environmentally safe substances as by-products. Recent experiments using bioremediation have
demonstrated the value of microbes for cleanup of oil spills. Bioremediation is also used
for cleansing soil contaminated with gasoline.
Microbial degradation of waste and waste
water forms the basis of a substantial portion
of the waste industry. The availability of new
microbial tools for waste management will provide an opportunity for new advances in productivity in this industry.
FEDERAL INVESTMENT
The key to future growth in U.S. biotechnology industry continues to be strong support for basic research and research training.
This investment continues to produce the advances in technology that allow the industry
to thrive. In 1992, the total Federal investment
in biotechnology-related research is proposed
Part Two-74
at approximately $4.1 billion. Over 80 percent
of this investment is supported through NIH.
One of the most significant endeavors is the
human genome project—designed to map the
location of all the genes in the human body—
supported by the Departments of Health and
Human Services and Energy.
Twelve Federal agencies support programs
directly related to or in support of biotechnology, including the Departments of Health and
Human Services, Energy, Commerce, Defense,
Agriculture, and Veterans Affairs, as well as
the National Science Foundation, the National
Aeronautics and Space Administration and the
Environmental Protection Agency. Most of the
support for basic biomedical research essential
to the advancement of biotechnology has come
from the National Institutes of Health. Many
of the agencies are in fields that are poised
for substantial growth, such as agricultural
and environmental research. The private sector also provides about $2 billion for biotechnology research and development, most of
which is committed to specific product development.
The United States biotechnology and other
industries were greatly assisted by the technology transfer policies initiated in 1980 and
accelerated in the Bush Administration. These
policies fostered joint R&D projects between
industry and federally supported universities.
More recently, this process was extended to
federally owned and operated laboratories by
protecting private sector commercial rights to
subsequent discoveries. Such joint R&D allows
industry to gain access to the most advanced
government facilities. Implementation of the
recently enacted Technology Transfer Act fosters competitiveness in, and commercialization
of, biotechnology. Commercialization of university research in cooperation with U.S. industry
is an important element of federally supported
university research.
The Federal Government is providing strong
encouragement for cooperative precompetitive
biotechnology efforts among the public sector,
university sector and private sector. Over the
last five years, scientists at NIH have entered
into more than 400 cooperative research and
development agreements (CRADAs) with private industry. The majority of these have involved the development of biotechnology, in-
THE BUDGET FOR FISCAL YEAR 1992
cluding a gene therapy for AIDS. Other Federal agencies such as the Food and Drug Administration and the Centers for Disease Control are entering into CRADAs.
RESEARCH TRAINING
The development of biotechnology research
and training centers is an additional approach
that may prove effective in promoting interdisciplinary training and promoting industry/
university research collaboration. The National
Science Foundation now funds two biotechnology engineering research centers at the Massachusetts Institute of Technology and Montana State University. There are a number of
other such centers, many established through
State initiatives.
FEDERAL REGULATORY
ENVIRONMENT
The 1986 Coordinated Framework established a roadmap for Federal regulation of biotechnology. The Framework was developed to
address the concerns over the potential adverse impact of unnecessary regulation on biotechnology research and commercial applications and possible risks associated with using
genetically engineered organisms in the environment. The Coordinated Framework focuses
on the characteristics and risks of the biotechnology product, not the process by which
it is created. This principle allows agencies to
concentrate resources in areas that may pose
greater risks and leaves relatively unfettered
the development of biotechnology products posing little or no risk.
Based on the principles outlined in the Coordinated Framework, the Food and Drug Administration (FDA) announced that it did not
need to establish new procedures for the review of new biotech-derived products. FDA's
review of products based on a case-by-case assessment of risks would address any risks involved in new biotechnology products. The
FDA established a system of user fees for the
review of drugs and medical devices, including
products that use techniques developed
through biotechnology. User fees will enable
the agency to speed its review of biotechnology
products and, in turn, allow firms to bring
their products to the marketplace sooner. The
other two major regulatory agencies—the En-
IV.C.
Part Two-75
ENHANCING R&D AND EXPANDING THE HUMAN FRONTIER
vironmental Protection Agency (EPA) and the
Department of Agriculture (USDA)—an-
nounced policies for developing additional rules
and guidelines.
making b i o t e c h n o l o g y r e s e a r c h discoveries
available f o r p r o d u c t development
NUMBER OF
CRADA'S SIGNED
180
160140
12010080
60
4020-
O-
1989
1990
1991
1992
STRENGTHENING SCIENCE AND MATHEMATICS
EDUCATION
There has been much debate about the
health of our Nation's science and technology
base and the need to improve this base so
we can continue to compete in the global economy. This need is embodied in the national
education goals that were established by President Bush and the Nation's Governors.
Since the spring of 1990, the interagency
Federal Coordinating Council on Science, Engineering, and Technology's Committee on Education and Human Resources has been developing a strategy to achieve the national education goals related to math and science edu-
cation. The analysis began with an examination of the science and engineering pipeline.
There are few indicators of student preference for math and science prior to the last
several years of high school. Yet after Grade
5, U.S. students' performance on international
math and science tests begins to decline until
by Grade 9 students score at the bottom. There
has been a very stable thirty year pattern of
only a few students (5 percent of 22 year olds)
earning undergraduate math and science degrees that does not appear to be changing. It
is estimated that less than 10,000, or 0.3 per-
Part Two-76
cent, of the over 4 million 1972 5th graders
will eventually obtain a science or engineering
doctorate.
The conclusion from this analysis is that the
national education goals can only be achieved
if a balanced investment is made in attracting
and retaining students throughout the science
and engineering pipeline. However, in light of
the performance problems mentioned above, it
appears that there is a need for a special nearterm emphasis on properly preparing and attracting students well in advance of college.
The budget proposes $1,941 million for math
and science education as a comprehensive step
to help address the problems that limit the
pool and performance of math and science
learners. This represents an increase of $225
million, or 13 percent, over the 1991 enacted
level. At the precollege level, the initiative has
THE BUDGET FOR FISCAL YEAR 1992
as its highest priority increasing the supply
of, and improving the skills of precollege mathematics and science teachers. In addition,
there will be increased emphasis on improving
curricula, developing new educational technologies, and increasing student interest and
performance in mathematics and science. Of
the total increase of $225 million, $146 million
is targeted toward the precollege level, a 28
percent increase over the 1991 enacted level.
At the undergraduate level, the initiative focuses on enhancing undergraduate science,
mathematics and engineering through curriculum improvements, faculty enhancement and
student incentives. Graduate education programs are maintained at roughly the 1991
level. A much more detailed description of this
math and science education initiative is included in Chapter IV.A., "Investing in Human
Capital and Reforming American Education."
IV.D. IMPROVING THE TRANSPORTATION
INFRASTRUCTURE
solidate other funding into a new, flexible
block grant program for other roads.
HIGHLIGHTS
In recognition of the importance of transportation to the national economy, the Administration is proposing substantial increases in
Federal transportation infrastructure funding—while attending, also, to appropriate limits on the Federal role and responsibility.
For the Department of Transportation, the
budget proposes an overall increase of $2.8 billion, 9 percent above the 1991 enacted level.
Two key elements of the Transportation budget proposal are:
• A $1.4 billion increase for highway construction and rehabilitation, from $14.6
billion in 1991 to $16.0 billion in 1992.
From 1991 to 1996, highway budget authority will increase by $5.7 billion (39
percent). By 1996, Federal highway spending will exceed $20 billion. The Administration will seek to re-authorize the Federal highway program for 5 years. On a
cumulative basis, almost $88 billion will
be provided for highway construction and
rehabilitation over the next 5 years. As
part of this reauthorization, the Administration will propose to target funds on a
new National Highway System and con-
• A $1.3 billion increase for aviation programs, from $7.9 billion in 1991 to $9.3
billion in 1992. This includes a $0.6 billion
increase for continued modernization of
the air traffic control system and a $0.4
billion increase to operate the system.
Americans spend nearly $800 billion for
transportation products and services annually.
In 1988, the U.S. recorded 3.6 trillion passenger-miles of travel and 3.6 trillion ton-miles
of freight traffic. Transportation and transportation-related businesses employ one-tenth of
the American work force. As a share of
consumer spending, transportation accounts
for almost 20 percent of the total.
Investment by all levels of government in
the Nation's transportation systems—such as
roads, airways, and mass transit is crucial to
the health of the Nation. As the economy
grows and changes, so too will the need for
transportation infrastructure services. Recent
growth in the demand for transportation services is shown in the accompanying chart
("Growth of Transportation Services and Real
GNP").
Table D - l . FEDERAL INVESTMENTS IN AMERICA'S TRANSPORTATION
INFRASTRUCTURE
(Budget authority in billions of dollars)
1991
Highways Total
Next Generation Components:
National Highway System
Urban/Rural Block Grant
Bridges
Mass Transit Capital
FAA Modernization
1992
1993
1994
1995
1996
14.6
16.0
16.3
16.8
18.3
20.3
n/a
n/a
1.6
2.4
2.1
7.7
3.9
1.8
2.9
2.7
7.8
4.0
1.9
2.9
3.0
8.1
4.1
2.0
2.9
2.9
8.9
4.5
2.2
2.9
2.5
11.2
5.7
2.8
3.0
2.5
n/a: Not available.
Part Two-77
Part Two-78
THE BUDGET FOR FISCAL YEAR 1992
g r o w t h o f t r a n s p o r t a t i o n services a n d r e a l gnp
PERCENT
<1980~100)
CALENDAR YEAR
Source: FAA and Federal Highway Administration.
PROVIDING HIGHWAYS FOR THE
NEXT GENERATION
and priorities have shifted to the preservation
and improvement of a mature highway system.
The Administration is proposing significant
increases in Federal highway spending—from
$14.6 billion in 1991 budget authority to $20.3
billion in 1996 (+39 percent). Over the 5-year
authorization period, 1992-1996, total expenditures from the Highway Account of the trust
fund, will exceed tax receipts from the public
by about $2.4 billion. Obligations are projected
to exceed receipts by $9.2 billion over the same
time period and in every year Federal obligation levels are expected to exceed receipts from
the public. The authorizations in the Administration's proposed legislation will exceed those
in the 1987-1991 highway bill by $16.8 billion.
The Federal highway program has evolved
through an historical process which has resulted in the layering of system upon system,
activity upon activity. Over time, it has lost
its coherent structure and covers a road network that provides substantially different Federal, State and local benefits. The Federal financing system is inadequately focused on
meeting national needs. As the next reauthorization bill is debated, the highway program
should be evaluated in the context of changing
responsibilities and abilities among the Federal Government and its State and local partners.
Consistent with the Administration's National Transportation Policy, the Administration's proposal will recast the objectives of the
system, its structure, its financing, and the
Federal/State/local government interrelationships. The proposal recognizes that the highway system is largely built, and that needs
Administration Highway Proposals.—
Consistent with these views, the Administration is proposing a new highway program with
the following elements:
• creation of a "National Highway System"
which concentrates Federal resources on
the rehabilitation and improvement of
IV. D.
Part Two-79
IMPROVING THE TRANSPORTATION INFRASTRUCTURE
Table D-2. THE FEDERAL COMMITMENT TO AN IMPROVED HIGHWAY
SYSTEM
(In billions of dollars)
Budget authority
Outlays
14.6
14.4
1992
16.0
15.2
highways which are most critical to interstate travel and commerce;
• establishment of a highway block grant
program which will consolidate many narrow categorical highway grant programs
into a larger and more flexible program,
termed the "Urban/Rural Program."
• additional Federal assistance for bridge rehabilitation and replacement; and
• encouragement of innovative financial and
management techniques for highways, especially through greater use of toll roads.
All of the above features will provide State
and local partners with greater flexibility to:
• choose, in conjunction with the Department of Transportation, which highways
should become part of the National Highway System;
• select which highway or transit projects
will receive block grant support; and
• use new or alternative financing techniques.
The Administration's highway reform proposals, and the projected funding increases,
will ensure that the physical condition of the
Nation's highways will continue to improve;
that the backlog of deficient bridges will be
addressed; and that through reduced federal
restrictions and increased programmatic flexibility, the needs of the nineties will be met.
Together, they will increase the ability of
States and localities to invest in those projects
which provide the greatest benefits while
maintaining a safe and productive system of
national highways.
1993
i-* i—1
CTi
^ CO
1991
1994
16.8
16.7
1995
18.3
16.8
1996
20.3
17.9
Percent
change,
1991-96
+39
+24
Establishing a New Core System—The
National Highway System.—A newly designated National Highway System (NHS) will
consist of those roads with the greatest significance for interstate travel and commerce. The
proposed NHS will be a system of some
150,000 miles nationwide that will include the
existing Interstate System of 43,000 miles and
other nationally important highways. This system will account for about 40 percent of highway vehicle miles travelled and about 70 percent of interstate motor carrier commerce.
(Federal funding for the NHS is shown in the
accompanying chart, "Funding the 'National
Highway System' Program, 1992-96".)
The NHS will be an interconnected system
that will serve major population centers, ports,
airports, and international border crossings;
meet national defense requirements; and serve
interstate and interregional travel. It will incorporate the Interstate System, but it will
also reflect the major demographic and travel
changes that have occurred since the Interstate routes were designated. Creation of the
National Highway System will be accomplished through a cooperative effort between
the States and the Department of Transportation.
The Federal share for projects on the new
National Highway System will be 75 percent,
except for rehabilitation on the Interstate System which will remain at 90 percent. A 75
percent Federal match is the ratio which now
pertains to the Federal-aid primary, secondary
and urban systems. Building on the accomplishments of the soon-to-be-completed Interstate System, the new NHS will encourage investment in cost effective arterial highways.
Part Two-80
THE BUDGET FOR FISCAL YEAR 1992
f u n d i n g t h e " n a t i o n a l h i g h w a y s y s t e m " p r o g r a m , 1992-96
(budget a u t h o r i t y )
12-|
$ BILLIONS
1992
1993
The proposal will continue the recent improvements in the condition of highway pavement. In 1982, 14 percent of the Interstate
System was classified as being in "poor" condition. By 1989, the percentage had dropped to
11 percent. By 1996, it is projected that the
percentage of pavement on the Interstate System that is in poor condition will have decreased to about 9 percent.
Providing Flexibility: the Urban/Rural
Block Grant.—The second major change to
the highway program will be the creation of
a new block grant for Federal highway assistance—the Urban/Rural Program (URP). The
URP Program has three major program elements:
• States will be able to expend URP funds
generally on any project currently on the
Federal-aid urban, primary, and secondary
highway systems. The existing categories
which compartmentalize Federal highway
spending will be broken down. These programs will be consolidated into this new
grant mechanism.
1994
1996
1996
• States will receive approval of an overall
program plan rather than for each and
every project they initiate. States will simply certify that their projects meet applicable Federal standards and provide annual
reports on fund usage. (The Federal Government will review and audit these plans
to ensure proper compliance.) As a result,
more expeditious highway construction
can be expected.
• States will be able to expend URP funds
on mass transit capital projects, thereby
further providing flexibility to States and
localities.
Under the Administration's proposal, the
percentage of project costs paid by the Federal
Government will be set at 60 percent for most
projects. With a higher financial stake invested
in highway projects, sponsors will carefully
weigh alternatives before selecting projects.
(Federal funding for the Urban/Rural highway
program is shown in the accompanying chart,
"Funding the Urban/Rural Highway Program,
1992-96".)
Part Two-81
IV. D. IMPROVING THE TRANSPORTATION INFRASTRUCTURE
f u n d i n g t h e u r b a n / r u r a l h i g h w a y p r o g r a m , 1992-96
Rebuilding
the
Nation's
Bridges.—
The Administration's
proposals will
elimi-
Bridges will benefit from an increased empha-
nate burdensome restrictions on creative solu-
sis on rehabilitation. Since 1984, the number
tions to highway financing needs, thus accel-
of structurally deficient interstate bridges has
erating the trend of private sector participa-
increased from 5.1 percent of the total to 7.2
tion. States will be permitted to use Federal
percent. The increased funding provided over
funds for the construction of toll roads, includ-
the next 5 years should arrest this trend, and
ing those in which there is private participa-
should reduce the number of bridges that are
tion. For example, they will be permitted to
structurally deficient by about one-third over
use their N H S or URP funds to improve exist-
the next 5 years. (Federal funding for the Na-
ing toll roads or rebuild existing toll-free non-
tion's Bridges is shown in the accompanying
Interstate highways to restricted access and
chart, "Funding For Bridges, 1 9 9 2 - 9 6 " . )
then charge tolls.
Fostering Partnerships with the States
and the Private Sector—Permitting Alter-
capacity needs cannot be met through new con-
natives.—Highway
transportation
has
bene-
Investing in New Technologies.—Highway
struction alone. Part of the solution must lie
fitted from a long tradition of Federal-State-
in innovative technologies. The
local-private partnership,
provides $60 million, $37 million more than
a partnership
that
1992 budget
has built and maintained most of the system.
provided in 1991, for Federal research and de-
The partnership represents a foundation the
velopment
funding
for
Intelligent
Vehicle/
Nation can build upon. New partners are also
Highway Systems (IVHS), often referred to as
emerging. For example, in Virginia and Cali-
"smart cars/smart highways." I V H S will use
fornia, private entrepreneurs have stepped for-
state-of-the-art
ward to plan, finance and build new toll roads
and computer technology
with minimum direct State/local involvement,
control systems, warn drivers of dangerous sit-
electronics,
communications,
to improve
traffic
Part Two-82
$ BILLIONS
THE BUDGET FOR FISCAL YEAR 1992
f u n d i n g f o r b r i d g e s , 1992-96
(budget a u t h o r i t y )
uations, and make more efficient use of the
existing road system. For example, traffic signalization could be controlled in a more sophisticated way, allowing real time adjustments to
be made to compensate for actual traffic situations and disruptions. Currently, most systems
are simply synchronized and some change depending on time of day. Expected benefits of
IVHS include reduced congestion, reduced fuel
consumption, improved air quality, and increased safety.
The Administration also proposes to continue to examine the economic and technical
feasibility of alternative high-speed surface
systems, including high-speed rail and magnetic levitation transportation. Federal research is focused on the identification of commercially viable technologies.
Working with States and Localities.—As
the Federal Government increases its commitment to the highway program, it expects that
the States and localities will continue to support the program as well. To date, the States
have been highly responsive in fulfilling their
role as partners with the Federal government.
For example, in the aftermath of the 1982 Federal motor fuels tax increase, States substantially increased their financial commitment to
highways (see accompanying chart, "Total Receipts for Highways By Governmental Unit".).
Ensuring a Safe Highway System.—The
Administration's authorization proposal will
contain a requirement that States use at least
10 percent of their apportioned Federal highway funds for projects that promote safety.
This will provide about $1.5 billion in 1992,
increasing to $1.9 billion in 1996. In addition,
the proposal will contain safety programs to
reduce drunk driving and encourage States to
adopt safety countermeasures.
SUPPORTING MASS TRANSIT
INFRASTRUCTURE
America's transportation network consists of
separate but largely complementary systems,
each meeting a different set of needs. While
the highway system is largely concerned with
providing the underlying facilities for moving
people and goods, mass transit systems are
exclusively devoted to the movement of people.
Part Two-83
IV. D. IMPROVING THE TRANSPORTATION INFRASTRUCTURE
$ BILLIONS
t o t a l receipts f o r h i g h w a y s
by g o v e r n m e n t a l u n i t
Source: Federal Highway Administration.
The benefits of mass transit are largely local.
While the Federal Government may assist in
improving the mass transit infrastructure, the
ultimate responsibility resides with States and
localities.
The Administration's 1 9 9 2 - 1 9 9 6 mass transit re-authorization bill will propose the following elements:
• Investment in Mass Transit Capital Improvements.—
Increasing the share of the
Federal mass transit dollar that is spent
for capital improvements to assure that
the existing mass transit infrastructure
does not deteriorate and, in fact, improves.
This goal can only be accomplished in cooperation with State and local governments and the private sector. These
groups must work to assure that the mass
transit infrastructure enhances mobility
and that it is well maintained and effectively used. To meet its portion of this
partnership, the Administration proposes
to increase Federal mass transit capital
spending from about $2.4 billion in 1991
to about $2.9 billion in 1992.
• Equitable Distribution of Fuel Tax Receipts.—Distributing
approximately
80
percent of mass transit funds by formula,
compared to the existing program which
distributes about 60 percent of the funds
by formula. This policy change will ensure
that the nationally collected motor fuels
tax is equitably distributed to all sections
of the country.
• Increased Local Responsibility.—Limiting
spending for the construction of new transit systems to those projects which are cost
effective.
• Trust Fund financing of Transit.—-Financing almost all Federal mass transit programs
out of the Highway Trust
Fund
(only 43 percent of Federal mass transit
funds are currently derived from the Trust
Fund). The Trust Fund can and should
finance Federal mass transit expenditures,
thereby minimizing the burden on general
taxpayers for support of these services.
The budget would also provide State and
local governments with the flexibility to decide
Part Two-84
THE BUDGET FOR FISCAL YEAR 1992
whether to use Federal highway and transit
funds for highway or mass transit projects.
MODERNIZING THE AVIATION SYSTEM
By the year 2000, the number of passenger
enplanements is forecast to increase by 48 percent. Failure to respond to increased demands
would lead to an aviation infrastructure which
is increasingly congested and obsolete. To accommodate increased demand and the need to
modernize, the Administration will continue to
work with all aviation groups to assure a safe
and efficient system. For 1992, the Administration proposes a 17 percent funding increase
to meet this goal.
Operating a Safe and Secure Aviation
System.—For Federal Aviation Administration
(FAA) operations, the Administration requests
$4.5 billion, a $0.4 billion or 10 percent increase over 1991. This increase is needed to
sustain current operating levels and provide
staff increases to deal with forecasted workload growth and scheduled commissioning of
new equipment and facilities. The staffing increases will add 450 air traffic controllers, 100
aviation safety inspectors, 260 maintenance
technicians and additional security inspectors.
Modernizing Aviation Equipment.—The
FAA developed the National Airspace System
(NAS) Plan in the early 1980s to modernize
the air traffic equipment. Nearly all of the
original NAS Plan projects are now under contract and new equipment and systems are already installed and integrated into the current
system.
The budget proposes to continue modernization of the national airspace system by
providing increased funding for FAA facilities
at $2.7 billion, a $0.6 billion or 29 percent
increase over 1991.
Now that the research and design phases
are completed, FAA is expecting deliveries of
several equipment systems over the next few
years. In the spring of 1991, FAA will begin
installing the first segment of the Advanced
Automation System (AAS). The AAS includes
computer software and hardware that will improve air traffic controllers' ability to manage
additional aircraft safely and efficiently. The
AAS is the largest undertaking in the air traffic modernization plan. When all five segments
of the AAS are installed, the aviation system
should benefit from increased safety, capacity
and productivity.
Other modernization projects include:
• computer software and hardware that will
improve computer speed, capacity, and reliability in order to reduce delays;
• radars and radar displays that will improve an air traffic controller's ability to
"see" aircraft, keep them safely separated,
and correct conflict situations before aircraft are placed at risk; and
• weather tracking systems that will detect
dangerous windshear conditions and warn
aircraft away from violent storms.
Modernization of the air traffic equipment
will result in greater operating efficiency and
safety, with airline passengers reaping most
Table D-3. THE TOTAL FEDERAL COMMITMENT TO AVIATION
(In billions of dollars)
1991-92
1992
Budget Authority:
Operations
Equipment
Airport grants
Research
Total
.
Dollar
change
Percent
change
4.0
2.1
1.6
0.2
4.5
2.7
1.9
0.2
+0.4
+0.6
+0.3
0.0
+10
+29
+19
+2
7.9
9.3
+1.3
+17
IV. D.
IMPROVING THE TRANSPORTATION INFRASTRUCTURE
of the benefits of modernization. Over a 20
year period, it is estimated that more than
$114 billion in benefits will be derived from
modernization.
Encouraging Airport Capacity Improvements.—For airport grant funding, the Administration requests $1.9 billion. During FAA's
1991 re-authorization, Congress accepted the
Administration's proposal to allow airports to
collect passenger facility charges (PFCs). A
PFC is a charge levied on departing passengers by airports for the use of aviation facilities. Some estimates show PFCs could generate about $1 billion per year for the top 100
U.S. airports. The ability of airports to charge
PFCs should provide airports with a stable,
non-federal source of funding that will help
address the growing airport capacity problems.
Recently, many airports have found it financially difficult to add capacity as quickly as
the system demands. Airports have incurred
high debt burdens in an attempt to eliminate
increasing airport congestion. PFCs offer a
new non-Federal source of revenue for airport
development. PFCs can help commercial service airports, but hub airports may be the most
significantly affected. One survey estimates a
Part Two-85
$3 PFC could generate as much as 30 percent
of total revenues raised at hub airports.
In 1988, the country had 21 major airports
that experienced more than 20,000 hours in
annual flight delays. Unless capacity is expanded, the number may grow to 41 airports
by 1998. Combining PFCs with Federal and
other funds (such as rental payments from airlines and other tenants) will provide airports
with the funding needed to address forecasted
airport congestion.
RESEARCH FOR THE FUTURE SYSTEM
The budget includes $210 million for aviation research and development. A significant
amount of research and development activities
will focus on enhancing the current air traffic
control system and preparing for future systems. For example, the FAA is researching and
defining the next generation of air traffic control equipment. This funding will also continue
research in the critical area of metal fatigue
and corrosion to detect problems with aging
aircraft. Funds will be provided to develop improved systems and devices for detecting explosives in checked and carry-on baggage.
IV.E. PRESERVING AMERICA'S HERITAGE
AND PROTECTING THE ENVIRONMENT IN A
GROWING ECONOMY
prevention and response activities; and resources for treating municipal sewage discharges to coastal waters of Boston, Seattle, Los Angeles, San Diego and New
York City.
HIGHLIGHTS
The budget places a major emphasis on efforts to protect and enhance America's natural
resources and the environment within the context of policies to promote economic growth.
Major increases are proposed to:
• Protect, preserve and expand America's
national treasury of parks, forests, wildlife
refuges, and other public lands.
• Greatly enhance the access of American
citizens to public lands and recreational
opportunities.
• Initiate a program that will protect some
of the Nation's most important Civil War
Battlefield sites.
• Increase coastal protection, through a new
interagency action plan; enhanced oil spill
• Enhance the effort to protect and accelerate the recovery of threatened and endangered species while reducing conflict with
economic activity by managing habitat on
a multi-species basis.
• Take further steps toward the President's
national goal of achieving "no net loss" of
wetlands by protecting critical habitat,
and by expanding wetlands research.
• Continue the President's commitment to
effective pollution control and environmental enhancement by implementing re-
Table E - l . THE BUDGET INCLUDES $2.4 BILLION IN NEW FUNDING
FOR ENVIRONMENTAL PROTECTION INITIATIVES
(Budget authority; dollar amounts in millions)
Summary of Major Initiatives
America the Beautiful
Reforestation
Legacy '99
Protecting America s Wetlands1
EPA Operating Budget
Superfund
Federal Facility Cleanup:
Department of Energy
Department of Defense
Other Agencies
Global Change Research
Natural Resources Research
Total
Actual
1989
1990
1991
Enacted
363
—
517
201
1,752
1,410
411
—
563
283
1,938
1,530
1,762
1,155
107
—
680
2,354
1,282
147
659
710
2
7,947
9,877
1992
Proposed
Percent
Change,
1991-92
589
70
819
299
2,313
1,616
785
140
823
489
2,477
1,750
+33
+100
+1
+64
+7
+8
3,687
1,923
172
954
844
4,352
2,582
211
1,186
900
+18
+34
+23
+24
+7
13,287
15,695
+18
Total has been adjusted to eliminate double counting of DOI Wetlands already included in America the
Beautiful and wetlands, Coastal American and global change research included in EPA's operating budget.
2 Includes a proposed $340 million 1991 supplemental for Environmental Restoration and Waste Management.
1
Part Two-87
Part Two-88
THE BUDGET FOR FISCAL YEAR 1992
cently enacted environmental legislation,
including the Clean Air Act.
tional parks, wildlife refuges, and other public
lands.
• Ensure that the Federal government does
its part toward environmental improvement by continuing programs to clean up
Federal facilities, both nuclear and nonnuclear.
The initiative will increase the number of
boat ramps, campsites, trails and interpretive
centers for America's growing population of
outdoor enthusiasts; improve the access of disabled Americans to our public lands; and ensure that key environmental features of these
lands are not threatened. Included in the program will be the establishment of a new America the Beautiful pass, specially designed for
use of repeat visitors to national parks, forests,
and other lands.
• Expand global change research for the second year and thereby extend America's
international leadership in this area.
• Preserve America's heritage.
THE BUDGET
INCLUDES AN INCREASE OF 40 PERCENT TO EXPAND AND PROTECT AMERICA'S
TREASURY OF NATIONAL PARKS,
WILDLIFE REFUGES, FORESTS AND
PUBLIC LANDS.
America's treasury of public lands is among
her most important assets. The budget reflects
the President's commitment to the outdoors by
providing the resources to expand, improve,
and maintain these assets, and to increase the
access of all Americans to them.
The budget amplifies the joint Department
of the Interior (DOI) and Department of Agriculture (USDA) initiative, America the Beautiful (ATB), begun last year. The budget provides nearly $1 billion (40 percent above 1991)
for improved stewardship of National parks,
wildlife refuges, forests, and other public
lands. ATB resource protection and enhancement activities are increased by $188 million,
or 76 percent above 1991 enacted levels and
Federal land acquisition is increased by $70
million over the President's 1991 budget proposal.
This initiative includes the following features:
Enhancing Recreation and Restoration
of Natural Resources.—An important component of America the Beautiful will focus Federal funding and expertise on a wide range
of threatened natural resource treasures and
key Interior recreational areas in need of improvement. The budget includes $329 million
(33 percent above 1991) for improved resource
protection, including wetlands conservation
and restoration, endangered species activities,
and enhanced recreational opportunities in na-
Land and Water Conservation Fund
(LWCF).—The budget continues the President's commitment to the acquisition of nationally significant natural and cultural resources.
Proposed 1992 funds for Federal land acquisition and LWCF State grants would be $350
million, an increase of $8 million, or 2 percent
over the appropriated amount for 1991.
Concurrent with the submission of the budget, the Administration will propose to Congress
a list of priority lands to be acquired by the
National Park Service, the Fish and Wildlife
Service, the Bureau of Land Management, and
the Forest Service. This list has been developed through a competitive rating system, in
which particular importance is placed on valuable wetlands, proximity to population centers,
increased recreational opportunities to the
public, protection of endangered species, and
other characteristics of such national significance that the land's early acquisition for public purposes is of special importance. Of the
total funding available to the Fish and Wildlife
Service, $3 million is proposed for the National
Fish and Wildlife Foundation.
The President's outdoor program reflected in
this budget includes full funding for efforts
such as land acquisition at Santa Monica
Mountains (CA), and implementation of legislation to expand the Everglades National Park
(FL).
The budget also re-starts a funding and acquisition partnership with States through the
LWCF State Grant program (the first time in
ten years that funds for these grants are being
requested). Requested funding for 1992 of $30
million would provide States with Federal
matching funds for the acquisition of parks
IV.E.
PRESERVING AMERICA'S HERITAGE AND PROTECTING THE ENVIRONMENT
Part Two-89
america's parks, f o r e s t s , a n d o t h e r public l a n d s
w i l l be e x p a n d e d
$ MILLIONS ( b u d g e t a u t h o r i t y f o r f e d e r a l l a n d a c q u i s i t i o n )
and open spaces, and for the development of
easement acquisition, technical assistance,
outdoor recreation resources.
and landbanking.
Protecting Battlefields.—The budget contains
$15
million
for a new initiative,
the
American Battlefield Protection Program. In
addition, the L W C F State grant request includes a proposed earmark of $6 million for
grants to support State and local protection
of battlefield sites. While some Civil War Battlefields are managed by the National Park
Service, many important sites remain unprotected and are threatened with development,
without their historic values being taken into
account. In order to meet this challenge the
Administration is proposing a new initiative
to:
• Develop partnerships with Federal, State,
regional and local officials and private conservation organizations to provide protection of threatened
sites. Efforts will be
made to explore all options for their protection, including creative use of public
and private land-use tools, such as zoning,
historic
district
designation,
land
and
• Develop and disseminate information on
public/private
demonstration
projects
to
protect battlefields.
• Apply limited Federal funds toward promoting protection through leveraging the
purchase of land by private conservation
organizations and other public agencies.
The Department of the Interior has identified priority battlefields that would be part of
the initiative's first phase, including:
—Gettysburg (PA)
—Antietam (MD)
—Wilderness (VA)
—Shenandoah Valley (VA)
—Harpers Ferry ( W V )
—Kennesaw Mountain (GA)
—Corinth (MS)
—Franklin Battlefield (TN)
—Glorietta Pass (NM)
Targeted Parks: America's Crown Jewels.—To
help meet the increasing demand for
Part Two-90
public use of the national parks, the budget
proposes a new Targeted Parks Initiative. In
conjunction with the National Park Service's
75th Anniversary celebration, the President is
proposing a special $10 million program that
will improve monitoring and protection in ten
"crown jewel" national parks to ensure that
these parks remain accessible to all, and to
protect fully the natural beauty which makes
them so popular.
The national parks under consideration for
inclusion in the targeted parks program are:
—Cape Cod National Seashore (MA)
—Acadia National Park (ME)
—Death Valley National Park (CA)
—Everglades National Park (FL)
—Grand Canyon National Park (AZ)
—Glacier National Park (MT)
—Olympic National Park (WA)
—Sequoia National Park (CA)
—Yellowstone National Park (WY)
—Yosemite National Park (CA)
Challenge Cost-Share Programs.—The
America the Beautiful initiative will also encourage expanded partnerships with private
parties and State and local governments
through new challenge cost-share programs for
the Park Service and Fish and Wildlife Service. Federal funds will be matched by non-Federal contributions for the protection and enjoyment of parks and refuges. Modeled after the
successful programs already ongoing in the
Forest Service and the Bureau of Land Management, these new programs will involve the
public in improving natural resources by increasing direct citizen efforts and financial
contributions.
The Endangered Species Program.—
Funding increases of $10 million would allow
for a re-prioritization of this program to include increases for prelisting, recovery, and
delisting activities. Management of multi-species ecosystems for biodiversity should significantly limit the number of conflicts related to
the preservation of individual species. The new
multi-species approach will protect threatened
and endangered species while at the same time
permitting economic activity. For example,
under the prelisting process, critical wildlife
habitat that would need protection would be
identified, while areas where economic activity
THE BUDGET FOR FISCAL YEAR 1992
could safely take place would also be identified.
Reforestation: Planting Trees for America's Future.—The 1991 budget proposed the
initiation of a national tree planting program
aimed at both rural and urban areas.
The President's proposal for 1991 was enacted in the 1990 Farm Bill, and $70 million
was appropriated to begin tree planting activities. Although the legislation did not provide
full funding for the President's goal of planting
1 billion trees per year, each state now has
a coordinating committee to develop a network
of leadership, expertise and corporate and private sector involvement in tree planting activity. The 1991 program will allow for planting
and timber stand improvement of nearly 100
million trees on 150,000 acres in rural areas
and another 15 million trees in communities
throughout the country.
Also in 1991, the President's proposed National Tree Trust Foundation was enacted and
capitalized with a one-time appropriation of
$20 million. The Foundation will direct its resources toward public awareness and private
fund raising efforts to mobilize individuals,
businesses, governments, and community organizations to plant and care for trees in cities
and towns throughout America.
The 1992 budget contains funds to expand
the reforestation initiative begun in 1991. The
budget proposes $140 million to expand tree
planting and care activities on privately-owned
rural lands and in the Nation's 40,000 rural
communities. The President's goal remains to
plant, maintain, and conduct timber stand improvements on one billion trees per year.
The continuation of the initiative recognizes
the remarkable value of trees as a resource.
In addition to their use for wood products and
wildlife habitat, trees sequester carbon dioxide
from the atmosphere; provide for reductions
in energy consumption by providing shade in
summer and wind abatement in winter; and
reduce erosion and the flow of pesticides into
the Nation's lakes and streams.
The National Forest: America's Great
Outdoors.—The budget includes funds for a
3-year, $625 million effort to enhance outdoor
recreation opportunities on National Forest
lands, thereby meeting the increasing demands
IV.E.
Part Two-91
PRESERVING AMERICA'S HERITAGE AND PROTECTING THE ENVIRONMENT
Table E-2. AMERICA THE BEAUTIFUL
(Buget authority; dollar amounts in millions)
Actual
Funding Summary
Land Acquisition
Reforestation
Resource Protection/Recreation:
National Forests
Department of the Interior
Other Agencies "coastal America" ....
Total, America the Beautiful
1989
1992
Proposed
1992--93
Dollar
Change
Percent
Change
206
237
342
70
350
140
+8
+70
+2
+100
157
174
247
88
329
18
+88
+82
+18
+33
363
411
659
925
+265
+40
for recreation on forest lands and helping to
reduce the current overcrowding of other Federal recreational facilities, including the National Parks. Under the initiative, attention
will be focused on providing those recreational
services where National Forest System lands
have a comparative advantage. Emphasis will
be placed on recreation management on lands
adjacent to urban areas and on specially designated areas such as National Recreation
Areas and the Wild and Scenic Rivers System.
Upon completion of this program, the Forest
Service will have in place recreation and trail
facilities that will assist in meeting rapidly increasing recreation demand on National Forests and other public lands. Specifically, the
program will address high demand areas such
as urban forests, scenic byways and specially
designated recreation areas. The program will
increase the number of new visitor centers for
priority urban forests, and generally expand
and enhance camping and picnic facilities in
order to meet the needs of the public well into
the next century. In addition, through partnership arrangements with the private sector, a
better mix of recreation opportunities, including added facilities more suitable for the elderly and handicapped, would be provided.
The program will also include the upgrade
of restroom facilities, provide for additional interpretive services, the expansion of scenic byways and added investments for cultural resources, as well as fish and wildlife activities.
This initiative will help to implement the Secretary of Agriculture's 1990 Forest and Range-
1990
1991
Enacted
land Resources Planning Act (RPA) program
to begin reducing a nearly 50-year backlog of
recreation enhancement needs. As a result of
this program, the backlog would be removed
in 10 years.
LEGACY 1999
The budget continues and expands the Legacy 1999 effort, begun in 1991, to leave a legacy of improved conditions at national parks,
wildlife refuges and other public lands.
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 this
effort "Legacy '99". The budget proposes funding of $823 million, an increase of $4 million
over 1991, to repair and rehabilitate facilities,
to reduce the backlog of facility rehabilitation
projects, including the repair of unsafe dams
and the cleanup of hazardous materials, and
to improve the maintenance of these facilities.
Higher funding levels will accelerate the restoration
of
important
facilities
in
existing
parks and recreation areas and improve the
day-to-day operating maintenance of Interior
facilities such as visitor centers, campgrounds,
roads, boat ramps, and administrative buildings. This increased funding will also allow
Interior to upgrade its infrastructure on a periodic basis to prevent long-term
that
could threaten
public
deterioration
safety
and
ulti-
mately increase costs to the Federal taxpayer.
Part Two-92
THE BUDGET FOR FISCAL YEAR 1992
Included in Legacy '99 are funds for certain
facilities of special importance:
tially responsible for damage to Interior's
lands and natural resources.
• $11 million to restore waterflows to the
Everglades National Park.
This identified funding will allow Interior to
fulfill its obligation to this and future generations to protect natural resources and the
public's use of these resources; increase the
likelihood that polluters, not taxpayers, will
pay for the cost of restoring injured resources;
and help prevent hazardous substance and oil
spill incidents from occurring in the future.
• $4 million to rehabilitate the existing
Baldridge Hall to create a new White
House Visitors Center that would house
exhibits and interpretive media and better
accommodate the millions of visitors to the
White House each year.
• $5 million for construction and rehabilitation of the Federal Interagency Fire Center in Boise, Idaho, that will enable Interior and the Forest Service to improve operations and coordination of national
wildland firefighting programs.
Funds for key dam safety improvements,
needed to protect people and the environment
downstream, will be increased to $123 million,
$19 million over 1991 levels, in the Legacy
'99 initiative. In addition, $80 million in new
funding, $21 million over 1991 levels, will accelerate the evaluation and clean up of hazardous waste sites located on federally managed
lands.
Complementing Legacy '99, the budget also
proposes the establishment of a $5 million
Natural Resource Damage Assessment fund
within Interior. This is similar to a $5 million
revolving fund created in the National Oceanic
and Atmospheric Administrative Act in 1991.
The fund will support timely, comprehensive
high priority damage assessment activities,
litigation strategies, coordination with other
agencies, and negotiations with parties poten-
Also complementing Legacy '99 is increased
funding in the budget from the Department
of Transportation's Federal Highway Trust
Fund (a total of $190 million, or 36 percent
over 1991) for public roads inside national
parks and on Indian reservations. There are
about 8,000 miles of park roads and parkways
and approximately 20,000 miles of roads on
reservations under the jurisdiction of Interior.
Both road systems provide critical, sometimes
unique access to parks and reservations, and
are necessary for the full use and enjoyment
of parks, and for economic and social development of Indian reservations.
Based on recent road condition inventories,
a substantial backlog of needed improvements
exists for the two systems. The only sources
of funding for improvements of roads under
Interior's jurisdiction are Federal appropriations. The proposed 1992 increases will help
to stabilize the overall condition of paved roads
in parks and on Indian reservations, minimize
further deterioration of the road systems, and
begin reducing the backlog of needed improvements.
In addition to Interior, $100 million (82 percent over 1991) is proposed for the approxi-
Table E-3. LEGACY '99—DEPARTMENT OF THE INTERIOR
(Budget authority; dollar amounts in millions)
Actual
1989
Maintenance
Rehabilitation
Dam Safety
Cleanup
Total
1990
1991
Enacted
1992
Proposed
Percent
Change,
1991-92
347
50
78
42
373
84
62
44
435
221
104
59
480
140
123
80
+10
-37
+18
+36
517
563
819
823
+1
IV.E. PRESERVING AMERICA'S HERITAGE AND PROTECTING THE ENVIRONMENT
mately 25,000 miles of State and local roads
that serve national forests under the jurisdiction of USDA's Forest Service.
THE BUDGET BEGINS A MAJOR PROGRAM TO IMPROVE THE NATION'S
COASTAL WATERS
Coastal America program.—The budget
contains $23 million for a major new initiative
to protect the Nation's coastal resources. The
EPA, Commerce, the Army Corps of Engineers
and Interior will focus on preservation and
cleanup of polluted coastal estuaries and eroding coastal wetlands. This is a practical, action-oriented approach to protection and restoration of coastal resources. The program
builds upon the existing expertise of these
agencies and provides a framework for activities at the national, regional, and watershed
levels.
Secondary treatment for municipal discharges.—Because one of the major sources
of coastal pollution is the discharge of municipal sewage, a special effort is included in this
budget to accelerate the achievement of secondary treatment levels in several major coastal cities. EPA's wastewater treatment program
has been funded in the budget at a total level
of $1.9 billion, consistent with authorized levels. The bulk of these funds will be appropriated as grants to capitalize State revolving
funds which make loans to municipalities for
meeting wastewater treatment needs.
However, the budget proposes to target $300
million in grants to coastal cities with the biggest remaining secondary treatment needs—
Boston, New York, Los Angeles, San Diego,
and Seattle. The $100 million earmarked for
Part Two-93
Boston exceeds the current special authorization for Boston by $80 million. An additional
$100 million is included to build a major treatment facility at the U.S.-Mexican border,
which is separately authorized by the Clean
Water Act. The facility will treat raw sewage
discharges from Tijuana into the Tijuana
River. These discharges have severely affected
a National Wildlife Refuge and have caused
the closing of beaches around San Diego for
the past several years.
Oil spill cleanup funding is increased
significantly.—Major increases in funds are
proposed for the Coast Guard to improve the
response to, and the cleanup of, oil spills along
the nation's coastline. The Coast Guard budget
proposes $108 million for oil spill prevention
and response activities, a $15 million (17 percent) increase over 1991. These resources will
be used to provide equipment, training and
personnel for the Coast Guard's Marine Environmental Protection Mission. The budget for
EPA includes an increase of more than 60%
for oil spill activities.
Outer Continental Shelf (OCS) Environmental Studies.—The budget proposes an increase of $14 million over the 1991 enacted
level to support the environmental studies program in the Minerals Management Service.
The $38 million request will be used to respond to the President's directive in June 1990
to upgrade the consideration of environmental
effects before proceeding with oil and gas leasing and development in certain areas of the
OCS. The environmental studies program provides scientific and technical information on
environmental, social, and economic effects of
oil and gas activity so that responsible leasing
decisions can be made.
Table E-4. COASTAL AMERICA
(Budget authority in millions of dollars)
Agency
National Oceanic and Atmospheric Administration
Environmental Protection Agency
Army Corps of Engineers
Department of the Interior
Total
1992 Funding
5.0
6.0
7.0
5.0
23.0
Part Two-94
THE BUDGET FOR FISCAL YEAR 1992
A 48 PERCENT FUNDING INCREASE
SUPPORTS THE PRESIDENT'S GOAL
OF "NO NET LOSS" OF WETLANDS
The President has articulated a national
goal of no overall net loss of wetlands. Congress enacted last year significant new legislation to help stop the loss of nearly 400,000
acres of wetlands each year throughout the
Nation. The budget fully implements many of
the new authorities provided:
• Water rights will be acquired on a willing
seller basis for the Stillwater National
Wildlife Refuge (NV), which is a significant wetland that provides habitat to migratory birds in the Pacific Flyway. There
have been reports that thousands of birds
have died there due to lack of water or
to stress associated with the lack of adequate supplies of healthy water.
• Funds are allocated for easements for
600,000 acres of wetlands to be brought
into the Environmental Conservation Acreage Reserve Program, enacted as part of
the 1990 Farm Bill. The budget proposes
nearly $500 million during 1992-1995 to
encourage farmers to remove higher priority wetlands from production through
these easements.
• The budget fully funds the recently enacted Wetlands Protection and Restoration
Program managed by the DOI and the
Army Corps of Engineers for the con-
servation and restoration of coastal wetlands.
• The budget also funds various multi-agency programs for acquisition and management of wetlands habitat significant to migratory birds and endangered species, conservation and restoration of other high priority wetlands, and an ongoing wetlands
research and development program.
POLLUTION CONTROL
EPA's operating budget is increased significantly.—The budget provides another increase for EPA's operating budget to carry out
the agency's research, regulatory and enforcement responsibilities. Since the Bush Administration took office, EPA's operating program
budget will have increased by 41 percent, and
the workforce needed to carry out its mission
will have been expanded by 20 percent. The
budget provides significant increases for carrying out the Clean Air Act, protecting the Great
Lakes, expanding environmental education, enforcing environmental laws, expanding research, and improving the capability of states
to carry out their environmental responsibilities.
Implementing Clean Air Act changes.—
The budget includes major increases for implementing the recently enacted Clean Air Act
Amendments of 1990. An increase of $117 million and 341 staff years is requested for EPA
to carry out the ambitious requirements and
Table E-5. FUNDING FOR WETLANDS RESEARCH, PROTECTION AND
ENHANCEMENT WILL INCREASE BY 48 PERCENT
(Budget authority; dollar amounts in millions)
Wetlands Funding
Department of the Interior
Department of Agriculture
Environmental Protection Agency
Army Corps of Engineers1
National Oceanic and Atmospheric Administration
Total
includes mitigation.
Actual
1989
1990
1991
Enacted
1992
Proposed
Dollar
Change,
1991-92
94
79
9
98
126
128
13
124
181
107
22
150
221
226
30
211
+40
+119
+8
+61
15
18
20
22
+2
295
409
480
710
+230
IV.E.
Part Two-95
PRESERVING AMERICA'S HERITAGE AND PROTECTING THE ENVIRONMENT
Table E-6. EPA'S OPERATING BUDGET WILL INCREASE BY 7 PERCENT
(Budget authority; dollar amounts in millions)
Actual
Funding Summary
Implementing Clean Air Act changes ..
Enforcing environmental laws
Expanding research
Improving States' ability to carry out
environmental responsibilities
Other operating programs
Total EPA operating program
Operating program workyears
1989
1992
Proposed
1991--92
Dollar
Change
Percent
Change
126
312
138
347
83
188
358
200
209
422
+117
+21
+64
+141
+11
+18
303
1,011
371
1,082
469
1,215
482
1,164
+13
-51
+3
-4
1,752
11,649
1,938
11,860
2,313
13,224
2,477
13,929
+164
+705
+7
+5
deadlines in the Act. Combined with the increases provided in 1991, EPA will have available a total of approximately $200 million and
600 staff years above 1990 levels to implement
the amendments.
The enacted Clean Air legislation provides
the authority to carry out the President's proposals to: (1) bring all cities into attainment
with ambient clean air standards; (2) reduce
sulfur dioxide emissions that cause acid rain
by 10 million tons annually; and (3) reduce
industrial emissions of toxic air pollutants by
75-90 percent. The budget provides the resources EPA needs to achieve the statute's objectives while promoting the use of market
forces to achieve those objectives in the most
cost-effective manner possible.
Protecting the Great Lakes.—The budget
also provides funds for an innovative EPA program to protect the Great Lakes by addressing
pollution from all environmental media (i.e.,
air, water and land) rather than the traditional focus on water pollutants. The budget
includes an increase of $20 million for the initiative. It will also accelerate meeting United
States commitments under the Great Lakes
Water Quality Agreement with Canada.
Environmental Education.—In November
1990 the President signed the Environmental
Education Act of 1990, which authorized a variety of programs to expand environmental
education. The budget proposes to double
EPA's environmental education funding in
order to carry out this law. In addition, the
1990
1991
Enacted
budget requests $500,000 to fund the Environmental Education Program authorized in the
Act, which will reward the Nation's best and
most innovative teachers in this area.
Enforcement.—EPA established new records in 1990 in its efforts to ensure that polluters pay for the cost of addressing the pollution
they cause. In total the agency recovered $105
million in 1990, an increase of $40 million over
the previous year. The budget includes an increase for EPA's operating program of $21 million to over $200 million to ensure that EPA
has the tools it needs to enforce the Nation's
environmental laws.
Cleaning up hazardous waste sites.—Resources for the Superfund hazardous waste
cleanup program are increased by $134 million
to $1.75 billion. The budget maintains the Administration's emphasis on requiring responsible parties to conduct cleanup activities, but
places a new priority on accelerating cleanup
by the Federal fund. In the past, too many
Superfund receipts have been spent on support
and research and development activities while
actual cleanup has lagged. Consequently, resources have been shifted from support activities to actual site cleanup work, so that the
entire increase is devoted to site cleanup.
Cleanup activities increase by $143 million, 19
percent over 1991. The bulk of this increase
($107 million) will be devoted to permanent
remedies at sites. Under the Administration's
proposals, the share of cleanup funding as a
percent of total Superfund budget authority
Part Two-96
THE BUDGET FOR FISCAL YEAR 1992
Table E-7. FOCUSING SUPERFUND ON CLEANUP
(Budget authority; dollar amounts in millions)
Actual
Activity
Cleanup
Enforcement
Support
Total, Superfund
$ BILLIONS
1989
1992
Proposed
1991--92
Dollar
Change
Percent
Change
532
176
702
651
187
692
753
209
654
896
225
629
+143
+16
-25
+19
+8
-4
1,410
1,530
1,616
1,750
+134
+8
superfund budget authority
will increase from 47 to 51 percent, while enforcement will maintain a 13 percent share
of total funding, and support will decrease
from 40 percent to 36 percent.
The Administration has pursued an aggressive program of cleaning up Superfund sites,
and has requested substantial increases in
Superfund funding. Unfortunately, as shown
in the chart on Superfund, Congress has repeatedly reduced the President's requested
level of funding for this important program.
1990
1991
Enacted
REVITALIZING THE COUNCIL ON
ENVIRONMENTAL QUALITY
The Council on Environmental Quality has
an important mission: to ensure that Federal
policies are consistent with the environmental
quality improvement goals of the National Environmental Policy Act (NEPA), to provide coordination among agencies on key issues, and
to report to the Nation on the state of the
environment and related indicators.
IV.E.
PRESERVING AMERICA'S HERITAGE AND PROTECTING THE ENVIRONMENT
Part Two-97
Table E-8. THE BUDGET FOR THE COUNCIL ON ENVIRONMENTAL
QUALITY INCREASES BY 64 PERCENT
(Budget authority; dollar amounts in millions)
Actual
1989
Council on Environmental Quality
1
0.85
1991
1990
1.46
Enacted
1.87
1992
Proposed
Percent
Change,
1991-92
3.06 1
+64
Includes $500 thousand to come from EPA for the President's Awards Program for Environmental Education.
The President has demonstrated his commitment to strengthening the CEQ and to ensuring that it has the capability to serve as an
effective source of environmental analysis and
information in the White House. In 1991, the
President proposed a budget increase for CEQ
of 90 percent. The 1992 budget continues to
demonstrate this commitment. The request for
CEQ represents an increase of nearly 64 percent over 1991 levels. This includes $500,000
in the Environmental Protection Agency to be
allocated to CEQ to administer Presidential
awards for Excellence in Environmental Education, an initiative requested in the President's 1991 budget and authorized in the National Environmental Education Act of 1990.
CLEANING UP FEDERAL FACILITIES
Department of Energy (DOE)
The budget provides a 30 percent increase
over 1991 appropriated levels in the funds to
continue an aggressive program to clean up
nuclear facility waste sites. Since the Bush Administration took office, funding for cleanup
has more than doubled, from an appropriated
level of $1.8 billion in 1989, to $2.4 billion
in 1990, to $3.3 billion in 1991, to the Administration's proposal of $4.4 billion for 1992. In
addition, as part of this accelerated cleanup
program, the Administration is proposing a
$340 million supplemental appropriation for
1991, bringing the total funding level for 1991
to $3.7 billion.
In addition to providing large funding increases, the Administration is implementing a
comprehensive 7-point plan for improving the
cleanup program. This strategy includes: (1)
risk-based budgeting; (2) program evaluation;
(3) independent cost review; (4) employee in-
280-000 0 - 9
1 - 4 (PART 2)
centives to achieve cleanup requirements expeditiously and cost effectively; (5) incorporating
R&D into cleanup activities more quickly than
presently occurs; (6) integrating the Department's Five Year Plan for Environmental Restoration and Waste Management and the
President's budget; and (7) supporting legislation to establish a consistent national priority
system for cleanup projects and to address the
reasons for inflated costs for environmental
restoration and waste management.
The combination of the significantly increased funding levels and the improved financial and management controls will enable the
Department to make substantial progress in
all areas where it has compliance agreements,
and still have funds to manage the newly generated waste at the DOE sites.
The Department of Energy cleanup program
encompasses four major categories of program
activities: corrective activities, environmental
restoration, waste management operations,
and technology research and development.
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. Corrective activities represent the smallest component of the
costs, totaling $144 million in 1992. Most of
the corrective activity requirements are in the
near term, reflecting the need for prompt action to bring operational facilities into compliance with existing standards.
Environmental restoration activities include
assessment and cleanup of surplus facilities
Part Two-98
and inactive sites to meet the requirements
of applicable environmental laws, regulations,
and standards. Environmental restoration consists of: (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.
Proposed funding in 1992 for environmental
restoration is $1.47 billion, a 41 percent increase over appropriated 1991 levels. This reflects the growth in scope of the program, as
the number of sites and extent of contamination become better understood, as well as a
gradual transition from the investigation and
feasibility studies required under CERCLA
and RCRA to actual remediation projects.
Waste management operations refer to the
ongoing activities throughout DOE that are directed toward the management of radioactive,
hazardous, mixed and sanitary wastes consistent with laws and regulations established to
protect public health and safety and the environment. The legal and regulatory requirements of waste management activities derive
from the type of waste being managed, with
EPA, DOE, the Nuclear Regulatory Commission, and, in some cases, States having a role
in determining standards and practices.
Funding for waste management activities
comprises the largest portion of the proposed
environmental restoration and waste management budget, totaling $2.38 billion in 1992,
a 34 percent increase over appropriated 1991
levels. This reflects the cost of constructing
and operating waste management facilities in
compliance with applicable laws and regulations.
Technology development activities are conducted to resolve major technical issues related
to effective waste management and clean-up,
and to advance beyond current technologies
needed to attain and maintain compliance with
environmental restoration and waste management laws and regulations. The main focus
of the program is on faster, better and less
costly techniques for waste cleanup and wastestream processing. The program is designed
to accelerate the conception, creation, development, and deployment of the next generation
of environmental cleanup and waste management technologies. Major initiatives will focus
on waste minimization, development of im-
THE BUDGET FOR FISCAL YEAR 1992
proved environmental characterization and
restoration technologies, application of robotics
and automated systems technologies, and adaptation of existing technologies to DOE problems. To accomplish the goals for improved
waste management and waste site cleanup, the
budget proposes to increase the investment in
technology development to $309 million, a 50
percent increase over appropriated 1991 levels.
An additional $44 million for transportation
management and program direction brings the
total Administration proposal for 1992 cleanup
activities at DOE sites to $4.4 billion.
Department of Defense (DOD)
The Defense Department is making major
progress in environmental cleanup and compliance. The leadership, policy, and structure are
in place today to identify and take care of
problems. The budget provides $2.6 billion, an
increase of almost $700 million or 34 percent
above 1991, for cleanup and compliance with
environmental laws. The Department of Defense will clean up all of its contaminated sites
and bring all of its operations into full compliance with Federal, State and local environmental laws.
The Department is spending $1.1 billion in
1991 and proposes spending of $1.3 billion in
1992 to clean up contaminated sites. The problems have been completely identified at all 895
of the Defense Department's sites listed on the
EPA's National Priority List. Actual cleanup
work has begun at 68 of those 95 sites.
In addition to cleanup costs, the Department
plans to spend $860 million in 1991, and $1.3
billion in 1992 to get into compliance with Federal, State and local environmental laws. Environmental program initiatives begun in 1990
are reducing DOD's hazardous waste generation by thousands of tons a year as part of
the plan to cut hazardous waste generation
in half by 1992. Looking further into the future, procurement guidelines established now
will reduce the amount of hazardous materials
used over the next decade and minimize, into
the next century, the environmental effects of
new systems.
These actions are coupled with thousands
of initiatives at local installations, ranging
from base-wide recycling programs to massive
IV.E.
PRESERVING AMERICA'S HERITAGE AND PROTECTING THE ENVIRONMENT
reductions in energy use. Taken together, all
of these steps will help ensure substantial environmental compliance at all Federal facilities.
Department of the Interior (DOI)
The budget proposes $80 million, a 36 percent increase above 1991, for environmental
compliance and hazardous waste management
activities, and assessment and investigation of
potentially contaminated DOI sites. This will
allow the Department to continue its site inventory, conduct assessments and investigations, and keep identified remedial actions on
schedule. Assessments and investigations 'of
potentially contaminated sites will increase 68
percent from 220 in 1991 to 335 in 1992. The
budget also fully funds remedial actions in
1992. DOI hazardous waste sites include unauthorized landfills on public lands, potential discharge from old mining operations on patented
or public land, polluted irrigation drainage
that in some cases is from Bureau of Reclamation water projects, and leaking underground storage tanks on lands managed by
various DOI agencies.
Department of Agriculture (USDA)
The budget proposes $35 million, an increase
of 17 percent above 1991, for hazardous waste
management activities in USDA. USDA operates a centrally managed Hazardous Waste
Management program, which is responsible for
coordinating and monitoring all hazardous
Part Two-99
waste compliance actions. The Forest Service
and the Agricultural Research Service (ARS)
account for over 90 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 Commerce (DOC)
The budget requests an increase of $2 million to establish a program of environmental
cleanup and compliance at National Oceanic
and Atmospheric Administration (NOAA) facilities. NOAA will create a system to identify
and monitor the cleanup of environmental
problems at its 228 locations nationwide.
NOAA will immediately begin replacing leaking underground storage tanks on its properties.
Department of Transportation (DOT)
The budget provides $57 million, a 19 percent increase above 1991, for hazardous waste
cleanup and compliance activities in DOT. The
Federal Aviation Administration (FAA) and
the Coast Guard account for nearly all of
DOT'S cleanup and compliance needs. Much
of the work involves replacement of underground fuel storage tanks.
Table E - 9 . THE BUDGET INCLUDES AN ADDED $1.7 BILLION TO
SPEED THE CLEANUP OF FEDERAL FACILITIES
(Budget authority; dollar amounts in millions)
Funding Summary
Department of
Department of
Department of
Department of
Department of
NASA and the
Total
Energy
Defense
Agriculture
the Interior
Transportation
Department of Justice
Actual
1989
1990
1991
Enacted
1992
Proposed
Percent
Change,
1991-92
1,762
1,155
8
42
29
28
2,358
1,282
24
44
29
50
1 3,690
1,923
30
59
48
35
4,356
2,582
35
80
57
39
+18
+34
+17
+36
+19
+11
3,024
3,787
5,785
7,149
+24
includes a $340 million supplemental for 1991 for environmental restoration and waste management.
Part Two-100
s BILLIONS
THE BUDGET FOR FISCAL YEAR 1992
speeding t h e c l e a n u p o f f e d e r a l f a c i l i t i e s
(budget a u t h o r i t y )
National Aeronautics and Space
Administration (NASA)
The budget requests $36 million, an increase
of 13 percent above 1991, 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.
Department of Justice (DOJ)
The budget requests $3 million for environmental cleanup and compliance activities at
DOJ facilities. The Bureau of Prisons accounts
for most of the Department's activities, with
resources devoted to RCRA and Superfund
cleanups, and compliance with the Clean Air
Act and Clean Water Act. In addition, in 1992
the Immigration and Naturalization Service
will undertake projects to replace existing underground storage tanks before leakage occurs.
Environmental Protection Agency (EPA)
The budget includes an additional 135 staff
years, a 117 percent increase over 1991, for
EPA oversight of cleanups at Federal facilities.
This increase will ensure that EPA has an
effective program of technical assistance and
oversight for all 116 Federal facilities on
Superfund's National Priority List for cleanup.
GLOBAL CLIMATE CHANGE
Funding for Global Change Research is
expanded by 24 percent in its second year
in an effort to extend America's leadership
in this area.—The budget proposes a 24 percent increase in global climate change research
activities over the 1991 enacted level of $955
million to the 1992 request level of $1.2 billion.
This program is designed to reduce the significant uncertainty associated with predicting the
behavior of the coupled ocean-atmosphere-land
Earth system which determines climate phenomena and to form the basis for rational,
IV.E.
PRESERVING AMERICA'S HERITAGE AND PROTECTING THE ENVIRONMENT
$ BILLIONS
Part Two-101
0.s. g l o b a l c h a n g e r e s e a r c h p r o g r a m
. (budget a u t h o r i t y )
comprehensive and cost effective responses to
climate change.
While the U.S. is making this substantial
investment in scientific and economic research
on climate change, it is, at the same time,
taking several policy steps that will, in addition to other benefits, have the effect of curbing greenhouse gas emissions.
through conservation measures. It is thus projected that greenhouse gases from this sector
will be reduced as a result of the Act.
With these actions, it is estimated that U.S.
greenhouse gas net emissions in the year 2000
will be no higher than in 1987.
Other provisions of the Act regulating emissions of volatile organic compounds, nitrogen
oxides, and carbon monoxide will not only
produce cleaner air but will also significantly
affect greenhouse gases or their precursors.
These reductions will reduce greenhouse gas
emissions both directly in terms of NOx and
indirectly by reducing ozone precursors and
encouraging energy efficiency.
The recently enacted Clean Air Act provisions will reduce U.S. greenhouse gas emissions. The Act's provisions for electric utilities
are an unprecedented reform of that industry
and the regulation of its emissions. The Act
puts a permanent cap on utility sulphur dioxide emissions at 10 million tons below the 1980
levels and reduces nitrogen oxides (NOx) by
2 million tons below projected year 2000 levels.
It also gives utilities the flexibility needed to
obtain emissions reductions under the emissions cap by any means they choose. Utilities
can choose to achieve emission reductions
Phasing out CFCs, carbon tetrachloride,
methyl chloroform, and hydrochlorofluorocarbons (HCFCs) in accordance with the Montreal Protocol, and even faster under the provisions of the Clean Air Act, will substantially
reduce emissions of greenhouse gases as well
as protect the stratospheric ozone layer. The
CFC user fee enacted in the 1989 Reconciliation Act has already reduced CFC production 23 percent below the level permitted
in the Montreal Protocol during the 12-month
period ending in June 1990. It is expected to
have some additional effects in phasing down
Part Two-102
THE BUDGET FOR FISCAL YEAR 1992
Table E-10. U.S. GLOBAL CHANGE RESEARCH PROGRAM
(Budget authority; dollar amounts in millions)
Actual
Funding Summary
1989
National Aeronautics and Space Administration
National Science Foundation
Department of Energy
Department of Agriculture
Department of Commerce
Department of the Interior
Environmental Protection Agency
-Smithsonian Institution
Department of Defense
Total
1
1992
Proposed
773
119
77
53
78
46
26
8
6
+121
+32
+11
+14
+31
+9
+4
+3
+6
1,186
+231
1990
—
489
55
50
21
18
13
13
0
—
—
652
87
66
39
47
37
22
5
0
—
659
955
—
—
—
—
—
—
—
1991-92
1991
Enacted
Dollar
Change
Percent
Change
+19
+37
+17
+36
+66
+24
+18
+60
..
+24
Program began in 1990.
ozone depleting compounds faster than required by either the Protocol or the Clean Air
Act provisions.
The President's proposed program for planting a billion trees a year will produce substantial benefits for wildlife, soil conservation, and
energy saving, as well as directly take up C02
from the atmosphere. The increase in the Federal gasoline tax enacted in the Omnibus
Budget Reconciliation Act of 1990 will reduce
emissions by encouraging energy efficiency in
road transportation. Increased funding requested in the budget for research and development in solar and renewable energy and energy conservation will be important in identifying and developing technologies and practices
which will allow energy needs to be met in
environmentally efficient ways. New energy
saving appliance standards promulgated by
the Department of Energy will increase energy
conservation and reduce demand.
The actions planned under current United
States policy will have a substantial effect on
U.S. greenhouse gas emissions. The U.S. share
of world-wide greenhouse gas emissions is declining as the world's economy grows. For this
reason, efforts to address the climate change
issue must involve all nations.
Beginning in February 1991, the United
States and other countries will begin negotia-
tions on a framework convention on climate
change. Although the climate change issue is
very complex and difficult, it is hoped that
a convention can be ready for signature by
the 1992 United Nations Conference on the
Environment and Development. Such a convention is needed to establish the framework
for long-term and world-wide international cooperation and joint effort in addressing climate
change concerns. The U.S. has been playing
a major role in the preparations for these negotiations through the Intergovernmental
Panel on Climate Change.
Global change economic research is substantially expanded.—To reduce large uncertainties about the economic implications of climate change, the budget requests $17 million
in 1992 for economic research on global
change, an increase of 115 percent. This research will be used to improve the economic
knowledge base about global change, particularly about climate change. It will begin to
reduce the very substantial uncertainties
about the economic sources of climate change,
the effects of climate change on human economic activities, and the economic and other
implications of actions which might be taken
to address climate change. The economic research funding will include $9 million for research by university and other non-govern-
IV.E.
PRESERVING AMERICA'S HERITAGE AND PROTECTING THE ENVIRONMENT
mental economists and $8 million for economic
research by Federal agencies.
In addition to these funds, the budget also
requests $2 million in new NSF funding to
establish International Institutes which will
provide regional centers to carry on and coordinate international scientific and economic research on global change.
WATER RESOURCE AGENCIES WILL
FOCUS ON ENVIRONMENTAL PROTECTION, RESTORATION AND MITIGATION
Army Corps of Engineers—Protecting
and Restoring Environmental Resources.—
The budget of $211 million for wetlands research, protection and enhancement activities,
described earlier in this chapter, includes $86
million to carry out a strengthened regulatory
program that will improve protection of wetlands. The budget includes $7 million for participation with other agencies and coastal
States in the Coastal America Partnership initiative. The budget includes $7.5 million to increase three-fold the "Section 1135" program,
which was extended at the President's request
by the Water Resources Development Act of
1990. This section provides general authority
to modify existing Corps projects in the interest of the environment. The budget would initiate nine fish and wildlife restoration studies,
two of which would focus on wetlands. The
amount for wetlands activities also includes
$1 million to initiate the recently authorized
study to develop a Wetlands Action Plan and
Demonstration Program. This study would include assessment of .methods and procedures
for establishing wetlands banking and trading,
and for evaluating and crediting contributions
associated with Federal projects or permits. An
anticipated outcome of this study would be a
proposal for two wetland mitigation banking
demonstration sites.
Mitigating Environmental Impacts of
Projects*—The Corps of Engineers budget includes $110 million to continue mitigating the
adverse environmental impacts of specific
water resources projects. Nearly one-fourth of
this amount would be used to address previous
wetland losses, and is included in total funding
for wetlands activities. Examples of mitigation
projects include land purchases in the area of
Part Two-103
the Tennessee-Tombigbee Waterway ($10 million) and construction of Columbia River juvenile fish bypass facilities at 6 existing locks
and dams ($31.7 million). These fish bypass
projects, with a total cost of almost $250 million, will provide facilities to assist the passage
of juvenile fish around the turbines at Lower
Granite, Lower Monumental, Little Goose,
McNary, The Dalles, and Ice Harbor. These
facilities have taken on greater importance in
the light of the potential endangered species
listing of several salmon species.
Bureau of Reclamation, Interior—Preserving and Restoring Environmental Resources.—The budget proposes several environmental initiatives for the Bureau of Reclamation. Nine new studies will evaluate the
potential for improving fish and wildlife habitat and preserving and restoring wetlands in
cooperation with local partners at selected Reclamation projects in California, Nevada, Idaho,
Colorado, and Oregon. In addition, new studies
will be initiated to identify the source of water
quality problems at projects in Colorado, California, Texas, New Mexico, Washington, and
Oregon including the Lower and Middle Rio
Grande, Upper Arkansas, Dolores, and the San
Joaquin River Basins.
Mitigating Environmental Impacts of
Projects.—The Bureau of Reclamation budget
proposal includes $89 million to mitigate adverse environmental impacts at water resources projects. Major environmental restoration activities will continue at the Central
Valley Project in California, including restoration of fish and wildlife resources along
the Trinity and Sacramento Rivers. Reclamation will also begin implementation of
provisions of the recently enacted Truckee-Carson-Pyramid Lake Water Settlement legislation in cooperation with other Federal and
non-Federal interests. Specific activities at
Reclamation projects will include modification
of project facilities and operational changes to
improve anadromous fisheries, migratory waterfowl habitat, and other environmental resources. Environmental mitigation is scheduled concurrent with construction of projects
included in the budget.
In addition, the budget places increased emphasis on non-structural solutions to water resource problems and improved management
Part Two-104
THE BUDGET FOR FISCAL YEAR 1992
Table E - l l . ARMY CORPS OF ENGINEERS (CIVIL WORKS): PROTECTION
AND RESTORATION OF ENVIRONMENTAL RESOURCES
(Budget authority; dollar amounts in millions)
Actual
1991
Funding Summary
1992
proposed
Enacted
1991-92
percent
Dollar
Change
Protection and Restoration:
Regulatory Program
Coastal Partnership
Modification of Existing
(Section 1135)
Restoration Studies
Other Wetlands Activities
64
65
72
—
—
—
—
—
—
—
—
13
30
10
10
86
7
+14
+7
+19
+6
+2
+21
+300
28
8
2
49
19
32
+13
+68
—
Projects
litigation:
Columbia River Juvenile Fish Mitigation
Tennessee-Tombigbee
Waterway
Mitigation
Other Mitigation Projects
Total
2
—
+75
—
—
39
49
15
80
10
68
-5
-12
-33
-15
126
154
216
262
+46
+21
and operation of existing facilities. This will
significantly reduce future adverse environmental impacts of water resource development
projects.
PRESERVING AMERICA'S HERITAGE
The Importance of the Heritage
The understanding, preservation, passing on,
and advancement of the rich historical and cultural heritage of this diverse and pluralistic
society is essential if Americans are to know
what it is to be "American"—and if America
is to build on its traditional strengths as it
continues to advance.
Support of the Heritage
The largest support of the heritage has come
from private and local initiatives. Federal tax
expenditures for historic preservation came to
approximately $170 million in 1989, supporting private investments in this area of approximately $900 million. A National Park Service
survey showed that 75 percent of the investments would not have been undertaken were
it not for the tax credit. Private giving to the
arts, culture and the humanities has risen
from $3.2 billion in 1980 to $7.5 billion in
Change
1989, according to the American Association
of Fundraising Counsel.
Direct Federal expenditures for preserving
America's cultural heritage are a relatively
small part of the budget. But they should not
be viewed as insignificant. They complement
tax deductions for charitable contributions as
a stimulus to the private support, on which
America's cultural activities have thrived. The
budget proposes $833 million in direct funding
for activities that preserve, pass on and contribute to the American heritage. This is $65
million (9 percent) more than enacted in 1991.
Direct Federal expenditures support the activities of the National Endowments for the
Arts and the Humanities, Institute of Museum
Services, the Smithsonian Institution, National
Gallery of Art, Historic Preservation Fund Program (Department of Interior), and the Advisory Council on Historic Preservation.
Smithsonian Institution
The budget requests $357 million for the
Smithsonian Institution, $46 million more
than enacted in 1991. Since its founding in
1846, the Smithsonian has in many respects
become the "Nation's Museum," as well as a
IV.E.
PRESERVING AMERICA'S HERITAGE AND PROTECTING THE ENVIRONMENT
leader in basic research in such fields as astrophysics and tropical biology. The Smithsonian
preserves and exhibits more than 137 million
objects, works of art and specimens representing America's cultural, scientific and
technological heritage. Its eleven museums in
Washington and the Cooper-Hewitt in New
York receive over 30 million visitors a year.
The budget includes $16.3 million for the
National Museum of the American Indian. The
funds will be used for increased operations of
existing facilities in New York City and continued preparation of an exhibit and education
center in the Old United States Custom House
in New York. Funds are included for planning
of a museum facility to be located on the Mall
in Washington, D.C. and for overall planning
for the Indian Museum in New York City and
Washington, D.C., and for continued repatriation of Native-American remains and objects.
The Indian 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 $1.7 million for
the Columbus Quincentennary Program which
will commemorate the voyages of Christopher
Columbus and the subsequent encounters
among the Europeans, Africans and the indigenous peoples of the Americas.
National Gallery of Art
The budget requests $58 million for the National Gallery of Art, $8 million more than
enacted in 1991. The National Gallery preserves and exhibits one of the finest collections
of works of art in the world. Its educational
programs reached an estimated 91 million people in 1990, providing young people and adults
with access to, and understanding of, some of
the great masterpieces of civilization.
The budget increase includes $4 million to
start construction of the National Sculpture
Garden. This facility is expected to attract
many valuable items as gifts to the Nation
to enhance the Gallery's sculpture collection
and to provide an attractive setting to display
sculpture on the Mall. The budget also provides for the cost of operations for a major
Part Two-105
exhibition, Circa 1492: Art in the Age of Exploration, to celebrate the 500th anniversary of
Columbus' Voyage to America. The exhibition
will present through many works of art an
image of the world as it existed in the late
15th century.
National Endowment for the Humanities
The budget requests $178 million for the National Endowment for the Humanities, $8 million more than the 1991 appropriation. 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. Recent projects supported by the
agency include the highly acclaimed 11-hour
television series, The Civil War, broadcast on
PBS in the fall of 1990.
Increased funding in 1992 will be used for
projects to improve humanities education at
elementary through graduate levels; to support
humanities scholarship, public programming,
and preservation activities; and to stimulate
private donations to humanities projects and
programs.
National Endowment for the Arts
The budget requests $174 million for the National Endowment for the Arts to support artists and institutions of quality directly and
through the States, and to foster greater attention to the arts in the Nation's schools.
Historic Preservation Fund Program
(Department of the Interior)
The budget requests $36 million for the Historic Preservation Fund Program of the National Park Service, $1.4 million more than
enacted in 1991. 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
Part Two-106
THE BUDGET FOR FISCAL YEAR 1992
sector architects and developers seeking to
meet the Secretary of 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,
and federally licensed undertakings that may
affect historic properties. The 1992 budget requests $2.5 million, an increase of 13 percent
over the 1991 enacted level. The increase will
allow ACHP to meet increasing project review
caseloads and to consider long-term improvements in the Historic Preservation Program.
Institute of Museum Services
The budget requests $27 million for the Institute of Museum Services, a 4 percent increase over the 1991 enacted level. The Institute provides general support grants to all
types of museums (including art, history,
science and technology museums), zoos, planetariums, historic houses, and botanical gardens. It also makes grants specifically for conservation, care and management of museum
collections.
Table E-12. PROGRAMS TO PRESERVE AMERICA'S HERITAGE
(Budget authority; dollar amounts in millions)
Actual
1989
Smithsonian institution
National Gallery of Art
National Endowment for the Humanities
National Endowment for the Arts
Historic Preservation Fund Program (Department of
the Interior)
Advisory Council on Historic Preservation
Institute of Museum Services
Total
jggj
1990
Enacted
1992
Percent
Proposed
246
39
153
169
267
42
157
171
311
50
170
174
357
58
178
174
+15
+16
+5
30
2
22
33
2
23
34
2
26
36
3
27
+6
+13
+4
661
695
767
833
+9
— .
V.
INCREASING CHOICE AND
OPPORTUNITY
Part Two-107
V.A. INCREASING CHOICE, EXPANDING
OPPORTUNITY, AND PROVIDING HOPE TO
DISTRESSED COMMUNITIES
rangements and health insurance up to
the recipient families;
HIGHLIGHTS
The 1992 budget focuses Federal resources
on low-income people and tailors numerous
programs to encourage individual choice. The
goal is to empower low-income individuals by
allowing them more control over their resources and a greater stake in their communities. Provisions in the budget that enhance
choice and improve opportunities for low-income individuals include:
• The Child Care and Development Block
Grant, the first grant program of its kind
to require that assistance be offered
through certificates to ensure parental
choice;
• More educational choice through a new
program of Federal grants to school districts that successfully implement educational certificate programs, new funding
for Magnet Schools of Excellence, changes
in Chapter 1 compensatory education programs to provide more parental choice,
and more State and local flexibility in the
use of Federal funds for education;
Increasing Choice and Flexibility:
• A newly expanded Earned Income Tax
Credit and new Health Insurance Credit
for families with children that make caring for children and health insurance more
affordable, and leave the choice of care ar-
1882$
BILLIONS
f u n d i n g f o r choice-based p r o g r a m s
w i l l increase d r a m a t i c a l l y
20-
18 H
1614-
12 H
10-
WM EDUCATIONAL CHOICE (BA)
TM HOUSING VOUCHERS
& CERTIFICATES (OUTLAYS)
£23 CHILD CARE
81 REFUNDABLE
TAX CREDITS
(OUTLAYS &
REVENUE LOSS)
8 -
642 -
O-
1880
1885
1882
Part Two-109
Part Two-110
• Greater use of housing vouchers to provide
low-income families with more choice in
where to live and.how much to spend for
housing;
THE BUDGET FOR FISCAL YEAR 1992
year covered by poverty-statistics, to 12.6 percent in 1970.
• Enterprise zones to revitalize distressed
communities by encouraging investment
and entrepreneurial activity to create productive private-sector jobs for low-income
residents;
From 1970 to 1980, Federal spending on programs making payments to individuals increased 113 percent in constant dollars. However, GNP increases slowed to 2.8 percent per
year, and productivity growth in the nonfarm
business sector fell back to 1.1 percent per
year. The average income of families in the
bottom fifth of the income distribution actually
declined 4 percent in real terms, from $9,655
to $9,274. After reaching its lowest point in
1973, the poverty rate saw its greatest annual
increase in 1980 when it rose from 11.7 to
13.0 percent.
• A modest liberalization of the Social Security earnings test in order to increase the
range of employment choices available to
elderly beneficiaries and promote longer
productive participation in the work force;
and
In the 1980s, median family income rose to
record heights, and the income of the lowest
fifth of families increased every year since
1982. Poverty declined from a high of 15.2 percent in 1983 to 12.8 percent in 1989, the latest
year for which data are available.
• Improved
employment
opportunities
through concentrating resources of JTPA
(Job Training Partnership Act) and the
Employment Service more on the most disadvantaged job-seekers, and permitting
greater employment on Federal projects of
workers without journeyman skills.
Unfortunately, it is characteristic of the
changing face of poverty in America that those
who do not finish their high school educations
and do not work regularly often do not benefit
fully from a growing economy and the increasing need for skilled workers.
Expanding Opportunity:
• Full funding for HOPE (Homeownership
and Opportunity for People Everywhere)
to offer low-income families the opportunity to become homeowners;
The Importance of Economic Growth
The most effective Government policies to
expand choice, opportunity, and hope are those
that promote broad-based economic growth.
Those Americans near the bottom of the income distribution saw their largest income
gains and sharpest declines in poverty not during years when Federal spending for benefit
programs was high, but in the 1950s and early
1960s. From 1950 through 1970, real GNP increased at an average annual rate of 3.5 percent, and productivity of American workers at
an average annual rate of 2.3 percent. Average
weekly earnings, in constant 1989 dollars,
grew from $273 in 1950 to $383 in 1970.
This economic growth was especially good
for those near the bottom of the income distribution. The average income of families
whose income put them in the bottom fifth
of all families grew 81 percent in constant dollars. Their share of all family income grew
from 4.5 percent to 5.5 percent. Poverty
dropped from 22.4 percent in 1959, the first
Fortunately, those below the poverty line are
not all stuck there permanently. Upward economic mobility remains common in American
society.
Economic opportunity and the determination
to take advantage of it are not benefits or services that Government programs can dispense.
However, Government has a central role to
play in development of policies that encourage
economic growth and a responsibility to promote equal access to opportunity. Government
also can help individuals, especially those with
few resources of their own, to develop the
human capital necessary to benefit fully from
opportunity.
When Government promotes additional opportunities and choices, rather than creating
dependency, it can help empower individuals
to join the mainstream of American life. When
Government policies and programs promote
choice, personal responsibility, and hope, they
are laying the same foundations for low-income
families on which the strength and prosperity
of the American family have always rested.
V.A.
Part T w o - I l l
INCREASING CHOICE, EXPANDING OPPORTUNITY, AND PROVIDING HOPE
INCREASING CHOICE AND FLEXIBILITY
Enhancing Parents' Choices in Caring for
Their Children
Parental choice is the essential element underlying child care legislation enacted as part
of the budget agreement late in 1990. This
important legislation contains two key elements:
• refundable tax credits ($26 billion from
1992-96, including a $2.4 billion increase
in 1992 alone), which afford parents the
maximum freedom of choice possible in a
Government program; and
• $732 million for the first Federal grant
program that requires parents be given
the option of receiving a certificate (voucher), which can be used to select the child
care arrangement of their choice, including
care by family, friends, neighbors and religious institutions.
Three major new and expanded provisions
of the Earned Income Tax Credit (EITC) will
provide low-income families with children in
which at least one parent works with refundable credits equaling up to 36 percent of their
earned income. Targeted to families with 1992
adjusted gross incomes less than about
$22,000 (roughly twice the poverty level for
a family of three), these new provisions:
Increase the basic EITC and adjust it
for family size.—The 14 percent credit that
previously was provided is expanded and adjusted for family size ($21 billion from
1992-96). Over time, the maximum credit
available to families will grow as shown in
Table A - l .
Provide a new supplemental child or
"wee tot99 credit.—A new 5 percent credit ($1
billion from 1992-96) is added to the EITC
for families that have children younger than
one year old but do not claim the Dependent
Care Tax Credit for that child. This new credit
(up to an estimated $378 in 1992) is designed
to enhance families' options to have one parent
stay at home to care for a child during its
first, critical months of life.
Add another new credit for health insurance.—An additional 6 percent credit ($4 billion from 1992-96) is added to help families
defray the cost of health insurance policies
that cover their children. In 1992, the maximum credit will be about $453.
Over the first five years of their implementation, these new provisions will provide lowincome families with $26 billion in additional
income. Because some of the benefits are
phased in, the five-year cost does not convey
the magnitude of the new provisions. Had they
been fully implemented in 1991, their five-year
cost would be about $38 billion—a very large
supplement to the earnings of low-income
working families.
Refundable tax credits reduce families' Federal income tax liability or, more commonly,
result in a payment to them because they have
little, if any, income tax liability. In either
case, parents will have more income to use
as they see fit to care for their children. As
the refundable tax credit bars in the figure
displaying child care resources illustrate, the
amount of these resources is projected to grow
significantly.
Table A-l. MAXIMUM BASIC EITC BENEFIT
(Calendar years; 1992 dollars)
Old Law
1992
One Child
Two or more
1,057
1,057
New Law
1992
1,329 (+26%)
1,389 (+31%)
1996
1,752 (+66%)
1,904 (+80%)
Part Two-112
THE BUDGET FOR FISCAL YEAR 1992
parents w i l l have a wider r a n g e o f choices
in c a r i n g f o r t h e i r c h i l d r e n
$ BILLIONS
$ BILLIONS
Grants include JOBS, AFDC transition child core (funding for which varies with economic assumptions), the new IV—A
child care grant for families at risk of going on welfare, and CCDBG.
Credits include the basic EITC, which effective 1/91 is expanded and odjusted for family size, the young child supplemental
credit, and the health Insurance credit.
Parental choice in caring for their children
also will grow under Federal grants specifically
designed to provide child care services, as the
bars showing grants to States in the child care
resources figure illustrate. The new Child Care
and Development Block Grant (CCDBG) is a
landmark addition to this category of grants.
CCDBG is the first child care grant program
to vest decisionmaking power in parents, rather than Government. Parents must be given
the option of receiving a certificate—which allows them to select the care-giver of their
choice—for services funded by 75 percent of
the grant funds ($549 million). A separate allocation of 25 percent of the grant ($183 million)
to fund child development, before- and afterschool care, and activities to improve quality,
may also be used to provide certificates for
care.
Funding for CCDBG first becomes available
in September, 1991. As a result, the major
portion of the $732 million appropriated for
the program in 1991 will be spent in 1992.
The budget proposes an additional $732 million for 1992.
Other Federal grants specifically support
child care services—the child care component
of the JOBS program, transitional child care
services for AFDC recipients who leave the
welfare rolls to work, and the recently enacted
grant program that provides child care services
to low-income working families at risk of going
on AFDC. These grant programs allow States
to use vouchers in providing child care services
if they so chose. The regulations for the
CCDBG will be drafted so that the certificate
program can serve as a model for providing
vouchers under the other programs. The certificate program also will be evaluated on a
continuing basis to determine how this approach to providing choice might be expanded
to other programs.
Increasing Choice in Education
One of the most important choices a parent
makes for his or her child is the school the
child will attend. Increasingly, school systems
V.A. INCREASING CHOICE, EXPANDING OPPORTUNITY, AND PROVIDING HOPE
are offering parents the opportunity to choose
the school they believe will serve the needs
of their children best. The result can be more
responsive and creative schools providing better educations.
The budget continues the Administration's
strong support for educational choice. The
budget contains several major initiatives: a
Certificate Program Support Fund; resources
for support of choice programs and demonstrations of new choice techniques; support
for magnet schools; clarification of the ways
in which the major program for disadvantaged
students, Chapter 1, can be used in school districts with choice programs; and support for
the choice clearinghouse and technical assistance center.
Providing incentives for school districts
to establish certificate programs.—New authority will be proposed for $200 million per
year for a Certificate Program Support Fund
to provide incentives to school districts to establish certificate programs that enable parental choice of schools. The new Federal funds
are not for certificates; they are support pay-
$ MILLIONS
Part Two-Ill
ments to Local Educational Agencies that have
certificate programs.
Funds would be available only to school districts that have in operation or will be initiating a qualified certificate program in the program year for which funds are appropriated.
Funds would be used to enhance educational
services.
Promoting innovative choice demonstrations.—Some States and districts may want
to implement choice programs, but need the
example of successful models to help them decide what form their programs should take.
New authority and $30 million will be sought
to finance nationally significant choice demonstrations with rigorous evaluations.
Increasing use of Education Block Grant
(Chapter 2) funds for choice.—The Block
Grants ($449 million) are the largest source
of flexible Federal funding for educational reform that the States now receive. Aiding local
districts will remain a focus of the Block
Grants. Amendments will be proposed to expand the amount reserved to States from 20
c h o i c e in e l e m e n t a r y a n d s e c o n d a r y e d u c a t i o n :
federal resources w i l l g r o w
Part Two-114
percent to 50 percent so that States would
have up to $225 million to support choice programs.
Funding Magnet Schools of Excellence.—
New authority and $100 million will be sought
to promote further opportunities for parental
choice by permitting establishment of magnet
schools in any school district, regardless of racial composition or the presence of a school
desegregation plan. Magnet schools programs
provide a form of competitive or open enrollment within districts or across districts. Generally, parents can select schools that, for example, specialize in a particular subject area,
such as science or the arts, or offer advanced
courses or special remedial courses. Magnet
schools are a proven successful technique for
providing parents with a choice of public
schools.
Supporting magnet schools program.—
The funding ($110 million) and operations of
the current magnet schools program related
to desegregation plans will be continued under
current law at the 1991 level of funding.
Facilitating the use of Local Educational Agency Grants (Chapter 1) funds
in choice programs.—Over $6 billion in compensatory educational funding under Chapter
1 is allocated among 90 percent of the Nation's
school districts every year. Language will be
proposed to clarify the relation between Chapter 1 funds and local choice plans. Where a
locality has a choice program in effect that
covers schools and children selected for Chapter 1 services, and a child's parents exercise
an option to change schools, the funds that
would have been spent for their child through
Chapter 1 services would follow the child to
the new school.
Maintaining a choice information and
assistance clearinghouse.—In 1990, the Department of Education established a technical
assistance center for choice plans, and a tollfree phone number for advice and referrals.
These activities will be continued and improved.
Increasing choice for low-income students pursuing higher education.—The
budget proposes to provide a significantly larger share of available higher education student
assistance grants to low-income students.
THE BUDGET FOR FISCAL YEAR 1992
Higher education aid, both Pell Grants, $5.8
billion for 1992, and Guaranteed Student
Loans, $5.9 billion, are flexible and portable,
and provide educational choice. In effect, Federal aid for higher education long has been
funding a successful voucher system. This initiative, described more fully in Chapter V.C.,
is designed to help more lower income students
take advantage of post-secondary education
and to provide these students with greater financial resources to expand the range of their
educational choices.
Expanding Choice in Housing Programs
Housing vouchers provide low-income residents more housing choice than new construction programs. When housing funds subsidize
a building, families can benefit from those
funds only by residing in that building, no
matter how deteriorated the building or its
neighborhood becomes. If they wish to move,
tenants lose the subsidy. By comparison,
vouchers permit assisted families to exercise
the same kind of choice as other families in
deciding where to live and when to move.
In addition to providing tenants with more
choice, vouchers permit more tenants to be assisted with a given amount of funds. A voucher
can be provided to a family at about one-half
the cost of assisting the same family through
new construction subsidies.
Until 1974, all housing subsidies were attached to buildings. Since that time, subsidies
allowing a tenant a choice of dwelling, first
in the form of Section 8 certificates in 1974,
and then in the form of housing vouchers in
1983, have become more prevalent. Most rental subsidies still are project-based. However,
since 1974, subsidies providing tenants with
choice have accounted for a growing share of
the total. If the Administration's policy is supported, over time, subsidies providing choice
will come to predominate.
Consistent with the emphasis on individual
choice, almost all of the additional rental assistance requested in the budget is for vouchers. Project-based subsidies or limited new construction is requested only for those groups
with special needs, such as the elderly, handicapped or homeless. The budget requests
78,680 additional vouchers, 2,000 new construction subsidies for the elderly and handi-
V.A.
INCREASING CHOICE, EXPANDING OPPORTUNITY, AND PROVIDING HOPE
Part Two-Ill
capped, and 5,367 project-based subsidies for
the handicapped, elderly and other special
uses. For 1992, $2.4 billion is requested for
incremental vouchers, an increase of $703 million, or 41 percent, over 1991. Total 1992 funding for vouchers and certificates, including
their contract renewals, is $8.3 billion, a 27
percent increase over 1991. (Table A-2 summarizes funding for major HUD programs expanding choice and opportunity.)
to receive supportive services. Such services
are very costly in a nursing home, and may
be more intensive than needed. This demonstration will allow frail elderly more choice
in determining where they want to live and
the amount of support services they need. As
long as their present units met certain housing
quality standards, the elderly tenants could remain in those familiar surroundings and still
qualify for supportive services.
One of the HOPE initiatives funded in the
budget is a demonstration to test the effectiveness of combining housing vouchers and supportive services assistance to enable frail elderly individuals to choose to remain in their
own units, rather than be forced to move to
congregate care. The vouchers would include
a subsidy to cover both housing costs and 40
percent of needed services; the other services
costs wTould be paid by State, local, or private
sources.
Increasing Local Flexibility: Moving
Decisionmaking Closer To The People It
Affects
For many frail elderly individuals who are
faced with increasing infirmity or recovering
from an illness or injury, the only current
choice may be to enter a nursing home in order
Experience shows that the Federal system
tends toward a proliferation of specialized programs and a labyrinth of federally legislated
and regulated requirements to fine-tune programs. No matter how well-intentioned each
individual Federal requirement can claim to
be, the sheer complexity of directions and restrictions on spending Federal funds has unintended adverse effects. Among the most significant is that communities may not have the
flexibility to use available funds as efficiently
and effectively as possible.
Millions OF m o r e t e n a n t c h o i c e in a s s i s t e d h o u s i n g u n i t s
SUBSIDIZED
UNITS
Part Two-116
THE BUDGET FOR FISCAL YEAR 1992
Table A-2. MAJOR INCREASES IN HUD PROGRAMS EXPANDING
CHOICE AND OPPORTUNITY
(Dollar amounts in millions)
Proposed 1992
1991
A » y
Vouchers and Certificates1
Incremental Only
HOPE Initiative Total
HOPE Grants
Shelter Plus Care
Preservation
Other HOPE
Enterprise Zone
HOME Grants
Low-Income Resident Economic
.Empowerment Program
6,517
1,713
2
Outlays
Budget
Authority
4,454
1,330
11
287
2 155
—
2 122
11
—
—
2 10
—
—
2
500
—
—
10
—
Dollar Change
Outlays
Budget
Authority
8,277
2,415
4,930
1,440
2,147
855
258
718
315
3 50
Percent Change
Outlays
Budget
Authority
Outlays
+1,760
+703
+475
+110
+27
+41
+11
+8
142
+1,860
+130
+648
+1,141
41
51
36
13
3 50
+700
+136
+718
+305
3 +50
+41
+40
+36
+13
3 +50
+452
+111
n/a
+3,050
n/a
n/a
+364
n/a
n/a
n/a
1,000
105
+500
+95
+100
+950
668
77
+668
+77
n/a
n/a
Includes renewal funding for vouchers and certificates.
proposed budget-neutral supplemental.
3 Reflects estimated revenue loss (tax expenditures).
n/a = Not applicable.
1
2 Reflects
The budget contains several proposals aimed
at reducing unnecessary Federal strings on
funds provided to State and local grantees.
While preserving essential standards, such as
nondiscrimination and financial accountability,
the proposals seek to bring decisionmaking
closer to the people it affects.
Increasing flexibility in use of education
funds.—Legislation will be proposed to allow
State and local grantees to obtain waivers of
some legislative and regulatory requirements
governing selected education programs administered by the Department of Education and
other agencies. In order to receive waivers,
grantees would propose educational goals to
be achieved by students. Continuation of the
waivers would depend upon progress toward
the established goals.
Replacing several categorical housing
programs with HOME grants.—The National Affordable Housing Act replaced several
categorical housing development and rehabilitation programs with more flexible HOME
grant funds. With HOME grants, States and
localities can provide housing assistance to eligible residents through tenant-based rental assistance and project-based subsidies, including
acquisition, construction, and moderate or sub-
stantial rehabilitation. This budget provides
States and localities greater flexibility in meeting the housing needs of their low-income residents by terminating several remaining Federal new construction programs and reallocating the funding to the HOME program. The
budget proposes a fully-offset 1991 supplemental of $500 million; funding is increased
to $1 billion in 1992.
Simplifying programs for the homeless.—The fragmentation of current programs
targeted to the homeless can impede the efforts of local providers to respond to the housing, health-related, educational, and vocational
problems of the homeless. The budget proposes
to consolidate funding from several small
McKinney Act homeless programs operated by
the Departments of Health and Human Services, Labor, and Education into a new program. This $57 million HUD initiative will
provide States, localities, and nonprofit providers greater flexibility to develop comprehensive
projects to address specific, hard-to-serve
homeless groups. In addition, the Department
of Health and Human Services proposes to use
demonstration authority to provide $20 million
in homeless research demonstration grants.
Total proposed funding for the homeless in the
budget is $1 billion.
V.A.
Part Two-117
INCREASING CHOICE, EXPANDING OPPORTUNITY, AND PROVIDING HOPE
EXPANDING OPPORTUNITY
Expanding Residents' Stake in Their
Communities through Homeownership
and Management
The importance of homeownership in promoting stable neighborhoods, socially responsible behavior, and civic involvement has long
been recognized. In the past, policies to provide
homeownership opportunities have been targeted primarily toward middle-income families,
especially families seeking to buy their first
home. The budget contains several proposals
to enhance homeownership opportunities for
first-time buyers, particularly lower income
families.
Expanding HOPE grants to help low-income families become homeowners.—The
Administration's Homeownership and Opportunity for People Everywhere (HOPE) initiative is a critical part of the National Affordable Housing Act, signed into law on November 28, 1990.
The goal of HOPE is to help low-income families become homeowners with a stake in their
communities. Helping public housing project
tenants become tenant-managers and owners
can produce dramatic improvements. The creation of a tenant-management corporation and
the transfer of ownership to the tenants can
transform a troubled public housing project
into a viable, dynamic residential community.
The Kenilworth-Parkside site in Washington,
D.C., is a vibrant example of such change.
HOPE will promote homeownership opportunities in three kinds of properties: (1) public
housing; (2) FHA-insured multifamily properties that are financially distressed or already
in HUD's portfolio because of foreclosure; and
(3) properties currently held in Federal, State
or local government portfolios.
The budget requests supplemental funding
in 1991 for these three programs at their authorized level of $155 million. This request is
fully offset. For 1992, the budget also requests
FUNDING FOR HOPE GRANTS INITIATIVE
INCREASES SHARPLY
$ MILLIONS
1,200
EZ3 OUTLAYS
^
BUDGET AUTHORITY
1,000-
800-
600-
400
200-
m
J888&«
1991
1992
1993
1994
1996
1996
Part Two-118
the authorized level, $855 million. (The funding request for the entire HOPE initiative is
$287 million for 1991 and $2.15 billion for
1992, as shown in Table A-2.)
Public and Indian housing homeownership:
This HOPE program creates a single funding
source for the activities necessary to develop
and implement successful homeownership opportunities in the public housing program. The
budget requests a fully-offset supplemental appropriation of $68 million for 1991, and $380
million for 1992. Program funds will provide
for: (1) planning and technical assistance
grants to assess the viability of tenant ownership and to prepare tenants for homeownership; and (2) implementation grants for project
rehabilitation, counseling, operating expenses,
capital and operating reserves, and transaction
costs. Section 8 certificates and vouchers also
will be available for relocation or replacement
housing. Funds will be awarded competitively
to eligible tenant-management groups and
local housing authorities. Applicants will be required to provide a 25 percent match for
HOPE implementation grants; the planning
and technical assistance grants require no
matching funds.
Government owned or held multifamily properties: This HOPE program creates homeownership opportunities in multifamily projects previously insured by FHA that become
financially or physically distressed or are
owned by HUD because of foreclosure.
A total of $51 million is requested for 1991
in the proposed budget-neutral supplemental;
for 1992, the request is $280 million. Grants
would be made to tenant groups or other nonprofit organizations and local housing authorities to acquire these properties and convert
them into low-income housing. Applicants will
provide matching funds equal to at least 33
percent of HUD implementation grants. No
match will be required for planning and technical assistance grants.
Single-family government-held properties:
This HOPE program creates homeownership
opportunities primarily in vacant single-family
properties (or multifamily rental properties
containing fewer than five units) held by Federal, State, or local agencies. With few exceptions, these properties were not previously in
the lower income or assisted housing stock.
THE BUDGET FOR FISCAL YEAR 1992
Thus, this program produces a net increase
in the lower income housing stock. Grants will
be used to assist in the purchase of publicly
held properties, such as those owned by HUD,
the Department; of Agriculture, the Department of Veterans Affairs, the Resolution Trust
Corporation, and State or local Governments,
including Public and Indian Housing Authorities.
A total of $36 million is requested in the
supplemental for 1991 for this program; for
1992, the request is $195 million. Grantees
must provide matching funds equal to at least
33 percent of HUD funds.
Preserving assisted low-income housing.—Over the next 15 years, the private owners of 360,000 units of HUD-assisted, FHAinsured, multifamily properties will become eligible to prepay their mortgage loans and convert their properties to market-rate rental
housing or other purposes. The regulatory
agreements signed at the time the properties
were built allow owners to prepay their mortgages after 20 years. The majority of these
properties were built in the early 1970s. Most
of the 20-year terms will expire in the near
future.
This "prepayment inventory" has posed a
major problem for housing policy makers. As
part of the HOPE initiative, the Administration proposed the first comprehensive strategy
to deal with this issue. The basic principles
of this strategy were to: (1) assure that lowincome households continue to have access to
affordable housing; (2) provide opportunities
for tenants to become homeowners; and (3)
compensate owners fairly to retain their properties as low-income rental units in those markets where affordable housing is lacking and
tenant homeownership is not viable.
The National Affordable Housing Act of 1990
incorporates these principles. If owners decide
not to accept financial incentives to continue
operating their properties as lower income
rentals, they must offer the property for purchase by the tenants, for resident homeownership, or to other entities who will maintain
the property as low-income rental housing. To
assist tenants to purchase properties, HUD
will provide grants to resident councils to cover
the costs of acquisition and for rehabilitation,
technical assistance, and other expenses.
V.A.
INCREASING CHOICE, EXPANDING OPPORTUNITY, AND PROVIDING HOPE
In support of the preservation strategy, the
budget requests $718 million in 1992. Within
this funding level, homeownership subsidies
would be available to families for purchasing
units in the "prepayment inventory."
Aiding distressed properties9 improving
housing, and offering tenants an equity
interest in their rental units.—In addition
to the HOPE initiatives, the budget proposes
a new Low-Income Resident Empowerment
Program to address distressed FHA-insured
and subsidized projects that are not part of
the "prepayment inventory" or that do not receive assistance through HOPE. These are
properties insured by FHA that are either financially distressed, in very poor physical condition, or both.
The primary goals of this initiative are: (1)
reduce the number of foreclosures and property acquisitions by FHA (which result in payments for claims by lenders); (2) improve the
living conditions of tenants; and (3) give them
an equity interest in these buildings.
In return for providing an equity interest
to the tenants, landlords would receive financial assistance to cover cash-flow problems or
to make needed physical improvements. The
total amount of the assistance provided to
owners would have to be less than an agreedupon cost cap, such as the cost of protecting
eligible tenants with vouchers.
For properties already owned by HUD because of foreclosures, the budget proposes
8,575 vouchers for use by tenant groups that
wish to acquire such buildings. If no tenants
wish to purchase the properties, the vouchers
would allow income-eligible tenants to remain
in these properties or move to other housing.
This initiative requires removal of statutory
requirements that project-based subsidies remain attached to most properties when they
are sold.
Permitting use of IRAs by first-time
home-buyers.—The Federal Government provides substantial support for homeownership
through the tax code and Federal credit programs. However, some potential home-buyers
have difficulty accumulating the savings necessary for a down payment. To expand homeownership opportunities for young families and
first-time home-buyers, the Administration
Part Two-Ill
proposes to allow Individual Retirement Accounts (IRAs) to be used for buying a home.
Although 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 Administration proposes that, beginning
January 1991, first-time home-buyers could
withdraw funds in their tax-deferred IRAs
without penalty. The maximum amount that
could be withdrawn from an IRA for a down
payment would be $10,000, and the maximum
house price would be 110 percent of the average area purchase price.
Revitalizing Economically Distressed
Communities: Enterprise Zones
To address persistent concentrations of poverty, the budget proposes tax incentives to create jobs and stimulate entrepreneurial activity
in blighted urban neighborhoods and poor
rural areas. The Secretary of Housing and
Urban Development would be authorized to
designate 50 Federal enterprise zones, onethird of them in rural areas, and offer certain
Federal tax incentives within the zones.
The revitalization of economically distressed
urban and rural areas requires effective coordination and use of public and private resources.
Productive private-sector jobs are critical to
any meaningful empowerment initiative. By offering tax incentives and the removal of regulatory barriers, enterprise zones encourage
new private-sector investments and entrepreneurial activity to create productive jobs.
Federal enterprise zones are not a panacea or
a replacement for other long-standing Federal
anti-poverty programs. However, the Administration believes enterprise zones will make a
crucial difference in creating the productive
partnership of the public and private sectors
needed to reverse long-term economic deterioration in selected areas.
The three major enterprise zone tax incentives are:
• 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.
Part Two-120
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 put more money in
their pockets. The proposed wage tax credit is designed to encourage low-income
inner-city and rural residents to obtain
employment, become self-supporting, and
leave welfare.
• Expensing of investor purchases of newly
issued corporate stock for businesses located in enterprise zones. This is an upfront deduction for up to $50,000 per year
of new equity investment, with a
$250,0000 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
should make zones attractive to new capital by giving an immediate tax saving to
individuals who invest in enterprise zones.
It is also designed to provide inner-city
entrepreneurs with the seed capital they
need to start small businesses.
• A zero capital gains rate for gains on investment in tangible property located
within an enterprise zone for at least two
years. To be eligible for the exemption,
firms must operate in the zones for at
least two years, must be engaged in the
active conduct of business in the zone, and
must have 50 percent of their employees
working in the zone. This is another
strong incentive for potential local entrepreneurs and outside investors to bring
capital into the zone. It is a more delayed
reward for entrepreneurship than the upfront expensing deduction.
The 50 zones would be chosen through a
competitive process after a systematic evaluation by the HUD Secretary. Applicant localities
must commit to provide regulatory relief and
improved services within the areas they nominate as Federal enterprise zones. Those States
and localities providing the strongest packages
of incentives and initiatives would be selected
for zone designation.
THE BUDGET FOR FISCAL YEAR 1992
Increasing Access to Employment
Opportunities
In 1990, there were about 18 million more
Americans employed than in 1980. During the
same period, median family income rose to historic heights. For most people, opportunity to
participate in the mainstream of American life
means opportunity for employment.
The budget includes several proposals for reform of current programs and services aimed
at increasing the capacity of disadvantaged
people to compete in the labor market.
Concentrating Job Training Partnership Act (JTPA) resources on the most disadvantaged participants.—JTPA is the
principal source of funding for job training of
disadvantaged workers. For 1992, $4.0 billion
is budgeted for JTPA. To improve the program's effectiveness, the Administration is proposing amendments to: target job training efforts on extremely disadvantaged adults and
youth through strict eligibility requirements
and a revised funding allocation formula; offer
a comprehensive array of education, job training, and support services; and intensify youth
job training efforts by replacing the summer
youth employment program with a year-round
education and training program.
In an effort to reach youth in poverty-stricken inner-city neighborhoods and rural communities, a new Youth Opportunities Unlimited
(YOU) program is proposed. By providing
grants to up to 40 high-poverty areas, YOU
would offer incentives to marshal public and
private resources to establish and meet goals
for improving the job opportunities for youth
residing in those areas.
Increasing support for vocational education and reducing abuses by some providers.—The budget provides significant funding for vocational education' through programs
under the Carl D. Perkins Vocational and Applied Technology Act and vocational student
support under the Higher Education Act. For
1992, $1 billion is proposed for the Perkins
Act programs; $5.8 billion for Pell Grants. In
addition, over $11 billion in subsidized student
loans will be supported under the Higher Education Act, most of which benefit students in
vocational training.
V.A.
INCREASING CHOICE, EXPANDING OPPORTUNITY, AND PROVIDING HOPE
In recent years, many students enrolled in
vocational training paid for with Higher Education Act funds have been victimized by
schools that provide training of little value,
leaving some students unable to qualify for
the kinds of jobs for which they were trained
and with an unmanageable burden of debt.
The resulting default costs have been very
high. Administration initiatives in 1990 began
to attack these abuses, and are now supported
by legislation enacted in the Omnibus Budget
Reconciliation Act of 1990 that bars the worst
schools from participation in the loan program.
Additional legislative remedies are being
sought in the Administration's Higher Education Act reauthorization proposals. The proposals would eliminate more schools with high
default rates and programs unable to meet
quality standards, prevent low-quality schools
from entering the program, limit the charges
these schools can finance with Federal funds,
and begin to establish standards of quality for
all schools. The result will be better educational opportunity and a better chance for
students to benefit in the labor market.
Reforming the Employment Service.—The
United States Employment Service is a joint
Federal-State program created by the WagnerPeyser Act of 1933, as amended by the Job
Training Partnership Act of 1982. The Federal
Government provides grants to States to carry
out various labor exchange activities, matching
the needs of employers and job-seekers
through a network of about 1,700 local Employment Service offices. These local offices
may offer job-seekers and employers a wide
range of services, including job referral, testing, counseling, workshops in job search techniques, job fairs, labor market information,
and specialized recruitment to meet affirmative action plans.
Since the Employment Service was established, the range of other private and public
agencies offering labor exchange services has
increased. In addition, over the years the Employment Service has taken on other functions
not closely tied to its original purpose. The
budget proposes Employment Service reforms
aimed at clarifying its mission for the future
and increasing its effectiveness. The proposal
is reinforced by recent General Accounting Office recommendations.
Part Two-Ill
As an initial reform step, the budget proposes to establish performance standards and
increase monitoring of State Employment
Service performance. The Department of Labor
will work with the States to develop improved
information about the different employment
services provided by the States, the costs of
providing those services, the populations
served, and the nature of the jobs obtained
through Employment Service referrals.
Some research suggests that the Employment Service is most effective at providing
labor exchange functions to those entering the
labor force, to minorities, and those with lower
levels of skills and experience. By comparison,
highly skilled and professional job-seekers
typically secure employment through self-initiated contacts or the efforts of private agencies.
Consequently, one focus of reform effort will
be to concentrate Employment Service resources on the more disadvantaged job-seekers.
Increasing opportunities on Federal construction projects for workers still learning their journeyman skills.—The Department of Labor recently issued regulations, effective February 4, 1991, to permit use of helpers on all Federal construction projects. Two
helpers would be permitted for every three
journeymen. This action is intended to lower
the cost of Federal construction contracts and
increase construction job opportunities for
workers with lower skill levels.
The budget proposes another reform with
similar objectives. The requirements imposed
by the Davis-Bacon Act regarding wage levels
for Federal construction projects would be limited to contracts of over $250,000. The current
threshold for application of the Davis-Bacon
provisions, $2,000, has not been raised since
1935.
Providing more construction employment opportunities for those who want to develop journeyman skills would create another rung on
the ladder to economic success for less-skilled
workers.
Making modest reductions in the constraints on employment faced by elderly
social security recipients.—If recipients of
social security retirement benefits aged 65 to
69 wish to supplement their benefits with
earnings, they may earn up to $9,270 this year
Part Two-122
without any reduction in their benefits. (The
amount of allowable earnings increases each
year with increases in average wages.) Beyond
$9,270, each three dollars of earnings reduces
their social security benefits by one dollar.
(After age 69, earnings do not affect benefits.)
For retirees with sources of income other
than earnings, such as private pensions and
investment income, this limitation on allowable earnings may have little effect on their
life-choices. For retirees without other private
sources of income, the earnings test can con-
THE BUDGET FOR FISCAL YEAR 1992
strain their choices of employment and their
standard of living.
The budget proposes an increase in the
amount of allowable earnings for social security retirement recipients aged 65 to 69. For
1992, allowable earnings would be increased
$800, or 8 percent, from $10,200 to $11,000.
For 1993, the increase would be $200, from
$10,800 to $11,000. For 1994, allowable earnings would continue to rise to the level projected in current law, $11,400.
V.B. ENDING THE SCOURGE OF DRUGS
AND CRIME
HIGHLIGHTS
The Administration is strongly committed to
ending the scourge of drugs and combatting
violent crime. The budget proposes an overall
increase of $1.1 billion, an 11 percent increase
over 1991, to extend the progress begun in
curbing drug use in America. If enacted, total
Federal drug control spending would be $11.7
billion—an increase of $5.2 billion, or 80 percent higher than when the President took office.
Ending the Scourge of Drugs
The key elements of the Federal drug control
effort are:
• To fight drugs at the source and on the
streets, the budget proposes an increase
of $627 million (14 percent) in criminal
justice activities and a $221 million increase (8 percent) in international and
interdiction programs;
• To expand and target prevention efforts,
the budget proposes to continue to increase the Education Department's Drug
Free Schools program to 79 percent above
1989 levels and includes a $15 million increase over 1991 for the Department of
Health and Human Services' (HHS) Community Partnership prevention grants;
• To improve and expand treatment programs, the budget proposes a new $99 million drug treatment grant program to expand the Nation's capacity to treat drug
users; additional resources are also proposed for treatment research and for programs that target pregnant women and individuals in the criminal justice system—
for a treatment total of $1.7 billion (up
10 percent).
Fighting Crime
In addition to drug control programs, overall
law enforcement efforts will continue to be a
priority. The level of crime is still too high.
If neighborhoods are to be made safe, the laws
must be enforced. Therefore, the 1992 budget
proposes an increase of $2 billion for all Federal law enforcement programs, from $12.8 billion in 1991, to $14.8 billion in 1992. (These
figures include some of the drug law enforcement programs discussed above.) The last section of this chapter discusses all Federal law
enforcement expenditures, of which the drug
control programs are one component. Key elements of the fight against crime include:
Table B - l . FEDERAL SPENDING TO FIGHT THE W A R ON DRUGS
(Budget authority; dollar amounts in billions)
Actual
Prevention
Treatment
Research
Interdiction
International
Intelligence
Criminal Justice
Total
1992
Request
Percent
change,
1991-92
1981
1989
1991
0.1
0.4
0.1
0.3
0.1
0.4
0.7
0.9
0.2
1.4
0.3
0.1
2.8
1.4
1.5
0.4
2.0
0.6
0.1
4.4
1.5
1.7
0.5
2.1
0.8
0.1
5.0
+5
+10
+12
+4
+20
+6
+14
1.5
6.4
10.5
11.7
+11
—
Part Two-123
Part Two-124
THE BUDGET FOR FISCAL YEAR 1992
• an increase of $328 million or 19 percent
above 1991 for the Federal Bureau of Investigations to expand and improve its efforts against violent and white collar
crime;
above 1991, to assure that criminals are
tried and held accountable for their offenses; and
• an increase of $467 million or 27 percent
above 1991 for the Federal Bureau of Prisons, to ensure that convicted offenders are
punished for their crimes.
• an increase of $609 million for the U.S.
Attorneys and the Judiciary, 22 percent
ENDING THE SCOURGE OF DRUGS
The total drug control request for 1992 is
$11.7 billion, a $1.1 billion increase over 1991.
ATTACKING THE DRUG MARKET AT
THE SOURCE AND ON THE STREET
The National Drug Control Strategy is an
integrated approach that attacks the problem
on all fronts through drug treatment, prevention, education, and law enforcement. In enforcing the law, pressure is put on all points
of the distribution chain—from the source
country where the drugs are grown to the
street corner where they are sold. At each
point, the goal is to identify, arrest, prosecute,
and punish those that break the law.
decline, one can say with certainty that some
of those individuals were deterred by the intensified pressure of the law enforcement
agencies. The budget will keep this pressure
on by proposing increased funding for criminal
justice, interdiction, and international activities.
The 1992 budget proposes an increase of 12
percent over 1991, or a total of $0.8 billion
for drug law enforcement activities.
Drug law enforcement affects drug use by
making the substances more difficult or expensive to purchase and by deterring current or
potential users with the threat of punishment.
The number of individuals using illicit drugs
in this country is declining. While it is not
possible to identify the exact causes of that
• To fight drugs domestically, the budget
proposes an increase of 20 percent for the
Organized Crime and Drug Enforcement
Task Forces (OCDETF). This effective
drug enforcement strategy will grow from
$335 million in 1991 to $402 million in
1992. The growth will be spread among
the OCDETF participants and will combine their intelligence, equipment and investigative techniques to produce an estimated 28 percent more indictments and
29 percent more convictions than in 1991.
• The budget proposes an 8 percent increase
for the Drug Enforcement Administration
(DEA), from $694 million in 1991 to $748
million in 1992. DEA's efforts will be concentrated on U.S. major trafficking areas,
with 91 percent of 134 new agents either
Table B - 2 . DRUG LAW ENFORCEMENT SPENDING INCREASES BY
$0.8 BILLION
(Budget authority; dollar amounts in billions)
Actual
Criminal justice ...
Interdiction
International
Intelligence
1989
1991
1992
Request
2.8
1.4
0.3
0.1
4.4
2.0
0.6
0.1
5.0
2.1
0.8
0.1
1991--92
Dollar
change
Percent
change
0.6
0.1
0.1
+14
+4
+20
+6
V.B.
ENDING THE SCOURGE OF DRUGS AND CRIME
targeted at regions with the most severe
drug trafficking crime, state and local task
forces, and marijuana eradication efforts.
• The budget proposes an 18 percent increase for the Federal Bureau of Investigation's drug operations, from $175 million
in 1991 to $206 million in 1992. With 44
new special agents, the Bureau will have
a force of over 1,000 drug agents. Sophisticated and successful initiatives against Colombian and South American trafficking
organizations will expand, as will the increased collection of drug intelligence, development of investigative technology, and
joint cooperation efforts.
• To prosecute drug dealers and users, the
budget proposes $201 million for the drug
component of the U.S. Attorneys. A 16 percent increase is proposed for the U.S. Marshals—a total request of $233 million.
• To incarcerate convicted drug offenders, an
increase of $350 million is proposed for
the drug-related portion of the Federal Bureau of Prisons to $1.4 billion in 1992.
This will add 2,450 drug-related prison
beds to the Federal prison system.
• To fight drugs at their source, a total of
$779 million is requested for international
anti-drug programs, an increase of $132
million over 1991. These resources will increase programs in Mexico and provide additional economic assistance to the Andean
nations conditioned on their counternarcotics performance and sound human
rights policies.
• At the border, $2.1 billion is proposed in
1992 to maintain and improve the drug
interdiction effort. Included in this request
are resources for 2 additional Coast Guard
helicopters to augment sea and air interdiction efforts. Resources also are proposed
to support an initiative to move INS border patrol personnel from the interior to
the Southwest border in support of land
interdiction efforts. The interdiction agencies will continue to integrate and streamline their operations to maximize their effort.
In addition to deterring potential users, law
enforcement also appears to be having an effect on drug traffickers. A recent rise in the
Part Two-125
price of cocaine indicates that it is now more
difficult to distribute the drug in this country.
In 1982, a kilogram of cocaine was selling at
the wholesale level for between $47,000 and
$70,000. By 1988, the wholesale price of cocaine had fallen to between $11,000 and
$24,000 per kilogram. In June of 1990, the
DEA announced that in New York and other
major cities the wholesale price of cocaine had
risen. Nationwide the price range had moved
to between $17,500 and $26,000 a kilo.
This rise in the price of cocaine has been
attributed to the law enforcement crackdown.
It is too early to determine whether this price
rise is a short-term disruption, but if the higher price level is sustained or increased over
time, it would be welcome news.
It is also worth noting that the observed
rise in price occurred at a time when the demand for the drug was falling. Had demand
remained constant, the price increase would
have been even greater.
COCAINE USE HAS STARTED TO FALL
The use of cocaine continues to decline—
down 72 percent from 1985 according to the
National Institute on Drug Abuse (NIDA) 1990
Household Survey. The household survey data
are the most recent of several indicators to
show a decline in drug abuse across the country. A trend that had been threatening the
Nation now appears to be reversing.
Other major national indicators of drug
use—the national household survey, the high
school senior survey, and the Drug Abuse
Warning Network (DAWN)—also show that
drug use is declining among the general population in this country.
In addition to a decline in cocaine use, the
1990 national household survey found a 44
percent reduction over the past five years in
reported current use (defined as use in the
previous 30 days) of any illicit drug—down
from an estimated 23 million users in 1985
to 12.9 million in 1990. The estimated number
of current cocaine users fell from 5.8 million
in 1985 to 1.6 million in 1990.
Other data support the findings of the
household survey. For example, the percentage
of high school seniors reporting current mari-
Part Two-126
THE BUDGET FOR FISCAL YEAR 1992
cocaine use h a s s t a r t e d t o
PAST YEAR USE
(PERCENT)
fall
20
1816-
NIDA HOUSEHOLD STUDY
AGES 18-25
PARTNERSHIP STUDY
AGES 13-17
14-
12
10
1979
UNIV. OF MICHIGAN
HIGH SCHOOL SENIORS
1981
1983
1986
1987
1989
1990
juana use has been falling steadily since 1979.
Reported cocaine use among seniors has fallen
steadily since 1985. While there are limitations
to this data (e.g., the sample does not include
adolescents who drop out of school), the trend
has been consistent. In a survey conducted by
the Partnership for a Drug-Free America, a
similar decline was observed. The accompanying chart compares the three surveys.
in two-thirds of the adults arrested. In September 1990, the figure had fallen to 51 percent. Although not a national indicator, the
D.C. drug testing program does illustrate that
progress is being made in a population often
missed by the other indicators.
Since the third quarter of 1989, there has
been a 30 percent decrease in cocaine-related
emergency room admissions. Data on these admissions (DAWN data) are presented in the
following chart.1
The results of the above surveys indicate
that fewer people are starting to use drugs
and of those who have started, more are stopping. Drug prevention and treatment programs
are intended to maintain these gains, and, if
possible, accelerate them. Understanding what
constitutes effective prevention is expanding
and that knowledge is being incorporated into
the Federal programs.
Local statistics show similar declines in drug
use. For example, individuals arrested in the
District of Columbia have been tested for illicit
substances since 1984. In 1984, 15 percent of
the arrestees tested positive for cocaine. By
the spring of 1988, cocaine use was detected
1 The DAWN system collects data on the number of drug-related
medical emergencies and deaths from a sample of hospitals and
medical examiners across the country. DAWN data have limitations, but it is possible to assemble a consistent panel of reporting
facilities and examine the trends.
EXPANDING AND TARGETING
PREVENTION EFFORTS
The budget proposes an increase of 5 percent
over 1991, or $73 million, for drug prevention
activities.
Drug prevention programs target children
and adolescents, seeking to prevent the onset
of substance abuse among non-users, encour-
Part Two-127
V.B. ENDING THE SCOURGE OF DRUGS AND CRIME
Table B - 3 . FEDERAL DRUG PREVENTION SPENDING INCREASES BY
$0.1 BILLION
(Budget authority; dollar amounts in billions)
Actual
Prevention
EMERGENCIES
(THOUSANDS)
1986
1989
1991
1992
Request
0.7
1.4
1.5
1991--92
Dollar
change
Percent
change
+0.1
+5
a f t e r climbing steadily, c o c a i n e - r e l a t e d
emergencies h a v e b e g u n t o f a l l
1987
Source: Drug Abuse Warning Network (HHS).
age current users to quit, and discourage current users from progressing to more dangerous
practices (e.g., from experimentation to regular
use or from non-intravenous to intravenous
use). National data as well as prevention experiments confirm that it is possible to change
the attitudes and behavior of individuals with
regard to drug use.
factors that contributed to the fall in drug use.
However, recent experiments suggest that prevention programs can make a difference. The
Midwestern Drug Abuse Prevention Research
Project and the RAND Corporation's Project
ALERT have shown that specific prevention
efforts can reduce drug use relative to control
groups.
Although it is tempting to say that drug prevention programs are solely responsible for the
reduced drug use among adolescents, prevention programs are probably one of the many
• The Midwestern Project involved mass
media campaigns, school-based education,
parent education and organization, community organization, and health policy
Part Two-128
THE BUDGET FOR FISCAL YEAR 1992
u s e o f m a r i j u a n a by high s c h o o l s t u d e n t s is d e c l i n i n g ;
d i s a p p r o v a l o f m a r i j u a n a is i n c r e a s i n g
GRADUATING CLASS
Source: National High School Senior Survey (HHS).
changes. The experiment reduced adolescent use of cigarettes, alcohol, and marijuana.
• Project ALERT, a school-based program
for adolescents, seeks to curb drug use by
motivating young people to resist drugs
and helping them acquire the skills to do
so. Project ALERT reduced the use of cigarettes and marijuana for both low- and
high-risk students and was equally successful in schools with high and low minority enrollments.2
Results of these kinds of efforts have been
incorporated into Federal prevention efforts.
• The Office of Substance Abuse Prevention
in the Department of Health and Human
Services finances demonstration projects
that coordinate local resources (school,
church, business, local government, and
civic groups) into comprehensive prevention systems to meet the needs of their
2 Phyllis L. Ellickson and Robert M. Bell, "Drug Prevention in
Junior High: A Multi-Site Longitudinal Test," Science, volume 247,
March 16, 1990 (pp. 1265-1372).
communities. The budget proposes to increase funding for community partnership
grants by $15 million, from an enacted
level of $99 million in 1991 to $114 million
in 1992.
• The Department of Education's Drug Free
Schools and Communities program provides resources for establishing drug education and prevention programs in the
schools. This program has grown dramatically in recent years, from $354 million
in 1989 to $606 million in 1991. The budget proposes to increase funding by 4 percent to $632 million. This includes $49.5
million ($25 million over 1991) for emergency grants to schools hardest hit by
drug abuse.
• The budget proposes to increase funding
for the Department of Housing and Urban
Development's Drug Elimination Grants
by $15 million or 10 percent, from an enacted level of $150 million to $165 million
in 1992. The purpose of these grants is
to help provide a drug-free environment
for the residents of public housing by de-
V.B.
Part Two-129
ENDING THE SCOURGE OF DRUGS A N D CRIME
veloping new prevention programs within
the projects as well as improving building
security.
Changing Attitudes in the Workplace.—
Just as the attitudes and behavior of adolescents have changed in the high schools, comprehensive drug workplace programs appear to
be having an effect on the employed population. One positive indication is that more employers are addressing the issue of substance
abuse. According to the Bureau of Labor Statistics, the percentage of employers with a formal substance abuse policy grew by about 60
percent over the last 2 years.
In those instances where drug testing is a
component of the program, a quantitative
measure is available to gauge progress. The
Federal Government provides examples of employers with effective workplace programs. The
U.S. military reports that drug testing procedures are responsible for an 82 percent decline
in drug use from 1981 to 1989. The Department of Transportation (DOT) witnessed a
steady decline in the percentage of samples
testing positive for illicit drugs from 0.9 percent in January 1988 to 0.4 percent in November 1990.
Again, this encouraging news must be accompanied by the reality that much is yet to
be done, both in the public and private sector.
The recent alcohol-related train accident in
Boston, in which several people were injured,
serves as a reminder of the continued need
for workplace substance abuse policies.
IMPROVING AND EXPANDING DRUG
TREATMENT PROGRAMS
In the fall of 1990, the Institute of Medicine
(IOM) released one of the most comprehensive
examinations of the effectiveness and financing
of drug treatment.3 The committee that produced that report cited four specific priorities
for public financing:
• ending delays in admission/treatment expansion;
• improving treatment quality;
• targeting pregnant women
mothers; and
and young
• targeting criminal justice-based treatment.
For 1992, $1.7 billion is allocated for drug
treament programs, a $156 million increase
over 1991. Each of the four treatment priorities is addressed in the budget proposal.
Ending delays in admission.—The 1992
budget proposes an additional $99 million to
create a categorical grant for the purpose of
expanding treatment capacity. In addition, a
number of other programs and initiatives, as
well as technical assistance to the States to
enable them to improve their management of
treatment resources, will be continued. If the
requested resources for drug treatment are
provided, an additional 40,000 people would
receive services in 1992.
The budget proposes to increase funding for
the Department of Veterans Affairs drug treatment programs by $39 million to expand the
treatment services provided to the Nation's
veterans.
Improving treatment quality.—The Administration believes that a National Strategy
to reduce the demand for drug use must simul3 Dean R. Gerstein and Henrick J. Harwood (eds.), Treating Drug
Problems: A Study of the Evolution, Effectiveness, and Financing of
Public and Private Drug Treatment Systems, National Academy
Press, Washington, D.C., 1990.
Table B-4. FEDERAL DRUG TREATMENT SPENDING INCREASES BY
$0.2 BILLION
( B u d g e t a u t h o r i t y ; d o l l a r a m o u n t s i n billions)
Actual
Treatment
280-000 0 - 9 1
5 (PART 2)
1991-- 9 2
1989
1991
0.9
1.5
1992
Request
1.7
Dollar
change
+0.2
Percent
change
+10
Part Two-130
taneously expand treatment capacity and improve the quality of all treatment. Therefore,
in addition to creating new public treatment
slots, the budget increases funding for investigation into the nature and treatment of addictive disorders.
Research sponsored by the National Institute on Drug Abuse (NIDA) has found that
the longer drug users stay with a treatment
program, the higher the probability that they
will remain drug-free.
The better that drug users are matched to
a particular treatment method, the higher is
the probability of success in treatment. For
example, NIDA research has shown that psychiatric status is a key factor for matching
drug abuse patients to treatment programs.4
Drug abuse treatment programs should be
able to recognize and treat those who suffer
from poly-drug abuse (including alcohol) and
mental illness. A recent NIDA-sponsored study
found that 50 percent of all individuals suffering from a drug disorder (other than alcohol)
also suffer from at least one mental disorder.5
HHS's Office for Treatment Improvement
(OTI) will continue to sponsor research and
demonstration grants to learn more about the
nature and treatment of addictive disorders.
The budget funds several promising programs
to improve the quality of treatment:
• $56 million for medications development,
an increase of $16 million over 1991.
NIDA has developed a unique partnership
among government, academic, and private
sector scientists to develop new medications for the treatment of drug addiction.
The 1992 proposal will allow NIDA to expand its capacity to test these drugs by
increasing clinic size and adding additional testing sites.
4 The NIDA-developed Addiction Severity Index demonstrates
that patients with low-severity illness do equally well in the various types of treatment programs. However, patients with mid-severity psychiatric problems and without serious family or employment problems can be effectively treated in outpatient programs.
And, of most concern for the treatment community, patients with
severe mental illness—a growing subgroup of patients—are particularly costly to treat and may even worsen in normally effective
treatment programs.
5Regier, Darrel A., et al., "Comorbidity of Mental Disorders with
Alcohol and Other Drug Abuse," Journal of the American Medical
Association, November 21, 1990, Vol. 264, No. 19, p. 2517.
THE BUDGET FOR FISCAL YEAR 1992
• $87 million for treatment improvement
grants. These grants will finance the Campus Project, "treatment campuses" to serve
patients with state-of-the-art treatment
methods and associated social services.
This will serve as a way for researchers
and practitioners to work together in exploring new treatment methods.
Drug use among the general population appears to be declining according to the survey
data mentioned above. However, the same
data also indicate that some demographic
subgroups are disproportionately represented
among drug users (e.g., young adults age
18-25), and among those still using drugs,
there are some groups whose drug use imposes
a greater cost on society than others. The Federal Government has a strong incentive to
focus on two sub-groups: pregnant women and
individuals within the criminal justice system.
Targeting pregnant women and their
children.—Babies who have been exposed to
drugs in utero are likely to need longer periods
of hospitalization after birth. As these children
get older, they can suffer from hyperactivity,
poor attention span, and other learning disabilities. The number of crack babies is estimated to be 1 to 2 percent of all live births,
or 30,000 to 50,000 babies annually.6 The HHS
Office of Inspector General estimated that the
cost for hospital delivery, perinatal care, and
foster care through age 5 was over $55,000
per crack baby.7 This estimate excludes additional costs for developmental intervention,
education, and health services through age 5
to prepare the child for school. The Inspector
General's report estimated that if these expenses were included, the total cost could triple.
In the budget, funds are requested for additional outreach and treatment for pregnant
women and their children. In the Alcohol,
Drug Abuse, and Mental Health Administration block grant, 10 percent is to be targeted
to women with drug abuse problems out of
a total $512 million requested in drug-related
funds.
6 Douglas Besharov, "The Children of Crack," Public Welfare, Fall
1989, pp. 6-11.
7 Office of Inspector General, Department of Health and Human
Services, Crack Babies, February 1990.
V.B.
Part Two-131
ENDING THE SCOURGE OF DRUGS AND CRIME
In addition, $124 million is requested to
fund outreach programs for pregnant women
and $10 million for the Human Development
Services' abandoned infants program.
Targeting individuals within the criminal justice system.—A number of studies
have established the link between drug use
and crime. In the spring of 1989, a majority
of the males arrested in sixteen U.S. cities
tested positive for illicit drug use according
to the Department of Justice's Drug Use Forecasting report. In ten of the cities, a majority
tested positive for cocaine use.
Focusing on individuals within the criminal
justice system makes sense for two reasons.
First, criminals who use drugs impose greater
costs on society through the crimes they commit, as well as the increased burden they place
on the criminal justice system. Second, drug
users who are on probation or parole, with
the threat of being returned to prison or jail,
have an added incentive to stay in a treatment
program.
The budget proposes to expand the availability of treatment programs in the Federal Bureau of Prisons. Funding for treatment services
will increase from $10 million in 1991 to $22
million in 1992.
The Judiciary will request $57 million in
1992 for substance abuse treatment and HHS
will request $17 million for criminal justice
treatment efforts.
FIGHTING CRIME
Many law enforcement officials cite the rise
in drug dealing as one of the causes for increasing violent crime across the country. The
falling rate of drug use should continue to
push down overall crime rates. However, crime
rates are still too high—particularly the murder rate. In the first 6 months of 1990, the
FBI reported that the murder rate rose 8 percent nationwide. Though these national figures
are frightening enough, one only has to go as
far as the morning newspaper to find
incidences of communities touched by violent
crime.
A fundamental responsibility of government
is to protect citizens and their property. Americans deserve to live in a society in which they
are safe and secure.
To accomplish this, the 1992 budget increases the resources available for continuing
the war on crime. A total of $14.8 billion is
requested for law enforcement activities, an increase of 16 percent over 1991. These figures
include some of the drug law enforcement programs discussed above.
The enhancements will strengthen the Nation's criminal justice system and increase the
certainty of apprehension, prosecution, and
punishment. To accomplish this, the Administration's 1992 strategy for fighting crime includes increased funding for law enforcement
programs, additional U.S. Attorneys, and in-
creases in prison staffing and bedspaces. Federal agencies will be participating in this law
enforcement strategy through the following:
• The 1992 Federal Bureau of Investigation
(FBI) budget will grow by 19 percent over
1991, from $1,693 million to $2,021 million. This growth will spread additional
crime-fighting resources to most of the
FBI's enforcement programs. Additional
resources are requested to address the escalation in Asian organized crime activity
and to combat Mexican and Colombian
drug trafficking groups. Over $64 million
of the Bureau's $328 million 1992 increase
address national security programs—185
agents are being added in this enforcement area. Funds are also included to continue the process of automating fingerprint identification nationwide. Once in
place, as many as 29,000 fugitives can be
readily identified by law enforcement officers.
• The FBI budget also requests 171 agents
for white collar crime programs. This enforcement area will experience the greatest growth rate in 1992, increasing by $30
million. Savings and loan failure investigations, HUD and bankruptcy fraud, and
public corruption criminal activity all require more 1992 enforcement resources.
Bank fraud and embezzlement funding ac-
Part Two-132
count for 55 percent of the increased resources. In 1990, the FBI was responsible
for over 2,200 savings and loan fraud convictions and the recovery of over $500 million in restitution settlements.
• For 1992, the request for the Immigration
and Naturalization Service (INS) represents an increase of 14 percent over
1991, from $887 million to $1,008 million
in 1992. These additional resources will
increase staffing and bedspace at INS detention facilities for criminal aliens.
Crimes committed by aliens are rising disproportionately in relation to the general
population and include more violent and
drug-related crimes. Funding is also provided to increase the presence of the Border Patrol on the Southwest border.
• To increase the certainty that criminals
are held accountable for their offenses,
$779 million is requested for the U.S. Attorneys, an increase of $104 million or 15
percent over 1991. These resources will enable the attorneys to prosecute more violent crimes, weapons offenses and drug
cases. The attorneys also will concentrate
on the prosecution of financial institution
fraud, white collar crime, and debt collection. New resources for affirmative civil
litigation will permit the attorneys to
begin more aggressive prosecution of
fraud, returning more dollars to the Treasury.
• If offenders are going to be held accountable for their crimes, more space is needed
in the prisons. The budget provides over
$350 million for new prison construction,
providing an additional 3,600 bedspaces by
1996. To run the current program and to
staff the new prisons as they come on line
a total of $2.2 billion is requested for the
THE BUDGET FOR FISCAL YEAR 1992
Bureau of Prisons, an increase of 27 percent over 1991.
• The request for the Judiciary represents
a 25 percent increase over 1991, from $2.0
billion to $2.6 billion in 1992. These funds
will support 85 new judgeships recently
authorized by Congress to address the increased backlog of criminal cases.
• The budget proposes a 20 percent increase
for the U.S. Marshals Service, from $290
million in 1991 to $347 million. These resources will support additional deputy
U.S. Marshals for the protection of the additional judges provided in the Federal
Judgeship Act, expanded witness protection efforts, and the guarding of prisoners.
Strengthening Criminal Statutes.—Continuing the fight against crime is more than
just a question of resources. In addition to expanding the criminal justice system, the Administration remains committed to strengthening current laws. This includes increasing penalties, eliminating repetitive delays in carrying
out judicial sentencing, and allowing the use
of evidence obtained in good faith by law enforcement officers.
This fight also is the responsibility of governments at all levels. For example, each National Drug Control Strategy has recommended tough anti-drug legislation for the
States to adopt. Although many States have
adopted much useful legislation, it is important that all States do so.
Those who commit crimes should and must
be held accountable for their actions if citizens
and their property are to be protected. This
requires the sustained cooperative commitment of all law enforcement officials—Federal,
State, and local—in all aspects of the criminal
justice system.
Part Two-133
V.B. ENDING THE SCOURGE OF DRUGS AND CRIME
Table B - 5 . FEDERAL SPENDING WOULD INCREASE BY $2.1 BILLION
TO FIGHT CRIME
(Budget authority; dollar amounts in millions)
Actual
1989
Federal Bureau of Investigation
Bureau of Prisons
U.S. Attorneys
Immigration and Naturalization Service
Drug Enforcement Administration
U.S. Marshals
Organized Crime Task Forces
Judiciary
Other
Total
1991
1,439
1,542
460
822
534
205
1992
Request
1991-92
Dollar
change
Percent
change
1,476
2,944
1,693
1,738
675
887
694
290
335
2,046
4,431
2,021
2,205
779
1,008
748
347
402
2,551
4,781
+328
+467
+104
+121
+54
+57
+67
+505
+350
+19
+27
+15
+14
+8
+20
+20
+25
+8
9,422
12,789
14,842
+2,053
+16
—
/
V.C. DISTRIBUTING FEDERAL BENEFITS
MORE FAIRLY
HIGHLIGHTS
Since the 1960s, there has been explosive
growth in the level of Federal expenditures
for payments to individuals. Ideally, economic
growth and opportunity would be sufficient to
eliminate the need for such governmental
transfer payments. In reality, however, a democratic market economy will continue to need
a social insurance system. It should not encourage dependency. But it must be available—at least as a "safety net" for the needy.
The notable characteristic of the growth of
payments to individuals in the past quarter
century, however, is that the growth has gone
principally to the non-poor. Total payments to
individuals have risen to 46 percent of the
budget, most of which does not go to the poor,
as illustrated in the charts that follow.
1988$
BILLIONS
Resources are scarce. Legitimate claims are
substantial. In order to preserve a responsible
"safety net", therefore, it is likely to be necessary—and in any case appropriate—to reduce the subsidies for those who clearly are
not needy. Thus, the budget initiates a set of
proposals to begin to reduce governmental subsidies for those who are not in need.
• Medicare beneficiaries, regardless of their
income, receive an average subsidy of
$2,445. The budget proposes that the
wealthiest seniors (those with annual incomes over $125,000) should pay higher
premiums under the voluntary Part B portion of the program, reducing their average 1992 subsidy to $1,690.
• Significant farm commodity program payments go to individuals with non-farm incomes over $125,000. Eliminating payment
i n c r e a s e s in c a s h t r a n s f e r s h a v e g o n e
principally t o the n o n - p o o r
240
220
200
180160-
CASH TRANSFERS RECEIVED BY THOSE
WITH POST-TRANSFER INCOME
ABOVE POVERTY
140
120
100-
CASH TRANSFERS RECEIVED BY THOSE
WITH POST-TRANSFER INCOME
BELOW POVERTY
80
60
40
20 H
o4
1975
1980
SOURCE: Current Population Survey.
CALENDAR YEAR
1986
1989
Part Two-135
Part Two-136
THE BUDGET FOR FISCAL YEAR 1992
THE PERCENTAGE OF BENEFITS RECEIVED BY
THE POOR HAS BEEN DECLINING, WHETHER MEASURED
ON A POST-TRANSFER OR PRE-TRANSFER BASIS
PERCENT
10080PERCENT OF CASH TRANSFERS RECEIVED BY THOSE WITH
POST-TRANSFER INCOME ABOVE THE POVERTY LEVEL
60-
40 PERCENT OF CASH TRANSFERS RECEIVED BY THOSE WITH
POST-TRANSFER INCOME BELOW THE POVERTY LEVEL
20-
1968
1979
CALENDAR YEAR
PERCENT
CALENDAR YEAR
Trend lines reflect data for 1968, 1979, and 1989 only.
SOURCE: Current Population Survey.
1989
V.C.
DISTRIBUTING FEDERAL BENEFITS MORE FAIRLY
eligibility for these upper-income people
would not threaten the operation of farm
programs and would better target benefits
to active farmers.
• Higher education legislation in the late
1970s diluted grant aid to low income students. The budget proposes that student
assistance in the form of Pell Grants be
more focused on low income students who
have the most limited access to higher
education.
• Child Nutrition programs provide subsidies to all school-age children, regardless
of their family's income. The budget supports continued increases in funding for
the School Lunch program, but redistributes a portion of the subsidy that benefits
higher income families in order to provide
more assistance to lower income children.
FAIRNESS IN FEDERAL BENEFIT
PROGRAMS
A significant share of government spending
on benefits goes to households at the lower
end of the income distribution. In calendar
year (CY) 1989, for example, 47 percent or
$184 billion of all cash and in-kind transfer
payments were received by households with incomes in the bottom fifth of the household income distribution. However, $26.5 billion of
these benefits went to households with incomes that put them in the top 20 percent
of all households.1 Substantial amounts of
other government spending, such as farm price
subsidies, also are received by those whose incomes put them well above the bottom fifth
of the income distribution.
As Federal spending and the incomes of all
segments of the population have increased over
time, Federal benefits increasingly have been
provided to those who are not poor. The preceding charts that provide information on the
amounts and percentages of cash transfers
going to those who are poor and non-poor illustrate this trend. Over the past two decades,
1 Benefits include all cash and noncash (food, housing, and medical) government transfers reported in the March income supplement to the Current Population Survey (CPS). The market-value
approach is used to value noncash benefits. Household quintiles
are based on post-tax, pre-transfer income, including the value of
employer-provided health insurance but excluding capital gains.
Government benefits are underreported in the CPS so that actual
benefits received are larger than those reported.
Part Two-137
government assistance in the form of cash
transfers has increased significantly. In constant dollars, the amounts going to the poor
essentially have remained flat, although they
vary somewhat with the business cycle. In contrast, the amounts going to the non-poor have
increased. As a result, the shares of cash
transfers received by the non-poor have increased, whether people are classified as poor
or non-poor using the official definition of poverty (all cash income, including government
transfer payments) or an alternative measure
that excludes government transfers. (A consistent data series on the total amounts of
noncash benefits received over time by those
at various income levels is not available. However, program data suggest that the trends are
similar to those for cash transfers.)
This is not to suggest that any of the measures used above should be adopted as a universal standard in determining eligibility for Federal benefits. Federal programs and the purposes they serve are too diverse to be governed
by a single set of economic criteria. The data
have been presented for two inter-related reasons:
• to indicate that Federal spending usefully
can be examined to determine whether decisions on eligibility made in the past result in the best use of scarce Federal resources today; and
• to counter the contention that "fairness",
of necessity, means more Federal spending
rather than more effective targeting of
spending to reach those in need.
Wiser and more equitable distribution of
Federal benefits is key to fairness and to meeting critical national needs.
PROPOSALS DESIGNED TO
DISTRIBUTE BENEFITS MORE FAIRLY
Medicare: Income-testing Premiums for
the Wealthy to Reduce Large Health Care
Subsidies for Society's Most Fortunate
Medicare has been successful in providing
quality health care to more than 33 million
participating seniors. A strong argument can
be made, however, that Part B provides benefits beyond the original intent of the program—insuring that affordable, quality care is
Part Two-138
THE BUDGET FOR FISCAL YEAR 1992
subsidies w o u l d be r e d u c e d f o r m e d i c a r e p a r t b beneficiaries
w i t h i n c o m e s o v e r $125,000
DOLLARS
Trend lines reflect data for years shown only.
available to seniors—by providing large subsidies to the wealthy.
Part B of the Medicare program is voluntary.
It primarily covers physician and outpatient
services. At its inception in 1967, Part B costs
were to be split 50/50 between beneficiary premiums and general fund subsidies. Subsequent
law changes, intended to shield low income
seniors from spiraling health cost inflation,
have changed that split. In 1992, 25 percent
of the costs ($31.80 per month) will be paid
by the beneficiary and 75 percent (approximately $95) by the general fund subsidies. The
result is a 1992 Part B Federal subsidy of
$1,113 for every senior, regardless of income.
In addition to the Part B subsidy, wealthy
seniors benefit from Part A Hospital Insurance
(HI). This mandatory coverage is funded from
the HI Trust Fund, to which employees pay
a 1.45 percent employee payroll tax on annual
earnings up to $125,000. Most current Medicare beneficiaries have paid for a small fraction of the benefits they will receive under
Medicare HI. The average actuarial subsidy
for each current Part A beneficiary is $1,330
per year.
The average Part A and Part B subsidy to
seniors with incomes over $125,000 is almost
$2,445 in 1992.
The budget does not propose to change Part
A, even for the wealthiest Medicare beneficiaries. It does propose to reduce the Part
B subsidy for individuals with annual adjusted
gross incomes (AGI) above $125,000 and couples with AGIs above $150,000. These beneficiaries would be required to pay a Part B
premium equal to 75 percent of total Part B
costs. Even with this change, these high income seniors still would receive a 25 percent
or $363 Part B subsidy in 1992 ($542 in 1996)
and a combined average Part A and Part B
subsidy of $1,690 ($3,370 in 1996). Medicare
Part B would continue to be a very good value
for these beneficiaries. The Department of
Health and Human Services anticipates that
few seniors would opt to drop this voluntary
coverage as a result of the proposed change,
although they would have this option.
Agricultural Subsidies: Imposing a Means
Test
Agricultural commodity programs help to
regulate farm plantings and the prices of many
V.C.
DISTRIBUTING FEDERAL BENEFITS MORE FAIRLY
commodities, and they provide direct income
support payments to eligible producers of
major crops such as wheat, corn, sorghum, barley, oats, cotton, and rice. "Deficiency payments", which constitute the largest share of
outlays for these programs, pay farmers the
difference between actual market prices and
statutory "target prices" on their eligible output. These payments go to individuals regardless of their incomes, including those who earn
substantial income from non-farming sources.
In recent years, deficiency payments have
gone to more than 10,000 individuals whose
annual adjusted gross income from non-farming sources has exceeded $125,000. Producers
in this category have been about two percent
of all program participants and they have received, according to preliminary estimates,
about $90 million in income subsidy payments
each crop year. A means test could be designed
to make these upper-income individuals ineligible for direct farm support. It would eliminate payments to highly paid professionals or
wealthy investors in order to target payments
to those who depend on farm income to assure
their farm's viability and support their families.
This proposal is consistent with others in
this budget that are designed to distribute
Federal benefits more fairly. The Administration does not propose to reopen the recently
enacted 1990 Farm Bill and Budget Reconciliation Act that took many months of hard
work and debate to accomplish. The proposal
is advanced as a matter of equity.
Student Aid: Restructuring Higher
Education Act Assistance to Serve the
Needy Better and to Reward Student
Achievement
Although States provide the largest subsidies to higher education, the bulk of their
support is provided to institutions. State subsidies are designed primarily to reduce tuitions
for all students, regardless of their families'
incomes. Because States supply relatively little
direct assistance to students, Federal programs authorized in the Higher Education Act
are the primary source of aid for students from
low income families. These programs—primarily Pell Grant and Guaranteed Student
Part Two-139
Loan (GSL)—finance 68 percent of all direct
aid to students in post-secondary education.
Federal student aid originally was intended
to ensure that students from low income families would have access to higher education. In
the late 1970s, concern that rising college costs
were making higher education less affordable
for many families led to the enactment of legislation that increased the share of Pell Grant
program funds going to students from higher
income families. This legislation diluted the effects of Pell Grants on low income students
because many more students, including those
from upper-middle class families, qualified for
an only slightly increased pool of grant funds.
Consequently, low income students have had
to borrow increasingly larger amounts from
the GSL program to pay for their educations.
Students from low income families are more
likely to default on loans, and many believe
that such students may avoid higher education
altogether for fear of incurring excessive debt.
Increasing low income students' access to higher education—and the economic rewards in the
labor market that accompany successful completion of additional years of schooling—is a
primary goal of the budget.
To this end, the budget proposes to reallocate student aid funds. For Pell Grants, the
budget requests $5.8 billion, a $400 million
increase over the 1991 appropriation. Total
GSL volume would be $11.7 billion, $721 million more than in 1991. Under the Administration's proposed reforms, more Pell Grant aid
would be provided to students from the lowest
income families. At the same time, students
from somewhat higher and middle income families would be able to borrow larger amounts
under the heavily subsidized GSL program,
meeting the needs these families also have in
financing higher education for their children.
The maximum Pell Grant award in 1992
would increase by 54 percent over the 1991
level, rising by $1,300 to $3,700. The share
of Pell Grant funds provided to students from
families with incomes under $10,000 would increase from 63 percent to 67 percent, and their
average award would rise from $1,708 to
$2,191. Annual limits in GSL would also increase for students in all years of postsecondary study, as shown in Table C - l .
Part Two-140
THE BUDGET FOR FISCAL YEAR 1992
Table C - l . PELL GRANT AWARDS FOR LOW INCOME STUDENTS
AND ANNUAL GSL LOAN LIMITS: 1992 CURRENT LAW AND PROPOSED
1992
Current
Pell Grants for students with family income below $10,000:
Total aid (in millions of dollars)
Average award (in dollars)
Stafford Loans (in dollars):
First and second years
Subsequent undergraduate years
Graduate study
Supplemental loans for students (in dollars):
First and second years
Subsequent undergraduate years
Graduate study
Under the proposed reallocation of aid, students from low income families—those most
likely both to need encouragement to pursue
higher education and to default under a heavy
debt burden—would not have to borrow heavily. Higher income students, who are more
likely to accept and pay off debt, would qualify
for decreased grant amounts and increased
loan subsidies. As a result of the budget proposals, thus, more academically qualified low
income students would be willing to try higher
education and would reap the benefits of this
schooling in higher earnings. Families with
greater ability to repay loans would have increased access to low-cost loans and would be
able to continue to finance college educations
for their children.
Health Education Assistance Loans and
Health Professions Student Loans:
Targeting Health Professions Assistance
to the Disadvantaged
The Health Education Assistance Loan
(HEAL) Program guarantees 100 percent of
banks' loans to health professions students in
a wide range of health disciplines. Since its
inception in 1976, HEAL has insured more
than 295,000 loans totaling over $2.1 billion
in principal.
HEAL was originally intended to provide financial relief to students in high-tuition medical schools and assure disadvantaged students
access to health professions educations. However, HEAL does not target financial assist-
Proposed
Increase
3,268
1,708
3,846
2,191
578
483
2,625
4,000
7,500
3,500
5,000
7,500
875
1,000
4,000
4,000
4,000
4,000
6,000
10,000
2,000
6,000
ance to disadvantaged students. Instead,
HEAL currently guarantees approximately
$260 million annually in loans for health professions students regardless of income. In fact,
HEAL's eight percent up-front premium and
high interest rate (11-12 percent in 1989 and
1990) make HEAL primarily an option for
higher income students. HEAL guarantees
loans to students in critical and noncritical
health professions alike, and many of HEAL's
defaults occur in health disciplines that are
not in short supply. Borrowers pursuing degrees in chiropractic and podiatry, for example,
are among the leaders in HEAL defaults.
Although intended to be self-financing,
HEAL has been unable to support itself; its
up-front premiums have been insufficient to
cover its high defaults. Estimates indicate that
HEAL's annual cohort default rate exceeds 20
percent. High defaults caused Congress in
1990 to appropriate $25 million to maintain
the solvency of the HEAL program. Credit reform changes enacted as part of the 1990
Budget Enforcement Act, which require that
implicit subsidies in loan programs be estimated, underline the fact that HEAL is not
self-financing: HEAL will require a total of approximately $61 million in 1992 to cover past
defaults and to pay defaults from new loans.
In subsequent years, HEAL will continue to
require appropriations to sustain its operations
and to cover its rising defaults.
Rather
than
continuing
to
provide
untargeted health professions assistance
V.C.
Part Two-141
DISTRIBUTING FEDERAL BENEFITS MORE FAIRLY
through HEAL's costly system of loan guarantees, which benefit many questionable institutions, the budget proposes to phase out the
HEAL program. It would be replaced by an
enhanced Health Professions Student Loan
(HPSL) program, which would better target
Federal assistance to disadvantaged health
professions students, particularly in needed
disciplines.
HPSL provides direct loans, through a revolving fund, to low income health professions
students who apply for assistance through
their schools. The budget proposes to make $15
million in new capital contributions to HPSL,
which would represent a down payment on a
multiyear HPSL capitalization effort ($90 million over six years). These new contributions,
along with the $60 million already available
each year from HPSL's $375 million revolving
fund, would enable HPSL to support and sustain 10,000 loans annually to financially needy
students, providing an average annual award
of $8,000. (Currently the average annual
award is $3,000, provided to 20,000 borrowers.) Chiropractic and podiatry students, who
account for 41 percent of HEAL's defaults and
21 percent of its loan volume, would not be
eligible to participate in HPSL. The larger, targeted awards provided under the enhanced
HPSL program would enable disadvantaged
students to obtain more assistance in completing their health professions training. At the
same time, the exclusion of chiropractic and
podiatry studies from the program would ensure that needy students are served by health
professions institutions that have earned the
public trust and are worthy of receiving taxpayer support.
School Lunch: Reallocating Subsidies to
Low Income Students
Every school day, the National School Lunch
Program serves meals to approximately half
of the nation's 50 million elementary and secondary students. The program provides meal
subsidies to all participating students regardless of family income, as shown in Table C-2.
Students from families with incomes greater
than 185 percent of poverty receive "paid"
meals, which are subsidized at the rate of
about 31 cents per day or $56 per year. Students from families with incomes between 130
percent and 185 percent of poverty receive reduced-price meals, while those from families
with incomes less than 130 percent of poverty
receive free meals.
The budget proposes to maintain the current
law level of support for the School Lunch program and to improve program fairness by reallocating subsidies to provide a greater share
to poor and near-poor children. Because the
budget proposal retains the program's current
three-tiered structure, no new paperwork burdens would be imposed on schools or families
with children in the program.
Under the budget proposal, the maximum
charge for a reduced-price lunch would be reduced from 40 cents to 15 cents. This reduction
would save each student eligible for reducedprice lunches (family income between 130 and
185 percent of poverty) as much as 25 cents
per day or $45 per year. Students from families with incomes above 185 percent of poverty
would pay, at most, an additional six cents
per day or $11 per year. Because the reduction
in the subsidy for "paid" lunches is modest,
it is expected to have little, if any, effect on
Table C - 2 . 1992 SCHOOL LUNCH SUBSIDIES UNDER CURRENT LAW 1
Per lunch subsidy
Average daily participants (in millions)
Total annual subsidy (in millions)
1 Subsidy
"Paid"
Reduced-Price
Free
(Income above
185% of
poverty)
(Income
between 130%
and 185% of
poverty)
(Income below
130% of
poverty)
$0.31
12.8
$375
$1.30
1.7
$351
$1.70
10.1
$2,975
value includes both cash and commodities. All per lunch subsidies are rounded to the nearest cent.
Part Two-142
participation of students from higher income
families. Schools, of course, would be free to
absorb some or all of the reduction in "paid"
lunch subsidies.
There are strong arguments for reducing or
eliminating all school lunch subsidies for students from upper income families. The Administration's primary concern, however, is to
transfer more of the available resources to
lower income children. Previous attempts to
reallocate school lunch subsidies have failed
because of charges that the program was being
"cut." Therefore, the budget proposes to fund
the program at the current law level of $4.3
billion (an increase of $244 million over 1991)
and retain some of the subsidy that benefits
students from high income families in the interest of advancing the cause of redistribution.
Veterans Dependency and Indemnity
Compensation: Standardizing Benefits to
Increase Payments to Survivors of LowerRank Military Personnel
The Dependency and Indemnity Compensation (DIC) program provides monthly
payments to surviving spouses, children and
dependent parents of military personnel who
die in service and ex-servicemembers who die
as a result of service-connected illness and injuries. Payments are based on military rank.
During 1990, nearly 342,000 beneficiaries received $2.4 billion in survivor payments, with
surviving spouses comprising 80 percent of the
beneficiaries. Surviving spouses of lowerranked enlisted members (E-6 and below) constitute almost 70 percent of surviving spouses.
The premise that DIC benefits should be related to a member's active duty pay grade results in a benefits structure that treats survivors differently based on the same misfortune—a service-connected death. Under the
current rate structure, monthly payments vary
from $564 for survivors of the lowest-ranked
enlisted members to $1,550 for survivors of
the Joint Chiefs of Staff. The current rate
structure does not recognize that survivors of
lower-rank enlisted personnel are less likely
than survivors of officers and other higherrank members to receive additional benefits
from sources other than DIC, such as Social
Security and military retirement.
THE BUDGET FOR FISCAL YEAR 1992
The budget proposes to standardize the DIC
benefit structure in a way that increases benefits for survivors of low-rank personnel. Under
this proposal, monthly payments to survivors
of lower-rank enlisted members would be
raised annually until their benefits equalled
the rate payable to survivors of members rated
E-6. These benefit increases would be provided
to both current DIC recipients and to those
who come onto the rolls in the future. Survivors of higher-ranked members who are new
beneficiaries also would be paid benefits equal
to the rate for survivors of E-6 personnel. Survivors of higher ranked members already on
the DIC rolls would not be affected by the
proposed changes. Table C-3 illustrates the
proposed DIC rate structure.
Railroad Retirement: Assuring that Basic
Social Security Benefits are Available to
Rail Industry Families
The rail industry is the only U.S. industry
not covered directly by Social Security.2 Rail
employees and employers pay social securityequivalent taxes, and—with some exceptions—
rail employees and their families are entitled
to equivalent benefits. Because railroad employment has declined over time, taxes paid
by the rail sector are not sufficient to cover
rail social security benefits. However, under
a "financial interchange" between the rail social security and the Social Security trust
funds, the rail system is guaranteed enough
money to pay benefits identical to those provided to regular Social Security recipients.
Even though funding is available, because of
exclusions in the Railroad Retirement Act, the
Railroad Retirement Board does not pay rail
social security benefits to four categories of
people for whom benefits are payable under
Social Security: certain children of retired or
disabled annuitants, widow(er)s, spouses, and
divorced spouses.
Rail social security coverage gaps affect
some of society's most vulnerable groups: children, elderly divorced spouses, and survivors.
As a result of the Railroad Retirement Act
exclusions, individuals in these groups who
cannot rely on the safety net provided by So2 A few categories of employees such as certain foreign agriculture workers, the Amish, ministers, and fraternity/sorority domestic service functionaries can be excluded from coverage, but no
sector-wide analog to the case of rail workers exists.
V.C.
Part Two-143
DISTRIBUTING FEDERAL BENEFITS MORE FAIRLY
Table C-3. PROPOSED VETERANS DEPENDENCY AND INDEMNITY
COMPENSATION MONTHLY BENEFITS1
(In dollars)
Member's Pay Grade
1991
Payments for Current and Future
Survivors:
E-l
E-2
E-3
E-4
E-5
E-6
Payments for Future Survivors: 2
Greater than E - 6
1
1992
1993
1994
1995
1996
566
583
599
636
653
669
585
585
601
638
655
671
603
603
603
640
657
673
641
641
641
641
659
675
660
660
660
660
660
676
677
677
677
677
677
677
701-1,556
671
673
675
676
677
Estimates assume annual cost-of-living adjustments.
beneficiaries are not affected by the proposed reform.
2 Current
cial Security may be forced to seek State or
federally funded public assistance, such as Aid
to Families with Dependent Children and Supplemental Security Income.
The budget would ensure that all rail families receive basic Social Security benefits. Any
family member ineligible under railroad retire-
ment exclusion rules could apply directly to
Social Security for benefits, which in 1992
would total an estimated $39 million. The proposal would not affect Social Security's actuarial balance because the financial interchange
between Social Security and rail trust funds
would automatically be reduced by $39 million
to reflect this change.
VI. ADVANCING STATES AS
LABORATORIES
Part T w o - 1 4 5
VI.
INTRODUCTION
The United States Federal system of government has the special advantage of permitting
and encouraging experimentation in new approaches to various kinds of problems on a
less-than-national scale. Supreme Court Justice Louis D. Brandeis capsulized this concept
in a famous dissenting opinion in which he
said 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."
State experimentation is partly spontaneous
and partly consciously fostered and promoted
by the Federal Government through demonstration programs and other means. Chapter
VI.A. describes areas where the Federal Government is promoting innovation. Chapter
VI.B. recounts some "natural" experiments in
the States. Chapter VI.C. provides information, as required by law, on Federal grants
to State and local governments.
State laboratories are currently active in a
wide variety of fields from welfare to the environment. Any laboratory experiment, to
produce useful results, must be carefully evaluated, and evaluations, too, are proceeding
with a new vigor after a period of relative
quiescence.
tion's forthcoming amendments to the Job
Training Partnership Act, through the proposed Youth Opportunities Unlimited demonstration program. Future changes in the
broad area of child welfare and foster care legislation will also likely emphasize experimentation.
In a broader sense, the Administration will
seek to transfer to the States a broader range
of authority and resources—as discussed in the
Director's Introduction. (See Chapter II.).
The Administration will also repropose legislation granting authority for waivers and more
flexibility to reduce regulatory constraints embodied by statute in programs involving Federal grants to the states. Such constraints
characterize grant programs in education,
transportation, health, training and social
services. Waivers and flexibility are important
components not only of the reforms associated
with the educational goals adopted by the
President and the Governors in Charlottesville, VA in 1989 but also of other initiatives
leading toward an escape from poverty. The
waivers are necessary in many cases to permit
innovative approaches in the States and localities.
The greatest ferment of experimentation in
the states as the 1990s began was in two
areas—education and health care.
It was State experimentation in the difficult
area of moving welfare recipients into jobs that
led to the Federal Family Support Act of 1988
(known colloquially as "welfare reform"), and
that act itself set in motion extensive evaluation of the changes it required. There will be
a multi-year, 10-state evaluation of the new
JOBS program established by the Act, which
will make possible assessment of the different
approaches permitted the states. The 1990
farm legislation authorized large-scale Food
Stamp program demonstrations seeking to find
ways of coordinating the Food Stamp job training programs, which have so far proved disappointing, and the JOBS program.
Even before the adoption of the six educational goals at Charlottesville the States
were trying out a variety of approaches to improving the level of achievement in the public
schools. The adoption of the national goals has
given additional impetus to experimentation.
The Federal Government has helped in a number of ways, but there has been particular emphasis on one educational innovation—the concept of "choice", in which parents and children
are given more freedom in the choice of what
school to attend.
The emphasis on experimentation, State
variations, and careful evaluation also characterizes the 1990 Affordable Housing Act and
will be an important feature of the Administra-
The Secretary of Education in 1990 established a new Center for Choice in Education
as a resource for information on what is occurring in various States and to provide assist-
Part Two-147
Part Two-148
THE BUDGET FOR FISCAL YEAR 1992
ance to those States or school districts interested in educational choice. The 1992 budget,
as briefly described below and more extensively in Chapter V.A., moves much further
by providing explicit financial assistance to
States and school districts for choice-based programs and experiments.
to deal with the problems of access to health
care for those without private insurance and
ineligible for medicare or medicaid, and the
steeply rising cost of medical care. A number
of States have enacted legislation in one or
more of these areas, and examples of the rich
variety of approaches will be described below.
In health care the experimentation has been
for the most part at State inititative, without
direct assistance from Washington. The aim
of the various States has been to find ways
Whether the field be transportation or the
environment, welfare or education, the nation
as a whole can only benefit from the exploratory work in the States.
VLA. ENCOURAGING EXPERIMENTATION
EDUCATIONAL CHOICE
The pressing need for renewed efforts to
achieve educational excellence was given national prominence by the 1983 report, "A Nation at Risk" and reached an historic mark
at the Education Summit held by the President and the Nation's Governors in Charlottesville, Virginia, in September 1989. The States
and local school districts are responding with
a host of reforms and potential improvements,
but the evidence is clear that much more needs
to be done.
With 16,000 school districts and 100,000
public and private elementary and secondary
schools across the country, there are myriad
opportunities to test new approaches to raising
educational achievement. These natural experiments vary greatly. Educational choice is
one such experiment that many now believe
holds great promise. In general, choice plans
allow parents some latitude to select the school
their children attend based on which school
they believe offers the highest quality education.
Choice leads to healthy competition among
schools by focusing on proven educational quality as the way to attract students. Although
some believe choice programs work against
public schools, that is not the case. Competition, among public schools and between
those schools and private education, is a powerful instrument for improved quality of all
forms of education.
A number of States and local education
agencies have already developed innovative,
successful choice plans.
• Milwaukee, Wisconsin offers low-income
students the option of attending any qualified non-sectarian private school to which
they have been accepted, and pays the
school up to $2,500 for the child. Because
of the way it was enacted, not because
of its content, this program was ruled in
violation of the State constitution in November 1990.
• Minnesota was the first State to implement an open enrollment policy that enables parents to select a public school outside their normal district boundary. Minnesota also offers a range of other choice
options, including allowing 11th and 12th
graders to attend postsecondary institutions and receive high school credit; special alternative settings for potential dropouts that make it possible for them to complete requirements and receive a high
school diploma; alternative settings for
older students; and special programming
for pregnant teenagers and teenage parents that make it possible for them to complete high school.
• District 4 in East Harlem, New York allows students to choose from among 50
programs in 23 school buildings, each devoted to a particular theme. School types
include the Jose Feliciano School for the
Performing Arts, the Academy of Environmental Sciences, the Isaac Newton School
for Science and Mathematics, and the
School of Science and Humanities. School
directors and teachers participate in the
hiring of new faculty members and in the
scheduling and design of courses. The increased choice has been accompanied by
better teacher morale, substantially reduced vandalism and truancy, and dramatic increases in student test scores.
The Federal Government has an important
role to play in expanding educational choice,
by encouraging more States and local education agencies to implement choice plans and
by enhancing their ability to do so with Federal education funds. The 1992 budget and the
Administration's legislative program include a
broad menu of proposals.
All the educational choice proposals are described in the chapter "Increasing Choice, Expanding Opportunity, and Providing Hope to
Distressed Communities". The ones that are
most directly concerned with encouraging and
helping States to experiment with choice are:
Part Two-149
Part Two-150
• The Educational Choice Program Support
Fund.—Legislation will be proposed to authorize $200 million per year with which
the Education Department would make incentive grants to school districts which
have qualified programs. Qualified programs include allowing the choice of public
or private schooling and giving the parent
control over sufficient funds to make the
choice meaningful. The funds will not pay
for choice programs; they will be incentive
grants to areas that implement such programs, and will have to be used to pay
for additional educational services.
• Choice Demonstrations of National Significance.—To help States and school districts
learn how to design additional workable
models of choice plans, authority and
funding will be requested to establish
carefully evaluated demonstration approaches.
• Choice in the Education block Grant.—The
Education Block Grant ("Chapter 2"), provides funds to States and school districts
to support education reforms. Authority
will be sought to permit States to retain
up to 50 percent of these funds and to
encourage them to use the funds to support choice plans.
ENTERPRISE ZONES—LABORATORIES
AT WORK
The idea of enterprise zones as a means of
dealing with the problems of distressed communities emerged in the 1970s in Great Britain. Two men of different political ideologies—
Peter Hall, a socialist academic, and Sir Geoffrey Howe, a conservative Chancellor of the
Exchequer in the Thatcher government—developed the idea, which was based in part on
the successful use of tax-free zones in such
Asian countries as Hong Kong and Taiwan.
In the United States the idea was given a
particular boost by the introduction of the
Kemp-Garcia bill in the U.S. House of Representatives in 1978. As in Britain, the two
sponsors—Representative Jack Kemp, Republican, and Robert Garcia, Democrat, both of
New York—represented opposite ends of the
political spectrum. The proposed creation of
enterprise zones became an element in Ronald
THE BUDGET FOR FISCAL YEAR 1992
Reagan's campaign for President in 1980.
Paradoxically, though the idea came from
Washington, no meaningful Federal enterprise
zone legislation has ever been enacted. However, the idea spread rapidly and by now about
three-fourths of the States are experimenting
with enterprise zones—ranging in number
from only one to more than 100 zones per
state.
The principle, which is now widely understood, is that the best single remedy for the
ills of poverty and its related social pathologies
is jobs. Enterprise zones are defined geographical areas, typically distressed sections of
cities but also rural areas, where governments
authorize a variety of incentives for the location of job-creating businesses. The principal
incentives involve tax relief or abatement of
various kinds, and relief from burdensome regulation is sometimes also a part of the package.
The experiments in the States have now
been under way long enough to permit meaningful evaluation of the results. The results
are on the whole promising and will be described in this section. However, an important
caveat is in order.
The State experiments have an unavoidable
handicap: They can offer relief only from State
and local taxes and regulations. The impact
of such relief on business location and employment decisions would obviously be significantly
greater if Federal taxes were also involved.
As a very rough measure of the incremental
impact of Federal enterprise zone legislation,
total Federal tax receipts are approximately
twice the combined total of Staite and local
taxes, and thus Federal tax relief may be expected to have more impact than State and
local tax relief. The combination of the two
would clearly be the most potent package of
all, and this has not yet been tried.
The President again this year is proposing
Federal enterprise zone legislation that would
authorize 50 zones, both urban and rural. In
zones that are designated under the legislation
there would be no capital gains tax on gains
from investment in tangible enterprise zone
business assets held for at least two years;
a refundable tax credit of 5 percent of the first
$10,500 in wages earned by low-income employees; and "expensing" by individuals for
VI.A.
ENCOURAGING EXPERIMENTATION
purchase of stock in enterprise zone companies, with a yearly deduction limit of $50,000
per individual and a lifetime cap of $250,000.
These would be powerful incentives for location
of productive enterprise in enterprise zones.
While all enterprise zone programs in the
States stem from the underlying principle of
seeking job creation as a remedy for localized
poverty, the programs vary in their details,
including the tax incentives used.
Evaluation of Enterprise Zones
The most extensive evaluation of State enterprise zone programs undertaken by the Federal Government was done for the Economic
Development Administration of the Department of Commerce by the Center for Regional
Business Analysis of the College of Business
Administration of Pennsylvania State University, completed in April 1989.
The Penn State evaluation finds that "statesponsored enterprise zone programs are characterized by considerable diversity in zone designation criteria, the incentives provided by
State and local governments, and the areal
scales and geographic locations of the zones".
For example, while all zones emphasize job
creation, some place more importance than
others on such goals as "neighborhood revitalization, community development, and the improvement of health, safety and welfare".
The study summarized its findings in these
terms:
The results of this study indicate that enterprise
zones are no "miracle cure" or panacea for economic distress, but that notable improvements
have occurred in very many zones. More than a
quarter of the zones for which we have information achieved gross job gain growth rates that
were higher than the national rate over comparable time periods. These gains occurred in
what are typically very distressed areas, reflecting
levels of unemployment, poverty, and economic
and demographic stagnation that are far worse
than either their host community or the nation.
Like any program, there is a limited set of high
performance zones and a multitude that have
achieved far less success.
The typical zone experienced the additional investment of several new and expanding businesses, although not unexpectedly, less success
was registered in staving off planned closures and
contractions. These new investments resulted in
a median of 175 and an average of over 460 jobs
gained per zone between the time of designation
and survey response. The investment per job figures indicate that [fears of a] labor-intensive
Part Two-151
"sweatshop" environment ... are unfounded. Of
considerable importance is our finding that zone
area residents held a majority of these jobs
gained, and that unemployed and low-income
workers also received substantial shares ...
Overall, the results of our study indicate that a
significant number of state-sponsored enterprise
zones have achieved notable successes in revitalizing some of their economically distressed areas.
Whether the zones actually caused these gains
is open to^argument, although considerable evidence, both quantitative and qualitative, points
to a significant marginal and catalytic role played
by the programs.
An important finding of the study was that
the zones that did best, while distressed, typically had "development potential." The study
said that "identifying those areas that retain
this potential without turning enterprise zones
into a self-aggrandizing program is a critical
balance point."
A narrower study of three enterprise zones
in the state of Maryland by the General Accounting Office found that employment increased in the zones but that "factors other
than the program seemed to account for these
increases." The GAO made several qualifications to its findings, however. The report concluded:
The factors most amenable to government intervention may not be the most commonly decisive
in business locations. Employers are less likely
to cite regulatory practices, taxes, financial inducements, and government-sponsored technical
assistance as important than factors such as market access and community and site characteristics.
Most enterprise zone incentives being in the form
of financial inducements may explain the lack of
employment growth attributable to Maryland enterprise zones.
However, the employers surveyed reported that
such financial inducements may influence hiring
and investment decisions. This could mean that
employers use the incentives after their businesses are located within the enterprise zone...
If this explanation is correct, actions could be
taken—such as better publicizing the enterprise
zone program to businesses outside the area or
strengthening enterprise zone incentives—that
could possibly increase the effect of an enterprise
zone program. Employers apparently viewed some
proposed federal tax incentives as potentially influential in their business decisionmaking.
Barry M. Rubin and Margaret G. Wilder,
in a study published in the APA Journal in
1989, developed a "disaggregated analysis"
method to deal with the problem raised by
the GAO report—a problem inherent in evaluating enterprise zones. Numerous factors bear
upon location of a business. How can one tell
Part Two-152
how much difference the enterprise zone incentives made, compared to other factors?
Rubin and Wilder chose the Evansville, Indiana zone in the 1983-86 period for their study,
which sought to factor out such elements as
"external growth stimuli and industrial composition" in evaluating the success of the zone.
The method was designated "shift-share analysis." The study found:
The results of the shift-share and the cost analysis point to two major conclusions. First, there
is a substantial growth in employment in the
Evansville enterprise zone that is due neither to
metropolitan area growth nor to the industrial
composition of the zone, but is instead a function
of the comparative advantage of the area that
comprises the zone. Given that the zone's geographic area was more distressed than the Evansville metropolitan area in the past years, and that
the zone area gave no sign of having operable
competitive advantages in the two decades prior
to zone designation, it is plausible to infer that
a large majority of the growth in employment is
due to the effects of the enterprise zone and the
zone association. Designation and operation of the
zone is the only major economic change in the
area that occurred in this time frame.
In more detail, the study found that of the
1,878 full-time jobs created in the Evansville
zone in the 1983-86 period, 325 resulted from
"the general growth of the Evansville Metropolitan Area", 123 came from the industrial
composition of the area, and the remainder,
or 1,430 jobs, was due to the enterprise zone
incentives.
Another major finding of the study is that
the program "is cost-effective in job generation" and "has shown lower cost-per-job levels
than most public sector economic development
programs."
However, the study also concluded that Indiana's particular tax incentive program, a chief
feature of which is a credit against local property taxes equal to the tax on inventories for
businesses in enterprise zones, may not be well
designed for direct job creation. It said that
"there appears to be no relationship between
the size of the fiscal incentives claimed by a
[business] sector and the extent of job generation in that sector," though the fiscal incentives "contribute to job generation in an indirect manner".
Evaluations of State enterprise zone programs will undoubtedly continue to be made.
However, there appears to be enough evidence
THE BUDGET FOR FISCAL YEAR 1992
at hand to show that these programs produce
measurable results. Addition of Federal tax incentives should multiply those results, at modest cost to the U.S. Treasury.
OTHER AREAS
Beyond the promotion of choice in education
and enterprise zones, there are numerous
other fields of governmental action where Federal policy encourages innovation and experimentation at the State and local level. What
follows are examples in several areas.
Transportation
The Administration's proposal for a five-year
reauthorization of the Federal highway program contains several innovations designed to
encourage the States to seek their own solutions for local transportation problems, using
both road building and mass transit.
• States will be allowed to use part of their
annual highway funding grants for either
highway or transit projects.
• Except for a newly designated National
Highway System (which includes the
43,000-mile Interstate sytem), the present
highway funding categories will be eliminated and States will have flexibility to
use Federal highway funds on most nonlocal roads.
• In a change from current law, States will
be allowed to use Federal highway funds
to build, expand or improve toll roads. The
Federal contribution would be 35 percent.
Tolls could continue after the construction
is paid for, provided the excess revenues
are used for highway or mass transit capital projects.
More flexibility for State and local governments is not limited to surface transportation.
In reauthorizing aviation programs last year
Congress accepted an Administration proposal
to change previous law and permit local airport authorities to levy passenger facility
charges (PFC). These fees, of up to $3 per trip,
will help the local authorities to finance airport expansion and improvement, including
bond financing backed by the revenues from
the fees.
VI.A.
Part Two-153
ENCOURAGING EXPERIMENTATION
Welfare
The Low Income Opportunity Board was an
interagency body established in the Reagan
Administration (now replaced by the Economic
Empowerment Task Force). One of its principal functions has been to screen applications
from the States for waivers from ordinary regulations and constraints to permit experimentation in the general area of welfare, including
aid to families with dependent children
(AFDC), food stamps and medicaid. All of the
experiments contain a requirement for thorough evaluation of the results—evaluations
that will be be forthcoming in the period from
1991 to 1995. The following is a brief description of several of the experiments which have
been approved by the Low Income Opportunity
Board.
• Alabama.—A single cash benefit replaces
the currently separate AFDC, food stamp
and low income energy assistance grants.
This will test, in particular, the gains and
losses from giving food assistance in cash
instead of in stamps that are redeemable
only in participating food stores.
• Maryland.—Incentive bonuses are offered
to teenage parent AFDC recipients to stay
in school and to long-term AFDC recipients to participate in training.
• New York.—In several counties, the AFDC
program has been replaced for some families with a demonstration program guaranteeing child support payments to single
custodial parents.
• Texas.—The State is testing the impact of
transitional medicaid benefits to welfare
parents who find work.
Not only does the Administration respond
to requests from the States for waivers from
the normal rules, it also solicits such requests.
States willing to experiment in the welfare
area on a budget-neutral basis would find sympathetic consideration for such concepts as
these:
• Pay higher benefits to families who view
AFDC as a short-term safety net and seek
to get off welfare as soon as possible, and
lower benefits to those who have made
welfare a way of life. Benefits might be
increased from present levels for newcomers on AFDC but gradually reduced
after several years.
• Modify Federal matching rates (which now
average a little over half of the benefits
paid) in such a way as to give States financial rewards if they reduced long-term
dependency.
In addition, the Administration will seek a
new approach to the problems of poverty by
encouraging establishment of "Empowerment
Opportunity Areas". These would be in two
forms—geographic concentrations of poor people, such as a central city or a rural area,
or target groups such as unmarried first-time
mothers. Special waivers from Federal requirements would be granted to encourage innovative approaches.
The plans to establish Empowerment Opportunity Areas would be developed locally and
submitted to the Federal government for approval of the necessary waivers. The programs
would have specific performance criteria by
which they could be evaluated and would normally last for a period of three to five years.
One of the conditions for approval of each proposal would be the willingness of State and
local governments to participate.
Environment
The major Clean Air legislation approved by
Congress and signed by the President in 1990
featured the market-based principle of "trading" in pollution reduction to foster the most
efficient achievement of the specified reductions in air pollutants such as sulphur dioxide.
The question arises whether this principle can
be applied to the goal of preserving wetlands
without completely halting local economic
growth and development.
The Army Corps of Engineers plans demonstration projects in the States to help find
the answer. "Wetlands mitigation banks"
would be established which would accept "deposits" in the form of wetlands restored or created to offset "withdrawals" in the form of development projects that cause some loss of wetlands. These banks would be linked to State
wetlands comprehensive plans.
VLB. REPORTING ON VARIATION AND
INNOVATION
NATURAL EXPERIMENTS IN HEALTH
CARE: STATES AS LABORATORIES
The U.S. faces two major health care problems: cost and access. Per capita health spending is the highest in the world—$2,192 in
1988—and is increasing rapidly. Total U.S.
health spending could increase from 11.6 percent of GNP in 1989 to 15 percent by the year
2000. There are clear benefits to this spending:
life expectancy in the U.S. is among the longest in the world and most Americans have
ready access to state-of-the-art medical care.
However, many experts believe that quality
can be maintained, or even improved, at a
lower cost. If so, excessive health spending
could be diverting resources needed for other
investments in the Nation's future.
classified as market-oriented or regulatory in
nature. Private sector initiatives are, of necessity, market-oriented. While there has been little formal evaluation, selected examples can
provide valuable insights.
Controlling Health Care Costs
Market-oriented measures to control cost
generally rely on selective contracting with
providers to obtain discounts and on "managed
care" to prevent unnecessary utilization. Regulatory approaches typically involve some form
of regulation of payments by all private and
public insurers to hospitals and other providers, although other regulatory approaches have
been tried as well.
Selective Contracting in California.—
Until 1982, California administered its Medicaid program in a traditional manner. Medicaid
beneficiaries could obtain treatment from any
hospital or physician willing to treat Medicaid
patients. In this context, market-based pricing
is not possible, so payment rates were set administratively by State officials. In 1982, California established selective contracting as a
pro-competitive reform.
Rising costs also threaten access to care.
Thirty-one million Americans—13 percent of
the population—are uninsured, primarily because of cost. There is widespread concern that
the uninsured may not be receiving necessary
medical care and may be in poorer health as
a result. Providing uncompensated care to the
uninsured also results in a heavy financial
burden for some hospitals, particularly inner
city hospitals. Most of the uninsured are poor
or near poor and cannot afford to buy insurance on their own. Many are employed (or are
the dependants of workers), but most uninsured workers are low-wage, low-skill workers
who cannot command health insurance as a
fringe benefit. Two-thirds of the working uninsured are employed by small businesses—a
segment of the economy that is facing special
problems with insurance coverage.
The theory is to use market forces to control
costs. Under the program, Medicaid establishes exclusive provider agreements with a
limited number of hospitals. Hospitals with exclusive provider contracts provide discounts to
the State in exchange for an increased share
of the Medicaid case load. Only those hospitals
with agreements are entitled to provide elective non-emergency treatment to Medicaid recipients.
State and local governments and private sector employers and health plans have developed
and are testing a wide variety of innovative
responses to the cost and access problems. It
would be difficult to provide a complete catalogue. Literally hundreds of initiatives are underway across the country. However, the basic
strategies being tested can be categorized in
broad terms. State initiatives can generally be
According to a 1986 evaluation funded by
the Health Care Financing Administration, average per diem costs for inpatient hospital care
were reduced by 16 percent as a result of the
program. More recent estimates indicate savings of approximately $300 million per year.
After a stormy beginning, providers are now
generally satisfied with the program. While
the program remains successful, political pres-
Part Two-155
Part Two-156
sure has forced California to enter into contracts with more and more hospitals. Some believe that this has diluted the potential advantage to be gained by selective contracting.
The "Buy Right99 Strategy: Cleveland
Health Quality Choice.—In response to soaring costs, many employers (and insurers) have
tried to obtain discounts from hospitals and
physicians through "preferred provider" arrangements, a looser form of selective contracting than that used in the California Medicaid
program. The health plan negotiates discounts
with "preferred" hospitals and physicians, but
patients retain choice. They still can receive
care from non-preferred providers, but must
pay higher cost-sharing. Care from "preferred
providers" is free or subject to reduced costsharing.
While preferred provider arrangements are
increasingly common, potential savings are
limited by employee demands that a broader
range of providers be included in the preferred
provider network. Employees have little incentive to support restrictive networks, in part
because they generally receive health insurance at nominal cost as a tax-free fringe benefit. In addition, employees are naturally concerned about quality of care.
To encourage greater employee support for
selective contracting and to improve quality,
a group of major employers in Cleveland, Ohio
is sponsoring the Cleveland Health Quality
Choice (CHQC) project. CHQC is developing
a state-of-the-art system for measuring and
comparing the quality of care in Clevelandarea hospitals. The system will include a survey to measure perceptions of quality from the
patient's standpoint and a system for measuring quality from a clinical standpoint. Patient
outcomes (e.g., death and complications) in
hospital intensive care units and for selected
medical and surgical admissions will be monitored with detailed clinical adjustments to account for differences in severity of illness.
CHQC hopes to be producing quality reports
on a routine basis starting in 1992. CHQC expects that participating employers would use
this information to guide their health purchasing decisions. Employers would share this information with their employees, and could adjust employee co-payments, to encourage use
of the selected providers. It will be several
THE BUDGET FOR FISCAL YEAR 1992
years before the impact of the program can
be assessed.
The Cleveland group must overcome many
hurdles. However, use of outcomes data to
compare quality appears to be just a matter
of time. Many experts believe that outcomes
data could be widely available within ten
years. One of the basic weaknesses in the market for health care is that individual and institutional purchasers of care have little ability
to evaluate quality. In the absence of reliable
information, consumers are apt to equate higher price, fancier facilities, or reputation with
better care. Thus, widespread consumer availability and use of quality data is likely to lead
to more informed decision-making. Competition among providers to attract these moreinformed consumers would be strengthened,
potentially leading to better care at lower cost.
Using Managed Care in the Private Sector: Allied-Signal Corporation.—Many corporations offer their employees a wide variety
of health plans. Allied-Signal, a New Jersey
based technology firm, is trying a different approach. In 1988, Allied Signal shifted all of
its health insurance business to CIGNA Corporation. This gave Allied Signal leverage to
obtain a number of important concessions from
CIGNA, including a highly unusual three-year
rate guarantee. CIGNA, in turn, established
a nationwide point-of-service managed care
network to help control costs.
Under the point-of-service approach, patients
can receive care from network providers or can
receive care out-of-plan. As with preferred provider arrangements, use of network providers
is encouraged by differential cost sharing. This
incentive works: over 80 percent of the care
received by Allied Signal employees is provided
in-plan.
CIGNA's point-of-service plan differs from
the typical preferred provider network in its
extensive use of managed care to control utilization. The cornerstone of this strategy is the
primary care "case manager" physician. Every
employee has a primary care physician. These
physicians are paid a fixed monthly fee for
each patient and are responsible for providing
routine primary care. Because payment is
fixed, these physicians are not subject to the
"do more, earn more" incentives of traditional
fee-for-service payment. Referrals to specialists
VLB.
REPORTING ON VARIATION AND INNOVATION
and hospitalizations must be authorized by the
primary care physician. Unauthorized use is
subject to higher cost-sharing. Further savings
accrue due to discounts negotiated with specialists and hospitals in exchange for inclusion
in CIGNA's network.
Allied estimates that it has saved more than
$200 million over the three year contract period. Employees appear to be generally satisfied as well. It is too early to say whether
favorable results can be sustained over a period of years. Nor is it certain whether Allied's
success can be reproduced elsewhere. Nonetheless, the approach appears to be promising.
Using Managed Care to Control Medicaid Costs in Arizona.—Until 1982, Arizona
was the only State that did not participate
in Medicaid. County governments provided
acute and long-term care for the poor. In 1982,
Arizona established a Medicaid program and
obtained a waiver to operate this through the
Arizona Health Care Cost Containment System (AHCCCS).
AHCCCS is unique in that all care is provided through managed care arrangements.
There is no fee-for-service option. Arizona contracts with participating health care organizations (HCOs) through a bidding/negotiation
process. Modest savings have been achieved—
estimated by HCFA at 5.7 percent in the
fourth year of the program compared to feefor-service alternatives.
Managed care is being used successfully in
other Medicaid programs as well. Overall, 2.3
million Medicaid beneficiaries receive care
through HMOs and other managed care plans.
Expanding Access by Limiting Covered
Medical Services: The Oregon Experiment.—The Administration continues to monitor with great interest the Oregon Basic
Health Services Act. As noted in the 1991
budget, this proposal expands greatly the
State's Medicaid program to cover the entire
State population whose incomes are below the
poverty line with a "basic" package of medical
services. Additional services will be provided
only if funds are available. The program also
requires that all workers in the State receive
at least this same "basic" coverage through
employment-based health insurance.
Part Two-157
To assist in designing the basic benefit package, health care services are to be ranked by
a Health Care Services Commission on the
basis of their effectiveness in improving
health. The Commission's initial report is expected to be completed in early 1991 and the
design of the benefit package finished in the
summer of 1991.
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.
Controlling Costs Through Rate Regulation: Maryland, New Jersey, and New
York.—For more than a decade, Maryland,
New Jersey, and New York have regulated
hospital payments to control costs. Health
plans are not free to set their own payment
rates or negotiate discounts. Maryland and
New Jersey have "all payer" systems that set
rates for private- and public-sector insurers.
New York controls rates for all payers except
Medicare. The Maryland and New Jersey systems are administered by a rate setting commission. The New York system is administered
by the State Department of Health.
The three States have had some success in
controlling costs, but each has also encountered problems. Maryland data suggest that
cost per hospital admission is growing more
slowly in Maryland than in the U.S. as a
whole. However, recently Medicare costs seem
to be increasing more rapidly under Maryland's all-payer system than they would increase under Medicare's own prospective payment system. There have been no rigorous
studies of the impact of rate setting on quality.
Ideally, rate-setting should be compared with
market-based approaches, such as selective
contracting, but such a study has not been
conducted.
New York is considering a proposal that borrows some elements of the Canadian health
system while retaining a mixed public and private system. Under the UNY*Care proposal,
payment rates for hospital, physician, and
other health services would be controlled to
keep aggregate outlays within an acceptable
range. To reduce administrative costs, the
Part Two-158
State would operate a single claims processing
and payment system for all private and public
programs. Private insurers would continue to
provide coverage to individuals not eligible for
public programs, but their role would change
dramatically; they would focus on efforts to
prevent overutilization. UNY*Care would also
provide universal health coverage through an
expansion of Medicaid and an employer mandate.
The regulatory strategy reflects an underlying assumption that there are fundamental
flaws in the market for health care. Commonly
cited problems include insurance which weakens incentives for consumers to be prudent
purchasers of care and the technical nature
of health care which limits the ability of consumers to make intelligent health purchasing
decisions. Advocates of regulation play down
the possibility that selective contracting, managed care, and other market reforms can correct these problems.
Regulation is, of course, accompanied by its
own set of potential problems. If prices are
set too low (or if investments are controlled),
shortages can develop with accompanying long
delays in receiving care. There is some evidence this has happened in Canada. Moreover,
price regulation is an inherently political process; thus, its effectiveness in controlling costs
is contingent on the politics of the day.
Expanding Access to Health Insurance
Market-oriented efforts to expand access
often attempt to make insurance more affordable through premium subsidies or through
low-cost minimum benefit packages. Regulatory measures, by contrast, typically involve
a mandate, or a special tax, to force employers
to provide health insurance as a fringe benefit
to workers. Other approaches focus on the special problems of small business.
Reducing Premium Costs to Encourage
Voluntary Coverage: The Washington
State Basic Health Plan.—In 1989 Washington State implemented its "Basic Health Plan"
with the goal of universal coverage. The approach is voluntary; there are no mandates.
To encourage enrollment, costs are held as low
as possible through use of managed care. To
reduce costs further, prescription drugs, dental, mental health, and custodial care were ex-
THE BUDGET FOR FISCAL YEAR 1992
cluded from coverage even though these services can be important for many low-income
residents. In addition, premiums are subsidized on a sliding scale basis. Individuals
with incomes below 100 percent of poverty pay
less than 15 percent of cost while those with
incomes between 175 and 200 percent of poverty pay 75 percent of cost.
Currently the program is available to individuals and families with incomes below 200
percent of poverty in 17 locations throughout
the State. Almost 19,000 residents are enrolled; total enrollment is capped at 30,000 because of limited funding. While the plan has
had some success, it falls far short of providing
universal access. The problem is clear: premium subsidies cost $900 to $1000 a year per
enrollee. With approximately 800,000 uninsured residents, universal coverage could cost
Washington State almost a billion dollars a
year. And costs could be even higher if the
availability of generous premium subsidies encouraged employers to cut back on the premium contributions they currently make for
low-wage workers.
Requiring Employers to Provide Health
Insurance Coverage: Hawaii and Massachusetts.—In contrast to Washington's voluntary approach, Hawaii and Massachusetts
are using mandates to expand health coverage.
Hawaii's program has been in effect since
1974. The Massachusetts plan has not yet
been implemented.
Under the Hawaii law, employers are required to provide coverage that meets or exceeds a State-defined package of benefits. Until
recently employer liability was limited to 1.5
percent of gross revenue. Starting in 1992,
Massachusetts employers will be required to
pay a "play-or-pay" tax of $1,680 per worker;
the tax will be waived for employers who are
providing an equivalent amount of health insurance.
As a result of its mandate fewer than 5 percent of the Hawaii population are uninsured—
the lowest percent in the nation. Low-income
school children and unemployed workers comprise most of the remaining uninsured. There
have been few obvious negative consequences.
The future of the Massachusetts plan is uncertain, particularly because of the State's economic problems.
VLB.
REPORTING ON VARIATION AND INNOVATION
Mandating health benefits expands coverage
at little or no direct cost to government. However, costly mandates will reduce employment
opportunities and cash wages for low-income
workers. If so, the intended beneficiaries could
be hurt more than they are helped. Because
of Hawaii's unique geography and economy,
the ability to draw lessons applicable to other
States is unclear; for example, there is evidence that because of a very tight labor market employers offer health plans that cost more
than the mandated floor amount in order to
attract workers.
Funding Uncompensated Care Through
a Hospital Tax: New Jersey.—New Jersey
relies on an approach that focuses on expanding access to hospital care. A special tax, or
surcharge, is imposed on all hospital bills. This
raises revenues that are then recycled to those
hospitals (about one third of the total) that
provide a disproportionate amount of uncompensated care. In 1990, the tax was about 19
percent and raised more than $600 million in
revenues.
From an access perspective, the New Jersey
program has a number of clear benefits. Access
for the uninsured is improved and New Jersey
hospitals, particularly inner city hospitals,
have been spared many of the uncompensated
care problems afflicting hospitals elsewhere.
Moreover, the New Jersey system helps level
the playing field between hospitals with differing indigent care burdens. This can be very
important in an increasingly competitive environment.
However, there are problems. The burden
of the hospital tax is ultimately born by those
employers that voluntarily provide coverage to
their workers. A further problem is that even
the current tax is insufficient to cover indigent
care costs fully. Finally, the system provides
no assistance for ambulatory care which could,
in some situations, prevent the need for a
more costly hospital admission.
Because of these concerns, a "Governor's
Commission on Health Care Costs" has recently recommended elimination of the hospital tax in favor of a broad-based payroll tax
and a Massachusetts-style "play-or-pay" tax of
$1000 per employee.
Part Two-159
Using Regulation to Make Health Insurance More Available For Small Business:
The Connecticut Plan.—Small business
plays a central role in the problem of the uninsured. Two-thirds of all uninsured workers are
employed by small business. In part, this reflects the general economics of small business,
but small firms also face a number of unique
problems with health insurance. Aggressive insurers are "skimming the cream" by offering
low, experience-rated premiums to small businesses with healthy workers. As this happens,
premiums for other firms increase rapidly. Because these firms are too small for effective
risk pooling, premiums can increase dramatically with even a single high-risk employee.
Whole firms are being denied coverage because
of a single employee with a chronic illness.
There are other problems as well. Overhead
costs are high: up to 40 percent of benefit payments for firms with fewer than 5 employees,
compared with 6 percent for firms with more
than 10,000 employees. Moreover, small firms
do not have the leverage needed to command
discounts from insurers.
Connecticut is addressing these problems
with a 1990 law focused on small business.
Premium setting and underwriting practices
are regulated to prevent "cream-skimming"
and "churning." Insurers would be prohibited
from denying or cancelling coverage based on
health status and there would be limits on
the extent to which premiums could be varied
based on health status or claims experience.
The bill also provides for the creation of a
risk pool to spread the cost of providing coverage to high risk groups. Finally, the law provides for a new low-cost minimum benefit
package available for small employers who are
not currently providing health insurance.
It is too early to assess the impact of this
initiative, but Connecticut's approach is gaining momentum. The National Association of
Insurance Commissioners and the Health Insurance Association of America are supporting
similar legislation for enactment by State legislatures across the country. However, some
observers
question
whether
chronically
understaffed insurance regulators will be able
to enforce adequately the complex provisions
involved. Moreover, insurance will remain too
costly for many, so the overall impact on the
uninsured is unlikely to be as large as hoped.
Part Two-160
Pooling the Purchasing Power of Small
Employers: The COSE Program.—Cleveland's "Council of Smaller Enterprises" (COSE)
is tackling the health insurance problems faced
by small business through a purely private
sector approach. Rather than relying on government regulation of underwriting and premium-setting practices, COSE is using the
pooled purchasing power of many small businesses to get the best value for its membership.
COSE is not an insurer; it does not provide
insurance coverage directly. Rather, COSE is
a group purchasing service that buys health
insurance for its membership. COSE provides
members with 10 plan options including preferred provider organization (PPO) and health
maintenance organization (HMO) options.
COSE is governed by a board of directors
that is elected by the membership and has
a full-time professional staff dedicated to mastering the intricacies of health insurance. To
reduce administrative costs, COSE administers
billing and enrollment functions directly. This
has also allowed COSE to develop an information system that it uses to support its aggressive purchasing efforts. These advantages are
unavailable to small businesses acting independently.
COSE's success can be measured by its enrollment growth. Since 1978, COSE has grown
from 80 member companies with approximately a thousand covered employees and dependants to over 6,250 member companies
with over 125,000 covered employees and dependants. The premiums paid by members and
enrollees total more than $100 million a year.
Because of its size, COSE can obtain substantial discounts from insurers and negotiate
rules of conduct to prevent problems and misunderstandings. According to an independent
consultant, premium rates for COSE increased
by only 35 percent between 1984 and 1990
compared with a 150 percent increase for commercial insurance rates during the same period.
COSE clearly has made a real difference for
the employees and families of its member companies. But COSE's strategy has its limits.
Health insurance is still very expensive. Moreover, COSE operates in a highly competitive
THE BUDGET FOR FISCAL YEAR 1992
environment and must, therefore, hold down
premium costs to attract members. As a result,
COSE limits coverage for high risk groups and
individuals with pre-existing conditions. Moreover, COSE charges modestly higher premiums
for small businesses with an adverse claims
history. Nonetheless, members have been protected from many of the underwriting practices
afflicting small business health insurance elsewhere.
OTHER AREAS
Spontaneous State and local experimentation, without explicit Federal sponsorship or
financing, is occurring in numerous areas of
governmental policy and action, apart from the
innovations in health care described above. In
education alone, for example, nearly every
State is trying out new ideas in an effort to
reverse the acknowledged weaknesses in student achievement in the public schools. An experiment with Federal support, educational
choice, is described in the preceding section.
Selected examples of State experimentation
are outlined below to illustrate the diversity.
Solid Waste
Collier County, Florida, has adopted a process called "landfill mining", which involves
digging up old landfills and sorting the trash
by machine into several types. Some recyclable
materials, such as ferrous scrap, plastics and
glass, are sold. Organic material is composted.
The county gains revenues and reduces the
threat to ground water posed by landfills.
Water Supply
The East coast of southern Florida has numerous golf courses, which need to be watered,
and a limited supply of fresh water. Palm
Beach and Martin counties, which are adjacent, treat waste water from a community of
50,000 to sufficient purity to be usable for golf
course watering. The treated water is sold to
the golf courses, saving 500,000 gallons daily
of drinking water and earning revenues to pay
for the waste water treatment.
Rail Transportation
The State of California has been able to sell
transportation bonds based on a recent increase in highway user fees. Part of the pro-
VLB.
REPORTING ON VARIATION AND INNOVATION
ceeds of the bond issues will be used, not for
road building, but rather to reduce highway
congestion by improving intercity rail passenger transportation within the State.
Welfare Payments
Ramsey County, Minnesota, is conducting an
experiment in which more than $4.5 million
each month in various kinds of cash welfare
benefits are paid to more than 11,000 recipi-
280-000 0 - 9
1 - 6 (PART 2)
Part Two-161
ents through Automated Teller Machines and
Point-of-Service terminals. No checks are issued. Recipients avoid check-cashing fees and
can, in effect, open a bank account and withdraw their benefits in small amounts during
the month rather than all at once. The demonstration will provide information on the
costs of electronic benefit disbursement, which
may exceed those of standard benefit issuance,
and the costs can then be weighed against the
advantages of the new system.
VLC. PROVIDING FEDERAL AID TO STATE
AND LOCAL GOVERNMENTS1
State and local governments have a vital
constitutional role in providing government
services. They have the major role in providing
domestic public services, such as public education, law enforcement, public roads, water
supply, and sewage treatment. The Federal
Government contributes directly toward that
role both by promoting a healthy economy and
by providing grants, loans, and tax subsidies
to State and local governments.
Federal grants help State and local governments finance programs covering most areas
of domestic public spending, including income
support, capital spending, and other assist1 Federal aid to State and local governments is defined as the
provision of resources by the Federal Government to support a
State or local program of governmental service to the public. The
three primary forms of aid are grants (including shared revenues),
loans, and tax expenditures.
$ BILLIONS
ance. Federal grant outlays were $136.9 billion
in 1990. They are estimated to be $158.6 billion in 1991 and $171.0 billion in 1992.
The accompanying chart shows trends in
outlays in major grant categories from 1980
to 1992. Grant outlays for payments for individuals are estimated to be 62 percent of total
grants by 1992; for physical capital, 16 percent; and for all other grants, largely for education, training, and social services, 22 percent.
In addition, Federal direct lending and loan
guarantees to State and local governments are
another source of Federal aid. Federal loans
are used by States and localities for a variety
purposes, including rural development and
transportation. Direct loan disbursements to
State and local governments are estimated to
f e d e r a l g r a n t s t o state a n d l o c a l g o v e r n m e n t s
(outlays)
180
160-
1980
1982
1984
1986
1988
1990
1992
Part Two-163
Part Two-164
THE BUDGET FOR FISCAL YEAR 1992
be $581 million in 1992, compared to $521 million in 1991. New guaranteed loans are estimated to be $125 million in 1992, compared
to $110 million in 1991. Information on new
credit reform concepts and other Federal credit
activities is available in Chapter VIII.A., "Recognizing and Reducing Federal Underwriting
Risks" in this volume.
Federal aid to State and local governments
is also provided through tax expenditures. Tax
expenditures are one of the means by which
the Federal Government carries out public policy objectives; they can be considered alternatives to direct spending programs.
The two major tax expenditures benefiting
State and local governments are the deductibility of most State and local taxes and the
exclusion of interest on State and local securities from Federal taxation. Federal aid to State
and local governments through tax expenditures is estimated to be $57.8 billion in 1992
compared to $55.4 billion in 1991.
A detailed discussion of the measurement
and definition of tax expenditures and a complete list of revenue loss and outlay equivalent
estimates for specific tax expenditures are in
Chapter XI, "Tax Expenditures," in this volume. State and local tax expenditures are dis-
played separately at the end of Table XI-1
in that chapter.
FEDERAL GRANTS BY FUNCTION AND
AGENCY
Table C - l shows a functional distribution
of Federal grant outlays as proposed in this
Budget. The functions with the largest amount
of grants are health and income security, with
combined estimated grant outlays of $109.8
billion or 64 percent of total grant outlays in
1992.
Table C-2 shows the distribution of grants
by agency. Grant outlays for the Department
of Health and Human Services are estimated
to be $90.3 billion in 1992, 53 percent of total
grants, much more than any other agency.
HISTORICAL PERSPECTIVES
In recent decades, Federal aid to State and
local governments has become a major factor
in the financing of certain government functions. The rudiments of the present system
date back to the Civil War. The Morrill Act,
passed in 1862, established the land grant colleges and instituted certain federally required
standards, as is characteristic of the present
Table C-l. FEDERAL GRANT OUTLAYS BY FUNCTION
(In billions of dollars)
Function
National defense
Energy
Natural resources and environment
Agriculture
Transportation
Community and regional development
Education, training, employment
and social services
Health
Income security
Veterans benefits and services
Administration of justice
General government
Total outlays
Actual
1990
Estimate
1991
1992
1993
1994
1995
1996
0.2
0.5
3.7
1.3
19.2
0.3
0.5
4.0
1.4
19.8
0.1
0.4
3.8
1.4
20.2
0.1
0.3
3.9
1.5
21.5
0.1
0.3
3.7
1.6
21.9
0.1
0.3
3.3
1.6
21.8
0.1
0.3
2.9
1.7
23.3
5.0
4.8
4.3
4.0
3.7
3.6
3.6
23.1
43.9
37.0
0.1
0.6
2.3
26.8
54.9
42.7
0.2
0.9
2.3
27.6
63.4
46.3
0.2
0.8
2.2
27.8
72.3
49.2
0.2
1.0
2.2
28.1
82.2
52.3
0.2
0.7
2.2
28.5
92.6
54.7
0.2
0.7
2.2
28.9
103.7
55.6
0.2
0.7
2.3
136.9
158.6
171.0
184.0
197.0
209.9
223.2
VI.C.
Part Two-165
PROVIDING FEDERAL AID TO STATE AND LOCAL GOVERNMENTS
Table C - 2 . FEDERAL GRANT OUTLAYS BY AGENCY
(In Billions of dollars)
Agency
Department of Agriculture
Department of Commerce
Department of Education
Department of Energy
Department of Health and Human Services
Department of Housing and Urban Development
Department of the Interior
Department of Justice
Department of Labor
Department of Transportation
Department of the Treasury
Environmental Protection Agency
Federal Emergency Management Agency
Other agencies
Total
grant system. Federal aid was later initiated
for agriculture, highways, vocational education
and rehabilitation, forestry, and public health.
In the depression years, Federal aid was extended to meet income security and other social welfare needs. However, Federal grants
did not become a significant factor in Government expenditures until after World War II.
Table C-3 displays trends in Federal grants
to State and local governments. Section A of
Table C-3 shows the percent distribution of
Federal grants by function. Functions with a
substantial amount of grants are shown separately. Grants in the functions for national defense, energy, veterans benefits and services,
and the administration of justice are relatively
small and are combined in the "other functions" line in the table.
The percent for transportation increased to
43 percent in 1960 with initiation of aid to
States to build the Interstate Highway System
in the late 1950s.
By 1970 there had been significant increases
in the relative share for education, training,
employment, social services, and health (largely medicaid).
Actual
—
Estimate
1991
1992
11.9
0.3
11.2
0.2
65.5
14.3
1.6
0.5
6.0
19.2
0.4
2.9
1.4
1.6
13.2
0.3
12.8
0.2
81.0
16.3
1.5
0.8
6.4
19.8
0.5
3.1
1.0
1.8
14.0
0.3
13.9
0.2
90.3
17.7
1.6
0.8
6.7
20.1
0.5
3.0
0.5
1.6
136.9
158.6
171.0
In the early and mid-1970s, major new
grants were created for natural resources and
environment (construction of sewage treatment
plants), community and regional development
(community development block grants), and
general government (general revenue sharing).
In the 1980s changes in the relative shares
reflect steady growth of grants for health
(medicaid) and income security and restraint
in most other areas.
Section B of Table C-3 shows the composition of grants divided into three major categories: payments for individuals, physical capital, and other grants. Grant outlays for payments for individuals have grown significantly
as a percent of total grants. In 1980, they were
36 percent of the total, and by 1990 they had
grown to 57 percent of the total. These grants
go through State or local governments to provide cash or in-kind benefits that constitute
income transfers to individuals or families. The
major grant in this category is medicaid, which
had outlays of $41.1 billion in 1990. Family
support payments to States (AFDC), child nutrition programs, and housing assistance are
also large grants in this category. All programs
in this category are identified by footnote in
Part Two-166
THE BUDGET FOR FISCAL YEAR 1992
Table C-3. TRENDS IN FEDERAL GRANTS TO STATE AND LOCAL
GOVERNMENTS
(Outlays; dollar amounts in billions)
Actual
Estimate
1955 I960 1965 1970 1975 1980 1985 1990 1991 1992 1993 1994 1995 1996
A. Percentage distribution of grants by
function:
Natural resources and environment ....
Agriculture
Transportation
Community and regional development
Education, training, employment, and
social services
Health
Income security
General government
Other functions
Total
B. Composition:
Current dollars:
Payments for individuals1
Physical capital2
Other grants
...
Total
Percentage of total grants:
Payments for individuals1
Physical capital2
Other grants
2%
3
43
2
2%
5
38
6
2%
3
19
7
5%
1
12
6
6%
1
14
7
4%
2
16
5
3%
1
14
4
3%
1
12
3
2%
1
12
3
2%
1
12
2
2%
1
11
2
2%
1
10
2
1%
1
10
2
10
4
53
3
1
7
3
38
2
10
6
32
2
1
27
16
24
2
1
24
18
19
14
2
24
17
20
9
1
17
23
26
6
1
17
32
27
2
1
17
35
27
1
1
16
37
27
1
1
15
39
27
1
1
14
42
27
1
1
14
44
26
1
1
13
46
25
1
1
*
100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
1.6
0.8
0.8
2.5
3.3
1.2
3.7
5.0
2.2
8.7
7.0
8.3
16.8
10.9
22.2
32.7
22.5
36.3
49.4
24.8
31.7
3.2
7.0
10.9
24.1
49.8
91.5 105.9 136.9 158.6 171.0 184.1 197.0 209.9 223.2
51%
26
24
35%
47
17
34%
46
20
36%
29
34
34%
22
45
36%
25
40
47%
23
30
78.6
25.7
32.5
57%
19
24
94.7 106.2 117.7 130.2 142.9 154.9
26.8 27.0 28.6 29.1 29.1 30.5
37.0 37.7 37.8 37.7 37.9 37.8
60%
17
23
62%
16
22
64%
16
21
66%
15
19
68%
14
18
69%
14
17
100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Total
Constant (FY 1982) dollars:
Payments for individuals1
Physical capital2
Other grants
Total
C. Total grants as a percent of:
Federal outlays:
Total
Domestic programs3
State and local expenditures
Gross national product
D. As a share of total State and local
capital spending:
Federal capital grants
State and local own-source financing ...
Total
1%
7
19
1
...
38.2
24.5
43.2
5.5
3.4
3.8
7.5
12.2
5.0
10.4
17.3
7.7
20.5
19.3
21.3
29.0
18.3
39.8
44.0
22.9
27.1
57.8
20.9
22.2
65.8
20.7
24.0
70.9
19.8
23.2
75.7
20.0
22.2
80.9
19.4
21.1
12.7
24.7
35.4
61.2
87.1 105.9
5%
14%
10%
1%
8%
18%
15%
1%
9%
18%
15%
2%
12%
23%
19%
2%
15%
22%
23%
3%
15%
22%
26%
3%
11%
18%
21%
3%
11%
17%
18%
3%
11%
17%
N/A
3%
12%
18%
N/A
3%
13%
19%
N/A
3%
14%
21%
N/A
3%
14%
21%
N/A
3%
14%
21%
N/A
3%
8%
92
24%
76
25%
75
25%
75
26%
74
36%
64
33%
67
23%
77
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
85.7
18.6
20.3
89.9
18.6
19.5
94.1 100.9 110.4 113.9 117.8 121.4 124.7 128.0
100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
1 For
an identification of accounts in this category, see table C-4, including its footnote.
2 Excludes capital grants that are included asi payments for individuals.
3 Excludes national defense, international affairs, net interest, and undistributed offsetting receipts.
N/A: Not available.
the detailed Table C-4, Federal Grants to
State and Local Governments—Budget Authority and Outlays, at the end of this section.
Grants for physical capital are to assist
States and localities with construction and
other physical capital activities. The major
grants in this area are for highways, but there
are also grants for airports, mass transit, sewage treatment plant construction, community
development, and other areas. Grants for physical capital were almost half of total grants
in 1960, shortly after initiation of grants for
construction of the Interstate Highway System. The relative share of these outlays has
declined somewhat steadily, as payments for
individuals and other social programs have
grown since the mid-1960s. In 1990, grants
for physical capital were 19 percent of total
grants.
The other grants are primarily for education,
training, employment, and social services.
These grants increased to 34 percent of total
VI.C.
PROVIDING FEDERAL AID TO STATE AND LOCAL GOVERNMENTS
Part Two-167
grants by 1970. In 1990 these grants were 24
percent of total grants.
found in Chapter XVIII, "Physical Capital
Presentation."
Section B of Table C-3 also shows these
three categories in constant dollars. In constant FY 1982 dollars, total grants decreased
from $105.9 billion in 1980 to $100.9 billion
in 1990, an average annual decrease of 0.5
percent. From 1980 to 1990, payments for individuals grew from $38.2 billion to $57.8 billion,
an average annual increase of 4.2 percent;
grants for physical capital decreased from
$24.5 billion to $20.9 billion, an average annual decrease of 1.6 percent, and other grants
decreased from $43.2 billion to $22.2 billion,
an average annual decrease of 6.4 percent.
• Data for summary and detailed grants to
State and local governments can be found
in many sections of Part Seven, "Historical
Tables." Section 12 is devoted exclusively
to grants to State and local governments.
Additional information on grants can be
found in Section 6 (Composition of Federal
Government Outlays); Section 9 (Federal
Government Outlays for Major Public
Physical Capital Investment); Section 11
(Federal Government Payments for Individuals); and Section 15 (Total (Federal
and State and Local) Government Finances).
Section C of Table C-3 shows grants as a
percent of Federal outlays, state and local expenditures, and gross national product. Grants
have declined as a percent of total outlays
from 15 percent in 1980 to 11 percent in 1990
and, as a percent of domestic programs, from
22 percent in 1980 to 17 percent in 1990.
As a percent of total State and local expenditures, grants have declined from 26 percent
in 1980 to 18 percent in 1990.
Section D of Table C-3 shows the relative
contribution of physical capital grants in assisting States and localities with capital spending. Federal capital grants declined as a percent of State and local capital spending from
36 percent in 1980 to 23 percent in 1990, reflecting restraint in Federal spending and increased capital spending by States and localities financed from their own sources, such as
taxes or borrowing.
OTHER INFORMATION ON FEDERAL
AID TO STATE AND LOCAL GOVERNMENTS
Additional information regarding aid to
State and local governments can be found in
other parts in this budget.
• Discussions of major policy proposals,
many of which affect aid to State and local
governments, can be found throughout
Part Two.
• Presentation of major public physical capital investment programs that are grants
to State and local governments can be
In addition to the data in this budget, a
number of other sources of information are
available that use slightly different concepts
of grants, provide State-by-State information,
or provide information on how to apply for
Federal aid.
• Governmental Finances, published annually by the Bureau of the Census in the
Department of Commerce, provides data
on public finances, including Federal aid
to State and local governments.
• The Survey of Current Business, published
monthly by the Bureau of Economic Analysis in the Department of Commerce, provides data on the national income and
product accounts (NIPA), a broader statistical concept encompassing the entire
economy. These accounts include data on
Federal grants to State and local governments. Data using the NIPA concepts appear in this budget in Chapter XVI, "National Income and Product Account Presentation."
• Budget Information for the States (BIS)
provides estimates of State funding allocations for the largest formula grant programs for the past, present, and budget
year. These programs comprise approximately 80 percent of total Federal aid to
State and local governments. The document is prepared by the Office of Management and Budget soon after the Budget
is released.
• Federal Expenditures by State is a report
prepared by the Bureau of the Census that
Part Two-168
shows Federal spending by State for
grants and other spending for the most
recently completed fiscal year.
• The Consolidated Federal Funds Report
(CFFR) is two annual documents that
show the distribution of Federal spending
by county areas and by local governmental
jurisdictions. It is released by the Bureau
of the Census in the Spring.
• The Federal Assistance Awards Data System (FAADS) provides computerized information about current grant funding. Data
on all direct assistance awards are provided quarterly by the Bureau of the Census to the States and to the Congress.
• The Catalog of Federal Domestic Assistance is prepared by the General Services
Administration with data collected by the
Office of Management and Budget and is
available from the Government Printing
Office. The basic edition of the Catalog is
usually published in June and an update
is generally published in December. It contains a detailed listing of grant and other
assistance programs; discussions of eligibility criteria, application procedures, and
estimated obligations; and related information. This is a primary reference source
for communities wishing to apply for
grants and other domestic assistance.
• The Federal Register is published daily by
the Government Printing Office and has
current information on agencies that are
accepting applications for specific programs. These notices also provide information on eligibility criteria and application
procedures.
THE STATE AND LOCAL GOVERNMENT SECTOR OF THE NATIONAL
INCOME AND PRODUCT ACCOUNTS
THE BUDGET FOR FISCAL YEAR 1992
accounting for receipts and expenditures. First,
financial transactions are excluded from NIPA
data but are generally included in budgetary
data. Second, a large number of transactions
in the NIPA accounts are recorded on an accrual basis, while many governments show
transactions on a cash basis. Third, NIPA data
aggregate total State and local transactions,
whereas many governments separate their
general fund from special funds. As a result
of these differences, NIPA totals are not the
same as an aggregate of these governments'
budgets. However, the NIPA data do provide
timely estimates of total State and local fiscal
transactions not otherwise available and, if
used with care, can provide helpful financial
indicators.
NIPA State and Local Sector.—The following chart shows State and local operating
account surpluses and deficits as a percent of
GNP, excluding the social insurance funds (primarily pensions). The social insurance funds
have been excluded because their surpluses
are for future pension obligations and are not
available for carrying out the general responsibilities of these governments. It is reasonable
for the operating account to be in deficit because it includes capital expenditures, often financed through borrowing. The peaks and
troughs in the operating account are largely
the result of:
• changes in economic activity, which affect
primarily receipts;
• decisions regarding debt-financed capital
spending; and
• changes in Federal aid.
The operating account was in deficit every
year from 1955 to 1971. During the 1970s it
was frequently in surplus. In part, this change
reflected the growth of Federal grants (rather
than State and local borrowing) to finance new
infrastructure.
The national income and product accounts
(NIPA) provide a comprehensive statistical description of the U.S. economy that includes
State and local government receipts and expenditures. These data measure the relationship between the State and local governments
as a sector of the economy and other sectors.
• The low point in 1975 was largely the result of the recession.
There are three major differences between
NIPA data and a government's own budgetary
• The surpluses in the latter 1970s were
largely the result of the economic recovery,
• The surpluses in the early 1970s were
largely the result of the initiation of general revenue sharing and strong economic
growth.
VI.C.
Part Two-169
PROVIDING FEDERAL AID TO STATE AND LOCAL GOVERNMENTS
STATE AND LOCAL SURPLUSES AND DEFICITS
AS A PERCENT OF GNP
-1
1955
1960
1965
1975
1970
i i i
1980
i i i i i
1985
1990
Excludes state and local social insurance funds.
increases in anti-recession Federal grants,
reductions in debt-financed capital spending, and general restraints in government
spending exemplified by the passage of
Proposition 13 in California in 1978.
spending financed by borrowing and to other
factors.
The recession brought the account into deficit in 1980 and 1982, albeit quite small ones
relative to the 1955-71 period. As a result of
the recession, States and localities reduced expenditures and increased taxes. These actions
along with economic growth helped return the
account to surplus for 1983-1986. The decline
into deficit beginning in 1987 is due to increases by States and localities in capital
The following two tables present detailed
Federal aid data for 1990, 1991, and 1992.
Table C-4, "Federal Grants to State and Local
Governments—Budget Authority and Outlays,"
provides detailed budget authority and outlay
data for grants. Table C-5, "Credit Assistance
to State and Local Governments," provides information on direct and guaranteed loans to
State and local governments.
DETAILED FEDERAL AID TABLES
Part Two-170
THE BUDGET FOR FISCAL YEAR 1992
Table C-4. FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS—BUDGET AUTHORITY AND
OUTLAYS
(In millions of dollars)
BUDGET AUTHORITY
Function, agency and program
NATIONAL DEFENSE:
Department of Defense—Military:
National Guard centers construction
Federal Emergency Management Agency:
Emergency management planning and assistance
Total, national defense
ENERGY:
Department of Energy:
Energy conservation
Department of Housing and Urban Development:
Assistance for solar and conservation improvements
Tennessee Valley Authority:
Tennessee Valley Authority fund
Total, energy
1990
actual
OUTLAYS
1991
1992
estimate estimate
1990
actual
1991
1992
estimate estimate
150
200
32
95
103
98
91
104
99
245
303
130
241
304
131
201
247
30
228
211
184
*
*
233
240
247
150
200
32
201
247
30
461
451
431
178
4
113
6
77
122
19
2
130
24
82
22
56
60
62
156
167
42
144
6
2
48
149
7
2
305
190
17
33
167
194
20
34
34
*
*
*
1,948
389
291
65
2,100
496
305
55
1,900
482
318
75
2,290
341
198
45
2,353
414
253
66
2,194
401
280
85
Total, natural resources and environment
3,825
3,956
3,670
3,745
3,980
3,838
AGRICULTURE:
Department of Agriculture:
Cooperative State Research Service
Extension Service
Food donations (Commodity Credit Corporation)
Buildings and facilities
Payments to States and possessions (AMS)
Temporary emergency food assistance program
340
369
403
45
1
169
391
398
423
63
1
170
384
411
485
27
1
147
350
364
403
387
388
423
1
167
1
170
368
407
485
1
1
155
1,328
1,447
1,455
1,285
1,369
1,418
NATURAL RESOURCES AND ENVIRONMENT:
Department of Agriculture:
Solid waste management grants
Watershed and flood prevention operations
Resource conservation and development
Forest research
State and private forestry
Department of Commerce:
Operations, research, and facilities (NOAA)
Department of the Interior:
Regulation and technology
Abandoned mine reclamation fund
Resource management
Construction
Cooperative endangered species conservation fund
Miscellaneous permanent appropriations
Sport fish restoration
Urban park and recreation fund
Land acquisition
Historic preservation fund
Miscellaneous permanent appropriations
Environmental Protection Agency:
Sewage treatment system construction grants
Abatement, control, and compliance
Hazardous substance superfund
Leaking underground storage tank trust fund
Total, agriculture
*
*
*
56
60
62
124
93
100
74
50
117
41
158
9
3
28
132
6
1
40
160
1
129
179
2
27
31
137
186
2
51
33
150
205
4
42
35
*
*
6
158
236
30
36
*
VI.C.
Part Two-171
PROVIDING FEDERAL AID TO STATE AND LOCAL GOVERNMENTS
Table C-4. FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS—BUDGET AUTHORITY AND
OUTLAYS—Continued
(In millions of dollars)
BUDGET AUTHORITY
Function, agency and program
TRANSPORTATION:
Department of Transportation:
Federal-aid highways (trust fund)
Highway traffic safety grants
Highway-related safety grants
Motor carrier safety grants
Railroad-highway crossings demonstration projects
Miscellaneous safety programs
Baltimore-Washington Parkway
Trust fund share of other highway programs
Miscellaneous appropriations
Miscellaneous highway trust funds
Office of the Administrator (Federal Railroad Administration)
Local rail freight assistance
Mandatory passenger rail service payments
Conrail commuter transition assistance
Research, training, and human resources (mass transit) ..
Interstate transfer grants — transit
Washington metro
Formula grants (mass transit)
Discretionary grants (mass transit)
Formula grants (trust fund)
Transit planning and research (trust fund) (UMTA)
Administrative expenses (trust fund share) (UMTA)
University transportation centers (trust fund) (UMTA)
Interstate transfer grants-transit (trust fund)
Miscellaneous expired accounts (mass transit)
Grants-in-aid for airports
Boat safety
Pipeline safety
Payments to air carriers (trust fund)
Washington Metropolitan Area Transit Authority:
Interest payments (Washington metro)
Total, transportation
COMMUNITY AND REGIONAL DEVELOPMENT:
Department of Agriculture:
Emergency community water assistance grants
Rural development grants
Rural water and waste disposal grants
Rural community fire protection grants
Rural development loan fund
Department of Commerce:
Economic development assistance programs
Miscellaneous appropriations (EDA)
Regional development programs
Regional development commissions
Department of Housing and Urban Development:
Other assisted housing programs (housing assistance)
Community development grants
Urban development action grants
Rental rehabilitation grants
Rental housing assistance for the homeless
Revolving fund (liquidating programs)
New community assistance grants
1990
actual
1992
1991
estimate estimate
14,708
124
10
59
8
13,729
126
10
60
23
12
10
146
63
8
10
404
40
15,468
165
35
60
18
OUTLAYS
1990
actual
1991
estimate
13,854
140
12
65
-3
13,826
127
8
62
5
10
12
10
155
58
*
12
66
15
1
14
14
4
2
2
274
244
2,242
879
2
3
228
221
2,324
1,135
88
5
2
160
85
1,625
1,282
150
5
2
149
64
1,605
1,400
1,651
30
4
1,800
35
5
1,900
35
7
39
1,220
26
4
90
1,434
35
5
52
52
52
60
59
20,036
19,677
21,108
19,225
19,818
7
132
3
2
10
16
153
4
3
160
180
*
-1
208
3
300
4
191
209
80
350
2,600
93
40
6
160
225
_*
2
2,915
-50
128
11
3,200
-14
2,920
57
239
2,818
209
37
3
-1
2
*
193
3,073
210
68
4
6
Part Two-172
THE BUDGET FOR FISCAL YEAR 1992
Table C-4. FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS—BUDGET AUTHORITY AND
OUTLAYS—Continued
(In millions of dollars)
BUDGET AUTHORITY
Function, agency and program
Department of the Interior:
Operation of Indian programs
Appalachian Regional Commission:
Appalachian regional development programs
Federal Emergency Management Agency:
Emergency management planning and assistance
Disaster relief
Neighborhood Reinvestment Corporation:
Payment to the Neighborhood Reinvestment Corporation
Total, community and regional development
EDUCATION, TRAINING, EMPLOYMENT, AND
SOCIAL SERVICES:
Department of Commerce:
Public telecommunications facilities
Department of Education:
Indian education
Impact aid
Chicago litigation settlement
Compensatory education for the disadvantaged
School improvement programs
Bilingual and immigrant education
Special education
Vocational rehabilitation and disability research
American printing house for the blind
Promotion of education for the blind
Vocational and adult education
Student financial assistance 1
Higher education
Libraries
Assessment, statistics, research and improvement
Department of Health and Human Services, except Social
Security:
Grants to States for special services
Interim assistance to States for legalization
Payments to States for family support activities
Social services block grant
Human development services
Payments to States for foster care and adoption assistance
Department of Labor:
Training and employment services
Community service employment for older Americans
Federal-State employment services (Federal and trust
funds)
Federal unemployment benefits and allowances
Community Services Administration:
Community services program
Corporation for Public Broadcasting:
Public broadcasting fund
Institute of Museum Services:
Institute of Museum Services
National Endowment for the Arts:
National Endowment for the Arts
1990
actual
OUTLAYS
1991
1992
estimate estimate
1990
actual
1991
1992
estimate estimate
19
21
69
20
21
55
142
164
94
124
110
123
12
1,101
19
15
157
11
1,173
16
699
13
303
27
26
27
27
26
27
4,707
3,931
3,564
4,965
4,793
4,341
20
22
23
20
24
66
787
69
771
70
615
5,342
1,290
152
1,880
1,625
6
6,197
1,421
157
2,271
1,740
6
6,393
1,414
160
2,533
1,850
6
63
799
10
4,437
1,080
152
1,485
1,623
6
62
800
15
5,309
1,422
155
2,101
1,762
8
64
681
14
6,033
1,451
158
2,444
1,821
6
1,287
73
25
127
893
90
20
144
1,022
33
34
108
3
444
940
15
2,802
2,799
148
584
2,801
3,204
*
1,113
59
24
126
1,231
64
24
132
1,236
389
301
436
272
11
2,762
2,612
2,800
3,058
2,800
3,238
351
544
7
2,749
2,267
1,375
2,584
2,367
1,579
2,444
2,310
3,068
81
3,151
86
3,117
75
3,042
76
3,049
79
3,149
83
1,052
79
1,084
71
984
1,032
3
1,063
54
1,044
48
24
35
29
-1
_*
229
299
327
229
299
327
5
5
6
5
6
6
34
44
43
30
36
44
VI.C.
Part Two-173
PROVIDING FEDERAL AID TO STATE AND LOCAL GOVERNMENTS
Table C-4. FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS—BUDGET AUTHORITY AND
OUTLAYS—Continued
(In millions of dollars)
BUDGET AUTHORITY
Function, agency and program
Total, education, training, employment, and social services
HEALTH:
Department of Agriculture:
Food Safety and Inspection Service (salaries and expenses)
Department of Health and Human Services, except Social
Security:
Health resources and services 1
Disease control, research and training
Alcohol, drug abuse, and mental health 1
Grants to States for Medicaid 1
Department of Labor:
Occupational Safety and Health Administration (salaries
and expenses)
Mine Safety and Health Administration (salaries and expenses)
Total, health
INCOME SECURITY:
Department of Agriculture:
Rural housing for domestic farm labor 1
Mutual and self-help housing 1
Rural housing preservation grants 1
Food donations (Section 32) 1
Special milk program 1
Food donation programs for selected groups 1
Food stamp program administration 1
Special supplemental food program for women, infants,
and children 1
Commodities supplemental food program1
State child nutrition payments (excl. Sect. 32) 1
Nutrition assistance for Puerto Rico 1
Department of Health and Human Services, except Social
Security:
Program administration
Family support payments to States (AFDC and CSE) 1 ....
Low income home energy assistance 1
Refugee and entrant assistance 1
Payments to States for family support activities
Payments to States for day care assistance 1
Payments to States from receipts for child support
Department of Housing and Urban Development:
Subsidized housing programs 1
Congregate services program 1
Assistance for renewal of expiring Section 8 subsidy 1
Section 8 moderate rehabilitation, single room occupancy
Homeownership and opportunity for people everywhere
(HOPE) grants 1
Shelter plus care—Section 8 moderate rehabilitation, single room occupancy 1
Shelter plus care—Section 202 rental assistance 1
Housing assistance for the elderly and persons with disabilities
Payments for operation of low income housing projects 1 ..
1990
actual
OUTLAYS
1991
1992
estimate estimate
1990
actual
1991
1992
estimate estimate
24,478
27,995
27,335
23,101
26,832
27,648
37
38
39
36
46
39
1,246
316
1,657
40,690
1,327
346
1,783
51,555
1,442
388
1,899
59,833
1,141
299
1,241
41,103
1,254
315
1,646
51,555
1,322
353
1,822
59,833
65
72
74
64
70
73
6
6
6
6
6
6
44,017
55,127
63,681
43,890
54,892
63,447
11
9
19
568
20
204
1,315
11
9
23
361
19
228
1,665
5
10
412
22
265
1,538
8
8
20
368
18
245
1,199
15
8
20
367
22
250
1,509
12
9
21
400
22
264
1,530
2,121
68
4,765
937
2,345
82
5,437
963
2,568
85
5,913
1,013
2,119
75
4,853
931
2,330
77
5,494
963
2,556
85
5,893
1,013
10
12,165
1,443
329
531
11
14,008
1,610
366
1,000
732
6
15,042
1,025
366
1,000
745
4
12,246
1,314
391
258
7
14,110
1,669
339
636
22
8
15,117
991
363
868
567
*
5,004
6
524
73
1,865
5,498
6,329
4,642
81
5,760
165
865
24
18
53
37
657
2,100
153
2,156
*
*
8,729
5
3
9,848
8
336
4
10,175
1
1,233
10
41
1,759
2
1
7
2,013
2,150
Part Two-174
THE BUDGET FOR FISCAL YEAR 1992
Table C-4. FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS—BUDGET AUTHORITY AND
OUTLAYS—Continued
(In millions of dollars)
BUDGET AUTHORITY
Function, agency and program
Drug elimination grants 1
Low-rent public housing (forgiven loans) 1
Emergency shelter grants program 1
Supportive housing demonstration program1
Homeless rental housing assistance 1
Home investment partnerships program (housing assistance)
Department of Labor:
Unemployment trust fund — administration
Federal Emergency Management Agency:
Emergency food and shelter program 1
Total, income security
VETERANS BENEFITS AND SERVICES:
Department of Veterans Affairs:
Medical care 1
Grants for constructing State care facilities 1
Construction of State veterans cemeteries
Total, veterans benefits and services
ADMINISTRATION OF JUSTICE:
Department of Housing and Urban Development:
Fair housing activities
Department of Justice:
Assets forfeiture fund
National Institute of Corrections
Justice assistance
Revolving fund
Crime victims fund
Department of the Treasury:
Customs forfeiture fund
Equal Employment Opportunity Commission:
Equal Employment Opportunity Commission
State Justice Institute:
State Justice Institute
Total, administration of justice
GENERAL GOVERNMENT:
Department of Agriculture:
Forest Service permanent appropriations
Department of Defense—Civil:
Corps of Engineers permanent appropriations
Department of Energy:
Payments to States under the Federal Power Act
Department of the Interior:
Payments in lieu of taxes
Bureau of Land Management permanent appropriations
Payments to States — mineral leasing receipts
National wildlife refuge fund
Administration of territories
Trust Territory of the Pacific Islands
Payments to the U.S. territories
Department of the Treasury:
Internal revenue collections for Puerto Rico
Miscellaneous permanent appropriations
1990
actual
350
73
127
1,801
OUTLAYS
1991
1992
estimate estimate
150
200
73
150
91
165
100
71
150
167
500
1,000
1,984
2,263
1990
actual
1991
estimate
458
46
33
329
67
57
11
10
1,742
2,084
130
134
100
132
139
34,468
45,338
49,387
36,964
42,745
92
41
4
104
70
4
128
85
5
92
38
3
104
42
138
177
218
134
152
12
12
13
176
3
557
200
3
586
205
3
499
125
125
150
6
18
177
3
244
200
3
519
*
85
30
20
25
10
11
904
963
365
25
20
113
40
25
10
894
10
574
928
355
370
369
356
6
6
6
2
2
2
105
116
451
16
72
33
74
104
106
515
18
101
48
75
105
111
472
21
61
19
78
103
215
451
16
78
38
74
104
101
515
18
85
48
75
277
103
277
135
277
141
277
101
277
135
VI.C.
Part Two-175
PROVIDING FEDERAL AID TO STATE AND LOCAL GOVERNMENTS
Table C-4. FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS—BUDGET AUTHORITY AND
OUTLAYS—Continued
(In millions of dollars)
BUDGET AUTHORITY
Function, agency and program
1990
actual
Commission on National and Community Service:
Commission on national and community service
District of Columbia:
Federal payment to the District of Columbia
1992
1991
estimate estimate
OUTLAYS
1990
actual
1991
1992
estimate estimate
55
Total, general government
Total, grants
15
15
538
568
536
578
568
536
2,160
2,366
2,202
2,309
2,307
2,212
136,507
161,526
173,674
136,894
158,572
170,984
* $500 thousand or less.
Programs included in the "grants for payments to individuals" category shown in Table C-3.
Table C-5. CREDIT ASSISTANCE TO STATE AND LOCAL GOVERNMENTS
1
(in millions of dollars)
1990
Actual
Function, agency and program
1991
1992
Estimate Estimate
Direct Loans
Natural resources and environment:
Department of the Interior:
Bureau of Reclamation loans, liquidating
Emergency fund, liquidating
Environmental Protection Agency:
Abatement, control, and compliance, liquidating
Total, energy, natural resources, and environment
Commerce and housing credit:
Department of Agriculture:
Rural housing insurance fund (FmHA), liquidating
Transportation:
Department of Transportation:
Right of way revolving fund, liquidating
Miscellaneous expired accounts (WMATA), liquidating
Total, transportation
Loan disbursements
Change in outstandings
Outstandings
Change in outstandings
Outstandings
13
11
95
-1
10
10
8
103
-1
9
-2
101
-1
9
Loan disbursements
Change in outstandings
Outstandings
37
31
90
28
20
110
26
16
126
Loan disbursements
Change in outstandings
Outstandings
50
41
195
38
27
223
26
13
236
Loan disbursements
Change in outstandings
Outstandings
24
12
434
30
19
452
25
13
466
Loan disbursements
Change in outstandings
Outstandings
Outstandings
30
3
93
177
42
95
25
118
177
Loan disbursements
Change in outstandings
Outstandings
30
3
270
93
177
42
270
95
25
295
Part Two-176
THE BUDGET FOR FISCAL YEAR 1992
Table C-5. CREDIT ASSISTANCE TO STATE AND LOCAL GOVERNMENTS ^Continued
(in millions of dollars)
1990
Actual
Function, agency and program
Community and regional development:
Department of Agriculture:
Rural development insurance fund (FmHA), liquidating
Department of Commerce:
NOAA coastal energy impact fund, liquidating
Department of Interior:
BIA revolving fund, liquidating
BIA-Indian loan guaranty and insurance fund, liquidating ...
Department of Housing and Urban Development:
Community development, liquidating
Revolving fund for liquidating programs, liquidating
Total, community and regional development
Education:
Department of Education:
Guaranteed student loans, liquidating
College housing loans, liquidating
College housing and academic facilities, liquidating
Total, education
Health:
Department of Health and Human Services:
Medical facility guarantee and loan fund, liquidating
General purpose fiscal assistance:
Other independent agencies:
Loans to the District of Columbia, liquidating
Grand total, direct loans
1991
Estimate
Loan disbursements
Change in outstandings
Outstandings
396
269
3,649
Change in outstandings
Outstandings
86
-2
349
214
3,863
-3
83
Loan disbursements
Change in outstandings
Outstandings
Loan disbursements
Change in outstandings
Outstandings
2
-5
57
8
6
3
60
2
2
9
Loan disbursements
Change in outstandings
Outstandings
Change in outstandings
Outstandings
2
-39
244
5
-40
204
27
27
Loan disbursements
Change in outstandings
Outstandings
401
219
4,071
363
175
4,246
Change in outstandings
Outstandings
Loan disbursements
Change in outstandings
Outstandings
Loan disbursements
Change in outstandings
Outstandings
-14
17
13
653
8
8
32
646
22
22
55
Loan disbursements
Change in outstandings
Outstandings
21
-32
702
47
700
14
14
Change in outstandings
Outstandings
-33
619
-35
584
Loan disbursements
Change in outstandings
Outstandings
525
210
6,304
521
184
6,488
Change in outstandings
Outstandings
-34
294
-31
263
Outstandings
*
-1
*
-2
-26
-17
25
-8
-2
Guaranteed Loans
Community and regional development:
Department of Agriculture:
Rural development insurance fund (FmHA), liquidating
VI.C.
Part Two-177
PROVIDING FEDERAL AID TO STATE AND LOCAL GOVERNMENTS
Table C-5. CREDIT ASSISTANCE TO STATE AND LOCAL GOVERNMENTS ^Continued
(in millions of dollars)
1990
Actual
Function, agency and program
Department of Housing and Urban Development:
Revolving fund for liquidating programs, liquidating
Community development, liquidating
Department of the Interior:
BIA, Indian loans, liquidating
Total, community and regional development
Income security:
Department of Housing and Urban Development:
Low-rent public housing, liquidating
Grand total, guaranteed loans
1991
1992
Estimate Estimate
Change in outstandings
Outstandings
Loan disbursements
Change in outstandings
Outstandings
-13
36
83
71
271
-15
21
100
70
341
-13
9
125
80
421
Loan disbursements
Change in outstandings
Outstandings
7
-87
66
10
7
73
-3
70
Loan disbursements
Change in outstandings
Outstandings
90
-64
668
110
31
699
125
42
741
Change in outstandings
Outstandings
-271
5,463
-300
5,163
-325
4,838
Loan disbursements
Change in outstandings
Outstandings
90
-335
6,131
110
-269
5,862
125
-283
5,579
* $500 thousand or less.
1 Only
direct loans are included in budget outlays. Guaranteed loans are non-Federal loans guaranteed by the Federal Government. For
a discussion of credit in the budget, see Chapter VIII.A., "Recognizing and Reducing Federal Underwriting Risks."
VII. PRESERVING NATIONAL
SECURITY AND ADVANCING
AMERICA'S INTERESTS ABROAD
Part Two-179
VII. INTRODUCTION
The budget requests $290.8 billion in budget
authority and $295.2 billion in outlays for National Defense (050), and $35.7 billion in budget authority and $17.8 billion in outlays for
International Affairs (150) in 1992. These levels are consistent with the Budget Enforcement Act which provides separate caps for
these functions in 1992 and 1993. The purpose
of this request is to provide for programs that
preserve the Nation's 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, human rights, international cooperation and the rule of law.
The defense budget request does not reflect
the full incremental costs of Operation Desert
Shield which includes Desert Storm. When
costs can be more reliably determined, a supplemental request will be submitted formally.
In the interim, Desert Shield placeholder
amounts are included in Governmentwide allowances.
Table VII-1. FUNDING SUMMARY FOR NATIONAL DEFENSE AND
INTERNATIONAL AFFAIRS
(In billions of dollars)
1990
Actual
National Defense (050):
Budget Authority
Outlays
Department of Defense-Military (051):
Budget Authority
Outlays
International Affairs (150):
Budget Authority
Outlays
Total:
Budget Authority
Outlays
Estimate
1991
1992
1993
303.3
299.3
285.6
298.9
290.8
295.2
290.9
292.0
(293.0)
(289.8)
(273.0)
(287.5)
(278.3)
(283.0)
(277.9)
(279.1)
18.8
13.8
19.8
17.0
35.7
17.8
21.8
18.3
322.1
313.1
305.4
315.9
326.5
313.0
312.7
310.3
29.0
15.0
14.0
8.2
4.6
0.8
Memorandum
Desert Shield placeholder amounts included in Governmentwide allowances (929)
Appropriation1
Offsetting receipts
Net Budget Authority
Net Outlays
^oes not include $1.0 billion already appropriated by the Congress in 1991.
Part Two-181
Part Two-182
THE BUDGET FOR FISCAL YEAR 1992
CONTEXT
The events of last year were both encouraging and disturbing. There was German unification, and rapid economic and political reform
in Eastern Europe, but also deep uncertainty
and instability within the Soviet Union. There
was close cooperation among our allies in the
Persian Gulf crisis, but disarray among them
in trade negotiations resulting in the suspension of the Uruguay Round. There was a restoration of democracy in Panama and Nicaragua, but a setback for democracy in
Suriname. There was a movement toward economic reform in Latin America as evidenced
by U.S. and Mexican free trade negotiations
and by the Enterprise for the Americans Initiative, but the persistence of trade restrictions
in many countries. There were reduced military tensions with the Soviet Union but also
the need for massive U.S. force deployments,
the most rapid large-scale deployment since
World War II. As this budget goes to press,
war has begun.
Against this background, there are both opportunities for action and problems to be ad-
dressed. Because of the reduced threat of a
major war with the Soviet Union, plans can
proceed for a significant reduction in military
force structure—of about 25 percent by 1995.
But, as recent events in the Mideast show,
necessary military capabilities must be maintained, and selectively strengthened and restructured to respond to regional conflicts and
to outlaw and terrorist regimes. Moreover,
force planning must take into account that the
Soviet Union continues to possess formidable
military power including massive strategic nuclear capabilities.
International affairs programs will reinforce
the movement toward democracy and free markets and support efforts to protect new and
existing democracies from threats to their security. This requires the full range of assistance tools, from development assistance to balance of payments support to military assistance. To tailor assistance to individual country
situations and to be able to respond to unfolding events, flexibility must be an essential feature of assistance programs.
VILA. PRESERVING NATIONAL SECURITY
The security objectives of the U.S. remain
unchanged. U.S. military forces must deter aggression and protect American citizens around
the globe. They must be able to repel or defeat
military attacks that threaten vital U.S. interests. The reduced threat of a major war with
the Soviet Union presents the opportunity to
reduce and restructure military forces. Nevertheless, combat-ready forces must be maintained and equipped with modern equipment
to respond to continuing threats. It is also in
the U.S. interest to pursue verifiable strategic
and conventional arms reduction agreements,
to prevent the transfer of technologies with
military applications to potential adversaries,
and to continue to meet the challenge of reducing the flow of illegal drugs into the U.S.
NATIONAL DEFENSE BUDGET
Table A - l shows the budget authority and
outlays through 1993 for the three national
defense subfunctions: military functions of the
Department of Defense, atomic energy defense
activities, and defense-related
other agencies.
activities
of
Currently planned 1991-1995 defense budget levels are compared in Table A-2 with last
January's budget and with the July 1990
Gramm-Rudman-Hollings baseline (no real
growth). The table shows that the 1991-1995
levels are $130 billion in budget authority and
$97 billion in outlays below last year's budget,
and $238 billion in budget authority and $182
billion in outlays below the July Gramm-Rudman-Hollings baseline.
Department of Defense—Military
The budget requests $278.3 billion for budget authority and $283.0 billion for outlays in
1992 for the military functions of DOD. The
1992 program for Defense is 12 percent below
the 1990 program in real terms, after inflation,
and 24 percent below the 1985 level. The budget includes proposed rescissions of $3.4 billion
in 1991, reflecting proposed program terminations in 1992 and elimination of low-priority
Table A - l . NATIONAL DEFENSE
(In billions of dollars)
1990
Actual
Budget Authority:
Department of Defense-Military
Operations
Investment
Atomic Energy Defense Activities
Defense-Related Activities
Total Budget
Shield)
Authority
(excluding
Outlays:
Department of Defense-Military
Operations
Investment
Atomic Energy Defense Activities
Defense-Related Activities
Total Outlays (excluding Desert Shield)
Estimate
1991
1992
1993
293.0
(172.7)
(120.3)
9.7
0.6
273.0
(170.7)
(102.3)
11.6
1.1
278.3
(170.1)
(108.2)
11.8
0.8
277.9
(167.2)
(110.7)
12.2
0.8
303.3
285.6
290.8
290.9
289.8
(169.9)
(119.9)
9.0
0.6
287.5
(170.8)
(116.7)
10.5
0.9
283.0
(167.2)
(115.8)
11.4
0.8
279.1
(166.6)
(112.5)
12.1
0.8
299.3
298.9
295.2
292.0
Desert
Part Two-183
Part Two-184
THE BUDGET FOR FISCAL YEAR 1992
active and reserve military personnel and
forces.
Table A-2. NATIONAL DEFENSE FUNCTION (050)
(In billions of dollars)
1991
January 1990 Budget:
Budget Authority
Outlays
July 1990 G-R-H Baseline (no real
growth):
Budget Authority
Outlays
February 1991 Budget: *
Budget Authority
Outlays
February 1991 Reductions from:
January 1990 Budget: *
Budget Authority
Outlays
July 1990 G-R-H Baseline: *
Budget Authority
Outlays
* Excludes effects of Desert Shield.
1992
1993
1994
1995
1991-1995
Total
306.9
303.3
312.5
309.2
317.5
311.9
321.6
315.7
325.7
318.6
1,584
1,559
314.2
306.8
326.7
317.6
339.0
326.8
350.6
342.2
361.6
350.0
1,692
1,643
285.6
298.9
290.8
295.2
290.9
292.0
291.9
286.7
295.1
288.6
1,454
1,461
-21.3
-4.4
-21.7
-14.0
-26.6
-19.9
-29.7
-29.0
-30.6
-30.0
-130
-97
-28.6
-7.9
-35.9
-22.4
-48.1
-34.8
-58.7
-55.5
-66.5
-61.4
-238
-182
VILA.
Part Two-185
PRESERVING NATIONAL SECURITY
Table A - 3 . SUMMARY OF ACTIVE AND RESERVE MILITARY PERSONNEL
AND FORCES
Estimate
1990
Actual
Military Personnel (in thousands):
Active
Army
Navy
Air Force
Marine Corps
Guard and Reserve
Army
Navy
Air Force
Marine Corps
Strategic Forces:
Intercontinental and Fleet Ballistic Missiles:
Peacekeeper
Minuteman
Poseidon-Trident
Strategic Bomber Wings
General Purpose Forces:
Land Forces (Active/Reserve):
Army Divisions
Marine Divisions
Naval Forces (total):
Total Naval Vessels
Aircraft Carriers (Deployable)
Battleships
Other Major Surface Combatants
Nuclear Attack Submarines
Amphibious Assault Ships
Sealift Fleet
1992
1991
1993
2,069
1,974
1,886
1,795
751
583
539
197
702
570
509
194
660
551
487
188
618
536
458
182
1,128
1,176
1,068
989
736
149
198
45
776
153
203
44
694
135
199
41
621
127
202
39
50
950
608
50
950
640
50
875
568
50
800
496
13
12
11
10
18/10
3/1
16/10
3/1
16/9
3/1
14/8
3/1
545
13
528
12
477
13
464
13
199
93
63
70
187
87
65
70
151
88
62
70
144
90
58
70
24/12
13/2
3/1
2
21/5
22/12
12/2
3/1
2
21/5
17/12
12/2
3/1
2
21/7
16/11
11/2
3/1
2
20/8
A
4
Air Forces (Active/Reserve):
Air Force Fighter Wings (equivalent)
Navy Carrier Air Wings
Marine Corps Wings
Air Force Conventional B-52 Squadrons ...
Strategic Airlift Squadrons
PRIORITIES
This year's budget reflects the following priorities.
IMPLEMENT ARMS CONTROL WHILE
MAINTAINING STRATEGIC DETERRENCE
Operations
Strategic Forces.—Deployed forces will
continue to form a triad of land-based, seabased, and air offensive systems, and will also
include air defense interceptors. Retirement of
the Minuteman II force will begin in 1992;
the Minuteman III and Peacekeeper missiles
will be maintained. Retirements of submarines
with the aging Poseidon (C-3) missile are to
be accelerated. Over the course of the 1990s,
the strategic submarine inventory will shrink
from its current mix of 34 Poseidon and Trident boats to a force of 18 Trident submarines
carrying Trident I (C-4) and Trident II (D-5)
missiles. The total bomber force will decrease
from 291 at the end of 1990 to 234 by the
Part Two-186
end of 1992, as B-52s are retired and F B - l l l s
are transferred to the tactical force.
Investment
Strategic Retaliatory Systems.—Modernization of the three major components of
strategic retaliatory forces will continue in
1992. The budget requests funds to procure
four B-2 (Stealth) bombers and 115 Advanced
Cruise Missiles. Development of the Small
Intercontinental Ballistic Missile continues,
and Rail-garrison Peacekeeper development
will continue and provide a missile flight test.
The budget requests funds for 28 D-5 missiles.
No additional Trident submarines will be built
beyond the 18th boat approved in the 1991
budget.
Strategic Defense: Global Protection
Against Limited Strikes.—In 1992 the Strategic Defense Initiative (SDI) will be reoriented to reflect the changing nature of ballistic-missile threats emerging in the post-Cold
War era. These threats arise primarily from
two sources. First, proliferation of advanced
technologies to hostile or unstable regimes
could enable these states to acquire ballistic
missiles of increasing range—possibly armed
with nuclear, chemical, or biological weapons.
Second, there is increased concern regarding
the unauthorized or accidental launch of ballistic missiles. The objective of the new approach
is to provide protection to U.S. territory, U.S.
forces deployed abroad, and U.S. friends and
allies from limited ballistic-missile strikes—
whether accidental, unauthorized, or from a
third country. Because this defensive concept
stresses protection against ballistic missile
threats irrespective of their source, it is called
Global Protection Against Limited Strikes
(GPALS). The objective of global protection
could be met with a defensive system less than
half the size of a system designed to achieve
the earlier "Phase I" objective of deterring a
massive Soviet attack. Also, GPALS would
allow for significant budgetary savings (20 percent for the next six years compared to levels
in the earlier plan). In 1992, $4.6 billion is
requested for SDI.
Arms
Control
Implementation.—The
budget request for the Department of Defense
includes nearly $480 million in 1992 to prepare for and implement arms control agree-
THE BUDGET FOR FISCAL YEAR 1992
ments. These funds are needed to implement
the Intermediate-range Nuclear Force (INF)
and Nuclear Testing Treaties. Funds are also
requested to support implementation of recently concluded agreements on Conventional
Forces in Europe (CFE), and Chemical Weapons (CW), as well as the Strategic Arms Reduction (START) agreement which may be concluded in 1991. Activities to be funded include:
on-site monitoring; escorting of foreign inspectors; destruction, modification, and relocation
of military equipment; and research and development of implementation techniques. These
figures do not include a separate, classified
amount for intelligence activities related to
arms control implementation.
ADAPT CONVENTIONAL FORCES TO
1990's THREATS
Operations
Military Personnel.—Personnel levels in
both the active and reserve forces will decline
as U.S. forces are reshaped for a changed security environment. Recent changes permit a
smaller military, but one that continues to be
highly trained and motivated. U.S. forces will
have the versatility to respond rapidly to crises
throughout the world. Active military endstrength will decline by 13 percent from
2,069,000 in 1990 to 1,795,000 in 1993. By
1996, force levels are projected to be 20 percent below 1990 levels. Reserve and Guard
personnel levels will decline by 12 percent,
from 1,128,000 in 1990 to 989,000 in 1993.
By 1996, reserve forces are projected to be 20
percent below 1990 levels.
General Purpose Forces.—In adapting
general purpose forces to the threats of the
1990s, force levels can be reduced by about
25 percent by 1995. Major changes in force
structure proposed through 1993 are:
• Land forces at the end of 1993 will include
17 active (14 Army and 3 Marine) and
9 reserve (8 Army and 1 Marine) divisions.
This reflects a reduction of 4 active divisions and 2 reserve divisions from force
levels at the end of 1990.
• Naval forces at the end of 1993 will include 13 deployable carrier battle groups
and 11 active carrier air wings (a reduction of 2 air wings from 1990 levels) and
VII.A.
PRESERVING NATIONAL SECURITY
two reserve wings. All four battleships,
older attack submarines and amphibious
warfare ships will be deactivated. The
total number of naval vessels will decline
from 545 at the end of 1990 to 464 at
the end of 1993.
• Air Forces at the end of 1993 will include
16 active and 11 reserve Air Force fighter
wing equivalents (about 3,300 total fighter
and attack aircraft), 2 B-52 squadrons
dedicated to the delivery of conventional
weapons (about 40 total aircraft), and 28
strategic airlift squadrons (391 total C-5
and C-141 aircraft) to provide intercontinental airlift. This is a reduction of more
than 8 fighter wing equivalents (active
and reserve) from the 1990 level.
Investment
Conventional Systems.—The Army's major
modernization program that began in the early
1980s is drawing to a close. However, development continues on the Light Helicopter, forward area air defense systems, and armored
vehicles.
To provide essential near-term modernization of naval forces, the budget provides for
procurement in 1992 of 1 SSN-21 nuclear-powered attack submarine, 5 Aegis radar-equipped
destroyers, 36 F/A-18 fighters, and several
types of tactical missiles. Development begins
on an advanced version of the F/A-18 and continues on the Advanced Air-to-Air Missile.
Modernization of the tactical Air Force continues with procurement in 1992 of 48 F-16
fighters, 8 C-130 and 6 C-17 transport aircraft, and 1,000 Advanced Medium Range Airto-Air Missiles. The next generation air superiority fighter—the Advanced Tactical Fighter—
continues in development.
Several systems will be, or recently have
been, terminated, with savings of $10 billion
in 1992 compared with previously planned
amounts. These terminations include the Navy
version of the Advanced Tactical Fighter, the
P-7 anti-submarine patrol aircraft, the F-14D
remanufacturing program, the Lance follow-on
missile, the Tacit Rainbow drone, the Bradley
fighting vehicle, binary chemical munitions,
the 155mm nuclear artillery round, and the
A-12 aircraft (see Table B-2 in Chapter IX.B).
Part Two-187
As a consequence of the decision to terminate the A-12 program for default, $0.5 billion
of unobligated 1991 funds will be used to pursue development of medium attack aircraft alternatives. Funding is also included in the
1993 and outyear A-12/AX program line pending an evaluation of alternatives.
MAINTAIN A STRONG TECHNOLOGY
BASE
For 1992, the budget proposes $3.9 billion
in budget authority for technology-base programs (basic and applied research). This is an
increase of $0.5 billion over the 1990 level.
These programs provide options for future defense systems and help to avoid technological
surprise from potential adversaries.
Funds are invested for work in computer
science and electronics, biomedical sciences,
geophysics, meteorology, chemistry, physics
and engineering methods. Areas of emphasis
within the technology base include parallel
computers to increase dramatically computation speed and new materials for electronics, gas turbine engines and airframe components.
In addition to basic and applied research,
the budget provides $2.2 billion in 1992 for
demonstration of devices with potential military application. Examples are development of
advanced electronics devices through SEMATECH, the industry semiconductor consortium,
the integrated high performance turbine engine program, and the unmanned underseas
vehicle program.
IMPROVE MANAGEMENT AND
REDUCE OVERHEAD
Defense Management Report.—As a follow-on to the proposals in last year's Defense
Management Report, additional management
initiatives are being proposed in the 1992
budget. These new initiatives will result in
savings of nearly $0.7 billion in 1992, growing
to $2.9 billion by 1996 and reductions in civilian and military personnel of 8,600 and 19,000
respectively by 1997. These and last year's proposals are projected to save over $72 billion
during the 1991-1997 period. These savings
will help DOD to maintain needed military capabilities within constrained resources. De-
Part Two-188
THE BUDGET FOR FISCAL YEAR 1992
fense management reforms are included in the
Management by Objectives Program.
the transfer of activities from bases that will
be closed or realigned.
The 1992 initiatives include functional consolidation and streamlining of activities such
as supply depots, inventory control points, research and development laboratories, maintenance facilities, and finance and accounting operations. Efforts continuing from last year's
management review include: improved management of logistics operations, especially supply and transportation systems; consolidation
of contract administration functions; consolidation of commissary operations; reductions in
consulting costs; and implementation of a corporate management information system.
The budget requests $100 million in 1992
for the initial costs of facilities and other realignment and closure actions which will be
announced by the Secretary of Defense on
April 15, 1991, as authorized by the Base Closure and Realignment Act of 1990. The additional realignment and closure actions stem
from the force structure and program reductions required to meet the defense budget levels in the Budget Enforcement Act. The specific bases have not been identified, but savings of $150 million in 1992 and $735 million
in 1993 are included in the legislative contingency account in anticipation of Congressional
approval.
The budget includes a proposal to create the
Defense Business Operations Fund (DBOF), a
revolving fund, from which customers would
purchase supplies, maintenance, accounting,
ADP services and other support. All costs including pay, procurement, and construction for
support activities are to be included in the
fund. The goal is to highlight the full costs
of support activities and allow operating units
to determine the supplies and services that
are needed for specific activities to be undertaken. This fundamental change in Defense's
financial management system will lead to longterm savings.
Civilian Personnel.—Decreases in the size
of the civilian workforce reflect the Department's defense management reforms as well
as the smaller force structure. By 1992, total
civilian end-strength will fall 11 percent from
its high point in 1987, about the same percentage as for active-duty military personnel.
These decreases have resulted largely from a
civilian hiring freeze instituted in January
1990. By 1993, the civilian workforce will total
976,000, falling below one million for the first
time since 1980. By 1996, the civilian personnel level is projected to be 14 percent below
the 1990 level.
Base Closures.—The budget requests $634
million for continued implementation of the
Base Closure and Realignment Act approved
by the Congress in 1989. An amount of $998
million was enacted for these purposes in
1991. These funds provide for the construction
of facilities and other one-time implementation
costs at military installations to accommodate
DESERT SHIELD
The Administration will submit a supplemental appropriation request for the incremental costs of Operation Desert Shield which includes Desert Storm. Such a request is not
being submitted with this budget because the
amount of this supplemental has not yet been
reliably determined. It will depend on actual
military requirements and on the amount of
offsetting contributions from our allies. As the
budget goes to press, there are evident and
highly significant uncertainties with respect to
both actual requirements and offsetting contributions. It is anticipated that these uncertainties will be clarified substantially in February, and that a more informed estimate of
supplemental requirements will then be developed and submitted. In the mean time, the
budget includes an assumed appropriation request of $30 billion in budget authority as a
placeholder in accord with the estimate by the
Comptroller General of the U.S. The actual
supplemental request could be significantly
different depending on events still to be determined.
INTELLIGENCE
Virtually all funding for the National Foreign Intelligence Program is included in the
defense budget. The exact level is classified.
The budget provides for obtaining information
on potential threats, improving capabilities to
counter hostile intelligence services, monitoring current and prospective arms reduction
VII.A.
PRESERVING NATIONAL SECURITY
treaties, detecting changes in foreign military
technologies, supporting the war on drugs, developing advanced technologies for intelligence,
and conducting covert action operations in support of national security objectives in accordance with law. Additional resources are included to expand human source collection and
to focus intelligence programs on new priorities.
ATOMIC ENERGY DEFENSE
ACTIVITIES
These activities, conducted by the Department of Energy, include research, development, testing and production of nuclear weapons; production of nuclear materials; storage
and cleanup of nuclear and other hazardous
wastes from defense programs; and design of
reactors for nuclear-powered Navy vessels. The
waste management program provides treatment, storage and disposal for all defense nuclear and hazardous wastes and supports research and development on the problems of
isolating and permanently storing these
wastes.
The budget includes for these purposes
budget authority of $11.8 billion in 1992, compared to $10.9 billion and 1991, exclusive of
a proposed supplemental 1991 appropriation of
$623 million. The budget provides for the restart of facilities at the Rocky Flats plant and
for the production of nuclear weapons to meet
the requirements of the forthcoming Nuclear
Weapons Stockpile Memorandum. The budget
provides for the operation of only one reactor
at the Savannah River Site, which will produce
Part Two-189
sufficient materiel to meet all needs. The budget request also includes $500 million in 1992
for the continued design of new production reactor capacity and $42 million for activities
related to reconfiguration of the nuclear weapons complex. In addition, the budget requests
$3.7 billion, an increase of $970 million over
the enacted 1991 level, for environmental restoration and waste management activities at
defense facilities. The proposed 1991 supplemental provides an additional $340 million for
these activities.
The proposed 1991 supplemental includes
$283 million to speed resumption of activities
at Rocky Flats and $340 million to initiate
activities necessary to meet environmental
compliance agreements.
DEFENSE-RELATED ACTIVITIES
Defense-related activities include civil defense and emergency preparedness activities of
the Federal Emergency Management Agency,
the Selective Service System, and the Maritime Administration's Ready Reserve Force,
which provides for a standby fleet that can
be activated when needed. The budget requests $757 million in budget authority and
$756 million in outlays for these purposes in
1992, compared to $1,053 million and $947
million respectively in 1991.
5-YEAR PROJECTIONS
Tables A-4 and A-5 show estimates of budget authority and outlays for each of the major
elements of the national defense function.
Part Two-190
THE BUDGET FOR FISCAL YEAR 1992
Table A-4. BUDGET AUTHORITY BY FUNCTION AND PROGRAM
(In billions of dollars)
1990
Actual
050 National Defense Discretionary
(excluding Operation Desert
Shield):
051 Department of Defense—
Military:
Military personnel
Operations and maintenance ....
Procurement
Research, development, test,
and evaluation
Military construction
Family housing
Revolving funds
Allowances
Estimate
1991
1992
Projection
1993
1994
1995
1996
78.6
86.9
81.4
79.0
85.0
64.1
78.0
86.4
63.4
77.5
84.6
66.7
76.5
84.6
68.8
75.9
85.7
74.7
77.0
88.0
74.8
36.5
5.1
3.1
0.2
34.5
5.0
3.3
1.7
39.9
4.5
3.6
3.4
-0.3
41.0
3.7
3.5
2.3
-0.9
40.1
7.0
4.0
2.8
-4.8
37.5
6.4
3.9
1.9
-4.4
36.0
6.6
3.9
1.4
-4.3
291.8
272.6
279.0
278.6
279.0
281.5
283.4
9.7
0.5
11.6
0.9
11.8
0.6
12.2
0.6
12.9
0.6
13.6
0.6
14.3
0.6
301.9
285.1
291.4
291.5
292.5
295.7
298.3
050 National defense—Operation
Desert Shield:
051Department of Defense—Military
j
2.0
1.0
050 National defense mandatory:
051 Department of Defense—Military
054 Defense-related activities
-0.8
0.2
-0.7
0.2
-0.7
0.2
-0.7
0.2
-0.7
0.2
-0.8
0.2
-0.8
0.2
-0.7
-0.5
-0.5
-0.5
-0.6
-0.6
-0.6
293.0
273.0
278.3
277.9
278.2
280.7
282.6
9.7
0.6
11.6
1.1
11.8
0.8
12.2
0.8
12.9
0.8
13.6
0.8
14.3
0.8
303.3
285.6
290.8
290.9
291.9
295.1
297.8
Subtotal, 051 DOD—Military
053 Atomic energy defense activities
054 Defense-related activities
Subtotal, discretionary
Subtotal, mandatory
National defense totals:
051 Department of Defense—Military
053 Atomic energy defense activities
054 Defense-related activities
Total
MEMORANDUM
929
Operation
placeholder
Desert
Shield
14.0
Part Two-191
VII.A. PRESERVING NATIONAL SECURITY
Table A-5. OUTLAYS BY FUNCTION AND PROGRAM
(In billions of dollars)
1990
Actual
050 National Defense Discretionary
(excluding Operation Desert
Shield):
051 Department of Defense—
Military:
Military personnel
Operations and maintenance ....
Procurement
Research, development, test,
and evaluation
Military construction
Family housing
Revolving funds
Allowances
Estimate
1991
1992
Projection
1993
1994
1995
1996
75.4
87.2
81.0
78.9
85.1
79.1
77.8
85.5
74.3
77.3
84.2
68.8
76.3
84.1
67.2
75.7
84.9
68.6
76.7
86.9
71.0
37.5
5.1
3.5
-0.5
35.5
4.6
3.3
0.4
37.8
4.9
3.4
1.8
-2.1
39.7
4.7
3.6
2.2
-0.9
39.9
4.9
3.7
2.4
-4.6
38.4
6.0
3.8
2.3
-4.3
36.7
6.4
3.9
1.9
-4.2
289.1
287.1
283.5
279.8
274.0
275.4
279.3
9.0
0.4
10.5
0.8
11.4
0.6
12.1
0.6
12.6
0.6
13.2
0.6
13.9
0.6
298.6
298.4
295.6
292.4
287.2
289.2
293.8
050 National defense—Operation
Desert Shield:
051 Department of Defense—Military
1.5
1.2
0.2
0.1
050 National defense mandatory:
051 Department of Defense—Military
054 Defense-related activities
-0.9
0.2
-0.8
0.2
-0.7
0.2
-0.7
0.2
-0.7
0.2
-0.8
0.2
-0.8
0.2
-0.7
-0.6
-0.6
-0.5
-0.6
-0.6
-0.6
289.8
287.5
283.0
279.1
273.3
274.6
278.5
9.0
0.6
10.5
0.9
11.4
0.8
12.1
0.8
12.6
0.8
13.2
0.8
13.9
0.8
299.3
298.9
295.2
292.0
286.7
288.6
293.2
8.2
4.6
0.8
0.4
Subtotal, 051 DOD—Military
053 Atomic energy defense activities
054 Defense-related activities
Subtotal, discretionary
Subtotal, mandatory
National defense totals:
051 Department of Defense—Military
053 Atomic energy defense activities
054 Defense-related activities
Total
MEMORANDUM
929
Operation
Placeholder
Desert
Shield
...
VILE. ADVANCING AMERICA'S INTERESTS
ABROAD
INTERNATIONAL AFFAIRS
The primary objective of international affairs
programs is to support U.S. interests abroad.
The overriding interest is the security of the
United States and of its citizens overseas. The
United States also has a major stake in the
international economy. The economic growth
of this country is now affected by the degree
to which other countries are willing to adopt
market oriented economic systems with open
trade and investment policies. Another element of U.S. policy is humanitarian concern
for other, less fortunate peoples worldwide.
As shown in Table B - l , the budget requests
$34 billion in budget authority and $19.6 billion in outlays for discretionary international
affairs programs. These amounts are consistent with amounts provided in the Budget Enforcement Act. While budget authority increases by 70 percent over 1991, $12.2 billion
of the growth is accounted for by an increase
in the U.S. quota in the International Monetary Fund. Such quota increases occur only
periodically and do not involve outlays.
International Security Assistance
The Persian Gulf crisis and the earlier
events in Panama and Nicaragua have demonstrated the vital role of security assistance
in supporting U.S. interests in a volatile time.
Budget authority of $8 billion is requested
with outlays estimated at $7.7 billion.
Security assistance advances U.S. national
security and foreign policy goals by promoting
the physical security and economic stability of
friendly and allied countries. Purchases of
military goods and services are funded through
foreign military financing, a program managed
by the State and Defense departments. Economic stabilization and growth are promoted
through the economic support fund managed
by the State Department and the Agency for
International Development (AID). Exchanges
with members of friendly and allied armed
forces are carried out through the inter-
280-000 0 - 9 1 - 7
national military education and training program run by the Defense Department.
Currently, the most critical security need is
support of key U.S. allies in the multilateral
effort to respond to Iraqi aggression in the Persian Gulf, in particular Egypt and Turkey.
These countries have incurred substantial risk
and economic hardship by their firm support
of international sanctions and other means to
force Iraq out of Kuwait. The importance of
maintaining support for Israel in these circumstances is self-evident.
In Latin America security assistance to
counter cocaine production is vital. While there
has been substantial disruption in drug trafficking from the Andean countries, the war on
drugs is far from over. Thus, the budget proposes continuing military aid -and increasing
economic support fund spending in the Andean
area. More than $400 million in security aid
is proposed for these countries, an increase of
47 percent over 1991. The aid is conditional
on vigorous efforts to halt trafficking.
Security assistance is also provided to countries that allow the United States military
base rights on their territories. Bases in Portugal and Greece have been important to the
success of the Desert Shield deployment.
While the supporting materials for the budget will contain specific country-by-country proposals for security aid, it is impossible to predict now precisely what actual needs will be
in 1992—particularly in the Middle East. The
latter uncertainty underscores the need to
avoid the earmarking of large portions of security assistance programs by country. In 1990,
88 percent of the two major security assistance
programs was earmarked by Congress. The
Administration will make a major effort to
eliminate security assistance earmarks in 1992
appropriations.
Other Programs.—Other security assistance programs include peacekeeping operations in Cyprus and the Sinai desert and
anti-terrorism assistance to friendly countries.
Part Two-193
(PART 2)
Part Two-194
THE BUDGET FOR FISCAL YEAR 1992
Table B - l . INTERNATIONAL AFFAIRS DISCRETIONARY PROGRAMS:
1990-1992
(In billions of dollars)
Budget Authority
Outlays
1990
1991
1992
1990
1991
1992
4,811
3,957
116
4,708
3,145
92
4,650
3,240
96
4,704
3,719
513
4,248
3,263
337
4,223
3,394
132
Total, Security Assistance
International Development and Humanitarian
Assistance:
Agency for International Development
Assistance for Eastern Europe
Enterprise for the Americas Initiative
Debt Restructuring
Multilateral Investment Fund
Multilateral Development Banks
Food Aid
Refugee Programs
Voluntary Contributions to Int'l Orgs
State Department Narcotics Assistance
Peace Corps
Other
8,884
7,945
7,986
8,936
7,848
7,749
2,559
(88)
0
(0)
(0)
1,469
978
513
274
130
166
58
3,196
(370)
2,351
(12)
0
(0)
(0)
1,429
978
544
265
111
156
-98
2,328
(141)
(0)
1,619
1,011
521
285
150
186
72
3,275
(400)
410
(310)
(100)
1,685
1,301
511
250
172
200
89
(0)
1,307
1,120
463
273
128
182
-84
2,746
(274)
325
(310)
(15)
1,484
1,120
520
257
146
198
-72
Total, Develop and Human Assist
Conduct of Foreign Affairs:
State Dept. Salaries and Expenses
Foreign Buildings
United Nations Programs
New Payments
Arrearage Payments
Other
6,147
7,040
7,893
5,736
5,717
6,724
1,792
293
702
(702)
(0)
141
1,870
228
910
(793)
(117)
153
2,050
570
1,327
(824)
(503)
170
1,822
356
727
(727)
(0)
141
1,898
377
940
(823)
(117)
170
2,005
399
956
(825)
(131)
168
Total, Conduct of Foreign Affairs
Foreign Information and Exchange Activities:
U.S. Information Agency
Board for International Broadcasting
Other
2,928
3,161
4,117
3,046
3,385
3,528
927
373
15
1,006
206
15
1,059
218
17
888
208
6
1,034
282
24
1,056
314
17
Total, Public Diplomacy
International Financial Programs:
Export-Import Bank
International Monetary Fund
Other
1,315
1,227
1,294
1,102
1,340
1,387
612
0
139
750
0
11
556
12,158
20
357
-741
-129
542
0
-93
185
0
40
752
761
12,734
-513
-449
225
20,026
20,134
34,022
18,315
18,739
19,613
International Security Assistance:
Foreign Military Financing
Economic Support Fund
Military Training and other
Total, Financial Programs
Total Discretionary Programs
*
*
*
*
* Under current budget law, the debt restructuring proposed in 1991 will require no budget authority or outlays. Under credit
reform principles to be implemented in 1992, the 1991 program would be $98 million in budget authority and outlays.
International Development and
Humanitarian Assistance
The United States continues to play a major
role in alleviating suffering and promoting
sound economic policies in the developing
world. In 1992, the budget proposes $7.9 billion in budget authority and $6.7 billion in
outlays for this program category. These pro-
grams are intended to promote the growth of
market-oriented economies through budgetary
support, the financing of development projects
and the provision of expert advice to foreign
governments and private entities. They also
provide relief supplies and funds to meet major
natural and manmade disasters and to aid refugees abroad and resettle them in the United
States.
ADVANCING AMERICA'S INTERESTS ABROAD
Part Two-195
Agency for International Development
(AID).—AID provides the bulk of U.S. bilateral development assistance. For 1992, the
budget would hold the programs under AID
management about level, adjusting for inflation, at $3.3 billion following an increase of
$.6 billion in 1991. Emphasis will be placed
on encouraging improved economic performance by recipient countries, promoting private
sector-led growth and supporting the emergence of democracies.
reforms by recipient countries, including measures to open their investment regimes.
Through such reforms, countries will build the
basis for sound and sustained economic
growth, thereby increasing investor confidence
and their ability to attract private investment
and flight capital.
VII.B.
Assistance for Eastern Europe.—Within
funds available to AID, the budget proposes
continuation of the recently initiated economic
assistance to Eastern Europe. Substantial
amounts of aid are being provided in recognition of the difficulties that the new democratic governments face in the unprecedented
task of shifting their economies from the communist model to free market principles. Much
of the assistance will be directed toward the
encouragement of small, private enterprises.
Budget authority for AID funding for Eastern
Europe would increase from $370 million in
1991 to $400 million in 1992. In addition,
under the multilateral development banks
heading, the budget seeks in 1992 the second
of five $70 million installments to capitalize
the European Bank for Reconstruction and Development, which also supports market oriented economic reforms in Eastern Europe.
Enterprise for the Americas Initiative.—
A significant new activity in the development
and humanitarian aid category is the President's special program for Latin America. This
program recognizes the historic opportunity for
the countries of the hemisphere to make major
economic strides under democratically elected
governments. It is based on the concepts of
Latin initiative and partnership with the United States. It also recognizes that while foreign
aid can be an important stimulant to growth,
other economic actions in the areas of trade,
investment, and debt restructuring are particularly well suited to the needs of the Latin
American and Caribbean countries.
The budget proposes a debt reduction program for Latin America that will begin in 1991
under existing legislative authority. In 1992
the program will have a subsidy value under
credit reform of $310 million. Debt reduction
will be conditioned on the adoption of economic
Complementing debt reduction will be a
multilateral investment fund managed by the
Inter-American Development Bank. It will provide carefully targeted support for diagnostic
studies of a country's investment climate, for
privatization of government owned companies
and for encouragement of small scale private
enterprise. The budget proposes $100 million
per year for five years starting in 1992 to capitalize this fund. Other developed countries are
expected to provide $200 million per year for
the fund.
Multilateral Development Banks.—The
multilateral development banks include the
World Bank group and the European, InterAmerican, Asian and African development
banks. These banks pool the resources of the
developed and developing nations to provide
loans and expert advice to promote the economic growth of the poorer countries.
Funding levels for each multilateral bank
and the funding shares of contributing countries are agreed on periodically by member
governments covering multi-year periods—usually three or four years. Annual installments
are paid on the agreed shares. For 1992 $1.5
billion of the $1.7 billion requested for payment by the Secretary of the Treasury to the
multilateral banks represents installment payments due under previous funding agreements.
Food Aid.—The Department of Agriculture
(USDA) and AID jointly administer this program. For 1992, the budget proposes $1.3 billion in food aid for the shipment of 5.6 million
metric tons of commodities. The 1990 Farm
Bill enacted major reforms in food aid that
will enable the United States to m4et food aid
challenges more effectively through the next
century. The law established a new government-to-government grant program, Title III,
managed by AID, to provide food to the poorest
countries of the world. Title III, proposed to
be funded at $309 million in 1992, will complement U.S. economic development objectives.
USDA will continue to provide loans, $317 mil-
Part Two-196
THE BUDGET FOR FISCAL YEAR 1992
lion, to foreign governments under Title I but
will place greater emphasis on market development for agricultural commodities. Under Title
II, funded at $627 million, the U.S. government will continue to provide emergency and
non-emergency food aid to individuals through
private voluntary organizations and the United
Nations World Food Program.
Refugee Programs.—The plight of refugees
has attracted world attention in recent years.
As a result, the United States increased the
number of refugees admitted to this country
by 14 percent in 1990. Funding in 1991 maintains this level and increases by $62 million
U.S. contributions to the care and maintenance
of refugees abroad. The $511 million requested
for 1992 in the budget for refugee assistance
will maintain the increased program including
the admission of 50,000 Soviet refugees and
54,000 refugees from Southeast Asia. Refugee
programs are managed by the Department of
State.
Voluntary Payments to International Organizations.—In addition to mandatory UN
payments, discussed below, the State Department provides voluntary contributions to 25
international programs that support important
multilateral development, humanitarian and
scientific activities. Programs funded by this
account directly serve specific U.S. interests
in nuclear non-proliferation, the environment,
and improvements in child health while encouraging burden sharing of the costs by other
countries. The $250 million requested in the
budget for 1992 is a 12 percent decrease from
the 1991 enacted level. The decrease is pri-
marily due to the completion of a third funding
cycle for the International Fund for Agricultural Development and a decreased payment
for the UN Afghanistan Trust Fund which is
phasing down.
State Department Narcotics Assistance.—The major emphasis of the international counter-narcotics program is on providing military and economic assistance to the
Andean countries as described above. In addition, the State Department's narcotics control
program will provide $172 million in assistance in 1992 to support counter-narcotics law
enforcement activities in the Andean countries
and elsewhere in the world. Other international programs also contribute to the fight
against drugs as shown in the table below.
Peace Corps—The Peace Corps exemplifies,
at the grassroots level, the President's emphasis on voluntarism and U.S. concern for the
peoples of other countries. The $200 million
requested for the Peace Corps in 1992, eight
percent above 1991, will support 5,060 volunteers and will enable the agency to enter
several new countries. The Peace Corps will
also expand its presence in Eastern Europe,
Latin America and Africa.
Other Programs.—Other development and
humanitarian assistance programs include the
African Development Foundation and the
Inter-American Foundation, which provide
small scale grants for social and economic development to indigenous private organizations.
Also included are the Overseas Private Investment Corporation, which insures and finances
Table B-2. INTERNATIONAL NARCOTICS CONTROL ASSISTANCE
(In millions of dollars)
Function 150 Anti-Narcotics Programs
Foreign Military Financing
Economic Support Fund
Agency for International Development
State Department Narcotics Assistance
United States Information Agency
Total
19901
1991
estimate
1992
request
114.5
42.7
17.2
129.5
3.4
101.3
187.2
14.6
150.0
3.8
141.1
283.8
10.3
171.5
4.5
307.3
455.9
611.3
^ o e s not include up to $53 million worth of equipment provided to Latin America through 506(a)(2) drawdown
authority.
ADVANCING AMERICA'S INTERESTS ABROAD
Part Two-197
private U.S. investment in developing countries and the trade and development program,
which finances feasibility studies abroad to facilitate subsequent U.S. investment.
activities, the Administration sought in the
1991 budget to end the recent practice of cutting appropriations for new payments to UN
programs below amounts mandated by treaty
commitments. The Administration also sought
full appropriation of the arrearages accumulated because of the appropriations shortfalls.
The Congress provided, with minor exceptions,
the full new 1991 payments due but only that
portion of arrearages actually planned to be
transferred to the organizations in 1991. For
1992, the budget seeks $824 million for new
mandated payments due in that year and $503
million for all of the remaining arrearages. The
arrearages will be transferred to the institutions in roughly equal installments over the
1992-95 period for mutually agreed special
purposes. Full appropriation in 1992 will provide an incentive for the organizations to engage in sound financial planning. The United
States remains committed to continuing the
progress made in the international organizations towards fiscal restraint with a greater
focus on essential programs.
VII.B.
Conduct of Foreign Affairs
This category includes the cost of diplomatic
representation, including consulates and missions to international organizations. It also includes annual payments that the United
States makes to the United Nations, its affiliated specialized agencies and to other international organizations such as NATO.
State Department Salaries and Expenses.—$2.05 billion is requested for the salaries and expenses account to carry out important foreign policy commitments in Eastern
Europe and to establish a permanent U.S. representative to the Conference on Security and
Cooperation in Europe. Funds are requested
to meet new workload requirements associated
with the Immigration Act of 1990 and improve
diplomatic security overseas. In addition, the
budget includes investment in the State Department's telecommunications, data processing, and financial management systems.
Foreign Buildings.—For 1992, the budget
proposes $570 million in the foreign buildings
account to complete a plan for constructing
physically secure embassies in locations abroad
that are subject to high threats of terrorist
attack or espionage. Balances of funds appropriated in the 1980s for this purpose will be
exhausted in 1992. Recent Iraqi threats of renewed terrorism against Americans demonstrate the importance of this effort. Funds are
also included for construction of embassy facilities in Moscow that will be secure against electronic and other penetration.
United Nations Programs.—As East-West
tensions diminish other world problems ranging from regional disputes to the environment
demand increased attention. The United Nations and other international organizations
offer forums to help deal with such challenges.
The importance of the United Nations to the
achievement of U.S. foreign policy objectives
has been most pointedly demonstrated by the
organization's role in the Persian Gulf crisis.
In recognition of the value of international
organizations and multilateral peacekeeping
Other programs.—Other conduct of foreign
affairs programs include the Arms Control and
Disarmament Agency, the International Trade
Commission, the U.S. Institute of Peace, and
a number of small State department administrative accounts.
Foreign Information and Exchange
Activities
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 support through the
Board for International Broadcasting for Radio
Free Europe and Radio Liberty (RFE/RL),
which provide radio broadcasts to the peoples
of Eastern Europe and the Soviet Union.
United States Information Agency
It is important that the peoples of other
countries have accurate information about the
United States and its policies and a good understanding of American society and its values.
The United States Information Agency (USIA)
is responsible for meeting these needs. It does
so through exchanges of persons (both short
term visits and the longer term Fulbright
scholarships),
through
publications,
and
Part Two-198
THE BUDGET FOR FISCAL YEAR 1992
through television and radio broadcasting, libraries and exhibits such as the U.S. pavilion
at the 1992 Seville/Genoa Exhibitions.
States and Japan and a number of other Asian
countries.
Eastern Europe, the Soviet Union and Islamic countries will require special public diplomacy efforts. In 1992, a new emphasis will
be placed on activities in these areas, while
programs will be slightly reduced in parts of
the world, such as Western Europe, that have
easy access to a wide range of private and
public sources of information about the United
States.
INTERNATIONAL FINANCIAL
PROGRAMS
Radio broadcasting was a key element of
public diplomacy throughout the Cold War.
USIA's Voice of America (VGA) and RFE/RL
were usually the only way to reach mass audiences in communist countries. Their broadcasts made valuable contributions to the political revolutions in Eastern Europe and the Soviet Union. In recent years, U.S. broadcasting
has been augmented by Radio Marti and TV
Marti, which provide surrogate local broadcast
media for Cuba.
In the 1980s, VOA initiated a major modernization of its transmitter network to assure
that all key target audiences receive a clear
signal. The budget includes $98 million in
1992 to continue that radio modernization program.
Board for International Broadcasting.—
With the establishment of democratic governments and the development of reliable, free
media in Eastern Europe, the need for RFE/
RL broadcasts to the region is diminishing. As
recent events in the Baltic countries show,
however, there remains continuing need for
the surrogate domestic radio services that
RFE/RL provide. The budget proposes only a
gradual phase down of this program. In 1992,
$218 million is requested. While above the
$206 million estimated for 1991 due to inflation and special financing factors, the 1992
funding level will lead to a reduction in broadcast hours.
Other Programs.—Other foreign information and exchange activities programs include
exchanges of persons between the United
This category of international affairs spending includes funding for two major financial
institutions.
Export Import Bank.—This Federal agency
provides loans, loan guarantees, insurance and
a small amount of grants to finance exports
of U.S. capital goods primarily to developing
countries. Budget authority of $556 million
and outlays of $185 million will support export
financing of $9.5 billion in 1992. This would
maintain the program at probable 1991 levels
adjusted for inflation.
International Monetary Fund.—The purpose of the Fund is to promote a stable world
monetary order, creating conditions for sustained economic growth. It does so in part by
drawing on funds deposited by member governments to make medium term loans to governments with balance of payments problems.
Loans are provided on conditions that promote
economic reforms in borrowing countries.
Roughly every five years, the Fund's members assess whether their deposits, called quotas, are adequate to meet its objectives. As
a result of such an assessment last year, it
was decided to increase quotas by 50 percent.
The increase in the United States quota will
amount to $12.2 billion in budget authority,
which is requested in 1992. Because of the
monetary character of quotas, there will be no
outlays associated with the increase, but exchange rate adjustments on previous U.S.
quota subscriptions resulted in $741 million
of negative outlays in 1990.
Other Programs.—Other international financial programs include a $20 million fund
for contingencies in 1992 as well as the special
defense acquisition fund. The latter is a revolving fund for the advance procurement of military goods for security assistance in which receipts occasionally exceed disbursements.
VIII. ADDRESSING INHERITED
CLAIMS, HIDDEN LIABILITIES,
AND DEBT
Part Two-199
VTII.A. RECOGNIZING AND REDUCING
FEDERAL UNDERWRITING RISKS
HIGHLIGHTS
This Chapter discusses in sequence:
• Insurance
—Deposit insurance
—Pension guarantees
—Other Federal insurance
—Private insurance
• Credit and GSEs
—Credit reform
—Government-sponsored enterprises
—Housing credit
—Education credit
—Agriculture credit
—Business credit
The Federal Government continues to be the
Nation's largest source of credit and underwriter of risk; the growth of its commitments
continues to outpace the growth of the economy. At the end of 1990, the face amount of
Federal and federally assisted credit and insurance was $6.2 trillion—up 8 percent from
a year ago and 113 percent from 10 years earlier. (See Table A - l . ) About half of all nonFederal borrowing is assisted by Federal credit
programs, Government-sponsored enterprises
(GSEs), or Federal deposit insurance.
Federal loans and contingent credit and insurance liabilities can result in substantial
budgetary costs to the Government when failures and defaults occur. Table A-2 indicates
that total cumulative outlays resulting from
deposit insurance over the next 6 years could
range from $112 billion to $161 billion under
likely or more stressful conditions. The present
value of future costs for other insurance,
GSEs, and credit programs might total $112
billion to $191 billion Under a similar range
of conditions.
The size and growth of these programs also
imposes additional economic costs that could
well exceed their potential budgetary costs.
The dramatic growth of the Government's
contingent credit and insurance liabilities is
in part due to failure to reflect their true costs
in the Federal budget. Federal credit programs
exist to provide benefits to certain borrowers
or to channel additional resources to certain
sectors. Thus, in most cases, Federal direct
loans and loan guarantees are expected to result in an overall loss to the Government. In
such cases, a subsidy cost and a loan or guarantee are combined in a single transaction.
These default and interest costs have been
paid over the life of the loan or guarantee,
but in the past these costs were never explicitly budgeted at the time credit was extended.
Progress Last Year.—The credit reform
provisions of the Omnibus Budget Reconciliation Act of 1990 (OBRA), enacted late
last year, acknowledge the implicit cost of Federal credit programs. For the first time, this
budget requests appropriations to cover the
cost of direct loans and loan guarantees at the
time credit is extended. For the first time, the
Administration and the Congress will allocate
budgetary resources by comparing credit program costs and their accompanying benefits
on an equal basis with the costs and benefits
of other programs. The new law also requires
the Office of Management and Budget (OMB)
and the Congressional Budget Office (CBO) to
study and report to the Congress on the feasibility of applying credit reform principles to
deposit insurance, other insurance, and GSEs.
During the past year, additional progress
has been made in recognizing and reducing
Federal underwriting risks.
• The new Resolution Trust Corporation
(RTC) resolved 273 failed savings and loan
institutions. As a result, the backlog of insolvent thrifts was cut in 1990 from 501
to 327. The number of troubled commercial banks fell from 1,151 to 1,006, alPart Two-201
Part Two-202
THE BUDGET FOR FISCAL YEAR 1992
though this apparent improvement is likely to be offset by rising loan losses and
the growing number of banks with weak
earnings.
• The Administration will present major
proposals to: reform deposit insurance, restructure financial services regulation, reorganize regulatory responsiblities, and recapitalize the Bank Insurance Fund (BIF).
• OBRA included reforms to several major
credit and insurance programs. The capital resources of the Federal Housing Administration's (FHA) single-family mortgage insurance program would be restored
to a financially prudent level by higher
downpayments, premiums tied to default
risk, and firm capital reserve target levels.
The
Farmers
Home
Administration
(FmHA) credit programs would be substantially shifted from direct loans toward
less-heavily-subsidized partial loan guarantees. Both the flat and the risk-related
premiums for the Pension Benefit Guaranty Corporation's (PBGC) insurance were
increased.
• Reauthorization of and comprehensive reforms in the guaranteed student loan
(GSL) program are proposed in this budget. They are expected to reduce defaults
and costs to the Government, while making the program more effective in helping
students.
• A thorough review of the FHA multi-family loan program is planned, accompanied
by measures to identify and eliminate
physical and financial problems in low-income rental properties.
• Proposals are made to reduce defaults and
costs for VA mortgage guarantees.
• Reforms are proposed to strengthen the
Farm Credit System (FCS), to continue
the improvements in FmHA credit programs, and to enable the Federal crop insurance program to better serve its purpose.
• A regular process of risk assessment and
policy review has been established, including the many analyses reported in this
Chapter.
Proposals for 1992.—Proposals for further
reforms to reduce underwriting risk are included in this budget and will soon be sent
to Congress.
• Further proposals are made to increase
pension funding and to advance PBGC
claims in bankruptcy.
Table A-l. FEDERAL CREDIT AND INSURANCE OUTSTANDING
(Dollar amounts in billions)
Program
Deposit Insurance
Other Insurance
GSE Loans1
Loan Guarantees
Direct Loans
Total
1 Net
1970
1975
1980
1985
1989
1990
476
216
24
125
51
855
187
49
189
74
1,456
831
151
299
164
2,342
1,031
370
410
257
2,888
1,281
763
588
207
2,815
1,681
855
630
210
+491
+678
+3,462
+404
+312
892
1,354
2,901
4,410
5,727
6,191
+594
of borrowing from Federal sources and federally guaranteed loans.
Percent
increase
1970-90
VIII.A.
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
Part Two-203
THE GROWTH OF FEDERALLY BACKED CREDIT AND
INSURANCE
For the past two decades, outstanding Federal and federally assisted credit and insurance have grown faster than nominal GNP.
By far the fastest growing category has been
the loans and securitization provided by Government-sponsored enterprises. GSEs are privately owned but, because they have continuing Federal connections, they are perceived by
financial markets to be quasi-governmental.
This reduces their cost of funds in capital markets. The largest GSEs support housing credit;
others channel funds to agriculture and education.
By far the Government's largest commitment
is to Federal deposit insurance at commercial
banks, thrifts, and credit unions. Until last
year, deposit insurance was the next most rapidly growing. The Government also insures private pensions against insolvency. A variety of
other programs insure against crop loss, flood
damage, and other hazards.
Federal loan guarantees have grown rapidly,
too. The largest amounts are for home mortgages insured by the Federal Housing Administration (FHA) or guaranteed by the Department of Veterans Affairs (VA). Student loans
(GSLs) are guaranteed by the Department of
Education, and smaller loan guarantee programs are scattered throughout the Government. Direct loans outstanding have declined
in recent years as credit programs have shifted
toward using loan guarantees.
In the past, too little attention was paid to
the scope and scale of these commitments.
Now, they are in the public spotlight. Insolvency of the Federal Savings and Loan Insurance Corporation (FSLIC) and many insured
thrifts, mounting failures among commercial
banks, the bailout of the Farm Credit System
(FCS), the failure of the largest student loan
guarantee agency, and large defaults on Federal direct and guaranteed loans have called
attention to the immediate and potential costs
of these programs to the taxpayer.
Assessing the Risks
Assisted credit (except for direct loans) and
insurance create contingent liabilities; that is,
they generate Government expenditures when
and 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 the risk over time or from program to program.
Most loan guarantees will not default. To
the extent that they do, the Government holds
some collateral to help offset the cost. 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. GSE bailouts may not be necessary
and, if they do occur, Federal outlays will be
much less than the GSEs' debt because of the
GSEs' assets.
Unfortunately, however, defaults and failures have been increasing. In 1990, loan writeoffs were $2.9 billion, guaranteed loan defaults
were $11.9 billion, and insurance costs were
$92.7 billion, of which 96 percent was spent
to cover losses at 433 failed banks and thrifts.
By way of comparison, only 8 years earlier
in 1982, loan writeoffs and defaults totaled
$3.7 billion, and insurance claims $4.6 billion.
Thus, total costs have increased twelve-fold.
Still larger potential future losses are perhaps even likely in view of the commitments
that the Government has already made and
those that it will make if current policies are
continued. Table A-2 shows initial estimates
of the size of these future losses. Their accuracy, of course, depends on the quality and
completeness of the historical data from which
they were derived and on future economic conditions. Efforts are continuing to fill in the
gaps, to improve the quality of data routinely
collected for these programs, and to improve
estimation methods.
The top part of the table shows estimates
of deposit insurance costs for failed banks,
thrifts, and credit unions over the period
1991-96. For banks and thrifts, estimates were
developed by projecting the effects of current
and expected loan losses and earnings on future earnings and capitalization. Future income was further adjusted for anticipated in-
Part Two-204
THE BUDGET FOR FISCAL YEAR 1992
Table A-2. POTENTIAL FEDERAL COSTS
(In billions of dollars)
Program
Face Value
1990
Range of
Potential Costs
Cumulative
Outlays,
1991-1996
Deposit Insurance:
Commercial Banks and Savings Banks
Thrifts
Credit Unions
Total Deposit Insurance
1,911
726
178
42-78
70-83
—
2,815
112-161
Present Value
of Future
Costs
Other Insurance:
Pension Guarantee
Other Insurance
Total Other Insurance
GSEs: 1
Sallie Mae
Freddie Mac
Fannie Mae
FHLBanks
FCS
Total GSEs
Guaranteed Loans:
FHA MMI
FHA GI/SRI
VA Mortgage
Guaranteed Student
Small Business
Farmers Home
Export-Import
Other Guaranteed Loans
Total Guaranteed Loans
Direct Loans:2
Farmers Home
REA and RTB
Export-Import
Other Direct
Total Direct Loans
Total of Other Insurance, GSEs, and Loans
1 Net
2
943
738
6-20
3-6
1,681
9-26
—
317
372
117
50
—
—
—
—
1-2
855
1-2
279
77
161
53
12
6
5
37
(6)-0
14-16
3-6
30-37
1-3
1-3
4-6
5-15
630
52-86
53
37
9
63
19-33
11-15
3-6
17-23
162
50-77
3,328
112-191
of borrowing from Federal sources and federally guaranteed loans.
Excludes loans and guarantees by deposit insurance agencies, for which costs are captured in the top section of
this table. Excludes programs not included under credit reform such as CCC farm price supports. Defaulted
guarantees which become direct loans are accounted for in guarantee volume and costs. The face value shown for
direct loans is lower than the amount shown in Table A - l by the amounts for these exclusions.
VIII.A.
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
creases in deposit insurance premiums. The
forecast also incorporates the effect of the expected weakness in the economy in 1991, resulting in higher loan losses in 1991 and 1992.
Beyond 1993, estimates also take into account
the rate at which undercapitalized institutions
have failed in the recent past. From 1991
through 1996, outlays for the three classes of
insured depositories are estimated to total
$112 billion. Enactment of proposals to recapitalize the Federal Deposit Insurance Corporation's (FDIC) Bank Insurance Fund (BIF),
to reform deposit insurance, and to restructure
financial services regulation should substantially reduce the projected outlays. A more severe recession could increase them to $161 billion.
The lower part of Table A-2 shows a range
of estimates for the present value of future
potential costs of pension and other insurance,
GSEs, guaranteed loans, and direct loans. In
each case, the smaller number represents the
loss if recent economic trends continue and
proposed reforms are enacted. The larger number represents the loss that might occur under
severe economic stress and if reforms are not
enacted.
Costs for pension guarantees were estimated
by analyzing the distribution and amount of
pension underfundedness and the likelihood
that firms might fail under different economic
scenarios. Estimates were developed for the
housing GSEs and credit programs—Fannie
Mae, Freddie Mac, FHA single family, and
VA—using simulation models to forecast mortgage defaults and prepayments. Estimates for
the Farm Credit System were made using a
model quantifying the performance of loan
portfolios under optimistic and stressful economic scenarios.
Part Two-205
Future costs for other credit programs were
estimated by projecting current outlay levels
into the future, taking into consideration the
improvements proposed in each of these programs or the effects of worsening economic
conditions. These estimates are more accurate
than they would have been last year. Implementation of credit reform will further improve
them.
Among the credit programs with larger costs
are several with substantial interest subsidies.
These include direct loans on which the borrower pays less interest than the cost of Treasury borrowing— for example, many FmHA and
REA loans. They also include student loans,
where the Government pays the interest while
the student is in school and pays any interest
above an 8 percent cap thereafter.
Default costs are high for some multifamily
housing programs, farm ownership and operating loans, Export-Import Bank lending, small
business credit, and REA power supply loans.
Among loan guarantees, GSLs have a high default rate, while VA guarantee and FHA insurance defaults come mainly from mortgages
with very high loan-to-value ratios.
Federal lending and insurance risks depend
on both economic conditions and public policies. The financial environment is changing
rapidly. Basic trends are unfavorable for depository institutions and for several sectors assisted by Federal credit. The insurance and
credit programs themselves encourage private
risk-taking. All of this implies large Federal
outlays unless reforms are undertaken to control the growth of these contingent liabilities
and to better manage specific sources of risk.
INSURANCE
Insurance Highlights
The scope and composition of Federal insurance is shown in Table A-3. By far the largest
commitment is $2.8 trillion of deposit insurance. The costs associated with this commitment are increasing because of stress in the
financial services industries.
• Technological change, increased competition
and
the
trend
toward
securitization of financial assets (mortgages, consumer, and business loans) have
reduced the profitability of insured banks'
and thrifts' traditional lines of business.
Part Two-206
THE BUDGET FOR FISCAL YEAR 1992
• In the past decade the number of thrifts
fell from nearly 4,000 to 2,389—of which
only 1,130 are well-capitalized and profitable.
• Commercial banks have more capital and
are more profitable on average than
thrifts. However, bank loan losses have
been climbing for three decades.
• Flaws in Federal deposit insurance are
now seen to have contributed to the cost
of the thrift cleanup and to the deteriorating condition of the Bank Insurance Fund.
The Administration's comprehensive reform
proposals for the Federal deposit insurance
system will strengthen that system to overcome many of these problems.
For pension guarantees and disaster insurance, the Administration's proposals focus on
improving the scaling of premiums and recoveries in relation to risk.
Rationale for Insurance.—The Federal
Government insures individuals and firms
against certain hazards not covered by private
insurance. 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 Govern-
ment. The probable loss as a percentage of
face value is likely to differ widely from program to program.
Government insurance programs have been
developed in part because some risks are both
hard to predict and catastrophic in size. It is
difficult or impossible to develop actuarially
sound premium structures and reserves that
would permit private firms to insure such
risks. The Federal Government is uniquely
suited for this role by its size, sovereign powers, and ultimate responsibility for the general
welfare. 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.
DEPOSIT INSURANCE
Along with other financial services firms, depository institutions perform a critical economic function by using individual and cor-
Table A-3 FACE VALUE OF MAJOR FEDERAL INSURANCE PROGRAMS
(In billions of dollars)
Program
Deposit insurance
Pension Benefit Guaranty
Corporation
Flood insurance
Federal crop insurance
Aviation war risk insurance
Maritime war risk insurance
Veterans life insurance
Overseas Private Investment Corporation
Nuclear risk insurance
National vaccine improvement program
Total
1975
1970
1980
1988
1989
1990
1,455.6
2,342.0
2,772.8
2,887.7
2,814.9
0.8
53.1
13.7
1.2
47.7
405.5
88.5
2.7
185.0
598.1
133.8
6.6
183.0
791.0
169.4
7.0
199.0
814.4
179.3
13.3
227.7
943.0
203.4
12.8
474.1
17.0
37.7
25.0
35.5
21.7
32.6
28.3
10.8
28.6
10.9
26.6
26.7
7.8
100.0
5.8
58.5
5.4
89.5
8.4
72.5
8.9
9.9
70.5
—
—
476.3
—
—
855.3
1985
—
—
11.0
11.0
n/a
692.7
1,042.7
2,286.5
3,373.3
4,059.5
4,168.8
4,495.8
VIII.A.
Part Two-207
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
porate savings to finance credit for businesses
and households. Deposit insurance supports
this intermediation by assuring savers that
their funds will be protected even if their
bank, thrift, or credit union fails.
of interest rate restrictions in the 1970s and
continuing with a long list of piecemeal adjustments. But, as might be expected, statutory
and regulatory changes have lagged developments in the market.
Government's potential exposure as deposit
insurer is part of its more general responsibility for the health and stability of the financial
system. Because of the need to manage this
exposure, financial services are among the
most heavily regulated industries. An elaborate structure of Government rules and oversight restricts what securities firms, insurance
companies, and depository institutions can do.
Among depositories, statutes and regulations
impose distinct roles on thrifts, banks, and
credit unions that a freely operating market
might not support.
First Steps Toward Reform.—While the
problems have been brewing for many years,
they have now reached the critical point. As
a result, the costs of inadequate Government
policies are being recognized. By 1988 the massive losses generated by failing thrifts had
bankrupted the Federal Savings and Loan Insurance Fund. In August 1989, the Financial
Institutions Reform, Recovery, and Enforcement Act (FIRREA) established a new Savings
Associations Insurance Fund (SAIF) for thrifts.
A new institution, the Resolution Trust Corporation (RTC), was given the task of resolving
insolvent savings and loans. That Act also took
the first steps toward deposit insurance reform
by prohibiting certain high-risk uses of thrift
funds, tightening oversight, and raising capital
requirements.
Changing financial markets are putting
many financial firms under severe stress. The
rate at which banks and thrifts fail has increased in a decade from a handful to hundreds each year. The pressure of change has
revealed flaws in the system of Government
regulation and deposit insurance. This has
forced a gradual, partial liberalization of banking regulation, beginning with the breakdown
In recognition of the need for other major
changes and in deference to the issues' complexity, FIRREA mandated a study by the
Treasury Department to be completed by Feb-
Table A-4. RESERVE RATIOS FOR FEDERAL DEPOSIT INSURANCE
(Dollar amounts in billions)
Fund
1970
1980
1985
1988
1989
1990
Federal Deposit Insurance
Corporation, BIF:
Insured deposits
Reserves
Reserve ratio (percent)
341.7
931.3
1,471.4
1,726.0
1,848.2
4.2
10.7
19.5
16.3
14.3
10.5
1.23
1.14
1.33
0.95
0.77
0.52
FDIC Savings and Loan Insurance
Corporation/SAIF:
Insured deposits
Reserves
Reserve ratio (percent)
134.6
472.8
766.8
889.2
874.5
726.1
2.9
6.1
7.5
-27.4
0)
0)
2.12
1.30
0.98
-3.08
51.5
103.8
157.6
165.0
178.3
0.2
1.1
1.8
2.0
2.1
0.33
1.08
1.17
1.25
1.25
National Credit Union Administration,
Share Insurance Fund:
Insured deposits
Reserves
Reserve ratio (percent)
1
—
1,910.5
FIRREA dissolved the FSLIC and created the Savings Association Insurance Fund to insure thrifts formerly
insured by FSLIC. SAIF 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.
Part Two-208
ruary 1991. This study includes comprehensive
proposals to reform both deposit insurance and
the structure of financial services regulation
created in the 1930s.
Further Reform Is Needed—Recently, attention has shifted from the problems of savings and loans to those of banks and the Federal Deposit Insurance Corporation's (FDIC's)
Bank Insurance Fund (BIF). Most banks are
healthy, but some—including several large
firms—are weak. The FDIC's reserves for bank
failures have been falling since 1987 and will
fall further in 1991 and 1992—unless the Fund
is recapitalized.
Banks and thrifts are bearing much of the
cost of covering depositor losses through higher
insurance premiums, new capital requirements, and closer supervision. Taxpayers are
paying for losses also, either in the form of
higher taxes or reduced spending on other
Government programs. Everyone is hurt when
misallocation of financing wastes resources
and slows growth. To reduce and eventually
eliminate this burden, the Administration is
proposing a comprehensive set of reforms intended to strengthen depository institutions
and sharply reduce deposit insurance costs.
These reforms are discussed in detail in the
Treasury study.
Reform is urgent. Unless the President's reform proposals are enacted, bank failures will
add an estimated $42 billion to BIF's outlays
and the Federal deficit from 1991 through
1996. A more severe and prolonged recession
could raise outlays to $78 billion and drain
the Fund more rapidly. Unless new resources
are provided to the BIF, its reserves will be
exhausted in 1992. To meet this shortfall will
require roughly $25 billion in new resources
between now and 1996.
Losses generated by closing and disposing
of savings and loans that failed in 1989 and
1990 or will fail through 1993 are expected
to exceed $100 billion. From 1991 through
1996, the cleanup is estimated to add $70 billion to the deficit.
On a far more modest scale, credit union
failures will cost that industry's Share Insurance Fund an estimated $80-100 million in
1991, which can be paid from current premium
and interest income. However, nearly 700 fed-
THE BUDGET FOR FISCAL YEAR 1992
erally insured credit unions, with over $9 billion in assets, were classified by the NCUA
as "troubled" at the end of September 1990.
Industries Under Pressure
To understand why reforms are needed and
what reforms are appropriate, it is important
to understand what has made the present
structure so expensive. The problems begin
with changes in the financial industries themselves. Around the world, new information and
communications technologies are making financial markets more efficient and closely integrated. New ways of providing credit bypass
the traditional depository intermediaries.
Both as providers of services to depositors
and as purveyors of credit, depository institutions feel the hot breath of new competitors.
Uninsured money market funds (MMFs) are
a close substitute for insured bank savings.
MMF growth was temporarily checked by deregulation of bank interest rates in 1982 but
soon resumed. These funds now exceed $450
billion.
Banks also face strong competition from
other business lenders. Business borrowing increased dramatically in the 1980s. From 1981
to 1989, U.S. corporations retired $570 billion
of equities while adding $1,140 billion of debt.
Financial intermediaries whose specialty is
business lending might be expected to profit
from this borrowing surge; but banks did not
fully participate. Corporate lending, once the
big banks' bread and butter, weakened as
many companies sold commercial paper and
junk bonds directly to investors. The outstanding volume of commercial paper has risen from
one-tenth of banks' commercial and industrial
loans 30 years ago to three-fourths today.
Banks face other competitors in both business and consumer lending. During the 1980s,
foreign banks steadily increased their share
of commercial lending in the U.S. at the expense of U.S.-chartered institutions. Although
Japanese banks lately have been retrenching,
capital-rich European banks continued their
U.S. inroads in 1990, raising the total of foreign banks' U.S. assets to over $730 billion
at mid-year. Meanwhile, U.S. banks are losing
ground overseas. Their international lending
has fallen steadily since 1982 and now totals
less than $210 billion. Under pressure to cut
VIII.A.
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
costs, several major banks dropped ambitious
plans to compete in foreign markets in the
past year.
Finance companies, which are well capitalized and fund themselves mainly with uninsured commercial paper, also have cut in on
banks' business. Their assets—mainly business
(51 percent) and consumer (30 percent) loans—
increased from $64 billion in 1970 to $551 billion in late-1990. Insurance companies and
pension funds are strong competitors with
banks for real estate lending. Automobile manufacturers have competed away some of the
profits banks once made from car loans.
With the erosion of their traditional role, depository institutions have searched for new
ways to earn profits. They have turned to a
variety of new activities: credit cards, mortgage banking, home equity loans, letters of
credit, currency trading, and many others. The
returns from some new activities are more
volatile and—because the risks are less well
understood—less predictable.
In the long run, the greatest effect of technology on depositories may be through the
rapid spread of securitized credit, such as
mortgage-backed securities. By lowering the
cost of pooling and pricing loans, computers
and modern telecommunications facilitate the
construction and marketing of these often-complex securities. The funds of investors in these
instruments then replace bank deposits as the
ultimate source of borrowed money. This benefits the economy by making risks more manageable and thus lowering the cost of capital.
However, because of its greater efficiency, the
new system of funding credit also erodes the
profitability of traditional intermediation.
This transformation is exemplified by the development of mortgage-backed securities, facilitated by the housing GSEs and thus subsidized by Government. Funding mortgages
through this system is more efficient for two
reasons: it is less costly for large GSEs to raise
funds by marketing mortgage-backed securities
to investors than for the typical, much smaller
thrift to gather deposits through a network
of branches; and it is easier for the GSEs than
for small, localized lenders to diversify their
risks. Government sponsorship gives the GSEs
a further edge by giving holders of their securities confidence that they will be shielded from
Part Two-209
loss by the Government even if the GSE fails,
thus lowering the yield that these investors
demand. Some of the cost savings from greater
efficiency and Government sponsorship is
passed along to homebuyers in the form of
lower mortgage interest rates. Traditional
mortgage lenders are forced to match these
rates even though their operating costs are
higher and their risks are less well diversified,
contributing to the squeeze on their profits.
By skimming off the standardized and generally less risky loans, securitization leaves depositories holding a disproportionate share of
loans that are more difficult to underwrite and
price correctly. Widespread securitization of
business loans is not yet a reality, but the
process is gaining steam. If securitization of
business and consumer credit grows rapidly,
as some predict, it could take much of the
profit out of the core lending activity of commercial banks and leave them holding a larger
share of hard-to-price loans. More optimistically, banks could profit from this development
both by brokering securitized credits and by
trading these securities to better balance their
risks.
Effect on the Thrift Industry.—The effect
of changing technology and markets on thrifts
has influenced the large number of firms that
are undercapitalized and either marginally
profitable or losing money. Although the industry has reduced its sensitivity to interest rate
swings, partly by holding adjustable-rate mortgages, many currently profitable thrifts remain
vulnerable to large losses should rates rise
sharply.
From 1980 through September 1990, the
number of savings and loans, excluding those
now in Government conservatorship, fell from
nearly 4,000 to 2,389. In the first year since
FIRREA was enacted, industry assets fell by
14 percent. Of the surviving institutions, only
1,130, holding 32 percent of all industry assets,
were judged by the Office of Thrift Supervision
to be well-capitalized and profitable.
Condition of the Federal Home Loan
Bank System.—The Federal Home Loan Bank
(FHLB) system, a GSE, was established in the
1930s as a central credit facility for home
mortgage lenders. At that time, the private
sector was a less reliable source of funding
for home loans, especially in times of economic
Part Two-210
distress, than it is today. The future of the
FHLB system may be tied to that of the thrift
industry and the system's ability to attract and
hold members.
The Banks are owned collectively by their
members, primarily thrifts and credit unions,
who are the only eligible borrowers. Loans to
members (termed "advances") provide thrifts
with a source of funds other than deposits—
one on which they need not pay an insurance
premium. Because the Banks require their advances to be collateralized by a pledge of safe
assets, they are protected from losses even if
the thrift fails.
The evolution of housing finance and
changes in regulation have led to the development of alternative sources of funds. They
have superseded the FHLB's original purpose
and reduced the benefits of system membership. Healthy thrifts occasionally use
longer-term advances to better match their
asset and liability durations. Troubled thrifts
tap advances as a way to maintain liquidity
when other funding becomes more expensive
or runs off. After 1985, the outstanding volume
of FHLB loans grew as these thrifts borrowed
from the Banks.
The volume of advances outstanding peaked
at $166 billion in April 1989, then declined
as insolvent savings and loans were closed. On
June 30, 1990, 51 percent of SAIF-insured
thrifts held FHLB advances. At the end of September, outstanding advances had dropped to
$118 billion. If the savings and loan industry
continues to shrink as anticipated, demand for
FHLB lending will decline further in 1991 and
perhaps beyond.
While the system's activity is shrinking,
some of the demands on its income are fixed.
FIRREA jointly obligated the system's 12 district banks to pay $300 million each year of
the interest owed to investors on REFCORP
bonds used to help finance the thrift cleanup.
FIRREA also committed the system to provide
between $50 and $100 million annually to subsidize home mortgages for certain low-income
buyers. In 1989, the Banks' combined income
was $1.8 billion, allowing them to pay dividends averaging 10.65 percent of capital stock.
In 1990, the Banks will earn an estimated $1.4
billion; through the first nine months of the
THE BUDGET FOR FISCAL YEAR 1992
year, they paid dividends at an average rate
of 8.75 percent of capital stock.
The Banks' income from advances and other
investments may contract further in 1991 and
beyond as many more insolvent thrifts are
closed. As this happens, their fixed commitments will claim an increasing share of earnings. For instance, if the volume of advances
falls by another 30 percent, earnings will probably fall by a similar proportion. Although the
Banks have made an effort to maintain dividends in the face of declining profits, the dividends are is likely to fall sharply as well. If
some or all of the Banks are forced to reduce
dividends, membership will be even less attractive. Already, some thrifts have expressed
a desire to cash out their stock and leave the
system. Unless offset by new members, departures would accelerate the reduction in demand for advances and leave even less income
to meet fixed obligations and pay dividends.
A decision thus may be needed in the near
future regarding the Banks' future role.
Effects on Commercial and Savings
Banks.—Commercial banks insured through
the BIF hold more capital and are more profitable on average than the thrifts. In the third
quarter of 1990, for example, the average private sector thrift lost money, while the average
commercial bank earned 45 cents on each $100
of assets.
Earnings have been hurt in recent years as
large banks lost heavily on foreign loans.
Other groups of banks ran into problems at
different times: those specializing in farm lending in the Midwest in the mid-1980s; banks
in the oil-producing states from 1986 through
1988; and recently those with large commercial
real estate exposures, especially on the East
Coast. To one degree or another, all had followed the siren song of asset appreciation that
started in the 1970s. That speculative bubble
has now been pricked. In the past four years,
banks have written off $75 billion in bad loans,
three times the total charged off from 1948
to 1981.
The relatively recent surge in loan losses
and bank failures is actually the culmination
of a trend toward increased risk that extends
over the past two decades. The greater risks
carried in bank portfolios can be indicated by
the rate at which loans go bad and must be
VIII.A.
Part Two-211
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
ratio o f net charge-offs t o loans
a t c o m m e r c i a l b a n k s : 1960-1990
•PRELIMINARY
charged off against the banks' capital. This
rate began to rise slowly in the 1970s, accelerating after 1981. Preliminary 1990 estimates
show charge-offs more than 50 percent above
1989. This trend implies that the stress on
the banking system is deeply rooted, progressive, and not likely to end soon.
Together, large commercial banks and savings banks pose the greatest threat to BIF
solvency. The median credit rating of 126 bank
holding companies with a combined $2.3 trillion in assets was triple-A in 1980, doubleA in 1985, but only A in 1990. In 1989, there
were 49 commercial banks with assets over
$1 billion that lost a total of $7.5 billion. Several of the largest banks again recorded large
loan losses in 1990. Within the group is a
small number that some analysts say are at
the brink of insolvency. Meanwhile, the average smaller bank has been able to increase
its capitalization and increase its loss reserves
as a proportion to its noncurrent loans.
The Nation's 479 savings banks, a group
mainly located in the Northeast and specializing in real estate lending, hold about 10 per-
cent of BIF-insured deposits. In the first nine
months of 1990, 35 percent were unprofitable.
The entire group lost $1.2 billion in that period, after a loss of $772 million in 1989. By
September, the FDIC had placed 31 of these
banks on the problem list.
The difficulty of forecasting whether any one
bank will fail and uncertainty regarding economic conditions, make any forecast of the
BIF's bank failure costs over the next few
years subject to a wide range of error. Even
with such uncertainties, given the current economic forecast and competitive conditions
within the industry, bank failures and insurance fund losses are likely to remain high for
the next few years.
Government's Role
The future strength of depository institutions also depends on Government policy. The
Federal Government's large role in defining
what these institutions can do and supervising
their activities complicates their adjustment to
the changing pattern of technology and competition. Firms must react not only to market
Part Two-212
forces but to Government rules; changes in
those rules can be unpredictable.
Government's role as deposit insurer also
complicates industry adjustment. It does this
by shielding depositors and, to a lesser degree,
other creditors from losses in case of failure.
By reassuring depositors, deposit insurance
also acts as a life support system that permits
failing firms to stay in the market longer. In
a period when healthy banks and thrifts already are under pressure, extra competition
from these sick and dying firms is an added
burden.
Flawed Deposit Insurance Policies.—In
the absence of deposit insurance, depositors
would be inclined to pull their money out of
a bank or thrift at the first sign of trouble.
However, knowing that they are protected
from loss, they are less attentive to such problems. One lesson of the savings and loan debacle is that institutions under pressure take
more risks. Those that are failing or insolvent
are especially prone to take excessive risks.
Once their equity capital is wiped out, they
are playing with other people's money. Without
market sources of discipline, it is left to Government to control risk-taking by failing firms.
These problems are inherent in deposit insurance. However, the deposit insurance system and regulatory structure that have
evolved since the 1930s have serious weaknesses that compound the problem. For example, prudently managed and well-capitalized
firms pay the same premiums as poorly run
and undercapitalized firms. Deficiencies in accounting practices and supervision sometimes
delay the recognition of operating losses. Closure practices often protect uninsured depositors and other creditors, reducing the discipline that these groups might otherwise impose on a troubled institution.
Government has compounded deposit insurance problems by limiting the financial services that banks and thrifts can offer. The
losses incurred by thrifts that moved away
from mortgage lending are sometimes used to
argue the opposite point. However, this "diversification" often occurred when thrifts were already insolvent and their owners were pursuing extremely risky but potentially high-yielding investments. The problem was allowing
undercapitalized firms to expand, not the ex-
THE BUDGET FOR FISCAL YEAR 1992
pansion of allowable activities. Adequately capitalized firms undertake diversification to reduce rather than increase risk.
Banks, securities firms, and insurance companies have been forbidden to enter each other's businesses or to affiliate. States have been
given authority to determine to what extent
bank and thrift ownership and operation can
cross State boundaries. Most States, until recently, restricted interstate ownership or
branching, making it difficult for depositories
to diversify against the risk of regional recessions.
Without fundamental reforms to correct
these deficiencies, the deposit insurance system will continue to encourage excessive risktaking. This will continue to impose an unfair
burden on well-run institutions in the form
of extra competition for deposits, higher premiums, and restrictive regulation. Until depositories can better diversify their risks and,
through affiliation with other firms, offer customers a full range of financial services, they
will fail more frequently than is necessary.
Beginning the Cleanup.—The cost of inadequate deposit insurance policy has already
been experienced in the savings and loan industry. The cost of cleaning up this disaster
was initially underestimated by all concerned.
In the past year, estimates have increased
partly because more thrifts failed than most
observers expected. Real estate markets also
deteriorated more than expected, enlarging the
volume of assets acquired by the RTC and
slowing their resale. The RTC now is expected
to take over and dispose of roughly 1,000 institutions.
In the first 13 months of its existence, the
RTC disposed of 273 failed institutions with
$79 billion in assets. Over $69 billion of assets
were sold out of conservatorship, another $7
billion were sold out of receiverships, and $34
billion were passed to acquirers. At the end
of September 1990, $142 billion of assets were
held by the RTC or remained in conservatorship. This total included $34 billion in delinquent loans and real estate.
Continuing the rapid pace of the cleanup
will require action by Congress early in 1991
to provide the RTC additional spending authority. Although the RTC is currently sched-
VIII.A.
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
uled to stop taking on new cases in August
1992, the Administration proposes to extend
this period through the end of FY 1993. The
RTC will soon exhaust the $50 billion originally provided by Congress to handle thrift insolvencies. Additional funding will be required
in 1991 and 1992 of $30 billion and $33 billion,
respectively. Failure to provide such additional
funding quickly will slow the pace of closures
during the second quarter of 1991. If such a
delay were to extend over several months, it
could increase the eventual cost of the cleanup
by about $2 billion.
Assuming Congress provides the additional
funding RTC needs by February 1991, the
budget estimates net outlays of RTC to be $85
billion in 1991 and $76 billion in 1992. These
outlay estimates assume RTC is able to continue, without interruption, its current pace
of resolving insolvent thrifts. The estimates include "working capital" expenditures (net) of
about $47 billion in 1991 and $43 billion in
1992. These "working capital" expenditures reflect RTC's costs of acquiring and holding assets temporarily until they can be sold.
RTC net outlay estimates remain volatile.
If additional loss funds are not provided quickly, 1991 outlays will be less and 1992 outlays
will be higher than currently projected, since
RTC will resolve fewer cases (and acquire
fewer assets) in 1991. RTC's net outlay estimates also depend upon underlying economic
assumptions. For example, a more protracted
recession could increase the number of assets
RTC will have to acquire to resolve insolvent
thrifts and could impede RTC's ability to sell
assets consistent with its current plans.
Total cumulative RTC net outlays between
1991 and 1996 are estimated to be $70 billion,
given current Administration economic assumptions. Under more adverse economic assumptions, these cumulative RTC outlays
could be $13 billion higher.
Condition of the Insurance Funds.—Five
years ago, the FDIC's bank insurance reserves
were $19.5 billion and equalled 1.33 percent
of the industry's insured deposits. On September 30, 1990, BIF reserves were $10.5 billion,
equal to 0.52 percent of insured deposits. Reserves are now expected to fall by another $6
billion in 1991, assuming a moderate reces-
Part Two-213
sion. In 1992, unless additional funds are obtained, reserves will be exhausted.
In addition to the BIF, the FDIC administers the separate, new SAIF insurance fund.
The SAIF will deal with thrifts that fail after
September 30, 1993, assuming the proposed
extension of the RTC. By then, it will have
a net worth of $1.6 billion. This should be
adequate for the reduced level of insured losses
that will prevail once the current backlog is
eliminated and the Administration's reforms
are in place.
Credit unions are insured through the National Credit Union Share Insurance Fund
(NCUSIF). It now has reserves of $2.1 billion.
Credit unions have been permitted to carry
their contribution of one percent of deposits
to these reserves as an asset. This year, as
in recent years, insured losses are expected
to be paid out of current revenues, primarily
interest on the reserve balance. This will permit the ratio of fund reserves to insured deposits to remain at the targeted 1.25 percent.
Nevertheless, insured losses are expected to
increase in the next 2 years, requiring close
attention to the condition of the fund. Many
credit unions are vulnerable to recession because their members are often drawn from a
single industry or firm and because their assets are mostly consumer loans. Liabilities will
expand as a result of the Rhode Island private
deposit insurance fund failure.
Banks currently pay a premium rate on deposits of 19.5 basis points; however, it is anticipated that the FDIC will increase the rate to
23 basis points in June 1991 as required to
bolster BIF reserves. Thrifts pay a premium
rate of 23.5 basis points. Credit unions have
contributed one percent of their assets to a
joint fund and may be assessed in the future
if necessary to replenish and maintain this reserve.
Additional Resources for the Bank Insurance Fund.—Until reforms reduce deposit
insurance losses, the FDIC must be assured
of the resources needed to deal with the anticipated number of bank failures. The alternative
is a backlog of insolvent but still open institutions. The experience of allowing a backlog of
insolvent thrifts to develop as a result of inadequate funding demonstrates the substantial
costs of delay in dealing with failure.
Part Two-214
THE BUDGET FOR FISCAL YEAR 1992
The Administration forecasts that, without
action to recapitalize the BIF, its net worth
will become negative in 1992 and continue to
decline through 1996. As described in the
Treasury Department's proposal for deposit insurance and financial services reforms, the Administration is proposing major reforms to the
Federal deposit insurance system and principles governing the recapitalization of the BIF
to restore it to a positive net worth position.
By 1994, it is anticipated that deposit insurance reforms and the new regulatory structure
of financial services will begin to improve industry profits. The resulting reduction in insurance losses will make it possible to begin
rebuilding BIF reserves.
Additional funding is not by itself a sufficient response to the problems of the BIF. If
more comprehensive reforms are not enacted,
it may be nearly impossible to restore BIF reserves to a prudent level.
The Administration's Proposals
The deposit insurance system we now have
imposes an unacceptable and unnecessary burden on depository institutions, taxpayers, and
the economy. That cost can be reduced to an
acceptable level only by giving banks, thrifts,
and credit unions the opportunity to operate
safely and profitably without extending the deposit insurance safety net.
The task of reform is two-sided. On the one
hand, exploitation of deposit insurance to subsidize excessively risky activities must be controlled. On the other hand, new opportunities
must be provided for depositories to diversify
their risks and capture the efficiencies of affiliation with other financial services. In this way,
over a period of time, a "virtuous cycle" can
be created through which capital and rewards
flow away from those activities that depend
solely on the deposit insurance safety net to
those which the marketplace will support. The
Administration's reform proposals are balanced
to achieve this result, and are presented independently in the Treasury study.
Toward Improved Budgeting for Deposit
Insurance
Federal budgeting conventions may have obscured the development of problems in the deposit insurance system at a time when reforms
could have reduced future spending. A sound
principle of budgetary accounting is that costs
should be recorded when they are incurred.
Otherwise, decisions are distorted by false
readings of their cost impacts.
This long-standing problem has been corrected for Federal credit programs through a
budgetary reform described later in this chapter. In 1991, both OMB and CBO will explore
whether it is appropriate and practical to
apply the principles of credit reform to deposit
insurance and other Government insurance
programs.
The subsidy conveyed by deposit insurance
rises with the number of weak and undercapitalized firms; when policies widen the safety
net to protect stockholders, uninsured depositors, or creditors; or when delay in recognizing
and dealing with insolvency adds to losses.
Conversely, it falls as policies are put in place
that effectively limit risk-taking with insured
funds or that increase firms' ability to earn
healthy returns without excessive risks.
Proper measurement of deposit insurance
subsidies over the last decade would have
shown that thrifts and banks were depending
more heavily on deposit insurance guarantees.
Without them, firms would quickly have lost
Table A-5. BIF NET WORTH—NO RECAPITALIZATION/REFORMS
(In billions of dollars)
1991
Net Worth
4.4
1992
-2.2
1993
-9.1
1994
1995
1996
-15.3
-19.3
-22.2
Note: The Administration forecasts that without action to recapitalize the Bank Insurance Fund (BIF), its net
worth will become negative in 1992 and continue to decline through 1996. These estimates of negative BIF net
worth could only develop if Section 15 (c)(5) of the Federal Deposit Insurance Act did not apply.
VIII.A.
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
the ability to fund themselves and continue
to operate. The costs of deposit insurance thus
would have been shown to be growing at an
alarming rate at a time when fund reserves
were still substantial. Recording this increase
in exposure as part of the budget might have
encouraged more timely action to reform the
system and limit losses.
If further study shows that changes in the
deposit insurance subsidy can be conceptually
identified and estimated with enough accuracy,
a recommendation may be considered to record
them as an increased cost when they are incurred, rather than when they are paid.
PENSION TERMINATION INSURANCE
The Pension Benefit Guaranty Corporation
(PBGC) guarantees payment of retirement
pensions when private sector defined-benefit
pensions terminate, usually in bankruptcy,
without sufficient assets to pay promised benefits. Separate insurance programs with different features cover the two main types of
pensions: (1) single employer pensions that are
sponsored by individual firms; and (2) multiemployer pensions to which several companies
in the same industry may contribute. The single employer program dominates the finances
of the PBGC.
Risk.—The present value of benefits that
are promised in all single employer pension
plans insured by the PBGC exceeds $800 billion. These promises are covered by pension
assets currently totalling $1 trillion. Although
the overall funding of defined benefit pensions
is generally good, about $20 to $30 billion of
unfunded liabilities are in substantially underfunded plans.
Underfunded pensions do not necessarily
pose risk to the insurance program. Risk is
due to financial problems in firms that have
underfunded pensions. A rather small number
of pensions account for most of the risk to
the PBGC. About $8 billion of the total
underfunding is in pensions of financially
strained firms that are likely to become bankrupt if their business conditions deteriorate
enough.
If the conditions of the last few years continue over the next thirty years, PBGC's deficit
is likely to climb to $6 billion; under more
Part Two-215
pessimistic assumptions, the PBGC's deficit
could reach $20 billion (both in 1991 dollars).
Some firms persist in underfunding their
pensions. This practice is concentrated mainly
in the steel, automobile, and airline industries.
Most underfunding is legal and reflects company use of pension funding methods currently
allowed in the law and Treasury regulations
or that were allowed in the past. PBGC insurance is particularly beneficial for such firms.
Premiums.—All sponsors of single employer, defined benefit pensions must pay a
flat rate per capita annual premium to the
PBGC. In addition, underfunded plans also are
required to pay a variable rate premium related to the PBGC's loss exposure.
In OBRA, Congress increased PBGC premiums from an average of $19 to $23. The
flat rate premium was increased from $16 to
$19 per covered worker. The variable rate premium, paid by employers whose plans are underfunded, was increased from $6 to $9 per
$1,000 of unfunded vested liability. The maximum on the variable rate premium was raised
from $34 to $53. The portion of total premiums
raised from the variable portion, 17 percent,
stayed about the same as before.
These increases give the PBGC additional
current resources and should provide a positive
cash flow past the end of the century. However, the conditions that could lead to even
higher PBGC deficits—underfunded pensions
in financially weak firms—have not yet been
changed. The PBGC's long-term deficit can be
expected to grow unless the program can increase its recoveries from companies terminating underfunded plans or can increase its premiums, particularly the variable one, further.
Bankruptcy and Unfunded Claims.—The
PBGC makes claims against firms that are
bankrupt and are terminating their pension
plans. The claim is for amounts of pension
underfunding and for current, unpaid pension
contributions. The PBGC's low priority in
bankruptcy proceedings often results in low recoveries, delays in recovering assets, and an
enlargement of the PBGC deficit. Moreover,
the PBGC usually has limited information because it is not on creditors' committees in
bankruptcy proceedings.
Part Two-216
PBGC's losses from terminating plans can
be increased because of subsidized early retirement benefits, called shutdown benefits, which
become payable when operations are closed.
They are common in collectively bargained
pensions in the manufacturing sector, but are
not normally funded in advance because the
triggering events cannot be predicted. In financially ailing firms, such contingent benefits can
use up pension assets before bankruptcy and
pension termination, thereby shifting the financing burden onto the PBGC. PBGC's losses
increase because it cannot recover the higher
claims from bankrupt firms.
The risk of large increases in the PBGC deficit can be reduced by legislation to achieve
policy goals already proposed in the 1991
budget, but not yet enacted. These measures
would strengthen company incentives to fund
pensions and further reduce PBGC's exposure
to loss. The Administration will propose legislation to clarify and improve the status of
PBGC claims in bankruptcy, to revise the legal
treatment of shutdown benefits, to give the
PBGC the option of becoming a member of
creditors' committees, and to further tighten
the regulations for interest rates used to determine company contributions to underfunded
pensions.
OTHER FEDERAL INSURANCE
The Federal Government operates insurance
plans to protect against other types of risk.
Two of them offer disaster insurance, which
is not readily available elsewhere; and some
offer insurance or indemnification in response
to some service in the Nation's interest.
Disaster Insurance
Disaster insurance has two problems that
tend to increase losses. The first problem
stems from the widely held perception that the
Federal Government will grant disaster relief
whether people are insured or not. Those who
believe they will be reimbursed for disaster
without paying for insurance will not buy coverage voluntarily even when it is subsidized.
The second problem, common to any insurance,
is the tendency of those protected to undertake
more risky behavior. This is especially a problem when insurance premiums are subsidized.
THE BUDGET FOR FISCAL YEAR 1992
Federal Crop Insurance.—Federal Crop
Insurance illustrates the difficulty in selling
disaster insurance, even when heavily subsidized. Federal crop insurance was expanded
in 1980 to protect farmers from the risk of
crop loss and obviate the need for disaster relief. The program is in need of serious reform.
Only one-third of eligible commodity production has been insured, despite the fact that
subsidies cover about two-thirds of total program costs, including premiums, administration, and excess losses. Yet even with a subsidy of roughly $1 billion per year, disaster
relief bills costing $7 billion were enacted in
1983, 1986, 1988, and 1989.
The "pay as you go" provisions of OBRA may
reduce the redundancy between federally subsidized crop insurance and ad hoc disaster relief, because all future relief bills must include
offsetting reductions in other programs. This
includes those enacted by supplemental appropriation, unless such relief is granted in response to a Presidentially declared "dire emergency." In the past, including the period covered by the Gramm-Rudman-Hollings law,
most supplemental appropriation spending was
not offset. Thus, there is reason to believe that,
in the future, ad hoc disaster relief bills will
be somewhat less frequent and, when available, less generous than in the past.
Crop insurance reform is nevertheless needed. Administrative expenses are high, ranging
between one-quarter and one-half of all program outlays. Further, the program remains
somewhat vulnerable to mismanagement. Most
importantly, the premiums have not been set
on an actuarially sound basis—even with some
subsidy in the premium assumed. Excessively
low premiums consitute a hidden subsidy beyond even that which was intended for the
program.
Two approaches will be used in an attempt
to address these problems. First, the Administration will aggressively use the new authorities provided in the 1990 farm bill to correct
both management and actuarial problems, including, where possible, the use of area yields
to reduce administrative costs. Second, legislation is being proposed by the Administration
to price insurance policies closer to their full
cost, lowering Federal premium subsidies from
30 percent to 15 percent of the policy's cost.
VIII.A.
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
Part Two-217
The new premiums will tend to be higher,
though some low-risk producers will pay less
than they do now.
5 to 10 percent chance that its resources would
not be adequate.
Federal Flood Insurance.—The availability of insurance against flood losses without
accompanying flood hazard reduction activities
can encourage unwise development of flood
plains. Federal flood insurance is therefore
available only to individuals who live in communities that adopt and enforce appropriate
land use and building standards. This includes
virtually all communities at risk of large flood
losses. In 1991, the Federal Emergency Management Agency (FEMA) will continue implementation of a new premium system that
strengthens incentives for communities to undertake measures beyond the minimum Federal requirements to reduce the risk of flood
damage.
National Interest Insurance
The General Accounting Office, in reviewing
Federal disaster programs concluded, "Insurance is the most efficient and equitable method
of
providing
disaster
assistance
(TAD-80-39)." Federal disaster assistance,
provided only in Presidentially declared disasters, cannot reliably substitute for insurance.
However, recipients of FEMA's means-tested
individual disaster assistance grants frequently cite the inability to afford premiums
as the reason for not carrying flood insurance.
This is despite the availability of subsidized
flood insurance for structures built before identification of the flood risk.
The National Flood Insurance Program currently generates sufficient annual income to
cover the equivalent of the average historical
loss year. However, the fund is not actuarially
sound over the long term because of the statutorily subsidized portion of the business. If loss
reserves and premium income are insufficient
to meet program losses and expenses, the fund
can borrow up to $1 billion from the Treasury.
In 1991, there is an estimated 40 to 50 percent
chance that the fund's loss reserves, together
with anticipated premium income for the year,
will not be adequate to meet losses. FEMA
estimates that if the fund were to be capitalized for a 10-year period without any borrowing authority, a reserve of $3 billion to $5 billion would be needed to assure that the fund
could satisfy policyholder claims with only a
VA Life Insurance.—VA has eight life insurance programs designed to help veterans
and servicepersons who have difficulty obtaining affordable life insurance in the private sector as a result of combat risks or health problems associated with their military service. Six
of the eight programs are actuarially sound.
The largest, the Serviceman's Group Life Insurance (SGLI), is completely self-supporting
in peacetime, but receives $50,000 per combatrelated death from appropriations. Two programs have unfunded liabilities: the ServiceDisabled Veterans Insurance (SDVI) and the
Veterans Mortgage Life Insurance (VMLI).
They provide insurance to service-connected
disabled veterans at premiums appropriate for
healthy people or, in the case of totally and
permanently disabled veterans, free. The difference is made up by an appropriation proposed to be $25 million in 1992.
War-Risk Indemnification.—The Government insures and indemnifies air and maritime carriers in case of loss from the operation
of their aircraft or ships during a war or national emergency. For aviation war risk insurance, claims paid under the program since its
inception have been only $151,000. However,
with the Middle East crisis, the number of
aircraft covered by the program has increased
to 569, from 408 in 1989, and their values
have been updated—in combination more than
doubling the face value of the insurance outstanding. A smaller program of maritime war
risk insurance now covers more than 1,000
vessels ranging from oil tankers to barges. It
includes the hull value of both the U.S. commercial fleet and foreign-flag vessels under
contract with the U.S. Government.
Overseas
Private
Investment
Corporation.—OPIC provides political risk insurance against losses caused by inconvertibility
of currency, expropriation, and political violence for foreign direct investment by U.S. corporations. At the end of 1990, $3.3 billion of
insurance was outstanding, with reserves at
30 percent of this amount. OPIC limits its exposure in any given project (which rarely exceeds $100 million), and also spreads its risk
Part Two-218
geographically, so that typically no more than
10 percent of its total insurance portfolio is
at risk in any single country.
The private market for political risk investment insurance is limited. In the U.S., there
are only a handful of private insurers. Many
investors seek coverage through Lloyd's of London. OPIC has counterpart agencies among
other OECD countries, which also insure investments by their respective nationals against
political risks. The volume of risks insured by
these agencies tends to be smaller than OPIC.
In recent years, premium income for these
counterparts has exceeded losses.
Vaccine Injury Compensation.—The National Childhood Vaccine Act of 1986 created
the Vaccine Improvement Program (VIP) to adjudicate and pay compensation for vaccine-related injury or death. Successful pre-October
1, 1988, claims are covered by limited appropriations from the general fund. Successful
post-October 1, 1988, claims are paid from a
trust fund financed by an excise tax levied
on each dose of covered vaccine sold in the
United States. Awards are made on a no-fault
basis for all vaccines specified in the Act; no
finding of negligence is necessary. Federal payment of claims gives vaccine manufacturers
partial relief from liability.
A total of 3,060 pre-October 1, 1988, claims
were filed before the original October 1, 1990,
filing deadline. This far exceeded the original
projection. In addition, P.L. 101-502 extended
the filing deadline by four months. Preliminary
estimates indicate that total awards for preOctober 1, 1988, claims could be as high as
$3 billion. Expected Federal payments for preOctober 1, 1988, awards is limited, since only
$80 million annually in Federal payments is
now authorized. Federal payments could be
much higher if the annual authorization level
were raised.
OTHER "SAFETY NETS"
The Government's overall responsibility for
the Nation's economic well-being may quickly
enlarge its commitments when unpredictable
events occur. Thus, when private "safety nets"
fail, such as when private or State-sponsored
deposit insurance plans for thrifts or credit
unions in Ohio, Maryland, and most recently
THE BUDGET FOR FISCAL YEAR 1992
Rhode Island came under stress, Federal regulators helped to resolve the crises and took
many of the former members under Federal
deposit insurance.
The Federal Government monitors the
strength and safety of all financial sectors.
Some of the changes that have put depository
institutions under pressure also are affecting
the securities and insurance industries. In
these cases, the first lines of defense against
potential risk are the capital of individual
firms and the safety nets created either by
the industry or State governments.
Securities Investor Protection
Corporation
Unlike depositors, investors in securities are
not protected by a Government fund. However,
customers of securities firms are protected by
an industry-sponsored fund of the Securities
Investor Protection Corporation (SIPC). This
fund insures them against losses of cash and
securities up to $500,000 when a broker-dealer
fails. Most broker-dealers in the general securities business are required to be members of
SIPC.
As of December 1990, the SIPC fund had
reserves of $568 million. Additional financial
support is available through a $500 million
line of credit with a consortium of banks. SIPC
may also borrow up to $1 billion from the
Treasury through the SEC. Neither line of
credit has ever been used.
A recent study by a major accounting firm
projects that, in a worst case scenario of the
failure of one of the largest SIPC members,
the maximum cost to SIPC would be about
$1.2 billion. This figure, however, is subject
to revision since market values change too rapidly for SIPC to give a continually updated
estimate of its coverage. The study concluded
that the current SIPC fund appears to be adequate to manage a major failure. However,
several trends in the securities industry may
pose new threats. They include an eleven-fold
increase in U.S. trading in the past two decades, the development of complex products and
new markets, and increased concentration of
securities industry capital in the top 25 firms.
VIII.A.
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
The Insurance Industry
Policyholders of insurance firms are also not
federally insured. Instead, a system of industry-financed State guarantee funds pays claims
on failed firms. The safety net of the guarantee
funds is not complete. Many funds have maximum payouts and exclude out-of-State policyholders.
Two parts of the insurance industry—life
and health insurers, and property and casualty
insurers—have, for different reasons, been
under increasing financial strain. In an era
of financial deregulation, life and health companies have faced intensified competition from
other saving vehicles, and have invested in assets which are now eroding in value. Property
and casualty companies were hurt over the
past decade by large increases in claims, particularly for product and professional damages,
that they had not anticipated in setting their
premiums.
The McCarran-Ferguson Act of 1945 authorized States to charter insurance companies, set
the standards, and supervise their enforcement. There is wide variation across States
in the stringency of standards, the resources
available to regulators, and the depth of their
oversight.
Life and Health Insurers.—As inflation
and interest rates rose in the late 1970s, life
insurance, with slow-growing cash value, was
no longer competitive. In response, the industry developed new products that were primarily investment-oriented, rather than insurance-oriented. These products had much higher cash values and their earnings often were
tied to frequently changing market rates.
The new products helped life insurers capture part of the growing market for retirement
savings. But direct competition with banks,
thrifts, brokers, and mutual funds trimmed
profit margins. In addition, the variable-rate
feature of many products increased interest
rate risk for insurers by creating a greater
potential for mismatching the return on assets
and liabilities.
The shift from pure insurance to an intensely competitive investment focus increased
the incentive for insurance firms to move into
more risky investments. As profit margins declined, the industry's average ratio of capital
Part Two-219
and surplus to assets declined—from 8.4 percent in 1970 to 6.4 percent in 1989. On a riskadjusted basis, the capital ratio has deteriorated still more.
More life and health insurers are failing
than in past decades. From 1985 to 1989, 96
firms failed, 43 in 1989 alone. Most were
small, so their drain on the State guarantee
funds has not been much of a burden on the
industry. The 1989 record assessment of insurers to cover policyholders of failed companies
was only $161 million; the total for 1985-89
was $366 million.
The quality of insurers' assets is one indicator of the potential for future insolvencies. The
200 largest life insurance companies hold 4.6
percent of their assets in below-investmentgrade bonds. For a few companies, the share
is much higher. The collapse of junk bond
prices and market liquidity has put these firms
under strain, making them vulnerable to soaring redemptions that could turn their longterm liabilities into short-term ones.
A broader problem is potential losses on the
mortgages and real estate that comprise nearly
one-quarter of industry assets. In general,
these insurers have avoided the construction
and development lending that proved so dangerous to thrifts. But even for established
properties, mortgage delinquencies are on the
rise, and property values are falling in many
markets, especially on the east and west
coasts. Insurers that have invested heavily in
these in the past few years could find themselves with a poorly performing portfolio.
Property and Casualty Insurers.—In
1989, the property and casualty industry suffered huge losses from Hurricane Hugo ($4 billion) and the California earthquake ($600 million). These culminated a decade of underwriting losses. Throughout this period, courts have
increased the scope and size of liability judgments, and claims have continually outpaced
premiums that were based on the lower claims
experience of prior years.
The increases in product and professional liability have been substantial and unexpected.
Claims for product damages, from asbestos to
the Dalkon Shield, have been numerous and
costly. Business pollution coverage claims were
increased by court rulings that insurers are
Part Two-220
responsible for the cleanup costs resulting
from their clients' years of dumping hazardous
wastes. Professional liability claims for doctors'
and hospitals' medical malpractice policies
surged during the 1980s. Directors and officers
insurance and professional liability policies
have made property and casualty insurers liable for the wrongful actions of directors, accountants, and lawyers involved in failed
thrifts and other firms.
Starting in the late-1960s, State regulators
increasingly allowed market forces to set rates
through price competition. Despite competition, rising claims costs pushed up premiums. By the mid-1980s, rates were soaring
and coverage was more difficult to obtain. In
this environment, many businesses and municipalities decided to self-insure. By the end
of the decade, self-insurance comprised about
30 percent of the market, leaving property and
casualty insurers on average with a riskier
book of business. Concurrently, consumers'
groups resisted premium increases, particu-
THE BUDGET FOR FISCAL YEAR 1992
larly for automobile insurance, and some jurisdictions obtained restraining legislation.
These pressures squeezed the profits of
many property and casualty companies and
eventually triggered insolvencies—a rare occurrence in the 1970s. From 1985 through
1989, 90 firms failed—some quite large. In
1989 alone, 23 firms folded. Assessments on
the industry by State guarantee funds totaled
a record $772 million in 1989, and nearly $3
billion over the five years 1985-89.
Policy Considerations•—The Federal Government has no legal liability to policyholders
of failed insurance companies. It is, however,
concerned with maintaining a healthy financial sector.
Some have proposed strengthening the
State-based regulatory system by improving
the quality of information and giving the regulators more resources and powers. Some would
place limits on high-risk investments, raise reserve requirements for riskier assets, and
tighten accounting rules.
FEDERAL CREDIT AND GOVERNMENT-SPONSORED
ENTERPRISES
Credit and GSE Highlights
The Government subsidizes and has assumed at least some risk for an enormous volume of credit. Federal subsidies shift credit
toward favored sectors—especially housing,
education, and agriculture.
• In the three months since credit reform
was enacted, explicit subsidy estimates
have been developed for all Federal credit
programs. Preparations are underway to
enable agencies to control lending by the
availability of subsidy budget authority.
Those plans include improvements in data
to upgrade the subsidy estimates and related improvements in loan origination
and monitoring.
• GSEs are the most rapidly growing purveyors of federally assisted credit and a
dynamic force in the trend toward
securitization. GSEs have symbiotic relationships with Federal credit programs.
* «r
They securitize guaranteed mortgages and
student loans, and are also assisted when
Federal programs serve as a lender of last
resort. While most GSEs can survive considerable economic stress, the Farm Credit
System and the FHLB system could benefit from immediate further policy review.
• Housing credit programs, GSEs, and deposit insurance support 83 percent of all
home mortgages. The Federal National
Mortgage Association (Fannie Mae) and
the Federal Home Loan Mortgage Corporation (Freddie Mac) survive a stress
test similar to those imposed by private
credit rating agencies so long as current
policies are continued. The FHA singlefamily program was substantially reformed last year. The FmHA housing programs will continue the reforms started
last year, and new proposals are made for
VIII.A.
Part Two-221
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
improving the FHA multi-family and VA
loan guarantee programs.
stress. Proposals are made to strengthen
the structure and incentives of the system.
• In education, nearly all student loans are
federally guaranteed, and 51 percent are
financed by the Student Loan Marketing
Association (Sallie Mae), a GSE. Sallie
Mae has virtually no exposure to economic
risk and survives some policy shocks, although it would be affected if the GSL
program were reconfigured as direct loans.
The reauthorization of the GSL program
will include improved incentives for students, schools, and States to reduce excessive defaults and program abuse.
• The Federal role in lending to business
is focused on financing exports, rural utilities, and small and minority businesses.
For the Rural Electrification Administration (REA) and the Small Business Administration (SBA), the budget proposals continue the shift from direct loans to partial
guarantees and reduced interest subsidies.
• In agriculture, 73 percent of all farm debt
has some form of Federal support. The
shift from FmHA direct loans toward loan
guarantees enacted as a result of the
budget agreement last year will help farmers to establish private credit and reduce
Federal costs. Four of the Farm Credit
System districts are projected to experience severe financial stress in the 1990s
under relatively optimistic scenarios; two
others are added under increased economic
PERCENT
OF TOTAL
The Federal Government's credit subsidies
shift resources toward favored economic sectors—especially housing, agriculture, and education. Federal credit subsidies are both direct
and indirect. Direct subsidies include interest
rates below Treasury rates and easier terms
on direct loans and guarantees of private loans
than necessary to absorb defaults and other
costs. Indirect subsidies include implicit Federal backing for Government-sponsored enterprises, which lowers their cost of funds. By
pricing credit below cost, the Government subsidizes borrowers and incurs costs to expand
the amount of credit to particular types of borrowers.
t w o perspectives o n f e d e r a l credit:
LEVEL
LEVEL
1992
Part Two-222
THE BUDGET FOR FISCAL YEAR 1992
In analyzing Federal credit programs, it is
important to distinguish the value of the subsidy provided from the total amount (volume)
of credit. For example, Federal direct loans account for only 13 percent of new Federal credit
extensions but 32 percent of the subsidy provided. This is because the average subsidy rate
on direct loans is 17.9 percent, compared with
2.5 percent on guarantees. The difference
shows up most dramatically when comparing
the composition of guaranteed loan volume and
the value of subsidies. Housing accounts for
two-thirds of the volume of new guarantees
in 1992, but because of the FHA reforms enacted in OBRA, none of the subsidy. In contrast, education accounts for 12 percent of the
volume, but 94 percent of the subsidy.
The Government has assisted and assumed
some risk on an enormous volume of credit.
At the end of 1990:
• In housing, $1,232 billion or 42 percent
of outstanding home mortgages had been
guaranteed by Federal agencies or securitized by GSEs. Another $1,214 billion or
41 percent (not including securitized
loans) was held by banks and thrifts with
deposit insurance; thrifts also receive advances from the Federal Home Loan
Banks, a GSE. Thus, of all home mortgages, 83 percent had explicit or implicit
Federal support.
• In education, nearly all student loans are
federally guaranteed. Furthermore, Sallie
Mae, a GSE, financed $28 billion, or 51
percent, of the guaranteed student loans
outstanding.
• In agriculture, the Farmers Home Administration accounted for $15 billion or 11
percent of all farm debt outstanding. The
Farm Credit System financed another $37
billion or 27 percent, and commercial
banks financed 35 percent, backed by deposit insurance and soon by Farmer Mac,
a GSE. In total, 73 percent of all farm
debt had Federal support.
• Business was also assisted by $103 billion
of Government credit. The Federal role is
focused on exports, rural utilities, and
small and minority businesses.
In 1992, the total volume of Federal loans,
guarantees, and GSE credit is expected to
reach $1,695 billion. Total Federal subsidies,
which take into account the present value of
expected future defaults, are estimated to be
$1.2 billion for direct loan obligations in 1992
and $2.9 billion for the much larger loan guarantee commitments.
New direct loan obligations fell 39 percent
from $27.2 billion in 1988 to $16.7 billion in
1990, and are projected to fall in 1992 to $14.7
billion. New guaranteed loan commitments
have risen from $100.7 billion in 1988 to
Table A-6. SUMMARY OF FEDERAL DIRECT LOANS AND GUARANTEED
LOANS
(In billions of dollars)
Actual
1989
Direct Loans:
Subsidy BA
Subsidy Outlays
Loan Obligations
Loan Disbursements
Guaranteed Loans:
Subsidy BA
Subsidy Outlays
Guarantee Commitments
Lender Disbursements
n/a
16.2
26.0
n/a
105.4
96.3
Estimated
1990
1991
1992
1993
1994
1995
1996
n/a
n/a
16.7
24.0
n/a
n/a
16.8
25.7
1.2
0.7
14.7
23.7
1.0
0.8
15.0
21.8
1.1
1.0
13.6
18.4
0.9
1.0
13.4
17.0
0.9
1.0
13.7
16.2
n/a
n/a
108.9
99.3
n/a
n/a
119.0
102.9
2.9
1.5
115.7
102.4
2.5
1.9
117.0
103.8
2.6
2.0
118.9
105.9
2.7
2.1
120.9
108.3
2.8
2.2
122.5
110.1
VIII.A.
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
$108.9 billion in 1990, an 8 percent increase.
This trend is projected continue through 1992
when volume should reach $115.7 billion.
Loans to agriculture are the largest single
component of direct loans. They have fallen
from $14.5 billion in 1988 to $7.0 billion for
1990. Housing guaranteed loan volume was
$62.9 billion in 1990, rising 17 percent since
1988. VA guaranteed loans have risen 8 percent over the past few years but may fall
slightly in the next year or two. Guaranteed
student loans have risen about 5 percent from
$11.8 billion in 1988 to $12.4 billion in 1990,
and are projected to rise further to $13.3 billion in 1992.
Tables A-12, A-13, and A-14 at the end
of this Chapter provide detailed information
on direct loans, guaranteed loans, and GSE
lending and borrowing.
CREDIT REFORM
In the private sector, loans are not made
unless the lender expects—at the time the loan
is made—that the present value of repayments, interest, and fees is at least as large
as the disbursement. Similarly, loans are not
guaranteed unless the guarantor believes that
fees received will at least cover future costs.
Later events may favor either the borrower
or the lender, but at the time of the initial
transaction, the belief is that instruments of
equal value are being exchanged.
For Federal direct loan and loan guarantee
programs, that is often not the case. Federal
programs exist to provide benefits to certain
borrowers or to channel additional resources
to certain sectors. Sometimes the Government's large scale and sovereign powers enable
it to provide such advantages without out-ofpocket cost. But in most cases, Federal credit
programs provide loans or guarantees that are
expected to result in a loss to the Government.
In such cases, a subsidy cost and a loan
or guarantee are combined in a single transaction. Federal budgeting and accounting in
the past failed to recognize this dual nature
of credit programs. As far back as 1967, the
President's Commission on Budget Concepts
recommended that the grant or subsidy cost
of direct loans be recorded as an expenditure
Part Two-223
and the unsubsidized portion be recorded separately as a loan.
A Significant Budget Agreement Accomplishment.—In the Federal Credit Reform Act
of 1990, part of OBRA, the Congress has officially recognized the future losses embodied in
Federal credit programs. The new law places
the cost of credit programs on a budgetary
basis equivalent to other Federal spending.
These expected costs—a measure of the credit
subsidy—will be included in the outlays of the
program, the agency, and the function that
conduct the credit program. The remaining,
unsubsidized cash flows will be recorded in
separate financing accounts.1 In this way, the
effect of credit programs on total budget outlays and the budget deficit will be determined
by the amount of the subsidy cost.
The new law requires that budget authority
be available to cover the subsidy cost of all
Federal direct loans and all loan guarantees
when they are made. For most programs, these
are annual appropriations of specific amounts
that lapse at the end of the year. For the few
credit entitlements, like VA guarantees and
guaranteed student loans, there will be current, indefinite appropriations constrained by
provisions of the authorizing law.
Better Incentives.—This change in budgetary accounting and control will improve the
incentives to make good program decisions.
The full cost will be recorded when the decision is made. Previously, at the time of decision the budget overstated the full cost of direct loans and understated the cost of guaranteed loans. Credit reform will improve the incentives for allocating resources among programs, and in choosing whether to provide assistance by a direct loan, a loan guarantee,
or another method. Because the long-run cost
is recognized initially, it will also improve the
incentive to reduce defaults by better structured programs, and by more effective underwriting, servicing, and collection.
How will these subsidy costs be calculated?
Essentially, they are the difference between
the present value of the expected cash outflows
from the Government and the present value
of the expected cash inflows, each discounted
JThe nonsubsidized cash flows will be a means of financing the
budget deficit, as explained in Chapter VIII.C.
Part Two-224
THE BUDGET FOR FISCAL YEAR 1992
Table A-7. ESTIMATED SUBSIDY RATES, BUDGET AUTHORITY, AND
OUTLAYS FOR DIRECT LOANS
Agency and Program
1992 Weighted-average
subsidy as^a
disbursements
Funds Appropriated to the President:
Foreign military financing
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:
Rural electric and telephone
Rural electric and telephone modifications
Rural telephone bank
Interior:
Bureau of Indian Affairs
State Department:
Repatriation Loans
Veterans Affairs:
Loan guaranty revolving fund
Guaranty and indemnity fund
Vocational rehabilitation
Small Business Administration:
Business loans
Disaster loans
Export-Import Bank
Federal Emergency Management Agency
Total, direct loan subsidies1
In millions of dollars
Subsidy Budget Authority
1992
1993
1994
Subsidy Outlays
1992
1993
1994
12.7
40
40
40
3
15
33
9.6
2
3
3
*
1
2
21.6
14.7
50.0
27.2
75.9
157
69
18
330
317
127
61
17
302
255
111
56
16
280
257
147
4
2
176
241
126
21
6
262
265
112
41
10
271
253
10.8
129
129
129
21
57
78
-22.4
-4.1
-111
-186
-1
-111
-2
-186
-1
-2
19.3
2
2
2
2
2
2
*
*
*
*
*
*
9.5
11.5
9.4
6.2
123
7
29.6
22.5
3.4
1
66
27
*
99
16
*
1
65
27
—
70
25
*
1
65
28
123
7
*
1
40
2
99
16
*
1
64
45
—
70
25
*
1
64
81
7.2
*
*
*
*
*
*
17.9
1,178
958
1,082
657
795
1,043
* $500 thousand or less.
1 Weighted
average.
by the interest rate on marketable Treasury
securities of like maturity at the time of loan
disbursement.
The word "expected" is important. It covers
not only the cash flows specified in the loan
or guarantee contract, but also the likely deviations from it. The 1992 budget estimates are
based on available historical experience. They
incorporate analysis of what causes deviations
from contract, and, in particular, how deviations relate to what is known or controllable
when the loan is made. The estimates take
into account characteristics of the loan or the
borrower that make default more likely, and
the degree to which policies or economic conditions influence that probability.
For implementation, much more knowledge
is necessary. No loan or guarantee can be
made unless unobligated subsidy appropriations are available. Each loan or guarantee
must be placed into a relatively homogeneous
risk category defined by its default probability
VIII.A.
Part Two-225
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
Table A-8. ESTIMATED SUBSIDY RATES, BUDGET AUTHORITY, AND OUTLAYS
FOR LOAN GUARANTEES
(In millions of dollars)
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 electric and telephone
Rural telephone bank
Education:
Guaranteed student loans, Stafford
Guaranteed student loans, PLUS ..
Guaranteed student loans, SLS
Health and Human Services:
Health professions graduate student
Housing and Urban Development:
Federal Housing Admin, mutual
mortgage
Federal Housing Admin, gen. and
special risk
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
Total, loan guarantee subsidies1
1992 Weightedaverage subsidy as a
percent of
disbursements
—
In millions of dollars
Subsidy Budget Authority
1992
—
2.5
—
1993
1994
—
3
—
Subsidy Outlays
1992
—
—
3
1993
3
—
—
1994
—
—
2
1
—
—
—
—
3.6
98
106
114
78
103
112
2.7
4.5
13.9
156
7
97
153
7
99
151
7
101
156
2
68
153
4
96
151
6
100
-0.1
-1.7
-1
-4
-1
-8
-3
-1
-4
-1
-8
-3
22.6
7.6
13.2
2,317
82
257
2,336
91
286
2,437
101
304
1,386
76
159
2,050
85
239
2,116
94
257
11.8
22
12
6
22
12
6
-2.6
-815
-1,254
-1,306
-815
-1,254
--1,306
0.6
55
57
60
36
53
55
—
—
—
—
—
—
—
*
*
15.1
7
7.3
1.2
*
*
*
*
*
*
168
152
150
168
152
150
1.1
4.4
54
371
56
430
56
446
49
126
50
183
51
204
2.5
2,876
2,534
2,627
1,516
1,928
1,995
7
8
7
7
8
* $500 thousand or less.
Weighted average.
and other likely costs. The actual experience—
the delinquencies, defaults, prepayments, and
modifications—of the loans in each of these
risk categories for each origination cohort must
be tracked.
Such tracking is necessary in order to assure
that subsidy appropriations are adequate to
280-000 0 - 9 1 - 8
(PART 2)
pay the long-term costs of the intended activities. Tracking is also needed because the subsidies for each origination cohort will be
reestimated in the budget each year.
Two Regimes.—Credit reform creates two
"regimes." Under the old regime are direct
loans and loan guarantees that were obligated
Part Two-226
or committed in 1991 or prior years. They will
continue to be recorded on a cash basis as
they have been in the past. In most cases,
they will remain in their existing "liquidating
accounts." New obligations or commitments
will not be made from them in 1992 or thereafter. These liquidating accounts will have permanent, indefinite budget authority to pay for
losses, and to repay any previous Treasury
borrowing. If a direct loan or a guarantee
made under the old regime is modified, a subsidy appropriation will be required and a subsidy outlay recorded.
The new regime will start in 1992. Each
credit program will have a "program account"
for subsidy appropriations and administrative
expenses. There will also be a counterpart "financing account" for each program^or two, if
the program makes both direct loans and loan
guarantees—which will display the cash-flows
of the credit activity.
When a direct loan is made, the subsidy will
be disbursed from the program account to the
program's direct loan financing account. That
will count as an outlay from the standpoint
of the agency. Since the financing account
records only financing transactions, it is not
included in the budget totals; thus, the subsidy
payment will also count as an outlay from the
standpoint of the Federal budget as a whole.
The financing account will borrow the
unsubsidized amount of the loan from Treasury, and disburse this together with the subsidy as a direct loan. All repayments, interest,
fees, and other income will be paid to the financing account, which will repay its debt to
Treasury with interest as the loan is scheduled
to be repaid. If the subsidy is correct, the financing account will come out even over the
life of the loan. If not, the subsidy will be
reestimated, and a further payment made by
the program account to the financing account.
When a guaranteed loan is made by the nonFederal lender, the subsidy will be disbursed
from the program account to the program's
guaranteed loan financing account. That will
count as an outlay from the standpoint of the
agency and the Federal budget as a whole.
The financing account will add to the subsidy
the fees which it collects. Together they will
constitute a reserve, earning interest from
Treasury, against future default claims and
THE BUDGET FOR FISCAL YEAR 1992
other costs. If the subsidy is correct, the financing account will come out even over the
life of the loan. If not, the subsidy will be
reestimated, and a further payment made by
the program account to the financing account.
On October 18, 1990, OMB Bulletin No.
91-02 provided instructions for presenting
credit reform in the 1992 budget. OMB is
drafting the bulletin and formats for incorporating credit reform into budget execution.
OMB and Treasury will modify financial statements to be congruent with these principles.
These three bulletins—for budget formulation, budget execution, and financial statements—set the conceptual framework for the
legally required reports. The new Chief Financial Officers Act requires financial officers to
produce financial statements in 1991 on "trust
funds, revolving funds and commercial type activities"—credit programs prominent among
them. In 1992, implementation of credit reform
will start. So intense attention will focus on
credit programs over the next few years.
Clearly, credit reform is not "just" an accounting change. It is an opportunity to see
each program with fresh eyes. Credit reform
asks the right questions: Who is being helped?
By how much? At what cost? It focuses attention and budgetary decisions on the costs underlying each loan, juxtaposed with the borrowers who benefit from these programs. It
provides perspective for both policy analysis
and program management.
GOVERNMENT-SPONSORED
ENTERPRISES
Government-sponsored enterprises were established and chartered by the Federal Government to perform specific credit functions.
They primarily act as financial intermediaries
that assist borrowers in housing, education,
and agriculture. They borrow in the securities
market and lend their borrowed funds for specifically authorized purposes either directly or
by purchasing loans originated by private lenders.
The GSEs are privately owned, with one partial exception. Their policies and operations
are determined by their boards of directors,
which have a majority elected by their private
owners. However, they reallocate resources
VIII.A.
Part Two-227
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
through Federal subsidies to achieve Federal
policy objectives. They may also pose a direct
or indirect financial risk to the Government.
In sum, they are neither wholly governmental
nor wholly private.
Government sponsorship has given them
various benefits. Their securities can collateralize public deposits and can be held in unlimited amount by most banks and thrifts. They
are exempt from SEC registration, and their
corporate earnings are exempt from State and
local income taxation. They may borrow from
the Treasury, largely at Treasury discretion,
in amounts ranging up to $4 billion. Because
of these specific advantages and their overall
Federal sponsorship, the credit market perceives their securities to have an implied Federal guarantee. As a result of all these factors,
GSEs borrow at lower interest rates than they
would otherwise have to pay.
The President's Commission on Budget Concepts recommended that the Federal budget
document show their loans, borrowing, and
complete financial statements. These are published in Chapter XIII.C. The Budget Enforcement Act, part of OBRA, requires the budget
to include an analysis of the financial condition
of the GSEs and the financial exposure that
they pose to the Government. This Chapter
fulfills that requirement for the Federal Home
Loan Banks, the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation, the Student Loan Marketing
Association, and the Farm Credit System.
In general, this assessment concludes that
the direct risk to taxpayers from these GSEs
is not large. Specific weaknesses were identified for the Farm Credit System, and recommendations made. The circumstances of the
Federal Home Loan Banks will require further
study in the context of financial services reforms.
These analyses focused primarily on interest
rate and credit risk. But GSEs also face managerial and operational risks, and unexpected
changes in their environment. They are dynamic businesses, seeking competitive advantage. It is difficult to foresee the effects of such
factors for taxpayers. Moreover, GSE activities
may have some indirect costs. They interact
with Federal credit programs, particularly
mortgage and student loan guarantees and
FmHA, in ways that have not been thoroughly
studied. Their larger effects on financial markets need to be examined. And public policy
is also concerned with the efficiency and effectiveness of these subsidies in achieving Federal objectives.
Extending Credit Reform to GSEs.—The
Federal Credit Reform Act also required OMB
and CBO to study the possibility of extending
the principles of credit reform to accounting
for Government-sponsored enterprises. Applying credit reform to GSEs would involve very
difficult conceptual and measurement issues.
There is a well developed academic literature on modeling default and prepayment
behavior to provide a basis for estimating the
subsidy for Federal direct and guaranteed loan
programs under credit reform. However, where
credit is extended by private firms whose operations are supported in part by implicit Government guarantees, it is helpful, but not sufficient, to model the risk of the firm's asset portfolio. The performance and behavior of the firm
matter as well. So does the behavior of the
Government, and capital market perceptions
of the firm's viability and the conditions of
the Government's guarantee.
OMB has begun to study the possibility of
measuring year-to-year changes in the Government's exposure to losses that could result
from the failure of firms operating with the
benefit of implicit Government guarantees. If
further study shows that this can be done, a
recommendation may be made that the costs
of these subsidies be recorded in the budget.
HOUSING
The Federal Government supports two systems of housing finance. One is based in part
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.
The Government National Mortgage Association (Ginnie Mae), part of the Department of
Housing and Urban Development (HUD),
packages as securities and guarantees timely
payment on FHA and VA mortgages. Two
GSEs—the Federal National Mortgage Association (Fannie Mae) and the Federal Home
Part Two-228
THE BUDGET FOR FISCAL YEAR 1992
Loan Mortgage Corporation (Freddie Mac)—
buy outright conventional mortgages, as well
as some FHA and VA mortgages, or package
them as guaranteed securities.
business loans. Federal costs accrue primarily
from defaults; when that occurs, the collateral
backing the loan partly offsets the loss. Default
claims are $1 to $2 billion per year—only
about 0.1 percent of the amount outstanding;
the present value of these future costs ranges
from $10 to $15 billion.
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.
Where problems have occurred in housing
credit programs, often the borrower's equity
was inadequate to withstand stressful economic conditions. At other times, the capitalization of private sector agents was inadequate. The most notable example of the latter
is the now-discontinued HUD multi-family coinsurance program.
The Government also provides direct loans
for rural housing through the Farmers Home
Administration (FmHA).
Housing credit, which is usually originated
in the private market, nearly always at market
interest rates, is generally higher quality than
other federally subsidized credit. Credit risk
is often held by or shared with the private
sector, which improves underwriting standards. Moreover, home owners resist default
even when it is in their financial interest.
Thus, default rates on mortgages are typically
lower than for student loans, farm loans, and
Risk persists in those programs that encourage home ownership by allowing minimal
downpayments—FHA, VA, and FmHA. However, reforms enacted in the past year and
proposed for the future have or will improve
the effectiveness of each of these programs.
Fannie Mae and Freddie Mac are profitable
stock-held corporations posing no immediate or
obvious threat to taxpayers.
housing debt o u t s t a n d i n g
$ BILLIONS
3,000-
TOTAL
2,500 -
2,000 -
1,600-
FEDERAL CREDIT
AGENCIES 8L
GSE DEBT
NOT FEDERALLY
ASSISTED
1,000-
600-
1970
1980
CALENDAR YEAR
VIII.A. RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
Major reforms of the FHA single-family program enacted last year will cover expected
losses from existing and future business under
most economic conditions. Administration proposals to make greater use of guarantees and
risk-sharing in the FmHA housing programs
are testing ways to enhance the performance
of the program. VA also proposes to make
greater use of its already effective risk-sharing
structure, as well as other improvements
which can reduce Government cost without impairing veterans' access to home ownership.
Fannie Mae and Freddie Mac
By the end of 1990, Fannie Mae and Freddie
Mac had about $700 billion in debt and mortgage-backed securities outstanding. Fannie's
capital including loan loss reserves is about
$4.2 billion or 1 percent. Fannie Mae has a
publicly annunciated short-term capital goal of
$6 billion for the end of 1991, which the corporation has stated it will reach. In addition,
it has set target capital ratios to assets and
mortgage-backed securities outstanding which
would have required the corporation to have
approximately $4.8 billion on September 30,
1990. Freddie's capital is about $2.6 billion or
0.8 percent. For both corporations, these capital measures are determined by GAAP accounting.
Part Two-229
after the severe downturn. Therefore, taxpayer
exposure is close to zero under the above scenario.
This analysis does not incorporate management and operations risks which, particularly
in times of severe economic stress, can rapidly
increase potential taxpayer exposure. Specifically, the ability of Fannie and Freddie to survive such stress depends on their continuing
to: (1) invest primarily in highly collateralized
home mortgages; (2) maintain high underwriting standards; and (3) limit interest rate risk.
Subsidy and Taxpayer Cost.—Even
though taxpayer exposure is close to zero
under the above scenario, a sizable Federal
subsidy is transmitted to both corporations.
The corporations, in turn, pass much of the
subsidy on to borrowers through lower mortgage rates. This subsidy can be measured by
comparing the borrowing costs of Fannie and
Freddie to those of the safest private corporations, those rated Aa to Aaa. GSE borrowing costs are about 25 to 40 basis points over
Treasury securities of comparable maturities,
while similarly rated private corporations borrow at 75 to 100 basis points over Treasuries.
Thus the subsidy is 35 to 75 basis points. Consistent with this result, studies have found
that mortgage rates are 25 to 50 basis points
lower because Fannie and Freddie exist in the
form and size they do.
Both Fannie and Freddie have become increasingly profitable in the last few years.
They appear not to have the problems of banks
and thrifts with rising loan losses and deteriorating income. Under projections of moderate
housing appreciation and stable mortgage
rates, Fannie and Freddie will be profitable
in the future, provided they continue their
present policies.
The private market discipline of making
profits for stockholders, combined with their
GSE status, makes Fannie and Freddie as efficient and profitable as they are. This illustrates the importance of market discipline in
safeguarding implicit liabilities of the Government.
Financial Condition and Taxpayer Exposure.—OBRA requires that the budget
evaluate the financial condition of GSEs and
potential taxpayer costs. The effects of severe
interest rate and credit risk stress on the performance of Fannie Mae and Freddie Mac were
analyzed by estimating how they would be affected by a depression scenario similar to that
used by rating agencies. It was assumed that
housing prices fell 10 percent per year for 4
years, and mortgage rates declined to 5 percent. Under this regime, both Fannie and
Freddie survive and return to profitability
Taxpayers are safe as long as Fannie and
Freddie operate as efficiently, profitably, and
safely in the future as they have in the recent
past. But this qualification is the reason why
effective regulatory oversight is needed in the
future. To ensure financial soundness, it is important that regulators avoid steps that would
encourage the corporations to engage in unprofitable or excessively risky business. If
Fannie or Freddie were to loosen underwriting
standards, or invest to a great degree in risky
assets, they might not survive severe economic
stress. Even under such conditions, however,
Part Two-230
THE BUDGET FOR FISCAL YEAR 1992
losses would probably not exceed a few billion
dollars on their assets.
• Insurance premiums should reflect the
varying risk of default as the downpayment varies.
FHA Single-Family
• Homebuyers should make enough equity
contribution to protect themselves and the
insurance fund from excessive risk.
The 1991 budget stated that the FHA singlefamily mortgage insurance fund potentially
faced billions of dollars in future losses. Losses
on mortgages insured in the 1980s virtually
wiped out the surplus that the fund had built
up since the 1930s. The fund's reserves had
fallen from over 5 percent of outstanding mortgages in 1980 to less than 1 percent in 1989.
In addition, each year's new business beginning in 1990 was estimated to lose from $200
to $700 million. To head off these losses, an
actuarial study of the program was completed
in 1990, and was followed by enactment of
major reforms. These reforms are expected to
shield taxpayers from losses under most circumstances, while maintaining access to home
ownership for people of moderate means.
Sources of Risk.—FHA's troubles developed
in part because housing prices rose much more
slowly in the 1980s than in the 1970s. Widely
fluctuating interest rates added to losses as
the high coupon mortgages of the early and
mid-1980s defaulted at unprecedented rates
when rates fell subsequently. The expected
losses on new FHA business reflected a trend
towards smaller downpayments, as well as expected continued slow increases in home
prices. In recent years, most FHA-insured buyers effectively put down less than five percent
of house value. While this demonstrates that
FHA offers homeownership opportunities not
available in the conventional mortgage market,
the riskier nature of these low downpayment
loans is precisely why such terms are not
available in the private sector.
Progress in Reducing Risk.—Last year,
the Administration and Congress considered
various options to stabilize the fund's financial
position. The objective was to rebuild its reserves to 2 percent of outstanding insurance
within 10 years while maintaining the following principles:
• The needs of the low- and moderate-income homebuyers should remain a high
priority.
The reforms enacted in the Omnibus Budget
Reconciliation Act of 1990 and the National
Affordable Housing Act (NAHA) of 1990 meet
the goal for reserves and the Administration's
principles. The NAHA established four operational goals:
• maintain
ratio;
an adequate
capital
reserve
• provide access to mortgage credit for
homebuyers with low downpayments and
first-time homebuyers;
• minimize the risk to the fund and homeowners from homeowner default; and,
• avoid adverse selection that would cause
FHA to insure only the highest-risk buyers.
The two most critical performance measures
are the FHA fund's capital reserve ratio (the
amount of reserves or equity in the fund balance relative to insurance liabilities outstanding) and homeowner default rates (the percentage of those buying homes in a given year
who are expected to default over the time their
mortgage insurance is in force). Expected
homeowner defaults and FHA's reserve levels
are directly related. Lower expected defaults
reduce FHA's costs from claim payments and
thus allow reserve levels to increase for any
given amount of premium income earned. Lowering default rates also protects more owners
from the pain of losing their homes.
The expected reduction in defaults is
achieved primarily by requiring buyers to have
a greater equity interest in their homes. The
NAHA reduced the proportion of closing costs
that can be financed from 100 percent to 57
percent and eliminated the use of FHA insurance to finance vacation properties. Default
rates are projected to decline by almost 6 percent, once the reforms are fully implemented
in 1995.
The expected increase in FHA's capital reserve ratio results not only from reduced de-
VIII.A.
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
Part Two-231
faults but also from an increase in insurance
premiums. Under prior law, FHA homebuyers
paid the premium (3.8 percent of the mortgage) in one, up-front payment. This payment
could be financed by adding it to the mortgage.
The enacted reforms make two changes:
sented in the budget, but retains both the fund
itself and the statutory obligation that the
fund be financially sound. Under credit reform,
any expected losses or explicit subsidies from
new credit commitments must be funded upfront through Congressional appropriations.
• The up-front premium is to be reduced
gradually to 2.25 percent of the mortgage
by 1995. This is intended to reduce the
financial burden of purchasing a home for
low-income and first-time homebuyers.
For most Federal credit programs, losses
from prior credit commitments are paid for
through a permanent indefinite appropriation.
Administrative costs are funded through current appropriations. However, for the FHA single-family program, the fund retains the responsibility for paying all losses on both old
and new business, paying administration expenses, and maintaining sufficient fund capital
reserves as reflected in its statutory targets.
To meet these requirements, the expected income from new credit commitments must exceed the expected losses from new commitments. This results in a negative credit subsidy for the program in the 1992 budget of
$815 million. This does not mean that current
premiums are excessive. Under credit reform
and the FHA reforms in NAHA, any additional
premium income beyond that needed to pay
for losses on new credit commitments must
be available to:
• A new annual premium is established,
with the amount varying with default risk.
This risk-rated premium is intended to reduce possible adverse selection problems
that might arise from the increase in FHA
premiums. The burden on low-income and
first-time homebuyers is minimized by allowing the premium to be paid annually
over an extended period.
Once the reforms are fully implemented in
1995, the discounted present value of the upfront and annual premiums together (assuming the buyer pays the annual premium for
the entire term of the mortgage) will vary from
5.5 percent of the mortgage for low-risk buyers
(those with downpayments of 10 percent or
more) to just under 7 percent for high-risk
buyers (those with downpayments of less than
5 percent) based on a 30-year mortgage term.
The NAHA reforms also permanently extend
the current high-cost area mortgage limits (the
lower of $124,875 or 95 percent of the area
median house price). By maintaining the current mortgage limits, the NAHA reforms ensure that FHA will continue to focus on the
mortgage needs of low-income and first-time
homebuyers.
These critical reforms are expected to reverse the financial problems of the FHA singlefamily insurance program and return the insurance fund to financial soundness. The statute also provides the HUD Secretary flexibility
to adjust premiums in order to assure that
the FHA fund reserve ratio targets are met
(1.25 percent within two years of enactment
and 2.0 percent within 10 years of enactment).
HUD will provide periodic reports to Congress
on the financial soundness of the FHA fund.
Credit Reform.—Credit reform changes the
way the FHA single-family program is pre-
• pay for administrative expenses of the
fund;
• fund losses on prior commitments; and,
• build the fund's reserves to 2 percent of
outstanding insurance liabilities. This is
enough to cover additional losses from
higher-than-expected future defaults.
Once the targeted 2 percent reserve is
reached, premiums can be reduced, provided
the reserve is maintained.
FHA Multi-Family
The FHA's General Insurance Fund multifamily programs insure mortgages for a number of property types, including apartment
buildings, condominiums, hospitals, and nursing homes. Each program poses a different risk
to the Government; for example, condominiums are a smaller risk than apartment buildings and hospitals. Much better information
is needed about how much risk is posed by
these insured properties.
Part Two-232
Cost and Risk.—Over the past decade;
many multi-family rental properties insured, by
FHA have developed severe financial and
physical problems. Poor underwriting and inadequate monitoring of program participants
have resulted in many deteriorating building
projects which provided unacceptable living
conditions for low-income tenants and have
often defaulted.
The default rate and the credit reform subsidy calculation understate the poor quality of
many of these loans, because of a cross-subsidy. To prevent default, project-based Section
8 vouchers have often been given to FHA
multi-family housing landlords to attract new
tenants or to permit existing tenants to pay
higher rents.
Proposals to Reduce Risk.—The Administration has taken steps to correct the dual
problems of accurately assessing risk up-front,
and improving the management of properties
currently insured. In September 1990, HUD
published a final rule terminating the multifamily co-insurance program. Co-insurance,
with insurance to date of $9.2 billion, has resulted in claims of $2 billion so far, and eventually could realize losses totalling $1 billion.
A review by Price Waterhouse, to be completed
this year, should assist HUD in assessing the
cost of major General Insurance Fund programs.
To improve the management and monitoring
of the existing portfolio, the Administration is
proposing a "Low-Income Resident Economic
Empowerment" program to identify and eliminate physical and financial problems in lowincome rental properties. The plan would create two new programs and provide $668 million in 1992 and $1.6 billion over the next
five years to meet project cash flow and repair
problems. In exchange for financial assistance,
property owners must agree to provide residents an equity interest in the project. This
plan is expected to reduce long-term costs to
the Federal Government while empowering
low-income residents by giving them more of
a financial stake in their homes.
VA Home Loan Guarantees
The VA home loan guarantee program is an
entitlement that finances mortgages with no
downpayment for veterans and active duty
THE BUDGET FOR FISCAL YEAR 1992
servicepersons regardless of income. In 1990,
VA guaranteed over 190,000 loans with an average loan amount of $83,000, comprising 6
percent of the single-family mortgage market.
Private lenders participating in the program
forgo the downpayment in exchange for VA's
guarantee. The coverage provided by the guarantee ranges from a high of 50 percent for
smaller loans (mainly to moderate income and
first-time homebuyers) to a low of 25 percent
for larger loans. The maximum claim payable
by VA is $46,000.
Cost and Risk.—The major cost of the loan
guarantee program results from borrower defaults and subsequent property foreclosures.
One of the most important determinants of defaults is lack of borrower equity, or high loanto-value (LTV) ratios. Because there is no
downpayment and the funding fee can be financed, over 80 percent of new VA loans have
LTV ratios of 95 percent or more. Over half
have LTV ratios of 100 percent or more. Between 1986 and 1990, over 250,000 VA-guaranteed loans were foreclosed. Based on the
most recent matured loan cohort, 15 mortgages
will eventually be foreclosed for every 100 new
loans.
The weighted average subsidy cost to the
Government is 3.1 percent of the value of new
direct and guaranteed loans. Assuming moderate housing inflation, the subsidy cost to taxpayers is estimated to be $2 billion between
1992 and 1996 under current law. Losses on
loans already in the pipeline will add another
$1.8 billion.
Progress Made in Reducing Risk.—In the
1991 budget, the Administration proposed several changes to lower default rates and reduce
the Government's liability in the event of a
foreclosure. The proposed reforms included a
4 percent downpayment requirement and an
increase in the loan origination fee. Unfortunately, the Congress did not adopt any of the
Administration's proposals.
Proposals for 1992.—For 1992, the Administration is again proposing changes to reduce
long-term losses. The major proposals are to:
(1) repeal the sunset on the loan origination
fee increase that was enacted as part of the
1990 Reconciliation bill; (2) charge a 2.5 percent fee and a 10 percent downpayment to all
but active duty servicepersons for multiple use
VIII.A.
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
of the loan guarantee benefit; and (3) include
expected losses on the resale of property in
calculating whether to take it over or to pay
the default claim. Combined, these proposals
are estimated to reduce the average subsidy
rate from 3.1 percent to 1.9 percent.
Rural Housing Insurance Fund
The primary FmHA housing programs are
the Section 502 single-family direct and guaranteed loan program and the Section 515
multi-family direct loan program. Both programs subsidize loans by setting interest rates
below the Treasury rate. The Section 502
homeownership loan program provides qualified borrowers with loans for the purchase, rehabilitation, or repair of single-family owneroccupied units. Participants qualify if their income is less than 80 percent of State median
income, they live in a legislatively defined
"rural" area, and they cannot obtain credit
from a private institution.
The Section 515 program, which generally
lends to private developers, finances both the
construction of new rental housing and the
purchase and rehabilitation of existing substandard rental housing. Units are occupied
by low- and moderate-income households, elderly households, or handicapped individuals.
Cost and Risk.—Most of the cost of both
programs is the difference between FmHA's interest income and the interest expense of
Treasury borrowing. The rate charged Section
502 borrowers depends on their income; currently, the average effective interest rate for
the outstanding portfolio is 3 percent. A Section 515 borrower's effective interest rate is
generally fixed at 1 percent.
Other costs come from loan defaults and delinquencies. The default and delinquency rate
of the outstanding $9.4 billion Section 515
portfolio is near zero due to the low interest
rate paid by developers (1 percent) and their
creditworthiness. The Section 502 delinquency
rate, defined as any payment more than 30
days overdue, was 14.9 percent of the outstanding $18.9 billion loan portfolio in 1990.
However, write-offs from loan defaults were
just 0.3 percent of principal. The total cost
or subsidy over the life of loans expected to
be underwritten in 1992 is estimated at 23
Part Two-233
percent of face value for the Section 502 and
43 percent for the Section 515 program.
The riskiness and costs of Section 502 loans
are larger than for conventional, privately
originated loans. First, FmHA lends to very
low- and moderate-income households who, as
an eligibility requirement, are unable to obtain
private credit. Second, because FmHA's interest rate is periodically adjusted for changes
in the borrower's income, the underlying costs
of the outstanding portfolio change as borrowers' ability to pay changes. During economic
slowdowns, not only might more defaults and
delinquencies be expected, but the effective interest rate paid by borrowers will drop as well.
FmHA interest subsidy costs increase correspondingly. As appraised values fall on existing loans, a lack of borrower's equity provides
an incentive for default. Because FmHA is authorized to lend at 100 percent of a home's
appraised value, a relatively small decline in
home values can produce a surge of defaults.
Progress in Reducing Cost.—To limit
costs, the Administration has sought and, for
the first time, received appropriations for a
Section 502 loan guarantee program. In 1991,
this new program will be directed at those
moderate-income borrowers who can obtain
private loans with a Government guarantee.
Subsidized guarantees, where FmHA will pay
part of the interest rate on a loan, also have
been authorized and appropriated for lowerincome borrowers. Both guarantee programs
cover losses on 90 percent of loan amounts.
Together, they should stimulate lending in the
private sector and reduce FmHA costs as financing assistance shifts from direct to guaranteed loans.
In 1991, FmHA hopes to initiate a pilot
Field Office Specialization Program (FOSP).
This program will improve credit management
by providing specialized staff and contract
services in 14 States. Now, a single FmHA
officer may determine borrower eligibility, appraise the property, make and service the loan.
By specializing these functions, FmHA expects
to decrease delinquency.
The budget continues progress toward the
goal of targeting assistance to the most needy
and making loan delivery more efficient. It further shifts the mix of the single-family housing
assistance from direct to guaranteed loans and
Part Two-234
THE BUDGET FOR FISCAL YEAR 1992
initiates a voucher rental assistance program.
More of the current direct loan borrowers can
be underwritten with guarantees to the private
sector than current appropriations allow. Replacing rental assistance contracts and some
multi-family loans with vouchers would promote efficiency by allowing renters the freedom
to choose where to rent and by using existing
housing stock rather than building unnecessarily.
EDUCATION
The Federal Government helps students and
their parents meet the costs of postsecondary
education by creating an extensive private
market for student loans. The Guaranteed Student Loan (GSL) program uses guarantees to
lenders through intermediary agencies and interest subsidies directly to lenders as incentives so that they will make loans available
to postsecondary students without collateral.
GSL is the largest Federal source of student
aid and represents more than 61 percent of
total student aid provided by the Department
of Education. 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 program,
because of the lack of collateral.
GSL Share of Federal Credit.—GSL subsidies represent two-thirds of total subsidy
costs for all Federal 1992 direct and guaranteed loan commitments. The estimated current
services subsidy for the GSL program for 1992
is 21.7 percent, 24.5 percent for Stafford loans,
8.1 percent for PLUS loans, and 14.1 percent
for Supplemental Loans for Students. Proposed
policies will reduce the aggregate subsidy for
GSL to 20 percent.
About 13,000 participating lenders receive
100 percent insurance against the risk of default, subject only to lender failure to follow
"due diligence" regulatory procedures, in which
case all or part of default claims are not honored. The guarantee is provided through
intermediary guarantee agencies which are in
turn reinsured by the Federal Government for
between 80 and 100 percent of default costs,
depending on the rate of default in their portfolios. The maximum amount of each loan and
the borrower's eligibility for the loan are deter-
mined separately by educational institutions
operating under Federal law and regulations.
Interest and Credit Risk.—Until default
costs rose so dramatically, the largest source
of cost exposure in GSL was the link between
interest rates and subsidies in the Stafford
loan program. Lenders receive an assured rate
of return equal to the interest rate of 91-day
Treasury bills plus 3.25 percent, revised quarterly. While the student is in school, the Federal Government pays the full amount. When
the student enters repayment status, he or she
pays a fixed amount (8 percent initially, then
10 percent), with the Government paying the
lender the difference between that payment
and the assured rate. The Government bears
the full risk of rising interest rates. This structure, while costly in times of high interest
rates, has long been deemed necessary to assure full participation of sufficient numbers of
lenders to make the program viable. Even at
high interest rates, the program is less costly
to the Government than a comparable amount
of aid provided through grants.
Loans outstanding at the end of 1990 were
$52.9 billion. Gross default rates have climbed
from 12.5 percent in 1980 to 16 percent in
1990, although the net default rate, which
takes collections into account, has remained
between 10 and 11 percent. The disparity between gross and net rate trends reveals the
increasing effectiveness of collection efforts
during this period. Default rates vary depending on a number of factors, including the background of students (e.g., family income), the
kinds of schools they attend (proprietary vocational, community college, college or university), whether they complete the education program, and number of years in repayment.
Gross default costs, including death, disability
and bankruptcy costs, were $2.4 billion in
1990, compared to $283 million in 1980.
Risk of Guarantee Agency Failure.—
Guarantee agencies are intermediary State
and non-profit private entities which insure
loans, collect on defaulted loans, and provide
various services to lenders. In 1990, the collapse of one of the largest of these agencies
dramatically highlighted potential risks in
these intermediaries. Guarantee agencies only
receive 100 percent reinsurance on defaults
from the Federal Government if their default
VIII.A.
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
rate is below 5 percent. At 5 percent, the reinsurance amount is reduced to 90 percent; at
9 percent, it drops to 80 percent. Agencies
must keep defaults under control or incoming
business and reserves growing in order to remain solvent.
When the large agency collapsed, the Government was not obligated to pay reinsurance
on the loans it insured. However, to avoid
shaking the confidence of students and schools
any further, the Administration assured lenders that all their valid claims would be fully
paid.
The policy purpose of the GSL program creates a necessary degree of risk not found in
normal commercial or consumer lending. The
Government recognizes and accepts a higher
degree of risk for these loans so that persons
with few financial resources can add borrowed
resources to the grants and other aid provided
and thus attend postsecondary institutions.
However, growing default costs, Senate investigations, and the 1990 guarantee agency collapse all made clear that the current level of
Government exposure in GSL exceeds the acceptable level of risk inherent in the program.
This has led to a series of efforts to reduce
the risk.
Progress in OBRA.—The Administration
proposed and Congress enacted an initial set
of default reduction reforms in OBRA. Savings
from these reforms are projected to be $1.7
billion over five years. For the first time, students at schools with unacceptably high default rates (35 percent in 1991 and 1992, 30
percent in 1993 and subsequent years) will be
ineligible for GSL loans.
Other changes include better screening of
students without a high school diploma or
GED for true ability to benefit from postsecondary program, extending restrictions on
Supplemental Loans for Students enacted in
1989 OBRA, and delaying disbursement of
loans for first-year students.
A joint Education/OMB management review
team, including members from other agencies
and the private sector, is examining all key
aspects of Federal management of the GSL
program. The team's recommendations will
form the basis for a complete overhaul of the
Department's GSL operations. The objectives
Part Two-235
are to improve information and monitoring so
that problems can be caught early and prevented from becoming serious and to devise
improved procedures for dealing with problems
when they do arise.
1992 Budget and Reauthorization Proposals.—These proposals are discussed more
fully in Chapter IV.A., "Investing in Human
Capital and Reforming American Education."
In general, they build on lessons learned from
the experiences in 1990 and continue the direction of the 1990 OBRA reforms. Major riskreducing provisions are:
• States would be required to back the guarantee agencies with full faith and credit
assurance. In the case of a guarantee
agency collapse, States would assume
some of the financial risk (the difference
between the Federal reinsurance level and
the insurance paid to lenders and part of
the administrative costs). States would be
allowed to charge schools a fee to help
cover their costs. If States do not choose
to back a guarantee agency, a risk-based
premium would be assessed on schools in
the State.
• States would be required to pay a fee on
new loan volume if the cohort default rate
of schools in the State exceeds 20 percent.
This will encourage States to impose necessary controls on State licensure and to
keep out schools that cannot provide quality education. Based on 1988 cohort data,
this fee would be assessed on seven States.
• Lenders with default rates above 20 percent would have their special allowance
payments (currently 3.25 points over the
plus 91-day Treasury bill rate) reduced by
.25 percentage point. Based on 1988 data,
this would affect approximately 155 lenders.
• States would be required to ensure that
schools met certain minimum quality
standards before granting licenses to operate, and accreditation agencies would also
monitor more closely the quality of the
schools they review. The 1990 OBRA provision would be further tightened by dropping the default rate threshold to eliminate schools from GSL eligibility from 30
percent to 25 percent in 1994.
Part Two-236
• Different types of schools have different
default experiences, not always attributable to programmatic differences. Of
particular concern are short-term vocational programs, where high cost of attendance coupled with extraordinary default rates mean high default costs. Reauthorization proposals will limit the maximum allowable cost of attendance at less
than 1-year vocational programs to community college costs.
Possible Loan Program Restructure.—
The budget and current reauthorization proposals continue the current GSL policy, which
has private lenders provide the capital for subsidized loans. The Administration is currently
exploring policy options and related management questions for a possible shift from a
guaranteed to a Federal direct loan structure.
No such shift has been decided upon. A fundamental restructuring of the GSL program
would involve a complex phase-out of the current guarantee system and significantly increased management responsibilities for the
Department of Education. Whether this approach would be desirable, all things considered, remains to be determined.
Health Education Assistance Loans
Cost and Risk.—Since its inception in 1976
as a Federal loan guarantee program of last
resort for students in critical and non-critical
health professions, Health Education Assistance Loans (HEAL) has insured over 295,000
loans, lending over $2.1 billion. Although intended to be self-financing, HEAL is structured as a Ponzi scheme, relying on insurance
premiums from new loans to pay defaults associated with old loans. This maintains an appearance of self-financing, which invites continuation of the program.
HEAL's upfront 8 percent premiums, however, have been unable to cover defaults. In
1990, Congress appropriated $25 million to
keep HEAL going. Credit reform helps to display HEAL's woes. In 1992, the program will
require an estimated $36 million to pay defaults arising from previously guaranteed
loans; through 1996, $246 million will be needed for this purpose. If the current $260 million
a year volume of loans is maintained, $25 mil-
THE BUDGET FOR FISCAL YEAR 1992
lion would be required for subsidies in 1992
and an estimated $133 million over 1992-96.
Attempts to Reduce Risk.—The Administration has proposed methods for reducing
HEAL defaults in previous budgets. These
have included requiring risk-sharing by lenders and schools. In the 1991 budget, the Administration recommended an orderly phaseout of HEAL. Congress did not adopt any of
these proposals.
This budget proposes a three year phaseout
of HEAL linked to a targeted, enlarged, and
enhanced Health Professions Loan Program
(HPSL). The phaseout of HEAL will save an
estimated $94 million in subsidy payments
over the next five years. Expansion of HPSL
would be funded with $15 million in new capital contributions, representing a downpayment on a multiyear HPSL capitalization effort
which would total $90 million over six years.
These new contributions, along with the $60
million already available each year from
HPSL's $375 million revolving fund, would enable the program to support 10,000 loans annually to exceptionally needy students in critical health professions. The annual average
award of the enhanced program would be
$8,000 in comparison with the current average
of $3,000 awarded to 20,000 borrowers. These
larger, targeted awards would enable disadvantaged students who may have relied on
HEAL to obtain additional assistance in completing health professions training.
Student Loan Marketing Association
Student lending is supported by extensive
secondary market activities, most notably by
the Student Loan Marketing Association (Sallie Mae), a Government-sponsored enterprise.
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 1990, Sallie Mae owned
51 percent of all outstanding GSLs. Sallie
Mae's domination grew in January of 1991
when it bought $1.2 billion in student loans
from Chase Manhattan Bank, the fifth largest
holder of GSLs, increasing Sallie's share of
outstanding loans to 53 percent.
Sallie Mae is extremely strong financially.
The Federal Government bears most of the
risk associated with GSL defaults. Sallie's
VIII.A.
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
transactions have little or no bearing on the
likelihood of default, and its own debt is
backed by ownership of 100 percent guaranteed GSL loans. Its income is based on a large
spread between its low cost of funds and the
rates of return it receives on student loans,
loan commitments, and other risk-free securities. Sallie poses little financial risk to the
Government under current policies as long as
it maintains a good match between the duration of its assets and liabilities.
Stress Test—As with the other GSEs, a
stress test was applied to Sallie Mae to provide
more information about its financial resiliency.
So long as it manages its interest rate risk
well, Sallie's only real risk is that the Government might change the rules of the game. Because student loan defaults are much less sensitive to economic conditions than collateralized housing or farm loans, the stress scenario
is regulatory rather than economic.
The stress test assumes that the Government retroactively removes its default coverage on Sallie Mae's $28 billion of loans and
commitments in excess of the minimum 80
percent. In addition, the test assumes that
guarantee agencies holding 30 percent of Sallie's loans become insolvent, with 20 percent
of Sallie's loans in these agencies defaulting
in one year. This leaves Sallie with credit
losses of 1.2 percent of its loan assets if recoveries are assumed to be zero. On top of this
credit loss, the test assumes that the special
allowance is retroactively reduced 100 basis
points to 225 basis points. The result of such
draconian measures is that Sallie Mae's income is cut in half but remains positive. It
does not even need to dip into capital. Even
if such events continued and Sallie did not
change its practices or pricing policies, it
would remain profitable, although less so.
Sallie would continue to be profitable because even after its special allowance is cut
by 100 basis points, its interest spread is still
substantially positive. What can only be described as large credit losses amount to less
than 1 percent of total assets. Sallie earns considerable profit for its stockholders. Its success
in fulfilling its statutory role in the GSL program is due to the combination of its ability
to operate almost entirely like a private cor-
Part Two-237
poration, and the substantial benefits from its
status as a Government-sponsored enterprise.
AGRICULTURE
Farmers borrow to finance each season's
planting expenses and to purchase land. Since
the 1930s, the Federal Government has assured a stable, low cost supply of farm credit
through its own direct lending and through
guarantees of commercial loans. Both operating and land ownership loans are available to
farmers at subsidized rates from USDA's
Farmers Home Administration (FmHA). Indirect Federal support for farm lending is provided through the Farm Credit System (FCS)
and the Federal Agricultural Mortgage Corporation (Farmer Mac), both Governmentsponsored enterprises (GSEs), as well as
through insured commercial banks.
Both the FCS and FmHA were heavily involved in lending to support the expansion of
agriculture during the export boom of the
1970s. Expecting rising income, farmers bid up
land prices, and took on substantial amounts
of debt. When world agricultural trade and
prices plummeted in the early to mid-1980s,
land values declined by up to 50 percent in
some areas. Both FCS and FmHA found themselves with significant losses. Federal assistance to FCS banks has cost $1.3 billion to
date and is projected to exceed $2.2 billion.
FmHA loan losses were $7 billion in the last
two years, with another $1.5 billion expected
through 1992.
In response to these stresses, the Agricultural Credit Act of 1987 restructured these
farm lending institutions. Greatly assisted by
better farm sector conditions, the health of the
Farm Credit System has much improved. However, farm income is not likely to continue to
grow as rapidly in the future as it has recently. Farm land values increased nationwide
by 5.5 percent in 1989 and an estimated 3.9
percent in 1990, but are forecast to increase
much more slowly through 1996.
Moreover, the 1990 farm bill makes U.S. agriculture more market-oriented, thus enhancing its ability to compete as the lowest-cost
supplier domestically and on the world market.
But export demand is variable. Therefore, the
extent of Federal exposure to farm credit
Part Two-238
THE BUDGET FOR FISCAL YEAR 1992
f a r m debt o u t s t a n d i n g
$ BILLIONS
240TOTAL
FARMERS HOME
ADMINISTRATION
1970
1980
1976
CALENDAR YEAR
losses is still at issue, along with the adequacy
of the reforms.
Repayments and substantial write-downs of
farm real estate loans by Federal and private
lenders have brought most borrowers' debt-toasset ratios below 40 percent. Total farm debt
has declined from $200 billion in 1985 to nearly $135 billion today, with real estate debt constituting roughly half the total. Coupled with
farmers' renewed reluctance to take on more
debt, this should cause fewer losses on new
farm real estate loans.
The Farm Credit System
Risk is inherent in the structure of the FCS.
By statute, it may lend only to agriculture,
putting its "eggs" all in one basket. It is required to make farm credit available nationwide.
After the near-insolvency of the 1980s, FCS
no longer fills the whole credit availability gap
between commercial banks and FmHA. But as
a cooperative, owned by its borrowers, FCS
finds it difficult to establish uniform higher
lending standards. There is a natural conflict
1985
1990
EST.
between borrower-owners, desiring the lowest
possible loan terms, and borrower-directors, interested in preserving the institution's financial viability. Some FCS institutions charge
one interest rate on all real estate loans, regardless of a borrower's financial condition.
There is no System-wide policy setting loan
terms according to borrower risk.
The FCS is decentralized. It has 12 Districts—11 of which are served by Farm Credit
Banks formed in the 1988 required merger of
Federal Land Banks and Intermediate Credit
Banks. In the remaining District, the Jackson
Federal Land Bank is in receivership and
therefore did not merge with the Jackson Intermediate Credit Bank. Internal FCS oversight is conducted mainly through the Funding
Corporation, which is responsible for coordinating the Districts' participation in debt
issuances. The Funding Corporation has the
authority to restrict an individual System
bank's access to debt issuances based on review of the bank's financial condition; in this
sense, it has more ability than any System
entity to control risk. Externally the FCS is
VIII.A.
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
regulated by the Federal Farm Credit Administration (FCA), whose board is appointed by
the President.
The degree to which FCS institutions' capital
is at risk is uncertain. District banks are
statutorily liable for payments on FCS debt.
System-wide debt is technically the "joint and
several liability" of all FCS District banks. In
practice, the existence of "joint and several liability" is uncertain. The 1987 FCS bailout legislation authorized up to $4 billion in Federal
assistance. At that time, the System had over
$2.4 billion in available retained earnings,
much of it at the local association level. However, the better-off FCS institutions refused to
assist the less solvent ones, and the liability
fell to the Federal Government. The bailout
specifically guaranteed that all existing borrower stock would be redeemed at par, essentially acknowledging that the stock was a liability, rather than at-risk capital.
Financial Condition of the FCS
The severe downturn in U.S. agriculture
during the first half of the 1980s, hit the FCS
hard. By December 1986 over 12 percent of
FCS loans were categorized as "non-accruing",
defined as those on which principal and interest is uncollectible or is seriously past due and
under-collateralized.
Two factors exacerbated FCS problems.
First, it charged borrowers on the basis of average costs on outstanding FCS debt, rather
than "marginal" costs on newly issued debt—
the way commercial lenders do. Thus, when
market interest rates declined in the mid1980s, many of the better FCS borrowers
switched to commercial bank lenders. In 1987,
for the first time in over a decade, commercial
banks had a greater market share of farm
loans than the FCS.
Second, its loan losses required additions to
reserves of $4.7 billion in 1985 and 1986. This
reduced the book value of borrower stock, as
well as FCS associations' available surplus
capital. Borrowers were required to purchase
stock when their loans were originated, and
the stock was automatically redeemed upon a
loan's repayment. The fear of not receiving the
par value of stock upon redemption accelerated
the flight of quality loans from the FCS.
Part Two-239
By September 30, 1990, the volume of
nonaccrual loans had decreased to just over
5 percent of all FCS loans, reflecting the large
write-offs of uncollectible loans and the improved farm income of the late 1980s. The allowance for loan losses was $1.5 billion. In
the last three years, the allowance was reduced by over $1.4 billion. This is a substantial
reason FCS showed positive net income of
$704 million in 1988 and $695 million in 1989.
Net income was $455 million through the third
quarter of 1990. Overall, asset quality is improving, but weakness remains in the real estate portfolio.
The continued financial stability of FCS will
depend on its profitability. This, in turn, depends on its ability to compete for the best
quality loans with commercial lenders, and on
a reduction in its costs. The FCS has taken
steps to make loan decisions on borrower income alone. Interest rate risk has been reduced as most real estate loans are made at
adjustable rates, albeit usually at local discretion rather than based on specific indices. The
organization of FCS makes controlling lending
policies and interest rate differentials difficult.
Moreover, although the 1987 Act yielded some
savings from mergers, the System's layered
structure results in overhead costs higher than
those of commercial banks.
The outlook for FCS can be assessed by examining the prospects for each of the Districts.
These vary from fairly stable to extremely vulnerable. Under an optimistic forecast for agriculture (stable farm income and no national
recession in 1991), only five Districts are likely
to achieve or maintain the 7 percent capital
standard without having to raise interest rates
or otherwise widen their interest margins.
Four others risk becoming insolvent in the
1990s (St. Paul, Omaha, Western and Spokane) unless they can widen their interest
margins substantially, perhaps to unrealistic
levels.
Although weaker Districts might build capital by increasing the rates they charge borrowers, it may be difficult to increase interest
rate spreads by the 50 to 150 basis points
above historical trends that would be necessary to achieve the capital standard. The incentive in borrower-owned cooperatives is to
keep rates down, and heavy competition from
Part Two-240
commercial banks may keep creditworthy borrowers out of the FCS.
Consistent with the approach taken to test
the financial strength of the other GSEs, a
stress test was applied to FCS. A moderately
severe stress was imposed, through simulation,
beginning in 1995. Farm income from all
sources (including Federal payments) and land
values fall 10 percent per year for three years
(a 28 percent drop from initial levels). While
such changes would clearly be significant, they
are smaller than experienced in the early
1980s. Predictably, more of the Districts became insolvent or had to raise their interest
spreads ever higher under this pessimistic scenario. Only six of the Districts are likely to
survive such stress without raising interest
rates to unrealistic levels. Taxpayer losses
could reach $5 billion, or $1 billion in present
value. In contrast, Fannie Mae, Freddie Mac,
and Sallie Mae survive more severe stress
tests.
Reducing Taxpayer Risk
The Agricultural Credit Act of 1987 created
three cushions against another taxpayer bailout of FCS.
• At-risk capital must be raised by FCS institutions to 7 percent of risk-adjusted assets by 1993. As of September 30, 1990,
all District banks except Spokane were on
track to meet this schedule.
• A system-wide insurance fund was created
that, starting in 1993, would pay any
amount owed on FCS debt that a member
bank cannot pay. It is also liable for repayment of Federal bailout funds. The Government provided $260 million of capital.
The FCS banks must pay premiums based
on the amount of non-accrual, accrual, and
guaranteed loans. The first premium is
now a year overdue, but is expected to
be paid along with the second premium
later this year. Payment is required until
the Fund equals 2 percent of outstanding
loans, which might be achieved in 1997.
This may be raised at the discretion of
the Insurance Corporation.
• The FCS Financial Assistance Corporation
(FAC) was created to serve as a safety
net financed by up to $4 billion in 15-
THE BUDGET FOR FISCAL YEAR 1992
year federally guaranteed debt. The Government pays all interest in the first 5
years and half in the second 5 years. To
date, $1.3 billion has been raised to buy
preferred stock of FCS institutions certified as distressed by the FCS Assistance
Board. FAC authority to issue debt expires
September 30, 1992, and the Assistance
Board terminates December 31, 1992,
when most of their functions are assumed
by the Insurance Corporation.
Self-help was a prerequisite for Federal help.
FCS institutions were assessed to purchase
stock in FAC. However, they sought successfully to have some of these funds rebated.
Shortly after passage of the 1987 Act, the Federal Land Bank of Jackson was placed in receivership at a cost to FAC of $388 million.
The FCS has stated that the member banks
will default on this debt, wiping out the FAC
Trust Fund balances and requiring an estimated $100 million from the Insurance Fund.
Furthermore, certified FCS institutions have
discretion whether to redeem FAC debt at maturity, or to leave those obligations to the Insurance Fund. Finally, FCS repayment to
Treasury for Treasury interest payments on
FAC debt, while required by law, has yet to
be recorded as a liability on the FCS banks'
books. Thus, it is clear that additional Federal
outlays will be required, and that reforms are
needed to reduce the Federal exposure.
Proposed Reforms to the FCS
Insurance Corporation.—The Insurance
Corporation should be separated from the
FCA. Currently, the three-member board of
the FCA is also the board for the Insurance
Corporation, but this relationship between the
regulator of FCS and the insurer presents possible conflicts of interest. In particular, the
regulator, which is responsible for setting regulations and standards that should keep an
institution from insolvency, should not have
the capacity to use insurance funds to cure
an insolvency that might occur at least in part
because of its own miscalculation. The Insurance Corporation should be managed by an
independent board, with its own examining capabilities to enable independent decisions regarding assistance for troubled institutions.
VIII.A.
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
The Insurance Corporation should be made
the statutory successor to the agreements between the Assistance Board and FCS institutions certified to receive FAC assistance. The
Assistance Board's authority expires in 1993,
yet the terms of the agreements run until FAC
assistance is repaid after 15 years. This clarification would ensure that the Insurance Corporation has legal standing to enforce provisions in the agreements that require the continuation of sound banking practices after
1992.
Financial Assistance Corporation.—The
1987 Act should be amended to require certified institutions to redeem FAC debt as
scheduled, rather than leave it to their discretion. If this change is argued to cause the preferred stock bought by FAC to be considered
a liability of the certified bank, rather than
a capital infusion to it, regulatory accounting
standards could be adopted to maintain that
FAC purchase of preferred stock represents
capital. System banks should be required to
begin accruing in their financial statements all
payables related to the repayment of FAC
debt, as well as the repayment of all other
Federal FAC-related outlays.
Management of the FCS.—The 12 FCS
Districts should be consolidated into two to
five Districts, to provide Districts greater geographic diversity and reduce overhead expenses. FCS boards of directors should be required to include more non-borrowers who
have expertise in the management of financial
institutions. This would provide needed objectivity and reduce the moral hazard inherent
in the dual role of borrower-director.
A System-wide standard for sound asset/liability management should be adopted, such
as requiring marginal cost pricing and indexing adjustable rate loans to Treasury rates.
This would reduce the risk from lagging adjustments by FCS institutions' directors. Liquidity guidelines for FCS institutions should
be clarified and enforced. Currently the FCS
has $51 billion in outstanding loans and well
over $54 billion in outstanding debt. Some institutions have over 400 percent of the liquidity required by the Funding Corporation.
These banks are investing mostly in commercial paper and agency securities, not Treasury
securities as in past years. This implies that
Part Two-241
some institutions are creating arbitrage profits
from the issuance of federally backed FCS
debt.
Farmers Home Administration Farm
Loans
The Federal Government provides farmers
financing assistance through the Agricultural
Credit Insurance Fund (ACIF) of the Farmers
Home Administration (FmHA). Originally intended to be a "temporary provider of supervised credit," it has over time become a continual source of subsidized credit. Relatively few
borrowers have "graduated" to private credit
or commercial viability. In 1991, $662 million
in ACIF direct loans are authorized, along
with $3.6 billion in guaranteed loans.
The ACIF violates most of the characteristics
of well-run credit programs. By statute, it
lends to small farm operations and is the farm
borrower's "lender of last resort"; as a condition of eligibility borrowers must have been
denied private credit "at reasonable terms".
ACIF borrowers are therefore by definition
very high credit risks, and this is reflected
in ACIF loan losses and loan subsidy costs.
ACIF currently has an outstanding direct loan
portfolio of $20 billion and outstanding guarantees of $5 billion. In the last two years, over
$4.5 billion in direct loans have been written
off, with another $1.7 billion expected in 1991
and 1992. Many of these write-offs are due
to conditions not expected to affect newly made
loans, notably the severe agriculture sector
downturn of early the 1980s and a discontinued loan program for "economic emergencies". Nonetheless, losses on current and
future loans are still expected to be among
the highest of all Federal loan programs.
Expected costs of current loans are reflected
in ACIF loan subsidy costs. Since the subsidy
under credit reform accounting is defined as
the present value of Federal costs on loans,
both net interest losses and default costs are
included. The estimated subsidy on direct farm
ownership loans made in 1991 is 33 percent,
while for operating loans it is 22 percent.
These two programs are the predominant lending activities of ACIF. The subsidy is so large
due to a number of causes. Farm ownership
loans are generally made for 100 percent of
appraised value, leaving no equity for borrow-
Part Two-242
ers and so no cushion if land values decline,
as they did in the mid-1980s. While eligibility
requires borrower cash flow that is adequate
for debt service, there is no required margin
for adversity. If crop production or prices are
less than forecast when the loan is made, or
if a tractor breaks down, there is no provision
in borrower income for contingencies.
The cost of ACIF direct loans is increased
by generous "borrower rights". Delinquent borrowers are eligible for interest rate reductions
and moratoriums on all loan payments for up
to five years.
Guaranteed farm loans have not experienced
the same relative losses as direct loans. Unlike
direct loan borrowers, guaranteed borrowers
are required to have a 110 percent debt service
margin, which helps provide for contingencies.
Most importantly, guaranteed loans are made
to more creditworthy borrowers who have access to private credit markets. Because the private originators must retain 10 percent of the
risk, greater care is exercised in examining
borrower repayment ability. There is some disturbing evidence, presented in GAO and Inspector General reports, that private lenders
are using ACIF guarantees to reduce the risk
on their current borrowers' loans. This violates
the policy purpose of the program, which is
to assist those who could not secure financing
without the guarantees. FmHA is reviewing
lenders' guarantee portfolios and new guarantee applications to correct this problem.
ACIF Reforms in the 1990 OBRA and
Farm Bills
The 1990 OBRA and farm bills made major
changes to the future direction of Federal farm
loan assistance, as well as portfolio management improvements which should reduce the
cost of ACIF loans. OBRA adopted some of
the Administration's 1991 budget proposal to
shift from direct loans to guaranteed loans.
Direct loans are authorized at $551 million for
1991, down from $1 billion in 1990 and $3
billion as recently as 1986. Direct loan authorizations decline further to $284 million in
1995. The 1992 budget adopts OBRA direct
and subsidized guaranteed loan levels through
1995.
OBRA authorized a new subsidized guarantee program at levels equal to reductions in
THE BUDGET FOR FISCAL YEAR 1992
direct loans ($482 million in 1991). These
guaranteed, privately originated loans are accompanied by a Federal interest rate buydown,
which will reduce the effective interest rate
to borrowers by up to 4 percentage points. This
will make these guarantees as affordable as
ACIF direct loans that were made at Treasury
rates, which historically comprised about 40
percent of direct loans. The costs are estimated
to be less than direct loans, largely because
guarantees do not carry the same substantial
borrower rights. The guarantees are targeted
to former direct loan borrowers, to aid their
transition to private credit.
The 1990 farm bill should reduce ACIF loan
losses, caused in part by loopholes created by
the 1987 Act. For example, the farm bill now
requires that borrowers eligible for net recovery buyout of their loans have acted in good
faith, whereas previously, delinquent borrowers sometimes sold collateral for ACIF loans
in order to reduce the net recovery value. In
addition, all of a borrower's assets must now
be included in the net recovery calculation, not
just those pledged as collateral. Some delinquent borrowers had substantial assets such
as boats or bank certificates of deposit which
were heretofore untouchable.
In the past year, many borrowers whose
loans were written down have again become
delinquent and requested another writedown.
In some cases this was because their loans
were written down until they showed just
enough income to cover their debt service,
leaving no cushion for mistakes. The law now
requires that writedowns leave a 105 percent
debt service margin. The bill further limits
writedowns to one per borrower, to counteract
incentives for an endless cycle, and limits the
writedown to $300,000.
Another provision will increase incentives for
lender participation in the ACIF guarantee
program by recommending that FmHA accept
private sector loan documentation for guarantee applications. The substantial paperwork
burden has been cited repeatedly as a barrier
for many banks' participation. The bill also authorized ACIF guaranteed loans to be securitized by Farmer Mac, a GSE, which will increase their liquidity.
VIII.A.
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
Further Reforms in ACIF Lending
Proposals
A number of Administration proposals were
not adopted in the farm bill or OBRA. The
Administration is anticipating an in-depth review of farm lending policy in the coming year,
and will make further recommendations to
focus the mission of Federal farm loan assistance and reduce Federal exposure.
The aging of the farm population may require that young, beginning farmers be assisted. Sales of ACIF inventory property will
be targeted to beginning farmers as will new
loan assistance, to the extent possible without
jeopardizing the financial viability of existing
ACIF borrowers. Direct farm ownership loans
will be targeted to socially disadvantaged applicants, as defined in the Small Business Act.
Such loans will not be used to refinance private loans, in order to prevent known highrisk additions to the portfolio.
To help return the program to its role as
temporary provider of credit, eligibility for direct loans is proposed to be limited to seven
years, while eligibility for any combination of
direct and guaranteed loans would be ten
years. At the end of these periods borrowers
must rely exclusively on private credit.
Direct loans to delinquent borrowers would
be prohibited, and tighter financial standards
would be applied. In order to avoid placing
borrowers in the difficult situation of barely
affording their loans, a debt service margin
of 105 percent is proposed for direct loans. The
possibility of reducing loan-to-value ratios on
direct loans from 100 percent to 90 percent
or 95 percent, and for guaranteed loans to 80
percent, should be examined closely, as the
current practice of allowing zero borrower equity reduces the incentives for borrowers to
repay their loans.
LOANS TO BUSINESS
In contrast to its dominant credit role in
housing, education, and agriculture, 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 2 percent of business liabilities. Bank
loans outstanding (other than mortgages) sup-
Part Two-243
ported by Federal deposit insurance are another 15 percent of business liabilities.
The Export-Import Bank
The Export-Import Bank provides direct
loans, loan guarantees, and export credit insurance to foreign borrowers to 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.
Eximbank credits finance a small portion of
total exports. In 1980, it issued $12.6 billion
in export credits, amounting to about 17 percent of all capital goods exports excluding
autos. In 1989, $6.3 billion in Eximbank support financed less than 5 percent of capital
goods exports. Over the course of the decade,
capital goods exports increased by nearly 90
percent. Eximbank programs in 1990 increased
significantly from the previous year, from $6.3
billion to $8.7 billion. About half of the $2.4
billion increase was due to a single transaction, a $1.2 billion guarantee for military
helicopters to Turkey.
Eximbank sustained large losses over the
past decade. In the late 1970s and early 1980s,
in order to offer U.S. exporters financing that
was competitive with that offered by foreign
governments, Eximbank lent at rates well
below Treasury borrowing rates, which resulted in operating losses of $2.3 billion between 1981 and 1988. In addition, due to the
international debt crisis in the 1980s, Eximbank suffered large losses from an increase
in both direct loan defaults and claims on
Eximbank guaranteed loans.
International debt problems are likely to
continue. To help change these conditions, the
Administration proposed the Enterprise for the
Americas Initiative (EAI), which involves investment and trade policy changes in Latin
America to stimulate economic growth.
Eximbank will play a role in the EAI, helping
to promote privatization through loan asset
sales.
Part Two-244
In addition, during the 1980s, the Treasury
Department and Eximbank negotiated with
foreign governments to move export credit
lending rates closer to market rates. These negotiations were extremely successful for loans
to developed countries and substantially reduced subsidies for loans to developing countries.
To strengthen the relationship between fees
and borrower credit risk, Eximbank began
charging higher fees to riskier borrowers in
1987. At the end of 1990, Eximbank increased
its loan loss reserve from $3.2 billion to $3.6
billion, equaling 38 percent of the $9.4 billion
in direct loans outstanding. It decreased its
estimate of recoveries on outstanding guarantee claims from $1.5 billion to $1.3 billion.
Overseas Private Investment Corporation
OPIC provides medium- to long-term financing for international investment at a time
when U.S. commercial banks are generally not
lending for that purpose unless the customer
has extremely high cash collateral or even
higher tangible U.S. asset collateral. At the
end of 1990, OPIC had $508.2 million in outstanding loans—$63 million direct and $445.2
million guaranteed. Reserves as a percentage
of outstanding loans were 21 percent of direct
and 107 percent of guaranteed loans.
Default claims on OPIC guaranteed loans
have been only 1.4 percent of outstanding
loans over the past six years. Generally, guaranteed loans are made to projects sponsored
by large U.S. businesses (averaging $5.3 billion
a year in gross revenue), and are made for
investments in middle- to higher-income countries. Because fee income is market based and
claim payments are small, the credit reform
subsidy estimate is zero.
OPIC direct loans have a historical loss rate
of 12.8 percent. They generally are made to
projects sponsored by small businesses (averaging $16.4 million a year in gross revenue),
are made for investments in middle-income
countries, and have a subsidy estimate of 9.6
percent. From 1991 to 1992, the ratio of direct
loans to guaranteed loans will decrease from
16 percent to 7 percent.
OPIC has developed a financial credit rating
system for its programs, with ratings of high,
THE BUDGET FOR FISCAL YEAR 1992
medium, low, and unacceptable. Guaranteed
loans are generally characterized by a medium
to low OPIC credit risk rating; direct loans
by a medium to high rating.
Recent reforms include establishing greater
accountability among loan officers, creating an
independent review function in the Treasurer's
office, and reorganizing the Finance Department to allow for closer supervision of credit.
OPIC is considering whether to calculate a
subsidy estimate for each loan at the approval
stage.
Rural Electrification Administration
The Rural Electrification Administration
was established in 1935 to bring electrification
to rural areas. Telephone assistance was added
in 1949, and in 1973 a new lending program
was authorized for electric power generation.
Currently, REA has over $37 billion in outstanding loans to about 2,000 borrowers. Its
electric borrowers provide 11 percent of the
total electricity sold in the U.S., and its telephone borrowers serve four percent of total
U.S. access lines. For 1991, direct loans are
authorized at $1.8 billion.
Interest rates on REA loans were fixed at
two percent in 1944—at that time above comparable Treasury rates. However, while Treasury rates have risen greatly since then, the
fixed rate on electric distribution and telephone loans has increased only to five percent,
yielding borrowers substantial interest rate
subsidies. Two percent loans are still authorized to borrowers who demonstrate financial
"hardship". Loans to power supply borrowers
are made at Treasury rates plus one-eighth
percent.
The REA loan program is a clear example
of a Federal program that has outlasted its
original mandate. The program's goals have
essentially been accomplished. Today over 99
percent of rural households have electrical
service, and 97 percent have telephone service.
Nearly all borrowers can raise funds in private
credit markets, without causing a significant
increase in subscriber rates. For example, in
the past five years over 25 percent of telephone
loans have gone to subsidiaries of major telephone holding companies, such as ALLTEL
and CONTEL, whose assets and profitability
rival Fortune 500 companies. Furthermore,
VIII.A.
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
electric distribution borrowers are already required to secure 30 percent of their financing
needs from private sources, and have shown
no difficulty in doing so. Yet, REA has consistently been denied the authority to refuse loans
to any entity that has ever been a borrower,
even though many previously rural areas are
now suburban in character. REA by statute
must lend on a first come, first served basis,
and cannot deny applicants loans based on
their general funds or cash on hand.
The overall financial health of borrowers is
reflected in REA loan delinquency and default
rates. For electric distribution and telephone
loans, delinquencies are practically zero.
Hence, their respective subsidies of 22 percent
and 19 percent are due almost entirely to interest rates below Treasury rates.
Loans to electric power supply borrowers do
not have interest rate subsidies, as they are
made at just above Treasury rates. However,
there have been substantial delinquencies
among these loans. In the last five years, Government losses from missed payments from
these borrowers have exceeded $1 billion, and
total losses could reach $3 billion. Many of
the delinquent power supply loans went to borrowers that built nuclear power projects that
had cost overruns and delayed start-up dates.
Some loans were based on projected energy
demand growth rates that did not occur. Total
REA loan subsidies in 1991 are estimated to
be $157 million.
OBRA Reforms.—The 1990 OBRA promises
significant reforms in REA lending policy.
Electric distribution and telephone loans (excluding those of the Rural Telephone Bank)
were reduced 25 percent from baseline levels
each year through 1995. More importantly, 90
percent REA guarantees of private loans were
authorized for the first time at annual levels
equal to direct loan reductions, or $224 million
in 1991. While these guarantees are much less
than recent Administration proposals, they
will demonstrate the viability of guarantees as
an alternative option for REA borrowers. In
addition, the reforms will for the first time
require financial means-testing of borrowers.
Healthier borrowers, or borrowers serving
areas of greater economic vitality, are expected
to receive lesser amounts of their requested
Part Two-245
financing from direct loans and more from
guarantees than do needy borrowers.
Unfortunately, the 1990 farm bill liberalized
lending policy for telephone borrowers, such
as allowing them to determine their own amortization schedules and forbidding REA to require rate increases as a condition for loans.
This will cause more loans to be made at two
percent and will reduce repayments of Federal
loans. Repeal of these and other farm bill telephone provisions is proposed.
1992 Administration Proposal.—The Administration is also proposing to continue the
trend set in OBRA to reduce direct loans and
to increase the use of partial guarantees, in
order to bring loan subsidies more in line with
borrower financial needs. Direct loans for financially needy borrowers will be maintained
at $325 million. In 1992, $500 million in power
supply loans are proposed to be guaranteed
at 90 percent of principal and interest, along
with $600 million in 70 percent guarantees
for electric distribution borrowers, and $275
million in 70 percent guarantees for telephone
borrowers.
The Administration will change regulations
to improve security on REA loans. Member distribution cooperatives would be required to
guarantee the repayment of power supply
loans. When State regulatory bodies deny rate
increases to power supply borrowers that they
need to repay their REA loans, authority is
proposed for REA to preempt these bodies and
raise wholesale power rates.
These policies would fulfill the 1973 Congressional policy goal: "that electric and telephone systems develop the ability to achieve
the financial strength needed to enable them
to satisfy their credit needs from their own
financial organizations and other sources".
REA borrowers have achieved the necessary
financial strength, and loan subsidies should
be reduced accordingly.
Small Business Administration
The Small Business Administration (SBA)
provides long-term loans and loan guarantees
to small businesses and victims of natural disasters. Although most small businesses can
borrow from commercial sources, the maturities are generally only three to five years.
Part Two-246
SBA provides long-term financing for small
companies through its General Business Section 7(a) loan program, and through local and
certified development companies and Small
Business Investment companies. These three
programs constitute 85 percent of SBA's total
portfolio and guarantee about one-third of total
long-term loans to small businesses. The average SBA guaranteed loan is for $185,000 with
a term of 12 years at an interest rate slightly
above the prime rate.
Most financial assistance is in the form of
commercial loan guarantees. SBA direct lending (excluding disaster assistance) has declined
from about $200 million in the mid-1980s to
less than $100 million in 1990. Over the same
period, guaranteed lending has increased from
$2.5 billion to $3.6 billion. It is expected to
exceed $4 billion in 1991. About $18 billion
of SBA-backed credit is outstanding, one-third
of which is direct loans or defaulted guaranteed loans assumed by SBA.
Recognizing Underwriting Risks.—On
average over the 1980s, SBA loans have had
a cumulative probability of default of just over
20 percent. Nearly $4 billion of SBA's loans
outstanding are expected to default with total
losses to the Federal Government (net of recoveries) of about $2 billion. If economic activity
is weaker than past experience, default losses
would be higher.
SBA has begun several studies to identify
risk factors affecting SBA loans. It is assessing
the financial condition of a number of lending
institutions participating in guarantee programs. It is obtaining the services of a financial advisor to evaluate the financial condition
of its loan portfolio. And it has started modeling default experience for SBA loans over
the period 1980-1990.
From these initial studies, several factors
have been identified as influencing the probability of default. Not surprisingly, the probability is lower as more of the loan is repaid,
and when employment of the firm is growing.
The probability is higher when the loan is
large relative to the size of the firm.
While 25 percent of all loans made or guaranteed by SBA before 1985 will eventually de-
THE BUDGET FOR FISCAL YEAR 1992
fault, the rate is lower—about 20 percent—
for loans made since 1985. This can be attributed to better lending practices by SBA and
the overall health of the U.S. economy in the
mid- to late-1980s.
Under current law, the weighted average
subsidy rate for SBA's guaranteed loans—
about 5 percent—is much lower than the rate
for direct loans, which is more than 35 percent.
For both direct and guaranteed programs,
most of the subsidy is due to loan defaults.
Reducing Underwriting Risks.—The Administration proposes a number of initiatives
to reduce the underwriting risks of SBA loan
programs. The guarantee of commercial loans
under the Section 7(a) program would be reduced from the current average of 85 percent
of principal down to 75 percent. This will force
commercial lenders to share in the default risk
more than under current law, resulting in better lending practices and fewer defaults. In
addition, higher fees will be charged to help
offset the cost of guarantee programs. These
measures will reduce the weighted average
subsidy rate for guaranteed loans from about
5 percent to about 1 percent.
In addition, the Administration proposes to
convert nearly all direct business lending to
loan guarantees because of the very high subsidy rate inherent in SBA's direct loan programs. This will dramatically reduce the cost
of these programs, because losses for guaranteed loans are much lower than for direct
loans. For disaster loans, the Administration
proposes to restrict eligibility to only those borrowers unable to obtain credit elsewhere. In
addition, the interest rate would be increased
to the Treasury's cost of borrowing. These initiatives v/ould decrease the subsidy rate for
disaster loans from 35 percent to 23 percent.
The Administration plans to continue its
evaluation of SBA credit programs over the
next year in order to gain better information
on their relative credit risks. This evaluation
will include a detailed study of the performance of recipients of SBA loans and the availability of credit in the private marketplace.
VIII.A.
Part Two-247
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
Table A-9. ACTUAL AND ANTICIPATED LOSSES FROM THE
GOVERNMENT'S PRE-CREDIT REFORM PORTFOLIO
(In millions of dollars)
Agency or Program
Direct Loan Writeoffs and Guaranteed
Loan Terminations
Actual
1990
Direct loans receivable:
Agricultural credit insurance (FmHA)
Export-Import Bank
Foreign assistance loans2
HUD-Housing Programs
Rural electric and telephone
Rural development insurance (FmHA)
Rural housing insurance (FmHA)
Small business assistance
Other
Total
Guaranteed loans outstanding:
Agricultural credit insurance (FmHA)
CCC export credit guarantees
Export-Import Bank
Guaranteed student loans
Federal Housing Administration fund
MARAD ship financing fund
Rural development insurance (FmHA)
Small business assistance
VA loan guarantee revolving fund
VA guaranty and indemnity fund
Other
Total
Direct loans for guarantee claims receivable:
CCC export loans
FHA single family
FHA multi-family
GNMA mortgage-backed securities
Guaranteed student loans
MARAD ship financing fund
VA loan guarantee revolving fund
Total
GRAND TOTAL
1 Face
2
1,701
272
7,178
1990
End-ofyear Outstanding
Loans
Losses as
Percentage of
Outstandings
10,938
3,641
12,908
1,970
2,859
182
2,605
1,477
7,024
54.6
38.7
37.3
20.7
8.1
4.4
9.1
22.1
18.3
7
77
438
113
8
106
430
94
20,016
9,408
34,575
9,494
35,212
4,100
28,560
6,677
36,624
2,922
9,517
184,666
43,604
23.4
57
17
68
1,212
2,906
6,079
137
89
467
2,052
71
2,792
7,044
148
76
552
1,881
63
72
4,666
7,508
5,045
52,866
361,779
3,014
1,280
12,200
152,115
9,350
19,712
500
1,926
1,650
7,607
12,472
301
93
1,220
3,391
342
797
10.7
25.7
32.7
14.4
3.4
10.0
7.3
10.0
2.2
3.7
4.0
11,872
13,859
629,535
30,299
4.8
1,982
456
2,590
383
4,682
637
2,997
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
n.a.
*
206
260
27
181
29
3,113
2,048
4,830
563
10,033
881
3,853
493
210
25,321
13,727
15,287
23,586
839,522
87,630
value of all future losses, net of recoveries and fees.
Includes $6.5 billion forgiveness of loans for Egypt.
2,015
Anticipated Future Losses
Part Two-248
THE BUDGET FOR FISCAL YEAR 1992
Table A-10. SUBSIDY BUDGET AUTHORITY FOR DIRECT LOANS AND
GUARANTEED LOANS BY FUNCTION
(In millions of dollars)
Direct loan subsidy budget authority
Function
150 International affairs .
270 Energy
300 Natural resources
and environment
350 Agriculture
370 Commerce and
housing credit1
400 Transportation
450 Community and
regional development ....
500 Education, training,
employment, and social
services
550 Health
600 Income security
700 Veterans benefits and
services
800 General government
Total
ADDENDUM
1992
estimate
1993
estimate
1994
estimate
Guaranteed loan subsidy budget authority
1992
estimate
1993
estimate
1994
estimate
386
18
325
-57
327
129
374
-1
432
-4
449
-8
157
126
111
254
259
265
331
303
278
-610
-1,043
-1,089
158
147
141
13
14
14
2,656
22
2,713
12
2,842
6
130
115
96
169
152
150
1,178
958
1,082
2,876
2,534
2,627
Secondary guaranteed
loans
Commitments by GNMA to guarantee securities that are backed by loans previously insured or guaranteed by
the Federal Housing Administration, Department of Veterans Affairs, or Farmers Home Administration (secondary
guarantees) are excluded from the totals and shown in the addendum, with its estimated subsidy of zero.
VIII.A.
Part Two-249
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
Table A-ll. NEW DIRECT LOAN OBLIGATIONS AND GUARANTEED
LOAN COMMITMENTS BY FUNCTION
(In millions of dollars)
Guaranteed loan commitments
Direct loan obligations
Function
150 International
affairs
270 Energy
300 Natural resources
and environment
350 Agriculture
370 Commerce and
housing credit1
400 Transportation
450 Community and
regional development .
500 Education, training,
employment, and
social services
550 Health
600 Income security
700 Veterans benefits
and services
800 General
government
Total
1991
estimate
1990
actual
1992
estimate
1990
actual
1991
estimate
1992
estimate
2,366
1,197
2,982
1,910
1,745
1,197
7,748
11,508
591
9,349
1,100
43
6,986
36
7,140
8,288
5,709
9,340
8,464
2,866
42
2,448
42
1,380
62,897
66,645
67,770
2,100
1,179
939
283
418
466
30
29
1
12,394
370
12,508
260
*
13,281
185
1,102
1,064
19,068
17,379
14,631
414
350
450
108,883
118,999
115,696
70,276
69,932
74,769
16,733
16,830
1,149
14,698
ADDENDUM
Secondary guaranteed
loans
* $500 thousand or less.
1 Commitments by GNMA to guarantee securities that are backed by loans previously insured or guaranteed by
the Federal Housing Administration, Department of Veterans Affairs, or Farmers Home Administration (secondary
guarantees) are excluded from the totals and shown in the addendum.
Part Two-250
THE BUDGET FOR FISCAL YEAR 1992
Table A-12. DIRECT LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT
(in millions of dollars)
Funds Appropriated to the President:
Foreign military financing, liquidating
Foreign military
financing,
financing
Overseas Private Investment Corp, liquidating
Overseas Private Investment Corp, financing
AID development loans revolving fund,
liquidating
AID private sector revolving fund liquidating
AID housing/other credit guarantees, liquidating
Enterprise for the Americas, Debt restructuring,
financing
Agriculture:
Agricultural
credit
(FmHA), liquidating
credit
Agricultural
(FmHA), fii
insurance
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations .
Loan disbursements
Change in outstandings
Outstandings
1992
1993
1,716
2,060
935
17,518
72
691
394
17,912
656
379
18,291
314
22
22
22
20
23
7
63
21
5
80
40
24
12
75
Obligations .
Loan disbursements
Change in outstandings
Outstandings
Obligations .
Loan disbursements
Change in outstandings
Outstandings
1995
1996
18,291
189
-161
18,130
59
-260
17,870
343
118
118
140
368
270
270
410
381
329
329
740
384
367
367
1,107
-1
79
-16
63
-19
45
-14
30
25
2
30
12
10
12
30
22
18
30
30
23
18
48
30
23
16
63
332
*
144
-1,012
92
-3,693
54
-297
12,989
35
-314
12,675
18
-343
12,332
13
-354
11,978
3
5
8
2
34
6
1
34
2
-5
30
2
-5
25
1
-7
18
58
23
217
57
23
240
56
23
262
57
23
285
53
21
306
3,982
3,982
-221
3,761
-257
3,504
-259
3,245
-265
2,980
47
-3,423
13,300
9
-2,534
10,767
6
-1,928
8,838
5
-1,629
7,209
2
-1,378
5,831
724
680
680
680
619
617
308
988
566
569
297
1,285
562
562
314
1,600
547
548
288
1,888
732
-955
29,211
123
-1,534
27,677
39
-1,563
26,114
14
-1,530
24,584
2
-1,484
23,101
-1
23
15
12
9
32
Obligations .
Loan disbursements
Change in outstandings
Outstandings
65
32
172
53
21
193
Obligations .
Loan disbursements
Change in outstandings
Outstandings
1,034
910
-2,530
20,016
862
689
-3,293
16,723
fund
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations .
Loan disbursements
Change in outstandings
Outstandings
1994
178
-571
17,991
Obligations ,
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings
insurance
995
1,584
593
16,584
1991
Obligations
Loan disbursements
Change in outstandings
Outstandings
fund
Rural housing insurance fund (FmHA),
liquidating
Estimate
Actual
1990
Agency or Program
2,220
1,927
694
28,560
2,167
1,882
1,605
30,166
VIII.A.
Part Two-251
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
Table A-12. DIRECT LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT
—Continued
(in millions of dollars)
Actual
1990
Agency or Program
Rural housing insurance fund (FmHA), financing
Rural develolpment insurance (FmHA),
liquidating
Rural
development
insurance
(FmHA),
financing
Estimate
1991
Obligations .
Loan disbursements
Change in outstandings
Outstandings
Obligations .
Loan disbursements
Change in outstandings
Outstandings
445
446
302
4,100
600
395
240
4,340
1992
1993
1994
1995
1996
1,211
825
822
822
1,223
1,110
1,098
1,920
1,217
1,178
1,155
3,075
1,204
1,184
1,149
4,224
1,189
1,180
1,102
5,326
429
264
4,605
326
151
4,756
180
-1
4,755
83
-97
4,658
60
-116
4,542
471
28
28
28
471
150
150
178
471
300
300
478
471
390
388
866
471
471
465
1,331
18
16
69
14
11
80
10
6
85
6
2
87
-5
82
35
4
4
4
35
12
12
16
35
21
21
36
35
28
27
63
35
35
33
96
843
953
5,404
416
557
5,961
161
341
6,302
15
173
6,475
10
116
6,591
9
19
19
156
187
206
296
344
550
431
493
1,043
433
495
1,538
fund
Rural development loan fund (FmHA),
liquidating
Rural development loan fund (FmHA), financing
Short and medium term export loans
(CCC), liquidating
Short and medium term export loans
(CCC),
financing
CCC — price support loans
Public Law 480 long-term export credits,
liquidating
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings
19
7
5
39
32
16
14
53
Obligations .
Loan disbursements
Change in outstandings
Outstandings
Obligations ,
Loan disbursements
Change in outstandings
Outstandings
17
-5
3,113
1,212
1,337
4,451
Obligations .
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings
5,952
5,952
-1,911
4,068
6,279
6,279
-1,273
2,794
7,564
7,564
212
3,006
7,646
7,646
-72
2,934
7,637
7,637
-41
2,893
7,674
7,674
-322
2,571
7,840
7,840
17
2,588
Obligations .
Loan disbursements
Change in outstandings
Outstandings
735
630
297
12,501
460
460
202
12,703
-1,007
11,696
-264
11,431
-269
11,163
-272
10,891
-277
10,614
417
317
317
317
332
347
347
664
339
333
333
997
339
334
332
1,329
339
334
333
1,661
1,074
-92
36,504
833
-584
35,921
638
-211
35,710
533
-214
35,496
198
-1,124
34,372
Public Law 480 long-term export credits,
Obligations
Loan disbursements
Change in outstandings
Outstandings
Rural electrification and telephone, liq-
Obligations
Loan disbursements
Change in outstandings
Outstandings
939
1,071
83
35,212
1,613
1,129
1,384
36,596
Part Two-252
THE BUDGET FOR FISCAL YEAR 1992
Table A-12. DIRECT LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT
—Continued
(in millions of dollars)
Actual
1990
Agency or Program
Rural electrification and telephone, fi-
Self-help housing land development fund,
liquidating
Farm credit system financial assistance
corp
program,
Obligations
Loan disbursements
Change in outstandings
Outstandings
1993
1994
1995
1996
893
546
530
530
1,372
1,159
1,131
1,661
316
198
169
1,830
274
549
516
2,346
293
475
434
2,780
124
94
1,736
103
68
1,804
81
40
1,844
65
18
1,862
65
13
1,875
125
6
6
6
125
30
30
36
125
55
55
91
125
72
72
163
125
85
84
247
*
*
*
*
*
*
1
1
1
*
*
Obligations
Loan disbursements
Change in outstandings
Outstandings
2 Ofil
2,061
.
2,061
2,061
liq-
EDA miscellaneous appropriations, liquidating
NOAA, coastal energy impact fund, liquidating
NOAA, Federal ship financing fund (fishing vessels), liquidating
Defense:
Navy industrial fund, liquidating
Education:
Guarantees of SLMA obligations, liquidating
177
111
82
1,643
Obligations
Loan disbursements
Change in outstandings
Outstandings
Rural telephone bank, financing .
Commerce:
Economic development
uidating
1992
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations
177
Loan disbursements
108
76
Change in outstandings
1,561
Outstandings
Rural telephone bank, liquidating
Estimate
1991
Obligations
Loan disbursements
Change in outstandings
Outstandings
2
-25
6
-23
265
Obligations
Loan disbursements
Change in outstandings
Outstandings
78
Obligations
Loan disbursements
Change in outstandings
Outstandings
-2
86
-3
83
Obligations
Loan disbursements
Change in outstandings
Outstandings
14
6
22
10
23
Obligations
Loan disbursements
Change in outstandings
-48
Outstandings
1,672
-49
1,624
Obligations
Loan disbursements
Change in outstandings
-2
-30
2
-22
244
1
-6
238
-3
80
78
76
74
72
-3
19
-3
16
-3
13
-3
10
*
*
-5
233
-4
228
*
-3
225
-78
1
-30
-2
-2
-2
-2
4
-1
22
-30
-30
-30
-30
-4,300
VIII.A.
Part Two-253
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
Table A-12. DIRECT LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT
—Continued
(in millions of dollars)
Outstandings .
Guaranteed student loans, liquidating
National direct student loans, liquidating
College housing/academic facilities, liquidating
College housing loans, liquidating
Higher education, liquidating .
Higher education facilities loans and insurance, liquidating
Energy:
Bonneville
uidating
Power
Administration
1991
1992
1994
1993
1995
1996
4,880
4,850
4,820
4,790
4,760
4,730
430
Obligations
Loan disbursements
Change in outstandings
Outstandings
2,774
3,242
10,033
2,655
1,419
11,452
2,234
786
12,237
1,684
183
12,420
973
-754
11,666
418
-1,406
10,260
133
-1,388
8,873
Obligations
Loan disbursements
Change in outstandings
Outstandings
175
458
-26
432
-33
399
-36
363
-28
336
-31
305
-73
232
Obligations .
Loan disbursements
Change in outstandings
Outstandings
30
26
26
50
29
61
61
111
59
58
169
26
25
194
10
8
202
3
-3
*
-6
202
196
Obligations
Loan disbursements
Change in outstandings
Outstandings
13
-26
653
25
-8
646
23
-11
634
18
-19
616
-38
578
-36
542
-35
507
Obligations
Loan disbursements
Change in outstandings
Outstandings
-15
1
Obligations .
Loan disbursements
Change in outstandings
Outstandings
-7
96
-7
83
-7
77
-7
70
-6
-6
90
64
59
1
2
2
2
2
2
2
127
-6
liq-
Health and Human Services:
Medical facilities, liquidating
Health maintenance organization loan
fund, liquidating
Health resources and services, liquidating
Health professions graduate student loan,
liquidating
Estimate
Actual
1990
Agency or Program
Obligations .
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings
121
122
123
124
125
126
Obligations .
Loan disbursements
Change in outstandings
Outstandings
-1
4
-1
3
-1
3
-1
2
*
*
1
1
1
Obligations
Loan disbursements
Change in outstandings
Outstandings
8
-1
508
6
-5
503
21
12
514
21
-8
506
21
-8
498
21
-8
490
21
-8
482
Obligations .
Loan disbursements
Change in outstandings
Outstandings
46
77
167
47
79
245
48
80
325
20
18
343
16
14
357
16
13
370
16
13
383
*
1
1
1
1
1
1
Part Two-254
THE BUDGET FOR FISCAL YEAR 1992
Table A-12. DIRECT LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT
—Continued
(in millions of dollars)
Housing and Urban Development:
Flexible loan subsidy program liquidating
Low-rent public housing, liquidating
Housing for the elderly or handicapped,
liquidating
GNMA management
functions
and
1991
1992
1993
1994
1995
1996
Obligations
Loan disbursements
Change in outstandings
Outstandings
20
18
177
148
146
323
-2
321
319
-3
316
-3
313
-3
310
Obligations
Loan disbursements
Change in outstandings
Outstandings
-45
1,951
-47
1,903
-50
1,853
-52
1,801
-54
1,747
-58
1,689
-62
1,627
Obligations .
Loan disbursements
Change in outstandings
Outstandings
462
368
322
7,543
11
650
601
8,143
797
743
8,886
581
522
9,408
-63
9,345
-68
9,278
-72
9,206
Obligations
Loan disbursements
Change in outstandings
Outstandings
587
40
563
929
107
669
775
46
715
517
21
736
279
-2
734
196
5
739
126
731
Obligations .
Loan disbursements
Change in outstandings
Outstandings
1,820
1,977
7,163
2,078
630
7,792
538
-5,394
2,399
-196
2,203
-211
1,992
-127
1,865
-125
1,740
1,023
5,651
5,651
799
75
5,725
1,070
321
6,046
823
305
6,352
800
284
6,636
23
-47
481
-65
416
-65
351
-65
286
-65
221
27
27
27
27
27
-2
liquidating
GNMA payments on mortgage-backed securities
FHA mutual mortgage insurance funds,
liquidating
FHA general and special risk, liquidating
Rehabilitation loan fund, liquidating .
Revolving fund for liquidating programs ..
Nonprofit sponsor assistance, liquidating
Interior:
Bureau of Reclamation loans, liquidating
BIA revolving fund, liquidating .
Estimate
Actual
1990
Agency or Program
Obligations .
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings
41
22
-58
571
Obligations
Loan disbursements
Change in outstandings
Outstandings
27
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
-2
1
*
28
-44
527
*
27
1
*
2
2
14
13
5
10
11
-8
8
95
103
10
11
13
14
1
6
*
*
*
*
*
2
2
1
1
-2
101
98
96
94
-8
-7
-7
-2
-2
-2
*
-2
91
VTII.A.
Part Two-255
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
Table A-12. DIRECT LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT
—Continued
(in millions of dollars)
Outstandings
BIA revolving fund,
financing
BIA loan guaranty & insurance fund, liquidating
BIA loan guaranty & insurance fund, financing
State:
Repatriation loans, liquidating (formerly
Emerg in dipl service)
Repatriation loans,
financing
Transportation:
Railroad rehabilitation, liquidating
Right-of-way revolving fund, liquidating ..
Miscellaneous
expired
(WMATA), liquidating,
1992
1991
108
114
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings
16
15
29
6
2
31
1
1
1995
1996
106
98
90
83
77
11
11
11
11
13
13
12
23
15
15
13
36
16
16
13
49
19
19
14
63
7
6
1
32
6
1
34
5
1
34
5
34
1
1
1
3
3
5
4
5
9
5
6
15
-1
2
-1
2
-1
1
95
25
143
95
25
168
168
168
*
31
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings
1994
1993
*
1
1
*
*
3
3
-1
*
*
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings
4
-184
106
Obligations
Loan disbursements
Change in outstandings
Outstandings
42
30
3
93
93
95
25
118
Obligations
Loan disbursements
Change in outstandings
Outstandings
177
177
177
177
177
177
177
Obligations
Loan disbursements
Change in outstandings
Outstandings
49
49
49
49
49
49
49
Obligations
Loan disbursements
Change in outstandings
Outstandings
139
-380
881
150
141
1,022
150
141
1,163
100
91
1,254
100
91
1,345
100
91
1,436
100
91
1,527
Obligations
Loan disbursements
Change in outstandings
4
4
1
-106
42
42
.
accounts
Aircraft purchase loan guarantees, liquidating
MarAd Federal ship financing fund, liquidating
Amtrack corridor improvement loans, liquidating
Estimate
Actual
1990
Agency or Program
- 1
Part Two-256
THE BUDGET FOR FISCAL YEAR 1992
Table A-12. DIRECT LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT
—Continued
(in millions of dollars)
Actual
1990
Agency or Program
Outstandings
Veterans Affairs:
Loan guarantee
uidating
revolving
fund,
Estimate
1991
1992
4
7
1,100
1,272
2,666
3,853
1,047
1,229
69
3,922
Obligations
Loan disbursements
Change in outstandings
Outstandings
Direct loan revolving fund, liquidating
indemnity
fund,
Obligations
Loan disbursements
Change in outstandings
Outstandings
Education loan fund, liquidating
Obligations
Loan disbursements
Change in outstandings
Outstandings
financing
Vocational rehabilitation revolving fund,
liquidating
financing
Other Independent Agencies:
Environmental Protection Agency:
Abatement, control, and compliance liquidating
NASA, liquidating
*
*
-13
47
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings
Vocational rehabilitation
1995
1996
-487
3,435
-264
3,171
-297
2,874
-294
2,579
-288
2,292
1,075
1,075
507
507
875
875
210
717
651
651
118
835
477
477
66
901
331
331
32
933
-1
13
-3
11
-3
7
-3
4
-2
2
72
72
27
27
160
160
45
73
249
249
60
133
312
312
65
198
346
346
65
263
-2
-2
4
-7
121
-10
*
*
-12
35
liq-
Guaranty and indemnity fund, financing .
Education loan fund,
1994
liq-
Loan guarantee revolving fund, financing Obligations
Loan disbursements
Change in outstandings
Outstandings
Guaranty and
uidating
1993
15
15
15
15
*
*
-5
20
-4
16
-4
12
10
8
17
6
132
8
-3
129
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings
2
2
*
1
2
2
*
1
Obligations
Loan disbursements
Change in outstandings
Outstandings
-1
2
2
1
1
Obligations
Loan disbursements
Change in outstandings
Outstandings
29
37
31
90
31
28
20
110
Obligations
Loan disbursements
Change in outstandings
Outstandings
844
101
1,096
107
-1,063
33
26
16
126
-33
1
111
VIII.A.
Part Two-257
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
Table A-12. DIRECT LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT
—Continued
(in millions of dollars)
Actual
1990
Agency or Program
Small Business Administration:
Business and investment loans, liquidating
Business and investment loans, financing
Small business development companies,
liquidating
Disaster loans, liquidating
Disaster loans, financing .
Federal Emergency Management Agency:
FEMA, liquidating
FEMA, financing .
Loans to the District of Columbia .
Export-Import Bank of the United States:
Export-Import Bank, liquidating
Export-Import Bank, financing .
FDIC Bank insurance Fund
FSLIC Resolution fund
280-000 0 - 9 1 - 9
(PART 2)
Obligations .
Loan disbursements
Change in outstandings
Outstandings
63
560
133
2,384
Estimate
1991
71
618
-4
2,380
Obligations .
Loan disbursements
Change in outstandings
Outstandings
1992
1993
1994
1995
1996
602
-19
2,361
548
-64
2,297
408
-182
2,115
275
-262
1,853
172
-295
1,558
5
2
2
2
5
5
4
6
5
5
3
9
5
5
2
10
5
5
1
11
Obligations .
Loan disbursements
Change in outstandings
Outstandings
-231
1,124
-176
948
-150
798
-130
668
-110
558
-48
511
-30
481
Obligations
Loan disbursements
Change in outstandings
Outstandings
1,241
768
301
3,169
350
567
19
3,188
133
-424
2,764
-478
2,286
-398
1,888
-331
1,557
-277
1,280
292
175
159
159
303
299
253
413
315
310
231
644
327
322
209
852
338
333
188
1,040
20
1
129
-19
110
-109
2
-2
6
6
4
4
6
6
3
8
6
6
2
9
6
6
6
6
9
9
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings
168
101
101
103
6
53
25
128
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings
-33
619
-35
584
-37
547
-39
508
-37
471
-39
432
-41
390
Obligations
Loan disbursements
Change in outstandings
Outstandings
612
998
24
9,408
750
974
-151
9,257
751
-302
8,955
516
-363
8,592
228
-598
7,994
146
-555
7,439
78
-567
6372
915
65
65
65
919
390
390
455
693
582
582
1,038
697
723
673
1,710
701
809
654
2,364
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
250
-2,120
197
-50
-4
193
-855
-4
188
-188
-50
-451
-451
Part Two-258
THE BUDGET FOR FISCAL YEAR 1992
Table A-12. DIRECT LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT
—Continued
(in millions of dollars)
Outstandings
National Credit Union Administration:
Share insurance
Central liquidity facility,
Estimate
Actual
1990
Agency or Program
1992
1991
1994
1993
1995
1996
1,808
953
903
451
Obligations
Loan disbursements
Change in outstandings
Outstandings
68
34
29
68
40
30
-11
57
40
15
-25
32
27
5
-5
27
34
15
7
34
32
13
-2
32
30
13
-2
30
Obligations
Loan disbursements
Change in outstandings
Outstandings
54
54
-55
58
158
113
59
117
124
78
-35
82
100
100
1
83
100
100
1
84
100
100
1
85
100
100
1
86
Obligations
Loan disbursements
Change in outstandings
Outstandings
1
1
1
4
4
6
6
6
6
6
6
6
6
6
6
6
Obligations
Loan disbursements
Change in outstandings
Outstandings
44
44
-28
148
49
49
148
54
54
7
155
51
51
5
161
49
49
5
165
50
50
7
173
51
51
9
182
Obligations
Loan disbursements
Change in outstandings
Outstandings
214
214
61
2,356
247
247
45
2,401
251
251
29
2,429
319
319
-10
2,419
359
359
2,419
326
326
-186
2,233
505
505
-99
2,135
411
349
1,419
659
590
2,009
458
383
2,391
90
13
2,404
-65
2,340
Community development credit union
Tennessee Valley Authority:
Power program
Seven States
Area and regional development
Other agencies and programs, liquidating
Grand total, net direct loans
*
*
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings
*
3
-59
769
*
365
301
1,070
16,733
16,831
14,697
14,977
13,582
13,447
13,688
24,019
25,740
23,696
21,810
18,445
17,027
16,245
2,752
1,283
741
-898
-782
-3,114
-7,987
209,987 211,271 210,353 209,456 208,674 205,560 197,574
* $500,000 or less.
1 Direct
loan obligations and disbursements for these programs represent increases in their holdings of loan assets rather than cash disbursements.
Part Two-259
VIII.A. RECOGNIZING A N D REDUCING FEDERAL UNDERWRITING RISKS
Table A-13. GUARANTEED LOAN TRANSACTIONS OF THE FEDERAL
GOVERNMENT
(in millions of dollars)
Funds Appropriated to the President:
Foreign military financing, liquidating
Overseas Private Invest Corp , liquidating
Overseas Private Invest Corp , financing
AID private sector revolving fund,
liquidating
AID private sector revolving fund, financing
AID housing & other credit guarantees, liquidating
AID housing & other credit guarantees,
financing
Agriculture:
Agricultural credit insurance fund
(FmHA), liquidating
Agricultural credit insurance fund
(FmHA),
financing
Rural
housing
insurance
(FmHA), liquidating
Rural
housing
(FmHA),
insurance
financing
Estimate
Actual
1990
Agency or Program
1991
1992
1993
1994
1995
1996
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
189
-48
8,602
420
-5
8,596
-466
8,131
-460
7,671
-492
7,179
-474
6,705
-444
6,261
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
212
118
59
445
250
220
172
618
215
103
721
199
43
764
-165
600
-166
433
-152
282
375
24
24
24
375
137
135
159
390
226
217
376
400
231
199
575
400
238
169
744
60
60
111
40
39
150
40
39
189
-22
167
-62
104
114
11
11
11
116
34
34
45
118
58
58
103
121
82
82
185
123
106
106
291
150
250
207
2,013
100
175
128
2,142
-1
2,140
2,130
2,118
100
100
33
33
33
100
67
67
100
100
100
100
200
100
100
100
300
732
-1,163
5,400
31
-1,550
3,850
-1,144
2,706
-812
1,894
-570
1,325
2,764
2,309
2,309
2,309
2,762
2,754
2,252
4,561
2,770
2,767
1,790
6,351
2,724
2,730
1,392
7,743
2,675
2,682
1,064
8,807
28
20
119
2
-3
115
-6
109
-5
104
-4
100
694
694
694
694
694
250
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
92
1
1
1
112
50
50
51
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
100
64
35
1,591
297
250
215
1,806
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
1,258
1,997
958
4,666
3,640
3,207
1,896
6,562
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
fund
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
fund
Commitments
*
-5
36
100
70
62
98
50
50
-10
*
50
-12
*
Part Two-260
THE BUDGET FOR FISCAL YEAR 1992
Table A-13. GUARANTEED LOAN TRANSACTIONS OF THE FEDERAL
GOVERNMENT—Continued
(in millions of dollars)
Actual
1990
Agency or Program
Estimate
1991
New guaranteed loans . ,
Change in outstandings
Outstandings
1992
1993
1994
1995
1996
486
484
484
680
668
1,152
694
670
1,822
694
656
2,478
694
643
3,121
118
-98
1,048
69
-124
923
25
-146
111
10
-128
649
4
-111
538
145
30
30
30
145
80
76
106
145
117
103
209
145
131
104
313
145
141
100
413
45
9
1,333
56
-13
1,320
45
3
1,323
34
-12
1,311
22
-27
1,284
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
1,100
110
109
109
1,150
335
332
441
1,200
625
617
1,058
1,250
872
857
1,915
1,280
1,072
1,047
2,962
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
275
28
27
27
275
82
78
105
275
151
141
246
275
206
187
433
275
248
218
651
-4,035
5,360
-2,825
2,535
-1,955
519
-118
461
-80
381
5,700
5,700
5,700
5,700
5,700
5,700
3,917
9,617
5,700
5,700
2,133
11,750
5,700
5,700
350
12,100
5,500
5,500
100
12,200
Rural development insurance fund
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
118
80
-156
1,280
230
107
-135
1,145
Rural development insurance fund
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
Rural elec and telephone revolving
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
-28
2,529
591
389
-1,205
1,324
Rural elec and telephone revolving
Commodity Credit Corp export credCommitments
New guaranteed loans .
Change in outstandings
Outstandings
Commodity Credit Corp export credits, financing
Commerce:
Economic
development
4,451
4,127
268
7,508
5,700
5,700
1,887
9,395
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
revolving
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
-12
91
-14
77
-12
65
-12
53
-10
43
-8
35
-5
30
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
35
35
-10
362
14
-25
337
-34
302
-30
272
-30
242
-30
212
-30
182
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
12,394
10,969
2,976
52,866
12,508
11,026
2,383
55,249
3,215
-5,857
49,392
55
-9,403
39,989
56
-8,643
31,346
58
-7,029
24,317
59
-5,447
18,870
NOAA Federal ship financing fund,
Education:
Guaranteed
student
loans,
liq-
Part Two-261
VIII.A. RECOGNIZING A N D REDUCING FEDERAL UNDERWRITING RISKS
Table A-13. GUARANTEED LOAN TRANSACTIONS OF THE FEDERAL
GOVERNMENT—Continued
(in millions of dollars)
Actual
1990
Agency or Program
Guaranteed student loans, financing
Health and Human Services:
Medical facilities guarantees
uidating
1993
1994
1995
1996
13,281
8,343
8,251
8,251
13,994
12,169
11,601
19,852
14,880
12,902
11,116
30,967
15,572
13,572
10,638
41,605
16,268
14,189
8,822
50,427
1992
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
liq-
Health resources and services, liquidating
Health professions graduate student
loans, liquidating
Health professions graduate student
loans,
financing
Housing and Urban Development:
Low-rent public housing, liquidating .
Revolving fund for liquidating programs
FHA mutual mortgage and cooperative insurance funds, liquidating ...
FHA mutual mortgage and cooperative insurance funds,
financing
FHA general and special risk, liquidating
FHA general and special risk, financing
Estimate
1991
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
-83
519
-52
468
-52
416
-76
340
-76
264
-76
188
-76
112
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
-1
-1
-1
-1
-1
-1
-1
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
370
260
208
2,080
260
260
210
2,290
-31
2,259
2,239
2,141
-25
2,116
2,090
185
185
185
185
120
120
118
303
60
60
55
357
-11
346
-17
329
-375
4,113
-400
3,713
-425
3,288
16
15
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
14
14
-21
12
11
10
-26
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
-271
5,463
-300
5,163
-325
4,838
-350
4,488
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
-13
36
-15
21
-13
9
-9
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
58,503
54,005
30,281
356,316
62,275
53,336
24,863
381,180
14,333
-87,471
293,708
-20,979
272,729
-19,051
253,678
-17,829
235,849
-13,041
222,808
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
53,593
31,049
30,739
30,739
56,265
47,209
45,938
76,677
57,495
48,650
45,636
122,313
58,454
49,541
44,081
166,394
59,433
50,370
38,090
204,484
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
1,082
74,830
74,830
-6,144
68,685
-5,469
63,216
-5,887
57,329
-2,680
54,649
Commitments
New guaranteed loans .
Change in outstandings
8,652
6,751
6,697
9S039
8,194
8,052
9,432
8,558
8,153
9,839
8,935
8,220
10,262
9,326
5,567
Part Two-262
THE BUDGET FOR FISCAL YEAR 1992
Table A-13. GUARANTEED LOAN TRANSACTIONS OF THE FEDERAL
GOVERNMENT—Continued
(in millions of dollars)
Actual
1990
Agency or Program
Estimate
1991
Outstandings .
GNMA mortgage backed securites,
liquidating
GNMA mortgage backed securites, financing
Community development grants, liquidating
Interior:
BIA loan guaranty & insurance fund,
liquidating
BIA loan guaranty & insurance fund,
financing
Transportation:
MarAd Federal ship financing fund,
liquidating
Aircraft purchase loan guarantees,
liquidating
Miscellaneous
expired
(WMATA), liquidating
Treasury:
Payments to Financial
Corp
70,276
64,039
33,338
395,094
69,932
63,002
26,205
421,299
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
1993
1994
1995
1996
6,697
14,749
22,901
31,122
36,689
-41,415
379,883
-43,464
336,420
-43,623
292,796
-42,093
250,703
-39,184
211,519
74,769
62,308
61,062
61,062
76,530
63,775
60,630
121,692
77,828
64,856
59,777
181,469
79,098
65,915
58,869
240,338
80,023
66,685
57,646
297,984
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
119
83
71
271
140
100
70
341
125
80
421
35
-10
411
-40
371
-40
331
-40
291
Commitments
New guaranteed loans
Change in outstandings
Outstandings
44
44
3
222
45
45
30
252
-16
235
-15
220
-14
206
-13
193
-12
181
46
46
46
46
48
48
44
90
49
49
43
132
51
51
41
173
53
53
40
213
-348
2,317
-299
2,019
-299
1,720
-299
1,421
-299
1,122
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
-589
3,014
-348
2,665
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
-15
53
-14
39
-11
28
22
-3
19
-3
16
16
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
820
820
820
820
820
820
820
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
414
414
414
1,261
350
350
350
1,611
450
450
450
2,061
2,061
2,061
2,061
2,061
Commitments
New guaranteed loans .
Change in outstandings
9,600
8,951
16
885
6
-8,526
-8,488
-7,978
-7,307
-6,675
-6,140
acct
Assistance
Veterans Affairs:
Loan guaranty revolving fund, liquidating
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
1992
VIII.A.
Part Two-263
RECOGNIZING A N D REDUCING FEDERAL UNDERWRITING RISKS
Table A-13. GUARANTEED LOAN TRANSACTIONS OF THE FEDERAL
GOVERNMENT—Continued
(in millions of dollars)
Actual
1990
Agency or Program
Outstandings
Loan guaranty revolving fund, financing
Guaranty and indemnity fund, liquidating
Guaranty and indemnity fund, financing
Other Independent Agencies:
Small Business Administration:
Business and investment loans, liquidating
Business and investment loans, financing
Disaster loans, liquidating ,
Export-Import Bank of the United
States:
Export-Import Bank, liquidating .
Export-Import Bank,
financing
FSLIC Resolution fund
National Credit Union
Administration:
Credit union share insurance fund,
liquidating
152,115
Estimate
1991
143,589
1992
135,101
9,468
9,468
9,350
9,350
16,495
16,495
16,002
25,352
Commitments
New guaranteed loans
Change in outstandings
Outstandings
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
4,352
3,635
1,399
12,200
4,266
4,403
1,760
13,960
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
1995
1996
127,123
119,816
113,140
107,001
5
5
5
10
4
4
4
14
3
3
3
17
2
2
2
19
-1,463
23,889
-1,743
22,146
-1,799
20,347
-1,723
18,624
-1,615
17,010
14,626
14,626
14,543
14,543
12,619
12,619
12,448
26,991
12,060
12,060
11,754
38,745
12,016
12,016
12,564
51,309
11,722
11,722
12,444
63,753
-2,980
11,197
-2,444
8,754
-1,888
6,866
-1,432
5,434
-1,086
4,347
4,829
4,346
4,008
4,008
4,829
4,346
3,317
7,325
4,829
4,346
2,500
9,825
4,829
4,346
1,593
11,418
4,829
4,346
422
11,839
3,810
1,188
8,509
1,979
309
8,818
1,085
-60
8,758
633
-224
8,535
392
-295
8,240
8,610
3,933
3,933
3,933
8,653
6,628
6,498
10,431
8,696
7,582
4,227
14,658
8,740
8,295
3,255
17,913
8,783
8,741
3,296
21,209
Commitments
New guaranteed loans
Change in outstandings
Outstandings
Commitments
New guaranteed loans
Change in outstandings
Outstandings
1994
1993
Commitments
*
New guaranteed loans
Change in outstandings
Outstandings
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
7,345
4,882
209
5,045
10,599
6,430
2,277
7,322
Commitments
New guaranteed loans
Change in outstandings
Outstandings
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
-4,245
304
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
7
4
-5
7
-304
Part Two-264
THE BUDGET FOR FISCAL YEAR 1992
Table A-13. GUARANTEED LOAN TRANSACTIONS OF THE FEDERAL
GOVERNMENT—Continued
(in millions of dollars)
Actual
1990
Agency or Program
Tennessee Valley Authority:
Power program
Other agencies and programs
Subtotal, guaranteed loans (gross)
Less secondary guaranteed loans:1
GNMA guarantees of FHA/VA/FmHA
pools
Subtotal, guaranteed loans (net)
Less guaranteed loans held as direct
loans:2
By GNMA
Total, primary guaranteed loans
Commitments
New guaranteed loans . ...
Change in outstandings ...
Outstandings
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
Estimate
1991
1992
1994
1993
2
2
2
2
3
-25
466
3
3
-30
436
1995
1996
-1
-32
404
-34
370
-36
333
-39
295
-41
253
Commitments
179,158 188,931 190,466 193,520 196,726 200,012 202,569
New guaranteed loans .
163,369 165,889 164,754 167,592 170,776 174,208 176,744
67,459
Change in outstandings
74,077
60,794
58,704
56,368
57,952
57,608
Outstandings
1,024,629 1,092,088 1,153,101 1,211,805 1,268,172 1,325,780 1,383,732
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
70,276
64,039
33,338
395,094
69,932
63,002
26,205
421,299
74,769
62,308
19,646
440,945
76,530
63,775
17,167
458,112
77,828
64,856
16,153
474,265
79,098
65,915
16,776
491,041
80,023
66,685
18,462
509,502
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
108,883
99,329
40,739
629,535
118,999
102,887
41,254
670,789
115,696
102,446
41,148
712,156
116,990
103,817
41,537
753,693
118,899
105,919
40,214
793,907
120,914
108,292
40,832
834,739
122,546
110,059
39,490
874,230
2
2
*
*
*
*
*
1
1
1
1
1
118,999
102,887
41,253
670,788
115,696
102,446
41,148
712,154
116,990
103,817
41,537
753,691
118,899
105,919
40,214
793,906
120,914
108,292
40,832
834,738
122,546
110,059
39,491
874,229
Commitments
New guaranteed loans
Change in outstandings
Outstandings
Commitments
New guaranteed loans .
Change in outstandings
Outstandings
108,883
99,329
40,739
629,535
* $500,000 or less.
1 Loans
guaranteed by the Federal Housing Administration, the Veterans Affairs, or the Farmers Home Administration are included above. GNMA places a
secondary guarantee on these loans, so they are deducted here to avoid double counting.
2 When
guaranteed loans are acquired by a budget account, they are counted as direct loans and shown in the direct loan table. Consequently, they are
deducted from the totals in this table.
VIII.A.
Part Two-265
RECOGNIZING AND REDUCING FEDERAL UNDERWRITING RISKS
Table A-14. LENDING AND BORROWING BY GOVERNMENT-SPONSORED
ENTERPRISES (GSEs)
(In millions of dollars)
Actual
Enterprise
1990
Estimate
1991
1992
LENDING
Student Loan Marketing Association ....
Federal National Mortgage Association:
Corporation Accounts
Mortgage-backed securities
Farm Credit System:
Banks for cooperatives
Farm Credit Banks
Farm Credit System Financial Assistance Corporation1
Federal Home Loan Bank system:
Federal home loan banks
Federal Home Loan Mortgage Corporation:
Corporation accounts
Participation certificate pools
Subtotal, lending (gross)
Less loans between GSEs
Less secondary funds advanced from Federal sources:
Student Loan Marketing Association from FFB2
Less guaranteed loans held as direct loans by:
Federal National Mortgage Association
Federal home loan banks .
Obligations
New transactions
Net change
Outstandings
10,194
10,194
5,068
27,896
11,213
11,213
5,576
33,472
12,334
12,334
6,134
39,606
Obligations
New transactions
Net change
Outstandings
Obligations
New transactions
Net change
Outstandings
24,054
24,840
6,811
116,529
128,729
97,879
72,912
281,806
21,307
21,841
7,436
123,965
80,273
79,069
47,734
329,540
21,958
22,190
6,800
130,765
80,215
79,012
43,116
372,656
Obligations
New transactions
Net change
Outstandings
Obligations
New transactions
Net change
Outstandings
Obligations
New transactions .
Net change
Outstandings
70,109
70,109
818
10,693
20,400
19,996
-601
39,204
69,066
69,066
-104
10,589
20,381
18,796
-7
39,197
70,089
70,089
275
10,863
20,903
18,988
600
39,797
414
1,261
350
1,611
450
2,061
Obligations
New transactions .
Net change
Outstandings
141,791
141,791
-33,271
119,373
120,051
120,051
-8,436
110,937
115,144
115,144
-978
109,960
Obligations
New transactions
Net change
Outstandings
Obligations
New transactions
Net change
Outstandings
Obligations
New transactions
Net change
Outstandings
Obligations
New transactions
Net change
Outstandings
1,544
1,544
-142
20,508
74,492
74,492
43,858
301,797
471,313
440,845
95,867
919,067
3,967
3,967
1,405
21,913
59,203
59,203
28,914
330,711
385,461
383,206
82,868
1,001,935
3,272
3,272
968
22,881
62,163
62,163
29,323
360,034
386,078
383,192
86,688
1,088,623
2,656
5,000
345
5,345
445
5,790
-30
4,880
-30
4,850
-30
4,820
-4,559
23,404
-1,409
21,995
-1,152
20,843
.
.
.
.
Obligations
New transactions .
Net change
Outstandings
Obligations
New transactions .
Net change
Outstandings
Obligations
New transactions .
Part Two-266
THE BUDGET FOR FISCAL YEAR 1992
Table A-14. LENDING AND BORROWING BY GOVERNMENT-SPONSORED
ENTERPRISES (GSEs)—Continued
(In millions of dollars)
Actual
Enterprise
Federal Home Loan Mortgage Corporation
Farm Credit System
Student Loan Marketing Association2
Total GSE lending (net)
Estimate
1990
Net change
Outstandings
.. Obligations
New transactions
Net change
Outstandings
.. Obligations
New transactions
Net change
Outstandings
Obligations
New transactions
Net change
Outstandings
. ,
1991
2,676
2,764
1992
.
2,764
2,764
377
4,661
-97
4,564
215
215
5,098
23,016
5,606
28,622
6,164
34,786
471,313
440,845
89,984
855,504
385,461
383,206
77,979
933,483
386,078
383,192
81,358
1,014,841
Net change
Outstandings
.. Net change
Outstandings
6,221
38,257
80,231
400,632
3,982
42,239
54,330
454,962
4,379
46,618
49,060
504,022
Net change
Outstandings
Net change
Outstandings
.. Net change
Outstandings
1,104
12,777
-526
42,253
414
1,261
-578
12,199
-1,025
41,228
350
1,611
307
12,506
180
41,408
450
2,061
Net change
Outstandings
Net change
Outstandings
Net change
Outstandings
Net change
Outstandings
Net change
Outstandings
Net change
Outstandings
-27,270
117,007
1
8,135
18,052
18,052
45,112
329,586
123,339
967,960
2,656
5,000
-9,919
107,088
1
8,136
11,943
29,995
31,790
361,376
90,874
1,058,834
345
5,345
-3,431
103,657
1
8,137
29,995
30,266
391,642
81,212
1,140,046
445
5,790
... Net change
Outstandings
... Net change
Outstandings
-30
4,880
2,070
7,762
-30
4,850
1,358
9,120
-30
4,820
204
9,324
... Net change
Outstandings
... Net change
Outstandings
... Net change
Outstandings
Net change
Outstandings
... Net change
Outstandings
-4,559
23,404
2,676
2,764
-173
4,284
215
215
5,098
23,016
-1,409
21,995
-1,152
20,843
2,764
377
4,661
2,764
-97
4,564
215
5,606
28,622
215
6,164
34,786
..
Obligations
New transactions
Net change
Outstandings
-173
4,284
215
215
, ..
.
BORROWING
Student Loan Marketing Association2
Federal National Mortgage Association
Farm Credit System:
Banks for cooperatives
Farm credit banks
Farm Credit System Financial Assistance Corporation1
..
Federal Housing Finance Board:
Federal home loan banks
..
The Financing Corporation
...
Resolution Funding Corporation
Federal Home Loan Mortgage Corporation
Subtotal, borrowing (gross)
Less borrowing from other GSEs
Less borrowing from Federal sources:
Student Loan Marketing Association from FFB2
Less investment in Federal securities
Less borrowing for guaranteed loans held as direct loans by:
Federal National Mortgage Association
Federal home loan banks
Federal Home Loan Mortgage Corporation
Farm Credit System
Student Loan Marketing Association2
...
...
...
. ,
Part Two-267
VIII.A. R E C O G N I Z I N G A N D R E D U C I N G FEDERAL U N D E R W R I T I N G RISKS
Table A-14. LENDING AND BORROWING BY GOVERNMENT-SPONSORED
ENTERPRISES (GSEs)—Continued
(In millions of dollars)
Actual
Enterprise
Total GSE borrowing (net)
1 For
2 All
Net change
Outstandings
.
,
Estimate
1990
1991
115,386
896,635
84,627
981,262
1992
75,678
1,056,940
the purposes of this table FAC lending is assumed to equal borrowing. It is netted out under loans (or borrowing) between GSEs.
SLMA lending financed through the FFB has been counted in Table A-12 as direct loans. All SLMA loans are student loans guaranteed by the Federal
Government and therefore the remainder is counted as guaranteed loans in Table A-13 and this table.
VIILB. IDENTIFYING LONG-TERM
RETIREMENT OBLIGATIONS
HIGHLIGHTS
An increasingly large share of the budget
is devoted to retirement pensions and health
insurance for the elderly.
• In 1992 social security outlays will be
$288.6 billion, which is 19.9 percent of
total outlays, compared with 15.5 percent
in 1970. As a share of the budget, social
security outlays should be relatively stable
in the 1990s, but will move sharply higher,
when the "baby-boom" generation begins
to retire in the next century.
• Rapidly growing health care costs are a
threat to the long term solvency of Medicare. It is the fastest growing major program in the budget. Medicare spending
jumped from $6.6 billion in 1970 to $32
billion or 5.4 percent of Federal outlays
by 1980. In 1992, without reform it will
be $130.3 billion, which is 9.0 percent of
the budget.
• As the population ages, the demand for
medical care is likely to continue increasing since the elderly are the most intensive users of medical services. Under current mid-range assumptions, Medicare's
Hospital Insurance (HI) Trust Fund will
be insolvent by 2006.
• Medicare's Supplemental Medical Insurance Trust Fund (SMI), which pays for
outpatient care, does not face insolvency
since it is funded on a pay-as-you-go basis;
but if its steep growth rate continues, substantially greater contributions from general revenue will be needed to continue
its current level of services.
Aside from social security and Medicare, the
Federal Government's largest annuity programs are for its own civilian and military
retirees. Outlays for these programs will total
$64.2 billion in 1992.
• Legislation enacted in the mid-1980s required that expected pension costs be
charged to agencies as they accrue for new
civilian and all military employees. Prior
to that, employment costs were understated.
• Many nonmilitary employees hired before
the passage of this legislation are still covered under pension systems that only
partly account for accruing obligations.
The Government also offers health benefits for its retirees in addition to those
provided under medicare. This too is an
accruing obligation that is not now reflected in agency budgets. The Administration supports the principle of charging
agencies the full current cost of such accruing obligations. Doing so would provide
the agencies with information and incentives to control costs.
Enactment of the Omnibus Budget Reconciliation Act of 1990 (OBRA) was an important step toward constraining the growth of
Government spending and limiting the budget
deficit. The deficit will be lower in the future
than it would have been otherwise.
• The Act removed the receipts and outlays
of the two social security trust funds from
the calculation of the Federal deficit targets, and adopted the principle that future
social security tax and benefit changes
should not worsen the actuarial conditions
of the trust funds.
• These reforms promote the goal of the "Social Security Integrity and Debt Reduction
Plan" proposed in last year's Budget. They
are designed to channel future social security surpluses into added national saving
that can be used to increase capital formation and raise productivity.
• OBRA also improved the outlook for Medicare by constraining its costs and enhancing its receipts.
• The 1992 budget proposes to increase
Medicare efficiency through reforms that
constrain increases in payments for sePart Two-269
Part Two-270
THE BUDGET FOR FISCAL YEAR 1992
lected hospitals, physicians, and related
services.
• Medical liability costs have helped to fuel
the rapid growth in medical costs and
have encouraged the practice of defensive
or unnecessary medicine. The Administration will propose a package of liability and
quality of care reforms to address these
issues.
MEASURES OF ACTUARIAL DEFICIENCY
Actuaries use at least three different methods to determine whether an actuarial deficiency exists in an annuity program: accrued
to date, closed system, and open system. These
methods differ in the assumptions they make
about the annuity program's future income
and obligations.
Accrued to Date.—One method that is
widely used in the private sector computes a
program's deficiency as of the date of the calculation, assuming that it will incur no further
obligations and receive no future income. The
present value of benefits due to past and
present employees is calculated based solely
on their service to date. The result is then
compared to the present value of the program's
assets to see if the assets satisfy minimum
funding levels.
This method is appropriate for annuity programs that face the risk of immediate termination should a sponsoring business firm be
forced into bankruptcy. It is, however, less rel-
evant for Government plans, where the sponsor of the program can be assumed to continue
in existence indefinitely. A more appropriate
consideration for Government plans is the extent to which plan income will be sufficient
to meet the plan's commitments. To answer
this question requires a deficiency concept that
takes into account future as well as past income and obligations.
Closed System.—This method computes the
present value of all expected future benefits
due to current and past employees. Unlike the
first method, this adds the present value of
the benefits current employees will earn in
their remaining years before retirement to the
value of the benefits to which they are already
entitled in computing pension plan liabilities.
Similarly, it adds the present value of their
expected future contributions and those made
on their behalf to plan assets. The difference
between the present value of benefits and assets computed in this way is the actuarial defi-
Table B - l . ACTUARIAL DEFICIENCIES OF RETIREMENT ANNUITY
PROGRAMS1
(In billions of dollars)
Currently
Accrued
Social Security—OASDI
Medicare—HI
Railroad Retirement
Civil Service Retirement System
Federal Employees Retirement System
Military Retirement System
Other Retirement Systems2
na
na
409
-2
393
15
Closed
System
7,100
na
34
643
6
513
22
Open
System
1,244
312
na
na
na
na
na
na = Not available.
x The actuarial deficiencies shown here are not fully comparable; they differ in their underlying economic
assumptions. These differences do not affect the order of magnitude shown in the table.
2 These retirement programs include Coast Guard Military, Public Health Service Commissioned Corps, State
Department Foreign Service, and the Central Intelligence Agency Retirement and Disability System.
VIII.B.
IDENTIFYING LONG-TERM RETIREMENT OBLIGATIONS
ciency. Although this concept is broader than
the first, it too is a closed-system calculation
in that only current and past employees are
considered, even when there is certain to be
future enrollment in the program.
Open System.—Under this method, the
plan's liabilities equal the discounted present
value of all benefits due to past, present and
future workers. The difference between this
grand total of plan liabilities and the value
of the plan's assets, including the present
value of all expected future contributions to
the plan, is the actuarial deficiency.1
Magnitudes of Actuarial Deficiency.—
For social security, the deficiency is $7.1 trillion under a closed-system calculation and $1.2
trillion using the open-system approach. Both
calculations use the same economic and demographic assumptions. The lower estimate is
more meaningful since it takes account of all
prospective receipts and outlays over the next
75 years. The social security system is firmly
established and it is reasonable to assume that
it will cover future workers, as well as those
currently employed. According to the social security actuaries' mid-range projections, future
social security payroll taxes, the income tax
paid on some social security benefits, and the
interest earned by the trust fund assets will
cover most, although not all, of the cost of
future benefits. This is reflected in the opensystem calculation of the deficiency.
For medicare hospital insurance, the Treasury, in its most recent report, shows an actuarial deficiency of $312 billion as of 1989, calculated on an open-system basis. In this program, rising hospital costs and increasing
usage compound the effects of an aging population.
The actuaries for the Federal civilian and
military retirement programs report closedsystem calculations in their annual reports required by Public Law 95-595. For the large
Federal retirement programs, the open-system
^ t h o u g h conceptually distinct, the open-system calculation will
give an answer identical to the closed-system calculation if the benefits due to future employees are exactly balanced by expected future contributions either made by them or on their behalf. In this
case, the added liabilities due to future workers are exactly
matched by the asset value of their expected future contributions
to plan income. Nothing is added to the deficiency by taking their
claims and contributions into account.
Part Two-271
calculation is identical, in principle, to the
closed-system deficiency as discussed in the
footnote. Future employees will enter systems
in which the present value of their own contributions, plus those made on their behalf by
their agency, will exactly match the present
value of their future benefits.
Based on closed-system calculations, the
Civil Service Retirement System (CSRS) had
an actuarial deficiency of $643 billion as of
1989, while that of the military retirement
fund was $513 billion. If the CSRS system
were to begin to be fully funded for all future
service, the actuarial deficiency would be $100
billion less. The new retirement system for civilian employees, the Federal Employees Retirement System (FERS), had a small deficiency due to the transfer of some employees
from CSRS to FERS. These employees had previously accumulated some unfunded retirement benefits under the old system.
The actuarial gap in the military retirement
fund is attributable entirely to those employees
with military service before 1985. Pension
costs for military service since 1985 are paid
to the military retirement funds and are fully
recorded in the budget currently. The costs of
the partly unfunded pensions for older military
personnel are being gradually amortized
through 2043.
Two qualifications to the analysis above are
worth noting. First, even those annuity programs that are fully funded and with no actuarial discrepancy, are not necessarily adding
to national saving. Agency outlays for accruing
pension obligations are matched by offsetting
intragovernmental receipts to the trust funds,
so changes in recorded outlays have no effect
on the deficit. The deficit is neither larger nor
smaller whether or not the annuity programs
are fully funded. Yet if the Government is to
add to national saving, it must reduce its deficit.
Second, the Government will have to meet
future pension and medical care costs as they
occur, out of future resources, even for fully
funded programs. Funding the plans currently
gives a better idea of what these programs
cost, but it does nothing to reduce the future
burden of these obligations unless accompanied by an increase in saving.
Part Two-272
THE BUDGET FOR FISCAL YEAR 1992
PUBLIC ANNUITY AND HEALTH INSURANCE PROGRAMS
Government-sponsored funds help to protect
the public from the risks of old age and disability through social security. For the elderly,
it also insures against hospital expenses and
the costs of other medical services through
medicare. These programs are nearly universal
in their coverage. The Government has also
taken responsibility for preserving the railroad
retirement pension program, which operates
both as a substitute for social security and
as a private pension plan.
Social Security
Social security consists of Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI). Total spending on these two programs is estimated to be $288.6 billion in
1992. This is sharply higher than the $92.1
billion (1992 dollars) spent in 1970. The rising
trend in retirement costs is partly due to more
generous benefits. It also reflects the aging of
the Nation's population, the doubling of the
number of DI beneficiaries, and an increased
tendency for early retirement.2
At age 65, men can now look forward to
15 additional years of life; as recently as 1970,
they could only expect to live 13 more years.
Over the same period, life expectancy at 65
for women lengthened from 17 to 19 years.
Meanwhile, the proportion of men who retire
before reaching age 65 has nearly doubled. The
shift to earlier retirement increases the number collecting benefits while reducing the number paying taxes.
As in the past, long-term demographic and
economic changes will largely determine the
future financial condition of the social security
trust funds. Nearly 80 million Americans were
born during 1946-1964. These "baby-boomers"
are now entering their prime working years,
when their incomes will be at their highest.
While they work and pay taxes over the next
two decades, the social security trust funds
2 During the 1970s, DI benefit awards grew explosively; the number of beneficiaries increased from 2.7 million to 4.7 million and
the cost of the program quintupled, rising from $2.8 billion to $14.9
billion (in constant dollars). In response, Congress mandated new
evaluation procedures to screen beneficiaries in the early 1980s.
Subsequently, program participation declined slightly, but since
1984, the number of beneficiaries has consistently increased.
should grow dramatically. But beginning
around the year 2C10, the "baby-boomers" will
start to retire in large numbers and, as they
do, they will claim more of the funds' resources.
The social security actuaries regularly estimate receipts and outlays 75 years into the
future, based on alternative economic and
demographic assumptions. According to their
latest mid-range assumptions, the funds' tax
receipts are expected to exceed outlays from
now until the year 2018. Total fund receipts,
including interest, are expected to run ahead
of outlays for another decade so that the reserves in the trust funds peak around 2029.
Following that year, the funds are drawn
down. They are estimated to be exhausted by
the year 2043.
A separate review of the DI trust fund alone
would be less optimistic. Workers and employers pay 0.6 percent of taxable payroll to the
DI trust fund. On mid-range assumption, the
DI fund will become insolvent by 2020.
The long-run actuarial deficiency in the trust
funds and other indicators of their financial
status are highly sensitive to the particular
assumptions made in projecting future income
and outgo. The indicators could easily be much
more or much less favorable than they are
under the mid-range projections. In order to
evaluate the future financial status of the
trust funds, it is necessary to project population growth, the retirement age, and productivity. There is great uncertainty in each
of these areas. The following is a brief review
of some considerations that are helpful in evaluating these projections.
Population Growth.—The Social Security
Trustees' mid-range projections (known as alternative II-B) envisage a slow rate of population growth. Under these assumptions, the
population growth rate drops from 1.00 percent
a year in the 1980s to a negligible 0.03 percent
by the middle of the next century. This pronounced slowdown reflects low estimates for
both fertility and immigration and a limited
increase in life expectancy. Of these three, the
low birth rate has the largest effect on future
population growth.
VIII.B.
IDENTIFYING LONG-TERM RETIREMENT OBLIGATIONS
The Trustees' mid-range assumptions extend
forward the low birth rates of the 1970s and
1980s. Fertility is projected at 1.9 births per
woman, only slightly above the postwar low
of just 1.8 births per woman in the mid-1970s,
and well below the postwar peak of 3.7 births.
Fertility, however, has been on an upward
trend in recent years. In 1990, an estimated
420,000 more babies were born than assumed
in alternative II-B.
Economic factors could lead to even higher
future birth rates. A large birth cohort such
as the postwar baby-boom faces many problems due to crowding in the labor market,
schools, even within the family. By having
fewer children of their own, the baby-boomers
were able to raise each child's future prospects.
But these children, facing more favorable circumstances, will have less reason to limit their
own family size. Economists who study population dynamics believe that population growth
has cycled in the past for this reason, and
it could rebound again as the children of the
baby-boom begin to raise families of their own.
Medical advances have extended the time
women are able to bear children with an ensuing rise in births among women over 35. The
expanded availability of nonparental care arrangements, which give women more opportunity to combine motherhood with a career,
also favors a rise in the birth rate. Finally,
new procedures to increase the probability of
conception could boost fertility.
Immigration is estimated to be about
675,000 people per year. The II-B assumptions
project a constant rate of immigration near
this level for the next 75 years. That contributes to the projected slowdown in population
growth occurring in the next century. Immigration has been on a rising trend for decades,
and the new immigration law raises the limits
that were in place when the Trustees' assumptions were last revised.
Longevity also affects population growth.
When people live longer, the population is
larger. The II-B assumptions project a continued improvement in longevity, but less rapid
than in recent decades. The biotechnology revolution and lifestyle changes are reasons for
thinking that a faster rate of improvement is
possible. Unlike higher birth rates and more
immigration, increased longevity raises social
Part Two-273
security expenses and diminishes the balance
in the trust funds.
Retirement Age.—The Trustees' II-B assumptions project continuing declines in labor
force participation by the elderly in a straightforward extension of trends over the past few
decades. Longer lifespans, however, could encourage delayed retirement as workers stay on
the job longer in order to finance extra retirement years. It takes about 6 more months of
work to provide the same retirement cushion
when life expectancy increases by two years.
Improvements in health are also likely to accompany increases in longevity, and these
could permit some workers to keep their jobs
who now retire because of poor health.
The social security reforms of 1983 also may
have an effect. They increased the age at
which full benefits are available from 65 to
67 and reduced the early retirement benefit,
changes that will be phased in gradually over
the next quarter century. There is also a larger
credit for delayed retirement. These reforms
could contribute to an increase in the retirement age, but most estimates suggest they will
have only a modest effect.
Productivity.—Labor productivity is assumed to rise at an average rate of 1.65 percent per year over the 75-year forecast period.
Although this is well within the range of past
U.S. experience, it exceeds the average rate
of improvement over the past 20 years. From
1909 to 1989, productivity grew at an average
rate of 2 percent per year. Since the end of
1969, however, it has only grown by 1.2 percent per year.
The risk that slower productivity growth
poses to the trust funds would be reduced if
the projected social security surpluses were actually saved. One rough calculation suggests
that the extra investment this saving could
generate might increase the rate of business
capital formation by as much as three-quarters
of a percentage point per year over the next
20 years, thereby adding about one-quarter
percentage point to average productivity
growth.
To allow for such uncertainties, the Trustees'
report presents alternative assumptions bracketing the mid-range path. Alternative I is the
optimistic projection. It assumes a fertility rate
Part Two-274
THE BUDGET FOR FISCAL YEAR 1992
Table B-2. ALTERNATIVE INDICATORS OF SOLVENCY FOR OASDI
I
Trustees' Alternative Assumptions
Beneficiaries per 100 covered workers in:
2015
2040
2065
II-A
II-B
III
34
44
41
37
52
55
37
53
56
41
64
80
Income rate minus cost rate as a percent of taxable payroll in:
2015
2040
2065
2.50
0.53
1.24
1.12
-2.69
-3.42
0.64
-3.40
-4.16
-1.23
-7.99
-12.42
Actuarial deficiency ( - ) as a percent of taxable payroll:
25 years
50 years
75 years
3.40
2.11
1.76
2.58
0.69
-0.31
2.17
0.17
-0.91
0.77
-1.83
-3.87
1,834
2,151
2,557
1,331
656
-403
1,091
160
-1,174
353
-1,499
-4,219
Present value of actuarial deficiency (-) in billions of dollars:
25 years
50 years
75 years
of 2.2 births per woman, and that immigration
will be greater than in II-B. Longevity does
not improve as much in alternative I. Shorter
lifespans strengthen the trust funds, so it is
"optimistic" to assume that they increase less
than in II-B.
Alternative III is the pessimistic scenario.
The birth rate and immigration are lower than
in II-B while longevity improves more. Alternative II-A makes the same demographic assumptions as in II-B, but assumes a higher
path for productivity.
Table B-2 shows the effect of these alternatives on some measures of social security
solvency. The 75-year actuarial deficiency
swings from a present value surplus of $2.6
trillion to a deficit of $4.2 trillion as one goes
from the optimistic to the pessimistic alternative. The combined trust funds would be exhausted in 2023 under alternative III, in 2043
under II-B, and in 2056 under II-A. Under
the optimistic assumptions of alternative I, the
funds remain solvent throughout the 75-year
projection period.
The risks that the funds will eventually tip
into deficit appear to be somewhat greater
than the chance that they will always maintain a surplus, but a deficit is not a certainty.
Policies that promote thrift, capital formation,
and productivity growth reduce the chance of
a permanent shortfall.
Recent Changes in Social Security.—In
1985, social security was removed by law from
the Federal budget, but the surplus in the
trust funds continued to be counted toward
deficit estimates and calculations for purposes
of sequestration under the Gramm-RudmanHollings Act. The Budget Enforcement Act of
1990 removed the OASDI trust funds from the
future deficit targets as well. The Act also includes "fire wall" provisions intended to make
it difficult to spend the projected buildup of
reserves on higher benefits or lower social security taxes.
The "fire wall" is necessary protection if the
surpluses are to add to national saving, but
it is not sufficient. The growing balance in the
trust funds must be matched by an equal improvement in the consolidated budget deficit
beyond what would have otherwise occurred.
The real test is whether the consolidated Federal deficit is reduced relative to what it would
otherwise have been. Unless the consolidated
budget deficit declines in this way, the surpluses in the trust funds will not be truly
saved regardless of accounting conventions.
If the "fire wall" works and if the rest of
the budget is gradually brought into balance,
VIII.B.
IDENTIFYING LONG-TERM RETIREMENT OBLIGATIONS
the surpluses will be used to reduce publicly
held Federal debt, add to private capital formation, and increase real GNP. It is not possible to avoid the extra costs that are looming
in the future when the baby-boom generation
retires, but it is possible to prepare to meet
them by saving more now. OBRA is a step
in that direction.
The most significant change made in social
security by OBRA was to add over two million
State and local government employees not covered by separate retirement plans into social
security and medicare as of July 1, 1991.
Medicare
The long-term ability to finance health care
for the elderly is at risk, as indicated by the
actuarial deficiency in the Medicare HI Trust
Fund discussed in the previous section. An increasingly older population and rapidly growing health care costs place demands on the
Medicare trust funds that need to be addressed. Medicare costs have increased an average of 11.4 percent each year since 1980.
The budget proposes a number of modest policy changes to help bring costs under better
control.
The Federal Hospital Insurance (HI) Trust
Fund is financed primarily through a payroll
tax and interest earned on Trust Fund reserves. The 1.45 percent HI tax applies to both
employers and employees up to a limit of
$125,000 a year on taxable wages. During
1990, HI covered 30 million aged and 3 million
disabled enrollees with total outlays of $64.1
billion. Medicare's other trust fund is the Supplementary Medical Insurance (SMI) Trust
Fund. It pays for physician and outpatient care
and is financed 25 percent by enrollee premiums and 75 percent by general revenues.
During 1990, 32 million people were enrolled
in SMI and total outlays amounted to $43.0
billion.
Despite significant cost containment measures enacted in recent years, The 1990 Annual
Report of the Board of Trustees of the Hospital
Insurance Trust Fund states that the HI trust
fund will become insolvent in 2003 under intermediate economic assumptions. Health Care
Financing Administration (HCFA) actuaries
estimate that provisions of the 1990 Omnibus
Part Two-275
Budget Reconciliation Act may extend the life
of the HI trust fund by three years. Bringing
the HI trust fund into actuarial balance over
the next 25 years would require that income
be increased by 21 percent, outlays be reduced
by 27 percent, or some combination of the two.
Although the SMI fund does not risk insolvency, its rapid growth has caused outlays to
nearly double in the past five years—from
$22.7 billion in 1985 to $42.2 billion in 1990.
If the current rate of growth continues, a substantial increase in general revenue contributions will be needed. Under current
growth assumptions, general revenue contributions will need to double between 1990
and 1996, from $33.2 billion to $68.7 billion,
and premiums will also rise; but not as quickly, thus increasing slightly the Federal share
of Part B financing.
Spending on Medicare in 1992 will be $127.3
billion, 11.9 percent over 1991 spending levels.
In order to improve program efficiency, the
budget proposes to constrain increases in payments for selected hospital, physician, and related services. Even with these reforms, spending on hospital services (Medicare Part A) will
rise by $5.2 billion and spending on physician
and related services (Medicare Part B) will rise
by $5.2 billion in 1992.
Expanding Coordinated Care.—Coordinated care programs such as health maintenance organizations (HMOs) and preferred
provider organizations (PPOs) have shown
great promise in providing efficient high quality care at lower cost than traditional fee-forservice medicine. By contracting directly with
providers to offer integrated services, beneficiaries receive quality care at lower cost. The
President's budget proposes a new "point-ofservice" option for Medicare beneficiaries and
includes initiatives to expand enrollment in
HMOs.
More than one-quarter of all working Americans and their dependents receive coverage
through HMOs and PPOs. In staff and group
HMOs, a group of primary care and specialist
physicians provide the full range of care to
plan enrollees. PPOs typically contract with
a group of providers (physicians, hospitals,
clinical laboratories, etc.) who offer to care for
more enrollees at reduced prices. PPO enroll-
Part Two-276
ees, by sharing in the lower costs, have an
incentive to use network providers.
A recent development has been the introduction of point-of-service choice (POS) in coordinated care systems. A POS option permits enrollees to choose on a service-by-service basis
whether to receive care from a selected POS
provider or, alternately, from any other provider of their choice. The budget proposes to
create a POS option for Medicare beneficiaries.
The budget also contains new initiatives to
expand enrollment of Medicare beneficiaries in
HMOs. Program rules make it difficult for
some Medicare beneficiaries to enroll in
HMOs. Enrollment periods for newly-eligible
Medicare beneficiaries are limited and retiree
groups have only limited opportunities to enroll in HMOs. Legislation will be proposed to
allow Medicare HMOs, at their own option,
to enroll new beneficiaries on an open enrollment basis, and to serve retiree groups exclusively.
Improving Quality.—The budget continues
the Administration's efforts to improve the
quality of care for Medicare beneficiaries.
While the quality of health care in the United
States remains second to none, it has shortcomings. Hospitals and physicians lack effective systems for monitoring the quality of care,
so they do not receive early warning of possible
problems.
Last year, the Institute of Medicine (IOM)
completed a study on improving quality assurance in Medicare. It recommended that hospitals use data on patient outcomes (morbidity
and mortality) to monitor and improve quality.
The IOM also recommended that Medicare's
peer review organizations (PROs) shift their
emphasis to aiding hospitals improve quality.
Over the past several years, the Health Care
Financing Administration has been developing
a state-of-the-art monitoring system that could
realize the IOM's vision. Called the Uniform
Clinical Data Set (UCDS), it can be used to
track medical care outcomes. The UCDS will
allow users to account for differences in severity of illness through detailed clinical adjustments. With this refinement, outcomes data
can be used in a reliable manner to monitor
and compare quality. The system will be used
initially to guide external quality review by
THE BUDGET FOR FISCAL YEAR 1992
the PROs. Ideally, hospitals would establish
similar systems and take the initiative in quality improvement. Eventually, with real-time
reporting, computer-based expert systems
could identify problems before patients have
suffered harm.
Part A Program Changes.—Teaching hospitals receive "add-on" payments originally
meant to compensate for their higher costs
when compared to non-teaching hospitals.
Studies by the General Accounting Office
(GAO), the Inspector General, the Health Care
Financing Administration, and the Congressionally-established Prospective Payment Assessment Commission (ProPAC) all indicate
that the proper rate for the indirect medical
education (IME) add-on is less than the legislated rate. Payments are substantially higher
than average costs for serving Medicare patients. As a result, teaching hospitals have significantly higher Medicare profit margins than
any other category of hospital. Different approaches have been proposed to establish equitable rates, ranging from an immediate reduction to a multi-year phase-down.
Teaching hospitals' higher costs arise from
a mix of poorer and more severely ill patients.
Over time, these two factors have been increasingly accounted for through other more
explicit payment mechanisms. Recent expansions in the disproportionate share payment
(DSH) now provide significant additional resources to hospitals whose patients are disproportionately poor. Medicare's case-specific
payments make up for most of the severityof-illness differences. As a result, the IME factor is too high. A recent ProPac analysis suggests that a rate of 3.2 percent—compared to
the present rate of 7.7 percent—is appropriate.
Even this analysis, conducted prior to the significant OBRA expansions of the DSH payment, likely overstates the appropriate adjustment. In its 1990 report, ProPAC recommended that a five-year phase-down of the
rate occur only after a careful review of the
financial condition of teaching hospitals.
The budget adopts the five-year phase-down
with a 1996 rate of 3.2 percent. Because of
OBRA DSH expansions, an immediate reduction from 7.7 percent to 4.4 percent is proposed
for 1992. The budget also proposes to substitute a hospital's average daily census of pa-
VIII.B.
IDENTIFYING LONG-TERM RETIREMENT OBLIGATIONS
tients for total beds in the formula used to
compute the IME adjustment. This should
limit Medicare's exposure to any inappropriate
manipulation of the IME formula.
Other program changes to put providers on
an equal footing will move the annual hospital
payment update to January 1st and eliminate
the guaranteed payment of return on equity
for proprietary skilled nursing facilities
(SNFs). In the past several years, Congress
has delayed the yearly update in hospital fees.
Moving the hospital update to January 1st is
consistent with this practice and will put hospitals on the same update cycle used for most
other providers. Proprietary SNFs are the only
class of provider for which the return on equity
is guaranteed by Medicare; elimination of
these payments puts proprietary SNFs on the
same footing as all other facilities.
Finally, the budget proposes to change the
method used for computing the limits on home
health costs. Currently, Medicare caps only the
total payment to home health agencies (HHAs)
for all HHA services. In billing Medicare,
HHAs can offset costs exceeding the limit for
one type of visit with amounts below the limit
for other types of visits. This approach creates
incentives for inefficient use of the range of
covered visits. In a recent study, GAO determined that setting type-of-visit, or per-discipline cost limits would have little adverse
effect on home health agencies or beneficiaries.
The budget proposes restructuring HHA payments caps in this way.
Part B Program Changes.—One set of
proposals will encourage hospital outpatient
departments (OPDs) to become more efficient
while helping to establish a level playing field
for OPDs, ambulatory surgery centers (ASCs),
and physician offices. These proposals would
also strengthen the incentives for appropriate
use of clinical laboratory tests at little or no
net cost to beneficiaries. These proposals address four problems:
• Most OPD services are still paid partly
on a cost basis more than seven years
after inflationary cost-based payments for
inpatient hospital services ended. Partly
as a result, outlays for OPDs have increased rapidly—by almost 17 percent a
year during the 1980s.
Part Two-277
• Cost-based payment perpetuates an uneven playing field. Payment rates and the
method used to determine the rates vary
widely for ambulatory surgery, diagnostic
tests and x-rays depending on where the
service is provided. ASCs and physician
offices are paid on a prospective fee schedule basis. OPDs are paid based on a blend
of prospective rates and costs. This hodgepodge reflects the accidents of history,
rather than any well considered policy. It
obviously makes no sense to pay sharply
differing amounts for the same service.
• Medicare beneficiaries pay substantially
more in coinsurance for the same service
provided in an OPD than in an ASC or
physician's office. Coinsurance payments
are set equal to 20 percent of the hospital's billed charge instead of 20 percent
of the Medicare payment rate. Because
hospital charges have been increasing rapidly, coinsurance for OPD services are substantially higher as a result.
• Coinsurance does not apply to clinical lab
tests even though there is a 20 percent
coinsurance on all other Part B services.
As a result, physicians and beneficiaries
have less reason to be mindful of the cost
of lab tests. Perhaps for this reason, outlays for clinical lab tests have increased
by more than 20 percent a year since 1985
when coinsurance for tests was eliminated.
To address these problems, the budget proposes a uniform set of payment rates in all
settings for surgery, diagnostic tests, and xrays. Rates would be set prospectively to encourage efficiency. Coinsurance for OPDs
would be based on the new prospective rates,
reducing out-of-pocket costs for care provided
in this setting. This, in turn, would permit
restoration of coinsurance for clinical lab tests
at little or no net cost to beneficiaries.
Because of the major changes in the scheduled January 1992 implementation of Medicare's new fee schedule for physician services,
the budget contains only a limited number of
proposals affecting physician payment.
• Currently, Medicare pays substantially
more for anesthesia provided by a nurse/
physician team than for anesthesia provided directly by a physician. This makes
Part Two-278
little sense because cost-effective delivery
of care is one of the main potential advantages from employing non-physician practitioners. The budget would correct this
problem by limiting payment for medically
directed nurse anesthetists to the prior
budget neutral rates and reducing payment for the supervising physicians to
keep the total payment for the team within limits.
• A similar policy would limit payment for
surgeons, when the surgeon elects to use
an assistant. Use of surgical assistants is
often a matter of convenience and personal
preference rather than a matter of medical
necessity. A number of studies have documented wide and unexplained variations
in the use of surgical assistants.
• A technical correction to the formula for
the Medicare Volume Performance Standard (MVPS) is needed for 1991. This reduces the MVPS for 1991 to 2 percentage
points below 1991 baseline expenditure
growth, as apparently intended by the
Congress.
Other changes in physician payment are also
included in the budget. Duplicate fees for laboratory specimen handling will be eliminated.
Resource-cost based fee schedule rates for the
technical component of radiology and diagnostic tests will be implemented.
Finally, the budget contains a number of
other miscellaneous changes. These include a
number of revisions of payment rules for durable medical equipment (DME). One of these
changes would reduce payment for home oxygen therapy by five percent to reflect the recent trend toward increased use of oxygen concentrators and away from oxygen tanks which
are more costly.
Standardizing
Medicare
Secondary
Payer Provisions.—The budget proposes to
amend the Medicare secondary payer (MSP)
provisions for the disabled and for end stage
renal disease (ESRD) beneficiaries by making
Medicare secondary to those employer group
health plans covering at least one employer
with 20 or more employees. Standardizing the
group health plan size for the disabled and
ESRD
beneficiaries
would
simplify
administration of group health plans and
THE BUDGET FOR FISCAL YEAR 1992
shield small employers from the potentially
high costs of providing health care coverage
for ESRD beneficiaries without cost to beneficiaries.
To ensure the proper sequence of payment
for health care, the budget includes $5 million
to establish a Clearinghouse for Third Party
Liability, located centrally in the Department
of Health and Human Services. The Clearinghouse would identify beneficiaries of Federal
health programs who are simultaneously enrolled in employment-based health care plans.
This information would be available to fully
Federally funded health programs, like Medicare, and, on a mutual basis, to administrators
of Federally-assisted health coverage like Medicaid. Employment-based health insurance
would be identified by having employers report
basic health insurance information to the Federal government on the employees' Wage and
Tax Statement (W-2). The Social Security Administration which receives a copy of the statement, would process the data for the clearinghouse. Beneficiary health insurance data
would be searched before Federal funds are
used and the health care bill would be forwarded to be paid by the appropriate health
insurer.
Medical Professional Liability Reforms.—From 1984 to 1988 medical malpractice premiums rose from approximately
$1.9 billion to $4.2 billion. This has led some
physicians to alter their behavior in an effort
to avoid liability—often choosing to discontinue
high-risk practices or to engage in unnecessary
defensive medicine. Growing liability costs and
unnecessary defensive medicine contribute to
high health care costs that are a problem for
everyone.
The Administration's reform package will include proposals that encourage States to:
• Cap the amount of allowable non-economic
damages. In the 26 States that have limited total damages, malpractice rates have
declined significantly;
• Eliminate joint and several liability for
noneconomic damages;
• Eliminate the collateral source rule that
allows for double recovery;
VIII.B. IDENTIFYING LONG-TERM RETIREMENT OBLIGATIONS
• Require structured payments for malpractice awards, as opposed to lump sum
payments;
• Promote pretrial alternative dispute resolution, including mediation and pretrial
screening panels, to encourage reasonable
settlements;
• Implement procedures to enhance the
quality of care.
Additionally, at the Federal level the Administration will propose to apply these tort reforms to Federal courts; to begin a pilot program in the Federal Employees Health Benefits Program that offers alternative dispute
resolution; and to improve the quality of medical care through enhanced effectiveness research and improved peer review.
To avoid preempting State laws and to encourage States to adopt liability reforms within
a reasonable three-year time period, the Administration will propose to initiate, beginning
in 1995, budget neutral incentive pools in Medicare and Medicaid.
Under the proposal, the Department of
Health and Human Services would pool:
• A portion of the annual increase (1 percent
of total payments) in Medicare prospective
payments for hospitals—approximately
$800 million in 1995;
• A portion (2 percent) of the State Medicaid
match for staff salaries and expenses.
State match rates average 53 percent.
This pool would amount to approximately
$90 million in 1995. The proposal does not
affect Medicaid provider reimbursement.
States that adopt a requisite number of reforms would share in the pool. Those States
would receive enhanced Medicaid administrative match rates and their hospitals would receive supplemental payments. This structure
provides incentives for the States to quickly
adopt reforms—the States that act first will
receive a reward, as will the State's hospitals.
Railroad Retirement Board
With three retirees for every rail employee—
the exact opposite of social security's ratio—
the rail pension system stands on shaky
ground. Between 1945 and 1980, the number
Part Two-279
of employees fell by 68 percent. In the last
decade, rail employment plummeted an additional 42 percent. This trend is expected to
persist as railroads discover technologies that
reduce operating and labor costs. Declining
employment, past under-funding by the rail
sector, and inadequate financing plans have
taken their toll on the rail pension system
which has an unfunded liability of $34 billion.
The Railroad Retirement Board's (RRB) chronic financial shakiness persists despite a number of Federal subsidies. The RRB has been
rescued from insolvency by the Congress five
times in the last 16 years.
The major change enacted by OBRA that
affects the RRB was an additional $384 million
Federal subsidy to the rail pension funds for
fiscal years 1991 and 1992. When the RRB
was on the verge of insolvency in 1983, the
pension system was allowed temporarily to
keep Federal income taxes on private pension
benefits for five years, or until it had received
$877 million, whichever came first. This temporary subsidy was repeatedly extended up
through October 1992. The Administration
strongly opposed each of these extensions
which, when added to other Federal subsidies,
could exceed $3 billion by the year 2000.
The Administration concurs with the Railroad Retirement Reform Commission's recommendation that rail workers and their dependents be entitled to the same social security benefits as those who are covered by the
Social Security Act. Legislation to ensure that
rail families receive basic social security benefits, to which some are not now entitled as
a result of exclusions in the Railroad Retirement Act, will be transmitted to the Congress.
This proposal is discussed in Chapter V.C.
"Distributing Federal Benefits More Fairly."
Overall Conclusion
Each of the programs reviewed in this section faces risks. The Railroad Retirement program has the most immediate problem. As currently structured, it would be unable to meet
its current obligations without Federal assistance. Neither Medicare nor social security is
in immediate danger of insolvency. Rising
medical costs and an aging population will deplete Medicare's Hospital Insurance trust fund
within 16 years according to current projec-
Part Two-280
tions unless further action is taken. Social security is in the least danger. But one component of social security, the disability insurance
THE BUDGET FOR FISCAL YEAR 1992
trust fund, is projected to run out of money
in 30 years.
FEDERAL EMPLOYEE RETIREMENT AND HEALTH
In the 1980s, both civil service and military
retirement were changed. The new programs
require full funding for accruing retirement
benefits due newly hired civilian employees
and all military employees. There still exists,
however, a large unfunded liability for previously hired employees. Furthermore, agencies are not charged for the Government's accruing health care costs for any of its future
retirees.
This year, the Office of Management and
Budget will study the possibility of recording
in the budget all currently accruing pension
program and retiree health care costs. The
purpose of this reform would be to improve
management incentives and better inform Congress and the executive about budget tradeoffs.
Civilian Retirement and Disability
Annuities
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 1992 are estimated at $35.0 billion.
The fund operates two distinct civilian pension
systems. The Civil Service Retirement System
(CSRS) includes civilian employees who were
hired before 1984 and chose not to transfer
into the new Federal Employee Retirement
System (FERS). The new system covers employees hired since 1984, plus any previous
hires who chose to transfer. The old system
will gradually be phased out of existence, but
the phase-out may take a century to complete.
The income, outgo and assets of both systems
are commingled.
Under CSRS, employees and their agencies
each pay an amount equal to 7 percent of the
employee's salary toward the accruing cost of
future retirement benefits. The total actuarial
cost is estimated at about 28 percent of payroll, so these contributions finance only half
of the total cost. That is why the actuarial
deficiency of CSRS under a closed-system calculation, including estimated benefits based on
future service of current CSRS employees—
$643 billion—greatly exceeds the deficiency
based on benefits earned to date—$409 billion.
FERS, by contrast, charges the full accrual
cost, not just part, and the agency contribution
is reflected in agency budgets.
OBRA eliminated the 50/50 lump-sum option
for the return of retirees' contributions for all
employees retiring after November 30, 1990,
except those who are involuntarily separated
or critically ill. A one-year extension is allowed
for employees mobilized as part of Desert
Shield. OBRA requires the Postal Service to
pay the COLAs of post-1971 annuitants, including partial reimbursement to the Federal
Government for COLA liabilities already paid.
The Budget proposes full reimbursement for
the past COLAs of these annuitants.
Military Retirement and Disability
Annuities
Military service pensions were financed before 1985 from annual general fund appropriations. Public Law 98-94 established fully funded accrual accounting for military retirement
starting in 1985. This includes new service
from employees hired before 1985, as well as
new hires. Under this law, the Defense Department pays the normal cost of the system
and the general fund makes payments from
general revenues to amortize the unfunded liability, estimated at $591 billion in 1992 for
pre-1985 service.
The Military Retirement and Disability
Fund was created as part of the change in
1985 to finance pensions and disability payments for career retirees, their survivors and
VIII.B.
IDENTIFYING LONG-TERM RETIREMENT OBLIGATIONS
dependents. The fund has three major income
sources: (1) The Board of Actuaries for the
fund determines what percentage of basic pay
is necessary to fund fully all future benefits
resulting from current military service. This
percentage is charged to the payroll of the Defense Department (or other employing agency)
and paid to the fund. Total charges to agencies
were $16.3 billion in 1990 and are projected
to decline to $16.2 billion in 1992 as the size
of the military force declines. (2) The general
fund makes an annual payment to the fund
of an amount adequate to pay off the unfunded
liabilities by 2043 for pension rights earned
before the fund was established. This amount
was $10.6 billion in 1990. (3) All balances in
excess of current cash requirements are invested in Treasury securities which earn interest.
The fund's income greatly exceeds disbursements for current retirees ($12 billion in 1990),
but the surplus will erode as the proportion
of retirees increases. Actuarial projections
show the ratio of retirees to military personnel
rising from 68 percent in 1992 to 88 percent
in 2030.
Charging the Defense Department for current accruals rather than current cash pension
benefits results in improved cost accounting
and more accurate trade-offs between military
personnel costs and other types of expenditures. In 1992, as noted, accrued costs will
total $16.2 billion. With the appropriate accounting, managers must consider full personnel costs when making resource decisions, and
thus be encouraged to employ resources efficiently. The accrual system's incentives have
also induced Congress to reform military pensions since immediate accrual savings result
from benefit reductions.
The Administration is also considering a proposed change to the current approach used for
computing military retirement accruals. This
change would allow the accruals to reflect actual personnel retention, pay and interest rate
experience more quickly and accurately. Separate accrual rates would be developed for officer and enlisted personnel in each of the Services. This will improve the estimates of Defense retirement accrual costs and will increase incentives for efficient personnel management. To allow sufficient time for appro-
Part Two-281
priate study of these accrual changes, the
budget shows the expected effect beginning in
1994.
Other Annuity Programs
Over 90 percent of all Federal civil and military career people belong to one of the major
pension programs discussed above. There are,
however, some smaller pension plans for specialized groups of employees, such as the foreign service, Coast Guard military personnel,
and the Public Health Service commissioned
officers. Some plans are fully funded, while
others remain on a pay-as-you-go basis.
The budget proposes again this year that
the Public Health Service Commissioned Officers Retirement Fund be converted to an accrual-based accounting system. The proposed
change would not affect outlays or benefits.
It would be desirable for all of the smaller
pension programs to be converted to an accrual
basis. As indicated earlier in this section, this
year the Office and Management and Budget
will be studying the feasibility of doing so.
Health Care for Retirees
Federal civilian retirees can continue to enroll in the health insurance programs to which
current employees belong, while military retirees can continue to use military medical facilities. Although agencies are charged the full
accrual value of new employees' retirement annuities, the costs for Federal retirees' health
care are not charged to agencies as they accrue. Thus, agencies are charged less than the
full cost of employee pay and benefits, and
consequently they have an incentive to use
more personnel in their allocation of budget
resources than is fully optimal. Although this
accounting practice has also been standard in
the private sector, new accounting rules announced by the Financial Accounting Standards Board (FASB) will require firms to record
these accruing liabilities against current income.
Most Federal civilian retirees purchase
health insurance through the Federal Employees Health Benefits Program (FEHBP). The
Government and insured retirees each pay
part of the premiums. An appropriation to the
Office of Personnel Management pays the Gov-
Part Two-282
ernment premium share for retirees. The Postal Service makes a contribution toward the
cost of its retirees' current and past premiums.
Other agencies make no payment for the cost
of their retirees' health coverage.
Rising health care costs and an increasing
number of Federal annuitants have caused expenditures for retiree health benefits to increase over time. Estimated outlays for Federal annuitants' health benefits in 1992 are
$3.6 billion.
A rough estimate of the present value of
civilian retiree health benefits based on service
to date is approximately $100 billion to $130
billion. On a closed-system basis, which includes benefits attributable to future service,
the present value of retiree health benefits is
estimated to be approximately $125 billion to
$185 billion. These estimates are only crude
approximations, based on the method in the
proposed FASB requirements for disclosure of
post-retirement health care liabilities for private business. These upper range and lower
range estimates reflect a difference of two percentage points in the assumed trend in health
care expenditures. Since there is no funding
for this program, an actuarial deficiency exists
equal to the present value of benefits.
Military retirees are entitled to essentially
free health care in military medical facilities
if the facility has the capability to provide the
needed care. Until they reach the age of 65,
military retirees are also entitled to health
care financed by the Civilian Health and Medical Program of the Uniformed Services
(CHAMPUS). No premium is charged for
CHAMPUS financed care, but there are
deductibles and a 25 percent co-payment requirement. After they reach 65 years of age,
military retirees are entitled to care financed
by medicare.
Department of Defense costs for retiree
health care consist of the costs of building,
THE BUDGET FOR FISCAL YEAR 1992
equipping, staffing, operating and maintaining
the military medical treatment facilities and
the costs of claims paid by CHAMPUS and
the administration of CHAMPUS. The costs
of the military health care program, including
health services provided to retirees, are funded
annually by direct appropriations in the year
the services are rendered (or, in the case of
CHAMPUS, billed). The accruing costs for future health care due current employees when
they retire is not now being recorded in the
budget.
In order to provide a better focus on military
retiree health care costs, the Defense Department is studying a proposal to fund the costs
of health care provided to retirees, including
the costs of CHAMPUS, on an actuarial basis.
This change would help make the total costs
of current force sizing decisions explicit when
those decisions are made. At present, the Defense Department does not have the capability
to determine the actual cost of providing
health care in military medical facilities to retirees. Broad average cost estimates are used
to estimate the cost of care provided to retirees.
The proposal currently under review would
deposit the costs of health care for future military retirees, estimated on an actuarial basis,
into a trust fund from which actual in-house
and CHAMPUS costs of those retirees would
be paid. This is similar to the current method
of budgeting for military retired pay. There
would be a period of approximately 40 to 65
years before health care costs for current retirees are no longer included in the budget authority requests of the Department of Defense.
Day-to-day management of medical costs
would not be affected by the change being
studied, nor would total budget outlays in any
year be affected. What would change is the
inclusion of cost in the program's budget when
the decision to incur the cost is actually made,
rather than years later.
VIII.C.
ACCOUNTING FOR FEDERAL
BORROWING AND DEBT
Debt is the most explicit and legally binding
obligation of the Federal Government. At the
end of 1990 the Government owed $2,410 billion of principal to the people who had loaned
it the money to pay for past deficits. The gross
Federal debt, including the amount held by
trust funds and other Government accounts,
was $3,206 billion. This year the Government
is estimated to pay about $216 billion of interest to the public on its debt. The total interest
on gross Federal debt is about $286 billion,
including $70 billion paid to trust funds.
The present deficit is continuing to increase
the amount of debt. However, the spending reductions and tax increases in the Omnibus
Budget Reconciliation Act of 1990, when combined with the present budget proposals,
should make it possible to restore the consolidated Federal budget to balance by 1996. The
reduction in the deficit and borrowing will be
accelerated as soon as the economy recovers
from its current slowdown and the Government ceases to incur large outlays to fund the
costs of resolving insolvent thrift institutions
and banks.
TRENDS IN FEDERAL DEBT
Federal debt held by the public has more
than tripled since 1980, as shown in table C - l .
Its growth was particularly rapid through
1986, increasing at an annual rate of 16 percent. The rate of increase was nearly cut in
half from 1986 to 1990, and a further sharp
deceleration is projected after 1992.
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 borrowing heavily to
buy homes and consumer durables, and with
businesses borrowing heavily to buy plant and
equipment, Federal debt also decreased almost
every year as a percentage of total credit market debt.
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 ratios of debt
to GNP and to total credit market debt stopped
declining by the middle of the decade.
The growth of Federal debt held by the public accelerated during the 1980s. Budget deficits were high. With inflation successfully reduced, the large growth in nominal debt meant
a large growth in real debt as well. The ratio
of Federal debt to GNP rose from 27 percent
in 1980 to 43 percent in 1987 and then leveled
off through 1989. This was still well below its
ratio from World War II to the beginning of
the 1960s. The ratio of Federal debt to total
credit market debt also increased up to 1986,
though to a lesser extent, before leveling off.
The Federal deficit increased in 1990 for reasons that are largely transitory. Sizeable outlays were needed to fund the costs of resolving
insolvent thrift institutions and banks, partly
in order to acquire assets that will be sold
in later years. The economic slowdown automatically decreased the growth of receipts by
reducing incomes below what they otherwise
would have been. Federal borrowing is estimated to increase still more in 1991, due to
the downturn in the economy and additional
outlays to resolve thrift institutions and banks,
and to be nearly as high in 1992 despite a
resumption of strong economic growth.
By 1993, however, the need for further new
disbursements to resolve insolvent thrift institutions and banks should be substantially diminished; and the proceeds from selling assets
acquired in previous years should rise. At the
same time, the deficit should be improved by
the continuing effects of economic expansion
and of the spending constraints and other policies put in place by the Omnibus Budget RecPart Two-283
Part Two-284
T H E B U D G E T F O R FISCAL Y E A R 1992
Table C - l . TRENDS IN FEDERAL DEBT HELD BY THE PUBLIC
(Dollar amounts in billions)
Debt held by the public
Current
dollars
Constant
1982
dollars1
Debt held by the public as
a percent of:
Credit
market
debt 2
GNP
Interest on
debt held by
the public
as a percent
of total
outlays3
1950
1955
1960
1965
1970
1975
219.0
226.6
236.8
260.8
283.2
394.7
921.0
839.0
761.3
772.4
682.7
686.2
82.1
58.6
46.7
38.8
28.6
25.9
55.3
43.3
33.7
27.0
20.7
18.4
11.4
7.6
8.5
8.1
7.9
7.5
1980
1981
1982
1983
1984
709.3
784.8
919.2
1,131.0
1,300.0
837.0
841.9
919.2
1,085.1
1,201.5
26.6
26.3
29.3
34.0
35.3
18.7
18.8
20.2
22.4
22.7
10.6
12.0
13.6
13.8
15.7
1985
1986
1987
1988
1989
1,499.4
1,736.2
1,888.1
2,050.3
2,190.3
1,344.4
1,516.2
1,599.6
1,685.8
1,728.2
37.9
41.5
42.7
42.9
42.7
23.2
23.6
23.1
23.1
22.8
16.2
16.1
16.0
16.2
16.5
2,410.4
2,717.6
2,995.4
3,200.0
3,261.9
1,828.6
1,974.7
2,090.9
2,153.9
2,119.3
44.6
48.4
50.0
49.8
47.4
23.4
estimate
estimate
estimate
estimate
16.2
15.3
15.7
16.1
16.6
1995 estimate
1996 estimate
3,267.3
3,250.7
2,051.1
1,973.4
44.5
41.6
1990
1991
1992
1993
1994
...
15.8
14.6
*Debt in current dollars deflated by the GNP deflator for the fiscal year with FY 1982 = 100.
Federal Reserve Board flow-of-funds accounts. Total credit market debt owed by domestic nonfinancial sectors, modified
to be consistent with budget concepts for the measurement of Federal debt. Projections not available.
3 Interest on debt held by the public is estimated as the interest on the public debt less the "interest received by trust funds"
(subfunction 901 less subfunctions 902 and 903). It does not include the comparatively small amount of interest on agency debt or
the offsets for other interest received by Government accounts.
2 Source:
onciliation Act of 1990. By 1996, the Government is estimated to have a small surplus on
a consolidated basis. The effect of cyclical
forces and deposit insurance on the pattern
of deficit reduction is analyzed further in
Chapter III, "Economic Assumptions and Sensitivities."
Federal borrowing is therefore estimated to
decrease considerably beginning in 1993 and
to turn into a small repayment of debt in 1996.
Debt held by the public is estimated to decline
from 50 percent of GNP in 1992 and 1993
to 42 percent in 1996. Interest on the debt
held by the public is estimated to be a smaller
drain on the budget, accounting for 14.6 percent of total outlays by 1996.
The net effect of Federal borrowing on the
economy depends partly on how the Government uses the borrowed funds. The outlays to
resolve insolvent thrift institutions and banks
are mostly paid to other financial institutions,
which largely use these funds to make loans
and buy securities. The Federal demand for
funds from the credit market to finance these
outlays is thus offset by an equal supply of
funds to the credit market. Because of the offsetting transactions, there is no upward pressure on the average level of interest rates, and
the Federal borrowing does not reduce private
investment. In other words, Federal borrowing
for this purpose does not divert national saving
from other, potentially more productive uses.
Federal borrowing or taxation to pay interest
VIII.C.
ACCOUNTING FOR FEDERAL BORROWING AND DEBT
on this debt, however, does have the normal
effects of borrowing or taxation.
Federal borrowing could also be used to
some extent to finance additional investment
with a high rate of return, either tangible or
intangible. If that occurred, the combination
of more debt and more capital would be productive. It is impossible to attribute specific
outlays to the borrowing except in special
cases. The funds from borrowing and general
tax receipts are mixed together. However, the
data do not reveal that any upsurge in Federal
investment has accompanied the upsurge in
Federal borrowing. Investment rose in absolute
terms but was about the same proportion of
total Federal outlays at the beginning of the
1990s as at the beginning of the 1980s; and
investment outlays, while significant, were a
modest proportion of total outlays.
Thus the above-normal growth in Federal
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 reduced. Although there
is reason for this concern, much of the present
rise in borrowing is transitory, caused by the
automatic effects of the economic slowdown
and the costs of resolving insolvent thrift institutions and banks. Sound policies based on the
Omnibus Budget Reconciliation Act of 1990
can eliminate the consolidated deficit by 1996
and ultimately balance the budget exclusive
of social security. This will reduce the drain
of Federal borrowing on national saving and
enhance productivity, which, in turn, will
make manageable the future interest on the
Federal debt and the burden of social security
expenditures in the next century.
DEBT HELD BY THE PUBLIC AND
GROSS FEDERAL DEBT
The Federal Government issues debt for two
principal purposes. First, as discussed in the
previous section, it borrows from the public
in order to finance the Federal deficit. Second,
it issues debt to Government accounts, primarily trust funds, that accumulate surpluses.
By law, most trust fund surpluses must be
invested in Federal securities. The gross Federal debt is thus defined to consist of both
the debt held by the public and the debt held
Part Two-285
by Government accounts. Nearly all the Federal debt has been issued by the Treasury and
is formally called "public debt," "but a small
portion has been issued by other Government
agencies and is called "agency debt."1
Borrowing from the public, whether by the
Treasury or some other Federal agency, has
a significant impact on the economy. Borrowing from the public is normally a good approximation to Federal dissaving, although, as discussed above, that is not the case when the
borrowing is used to fund the cost of resolving
insolvent thrift institutions and banks. Federal
dissaving, even if used productively for additional investment, has to be financed by the
saving of households and businesses, the State
and local sector, or the rest of the world.2 Borrowing from the public affects the volume of
securities sold in the credit market, the size
and composition of assets held by the private
sector, and the perceived wealth of the public.
And it affects the amount of taxes required
to pay interest outlays to the public. Borrowing
from the public is therefore an important concern of Federal fiscal policy.
Issuing debt securities to Government accounts is an essential element in accounting
for the operation of these funds. The balances
of debt represent the cumulative surpluses of
these funds due to the excess of their tax receipts and other collections compared to their
spending. These balances can be used in later
years to finance future payments to the public.
The interest on this debt compensates these
funds—and the members of the public who pay
earmarked taxes or user fees into these
funds—for spending some of their income at
a later time than when they receive it. Public
policy may deliberately run surpluses and accumulate debt in trust funds and other Government accounts in order to finance future
spending or to measure the accruing cost of
x The term "agency debt" is defined more narrowly in the budget
than in the securities market, where it includes not only the debt
of the Federal agencies listed in table C-3 but also the debt of the
Government-sponsored enterprises listed in table A-14 of Chapter
VIII.A and certain Government-guaranteed securities.
2 The Federal sector of the national income and product accounts
provides a better measure of the deficit for analyzing Federal dissaving than does the budget deficit or Federal borrowing from the
public. The Federal sector and its differences from the budget are
discussed in Chapter XVI. Federal expenditures for tangible and
intangible capital are not counted as saving in the national income
and product accounts and hence in this discussion.
Part Two-286
employee retirement plans, as it is doing now
with social security and certain other funds.
However, the issuance of debt to Government accounts does not have any of the economic effects of borrowing from the public. It
is an internal transaction between two accounts, both within the Government itself. It
does not represent either current transactions
of the Government with the public or an estimated amount of future transactions with the
public. If the account conducts a retirement
program, it does not represent the actuarial
liability or an unfunded actuarial liability.
(The future transactions of the major Federal
retirement programs, which own about fourfifths of the debt held by Government accounts, are important in their own right and
are discussed in Chapter VIII.B, "Identifying
Long-Term Retirement Obligations.") Debt
held by the public is therefore a better concept
than gross Federal debt for analyzing the effect of the budget on the economy.
Table C-2 summarizes Federal borrowing
and debt from 1990 through 1996. This table
is supplemented for earlier years by the data
in Part Seven, "Historical Tables," tables
7.1-7.3. In 1990 the borrowing from the public
was $220.1 billion, and Federal debt held by
the public increased to $2,410.4 billion. The
issuance of debt to Government accounts was
$118.7 billion, and gross Federal debt increased to $3,206.3 billion. Borrowing is estimated to increase to $307.2 billion in 1991,
decline moderately to $277.8 billion in 1992,
and then decline rapidly and turn into a $16.7
billion repayment of debt in 1996.
Borrowing from the public depends both on
economic conditions and on the Federal Government's expenditure programs and tax laws.
The sensitivity of the budget to economic conditions is analyzed in Chapter III.
MEASUREMENT OF BORROWING AND
DEBT
Debt held by the public was formerly measured as the par value (or face value) of the
security, which is the principal amount due
at maturity. The only exception was savings
bonds. However, most Treasury securities are
sold at a discount from par, and some are sold
at a premium. If Treasury sells a bill with
THE BUDGET FOR FISCAL YEAR 1992
a $10,000 par value at a price of $9,300, it
raises $9,300 of cash and finances $9,300 of
the deficit. For both economic and budgetary
analysis, it is more meaningful to say that the
Government has borrowed $9,300 than to say
it has borrowed $10,000.
The budget recently adopted the accrual
method of measuring almost all Treasury debt
held by the public.3 At the time of sale, the
accrual value equals the sales price. Subsequently, the accrual value equals the sales
price plus the amount of the discount that has
been amortized up to that time. In equivalent
terms, the accrual value equals the par value
less the unamortized discount. (For a security
sold at a premium, the definition of accrual
value is symmetrical.) Data were revised back
to 1956. Agency debt, with one minor exception, continues to be recorded at par. (Treasury
reports debt held by the public at both par
and accrual values.)
Debt held by Government accounts consists
almost entirely of "special issues" of Treasury
debt, which are reported only at par. As a
result, only a small part of debt held by Government accounts is recorded in the budget
at accrual value. Gross Federal debt—the sum
of debt held by the public and debt held by
Government accounts—is therefore reported in
the budget largely on an accrual basis but
partly at par. For the same reason, total
Treasury debt, which includes almost all Federal debt, is also reported in the budget largely
on an accrual basis but partly at par. (Treasury reports its corresponding series only at
par.)
BORROWING AND GOVERNMENT
DEFICITS
Debt Held by the Public.—Table C-2
shows the relationship between borrowing
from the public and the Federal deficit. The
total deficit of the Federal Government includes not only the budget deficit but also the
surplus or deficit of the off-budget Federal entities, which have been excluded from the
budget by law. Under present law the off-budget Federal entities are the old-age and survivors insurance trust fund, the disability insur3 See Special Analysis E, "Borrowing and Debt," in Special Analyses, Budget of the United States Government, Fiscal Year 1990, pp.
E-5 to E-8.
VIII.C.
Part Two-287
ACCOUNTING FOR FEDERAL BORROWING AND DEBT
Table C-2. FEDERAL GOVERNMENT FINANCING AND DEBT
(In billions of dollars)
Estimate
1990
actual
1991
1992
1993
1994
1995
1996
-220.4
(-277.0)
(56.6)
-318.1
(-378.5)
(60.4)
-280.9
(-344.4)
(63.6)
-201.5
(-273.8)
(72.3)
-61.8
(-150.4)
(88.7)
-2.9
(-106.3)
(103.4)
19.9
(-102.6)
(122.5)
FINANCING
Surplus or deficit (-)
On-budget
Off-budget
Means of financing other than
borrowing from the public:
Decrease or increase (-) in Treasury
operating cash balance
Increase or decrease (-) in:
Checks outstanding, etc.1
Deposit fund balances
Seigniorage on coins
Credit financing account balances:
Increase or decrease (-) in guaranteed loan financing accounts
Increase (-) or decrease in direct
loan financing accounts
Total, means of financing other
than borrowing from the public
0.8
10.2
-0.1
-0.9
0.5
1.1
-0.9
0.5
3.4
-0.8
0.5
-1.2
0.5
0.5
0.5
0.5
3.4
3.7
2.3
0.3
-0.4
-3.4
-4.0
-2.9
-3.3
-3.3
0.3
10.9
3.1
-1.0
-0.1
-2.5
-3.2
Total, requirement for borrowing
from the public
Reclassification of debt2
-220.1
-307.2
-277.8
-202.6
-2.1
-619
-5.4
16.7
Change in debt held by the public
220.1
307.2
277.8
204.6
61.9
5.4
-16.7
3,173.5
32.8
3,595.6
22.3
3,998.7
22.4
4,340.2
25.3
4,560.8
26.0
4,748.8
24.5
4,925.2
24.2
3,206.3
3,617.8
4,021.1
4,365.5
4,586.8
4,773.3
4,949.4
755.9
2,410.4
(234.4)
(2.176.0)
900.2
2,717.6
1,025.7
2,995.4
1,165.5
3,200.0
1,324.9
3,261.9
1,505.9
3,267.3
1,698.7
3,250.7
3,173.5
3,595.6
3,998.7
4,340.2
4,560.8
4,748.8
4,925.2
-15.6
0.4
-15.6
0.4
-15.6
0.3
-15.6
0.3
-15.6
0.3
-15.6
0.3
-15.6
0.3
3.0
3.0
3.0
3.0
3.0
3.0
3.0
3,161.2
3,583.3
3,986.4
4,327.9
4,548.5
4,736.4
4,912.8
DEBT, END OF YEAR
Gross Federal debt:
Debt issued by Treasury
Debt issued by other agencies
Total, gross Federal debt
Held by:
Government accounts
The public
(Federal Reserve Banks)
(Other)
DEBT SUBJECT TO STATUTORY
LIMITATION, END OF YEAR
Debt issued by Treasury
Deduct (-): Treasury debt not subject to
limitation 3
Agency debt subject to limitation
Unamortized discount (less premium) on
Treasury notes and bonds other than
zero-coupon bonds
Total, debt subject to statutory
limitation4
besides checks outstanding, includes accrued interest payable on Treasury debt, miscellaneous liability accounts, allocations of specia.1 drawing
rights, and, as an offset, cash and monetary asseits other than the Treasury operating cash balance, miscellaneous asset accounts, and profit on sale of
gold.
2 The
Farm Credit System Financial Assistance Corporation is estimated to be reclassified from a Government-sponsored enterprise to a Federal
agency as of October 1, 1992, and its debt is accordingly reclassified as Federal agency debt.
3
Consists primarily of Federal Financing Bank debt.
4
The statutory debt limit is $4,145 billion.
Part Two-288
ance trust fund, and the Postal Service fund.
Since they had a large combined surplus in
1990 and are estimated to have a growing surplus during 1991-96, they reduce the requirement for Treasury to borrow from the public
by a substantial amount.
The total Federal deficit is financed either
by borrowing from the public or by several
other means, shown in table C-2, such as a
decrease in Treasury's cash balance. These
other means of financing are normally small
relative to borrowing from the public. This is
because they are limited by their own nature.
Decreases in cash balances, for example, are
inherently limited by past accumulations,
which themselves required financing when
they were built up. In 1990 these other accounts contributed $0.3 billion toward financing the deficit. In 1991 the estimated borrowing is $10.9 billion less than the total deficit,
primarily because the $40.1 billion cash balance at the end of 1990 was $10.1 billion more
than the $30 billion estimated for the end of
both that year and 1991.
A new type of means of financing has been
created by the Federal Credit Reform Act of
1990. Credit reform will change the method
of budgeting for Federal credit programs starting in 1992. As explained in Chapter VIII.A,
"Recognizing and Reducing Federal Underwriting Risks," the budget will record the subsidy
cost of new direct loans and loan guarantees
instead of the annual cash flows. The portion
of the cash flows that does not represent a
subsidy cost will be non-budgetary, recorded
as a means of financing.
The nature of the financing transactions will
differ between loan guarantees and direct
loans. For loan guarantees, the program account in the budget will pay the subsidy cost
of new loan guarantees to a non-budgetary
guaranteed loan financing account. This account will hold the subsidy, collect fees, and
pay default claims. It will accumulate balances
to the extent that its collection of subsidies,
fees, and interest exceeds its payments. These
balances will be deposited with Treasury in
interest-earning, uninvested funds, which are
not part of the Federal debt.
When the guaranteed loan financing account
collects a subsidy payment or an interest payment from the budget, the increase in its bal-
THE BUDGET FOR FISCAL YEAR 1992
ances will exactly offset the increase in outlays
and the budget deficit. No additional borrowing from the public will be needed to finance
the additional deficit; the increase in the balances will itself be the means of financing the
increase in the deficit. When the guaranteed
loan financing account collects fees from the
public, this will increase its balances and provide cash to the Government that will be used
to pay the Government's bills just like tax receipts, borrowing, or any other cash collections.
And when the account pays default claims to
the public, the decrease in its balances will
require financing just like any other cash disbursement. An increase in the balances of the
guaranteed loan financing accounts will therefore be a means of financing the Federal deficit.
For direct loans, the program account in the
budget will likewise pay the subsidy cost of
new direct loans to a non-budgetary direct loan
financing account. This account will borrow the
non-subsidy portion of the direct loan from
Treasury and disburse the entire loan to the
public. It will subsequently collect interest and
repayments of principal from the public, pay
interest to Treasury on its balances of debt,
and repay its debt to Treasury.
When the direct loan financing account
makes a direct loan, the subsidy and non-subsidy portions of the loan disbursement will
both require financing. The subsidy portion is
a budget outlay and causes in increase in the
deficit; the non-subsidy portion is represented
by the increase in the balances of debt that
the account owes to Treasury. Thus, an increase in the account's balances of debt due
to making a direct loan corresponds to a requirement for additional Government financing. A decrease in the account's balances of
debt due to the repayment of a loan—and a
corresponding repayment of its debt to Treasury—will provide cash to the Treasury that
will be used to pay the Government's bills just
like any other cash collections. A decrease in
the balances of the direct loan financing accounts will therefore be a means of financing
the Federal deficit.
An increase in the balances of the guaranteed loan financing accounts and the direct
loan financing accounts will thus be means of
financing the Federal Government, but they
VIII.C.
Part Two-289
ACCOUNTING FOR FEDERAL BORROWING AND DEBT
will have opposite effects. As shown in table
C-2, the guaranteed and direct loan financing
accounts are estimated to have essentially
equal and offsetting effects on the means of
financing in 1992. In the following years the
direct loan financing accounts are estimated
to increase financing requirements by more
than the amount that is financed by the guaranteed loan financing accounts. By 1996, the
net effect is estimated to add $3.7 billion to
the financing requirements.
Debt Held by Government Accounts.—The
amount of Federal debt issued to Government
accounts depends largely on the surpluses of
the trust funds, both on-budget and off-budget,
which owned 95 percent of the total Federal
debt held by Government accounts at the end
of 1990. In 1990, for example, the total trust
fund surplus was $120.3 billion and Government accounts invested $118.7 billion in Fed-
eral securities. The small difference is because
some other accounts hold Federal debt and because the trust funds may change the amount
of their cash assets not currently invested.
AGENCY DEBT
Several Federal agencies, shown in table
C-3, sell debt securities to the public and in
a few cases to other Government accounts. The
reason for issuing agency debt differs considerably from one agency to another. At the end
of 1990, agency debt was only one percent of
Federal debt held by the public. During 1990,
agency borrowing was $7.3 billion.
The predominant agency borrowers from the
mid-1980s to 1989 were the Federal Savings
and Loan Insurance Coporation (FSLIC) and
the Federal Deposit Insurance Corporation
(FDIC) permanent insurance fund. (FSLIC's li-
Table C-3. AGENCY DEBT
(In millions of dollars)
Description
Borrowing or repayment (-) of debt
1990
1991
1992
actual
Borrowing from the public:
Defense
Housing and Urban Development:
Federal Housing Administration
Interior
Small Business Administration:
Participation certificates: SBIC and section 505 development company
Architect of the Capitol
Federal Deposit Insurance Corporation:
Bank Insurance Fund
FSLIC Resolution Fund
National Archives
Postal Service
Tennessee Valley Authority
Total, borrowing from the public
Borrowing from other funds:
Housing and Urban Development:
Federal Housing Administration
Total, borrowing from other funds
Total, agency borrowing
¥
$500 thousand or less.
280-000 0 - 9 1 - 1 0
(PART 2)
estimate
-
3
55
-149
-632
-
estimate
3
Ddbt end
1992
estimate
2
9
65
-137
140
13
24
13
859
-11,497
-518
-157
8,000
74
163
930
3,322
7,685
302
250
10,310
133
22,268
7,271
-10,552
7
*
*
146
7
*
*
146
7,278
-10,551
133
22,414
Part Two-290
abilities were subsequently transferred to the
FSLIC Resolution Fund, and the FDIC permanent insurance fund was renamed the Bank
Insurance Fund, or BIF.) They issued notes
to help resolve the financial problems of certain failing thrifts and banks, primarily by
providing notes to prospective purchasers as
parts of agreements for them to buy the failing
institutions. Issuing notes to pay the Government's bills is equivalent to borrowing from
the public and then paying the bills by disbursing the cash borrowed, so it was recorded
as being simultaneously an outlay and a borrowing.4 The notes were therefore classified as
agency debt.
During 1990, both FSLIC and BIF notes outstanding declined by small amounts. In 1991,
however, $11.5 billion of FSLIC notes are estimated to be repaid, reducing the amount outstanding by over half. BIF, on the other hand,
is estimated to issue $0.9 billion more of notes
in 1991. Both agencies are estimated to repay
small amounts in 1992 and later years. These
notes are estimated to be half of all agency
debt at the end of 1992.
A number of FSLIC's assistance agreements
during 1988-89 specified that the final determination of the amount of notes given to the
purchaser was not to be made until the assets
and liabilities of the failed thrift had been fully
valued. This was done in 1990. However, the
valuation depended on conditions as of the day
of the contract, the Government's legal obligation was determined as of that day, and the
adjustment to the notes was retroactive to that
day. Outlays and borrowing are therefore recorded retroactively as of the day of the contract in 1988 or 1989. This increases FSLIC
outlays and borrowing by $7 million in 1988
and $1,365 million in 1989 over the amounts
previously published.
The budget last year showed that a certain
new type of lease-purchase contract was equivalent to direct Federal construction financed
by Federal borrowing. The Federal Government guaranteed the debt used to finance the
construction of buildings for the National Archives and Architect of the Capitol and is exer4 The FHA and Interior debt securities are also issued as a
means of paying specified bills. The budgetary treatment of these
securities is further discussed in Special Analysis E of the 1989
budget, pp. E-25 to E-26; and Special Analysis E of the 1988 budget, pp. E-27 to E-28.
THE BUDGET FOR FISCAL YEAR 1992
cising full control over the design, construction,
and operation of the buildings. The construction and interest expenditures were therefore
classified as Federal outlays, and the borrowing, which took place in 1989, was classified
as Federal agency borrowing from the public.
The securities used to finance the construction
of the building for the Architect of the Capitol
were zero-coupon certificates, for which the
sales price was about one-fourth of par value.
As an exception to the normal treatment of
agency debt, they are recorded in the budget
at accrual value and the interest is accrued
as an outlay.5
The proper budgetary treatment of leasepurchases has been further examined during
the past year. It has been determined that
outlays for a lease-purchase in which the Government assumes substantial risk will be recorded in an amount equal to the asset cost
over the period during which the contractor
constructs, manufactures, or purchases the
asset; if the asset already exists, the outlays
will be recorded when the contract is signed.
Agency borrowing will be recorded each year
to the extent of these outlays. The agency debt
will subsequently be redeemed over the lease
payment period by a portion of the annual
lease payments. This rule is effective starting
in 1991. However, no authorizations for leasepurchase agreements in which the Government
assumes substantial risk are estimated for
1991 or 1992.
Besides the lease-purchases financed in
these ways by agency borrowing from the public, the budget also reflects the cost of leasepurchases financed by the Federal Financing
Bank (FFB). The FFB, established within the
Treasury Department in 1974, can lend to
agencies by purchasing agency debt or in other
specified ways. It finances these transactions
by borrowing from the Treasury, which in turn
borrows from the public. This reduces the cost
of financing below what the agency or guaranteed private borrower would have had to pay
in the credit market. In 1988, 1989, and 1990
Congress authorized the General Services Administration to enter into lease-purchase contracts for a number of buildings to be constructed over five years at a total cost of $1.9
5 Table C-3 reflects corrections to the calculation of accrual
value.
VIII.C. ACCOUNTING FOR FEDERAL BORROWING AND DEBT
billion. The FFB is financing these contracts.
The outlays will be recorded in the budget as
payments are made for construction and other
costs, and the financing will consist of Treasury borrowing from the public.
Because the FFB reduced the cost of agency
borrowing below what the agency would have
had to pay in the market, agencies for many
years after the FFB was established normally
borrowed almost nothing from the public. The
one large exception was when borrowing was
inherent in the operation of an agency program, as it was for the issuance of FSLIC and
FDIC notes and a few other securities. FFB
purchases of agency debt were not included
in tabulations of Federal debt, in order to
avoid double counting. Therefore, until FSLIC
and FDIC began to issue large amounts of
notes, agency debt usually declined every year.
However, because of the decline of interest
rates in recent years, the interest rate on outstanding debt is often higher than the rate
on new borrowings. The Tennessee Valley Authority decided to repay some of the high-interest debt that it owed FFB when that debt became callable and to finance that repayment
by new borrowing from the public. In order
to lock-in the prevailing interest rates, TVA
borrowed $8.0 billion from the public in late
calendar year 1989 and placed most of the proceeds in a defeasance trust. The defeasance
trust, in turn, began using these balances to
pay off debt to the FFB during 1990 and is
estimated to complete its operations in 1994.
In the meantime, the defeasance trust is invested in Treasury securities, as shown in
Table C-4, where it is classified as part of
TVA.
The sale of TVA bonds combined with the
purchase of Treasury securities has no net effect on the amount of Federal debt held by
the public. When the defeasance trust sells its
Treasury securities in order to pay off TVA
debt to the FFB, the FFB and Treasury use
the proceeds to retire Treasury securities.
Again, there is no effect on the amount of Federal debt held by the public. Only the composition of debt held by the public is changed,
as TVA bonds replace Treasury securities.
Gross Federal debt does rise temporarily until
the defeasance trust uses up its balances.
Part Two-291
DEBT HELD BY GOVERNMENT
ACCOUNTS
Trust funds, and some public enterprise revolving funds and special funds, accumulate
cash in excess of current requirements in order
to meet future obligations. These cash surpluses are invested mostly in Treasury debt
and, to a very small extent, in agency debt.
Investment by trust funds and other Government accounts was around $10 billion per year
in the early 1980s. Primarily due to the Social
Security Amendments of 1983, an expanding
economy, and the creation of the military retirement trust fund, investment has risen
greatly since then. It was $118.7 billion in
1990 and, as shown in table C-4, it is estimated to be $125.5 billion in 1992.
The extraordinary rise of investment by Government accounts is concentrated among a few
trust funds. The two social security trust
funds—old-age and survivors insurance (OASI)
and disability insurance (DI)—have large surpluses and invest increasing amounts almost
each year: a total of $178.1 billion during
1990-92, which constitutes 51 percent of the
total estimated investment by Government accounts. The hospital insurance trust fund (HI),
also financed by the social security payroll tax,
has large surpluses at present and accounts
for 15 percent of the total investment over this
period.
In addition to these three funds, the largest
investors in Federal securities are the two
major Federal employee retirement funds: the
civil service retirement and disability trust
fund and the military retirement trust fund.
They account for 31 percent of the total investment by Government accounts during 1990-92.
Altogether, these two retirement funds and the
three funds financed by the social security tax
account for 97 percent of the estimated investment by all Government accounts during this
period.
The holdings of Federal securities by Government accounts are estimated to rise to
$1,025.7 billion at the end of 1992. This will
be 26 percent of the gross Federal debt. The
five major trust funds discussed above will account for 82 percent of the total holdings by
Government accounts.
Part Two-292
THE BUDGET FOR FISCAL YEAR 1992
Table C-4. DEBT HELD BY GOVERNMENT ACCOUNTS
(In millions of dollars)
Investment or disinvestment (-)
Description
Investment in Treasury debt:
Overseas Private Investment Corporation
Defense—Civil: Military retirement trust fund
Energy: Nuclear waste fund
Health and Human Services:
Federal old-age and survivors insurance trust fund1
Federal disability insurance trust fund1
Federal hospital insurance trust fund2
Federal HI catastrophic trust fund2
Federal supplementary medical insurance trust fund2
Federal SMI catastrophic trust fund2
Housing and Urban Development:
Federal Housing Administration
Other
Interior: Outer Continental Shelf deposit funds
Labor:
Unemployment trust fund
Pension Benefit Guaranty Corporation
State: Foreign Service retirement and disability trust fund
Transportation :
Highway trust fund
Airport and airway trust fund
Treasury: Exchange stabilization fund
Veterans Affairs:
National service life insurance trust fund
Other trust funds
Federal funds
Environmental Protection Agency: Hazardous substance trust fund
Office of Personnel Management:
Civil Service retirement and disability trust fund
Employees life insurance fund
Employees health benefits fund
Federal Deposit Insurance Corporation:
Bank Insurance fund
FSLIC Resolution fund
Savings Association Insurance fund
National Credit Union Administration: Share insurance fund
Postal Service fund1
Railroad Retirement Board trust funds
Tennessee Valley Authority
Other Federal funds
Other trust funds
Total, investment in Treasury debt
Investment in agency debt:
Housing and Urban Development:
Government National Mortgage Association
Total, investment in agency debt
Total, investment in Federal debt
1990
actual
1991
estimate
1992
estimate
Holdings
end of
1992
estimate
147
11,265
363
334
17,395
492
93
12,201
507
1,932
94,349
3,491
55,151
3,077
13,335
-530
3,921
—1,033
54,941
2,329
16,049
59,849
2,759
22,751
318,506
16,593
135,049
1,746
-1,015
15,017
542
524
35
391
63
51
202
373
53
7,228
2,636
1,213
5,533
747
509
-3,019
606
533
-1,894
551
562
45,615
2,745
5,976
701
1,398
684
-450
-3,149
-68
48
278
500
16,276
11,440
2,295
223
51
136
481
158
37
-10
963
105
34
9
100
11,180
1,564
741
3,294
21,097
925
1,190
21,880
941
849
23,648
964
421
281,214
12,511
5,882
-6,577
-937
13
45
-1,356
682
5,447
106
790
-7,938
-902
-13
110
1,436
906
-2,445
11
172
812
120
2,600
519
-2,432
54
744
812
2,114
7,100
10,694
570
2,541
4,510
118,685
104,308
125,516
1,025,585
146
500
7
*
*
7
*
*
146
118,692
104,308
125,517
1,025,731
1,247
-1,356
60,538
58,228
35
-9,459
1,436
55,009
57,270
51
790
2,600
59,466
62,608
53
27,749
7,100
654,569
335,099
1,213
MEMORANDUM
Investment
Investment
Investment
Investment
Investment
by
by
by
by
by
Federal funds (on-budget)
Federal funds (off-budget)
trust funds (on-budget)
trust funds (off-budget)
deposit funds3
* $500 thousand or less.
1 Off-budget Federal entity.
2 The
investments of the HI and SMI catastrophic trust funds were transferred to the SMI trust fund in 1990. A further transfer is estimated from
the SMI trust fund to the HI trust fund in 1992.
3 Only those deposit funds classified as Government accounts.
VIII.C.
ACCOUNTING FOR FEDERAL BORROWING AND DEBT
LIMITATIONS ON FEDERAL DEBT
Definition of Debt Subject to Limit.—
Statutory limitations have normally been
placed on Federal debt. Until World War I,
the Congress ordinarily authorized a specific
amount of debt for each separate issue. Beginning with the Second Liberty Bond Act of
1917, however, the nature of the limitation
was modified in several steps until it developed into a ceiling on the total amount of most
Federal debt outstanding. The latter type of
limitation has been in effect since 1941. The
limit currently applies to most debt issued by
the Treasury since September 1917, whether
held by the public or by Government accounts;
and other debt issued by Federal agencies
that, according to explicit statute, is guaranteed as to principal and interest by the United
States Government.
Table C-2 compares total Treasury debt
with the amount not subject to limit. Most
of the Treasury debt not subject to limit was
issued by the FFB. It is authorized to have
outstanding up to $15 billion of publicly issued
debt, but it normally borrows from the Treasury because Treasury can borrow more cheaply
from the public. A few years ago, however,
the debt limit constraint led Treasury to issue
FFB securities to the civil service retirement
and disability trust fund in place of otherwise
identical Treasury securities that were subject
to the debt limit. This enabled Treasury to
raise needed cash by selling securities to the
public that were subject to the limit. Since
1986 the civil service retirement fund has normally held $15.0 billion of FFB securities, and
the budget assumes that the FFB securities
outstanding at the end of the fiscal year will
be kept at the amount authorized by law. The
remaining Treasury debt not subject to limit
consists almost entirely of silver certificates
and other currencies no longer being issued.
The sole type of agency debt now subject
to the general limit is the debentures issued
by the Federal Housing Administration, which
were only $357 million at the end of 1990.
Some of the other agency debt, however, is
subject to its own statutory limit. For example,
until 1991 the Postal Service was limited to
$10 billion of securities outstanding and $2
billion of annual borrowing. Under revised legislation, its limit on debt outstanding is rising
Part Two-293
in two steps to $15 billion in 1992, and its
limit on annual borrowing has increased to $3
billion. Besides Treasury debt and agency debt,
the debt subject to limit also includes a few
very small adjustments.
The amount of debt subject to limit was formerly defined by law as the par value of the
securities (except for savings bonds, which
were measured at redemption value). This was
modified by law in August 1989 in a way that
currently applies to Treasury bills and zerocoupon bonds. These securities do not pay any
cash interest. They are sold at a discount and
pay their entire interest through the periodic
amortization of the discount over the term of
the security. For Treasury bills, with a maturity of one year or less, the difference between
par value and sales price is large enough to
be significant. For zero-coupon bonds with a
30-year maturity, the par value could be
around ten times the sales price. Measuring
zero-coupon bonds at par reduced Treasury's
flexibility in debt management, because these
securities increased the debt subject to limit
by a large multiple of the cash raised to finance the deficit. Furthermore, measuring
these securities at par produced a significant
difference between the recorded debt and the
accrual value, which, as previously explained,
is more meaningful for economic and budgetary analysis.
The change in law provided that Treasury
securities issued on a discount basis are to
be measured at accrual value for calculating
the debt subject to limit. The new method is
not applied to regular notes and bonds or to
"special issues," which are issued almost exclusively to Government accounts and comprise
most of the debt that is held by Government
accounts. These securities are still recorded at
par for calculating the debt subject to limit.
However, bills and zero-coupon bonds account
for most of the unamortized discount (less premium) on Treasury securities other than "special issues": $56.9 billion out of $59.8 billion
at the end of 1990.
An adjustment for measurement differences
is thus needed in order to derive debt subject
to limit from Treasury debt and agency debt.
The budget records all Treasury debt except
"special issues" at accrual value; the debt subject to limit records Treasury bills, zero-coupon
Part Two-294
bonds, and savings bonds at accrual value but
regular notes and bonds and "special issues"
at par value. The unamortized discount (less
premium) on regular notes and bonds is thus
part of debt subject to limit but is not part
of Treasury debt (as recorded in the budget).
Therefore, as in table C-2, the unamortized
discount on regular notes and bonds must be
added to Treasury debt in order to derive debt
subject to limit. (The tables published by the
Treasury Department derive the debt subject
to limit from a different base than table C-2
but have a similar adjustment.)
Methods of Changing the Debt Limit.—
The statutory debt limit has frequently been
changed. During the 1960s Congress passed
13 separate acts to raise the limit or to extend
the duration of a temporary increase, and during the 1970s Congress passed 18 such acts.
During the 1980s Congress passed 24 such
acts, two to four every year except 1988. In
1990 Congress passed seven such acts, the
most ever enacted in a single year.
The statutory limit can be changed by normal legislative procedures. It can also be
changed as a consequence of the annual Congressional budget resolution, which is not itself
a law. The budget resolution includes a provision specifying the appropriate level of the
debt subject to limit at the end of each fiscal
year. The rules of the House of Representatives provide that, when the budget
resolution is adopted by both Houses of the
Congress, the vote in the House of Representatives is deemed to have been a vote
in favor of a joint resolution setting the statutory limit at the level specified in the budget
resolution. The joint resolution is transmitted
to the Senate for further action. It may be
amended in the Senate to change the debt
limit provision or in any other way. If it passes
both Houses of the Congress, it is sent to the
President for his signature. This method directly relates the decision on the debt limit
to the decisions on the Federal deficit and
other factors that determine the change in the
debt subject to limit. Both methods have been
used numerous times.
Recent Changes in the Debt Limit.—The
statutory debt limit was raised to $3,122.7 billion on November 8, 1989. As the amount of
debt approached the limit in the summer of
THE BUDGET FOR FISCAL YEAR 1992
1990, consideration of the debt limit became
part of the overall budget negotiations between
the President and the Congress. On August
9, 1990, the limit was temporarily raised to
$3,195 billion through October 2. As the negotiations continued, this temporary increase
was extended for a few days at a time in four
subsequent acts and was raised to $3,230 billion from October 28 through November 5, The
latter four of these temporary increases were
as one provision of a continuing resolution,
which provided appropriations to continue to
operate the Government for the same temporary time. The budget negotiations were concluded with the Omnibus Budget Reconciliation Act of 1990, which the President
signed on November 5, 1990. This increased
the debt limit to $4,145 billion, which is currently estimated to be sufficient until sometime during 1993.
Unlike some previous years when the debt
limit was under consideration, the debt limit
in 1990 never temporarily dropped below the
actual level of debt on a business day. Treasury was always able to fully invest the trust
funds and never had to suspend the sales of
savings bonds, State and local government series issues, or other securities. However, the
debt was virtually at the limit for a number
of days, and Treasury postponed several auctions because of uncertainty about congressional action.
Federal Funds Financing and the
Change in Debt Subject to Limit.—The
change in debt held by the public, as shown
in table C-2, is determined principally by the
total Government deficit. The debt subject to
limit, however, includes not only debt held by
the public but also debt held by Government
accounts. The change in debt subject to limit
is therefore determined both by the factors
that determine the total Government deficit
and by the factors that determine the change
in debt held by Government accounts.
The budget is composed of two groups of
funds, Federal funds and trust funds. The Federal funds, in the main, are derived from tax
receipts and borrowing and are used for the
general purposes of the Government. The trust
funds, on the other hand, are financed by taxes
or other collections earmarked by law for sped-
VIII.C.
Part Two-295
ACCOUNTING FOR FEDERAL BORROWING AND DEBT
Table C-5. FEDERAL FUNDS FINANCING AND CHANGE IN DEBT
SUBJECT TO STATUTORY LIMIT
(In billions of dollars)
Description
Federal funds surplus or deficit (-)
(On-budget)
(Off-budget)
1991
-340.7
(-339.0)
(-1.6)
Means of financing other than borrowing:
Decrease or increase (-) in Treasury operating
cash balance ....
Increase or decrease (-) in:
Checks outstanding, etc.1
Deposit fund balances2
Seigniorage on coins
Credit financing account balances:
Increase or decrease (-) in guaranteed loan
financing accounts
Increase (-) or decrease in direct loan financing accoutns
Total, means of financing other than
borrowing
Increase or decrease (-) in unamortized discounts (less premiums) on Treasury notes and
bonds other than zero-coupon bonds
Adjustments including increase in debt subject
to limit but not part of Federal debt
Increase in debt subject to limit
-436.3
(-436.3)
(-0.1)
0.8
10.2
1.4
-0.9
0.5
7.0
-0.9
0.5
1992
-405.6
(-406.8)
(1.1)
1993
-341.4
(-340.4)
(-1.0)
1994
-220.3
(-219.7)
(-0.7)
1995
-181.8
(-181.3)
(-0.5)
1996
-170.4
(-171.1)
(0.7)
6.1
-0.8
0.5
-1.2
0.5
0.5
0.5
0.5
3.4
3.7
2.3
0.3
-0.4
-3.4
-4.0
-2.9
-3.3
-3.3
1.8
16.9
5.8
-1.0
-0.1
-2.5
-3.2
0.1
8.0
-3.4
0.1
-0.9
-2.2
-2.4
7.2
-10.6
0.3
2.9
-2.1
0.7
-1.5
-0.3
-331.6
-422.1
-403.0
-341.5
-220.6
-188.0
-176.4
331.5
422.1
403.0
341.5
220.6
188.0
176.4
3,161.2
3,583.3
3,986.4
4,327.9
4,548.5
4,736.4
4,912.8
Decrease or increase (-) in Federal debt held by
Federal funds and deposit funds3
Increase or decrease (-) in Federal debt not subject to limit
Reclassification of debt4
Total, requirement for Federal funds
borrowing subject to debt limit
Estimate
1990
-0.1
*
ADDENDUM
Debt subject to statutory limit5
* $50 million or less.
besides checks outstanding, includes accrued interest payable on Treasury debt, miscellaneous liability accounts, allocations of special drawing
rights, and, as an offset, cash and monetary assets other than the Treasury operating cash balance, miscellaneous asset accounts, and profit <3n sale of
gold.
2 Does
3
not include investment in Federal debt securities by deposit funds classified as part of the public.
Only those deposit funds classified as Government accounts.
"The Farm Credit System Financial Assistance Corporation is estimated to be reclassified from a Government-sponsored enterprise to ii Federal
agency as of October 1, 1992, and its debt is accordingly reclassified as Fe deral agency debt.
5 The
statutory debt limit is $4,145 billion.
fied purposes, such as paying social security
or unemployment benefits.
A Federal funds deficit must generally be
financed by borrowing, either by selling securities to the public or by issuing securities to
Government accounts. Federal funds borrowing consists almost entirely of the Treasury
issuing securities that are subject to the statutory debt limit. Trust fund surpluses are al-
most entirely invested in these securities, and
trust fund holdings include most of the debt
held by Government accounts. The change in
debt subject to limit is therefore determined
principally by the Federal funds deficit, which
is equal to the arithmetic sum of the total
Government deficit and the trust fund surplus.
Table C-5 derives the change in debt subject
to limit. In 1990 the Federal funds deficit was
Part Two-296
$340.7 billion, and other factors reduced the
change in debt subject to limit by $9.2 billion.
The largest other factor was the sale of agency
debt not subject to limit. As a result, the debt
subject to limit increased by $331.5 billion,
which was $111.3 billion more than the increase in debt held by the public.
As long as the trust fund surplus is large,
the Federal funds deficit will be much more
than the total Government deficit; and the increase in debt subject to limit will be much
more than the increase in debt held by the
public. The trust fund surplus is estimated to
increase substantially above its present level
in the future, so the debt limit will have to
be increased by much more than the total Government deficit. In 1996, for example, the Government is estimated to repay $16.7 billion of
debt held by the public. Nevertheless, the debt
subject to limit is estimated to increase by
$176.4 billion—a difference of $193.0 billion.
DEBT HELD BY FOREIGN RESIDENTS
During most of American history the Federal
debt was held almost entirely by individuals
and institutions within the United States. In
the late 1960s, as shown in table C-6, foreign
holdings were just over $10.0 billion, less than
5 percent of the total Federal debt held by
the public.
Foreign holdings began to grow much faster
starting in 1970. This increase has been primarily due to foreign decisions, both official
and private, rather than the direct marketing
of these securities to foreign residents. At the
end of fiscal year 1990 foreign holdings of
Treasury debt were $404.8 billion, which was
17 percent of the total debt held by the public.
This proportion rose in most recent years but
declined in 1990, when foreign holdings increased by only $9.9 billion. Although the
amount of debt held by foreigners has grown
greatly in the past ten years, the proportion
is now a little lower than during the late
1970s. At the end of 1990, foreign central
banks and other official institutions owned 67
percent of the Federal debt held by foreign
residents; private investors owned nearly all
the rest. All of the Federal debt held by foreign
residents is currently denominated in dollars.
THE BUDGET FOR FISCAL YEAR 1992
Foreign holdings of Federal debt are about
one-fifth of the foreign-owned assets in the
U.S., and foreign purchases of Federal debt
securities are normally only a moderate part
of the total capital inflow from abroad. The
foreign purchases of Federal debt securities do
not measure the full impact of the capital inflow from abroad on the market for Federal
debt securities. The capital inflow supplies additional funds to the securities market generally, which affect the market for Federal
debt. For example, the capital inflow includes
deposits in U.S. financial intermediaries that
themselves buy Federal debt.
FEDERALLY ASSISTED BORROWING
The effect of the Government on borrowing
in the credit market arises not only from its
own borrowing to finance Federal operations
but also from its assistance to certain borrowing by the public. Federally assisted borrowing
is of two principal types: Government-guaranteed borrowing, which is another term for
guaranteed lending, and borrowing by Government-sponsored enterprises (GSEs). The Federal Government also exempts the interest on
most State and local government debt from
income tax.
Federal guarantees and GSEs are discussed
in Chapter VIII.A, "Recognizing and Reducing
Federal Underwriting Risks." Detailed data on
guaranteed loans are presented in table A-13,
and data on GSE borrowing and lending in
table A-14. Table C-7 brings together the totals of Federal and federally assisted borrowing and lending and shows the trends since
1965 in terms of both dollar amounts and,
more significantly, as percentages of total credit market borrowing. The lending is recorded
at face value. It does not take into account
the degree of subsidy and does not indicate
the extent to which the credit assistance is
likely to have changed the allocation of financial and real resources.
The Federal borrowing participation rate increased from an average of 17 percent in the
1960s to 27 percent in the 1970s and 42 percent in the 1980s. Since peaking at 56.6 percent in 1983, it was around 40 percent until
1990 despite the decline in Federal borrowing.
The major factor keeping up the participation
rate was the marked rise in GSE borrowing.
Part Two-297
VIII.C. ACCOUNTING FOR FEDERAL BORROWING AND DEBT
Table C-6. FOREIGN HOLDINGS OF FEDERAL DEBT
(In billions of dollars)
Debt held by the
Fiscal year
public
Total
Borrowing from the
public
Foreign1
Total2
Interest on debt
held by the public
Foreign1
Total3
Foreign4
1965
1966
1967
1968
1969
260.8
263.7
266.6
289.5
278.1
12.3
11.6
11.4
10.7
10.3
3.9
2.9
2.9
22.9
-1.3
0.3
-0.7
-0.2
-0.7
-0.4
9.6
10.1
11.1
11.9
13.5
0.5
0.5
0.6
0.7
0.7
1970
1971
1972
1973
1974
283.2
303.0
322.4
340.9
343.7
14.0
31.8
49.2
59.4
56.8
3.5
19.8
19.3
18.5
2.8
3.8
17.8
17.3
10.3
-2.6
15.4
16.2
16.8
18.7
22.7
0.8
1.3
2.4
3.2
4.1
1975
1976
TQ
1977
1978
19795
394.7
477.4
495.5
549.1
607.1
639.8
66.0
69.8
74.6
95.5
121.0
120.3
51.0
82.2
18.1
53.6
58.0
32.6
9.2
3.8
4.9
20.9
25.4
-0.7
25.0
29.3
7.8
33.8
40.2
49.9
4.5
4.4
1.2
5.1
7.9
10.7
1980
1981
1982
1983
1984
709.3
784.8
919.2
1,131.0
1,300.0
121.7
130.7
140.6
160.1
175.5
69.5
75.5
134.4
211.8
168.9
1.4
9.0
9.9
19.5
15.4
62.7
81.7
101.1
111.5
133.5
11.0
16.4
18.7
19.2
20.3
19855
1986
1987
1988
1989
1,499.4
1,736.2
1,888.1
2,050.3
2,190.3
222.9
265.5
279.5
345.9
394.9
199.4
236.8
152.0
162.1
140.1
47.4
42.7
14.0
66.4
49.0
152.9
159.3
160.3
172.2
188.9
22.9
23.8
24.9
28.6
34.7
1990
2,410.4
404.8
220.1
9.9
202.4
37.4
Estimated by Treasury Department. These estimates exclude agency debt, the holdings of which are believed to
be small. For the most part they are measured at par value and therefore are not strictly comparable with the
data on debt held by the public. However, the zero-coupon bonds sold to Mexico are measured on an accrual basis.
2 Borrowing from the public is defined as equal to the change in debt held by the public from the beginning of
the year to the end, except to the extent that the amount of debt is changed by reclassification.
3 Estimated as interest on the public debt less "interest received by trust funds" (subfunction 901 less
subfunctions 902 and 903). Does not include the comparatively small amount of interest on agency debt or the
offsets for other interest received by Government accounts.
4 Estimated by Bureau of Economic Analysis, Department of Commerce. These estimates include small amounts
of interest from other sources, including the debt of Government-sponsored enterprises, which are not part of the
Federal Government.
5 Benchmark revisions reduced the estimated foreign holdings of Federal debt as of December 1978 and
increased the estimated foreign holdings as of December 1984. As a result, the data on foreign holdings in
different time periods are not strictly comparable, and the "borrowing" from foreign residents in 1979 and 1985
reflects the benchmark revision as well as transactions in Federal debt securities.
Part Two-298
T H E B U D G E T F O R FISCAL Y E A R 1992
In 1990, however, the participation rate rose
to 55.4 percent because of the increase in Fed-
eral borrowing. The Federal lending participation rate has been much more stable over time
than the borrowing participation rate.
Table C-7. FEDERAL PARTICIPATION IN THE CREDIT MARKET
(Dollar amounts in billions)
Actual
1965
Total net
market 1
borrowing
in
1970
1975
1980
1985
1986
Estimates
1987
1988
1989
1990
1991
1992
credit
Federal borrowing from the public
Guaranteed borrowing
Government-sponsored enterprise
borrowing 2
67.2
87.9
164.0 329.4 743.3 882.4 742.7 768.4 696.5 678.9
3.9
5.0
3.5
7.8
51.0
8.6
69.5
31.6
1.2
4.9
5.3
21.4
199.4 236.8
21.6
34.6
57.9
103.2
152.0
60.4
162.1
40.3
111.7
87.1
123.2
10.1
16.2
65.0
15.0
18.4
39.6
Total net lending in credit market1
67.2
87.9
2.0
5.0
3.0
7.8
12.7
8.6
24.2
31.6
28.0
21.6
11.2 - 1 9 . 0 - 1 3 . 4 - 1 4 . 6
34.6
40.3
60.4
41.7
1.4
5.2
5.5
24.1
60.7
83.3
8.3
15.9
26.9
79.9
110.3
12.4
18.1
16.4
24.3
14.8
Total, Federal and federally
assisted lending
Federal lending participation
rate (percent)
n.a.
140.1 220.1 307.2 277.8
41.7
40.7
41.1
41.3
Total, Federal and federally
assisted borrowing
Federal borrowing participation rate (percent)
Direct loans
Guaranteed loans
Government-sponsored enterprise
loans 2
n.a.
115.4
84.6
75.7
122.5 278.9 374.5 324.0 289.5 305.0 376.2 433.1 394.6
37.2
37.5
42.4
43.6
37.7
43.8
55.4
n.a.
n.a.
164.0 329.4 743.3 882.4 742.7 768.4 696.5 678.9
n.a.
n.a.
2.8
40.7
1.3
41.3
0.7
41.1
90.0
78.0
81.4
107.8
82.5
101.5
129.1 149.2
109.4
128.6
14.2
18.5
14.6
20.1
133.5 120.5 123.2
19.7
n.a.
n.a.
Total net funds borrowed (loaned) in credit market by domestic nonfinancial sectors, excluding equities. Financial sectors are
omitted to avoid double counting, since financial intermediaries both borrow and lend in the credit market.
2 Most Government-sponsored enterprises (GSEs) are financial intermediaries. GSE borrowing (lending) is nevertheless compared
with total credit market borrowing (lending), because GSE borrowing (lending) is a proxy for the borrowing (lending) by
nonfinancial sectors that is intermediated by GSEs. It assists the ultimate nonfinancial borrower (lender) whose loans are
purchased or otherwise financed by the GSE. In order to avoid double counting, GSE borrowing and lending are calculated net of
transactions with Federal agencies, transactions between GSEs, and transactions in guaranteed loans.
Source: Federal Reserve Board flow of funds accounts for total net borrowing and lending.
n.a. = Not available.
1
IX. MANAGING FOR INTEGRITY
AND EFFICIENCY
Part Two-299
IX. INTRODUCTION
This chapter describes five efforts the Administration is undertaking to improve Federal
management.
management is impeded by unreliable information of its operations and financial condition.
This should not be; it must be remedied.
(A) Strengthening Management and Accountability
Chapter IX.A. addresses progress to date,
and the investments and future savings anticipated in 1992, relating to the strengthening
of management and accountability. It describes
the Administration's efforts to improve the machinery and integrity of Government—people
and systems. Its focus is the delivery of Government programs and the improvement of
confidence of Americans in governmental operations. Of particular note are the actions and
investments in improving financial management and reducing risk in High Risk areas.
(B) Improving Returns on Investment
(C) Reforming Regulation and Managing RiskReduction Sensibly
(D) Reforming the Budget Process
(E) Managing by Objectives
The Federal Government is an enormous enterprise. It spends 22 percent of the GNP, total
economic activity larger than all countries except the United States itself, Japan, the Soviet
Union and a newly united Germany. By virtue
of its size, Government suffers, in many instances, from diseconomies of scale. Like other
enterprises, it is, on occasion, incompetent. It
has been taken advantage of, gamed, and even
looted. It can also be extraordinarily effective,
as was evidenced in preparations for Desert
Shield and Desert Storm, and, on a more routine level, in most of the programs for which
increases are being requested in the budget.
Unlike private enterprise, the Government's
purpose is to provide for, assist, and regulate
where the marketplace cannot or does not satisfactorily do so. It is rightly directed by the
politics and policies of democratic institutions.
These politics and policies can, however, pose
barriers to good management.
The Government has no simply quantifiable
objectives such as profits or market share
against which to measure its success or failure.
Its measures of success are difficult to arrive
at. Since the matters it deals with are affected
by much more than Federal actions, it is difficult to know the exact impact of Federal
intervention. Yet, knowledge of these matters
can be improved significantly. At the same
time, the Federal Government's day-to-day
Chapter IX.B. addresses the improvement of
Government returns on investment—improved
outcomes of Federal policies and programs in
relation to their costs. This section begins with
the Administration's evaluation agenda, and
then describes discretionary program terminations, decreases and increases presented in
the budget. Its focus is informed choices within
resource constraints.
Chapter IX.C. addresses the reform of Federal regulation and the more sensible management of risk-reduction in the areas of health
and safety. Its focus is also informed choices
within resource constraints. But it goes beyond
Chapter IX.B. in that it discusses the nonFederal costs of Federal mandates, as well as
the direct costs of Federal programs.
Chapter IX.D. discusses the reform of the
budget process. It notes the progress achieved
through the Budget Enforcement Act of 1990
and renews proposals for additional reforms
to make the process work better and become
more effective in reducing the deficit.
Finally, Chapter IX.E. reports on the Administration's progress in achieving the objectives
selected by the President for management by
objective.
Part Two-301
IX.A.
STRENGTHENING MANAGEMENT AND
ACCOUNTABILITY
For too many years, the Nation has been
justifiably outraged by revelations of Government mismanagement.
This section describes progress in:
• Improving Financial Management
• Addressing High Risk Areas
• Information Resources Management
• Procurement Reform
• Partnerships with the States
• Pay Reform
It also describes:
• Management Investments and Savings in
the 1992 Budget
OVERVIEW
In October 1989, the Administration made
a major commitment to identifying the areas
of highest risk and vulnerability in Government operations. The current High Risk List
totals 106 entries. In each of these areas, the
Administration has developed and is implementing corrective action plans; and the risks
in many of the areas have been, and are continuing to be, substantially reduced. The results of these efforts are summarized in this
Chapter.
The corrective actions will take time. Long
term strategies are needed. The High Risk approach ensures that the Administration publicly identifies the Government's most severe
management problems and that these problems receive priority attention.
Financial management issues, which account
for over one-third of the High Risk areas,
clearly illustrate the need for long-term efforts.
In the early 1980s, Federal cash flows were
not under control, and there was no comprehensive Federal credit and debt collection
policy. The Government had over 500 financial
systems, many of them antiquated, incompat-
ible, or redundant, and many not in compliance with applicable accounting standards.
Under the banner of Reform '88, the previous Administration made some progress in
these areas. This progress has enabled the
Bush Administration to start focusing on the
quality, relevance, and timeliness of Federal
financial data—to make it accurate and useful
to policy and program officials, the Congress,
and the public. The Administration's efforts in
this area have been strongly reenforced by a
series of cooperative efforts with Congress to
produce needed legislation.
Good management begins with people. Recruiting and retaining a quality Federal
workforce is central to ensuring responsive and
effective public services. Passage of the Federal Employees Pay Comparability Act of 1990,
and earlier enactment of increased senior-level
pay, will over time, and for most functions,
eliminate noncompetitive pay as a disincentive
to Federal recruitment and retention. There
remains, however, the need for more successful
recruitment strategies and initiatives, more attention to the development of management
skills, and more delegation of personnel management authority to line managers.
Good Federal management also requires
good partnerships—with State and local governments and with private parties. Partnerships make sense. But they are hampered by
the desire of too many at the Federal level
to control all possible contingencies. Congress
seeks to micro-manage. Auditors insist on endless procedural safeguards. Program officials
overly design. Regulators require technologies
as opposed to outcomes. Virtually everybody
gets into the act. A balance must be found:
based on trust and mutual respect, on analysis
of the merits, and on accountability.
IMPROVING FINANCIAL MANAGEMENT
There has been progress. But much remains
to be done to improve financial management.
Part Two-303
Part Two-304
OMB's Five Point Program.^—Announced
in May 1990, this Program -lias obtained results in each of five targeted areas.
• Accounting Standards.—Unlike the private sector and State and local government, the Federal Government has had no
agreed means to establish and enforce accounting standards. Without such a mechanism, consistent Federal financial data
reflecting the operations and condition of
the Federal Government cannot be obtained. On October 10, 1990, the Secretary
of the Treasury, the Director of OMB, and
the Comptroller General signed a Memorandum of Understanding establishing a
Federal Accounting Standards Advisory
Board (FASAB). FASAB allows the Federal Government, for the first time, to develop comprehensive accounting standards
through a public process. The Board began
its work in January 1991.
• Financial Information and Functional
Standards. —Consistent, Governmentwide
financial reporting requires financial information standards for all data elements in
Treasury and OMB financial reports. The
Joint Financial Management Improvement
Program (JFMIP)—whose principals are
the Secretary of the Treasury, the Director
of OMB, the Comptroller General, and the
Director of the Office of Personnel Management—will issue these definitions by
May 1991. Building on the Core Financial
System Requirements established in January 1988, the JFMIP issued functional
standards in May 1990 for personnel/payroll systems and in January 1991 for travel. Additional functional standards will be
developed in 1991, starting with standards
for procurement and credit systems.
• Agency Financial Systems.—In order to
improve funding recommendations and
policy guidance, OMB-led interagency
teams reviewed in September 1990 the financial systems plans of five agencies: the
Departments of Agriculture, Commerce,
Transportation, and Veterans Affairs, and
the Internal Revenue Service. In addition
to agency-specific improvements, these reviews indicated the need for better integration of program and financial data, and
for stronger OMB policy guidance, require-
THE BUDGET FOR FISCAL YEAR 1992
ments, and monitoring. In 1991, OMB^will
address these needs and undertake additional agency reviews.
• Central Agency Systems.—Treasury and
OMB have embarked on a major project
to integrate their financial data bases by
1994. The first step, automating budget
execution data through use of a Treasury
data base, has already been implemented.
As a result, in February 1991, the Government will know, for the first time, what
its current unobligated balances are.
• Audited Financial Statements.—Annual,
audited financial statements are essential
to improving the quality and usefulness
of financial data, and providing policy and
program managers with reliable information on the operations and condition of
their programs and agencies. The Administration's program would have provided
such statements for all major agencies by
1994, but this program has now been superseded by the requirements of the Chief
Financial Officers Act of 1990.
Chief Financial Officers Act of 1990
(CFOs Act).—The
CFOs Act
strongly
reenforces the Administration's efforts to improve Federal financial management. First, it
puts in place a powerful financial management
organizational structure: 23 agency chief financial officers, and, within OMB, a Deputy Director for Management, a Controller, and an Office of Federal Financial Management. Second,
the Act requires accountability—through detailed financial plans and status reports—from
the agencies and from OMB. Third, the Act
lays out a strategy for producing audited financial statements—beginning with revolving
and trust funds, primarily commercial activities, and ten pilot agency-wide statements (for
the Departments of Agriculture, the Air Force,
the Army, Housing and Urban Development,
Labor, and Veterans Affairs; the Bureau of
Customs, the General Services Administration,
the Internal Revenue Service and the Social
Security Administration.)
Credit Management.—At the end of 1990,
the Government's loan portfolio totaled about
$840 billion, of which $210 billion was in direct
loans and $630 billion in guaranteed loans.
The Administration and the Congress have
worked to strengthen management of this port-
IX.A.
STRENGTHENING MANAGEMENT AND ACCOUNTABILITY
folio by improving organizational capacity, improving the quality of information provided to
decisionmakers, and helping agencies reduce
their risk exposure.
• Improved Organizational Capacity.—The
CFOs Act charges agency chief financial
officers with either directing and managing, or providing policy guidance and
oversight of, "all financial management
personnel, activities, and operations, including ... systems for credit management
" This is an important step toward getting agency credit programs on
a sound financial footing. It complements
an Administration initiative to strengthen
the technical qualifications of credit staff.
Since June 1990, the Federal Credit Policy
Working Group, chaired by OMB, has been
working on a core training curriculum and
certification standards for Federal credit
professionals. The initial curriculum and
standards will be issued by June 1991.
• Improved
Information for
Decisionmakers.—The Omnibus Budget Reconciliation Act of 1990 reforms credit
budgeting by requiring calculation of, and
annual appropriations for, the subsidies
inherent in direct and guaranteed loan
programs. Beginning in 1992, budgets will
reflect the real costs of Government credit.
Credit reform will require credit agencies
to become more accurate and accountable;
there will be budget consequences for inaccuracy after 1994. In addition, the budget
sets out, for the first time, allowances for
doubtful debt for the Government's existing direct and guaranteed loan portfolios.
Further, OMB's Five Point Program directly addresses the need for more accurate, consistent, and meaningful financial
information on the Government's credit
programs; and the CFOs Act requires, no
later than 1992, annual audited financial
statements for all credit programs.
• Reduced Risk Exposure.—In November
1990, OMB issued policy guidance regarding management of the Government's
guaranteed loan programs. This policy
guidance resulted from an intensive, government-wide study of ways to reduce the
Government's risk of losses from its $630
billion guaranteed loan portfolio. The pol-
Part Two-305
icy guidance, sets out extensive requirements for lender qualification, standard
lender agreements, lender reviews, portfolio management, inventory management,
and asset disposition.
In addition, through the Federal Credit
Policy Working Group, OMB has developed "Early Warning Reports" that highlight, for each major credit agency, significant trends in portfolio performance and
relevant economic indicators. These quarterly reports help to ensure that senior
agency and credit officials have timely information on actual or potential problems
in their credit programs.
Cash Management.—The Administration's
goal is to convert the Government's $2 trillion
plus annual cash flow, to the maximum feasible extent, to a fully electronic payment and
collection system. This effort will save administrative costs, reduce borrowing, and improve
service to the public.
• Payments.—A series of demonstration
projects, started in 1990, are currently
testing delivery of Federal benefits
through automated teller machines and
point-of-sale terminals. Aggressive implementation of the Prompt Payment Act has
resulted in over 90 percent of Federal payments to vendors being made on time,
avoiding interest and late payment penalties. (This compares with 84 percent of
Federal payments made on time in 1986.)
In addition, OMB strongly supports agency use of electronic payments through
Vendor Express and the GSA Small Purchase Card.
These efforts to improve the Government's
payment systems have been reenforced by
the Cash Management Improvement Act
of 1990 and the Food, Agriculture, Conservation, and Trade Act of 1990. The
Cash Management Improvement Act requires payment of interest when the Federal Government does not provide, or the
States do not disburse, Federal funds in
a timely and efficient manner. The Food,
Agriculture, Conservation, and Trade Act
requires establishment of electronic benefit transfer standards for the Food Stamp
Program by April 1992.
Part Two-306
• Collections.—Enactment of the Federal
Debt Collection Procedures Act of 1990
will improve the prospects for Federal collections, by providing for uniform Federal
procedures for enforcement of judgments
to collect Federal debt. The Federal Tax
Deposit Redesign Project—now in its testing phase and scheduled for completion in
1994—will automate the receipt, processing, and deposit of nearly $1 trillion in
annual employer tax deposits. In addition,
the Internal Revenue Service is studying
the feasibility of offsetting tax refunds to
businesses with delinquent Federal debt;
and OMB and the Department of Treasury
are working closely with agencies to implement mechanisms such as those involving
lockboxes, pre-authorized debits, and credit/debit cards.
Expired Accounts Legislation.—During
the summer and fall of 1990, OMB worked
with the Congress to address concerns that
inadequate controls over expired appropriation
accounts had allowed inappropriate uses of the
funds in these accounts. Comprehensive reform legislation was enacted as part of the
National Defense Authorization Act of 1990.
This legislation puts an end to agencies using
expired accounts for indefinite periods; expired
accounts must now be canceled five years after
their establishment. The legislation also places
significant restrictions on the use of expired
account funds during that 5-year period. In
January 1991, OMB issued government-wide
guidance for implementation of the legislation.
ADDRESSING THE HIGH RISK AREAS
From the many hundreds of weaknesses exposed in reports required by the Federal Managers' Financial Integrity Act (FMFIA) and
fresh assessments by agency heads, OMB identified, in October 1989, 106 high risk areas
requiring priority attention. Since that date,
12 new areas have been added to the list, two
areas have been merged, and 11 areas have
been eliminated (sufficiently corrected so as no
longer to require highlighting as a high risk).
Of the 12 additions to the list, 5 are based
on agencies' 1990 FMFIA reports (which were
submitted to the President in December 1990).
High risk areas are those where the Government's vulnerability is such that agency heads
THE BUDGET FOR FISCAL YEAR 1992
must personally see to their correction as a
matter of priority.
OMB's commitment is to ensure that reasonable resources are provided in the budget to
assist agencies in taking appropriate and timely corrective actions. OMB has also attempted
to focus agency attention on these areas of
high risk, and provide OMB and other staff
assistance in selected areas. Over a third of
the high risk areas involve financial management; the efforts described above under Financial Management are, in part, aimed at reducing risk in these areas. In addition, OMB
agency teams have directly investigated problems in the Railroad Retirement Board, the
Department of Education's Guaranteed Student Loan program, the Internal Revenue
Service, and the Bureau of Indian Affairs. The
Secretaries of Housing and Urban Development and Defense have made high risk corrections major Departmental priorities.
The results, however, have been mixed. In
assessing the High Risk List prior to addition
of five areas based on 1990 FMFIA reports,
OMB found that:
• In 36 of the high risk areas, agencies had
made significant progress in correcting the
deficiencies (Status 1).
• In 42 of the high risk areas, active efforts
were underway to improve progress in correcting the deficiencies (Status 2).
• In 23 of the high risk areas, OMB had
reservations about the adequacy of agency
plans and/or progress (Status 3).
There follows, at the end of this Chapter,
a list of the high risk areas (organized by
agency) that summarizes agency progress to
date in correcting them.
1991 Priorities.—The Administration plans
intensive efforts in 1991 with respect to the
following high risk areas:
• Department of Agriculture (USDA).—In
1991, OMB will focus on USDA high risks
related to the Farmers Home Administration and the Food and Nutrition Service's
Food Stamp Program.
—Farmers
Home
Administration
(FmHA).—FmHA has embarked on a
major endeavor to improve management
IX.A.
STRENGTHENING MANAGEMENT AND ACCOUNTABILITY
controls over loan making and loan servicing. A 14-State pilot (involving 42 percent of FmHA's loan volume) is underway to improve loan collection and property disposal efforts. In January 1991,
OMB and the Department of Agriculture
established a high level advisory committee to review progress on a regular
basis, recommend improvements to the
pilot, and facilitate solutions to problems
outside FmHA control.
—Food Stamp Program. In its 1990
FMFIA report, USDA advised that illegal food stamp trafficking represents an
area of high risk. An estimated $100
million in program benefits are illegally
exchanged each year for cash and items
such as drugs and weapons. In 1991,
OMB will work closely with USDA to
evaluate Food Stamp internal controls
and alternative delivery mechanisms,
such as electronic benefit transfer, to
minimize this problem.
• Department of Defense (DOD).—In 1991,
OMB will focus on DOD high risks in the
areas of information systems, contracted
advisory and assistance services, and property accountability.
—Information Systems.—The
military
Services and DOD agencies have, in the
past, each developed and maintained
separate data processing systems for
common administrative functions. These
redundant, overlapping, and non-standard data systems and communications
seriously impede the efficient functioning of the Department. In November
1990, the Secretary of Defense approved
the Corporate Information Management
(CIM) Program, which is designed to
correct these problems. CIM is designed
to ensure integration of computing, telecommunications and information management activities, and implementation
of policies, programs and standards governing the acquisition and operation of
automated data processing equipment.
In 1991, OMB designated CIM as a Priority System, ensuring OMB oversight
of CIM implementation.
—Contracted Advisory and Assistance
Services (CAAS).—The Department will
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implement in 1991 strengthened controls over contracts for advisory and assistance services. There will be a special
focus on competition and contract approvals. Better controls will also be pursued over funding provided to Federally
Funded Research and Development Centers and DOD funding passed through
to projects managed by the Department
of Energy. DOD expects that these increased controls will result in reduced
Departmental reliance on advisory and
assistance services and yield substantial
savings during the period 1991-97. The
DOD Inspector General continues to
identify problems with the definition of
CAAS, and to recommend increased attention to the cost-effectiveness of contractor support. OMB will in 1991 closely monitor DOD's efforts in this area.
—Property Accountability.—In its 1990
FMFIA report, DOD identified a new
material weakness: inadequate financial
accountability for real and personal
property in the Department of the Army.
The value of this property is estimated
at $200 billion. Property systems maintaining line item accountability are not
integrated with financial accounting systems, resulting in a lack of financial control over line item transactions. In 1991,
OMB will closely monitor DOD efforts
to correct this weakness in the Department of the Army, and will request that
DOD determine the extent to which this
weakness may also exist in the other
Services.
• Department of Education Guaranteed Student Loan (GSL) Program.—The GSL program has long been recognized as a high
risk area due to its statutory complexity
and rapidly rising default costs. Administrative steps to begin to address the default problem were implemented in 1989.
In the summer of 1990, a major student
loan guarantor, the Higher Education Assistance Foundation (HEAF), faced insolvency due to its inability to cover a large
number of defaults, primarily at vocational
schools. Following Education and OMB
staff review of HEAF's operating policies
and financial condition, the Department of
Education ended HEAF's authority to
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guarantee new loans and reached agreement with the Student Loan Marketing
Association (Sallie Mae) to assume management responsibility for the HEAF portfolio in September 1990.
As part of the budget reconciliation negotiations in 1990, the Administration
sought a package of GSL program restructuring and default reduction measures.
Many of these were enacted, and, as a
result, hundreds of schools that have been
abusing the system are now barred from
participation. Savings are projected at $1.7
billion over five years. In December 1990,
a joint Education/OMB Management Review Team, with participation from other
agencies and the private sector, was established to evaluate GSL program operations. Early in February 1991, the Team
will provide the Department with a management improvement plan to strengthen
the Department's administration of the
GSL program and provide the capabilities
necessary to manage a large financial enterprise. The Administration will also
work with Congress in 1991 to improve
the legislative foundation of the GSL Program, as part of the 1992 Higher Education Act Reauthorization.
• Department of Energy (DOE) Environmental Clean-up.—DOE is responsible for
addressing the serious environmental,
health and safety, and waste management
problems caused by Government weapons
production and nuclear facilities. DOE has
an active program underway to correct
these problems, and has completed "Tiger
Team" assessments of 18 of its 36 facilities. However, the full extent of the problems is not known; planned corrective actions are not adequately prioritized; and
reliable completion dates for corrective actions have not been determined. OMB will
work with DOE in 1991 and 1992 to: ensure that environmental, health, and safety risks are being appropriately assessed;
establish better means of prioritizing corrective actions based on risk assessment
and effective allocation of scarce dollars;
improve cost estimates and management
and oversight of the cleanup program; and
establish realistic, achievable plans for
corrective action. OMB, DOE, the Depart-
THE BUDGET FOR FISCAL YEAR 1992
ment of Justice and other affected agencies will also seek to address the impact
that employee liability issues are having
on program accomplishments.
• Department of Health and Human Services
(HHS), Health Care Financing Administration (HCFA) Financial Systems.—Effective operations of Medicare and Medicaid
programs require accurate and timely program data. A system (nine regional data
bases containing all beneficiary entitlement, utilization, and claims history data)
has been developed for Medicare. Although
this information should be convertible into
management information reports to permit
timely and accurate identification of payment problems, these reports have not
been completed. A similar informational
gap exists for Medicaid. Medicaid relies on
quarterly State reports to determine Medicaid grants to States and estimate Federal Medicaid expenditures by hundreds of
millions of dollars. These reports routinely
misestimate Medicaid expenditures and
provide little explanation for errors. HHS
has established an ad hoc adjustment factor for budget estimates and has indicated
its willingness to address the underlying
problems associated with State reporting.
During 1991, OMB will work closely with
HHS to develop better program data systems.
• Department of Housing and Urban Development (HUD).—HUD programs account
for 10 of the high risk areas. The passage
of the Department of Housing and Urban
Development Reform Act of 1989 and the
National Affordable Housing Act of 1990,
and the aggressive leadership of HUD
management, have resulted in progress toward acceptable management controls
within the Department. HUD quarterly reports on material weaknesses show continuing overall improvement. Key financial
management officials are now in place: a
Departmental Chief Financial Officer and
five Controllers (including one at the Federal Housing Administration (FHA)). FHA
has completed a management strategy and
funding plan that provide management
and staff with reasonable goals and understandable operational methods.
IX.A.
STRENGTHENING MANAGEMENT AND ACCOUNTABILITY
In 1991, OMB will continue to monitor
HUD reform, notably the Department's development of a new 5-Year Financial Management Systems Plan and the Department's efforts to minimize on-going risks
associated with terminated programs. In
addition, OMB will be looking at the two
new high risk areas identified in HUD's
1990
FMFIA
Report—Modernization
Projects (cost overruns and improperly
awarded contracts) and FHA Title I Manufactured Housing Loans (excessive insurance claims through 1990 estimated at
$500 million).
• Department of the Interior's Bureau of Indian Affairs (BIA).—The BIA has failed
to address its long-standing administrative
and financial management problems. Numerous Inspector General and General Accounting Office audits have reported problems in BIA control over tribal trust funds,
operations of field finance offices, travel
advances and vouchers, data systems, and
individual Indian money accounts. A special Senate report issued in 1989 underscored BIA's management problems.
In December 1990, in response to reports
of significant year-end account reconciliation problems, Interior and OMB reviewed the BIA financial system. The review confirmed the audit findings, as well
as OMB's assessment, that the Department's corrective action plans were inadequate. OMB and the Department collaborated in January 1991 in designing a plan
to correct BIA management problems, particularly its accounting system problems,
by October 1991. The Secretary of the Interior and the Director of OMB jointly announced in January 1991 the establishment of a special management team to approve all future transaction adjustments
in the BIA financial system and assist in
its complete overhaul and revamping.
The budget provides $26 million ($12 million over 1991) to improve the management and accountability of programs serving Indian tribes and individual Indians.
The budget also provides additional resources ($21 million over 1991) for a pilot
program to improve Indian education,
child welfare, reservation development,
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and road improvement programs administered by BIA. This increased funding is
being proposed on a pilot basis only, due
to BIA's longstanding and widespread
problems in properly accounting for the
use of funds. Any further funding of this
program beyond the pilot will be strictly
conditioned on improved BIA management
and accountability.
• Department of Justice Debt Collection.—
The Department of Justice has made
progress in implementing central planning
for its debt collection efforts, including
those on behalf of other agencies; but more
remains to be done. For example, the Department has not met the needs of referring agencies, OMB, and the Department
of the Treasury for information on case
status, plans for case resolution, and reconciliation of case values. OMB is working
with the Department and the referring
agencies, through the Litigation Subgroup
of the Federal Credit Policy Working
Group, to correct these problems, and has
asked the Department to submit, by May
1991, a comprehensive corrective action
plan. In December 1990, the Department
appointed a senior official within the Deputy Attorney General's Office to coordinate
Department debt collection activities.
• Department of Labor Job Training Partnership Act (JTPA) Program.—In its 1990
FMFIA report, the Department identified
the JTPA program as a high risk area,
due to inappropriate procurement practices by some Service Delivery Area administrative units. Problems have included: payment for inadequate performance; lack of competition in contracting;
actual or apparent conflicts of interest;
and inadequate contract monitoring. A
number of these issues were addressed in
the Administration's proposed JTPA
amendments, which were transmitted to
Congress in June 1989. The Administration will repropose legislation designed to
strengthen JTPA's fiscal integrity. In
1991, OMB will work closely with the Department in implementing planned corrective actions.
• Department of the Treasury's Internal Revenue Service (IRS).—In the summer of
Part Two-310
1990, a joint OMB/Treasury/IRS Work
Group was established to define long-term
IRS resource needs and performance expectations. A key aspect of the Work
Group's mission has been to address,
through proposals for IRS improvements
and additional IRS resources, the need for
increased collection activity and taxpayer
compliance. The budget reflects the Administration's commitment in both areas.
In 1991, the Work Group will analyze IRS
long term needs in the area of tax systems
modernization.
At the end of 1990, IRS delinquent accounts receivable totaled more than $61
billion, including an estimated allowance
for doubtful accounts of $17 billion. This
estimated allowance is preliminary.1 It in
no way changes the IRS enforcement responsibilities for all unpaid tax accounts.
By September 1991, the IRS will present
a detailed analysis of accounts receivable
collectibility and a corresponding allowance for doubtful accounts.
• Department of Veterans Affairs (DVA)
Loan Guaranty Fund.—The DVA has
made progress in developing alternatives
to foreclosure for defaults on guaranteed
single family mortgage loans. However,
DVA portfolio management could be improved through a more systematic approach to detecting, monitoring, and reacting to variations in credit underwriting
practices and changing economic conditions. In 1991, OMB will work with the
Department to begin addressing this situation through selection and testing of a
model for predicting DVA defaults. The
budget provides DVA with $367,000 in
1992 to implement this model and enhance the Lender Monitoring Unit's capacity to oversee loan servicers as well as
loan originators.
• National Aeronautics and Space Administration (NASA) Contractor Oversight.—
During 1990, NASA conducted—in col1 The estimated allowance is based on a 1988 study of IRS accounts receivable conducted by Price Waterhouse. The estimate assumes that approximately 40 percent of delinquent amounts beyond the 6-month notice stage may not be collected, as a result of
abatements (due to IRS or taxpayer error) or less than full payments. The estimate does not allow for conversions into repayment
due to stepped up efforts of the IRS to collect on tax delinquencies.
THE BUDGET FOR FISCAL YEAR 1992
laboration with OMB—an analysis of its
staffing, including a thorough review of its
reliance on contractors (rather than NASA
staff) for various programs and services.
The principal conclusion of the study was
that too few staff resources had been
available to monitor and oversee NASA
contractors—resulting in decreased quality
and timeliness in contractor performance.
To correct this situation, NASA established in 1990 a Headquarters Contract
and Subcontract Management Branch, and
expanded contract management training of
NASA staff. Further, NASA's personnel
ceiling for 1991 includes a sizeable increase for project management (including
staff increases for the contract administration function). The budget provides for
continued increases in NASA staffing for
that function. In 1991, OMB will monitor
the results of the 1990 and 1991 investments in improving NASA's contract management.
• Railroad Retirement Board (RRB).—In
April 1990, OMB led a management review of the operations and programs of
the RRB. The RRB's Inspector General
had previously identified large mass adjustment backlogs in retirement and survivor annuities, program fraud, problems in
railroad tax compliance, uncertainty about
the integrity of the RRB's trust funds, and
weaknesses in managing accounts receivable. Further, the RRB's 1989 FMFIA report acknowledged 20 material weaknesses and an inability to certify the adequacy of controls for the Board's biggest
benefit program.
Following a two week on-site review, a 20person interagency review team issued a
report documenting 42 findings and recommending 104 corrective actions. The report formed the basis for an OMB Management Review Hearing in June 1990. In
December 1990, RRB and OMB negotiated
an agreement whereby $14 million was
placed in the budget (to remain available
through 1996), but subject to annual apportionment releases as RRB problems are
solved. It is specified that "these funds are
to supplement, not supplant, existing resources devoted to such operations and improvements." These actions and funding
IX.A.
STRENGTHENING MANAGEMENT -AND ACCOUNTABILITY
provide the RRB with the means to
achieve substantially improved service to
RRB beneficiaries and to restore a basis
for confidence in the operations and integrity of the Railroad Retirement System.
INFORMATION RESOURCES
MANAGEMENT
The Paperwork Reduction Act requires
OMB, through its Office of Information and
Regulatory Affairs (OIRA), to work to improve
the Federal Government's management of information resources. Information resources
management (IRM) is a critical area—not only
because information resources constitute a
growing portion of agencies' expenditures, but
also because the Government is so dependent
on information technology to operate its programs. The earlier section outlining OMB activities to implement the CFOs Act indicates
the extent to which both the Congress and
the Executive Branch recognize this. OIRA's
recent IRM initiatives include:
• Reviewing, with assistance from the National Institute of Standards and Technology and the National Security Agency,
computer security oversight, especially
where computer security is identified as
a material weakness (posing risks to the
integrity of data and programs).
• Beginning development of a governmentwide policy on the dissemination of government information (ensuring that information created at taxpayer expense is accessible, on an equal and equitable basis,
to all users).
• Revising OMB Circular No. A-130, "Management of Federal Information Resources," which establishes Federal policies and procedures to guide agencies in
managing information resources.
• Improving records management policies so
as to help agencies identify and deal with
electronic records.
• Issuing guidance on what agencies may
charge for records under the Freedom of
Information Act.
• Issuing guidance to help agencies implement the Privacy Act.
Part T w o - 3 1 1
• In concert with the Office of Federal Procurement Policy, promoting the use of electronic data interchange between the Government and its business partners in order
to reduce paperwork and eliminate errors.
• Integrating agency paperwork reduction
efforts and the annual Information Collection Budget into overall agency IRM planning process.
• Conducting the Program for Priority Systems, explained in the following section.
Priorities
The Program for Priority Systems (PPS) was
established in 1984 to provide visibility and
give impetus to efforts to improve Government
service delivery and administration through
more effective use of computer and related information technology. One objective of PPS is
to involve top management in the planning
(including cost-benefit analysis) for Federal
uses of modern information technology, particularly in setting directions and making critical decisions for its development and use. PPS
projects are selected for their size, complexity,
sensitivity, or proposed use of a precedent setting technology or approach. The PPS provides
an opportunity to identify and facilitate successful information management practices and
technologies in areas where they are critical
to Government services and management.
Two PPS information systems have advanced sufficiently, so that they no longer require PPS planning assistance. These are the
Department of Commerce's Advanced Weather
Interactive Processing System (AWIPS-90)
and its Patent and Trademark Office automation plan. Two new systems, the Defense Corporate Information Management (CIM) program and the FBI Integrated Automated Fingerprint Identification System (IAFI3), have
been added to the program as presented below.
Internal Revenue Service's (IRS) Tax
Systems Modernization (TSM).—The IRS
has made substantial progress in defining the
information and systems architecture for the
TSM. It will provide a modern automated approach to processing taxes. TSM will decentralize to the ten service centers many of the processing functions currently performed at IRS'
central computing centers. TSM should reduce
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the paperwork burden associated with the filing of tax returns and enable the IRS to respond to taxpayer inquiries faster and with
more accurate information. The IRS will, during 1991, update and publish an approved Design Master Plan that outlines the IRS systems architecture in more detail and lays out
plans for transition from the current to the
target architecture. The budget includes $4.8
billion for TSM from 1990 through 1996.
General Service Administration's FTS
2000.—The Federal Telecommunications System (FTS) 2000 is a nationwide, interagency
telecommunications system that uses digital
switching and fiber optics technology to provide voice, data and video communications
services. Two 10-year contracts (aggregating
up to $25 billion) were awarded in December
1988 to replace the existing FTS voice communications network. The transition for 1.2 million Federal users from the old FTS was completed ahead of schedule in June 1990, saving
agencies $75 million in 1990. The new FTS
2000 is expected to save $200 million in 1991
on voice services alone. By law, the system
is mandatory for use by Federal agencies.
In addition to providing such enhanced voice
services as teleconferencing, calling card authorization codes, call screening, and "800"
service, FTS 2000 offers a wide variety of computer-to-computer data communications services (including packet switching, electronic
mail, video teleconferencing, and integrated
voice-data service). Detailed billing information
will improve agencies' ability to control costs.
In 1992, GSA will continue to bring agency
data communications onto the FTS 2000 network to improve the ability of Federal agencies
to share weather, law enforcement, and financial information. GSA will also conduct a
recompetition between the two incumbent vendors to help keep prices competitive with commercial services.
Social Security Administration's Strategic Plan.—By the year 2000, the number of
beneficiaries is expected to reach 45 million,
and the benefits disbursed will increase to over
$250 billion. During the 1980s, SSA developed
and implemented its System Modernization
Plan, updating the computer and telecommunications facilities supporting major SSA programs. This modernization provided for signifi-
THE BUDGET FOR FISCAL YEAR 1992
cant increases in productivity and allowed SSA
to replace its 1950s technology. SSA is expected to formulate a strategic plan, in the
spring of 1991, to provide for the next stage
of improvements. In addition to meeting increased workload, the SSA plan will attempt
to improve service to existing beneficiaries.
The improvements will include pre-retirement
notification of benefit status and eligibility and
increased reliance on electronic communication
with the public.
Governmentwide Financial Management
System (FMS).—Government standards call
for a single primary financial system in each
major agency. The objective is to integrate
agency financial systems with other administrative systems (e.g., payroll, loans, etc.) and
with major program systems. This PPS will
integrate agency primary systems, Treasury's
system, and OMB's system to form a single
governmentwide system. The FMS will provide
quality financial information to all levels of
management and improve control of the Government's budget and other resources.
Securities and Exchange Commission's
(SEC's) Electronic Data Gathering, Analysis, and Retrieval (EDGAR) System.—The
SEC receives 200,000 disclosure documents annually from 13,200 registrants (9 million pages
per year). The EDGAR system automates, in
electronic format, the filing, processing, and
dissemination of disclosure documents—ensuring more rapid information flows to financial
markets and as a result more effective reviews
of SEC filings, greater market efficiency, and
more productive allocations of capital.
The SEC has operated a pilot EDGAR program since 1984. In 1987, it revised the proposed operational program design to fund the
complete receipt, acceptance, and review process for required filings. The SEC awarded a
contract in January 1989 to implement the
EDGAR System by 1997, at a currently estimated cost of about $77 million over its life.
Federal
Aviation
Administration's
(FAA's) Advanced Automation System.—
The FAA has been provided $1.5 billion to
modernize computer systems supporting air
traffic control as part of its responsibility for
ensuring safe and efficient operation of airways and airports. FAA's Advanced Automation System (AAS) will be the backbone of the
IX.A.
STRENGTHENING MANAGEMENT -AND ACCOUNTABILITY
entire air traffic control system. The modernized system will include new controller
work stations, advanced communications, and
greater use of satellite navigation technology.
By 2000, the new system will annually support
185 million aircraft operations, 27 percent
more than at present. It will also generate
fuel savings and reduce maintenance personnel costs. The budget provides $716.9 million
in 1992 for this system.
Interagency Border Inspection System
(IBIS).—Three agencies (State, Customs, and
the Immigration and Naturalization Service)
created IBIS, a shared system, to assist law
enforcement officials at the border in identifying individuals of interest. By December 1990,
IBIS was operating at 17 airports handling
two-thirds of the 30 million travelers arriving
each year in this country by air. In 1991, IBIS
will be tested at three land border entry
points. In addition to budgetary savings from
resource sharing, IBIS has freed Customs inspectors to move among travelers and expedite
those who warrant no more than a cursory
inspection. IBIS will also improve border law
enforcement through ensuring cooperation in
the development of border information systems. Although total IBIS costs are only about
$10 million annually, this system is proving
to be a model of interagency cooperation.
Defense's Corporate Information Management (CIM) Program.—As noted above
in the discussion of high risk areas, in October
1989, the DOD initiated CIM as an effort to
eliminate unneeded redundancy in automated
information systems across the Department.
The CIM effort will identify common business
areas (e.g., inventory, payroll, warehousing)
and develop uniform information requirements
and data formats. Later, these requirements
will be incorporated as review criteria for systems acquisitions.
CIM was added to the PPS in 1991 for its
promising approach to information management. The program has completed the concept
development phase, and CIM functional groups
are studying various areas where improved
methods and requirements would be developed.
FBVs Integrated Automated Fingerprint
Identification System (IAFIS).—The IAFIS
is the keystone of the FBI Identification Divi-
Part Two-313
sion's modernization, initiative which includes
relocation.of fingerprint services to Clarksburg,
West Virginia. The IAFIS will be a rapid response, paperless system that will receive and
process electronic fingerprint images, criminal
histories, and related data on convicted felons.
Providing access to the data through the National Crime Information Center (NCIC) 2000
network will allow 63,000 Federal, State and
local law enforcement users to receive fingerprint identification data in hours instead of
weeks. The FBI is currently preparing the requirements and concept studies for the IAFIS.
PROCUREMENT REFORM
The Administration continued in 1990 its efforts to reduce and eliminate red tape, excessive delays, "influence peddling" and outright
fraud in administering the Federal Government's $200 billion procurement budget. While
program offices and Inspectors General continue to ferret out criminal wrongdoing, agencies and OMB's Office of Federal Procurement
Policy (OFPP) have developed new policy approaches to streamline and improve the procurement process. These address not only the
types of goods and services bought, but also
the procedures used to acquire them. They emphasize looking first to the commercial marketplace—for both services and products—and ensuring that the procurement process is open,
fair and free of bias.
Contracting for Services.—Over the past
decade, the Government's purchase of services
from the private sector has grown in real
terms by over thirty percent—almost five
times more than the growth rate for the purchase of supplies and equipment. Today, the
Government spends roughly as much on purchased services as it does for civilian personnel. These services range from such routine
activities as mowing lawns on military installations to developing high technology proposals
for new aerospace systems.
The General Accounting Office (GAO) and
others have articulated a number of concerns
with service contracting. These include cost
overruns and delays; and problems of performance, violations of law, and bias. Questions
have also been raised about contracting in "inherently Governmental" areas. For its part, industry has argued that "fixed price", low-bid
Part Two-314
contracting is inappropriate for acquiring sophisticated professional and technical services—placing as it does too much emphasis on
price as opposed to quality, and providing insufficient flexibility for contractors to use innovative methods to accomplish the Government's objectives.
OFPP published in the Federal Register in
September 1990 a draft policy letter for comment which directly addresses these concerns.
The policy would require Government officials
to look to quality as well as price, define their
needs at the time of contract award, and emphasize "what" should be accomplished (not
"how" the work should be performed). A final
policy letter will be published in February
1991, and regulations carrying out the policy
will be issued by July 1991.
Consultants.—The key rulemaking agencies
(Defense, NASA and GSA) published regulations in the Federal Register in October 1990
to implement OFPP's December 1989 Policy
Letter on Conflict of Interest Policies Applicable to Consultants (developed at Congress's direction). The policy requires contractors to report whether they have conflicts of interest or
enjoy an unfair competitive advantage. In
1991, the Administration will propose alternative legislative disclosure requirements that
will ensure procurement integrity, while making the legal requirements more straightforward and understandable. Both existing law
and the Administration's proposal include severe penalties for the misuse by Government
officials, contractors or consultants of sensitive
procurement information.
OFPP is working closely with the GAO to
improve other aspects of the Government's use
of consulting or advisory and assistant services. These efforts are aimed at two goals: defining more clearly the activities which constitute such services, and identifying those activities that should be considered "inherently
Governmental." Policies in both of these areas
should be published for comment in 1991.
Commercial Products and Technical
Data Initiatives.—The Administration proposed legislation in April 1990 to authorize
more flexible, commercial-style procedures for
acquiring commercial products. Congress was,
however, only prepared to enact a provision
authorizing the Government to require offerors
THE BUDGET FOR FISCAL YEAR 1992
to show that the products being offered were
commercial products, and even that legislation
failed passage. However, the Congress did
enact provisions which allow award to other
than the lowest bidder for a defense contract,
where factors other than price are important.
The Administration will again seek enactment
of its 1990 proposal to authorize more flexible
procedures for the acquisition of commercial
products, and will seek to extend governmentwide the provisions to allow factors other than
price to be considered in the award of a contract.
Existing procurement practices prevent the
Government from tapping the best of American
industry's commercial products. Too often, the
Government interprets full and open competition to require the issuance of detailed
specifications or the dissemination of proprietary technologies. These practices level firms'
competitive advantages and take away their
incentive to innovate and offer their best expertise. Ironically, these practices frequently
are coupled with Government demands for cost
and pricing or sales data in place of reliance
on competition to ensure reasonable prices.
This raises the costs and risks of Government
contracts—causing firms, in some cases, to be
unwilling to offer their goods to the Government.
Cost Accounting Standards.—The Cost
Accounting Standards (CAS) Board, authorized
by the Office of Federal Procurement Policy
Act Amendments of 1988, was established in
July 1990 to improve the consistency and accuracy of the cost accounting practices of firms
doing business with the Government. The
Board has exclusive statutory authority to
make, promulgate, amend and rescind cost accounting standards and interpretations of
those standards. It is chaired by the OFPP
Administrator and includes two private sector
members and two other Government members.
The Board has set, as its first priority, the
recodification of the two rules in the Code of
Federal Regulations affecting cost accounting
standards into one coherent and logical rule.
Special efforts will be made to ensure that no
one relying on one of the existing sets of rules
will be detrimentally affected by the transition
to the new recodified Cost Accounting Standards. The Board has, in addition, decided to
IX.A.
Part Two-315
STRENGTHENING MANAGEMENT -AND ACCOUNTABILITY
apply existing cost accounting standards to
contracts of the civilian procurement agencies;
national defense contracts are currently subject to CAS coverage. The Board has also
agreed to establish a set of research priorities.
To provide for maximum public participation, the Board solicited in November 1990 recommended agenda items from affected contractors, as well as from Federal agencies and
the general public. The response to this solicitation will form one basis for determining the
major areas of focus of the Board over the
next year.
PARTNERSHIPS WITH THE STATES
The Federalism Executive Order, E.O.
12612, establishes fundamental principles and
policymaking criteria to guide Federal departments and agencies in developing and carrying
out Federal policy. President Bush reaffirmed
in a Cabinet meeting in February 1990 his
commitment to Federalism and the Executive
Order.
One tenet of Federalism is a commitment
to State deregulation, in particular to not reimposing Federal regulations with respect to
block grants. Block grants are designed to
allow states and localities the flexibility to determine how best to serve their constituencies
in administering Federal programs. The Administration is continuing its efforts to achieve
the necessary balance between maintaining
program integrity and accounting for Federal
dollars, while, at the same time, assuring that
States and localities are not overburdened by
Federal administrative requirements. These
balances were carefully maintained in promulgating final rules for the Department of Education's Chapter 2 block grant program and
publishing proposed rules for the Department
of Housing and Urban Development's Community Development Block Grant (CDBG) program.
Administration officials met with State and
local elected officials and their representative
organizations on the details and potential impacts of the President's 1991 Federal budget,
and will do so again with respect to this budget. Forty-eight Governors urged, as a top priority, that there be no further Medicaid mandates for the next several years; in response,
the Administration has proposed no new mandates.
In keeping with this spirit of cooperation
and partnership, significant State and local
government achievement and innovation are
again highlighted in the States as Laboratories
section of this budget.
PAY REFORM
The 1991 budget noted the deficiencies in
the Federal civilian pay system, and indicated
that the Administration would submit legislation to begin Federal pay reform. Much more
than a beginning has been accomplished.
Working closely with the Congress over the
past year, the Administration was able to secure passage of a comprehensive Federal civilian pay reform bill.
The Federal Employees Pay Comparability
Act (FEPCA), enacted in November 1990,
made much needed structural changes to the
pay system that make it more responsive and
flexible. Among its major features, FEPCA provides for:
• a locality-based pay system that will reflect geographical variations in pay;
• special flexibilities, such as bonuses, that
will permit the Government to respond to
difficult or unusual staffing problems; and
• a requirement to develop, and institute,
systems that strengthen the link between
pay and performance.
With enactment of FEPCA, the Federal Government will now be able to compete more successfully for the skilled and dedicated employees that it needs to accomplish effectively its
many complex and important missions.
MANAGEMENT INVESTMENTS AND
SAVINGS IN THE 1992 BUDGET
The budget requests $29.5 billion in budget
authority and $27.5 billion in outlays, $4.1 billion and $3.3 billion, respectively, more than
in 1991—to improve service delivery, invest in
financial management, reduce the risks in
areas of high risk, and improve information
resources management. The budget also highlights $4.1 billion in savings and/or increased
receipts which will be achieved from selected
Part Two-316
THE BUDGET FOR FISCAL YEAR 1992
management reforms, and a new initiative to
improve Federal economic statistics.
Selected Improvements in Service
Delivery
Internal Revenue Service.—Roughly 115
million tax returns are filed each year. The
budget requests $6.7 billion and over 118,000
staff in 1992 for the Internal Revenue Service
(IRS), $622 million more than in 1991. The
IRS's budget specifically includes $450 million
to enable it to continue to modernize the tax
system to ensure that taxpayers pay the right
amount and get their refunds promptly.
Social Security.—Over 40 million Americans receive Social Security payments. The
budget requests $4.5 billion for operating the
Social Security Administration, $375 million
more than enacted in 1991. These amounts
will help the Social Security Administration
to continue replacing and upgrading obsolete
computer systems and enhance the level of
service provided to beneficiaries by claims representatives.
Medicare and railroad pension benefits from
the RRB. The budget requests $113 million
for operating the RRB, $22 million more than
enacted in 1991. As part of that increase, the
budget requests a new Special Management
Improvement Fund with $14 million in five
year budget authority to finance reforms that
evolved out of the joint RRB/OMB Management Review in 1990. The RRB has developed
an agreement with OMB, complete with annual performance measures, to carry out these
operational improvements. They should substantially improve service to America's railroad
pensioners.
Civil Aviation.—Last year, Americans
boarded commercial aircraft 457 million times.
The budget requests $9.3 billion in budget authority for the Federal Aviation Administration (FAA), $1.3 billion more than in 1991.
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.
Railroad Retirement Board (RRB).—
888,000 retired railroad workers and their
families receive Social Security equivalent,
Table A - l . INVESTMENTS IN MANAGEMENT IMPROVEMENT
(In millions of dollars)
1991
Enacted
Net Total:1
Budget authority
Outlays
Selected Improvement in Service Delivery:
Budget authority
Outlays
Investments in Financial Management:
Budget authority
Outlays
Investments to Reduce Risks in High Risk Areas:
Budget authority
Outlays
Information Resources Management Priorities:
Budget authority
Outlays
,.
,
1992
Proposed
1991-92
Increase
25,402
24,242
29,525
27,519
+4,123
+3,277
18,206
17,388
20,546
18,966
+2,340
+1,578
1,487
1,432
1,825
1,748
+338
+316
6,234
5,922
7,912
7,516
+1,678
+1,594
1,672
1,641
2,289
2,220
+617
+579
Budget authority and outlay totals for 1991 and 1992 are adjusted for duplication of items included in more
than one category.
1
IX.A.
Part Two-317
STRENGTHENING MANAGEMENT -AND ACCOUNTABILITY
Table A-2. INVESTMENTS IN FINANCIAL MANAGEMENT
(Budget authority in millions of dollars)
1991
Enacted
Credit and Cash Management
Audited Financial Statements
Financial Systems
Central Agency Systems and Standards
Total
Investments in Financial Management
The budget requests $1.8 billion for financial
management improvements, $338 million more
than enacted in 1991.
Credit and Cash Management.—The
budget requests $1.1 billion for credit and cash
management, $82 million more than enacted
in 1991. The largest single agency increase in
1992 is $35 million to FmHA for a 14-State
internal control pilot, accounting system improvements, and increased personnel costs (including salaries and training). $44 million is
requested for the Departments of Education
and Veterans Affairs and the Small Business
Administration to improve guaranteed loan
programs and debt collection. Treasury's Financial Management Service is requesting $6
million to improve credit and cash management activities governmentwide.
Financial Systems.—The budget requests
$603 million for financial systems upgrades,
$162 million more than enacted in 1991.
(These amounts include Central Agency Systems and Standards funding of $7 million as
reflected in Table A-2. They do not include
financial system upgrades to be undertaken in
1992 as part of the Defense Corporate Information Management (CIM) Program. CIM
funding requirements attributable to specific
financial systems are still being defined). This
funding provides for continued improvement of
agency financial systems throughout the Government, as well as the integration of agency
systems with upgraded central systems at
Treasury and OMB. These improved agency
and central systems will provide for more complete, accurate, and timely information for
management of the Government's programs,
1992
Proposed
1991-92
Increase
1,035
10
440
2
1,118
104
596
7
+82
+94
+157
+5
1,487
1,825
+338
and for disclosure of the Government's financial operations and condition through annual
financial statements.
Audited
Financial Statements.—The
budget requests $104 million for audited financial statements, $94 million more than enacted
in 1991. These amounts include $31 million
for agency preparation of financial statements
and $73 million for audits. The preparation
and audit of financial statements will improve
the quality of the Federal Government's financial data. The audits will also provide a means
for identifying financial management deficiencies.
Reducing the Risk in High Risk Areas
The budget requests $7.9 billion to reduce
the risk in high risk areas, $1.7 billion more
than enacted in 1991.
The largest requested investment ($5.1 billion) is for the Department of Energy (including development and implementation of the
Environmental Restoration and Waste Management Five Year PlanX Other significant requested investments include $533 million for
Department of Justice prison construction and
$243 million for Department of State security
improvements at overseas posts. (See listing
at the end of this chapter.)
Information Resources Management
The budget requests $2.3 billion for priority
systems, $617 million more than enacted in
1991. The areas of emphasis are noted in the
section on Information Resources Management.
Part Two-318
THE BUDGET FOR FISCAL YEAR 1992
Table A-3. SUMMARY OF THE PROGRAM FOR PRIORITY SYSTEMS
(Budget authority in millions of dollars)
1990
Actual
SSA Strategic Plan
Tax Systems Modernization
Governmentwide Financial Management System1
FTS 2000
FAA Advanced Automation System
Interagency Border Inspection System
SEC EDGAR System
Defense Corporate Information Management
FBI Automated Fingerprint Identification System2
Totals
1 1990
1991
Estimate
1992
Proposed
207
158
433
38
537
10
12
225
278
442
20
585
10
12
100
260
451
603
20
717
10
9
219
1,395
1,672
2,289
and 1991 adjusted to reflect change in reporting basis.
not available because project in preliminary planning.
2 Estimate
Illustrative Savings from Management
Reform
The budget anticipates $4.1 billion in savings and/or increased receipts as a result of
selected management reforms.
Defense Management Reform (DMR).—
The budget reflects nearly $700 million in
DOD management reform savings for 1992.
Total savings for the period 1992-96 are expected to be about $10 billion. The combination
of new initiatives and those announced last
year are projected to yield savings of over $72
billion during the 1991-1997 period. The Department's implementation of DMR recommendations is being tracked in the Management by Objectives (MBO) system; the specific
reforms are described in the Chapters on
MBOs and Preserving National Security.
Improved Debt Collection.—The budget
anticipates $2.7 billion in additional 1991 receipts from the collection of debt—$1 billion
from delinquent tax debt and $1.7 billion from
non-tax debt. At the end of 1990, total delinquent debt stood at $107 billion. Allowances
for doubtful accounts stand at $105 billion at
the end of 1990—$17 billion for tax debt and
$88 billion for nontax debt. As noted above
in the discussion of IRS under "Addressing
The High Risk Areas", the estimated allowance
for doubtful tax debt is preliminary. The composition of the allowance for doubtful nontax
debt is detailed in Chapter VIII.A., Table A-9,
"Actual and Anticipated Losses from the Government's Pre-Credit Reform Portfolio."
The growth in actual delinquent debt between 1989 and 1990 is shown in Table A-4.
The 4.8 percent growth in tax receivables delinquent is due to factors such as increased
penalties, stepped up enforcement, and the
growth in taxes due. For loan receivables delinquent, most of the growth is due to the continued high rate of student loan defaults, over
$2 billion in 1990. For other delinquent receivables, the growth is principally the result of
first-time agency reporting to Treasury of $336
million for uncollected Medicare overpayments
and $1.3 billion due to the Department of Energy's Petroleum Violation Escrow Fund.
• Tax Debt— The budget includes $47 million for the second year of a 3-year tax
collection initiative to slow the growth in
tax debt. The additional 799 collection personnel hired in 1991 and the additional
922 budgeted in 1992 should, by themselves, increase collections by $757 million
between 1991 and 1993. The IRS will develop a management improvement plan to
increase collections by up to $2.25 billion
through various initiatives such as: increasing the use of installment agreements; modifying non-filer notices to include a demand for payment; improving
ability to locate and contact taxpayers;
IX.A.
Part Two-319
STRENGTHENING MANAGEMENT -AND ACCOUNTABILITY
Table A-4. GROWTH IN DELINQUENT DEBT 1989-1990
(Dollar amounts in millions)
Tax Receivables Delinquent
Loan Receivables Delinquent
Other Receivables Delinquent
Total
Dollar
Change
Percent
Change
1989
1990
58,660
27,265
13,147
61,451
29,870
15,549
+2,791
+2,605
+2,402
+4.8
+9.6
+18.2
99,072
106,870
+7,798
+7.9
Source: Treasury Schedule 220-9.
streamlining the offer-in-compromise procedure; and expanding cooperation with
State agencies.
• Non-Tax Debt—The budget requests in
1992 $606 million and 10,224 staff to enhance non-tax collection efforts, $63 million and 478 staff more than in 1991. For
example, 92 staff and $4 million have been
added to enhance Department of Veterans
Affairs collection of delinquent medical
debt from third party insurers; additional
collections of $185 million are expected
from this investment. Legislation is under
consideration to mandate the use by all
agencies of special collection tools (e.g.,
Federal income tax refund offsets, use of
private collection agencies, and Federal
employee salary offsets).
• When all delinquency prevention and collection methods fail, the Department of
Justice seeks recovery through litigation.
The Administration has long recognized
the need for improvements in the Justice
Department's ability to collect debt re-
ferred by other Federal agencies (currently
$6.5 billion). Additional recoveries of $35
million over 1991 are anticipated from implementation of a centralized prescreening
and case tracking system and the Federal
Debt Collection Procedures Act of 1990.
Davis-Bacon Reform.—The budget includes savings of $734 million in budget authority and $237 million in outlays from legislative and regulatory reform of the DavisBacon Act. Legislative reform will include proposals to raise the threshold for contracts subject to the Act's provisions from $2,000 to
$250,000 and to reduce paperwork requirements. In addition, a Federal District Court
has allowed implementation of a Department
of Labor regulation permitting the use of
"helpers" on Federally funded construction
projects. Savings from implementation of the
DOL regulation have also been included in the
budget.
Economic Statistics Initiative
Federal economic statistics alter private and
public spending patterns, move markets and
Table A-5. DAVIS-BACON REFORM SAVINGS
(In millions of dollars)
1992
Autlionty
Outlays
Federal Funds
Trust Funds
387.5
346.3
168.0
68.7
Total
733.8
236.7
Part Two-320
drive Government policy. The budget requests
nearly $30 million over 1991 enacted levels
for an Economic Statistics Initiative that
builds on the improvements requested in the
1991 budget. The Initiative provides for an increase of more than $200 million over the five
year period 1992-96.
The Initiative includes: (1) modernizing the
National Income and Product Accounts to improve their accuracy, breadth, and international comparability; (2) improving the coverage and detail of international flows of
funds; (3) separating quality and inflation
changes in price data; and (4) increasing the
coverage of the service sector which accounts
for more than 70 percent of total U.S. output.
The Initiative is concentrated in three agencies: the Bureau of Economic Analysis, the Bureau of Labor Statistics, and the Bureau of
the Census. Funds are also requested for the
THE BUDGET FOR FISCAL YEAR 1992
National Agricultural Statistics Service and
the National Science Foundation.
In addition to these program improvements,
the Initiative will result in fundamental
changes in the Federal statistical system itself.
First, through an accompanying legislative initiative, it will provide a standardized mechanism for limited sharing of confidential statistical information solely for statistical purposes
between statistical agencies under stringent
safeguards. This will improve data quality
throughout the Federal statistical system. Second, the Initiative will help the Government
acquire an improved statistical workforce by
creating a graduate program specifically designed to meet Federal statistical survey
needs. This program will improve the talents
and skills of the existing workforce, and attract new highly qualified applicants to the
Federal statistical system.
IX.A.
Part Two-321
STRENGTHENING MANAGEMENT -AND ACCOUNTABILITY
PROGRESS REPORT
CORRECTION OF HIGH RISK AREAS
This is a progress report on agency efforts
to correct high risk areas. OMB's assessment
of agency progress is presented in Column 3,
"Status." The status codes are: (1) Significant
progress; (2) Active efforts underway to im-
prove progress; (3) Reservations about adequacy of progress and/or plans; (A) Added to
High Risk List as a result of 1990 FMFIA
report; (D) Deleted from High Risk List.
DEPARTMENT OF AGRICULTURE
(In thousands of dollars)
High Risk Area
Progress to Date
Farmers Home (FmHA)
Loan Programs: High
total delinquencies
($13.4B) and high
delinquency rates (23.2%)
in 1990.
14-State pilot (involving 42% of FmHA annual loan volume)
initiated to test separation of loan-making and loan-servicing
functions. State plans approved in July 1990. Next steps: pilot
staffs to be hired and trained in 1991. Initial assessment of
pilot to be completed by June 1992.
Food and Nutrition Service
(FNS): Food Stamp
coupon and bank deposit
data not reconcilable
(difference of over $200M
annually).
Status
1991
1992
Estimate
Proposed
2
45,668
64,265
New depositing and reconciliation procedures put in place at all
financial institutions as of September 1, 1990. Next step:
evaluation of the national implementation of the system
redesign will be performed by September 1991.
1
0
0
FNS Food Stamp Coupon
illegal trafficking (est.
$100M in benefits
diverted annually).
In its 1990 FMFIA report, the USDA reports a new high risk
area: Food Stamp coupons are being exchanged for cash and
items such as drugs and weapons. Enhancements to policy and
investigative techniques to undercover trafficking are
underway. Electronic benefits transfer (EBT) systems that
have been piloted in 3 States (MD, PA, and NM) may be a
safeguard to prevent unauthorized third parties from abusing
the program. ADDED TO HIGH RISK LIST.
A
Federal Crop Insurance:
Overpayment of claims.
Improved management oversight by OMB and FCIC has
resulted in a decreasing percentage of claims being overpaid
(from 31% in 1985 to 13% in 1988). Next steps: more rigorous
compliance reviews of reinsured companies to ensure
adherence to the terms of the Standard Reinsurance
Agreement.
1
5,598
5,690
DEPARTMENT OF COMMERCE
(In thousands of dollars)
High Risk Area
Progress to Date
Departmental computer site
security weak.
2 8 0 - 0 0 0 0 - 9 1 - 1 1
In accordance with the Computer Security Act of 1987, plans
for the security of sensitive systems were completed and
NIST/NSA comments incorporated. Next step:
implementation of plans already underway.
(PART 2)
Status
2
1991
1992
Estimate Proposed
2,498
2,448
Part Two-322
THE BUDGET FOR FISCAL YEAR 1992
DEPARTMENT OF COMMERCE—Continued
(In thousands of dollars)
1991
1992
Estimate Proposed
Progress to Date
Status
Departmental financial
systems inadequate.
Department lacks a core
financial system.
Previous attempt to develop corefinancialsystem unsuccessful
and OMB finds 1990 systems plan flawed. DOC has taken
corrective action, including the establishment of a new
Office of Financial Management with responsibility for all
financial systems development. OMB continues to have
reservations about the adequacy of DOC actions until a
financial management plan is received and reviewed; DOC
believes that there are active efforts underway to improve.
Next steps: a plan for systems improvement is under
development; 1992 funding provides for initial systems
development.
3
250
3,000
National Weather Service
(NWS): Major systems
acquisition problems
($114M at stake in 1991).
A range of major systems, procurement and management
issues adversely affect the ability of the Department and
NOAA to acquire major systems, particularly for the
Weather Service's modernization. Next steps: in 1991, DOC
and NOAA senior management will implement an action
plan to strengthen systems management, acquisition and
administrative controls over major systems implementation.
3
164,106
221,503
Minority Business
Development Agency
(MBDA): Inadequate
grants management
($44M at stake in 1990).
Despite marginal improvements, 44% of grants were processed
late in 1990. Funding of special projects criticized by IG.
Private consultant study performed. OMB has reservations
about the adequacy of agency progress; DOC believes that
with the appointment of a new Acting Director and a strong
commitment to implement the study recommendations,
there are active efforts underway to improve. Next steps:
implementation plans are being developed based on study
recommendations. Special project funding has been frozen in
the interim.
3
200
100
Patent and Trademark
Office (PTO): Problems in
automating systems.
Long term effort to automate patent and trademark paper
files. Revised program that experienced delays in the past is
back on track. Next steps: identifying the functional, data
and performance requirements for the next generation of
electronic trademark searching, and evaluating the
desirability of further expansion of the automated Patent
Search system data base. DOC, in its 1990 FMFIA report,
states that this high risk has been corrected and proposes
dropping it from the High Risk List; OMB will review this
request in February 1991.
1
54,302
69,069
High Risk Area
DEPARTMENT OF DEFENSE
(In thousands of dollars)
High Risk Area
Departmental and Service
supply operations
inadequate, weakening
effective management of
inventories ($103B at
stake).
Progress to Date
Status
Defense Management Report (DMR) actions have produced
major improvements. 9 of 29 material weaknesses resolved.
Major changes: supply depots consolidated; inventory points
centralized from Services to Defense Logistics Agency (DLA).
Problem area: private contractor access to DOD supply
system inadequately controlled. Next steps: current DMR
initiatives will continue as part of an overall inventory
reduction plan. Policy and procedure revisions scheduled for
completion in 1991 to address private contractor access
weakness.
2
1991
1992
Estimate Proposed
80,000
20,500
IX.A.
Part Two-323
STRENGTHENING MANAGEMENT -AND ACCOUNTABILITY
DEPARTMENT OF DEFENSE—Continued
(In thousands of dollars)
1991
1992
Estimate Proposed
High Risk Area
Progress to Date
Status
Departmental and Service
information technology
development and ADP
security deficient ($9B at
stake for general purpose
ADP).
Eleven of fifteen identified weaknesses have been addressed.
DOD is developing a Corporate Information Management
System (CIMS) that: improves information life cycle
management; eliminates multiple information systems; and
standardizes and improves the quality of MIS. As part of
CIMS and other initiatives, ADP equipment acquisition and
inventory controls will be enhanced. Problem areas: ADP
security and system support for MIS; these are being
addressed. Next steps: CIM initiative planned for
implementation during 1991 through 1995. Over 100
information resources management reviews are planned for
1991.
2
364,700
395,700
Foreign Military Sales
(FMS) Program:
unreconciled balances
($170B of active cases at
stake).
1990 FMFIA report shows 3 of 5 weaknesses corrected. No
new unreconciled balances following major revisions in
accounting procedures. New integrated financial
management system now charges customers for costs and
surcharges. Most unreconciled balances are resolved. DOD
believes that significant progress has been made in this
area; OMB maintains its assessment that active efforts are
underway to correct this deficiency until there is an
opportunity to evaluate DOD's recent accomplishments.
Next steps: reconcile remaining out of balance conditions,
specifically case level detail records with country level
summary records.
2
N/A
N/A
Departmental and Service
controls over DOD
property in private
contractor possession and
post-award oversight
inadequate. (Contractors
held $56.5 billion in DOD
property in 1989.).
Significant progress in resolving the eight identified
weaknesses including: improved oversight by Contract
Administration Offices; better documentation for contract
awards; improved monitoring of subcontractors by prime
contractors; better controls over acceptance of material into
DOD inventory. DLA and Service components
implementation plans are on schedule. DMR initiative will
streamline and provide improved ADP systems for
management purposes. Next steps: CIM plans in 1991 to
develop functional requirements needed to gain auditable
control of government material held by contractors.
2
15,000
N/A
Departmental and Service
controls over contracted
advisory and assistance
services (CAAS)
inadequate or nonexistent (almost $2B at
stake in 1990).
Major reductions in CAAS expected in 1991 and outyears as a
result of a DMR initiative. Policy changes were implemented
to improve control over CAAS expenditures. The DOD
Inspector General continues to identify problems with the
definition of CAAS, and recommends that the costeffectiveness of contractor support for continuing
requirements be given more attention. Competition and the
use offirm-fixed-pricedcontracts for CAAS can be increased.
Next steps: DOD plans to revise the definition of CAAS and
develop CAAS reporting, accounting and tracking
requirements during 1991.
2
N/A
N/A
Departmental and Service
financial accountability
for real and personal
property is inadequate
($200B at stake in Army).
In its 1990 FMFIA report, DOD identified a new material
weakness: inadequate financial accountability for real and
personal property in the Department of the Army. Property
systems maintaining line item accountability are not
integrated withfinancialaccounting systems, resulting in a
lack offinancialcontrol over line item transactions. Next
steps: in 1991, OMB will closely monitor DOD efforts to
correct this weakness, and will request that DOD determine
the extent to which this weakness may also exist in the
other Services. ADDED TO HIGH RISK LIST.
A
N/A=Not available.
Part Two-324
THE BUDGET FOR FISCAL YEAR 1992
DEPARTMENT OF EDUCATION
(In thousands of dollars)
1991
1992
Estimate Proposed
High Risk Area
Progress to Date
Status
Student Financial Aid
(SFA) Program
Management: Guaranteed
Student Loan and other
SFA program abuses and
fraud. Loan defaults are
increasing by nearly $1B
(est.) annually.
Default and Accreditation, Certification, and Eligibility
initiatives underway; Guarantee agencies being reviewed to
determine financial condition; legislative proposals being
developed. Next steps: Education-OMB Management team
formed to recommend management improvements by
February 1991.
2
12,643
29,343
Departmental inability to
generate reliable
accounting data.
Limited improvements made in reconciling subsidiary and
program accounts to primary accounting system. Next steps:
begin integration of accounting and payment management
systems by September 1991.
3
7,234
8,934
Departmental contract and
grant award and closeout.
Vulnerable to
unauthorized drawdowns
($400M).
Automated closeout system being developed as part of
Payment Management System. Next steps: automated
suspension of funds will be operational in June 1991.
2
866
366
Departmental internal
control process weak in
identifying material
weaknesses.
Two Senior level committees established to look at
weaknesses. Greater management and program attention to
internal controls. Next step: implementation of Common
Audit Resolution System (CARS) will begin in April 1991.
1
613
1,313
Departmental program
compliance monitoring
and accountability
inadequate.
Department and IG staff are instituting a comprehensive
grant monitoring and evaluation effort in 1991 and 1992.
Next steps: 1991 and 1992 funding increases provided for
additional monitoring staff, increased travel for on-site
monitoring (travel funds increase 35% in 1991 and an
additional 10% in 1992).
2
16,250
32,450
Departmental security of
computer systems
inadequately reviewed.
Security of the most sensitive systems being reviewed through
implementation of the Computer Security Act of 1987. Next
steps: five ADP systems will have complete security reviews
by end of 1991.
2
582
582
Office of Special Education
and Rehabilitation
Services: Allegations of
mismanagement.
Management improvements have been implemented.
DELETED FROM HIGH RISK LIST.
D
DEPARTMENT OF ENERGY
(In thousands of dollars)
High Risk Area
Progress to Date
Status
Defense nuclear production
capabilities shut down.
Modernization Review Committee established; design
contracts awarded for two production facilities; quality
assurance program implemented; reactor operations
manual issued. Next steps include environmental impact
statement for new production reactors and
reconfiguration of Five-Year Plan by the end of 1991.
1
1991
Estimate
382,000
1992
Proposed
533,500
IX.A.
Part Two-325
STRENGTHENING MANAGEMENT -AND ACCOUNTABILITY
DEPARTMENT OF ENERGY—Continued
(In thousands of dollars)
High Risk Area
1991 :
Estimate
1992
Proposed
Progress to Date
Status
Nuclear plant
environmental problems.
Established (i) separate organization to develop and
implement Environmental Restoration and Waste
Management Five-Year Plan and (ii) in-house capacity to
conduct reviews (tiger teams). Published Five-Year Plan
and initiated priority 1, 2, and 3 activities; conducted 18
tiger team reviews; and provided training to senior and
mid-level managers. Even though active efforts are
underway to improve progress, reservations about the
adequacy of progress remain, however, because the total
extent of the problem, as well as the costs and time
frames for corrective action, are unknown. Also,
improvement projects are not adequately ranked by
priority and tracking systems are incomplete and
overlapping. Next steps include developing a risk based
priority system by the end of 1991, completion of tiger
team reviews by 1992, establishing a central tracking
system, and continuing implementation of Five-Year Plan.
3
3,103,067
4,046,477
Nuclear plant health and
safety problems.
Established Offices of Nuclear Safety and Health;
conducted 18 tiger team reviews and over 100 technical
safety appraisals; and strengthened training program.
Even though active efforts are underway to improve
progress, reservations about the adequacy of progress
remain, however, because tiger team assessments remain
to be completed and comprehensive epidemiological data
are unavailable. Next steps include revising nuclear
safety rules and enforcement policies and modifying
criteria for awarding contractor fees to emphasize safety
by the end of 1991, conducting remaining tiger team
reviews and establishing comprehensive epidemiological
data by the end of 1992, and correcting safety
deficiencies over the long term.
3
105,225
159,409
Nuclear waste storage and
acquisition and contract
management inadequate.
Plan for restructuring program initiated; completed Safety
Analysis Report for the Waste Isolation Pilot Plant;
modified contractor award fee review process; expanded
reviews of field procurement operations; and
strengthened Energy Systems Acquisition Advisory
Board. Next steps include initiating the test program at
WIPP in 1991, determining site suitability of Yucca
Mountain by 2001, and implementing changes to
contractor indemnification and award fee structures by
1992.
2
299,208
372,518
Departmental oversight of
commercial functions is
inadequate. ($8B at stake
in 1990).
Established organization to provide central oversight of
pricing practices; implemented pricing procedure to
recover the full cost of employees involved in
reimbursable work; and revised contractor purchasing
review guidelines. Next steps include a Department-wide
review of commercial functions in 1991 to include policies
and oversight of Power Marketing Administrations, work
for other Federal agencies, uranium enrichment, waste
disposal receipts from utilities, oil price overcharges, and
isotope production.
2
493
252
Part Two-326
THE BUDGET FOR FISCAL YEAR 1992
DEPARTMENT OF HEALTH AND HUMAN SERVICES
(In thousands of dollars)
High Risk Area
1991
1992
Estimate Proposed
Progress to Date
Status
Food and Drug
Administration (FDA):
Application review
process for generic drug
approval faulty.
First-in, first-out (FIFO) review procedure established; 29
review guidelines issued; Ombudsman and Office of Generic
Drugs created; special audits of 36 firms with 3,250 drug
approval applications. Next step: in 1991 PHS will conduct a
foliowup review of the generic drug application process to
ensure corrective results have been achieved. HHS, in its
1990 FMFIA report states that this high risk is almost
corrected and will propose dropping it from the High Risk
List following a final management assessment.
2
46,500
52,100
Health Care Financing
Administration (HCFA):
Financial systems
inadequate to predict
Medicare/Medicaid costs.
Accurate and timely Medicare program accounting data
needed for proper program management. Establishing
common Medicare patient database (CWF) and developing
data base management system for report generation. (Better
Medicaid data also needed to identify problems and estimate
costs.) Next steps: during 1991 complete development of
Medicare reports with costs by function, and work with
HCFA to improve Medicaid information systems.
3
14,800
8,000
HCFA: Medicare payment
safeguards provide
insufficient "medical
necessity" checks ($1.8B
at stake in 1992).
Common Medicare patient database to isolate unnecessary
medical procedures partially implemented; additional HCFA
guidance on safeguard activity provided to contractors. Next
steps: during 1991, management should be able to increase
savings by improving prepayment reviews and targeting
audits.
1
282,400
282,400
HCFA: Medicare making
payments which should
be made by others
($600M at stake in 1992
from data match).
IRS-SSA W-2 data match instituted; Medicare claim form
modified; employer questionnaire implemented. Next steps:
during 1991 manually pursue leads generated by IRS-SSA
data match. The budget proposes support for
implementation of the Government's insurance information
Clearinghouse.
1
55,100
55,100
Social Security
Administration (SSA):
SSA and IRS not
reconciling earnings
records (1978-87).
Corrected problem leading to backlog; two requests for
information sent to employers accompanied by telephone
folio wup for large cases; SSA's efforts to reconcile tax years
1978-87 completed. DELETED FROM HIGH RISK LIST.
D
Indian Health Service:
Insufficient financial
controls and attention to
management ($1.5B (BA)
at stake in 1992).
During 1990, IHS recognized the magnitude and scope of its
problems, developed the QM initiative to address these
weaknesses, and, in late 1990, began instituting corrective
actions such as implementing travel voucher controls.
Although work continues, new weaknesses, such as budget
execution controls, continue to be identified through IHS
and IG reviews. HHS believes that there are active efforts
underway to improve progress. Reservations remain,
however, because the full scope of the problem may not be
known. Next steps: during 1991, IHS and HHS management
need to exercise extensive oversight and tracking to keep
improvement efforts on schedule so that planned results can
be realized. FMFIA and other reviews will continue to
identify management and operational weaknesses. The
budget provides additional resources for financial
management staff ($5M) and for ADP ($1M).
3
830
6,400
IX.A.
Part Two-327
STRENGTHENING MANAGEMENT -AND ACCOUNTABILITY
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
(In thousands of dollars)
1992
1991
Estimate Proposed
High Risk Area
Progress to Date
Status
Departmental data systems
fail to verify tenant
information in Section 8
subsidy program ($10B at
stake annually).
Computer match with SSN established to verify income;
contractor reviewing program and drafting action plan.
Integrated information processing system being built to
address this and other major data processing concerns. Next
steps: finalize action plan by February 1991.
2
4,894
19,577
Departmental core
accounting system lacks
controls and security.
HUD has hired CFO and Comptrollers for Administration,
FHA, Public and Indian Housing, Community Planning and
Development, and Government National Mortgage
Association. Contract awarded to identify by end of March
1991 corrective actions needed. Next steps: review and,
where appropriate, implement recommendations.
3
4,791
6,625
Departmental: Secretary's
discretionary loan
management set-aside
funds produce arbitrary
awards ($5M at stake
annually).
For 1990, clearer policies established to ensure open and
competitive bidding in accordance with 1989 HUD Reform
Act. In 1991, program abolished. DELETED FROM HIGH
RISK LIST.
D
Federal Housing
Administration (FHA):
High defaults in
multifamily coinsurance
(program incurred $960M
in losses from inception to
1989).
Program terminated (no new liabilities). HUD needs closely to
scrutinize claims submitted by lenders ($544M in 1990).
Next step: develop a plain to minimize continuing losses by
July 1991.
3
246
1,024
FHA distributive shares
and insurance premium
refunds delayed and
miscalculated.
Automated audit trails and sampling process installed to
identify error rates and size of overpayment. The National
Affordable Housing Act of 1990 suspends payment of
distributive shares unless FHA fund is actuarially sound.
Next steps: verification review to be completed by March
1991.
1
10
0
FHA single-family property
disposition controls
inadequate ("Robin
HUD") ($3B at stake in
annual property sales).
Standard contract and bonding requirements for area
management brokers have been implemented. Next steps:
complete installation of new property management system
by September 30, 1991.
2
9,857
9,000
FHA Retirement Service
Center program has
excessive default claims.
Reviewed some Centers; proposed regulation to terminate
program published in Federal Register on 11/23/90; awaiting
public comments. HUD needs to develop plan to minimize
continuing losses. Next steps: publish final regulation by
May 1991.
3
14
o
FHA: Section 8 moderate
rehabilitation
overpayments and noncompetitive awards (IG
estimates $ 413M in
overpayments).
Program reformed in 1989 but received no funding in 1991.
Program abolished in 1992 by recent National Affordable
Housing Act. Reviewed rents of 60 projects funded since
1984. Next steps: reduce excessive rents and collect subsidy
overpayments where warranted. To be completed by March
31, 1991.
1
14
0)
FHA single-family mortgage
insurance (MMI Fund)
risks insolvency (lost
$1.4B in 1988 on accrual
basis).
$45B is underwritten every year. Investors/non-homeowners
eliminated from program in 1990; vacation houses
eliminated in 1991; stricter appraisal standards being
implemented. National Affordable Housing Act of 1990
raised insurance premiums and made other program
reforms to reduce defaults. Next steps: monitor
implementation of legislation and check for adverse selection
problems.
2
0
0
Part Two-328
THE BUDGET FOR FISCAL YEAR 1992
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT—Continued
(In thousands of dollars)
High Risk Area
Progress to Date
Status
FHA Title I Manufactured
Housing Loans have
excessive claims (costs to
FHA and GNMA over
$500M).
Program does not require normal real estate underwriting
procedures, such as on-site property inspection. Many
lenders not evaluating borrower creditworthiness, and not
monitoring dealer compliance. HUD looking into program
redesign. ADDED TO HIGH RISK LIST.
A
Public and Indian Housing
(.PIH): Public Housing
Modernization Projects
inadequately
administered by Public
Housing Authorities.
PHAs funding projects without regard to their viability.
Contracts improperly administered. Costs are undocumented
and incurred without HUD approval. HUD revising
handbook, staff training and monitoring procedures. ADDED
TO HIGH RISK LIST.
A
1992
1991
Estimate Proposed
Program terminated.
DEPARTMENT OF THE INTERIOR
(In thousands of dollars)
High Risk Area
Progress to Date
Status
1991
1992
Estimate Proposed
Bureau of Land
Management (BLM):
Inadequate gas and oil
inspection to verify
production and usage.
(Current annual
revenues: $385M).
BLM inspection and enforcement procedures continue to
improve and new staff hired for greater on-site inspection
coverage.
1
2,397
4,745
Bureau of Territorial and
International Affairs:
Lack of grant oversight
($325M at stake).
No Headquarters oversight of grant funds; positions to be
added in 1991 and 1992. Next step: recruit and staff
Headquarters financial management position in 1991.
3
130
415
Bureau of Indian Affairs
(BIA): Poor management
and inadequate financial
systems and controls.
In 1991, BIA is establishing an Office of Audit and Evaluation
to oversee high risk areas and material weaknesses and is
reconciling and auditing Tribal and Individual Indian
accounts. Next steps: an Interior-OMB management review
team established in January 1991 will implement
improvements infinancialmanagement by October 1991.
Resources are provided in 1992 forfinancialmanagement
improvements, trust fund activities, increasing Indian oil
and gas lease inspections, and audits of Indian royalty
payments and revenues.
3
13,900
25,500
DEPARTMENT OF JUSTICE
(In thousands of dollars)
High Risk Area
Departmental debt
collection system
inadequate to support
collection of $6.5B
inventory.
Progress to Date
Associate Deputy AG for Debt Collection appointed in
December 1990 to centralize planning and oversight. Next
steps: DO J will prepare by May 1, 1991, a comprehensive
plan to improve controls, resolve both referred and DO J
debts, and address the information requirements of client
agencies, OMB, and Treasury (including reconciliation of
debt collection cases in DOJ inventory with receivables
referred by client agencies).
Status
3
1991
1992
Estimate Proposed
3,000
8,000
IX.A.
Part Two-329
STRENGTHENING MANAGEMENT -AND ACCOUNTABILITY
DEPARTMENT OF JUSTICE—Continued
(In thousands of dollars)
High Risk Area
Progress to Date
Status
1991
1992
Estimate Proposed
Departmental asset
forfeiture fund controls
inadequate to deal with
over $1B in assets.
Permanent Executive Office established in Deputy AG Office.
Next steps: integrated Financial Management Information
System to be established in 1992; preparing 1990 financial
statement; procedures and forms to be standardized among
all DOJ agencies in 1991.
2
26,600
23,141
Executive Office of the US
Trustees: Inadequate
oversight of private
trustees by US Trustees.
($26B at stake).
Staff being trained in financial management to improve
oversight. Next steps: additional staff (123 FTE) proposed in
1992 budget; new audit guidance for bankruptcies will
strengthen controls in 1991.
1
2,300
6,392
Bureau of Prisons (BOP)
overcrowding creates
unsafe conditions.
Plan developed to increase rated capacity to 78,188 beds by
1996; funding available through 1991 has achieved 51% of
goal or 39,696 beds. In 1992, construction funds will provide
3,600 beds in 1995-96, and funds for equipment will allow
BOP to activate 5,783 beds in 1992. In addition, in 1991,
4,000 additional positions were provided to BOP to address
overcrowding; these positions will be fully funded in 1992.
1
429,876
533,214
BOP: Not all prisons
comply with fire and/or
hazardous waste disposal
codes.
All immediate life and health risks corrected; safety programs
in place; remedial actions to be completed in 1992.
2
6,760
21,015
BOP: Inadequate staff to
operate and manage
prisons.
Special salary rates established for physicians, guards, and
support staff; training program strengthened; national
campaign underway to recruit staff. Next steps: overall goal
of 1:3 staff to inmate ratio funded in 1991 and proposed in
1992.
1
62,361
139,932
Immigration and
Naturalization Service
(INS): Poor management
controls and inadequate
financial management
system.
INS has been cited for significant weaknesses in financial and
program management areas. The 1992 budget proposes
funding to implement detailed corrective action plans to
upgrade financial management system and resolve security,
assets forfeiture and other program management
deficiencies by 1994.
3
400
1,830
Marshal's Service (USMS):
Financial management
system poor; shortage of
detention facilities.
USMS financial system to become part of the Department's
Financial System and integrated with a District Office
System in 1994. Next steps: three year funding plan
initiated in 1991 to construct holding cells.
3
13,426
1,360
DEPARTMENT OF LABOR
(In thousands of dollars)
High Risk Area
Progress to Date
Status
1992
1991
Estimate Proposed
Departmental ADP
procurement concerns.
New Office of Procurement Integrity established. DELETED
FROM HIGH RISK LIST.
D
Employment and Training
Administration (ETA):
Federal equity in real
property held by State
Employment Security
Agencies at risk ($1B in
fair market value).
Grantee Real Property tracking system designed; ETA
grantees issued guidance outlining real property
requirements. Lack of good tracking system permitted
grantees to dispose of property without adequate
compensation to DOL for its share. Next steps: tracking
system to be operational in 1991.
1
720
210
Departmental financial
systems inadequate.
Core accounting system installed October 1989. Next steps:
travel, accounts payable, grants management and property
management subsystems are being implemented in 1991.
1
3,835
1,498
Part Two-330
THE BUDGET FOR FISCAL YEAR 1992
DEPARTMENT OF LABOR^Continued
(In thousands of dollars)
High Risk Area
Progress to Date
Status
Job Training and
Partnership Act (JTPA):
Single Audit Act not
effective in safeguarding
JTPA Federal funds.
IG conducting audit on the adequacy of the Single Audit Act
for this purpose. Next steps: IG audit report scheduled for
issuance in February 1991.
2
JTPA Service Delivery Area
grantees have inadequate
procurement practices.
In its 1990 FMFIA report, the DOL identified the JTPA
program as a high risk area, due to inappropriate
procurement practices by Service Delivery Area
administrative units. Problems have included: payment for
inadequate performance; lack of competition in contracting;
actual or apparent conflicts of interest; and inadequate
contract monitoring. In 1991, OMB will work closely
implementing planned corrective actions. ADDED TO HIGH
RISK LIST.
A
Pension and Welfare
Benefits Administration
(PWBA): Oversight of
pension plans inadequate.
AICPA Audit Guide completed and released. The Guide sets
industry standards for enhanced audit testing, reporting,
and disclosure. Next steps: 100 additional Enforcement and
33 additional Solicitor positions added in 1991; the
Administration introduced legislative proposals in 1990 and
will reintroduce them in 1991 to strengthen Employee
Retirement Income Security Act in 1991.
1
1991
1992
Estimate Proposed
275
296
9,962
11,129
DEPARTMENT OF STATE
(In thousands of dollars)
High Risk Area
Progress to Date
Status
1991
1992
Estimate Proposed
Foreign Buildings Office
Two maintenance assistance centers established; facility
(FBO): Rehabilitation and.
managers program implemented. Data on post conditions
maintenance of real
and staffing needs being collected; but strategy for managing
property overseas
these data remains unclear. Next steps: the budget supports
inadequate.
a $2.5 billion five-year plan that enables the Department to
complete its highest priority embassy office buildings and
maintain and rehabilitate existing facilities.
3
88,210
106,821
Consular Affairs: Visa
processing controls
inadequate; increased
risk of visa fraud.
Training material and policy guidance revised and distributed;
name check procedures improved at seven posts. Next steps:
the budget provides $4M for implementation of the Machine
Readable Visa program.
1
5,188
6,171
Departmental management
of overseas security
program inadequate.
Physical security improvements completed at 25 posts; new
standards developed and distributed; training conducted for
300 employees. New standards must be incorporated into
security handbook. Diplomatic Security Bureau must
monitor post compliance with new standards.
2
230,272
242,861
Departmental ADP security
vulnerabilities and
operational deficiencies.
Construction of back-up site for mainframe nearing
completion; improved policy and operational guidance for
systems security; improved password procedures strictly
enforced; revision of basic policy documents progressing.
Broad ADP vulnerabilities still to be defined and addressed.
Next steps: complete contingency plans for main data
processing center and overseas administrative centers by
July 1991.
3
10,325
21,425
Departmental accounting
and financial systems do
not meet core
requirements.
Current transactions for 28 of 30 bureaus converted from old
systems to new primary accounting system. Next steps:
Convert two remaining bureaus by October 1991.
1
6,200
7,700
Part Two-331
IX.A. STRENGTHENING MANAGEMENT -AND ACCOUNTABILITY
DEPARTMENT OF TRANSPORTATION
(In thousands of dollars)
High Risk Area
Progress to Date
Status
1991
1992
Estimate Proposed
Departmental financial
management and
administrative systems
non-standard, fragmented.
Core accounting system being implemented. Next steps:
implementation scheduled for completion in 1992.
Administrative systems scheduled for completion in 1996.
1
5,000
12,200
Urban Mass Transit
Administration (UMTA):
Poor grants management
($30B in active grants at
stake; $3B new grants
annually).
Additional staffing resources resources for grant monitoring
provided in 1991 and further increases of $940,000 proposed
in budget; backlog of inactive grants eliminated;
disbursement practices improved. Next steps: fill new grant
monitoring positions by June 1991.
2
1,060
2,000
Federal Highway
Administration (FHWA):
Poor practices in use of
consultants by grantees.
Regulation proposed to correct problem. Next steps:
publication of final rule expected in March 1991.
1
Departmental major
systems acquisition
procedures inadequate.
Studies conducted; operational and management control
weaknesses identified. Next steps: contract policy and
procedures currently being revised; in 1992, FAA will
monitor specific airport construction materials for design
conformance.
1
408
1,266
Maritime Administration
(MarAd): Inadequate
controls over
disbursement of Federal
funds.
Based on assessments by DOT, OIG and GAO, no material
weakness exists in the funds disbursement process.
However, MarAd recognizes the significance of the
Operational Differential Subsidy (ODS) and Loan Guarantee
Programs and the need for adequate oversight and program
control to ensure material weaknesses do not develop. Next
steps: further study of ODS; OMB requested action plan in
1991.
2
DEPARTMENT OF THE TREASURY
(In thousands of dollars)
1991
1992
Estimate Proposed
High Risk Area
Progress to Date
Status
Internal Revenue Service
(IRS): Accounts receivable
collection strategy
inadequate ($64B owed in
1990).
Formed "Vital Few" Project to focus on large dollar accounts
receivable; management initiatives still in development.
OMB/IRS Work Group developing further reforms. Next
steps: an additional $757M to be collected with additional
FTEs between 1991 and 1993. The budget proposes an
additional $47.3M for collections and $450M for tax systems
modernization with agreement on tax systems
modernization by April 1991.
3
42,200
47,300
Customs Service:
Inadequate collecting/
accounting systems for
revenues on imports
($19B at stake in 1990).
Primary accounting system will be replaced by 1993;
enhancements being made to revenue collection system.
Next step: in 1991, Customs will undergo GAO review.
2
8,925
16,244
Public Debt: Major
problems in account
reconciliation regarding
Public Debt.
New office created to oversee implementation of new finance
system. Next step: implementing new accounting and
reporting system by 1992.
2
6,019
2,395
Department: Lack of
systems coordination.
Previously, there existed a problem with overall coordination
of the bureau's financial systems oversight. Next steps:
Bureau payroll systems will be combined at USDA National
Finance Center (completion by 1993); property management
systems will be integrated; off-the-shelf AMS software being
used.
2
75
225
Part Two-332
THE BUDGET FOR FISCAL YEAR 1992
DEPARTMENT OF VETERANS AFFAIRS
(In thousands of dollars)
High Risk Area
Progress to Date
Status
1992
1991
Estimate Proposed
Veterans Benefits
Administration (VBA):
Compensation and
pension benefit
overpayments ($182M in
overpayments annually).
Legislation passed that will enable matching of DVA income
records with IRS. Next step: negotiate memorandum of
understanding with IRS and SSA on exchange of data by
April 1991.
1
7,759
6,857
Departmental audit
followup systems
inadequate.
Decentralized, manually maintained audit followup system
converted to a centralized, automated system. Next steps:
validate implementation of corrective action by June 1991.
1
1,400
9,200
Veterans Health Services
and Research
Administration
(VHS&RA): Drug
inventory controls
inadequate.
75% of VA hospitals converted from ward stock to unit dose
distribution system. Next steps: additional 6% conversion as
planned for 1991.
1
6,256
12,870
25
26
VHS&RA: Health care
IG audits indicate a need for strategic planning. For example,
facilities construction
the planning process should incorporate recent demographic
planning process weak
information and analysis of various cost proposals. Next
($153M in 1988 and 1989).
steps: DVA will develop by April 1991, a strategy for
implementing cost containment measures that also identifies
critically needed improvements at existing medical centers.
3
Departmental internal
controls program weak.
Senior Management Review Council established to oversee and
review the internal control process. FMFIA implementation
has improved. Next step: implement Department
Management Control Tracking System by June 1991.
1
Loan Guaranty Program:
Lack of system for
assessing credit risk
exposure ($150B in
guaranteed loans
outstanding).
Little progress has been made, although VA is now
considering a corrective action plan. This plan should
include a Credit Early Warning initiative based on a
housing loan default prediction model. Next steps: DVA will
adopt a housing loan default model by June 1991.
3
VHS&RA: Physician
employment screening
inadequate.
Detailed operating instructions issued and accountability
established at the Medical Center director level. Next step:
validat
@FedFRASER