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ANALYTICAL
PERSPECTIVES

BUDGET OF THE UNITED STATES GOVERNMENT

Fiscal Year 

THE BUDGET DOCUMENTS
Budget of the United States Government, Fiscal Year 1997
contains a summary of the President’s budget proposals. This document was released on February 5, 1996.
Budget of the United States Government, Fiscal Year
1997—Supplement contains the Budget Message of the President
and information on the President’s 1997 budget proposals.
Analytical Perspectives, Budget of the United States Government, Fiscal Year 1997 contains analyses that are designed to
highlight specified subject areas or provide other significant presentations of budget data that place the budget in perspective.
It includes economic and accounting analyses; information on
Federal receipts and collections; analyses of Federal spending; detailed information on Federal borrowing and debt; the Budget Enforcement Act preview report; current services estimates; and other
technical presentations. It also includes information on the budget
system and concepts and a listing of the Federal programs by agency
and account.
Historical Tables, Budget of the United States Government, Fiscal Year 1997 provides data on budget receipts, outlays,
surpluses or deficits, Federal debt, and Federal employment covering
an extended time period—in most cases beginning in fiscal year
1940 or earlier and ending in fiscal year 2002. These are much
longer time periods than those covered by similar tables in other
budget documents. As much as possible, the data in this volume and
all other historical data in the budget documents have been made
consistent with the concepts and presentation used in the 1997
Budget, so the data series are comparable over time.
Budget of the United States Government, Fiscal Year
1997—Appendix contains detailed information on the various
appropriations and funds that constitute the budget and is designed
primarily for the use of the Appropriations Committee. The Appendix contains more detailed financial information on individual programs and appropriation accounts than any of the other budget documents. It includes for each agency: the proposed text of appropriations language, budget schedules for each account, new legislative
proposals, explanations of the work to be performed and the funds
needed, and proposed general provisions applicable to the appropriations of entire agencies or group of agencies. Supplemental, rescission, and adjustment proposals for the current year are presented
separately. Information is also provided on certain activities whose
outlays are not part of the budget totals.

A Citizen’s Guide to the Federal Budget, Budget of the
United States Government, Fiscal Year 1997 is an Office of Management and Budget publication that provides general information
about the budget and the budget process for the general public.
Budget System and Concepts, Fiscal Year 1997 contains an
explanation of the system and concepts used to formulate the President’s budget proposals.
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GENERAL NOTES
1.
2.
3.

All years referred to are fiscal years, unless otherwise noted.
Detail in this document may not add to the totals due to rounding.
At the time of this writing, five of the 13 appropriations bills were not enacted, and
the programs covered by them were operating under a continuing resolution. For
these programs, references to 1996 spending levels in the text and tables incorporate
the Administration’s proposed adjustments to the continuing resolution levels.

U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON 1996
For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402

TABLE OF CONTENTS
Page

Economic and Accounting Analyses
1. Economic Assumptions ........................................................................................

2. Stewardship: Toward a Federal Balance Sheet .................................................

Federal Receipts and Collections
3. Federal Receipts ...................................................................................................

4. User Fees and Other Collections ........................................................................

5. Tax Expenditures .................................................................................................

Special Analyses and Presentations
6. Federal Investment Spending and Capital Budgeting ......................................

7. Research and Development Expenditures ..........................................................

117

8. Underwriting Federal Credit and Insurance .....................................................

119

9. Aid to State and Local Governments ..................................................................

167

10. Federal Employment ............................................................................................

179

Federal Borrowing and Debt
11. Federal Borrowing and Debt ...............................................................................

187

Budget Enforcement Act Preview Report
12. Preview Report .....................................................................................................

201

13. Review of Direct Spending and Receipts ............................................................

209

14. Deficit Reduction Fund ........................................................................................

215

Current Service Estimates
15. Current Services Estimates .................................................................................

219

Other Technical Presentations
16. Trust Funds and Federal Funds .........................................................................

255

17. National Income and Product Accounts .............................................................

273

18. Comparison of Actual to Estimated Totals for 1995 .........................................

275

19. Relationship of Budget Authority to Outlays ....................................................

281

20. Off-Budget Federal Entities ................................................................................

283

21. Loan Asset Valuation ...........................................................................................

285

Page

Federal Drug Control Funding
22. Federal Drug Control Funding ............................................................................

295

Unnecessary Reports to Congress
23. Unnecessary Reports to Congress .......................................................................

299

Budget System and Concepts and Glossary
24. Budget System and Concepts and Glossary .......................................................

325

Federal Spending
25. Federal Spending by Function, Subfunction, and Major Program ...................

343

Outlays to the Public
26. Outlays to the Public ...........................................................................................

375

Federal Programs by Agency and Account

27. Federal Programs by Agency and Account .........................................................

383

List of Charts and Tables ....................................................................................................

501

Index .........................................................................................................................................

507

ECONOMIC AND ACCOUNTING ANALYSES

ECONOMIC ASSUMPTIONS

Introduction
The economic expansion is about to enter its sixth
year. Too often in the past when expansions have
reached this point, or even sooner, the economy has
begun to overheat, pushing up inflation and interest
rates, and ultimately bringing on a recession. In contrast, the policy decisions of the last three years have
enabled this expansion to attain an elusive goal—a ‘‘soft
landing’’ in which economic growth has slowed to a
sustainable rate without triggering an increase in unemployment.
The ‘‘soft landing’’ of 1995 is the culmination of three
years of very successful macroeconomic policy. Over this
period, jobs have increased and unemployment has fallen, while at the same time, inflation has been low
and relatively stable. Interest rates have fluctuated,
but long-term rates are as low as at any time in recent
memory. Looking ahead, the Administration expects
economic growth to continue at a moderate rate for
the foreseeable future.1 Employment is projected to expand sufficiently to absorb new workers, keeping the
rate of unemployment stable. Meanwhile, the Administration expects inflation to continue at a low, relatively
constant rate, and interest rates to decline further as
the budget is brought into balance.
The Omnibus Budget Reconciliation Act of 1993 put
the Federal budget deficit on a downward track that
helped to reduce long-term interest rates, which in turn
helped spark the revival in the economy. The Administration’s current budget proposals would build on that
success and cap it with a balanced budget. The Federal
Reserve has helped to support these needed fiscal actions by pursuing a policy to control inflation, while
also showing that it is willing to reduce interest rates
when that is appropriate.
This chapter begins with a review of recent economic
and policy developments. With this as background, it
then presents the Administration’s economic assumptions. The assumptions call for a continuation of trends
already evident in the economy for most of the major
economic variables. They offer a reasonable and prudent basis for making budget projections.
Two important changes in the statistics on which
this forecast is based are also described in this chapter.
First, real gross domestic product (GDP) is now measured on a chain-weighted basis in the National Income
and Product Accounts. This is reflected in the budget
projections of real GDP and the aggregate measure of
inflation. Second, anticipated changes in the calculation
1 Beyond the next year or two, the Administration does not attempt to project the economy’s cyclical patterns. The longer term economic projections used for the Budget and summarized here are best thought of as forecasts of average experience expected to be achieved
over a period of several years.

of the Consumer Price Index (CPI) will slow its growth,
and that of related measures of price inflation.
The chapter compares the Administration’s economic
assumptions with those of the Congressional Budget
Office (CBO) prepared at about the same time (December 1995). Although there are some differences in the
underlying policy assumptions on which the two forecasts are based, they are quite similar, and the differences between them are well within the normal
range of forecasting error.
The chapter also includes an analysis of the impact
of changes in the economic assumptions since last
year’s budget on the projected deficit, and it concludes
with estimates of the sensitivity of the budget to
changes in economic assumptions.
Recent Developments
1993—Enacting a Responsible Fiscal Policy: The
passage of the Omnibus Budget Reconciliation Act of
1993 (OBRA93) put fiscal policy on a sounder footing
and created the preconditions for a healthy expansion.
The 1992 deficit was $290 billion. Since then, the deficit
has fallen for three straight years, bringing it down
to $164 billion in 1995. That is just 2.3 percent of
GDP, less than half the level in 1992. The improvement
in the deficit is traceable to both improvement in the
economy and to policy changes, of which the President’s
economic program was far and away the most important. The Administration estimated that OBRA93
would reduce the deficit during the five years 1994–98
by a cumulative total of $505 billion. During the first
two years alone, it cut deficits by about $130 billion.
The economic program has also contributed indirectly
to the reduction in the deficit by strengthening the
pace of the economic recovery.
Stabilizing Inflation: Most previous postwar expansions have ended because inflation accelerated, forcing
a policy correction. The best way to avoid the need
for such measures is to act before inflation becomes
a problem. That is just what monetary policy did during
1994. Entering that year, inflation was under control;
the CPI had only increased 2.7 percent over the preceding 12 months. However, 1993 had seen unemployment
fall by almost a full percentage point as real economic
growth accelerated, and the economy’s momentum was
clearly pointing towards further large gains in 1994.
Those gains were realized, as 1994 became one of the
best years for overall economic performance since the
end of World War II. During 1994, 3.5 million new
jobs were created, and the unemployment rate was
pulled down by another full percentage point. These
were welcome developments; but if the economy had
continued to expand at that rate, shortages of labor

4
and plant capacity would have been sure to emerge,
carrying with them a high risk of accelerating price
increase.
To avoid that risk, the Federal Reserve raised shortterm interest rates in several stages during 1994. The
intention was to slow growth and stabilize unemployment at its new lower levels to avoid the inflation risks
that faster growth would generate. While the Fed was
acting to raise short-term rates, investors in the financial markets were pushing up long-term rates, anticipating future inflation and the possibility of further
Fed tightening to choke it off.
The effect of these developments was seen in 1995.
The higher interest rates cooled off demand in the
economy’s interest-sensitive sectors, such as housing
and consumer durables. In 1995, real GDP rose 1.4
percent, down from a growth rate of 3.5 percent during
the previous year.2 Although growth slowed, the economy continued to generate new jobs at a healthy rate,
albeit less rapidly than in 1994; and the unemployment
rate did not increase. Payroll employment rose by 1.7
million in 1995 and the unemployment rate averaged
5.6 percent for the year, which was its lowest level
since 1990.
The slower growth of economic activity and employment was accompanied by continued moderation in
wages and prices, exactly what the Fed had been hoping to achieve when it tightened policy in 1994. The
most meaningful measure of overall labor compensation, the Employment Cost Index, rose 2.9 percent in
1995—virtually the same increase as in the previous
year.
Compensation costs were also held down by a significant deceleration in employee benefit costs. Health insurance premiums, which had been rising at doubledigit rates earlier in the decade, were brought firmly
under control. The spread of innovations in health care
delivery helped to bring about this moderation. Although slower growth of employee health care costs
shows up in the aggregate statistics as a decline in
the rate of increase in compensation, the long-run effect
is likely to be an increase in workers’ take-home pay.
Most studies reveal that employee benefits are paid
for by workers through lower cash wages. A reversal
of the trend towards increased benefit costs should
strengthen cash wages in the long run.
Moderation in labor markets was mirrored in the
product markets. At the beginning of 1995, the capacity
utilization rate in manufacturing had reached nearly
85 percent, a level that in the past had initiated an
acceleration of price increases. By spring, slower growth
caused the operating rate to return to a range of around
82 percent, a level associated in the past with stable
price inflation.
Reflecting this moderation, the CPI rose only 2.5 percent over the 12 months of 1995, slightly less even
than in 1994. The underlying rate of inflation, the CPI
excluding food and energy, was also well-behaved, ris2 These rates are based on the new chain-weighted definition of real GDP which is explained more fully below.

ANALYTICAL PERSPECTIVES

ing 3.0 percent during 1995. The inflation rate over
the three years 1993–1995 was the best since the
mid–1960s.
Sustaining the Momentum of the Expansion: As
it became clear that inflation was under control and
likely to remain so for some time, the Federal Reserve
gradually relaxed its previous tightening. Having
achieved the desired ‘‘soft landing’’, the Federal Reserve
took steps to make sure the economy would not stall
out. It reduced the Federal funds rate by one-quarter
percentage point in July and in December of 1995, and
again in January of 1996. Judging from the futures
market, the financial community anticipates a further
reduction of about one-quarter percentage point by this
summer.
While the Federal Reserve was lowering short-term
rates last year, the financial markets were lowering
long-term rates even more. The inflation fears that had
troubled the markets in 1994 were succeeded in 1995
by the expectation that inflation would remain subdued.
Moreover, bipartisan agreement that the budget should
be balanced in the coming years helped further reduce
long-term interest rates. From the end of 1993 to the
beginning of 1996, long-term interest rates fell more
than two full percentage points. Except for a few
months in 1993, the last time long-term interest rates
were this low was in the 1960s. The drop in rates
last year is expected to set the stage for a pickup in
economic activity in 1996.
Lower interest rates and a healthy economic outlook
propelled the stock market to record levels. Last year,
the Dow-Jones industrial average rose 36 percent, and
other major indexes were up by similarly impressive
amounts. In the opening months of this year, stock
markets set a series of new highs. Financial markets
fluctuate, and these gains will not continue unabated;
but the rise in the stock market last year will contribute to the forward momentum in the economy in 1996
by lowering the cost of capital to business, which should
stimulate investment, and by raising household wealth,
which will boost consumer spending.
Economic Projections
Key assumptions: The economic projections underlying this budget are summarized in Table 1–1. They
are based on several key assumptions. First and foremost, the projections assume that the Administration’s
budget will be adopted. The budget proposals are intended to reduce the deficit progressively and achieve
a small surplus in 2002, according to Congressional
Budget Office assumptions, and in 2001 according to
Administration estimates. Such a policy would foster
a continuation of the favorable macroeconomic trends
that have emerged since 1992. Deficit restraint moderates inflationary pressures by restraining demand. It
enables the Federal Reserve to continue its recent policy of easing short-term interest rates. The combination
of easier monetary policy and fiscal restraint provides
an environment in which financial markets can keep

ECONOMIC ASSUMPTIONS
Table 1–1.

ECONOMIC ASSUMPTIONS 1

(Calendar years; dollar amounts in billions)
Projections

Actual
1994

1995

1996

1997

1998

1999

2000

2001

6,931
6,604
105.0

7,254
6,742
107.6

7,621
6,888
110.6

8,008
7,047
113.6

8,417
7,212
116.7

8,848
7,380
119.9

9,295
7,553
123.1

9,772
7,730
126.4

10,268
7,911
129.8

5.9
3.5
2.3

4.1
1.5
2.5

5.1
2.2
2.8

5.1
2.3
2.7

5.8
3.5
2.3

4.7
2.1
2.5

5.1
2.2
2.8

5.1
2.3
2.7

Incomes, billions of current dollars:
Personal income .........................................................................................................
Wages and salaries ....................................................................................................
Corporate profits before tax ........................................................................................

5,750
3,241
528

6,104
3,420
602

6,416
3,607
650

6,716
3,801
702

7,025
3,995
753

7,337
4,193
800

7,664
4,403
843

8,031
4,629
882

8,434
4,864
917

Consumer Price Index (all urban): 2
Level (1982–84 = 100), annual average .....................................................................
Percent change, fourth quarter over fourth quarter ...................................................
Percent change, year over year .................................................................................

148.2
2.6
2.6

152.4
2.7
2.8

156.6
3.1
2.8

161.3
2.9
3.0

165.9
2.8
2.8

170.5
2.8
2.8

175.3
2.8
2.8

180.2
2.8
2.8

185.2
2.8
2.8

Unemployment rate, civilian, percent:
Fourth quarter level .....................................................................................................
Annual average ...........................................................................................................

5.6
6.1

5.6
5.6

5.7
5.7

Federal pay raises, January, percent:
Military .........................................................................................................................
Civilian 3 .......................................................................................................................

2.2
............

2.2
2.0

2.6
2.0

3.0
3.0

3.1
NA

Interest rates, percent:
91-day Treasury bills 4 ................................................................................................
10-year Treasury notes ...............................................................................................

4.3
7.1

5.5
6.6

4.9
5.6

4.5
5.3

4.3
5.0

4.2
5.0

4.0
5.0

Gross Domestic Product (GDP), current dollars:
Levels, dollar amounts in billions ...............................................................................
Percent change, fourth quarter over fourth quarter ...................................................
Percent change, year over year .................................................................................

6,738
6.5
6.2

7,078
4.2
5.0

7,428
5.1
5.0

7,805
5.1
5.1

8,203
5.1
5.1

8,623
5.1
5.1

9,058
5.1
5.1

9,523
5.1
5.1

10,005
5.1
5.1

5,702
3,279
525

6,054
3,450
572

6,357
3,631
608

6,654
3,826
657

6,960
4,020
706

7,270
4,220
749

7,595
4,431
790

7,958
4,658
826

8,358
4,895
859

Gross Domestic Product (GDP):
Levels, dollar amounts in billions:
Current dollars .............................................................................................................
Real, chained (1992) dollars ......................................................................................
Chained price index (1992 = 100), annual average ...................................................
Percent change, fourth quarter over fourth quarter:
Current dollars .............................................................................................................
Real, chained (1992) dollars ......................................................................................
Chained price index (1992 = 100), annual average ...................................................
Percent change, year over year:
Current dollars .............................................................................................................
Real, chained (1992) dollars ......................................................................................
Chained price index (1992 = 100), annual average ...................................................

2002

Addendum: GDP and incomes, pre-revision basis: 5

NA=Not Available.
1 Based on information available as of mid-January 1996.
2 CPI for all urban consumers. Two versions of the CPI are published. The index shown here is that currently used, as required by law, in calculating automatic adjustments to individual income tax brackets. Projections reflect
scheduled changes in methodology.
3 Percentages for 1994-1996 exclude locality pay adjustments. Percentages to be proposed for years after 1997 have not yet been determined.
4 Average rate (bank discount basis) on new issues within period.
5 Because the comprehensive revision to the National Income and Product Accounts (which include GDP and incomes) was delayed due to furloughs of Government employees, some budget estimates are based, at least in
part, on GDP and incomes data on the pre-revision basis shown in this addendum.

long-term interest rates on a downward path. A policy
to balance the budget would thus encourage investment, and thereby raise the level of productivity and
potential output in the long run.
Real GDP: Economic growth was temporarily restrained in the fourth quarter of last year by two shutdowns of the Federal Government, and in the first
quarter of this year by a record-breaking blizzard. According to preliminary estimates, real GDP grew at
a 0.9 percent annual rate in the fourth quarter; based
on partial information, first quarter growth may also
be relatively weak.

Growth is expected to pick up as the negative impact
of the recent disruptions fades. Interest-sensitive sectors, such as consumer durables and business equipment spending, are likely to be at the leading edge
of the acceleration in response to the fall in long-term
interest rates during 1995 and the surge in the stock
market. On average, real GDP is forecast to increase
2.2 percent over the four quarters of 1996.
During 1997–2002, real GDP is projected to rise 2.3
percent annually (the Administration’s estimate of the
economy’s potential growth rate). Lower interest rates
and smaller deficits are projected to increase investment and raise the trend growth in output per hour.
Productivity in the nonfarm business sector had been

6
growing at 1.1 percent per year on average since 1973,
but it is projected to increase 1.2 percent annually over
the next six years.
Potential GDP growth is also determined by growth
of the labor force. Labor force participation trends of
recent years are assumed to continue. The rise in the
female participation rate is expected to be much less
than during the 1970s and 1980s, while the male rate
is expected to continue to decline. On balance, there
is likely to be little overall change in labor force participation. During 1997–2002, the labor force is projected
to grow 1.1 percent per year, about the same pace as
during the past six years, but noticeably slower than
the 1.7 percent rate during the 1980s when female participation rates rose rapidly.
Unemployment rate: The civilian unemployment
rate, which averaged 5.6 percent during the fourth
quarter of 1995, is expected to average 5.7 percent this
year and hold at that level through the end of the
projection period. With real GDP projected to rise at
the rate of growth of potential output, the unemployment rate would remain stable.
Inflation: The chain-weighted GDP price index is
projected to rise 2.7 percent a year over the projection
horizon. That is just slightly faster than the 2.5 percent
estimated for 1995. The Consumer Price Index is expected to rise 3.1 percent during 1996, about the same
as the 3.0 percent rise last year in the CPI excluding
food and energy. The CPI is expected to rise 2.9 percent
in 1997 and 2.8 percent per year during 1998–2002.
The deceleration is due to scheduled improvements in
the methods used to calculate the CPI. These improvements are discussed later in this chapter.
Interest rates: Short- and long-term rates are projected to fall as a result of the reduced borrowing needs
of the government that result from the Administration’s
budget proposals. The 91-day Treasury bill rate is expected to fall to 4.0 percent by 2000 and hold at that
level through 2002; in the fourth quarter of 1995, the
rate was 5.3 percent. The yield on the 10-year Treasury
note is projected to decline to 5.0 percent by 1998 and
hold at that level; in the fourth quarter of last year,
the yield was 5.9 percent. These projections, in combination with a forecast of stable inflation, imply a
reduction in real interest rates to levels that prevailed
when the Federal budget was close to balance. The
sharper fall in short rates will cause the yield curve
to steepen, which is a more typical pattern for an expansionary period.
Incomes: As a result of the drop in interest rates,
the share of nominal GDP accounted for by personal
interest income, a component of personal income, is
expected to decline. On the other hand, the corporate
sector is a net borrower, so the profits share and the
share of dividend income are likely to grow because
of the reduction in interest costs. The projected share
of wages and salaries in GDP is expected to remain

ANALYTICAL PERSPECTIVES

about unchanged over the projection horizon. After adjustment for inflation, real wages and salaries are projected to increase 14 percent from 1996 to 2002.
Statistical Improvements
The economic assumptions incorporate two important
changes in the way economic activity is measured.
Fixing Biases in Real GDP: For fifty years, the
featured measure of real GDP was based on a fixedweight price system, with an update every five to ten
years to account for shifts in spending patterns. While
convenient and familiar, that system introduced a ‘‘substitution bias’’ into the estimate of real GDP and the
GDP implicit price deflator. The bias was significant
whenever relative prices changed rapidly—as for example in the 1970s, when oil prices jumped sharply. Until
the recent revision, 1987 was the base year for the
fixed-weight price system. The large drop in the quality-adjusted price of computers since 1987 caused a
growing upward bias in the measurement of real GDP
growth.
To remove these biases, the Bureau of Economic
Analysis changed to a chain-weighted system for estimating real GDP in January of 1996. The weights are
now based on nearly contemporaneous spending patterns. Real GDP growth for 1993, for example, is calculated using average expenditure weights for
1992–1993, and the growth rate for 1994 is computed
using an average of 1993–1994 spending. Thus, the
weights are linked year-to-year, hence the term ‘‘chain
weights.’’
The substitution bias in the former fixed-weight system distorted the picture of real growth and aggregate
inflation. The shift to chain weights lowered the measured rate of real GDP growth in 1993–94 by about
1⁄2 percentage point yearly compared with the previous
estimate, and raised the estimate of aggregate inflation
by a similar amount. While converting to chain weights
provides a more accurate measure of the Nation’s economic performance, it does have one inconvenience.
Real GDP no longer exactly equals the sum of real
spending by households, businesses and governments—
the familiar rule that GDP = C+I+G+net exports. Now
there is a difference, known as ‘‘the residual,’’ that
needs to be added to the components to sum to real
GDP.
Changing the CPI: The CPI is one of the most
important statistics produced by the Federal Government. It is widely used to measure changes in the cost
of living.3 The CPI’s effect on the budget is pervasive;
it is linked by formula to spending for social security,
Federal pensions, and many smaller programs, and to
the tax brackets and exemptions in the individual income tax. It is estimated that a reduction of 0.1 percentage point in the average yearly rate of change in
3 This is done even though the CPI is explicitly not a cost-of-living index. Rather, it
measures changes in the average cost of a fixed market basket of goods and services.
By design, the CPI does not allow for those changes in consumption patterns that people
make routinely to maintain their standard of living when prices are changing.

ECONOMIC ASSUMPTIONS

the CPI would reduce the budget deficit by a total
of about $20 billion over the next seven years.
Given its importance, it is not surprising that the
CPI has often been criticized. There is no perfect price
index, but the Bureau of Labor Statistics (BLS), which
computes the CPI, strives to eliminate potential biases
from the index. Over the years, the BLS has been receptive to suggestions for improvements. BLS is the
main source of the technical analysis needed to make
such improvements, and it is often the first to highlight
potential problems.
Much recent criticism has suggested that the CPI
may overstate inflation. Various possible causes have
been examined. One major problem is how to separate
quality changes from price increases for goods and services. For example, if the price of a visit to the doctor
goes up, how much of this is due to better service
due to improved diagnostic equipment and new testing
procedures, and how much is a pure price increase?
Such questions are hard to answer, but critics believe
BLS too often treats quality improvements as price
rises. Another problem area is the exclusion of new
products or new outlets from the sample used to determine the CPI. There are good practical reasons why
it takes time to incorporate new items into that sample,
but the effect may be to miss some important price
declines that occur as new products and services enter
the market.
Finally, there are some technical issues concerning
how the CPI is measured and put together. BLS has
announced that it will introduce two methodological improvements in the CPI over the next three years that
should make the index more accurate. These changes
are expected to reduce the annual rate of growth of
the index by about 0.3 percentage points.
The announced improvements (along with recent revisions to GDP) will also narrow the wedge between the
rates of change in the CPI, on the one hand, and the
price indexes for consumer expenditures and for GDP
in the National Income and Product Accounts on the
other. During 1998–2002, the annual growth in the CPI
is assumed to be 2.8 percent, almost the same as the
2.7 percent assumed for the chain-weighted price index
for GDP.
By January 1997, BLS plans to institute new estimation procedures to correct what has sometimes been
called ‘‘formula bias,’’ but which might be more accurately described as ‘‘sample rotation bias.’’ These new
procedures are estimated to reduce the growth of the
CPI by about 0.2 percentage point per year. The bias
arises because of the need to update the sample of
items entering the CPI. New brands and varieties of
goods are continually being introduced in the marketplace, and if the CPI is to remain current, it must
be based on the current brands of cereals, toothpaste,
automobiles, et cetera. When new goods are introduced,
however, the usual BLS procedures can generate inappropriate weights for those that are temporarily selling
at either abnormally low or abnormally high prices.
The problem is greatest for items with prices that fluc-

tuate around a trend, such as fruits and vegetables.
Recognizing this, BLS instituted a correction for some
components of the index in January 1995. One possible
course is to apply the same type of correction throughout the index.
Correcting the sample rotation bias in the CPI will
also reduce the rate of change in the price indexes
used to determine real personal consumption expenditures in the national income and product accounts,
which are based on detailed data from the CPI. The
effect of a slower rise in consumer prices is expected
to hold down the growth of the overall GDP price index
by about 0.1 percentage point yearly. Consumer expenditures account for about two-thirds of GDP, and the
rest is not affected by the change. Measured real GDP
growth will, of course, increase by a similar magnitude
(because total nominal spending growth is a datum that
is not affected by this change).
The second scheduled improvement in the CPI is an
updating of the fixed market basket that is expected
to occur in January 1998. Currently, the CPI market
basket is based on 1982–1984 consumption patterns;
in 1998, the market basket will be updated to reflect
1993–1995 spending patterns. This ‘‘rebasing’’ of the
index occurs about every 10 years. Rebasing tends to
reduce the measured inflation rate in subsequent years
by reducing the substitution bias that builds up over
time as the economy moves away from the base period
prices. The new weights tend to give more emphasis
in the index to goods whose prices have been rising
relatively less rapidly (because consumers tend to shift
their consumption toward those items). The budget assumes that the change in the CPI market basket will
slow the growth of the CPI by about 0.1 percentage
point per year beginning in 1998. This improvement
will not affect real GDP or the price indexes associated
with it.
These improvements in the CPI will go some way
towards correcting its apparent tendency to overstate
inflation. The largest potential biases—quality measurement and adjustments for new goods—will not be
addressed by these changes. Continued research in
these areas by BLS and outside experts is needed to
improve this vital economic statistic.
Comparison with CBO
The Congressional Budget Office (CBO) prepares forecasts of the economy that are used by Congress in
formulating budget policy. Thus, it performs a similar
function to that of OMB, the Council of Economic Advisers and Treasury for the Executive Branch. While outside observers have often compared the CBO forecast
with that of the Administration, the budget is usually
prepared well before the current CBO forecast is made
public, so a timely forecast comparison is generally impossible.
Over the past year, however, there has been heightened interest in the economic assumptions used for the
budget and in the differences between Administration
and CBO forecasts. That is because the fiscal policy

8
objective is now to achieve a balanced budget, rather
than a specific amount of deficit reduction. Even small
differences in economic assumptions can matter for the
size of policy changes needed to achieve budget balance.
When the goal is a specific amount of deficit reduction,
differences in economic assumptions usually have little
bearing on the size of policy changes needed to achieve
a specific amount of budgetary savings.
Post-Policy vs Pre-Policy: One important difference
between CBO and the Administration concerns the policy assumptions on which the forecast is based. The
Administration projections always assume that the
President’s budget proposals will be enacted as proposed; the economic projections are ‘‘post-policy.’’ CBO
normally assumes that current law will continue; it
is a ‘‘pre-policy’’ projection.
This difference often is immaterial in determining
the major macroeconomic variables. Important as budget policy is, especially in the long run, even large dollar
changes in programs will often have only a modest
effect on real GDP or inflation. Therefore, a specific
budget proposal may make little difference to the macroeconomic outlook. Thus, comparisons of CBO and Administration economic projections can be meaningful
even when the policy assumptions are not identical.
Sometimes the difference is crucial, however, and that
was the case in 1995.
The Fiscal Bonus: The Administration’s policy is
to balance the budget over the next seven years. The
decision to seek a balanced budget has major implications for the economic outlook. Such a significant
change in policy, if enacted, would be likely to cause
noticeable changes in several macroeconomic variables,
especially interest rates and income shares. However,
CBO’s initial forecast for the 1996 budget (and the Administration’s) assumed that the deficit would not be
eliminated over this time period.
In April, CBO presented its estimates of the fiscal
bonus that would result from balancing the budget following the policies in the congressional budget resolution. This bonus took account of the more favorable
interest rate outlook that would result from a balanced
budget. It did not, however, reflect the likely shifts
in income among sectors of the economy that would
follow from the lower interest rates generated by a
balanced budget. This was corrected in December, when
a revised CBO forecast was prepared that took into
account the full range of macroeconomic effects that
a balanced budget would produce.
The Treatment of Statistical Biases: The statistical biases in the measurement of real GDP and inflation described above posed problems for forecasters.
Neither CBO nor the Administration was completely
consistent in dealing with these issues. In some cases,
projected economic variables reflected the bias that was
built into their measurement; in other cases, the projections assumed that the bias would be corrected somehow during the course of the forecast. In any case,

ANALYTICAL PERSPECTIVES

the revisions to GDP that were made in January and
the planned modifications to the CPI go a long way
toward removing this source of past difference in the
forecasts.
Projection Comparison: The main outlines of the
Administration’s current forecast were determined in
December at about the time that CBO made public
its economic projections. A comparison of the two forecasts (including the CBO fiscal bonus to put them on
the same policy basis) reveals a convergence of views
summarized in Table 1–7.
• Real GDP: The projections of real GDP, on the
new chain-weighted basis, are identical.
• Inflation: The Administration assumes that there
will be no further reduction in the rate of inflation
as the expansion continues except for statistical
corrections to the CPI. CBO’s inflation forecast
is similar, but its projection of the chain-weighted
GDP price index is slightly lower than that of
the Administration.
• Unemployment: CBO is projecting an increase in
unemployment that would raise it above recent
levels. The Administration believes that unemployment will remain closer to its 1995 average,
which is believed to be consistent with continued
stability of inflation and economic growth.
• Interest Rates: The largest difference in economic
assumptions is for long-term interest rates. Of all
the macroeconomic variables, these may be the
hardest to anticipate. It is widely accepted that
changes in budget policy affect interest rates, but
it is hard to estimate the quantitative effect that
policy changes will have. In presenting its fiscal
bonus calculations, CBO has taken two views of
the matter. The December projection shown here
is the more conservative: long-term interest rates
show little further decline from their levels at the
end of last year. CBO had projected a much larger
effect on interest rates last April. The Administration’s interest rate projections are very close to
CBO’s larger April bonus estimate, with changes
in the early years based on recent experience.
• Profits and Other Incomes: The projections of future receipts depend not only on the overall level
of economic activity but also on the distribution
of income among profits, wages, and other incomes. Both the Administration and CBO expect
that the lower interest rates associated with a
balanced budget will shift income from interest
to profits, leaving the share of wages roughly stable.
Although the differences in economic assumptions are
not large—indeed, they are much less than differences
that commonly prevailed under previous Administrations—the effect of the differences on the deficit is significant. The Administration’s budget is balanced on
the December CBO assumptions, but the surplus estimated for 2002 is smaller, and it is not possible to
extend the Administration’s proposed tax reduction per-

ECONOMIC ASSUMPTIONS
Table 1–2.

COMPARISON OF ECONOMIC ASSUMPTIONS
(Calendar years)
Projections
1996

1997

1998

1999

2000

2001

2002

Real GDP (chain-weighted): 1
CBO December ..................................................
1997 Budget .......................................................

2.2
2.2

2.3
2.3

Chain-weighted GDP Price Index: 1
CBO December ..................................................
1997 Budget .......................................................

2.7
2.8

2.6
2.7

Consumer Price Index (all-urban): 1
CBO December ..................................................
1997 Budget .......................................................

3.2
3.1

3.1
2.9

3.0
2.8

2.9
2.8

3.0
2.8

Unemployment rate: 2
CBO December ..................................................
1997 Budget .......................................................

5.9
5.7

6.0
5.7

Interest rates: 2
91-day Treasury bills:
CBO December ..............................................
1997 Budget ...................................................

5.3
4.9

5.0
4.5

4.7
4.3

4.2
4.2

3.9
4.0

10-year Treasury notes:
CBO December ..............................................
1997 Budget ...................................................

5.8
5.6

5.6
5.3

5.5
5.0

1 Percent
2 Annual

change, fourth quarter over fourth quarter.
averages, percent.

manently. Over seven years, CBO’s economic assumptions would increase deficits by a cumulative total of
about $300 billion relative to the Administration’s assumptions, necessitating substantially greater savings
to achieve balance by 2002.4
Although the budgetary consequences are large, there
is very little scientific basis on which to choose between
the two projections. Economic forecasting is difficult
and the average errors that forecasters make are far
larger than the differences in the major economic variables discussed here. If past experience is a guide, neither projection will prove completely accurate. The important question is whether a particular economic projection provides a sound and prudent basis upon which
to plan the Nation’s budget. The Administration believes that its assumptions, which are well within the
range of historical experience, fulfill that function.
Omnibus Trade and Competitiveness Act of 1988
As required by the Omnibus Trade and Competitiveness Act of 1988, Table 1–3 shows estimates for eco4 This comparison only adjusts for differences in economic assumptions. Other differences
would arise because of different technical assumptions, such as the projected increase in
Medicare and Medicaid costs.

Table 1–3.

nomic variables related to saving, investment, and foreign trade consistent with the economic assumptions.
The merchandise trade and current account deficits
deteriorated in fiscal year 1995 as growth in U.S. exports was exceeded by growth in imports. There was
improvement in the trade deficit near the end of fiscal
year 1995 and the first quarter of fiscal year 1996.
Net private investment in the United States has expanded rapidly during this Administration, and it is
expected to continue to increase as the economy expands. The sources for the increased private investment
are the decline in the Federal deficit and higher private
saving, plus a larger inflow of foreign capital.
The Act requires information on the amount of borrowing by the Federal Government in private credit
markets. This is presented in Chapter 11, ‘‘Federal Borrowing and Debt.’’
It is difficult to gauge with precision the effect of
Federal Government borrowing from the public on interest rates and exchange rates, as required by the
Act. Both are influenced by many factors besides Government borrowing in a complicated process involving
supply and demand for credit and perceptions of fiscal
and monetary policy here and abroad.

SAVING, INVESTMENT, AND TRADE BALANCE
(Fiscal years; in billions of dollars)
1995 actual

Current account ..................................................................................
Merchandise trade balance ................................................................
Net foreign investment .......................................................................
Net domestic saving (excluding Federal saving) 1 ............................
Net private domestic investment .......................................................

–165
–180
–169
397
361

1997 estimate

–185
–210
–185
410
385

to
to
to
to
to

–145
–170
–145
450
415

1 Defined for purposes of Public Law 100–418 as the sum of private saving and the surpluses of State and local governments. All series
are based on National Income and Product Accounts (NIPA) except for the current account balance. The (NIPA) figures, both actual and
projected, are on a pre-benchmark revisions basis.

ANALYTICAL PERSPECTIVES

Impact of Changes in the Economic
Assumptions
The economic assumptions underlying last year’s
budget were predicated on little projected change in
the level of the budget deficit over the ensuing five
years. The assumptions underlying this year’s budget
reflect a change in fiscal policy that puts the deficit
on a declining path toward budget balance by the year
2002. This change in fiscal policy alters the economic
outlook; in particular it reduces the levels of expected
future interest rates. As noted above, lower interest
rates imply a shift of income out of interest income
and into corporate profits—and, to a lesser extent, into
dividend income—resulting in higher projected receipts
due to the higher tax rates involved. The outlook for
long-term real economic growth (on a comparable basis
of measurement) has not been raised to reflect the
change in fiscal policy. However, other changes in the
economic outlook summarized in Table 1–4 (in particular a reduction in the expected annual rate of inflation
measured by the CPI) will be affected by the technical
improvements to reduce the overstatement of inflation
discussed above. Also, the equilibrium unemployment
rate on a noninflationary growth path has been reduced
0.1 percentage point based on the experience of 1995.
The effects on the budget of the changes in the economic outlook are shown in Table 1–5. For example,
in the last column, the year 2000 deficit is reduced
by $99 billion as a result of changes in economic assumptions in the 1997 budget compared to those in
the 1996 budget—from $127 billion under 1996 budget
economics with 1997 budget policies, to less than $28
billion with 1997 budget economics and policies. The
Table 1–4.

effect of reducing the projected rate of inflation is to
reduce the projected levels of both receipts and outlays.
(This effect is discussed more fully in the last section
of this chapter.) The reduction in the equilibrium unemployment rate causes a modest reduction in outlays.
The largest budget effect, however, is major reductions
in interest costs resulting both from the decline in projected interest rates and from the fact that interest
costs are incurred on a reduced amount of debt. (The
debt service savings shown are only the portion of total
debt service cost reduction resulting from changes in
the economic outlook, not the total effect of moving
toward a balanced budget by the year 2002.)
Structural vs. Cyclical Deficit
When there is slack in the economy, receipts are
lower than they would be if resources were fully employed, and outlays for unemployment-sensitive programs (such as unemployment compensation and food
stamps) are higher. As a result, the deficit is higher
than it would be at full employment. The portion of
the deficit that can be traced to such factors is called
the cyclical deficit. The remainder, the portion that
would remain at full employment (consistent with a
5.7 percent unemployment rate), is called the structural
deficit.
Changes in the structural deficit give a better picture
of the impact of budget policy on the economy than
does the unadjusted deficit. During a recession or the
recovery from one, the structural deficit also gives a
clearer picture of the deficit problem that fiscal policy
must address, because this part of the deficit will persist even when the economy has fully recovered, unless
policy changes.

COMPARISON OF ECONOMIC ASSUMPTIONS IN THE 1996 AND 1997 BUDGETS
(Calendar years)
1995

1996

1997

1998

1999

2000

change): 1

Nominal GDP (percent
1996 budget assumptions 2 ...........................................................
1997 budget assumptions .............................................................

5.4
4.2

5.5
5.1

5.6
5.1

5.5
5.1

Real GDP (percent change): 1
1996 budget assumptions 2 ...........................................................
1997 budget assumptions .............................................................

2.2
1.5

2.3
2.2

2.3
2.3

GDP price index (percent change): 1
1996 budget assumptions 2 ...........................................................
1997 budget assumptions .............................................................

3.1
2.5

3.1
2.8

3.2
2.7

3.1
2.7

CPI-U (percent change): 1
1996 budget assumptions .............................................................
1997 budget assumptions .............................................................

3.2
2.7

3.2
3.1

3.2
2.9

3.2
2.8

3.1
2.8

Civilian unemployment rate (percent): 3
1996 budget assumptions .............................................................
1997 budget assumptions .............................................................

5.8
5.6

5.9
5.7

5.8
5.7

91-day Treasury bill rate (percent): 3
1996 budget assumptions .............................................................
1997 budget assumptions .............................................................

5.9
5.5

5.5
4.9

5.5
4.5

5.5
4.3

5.5
4.2

5.5
4.0

10-year Treasury note rate (percent): 3
1996 budget assumptions .............................................................
1997 budget assumptions .............................................................

7.9
6.6

7.2
5.6

7.0
5.3

7.0
5.0

1 Fourth

quarter-to-fourth quarter.
to reflect January 1996 comprehensive revisions.
year average.

2 Adjusted

3 Calendar

ECONOMIC ASSUMPTIONS
Table 1–5.

EFFECTS ON THE BUDGET OF CHANGES IN ECONOMIC ASSUMPTIONS SINCE LAST YEAR
(In billions of dollars)
1996

1997

1998

1999

2000

Budget totals under 1996 budget economic assumptions and 1997 budget policies:
Receipts .....................................................................................................................................
Outlays .......................................................................................................................................

1,407.8
1,595.3

1,472.5
1,673.5

1,556.0
1,731.6

1,635.1
1,789.6

1,724.9
1,851.5

Deficit (–) ...........................................................................................................................

–187.5

–201.0

–175.6

–154.5

–126.6

Changes due to changes in economic assumptions:
Receipts .....................................................................................................................................
Outlays:
Inflation ..................................................................................................................................
Unemployment .......................................................................................................................
Interest rates ..........................................................................................................................
Interest on changes in borrowing .........................................................................................

19.0

22.7

21.9

17.4

8.9

–3.8
–2.9
–13.9
–2.3

–7.3
–1.0
–24.6
–5.3

–9.8
–1.1
–35.6
–9.3

–13.1
–1.1
–44.2
–14.3

–16.9
–1.1
–52.5
–19.7

Total, outlays .....................................................................................................................

–22.9

–38.2

–55.8

–72.7

–90.2

Decrease in deficit (+) ......................................................................................................

41.9

60.9

77.7

90.1

99.1

Budget totals under 1997 budget economic assumptions and policies:
Receipts .....................................................................................................................................
Outlays .......................................................................................................................................

1,426.8
1,572.4

1,495.2
1,635.3

1,577.9
1,675.9

1,652.5
1,716.9

1,733.8
1,761.4

Deficit (–) ...........................................................................................................................

–145.6

–140.1

–98.0

–64.4

–27.5

In the early 1990’s, large swings in net outlays for
deposit insurance (the S&L bailouts) had substantial
impacts on deficits, but had little impact on economic
performance. It therefore became customary to remove
deposit insurance outlays as well as the cyclical component of the deficit from the actual deficit to compute
the adjusted structural deficit. This is shown in Table
1–6.
Since the economy is projected to be quite close to
full employment over the forecast horizon, the cyclical
component of deficits are small. Deposit insurance net
outlays are relatively small and do not change greatly
from year to year. Thus, rather unusually, the adjusted
structural deficits in this budget display much the same
pattern of year-to-year changes as the actual deficits.
The most significant point illustrated by this table,
therefore, is the fact that of the $145 billion reduction
in the actual budget deficit between 1992 and 1996
(from $290 billion to $146 billion), nearly 45 percent
($65 billion) resulted from cyclical improvement in the
economy. The rest of the reduction stemmed primarily
from policy actions—mainly those in OBRA93 which
reversed a projected steep rise in the deficit.

Table 1–6.

Sensitivity of the Budget to Economic
Assumptions
Both receipts and outlays are affected by changes
in economic conditions. This sensitivity seriously complicates budget planning, because errors in economic
assumptions lead to errors in the budget projections.
It is therefore useful to examine the implications of
alternative economic assumptions.
Many of the budgetary effects of changes in economic
assumptions are fairly predictable, and a set of rules
of thumb embodying these relationships can aid in estimating how changes in the economic assumptions
would alter outlays, receipts, and the deficit.
Economic variables that affect the budget do not usually change independently of one another. Output and
employment tend to move together in the short run:
a higher rate of real GDP growth is generally associated with a declining rate of unemployment, while weak
or negative growth is usually accompanied by rising
unemployment. In the long run, however, changes in
the average rate of growth of real GDP are mainly
due to changes in the rates of growth of productivity
and labor supply, and are not necessarily associated
with changes in the average rate of unemployment.
Inflation and interest rates are also closely interrelated:

ADJUSTED STRUCTURAL DEFICIT
(In billions of dollars)

1992

1993

1994

1995

1996

Unadjusted surplus/deficit ..................................................................
Cyclical component ........................................................................

290.4
63.6

255.1
51.1

203.2
19.2

163.9
–3.2

Structural surplus/deficit .....................................................................
Deposit insurance outlays 1 .........................................................

226.8
–2.4

204.0
–28.0

184.0
–7.6

Adjusted structural surplus/deficit ......................................................

229.2

232.0

191.5

1 In

1992, includes $4.9 billion in allied contributions for Desert Storm.

1997

1998

1999

2000

2001

2002

145.6
–1.1

140.1
............

98.0
............

64.4
............

27.5
............

–8.3
............

–43.9
............

167.1
–17.9

146.7
–13.5

140.1
–4.3

98.0
–2.0

64.4
–0.5

27.5
–2.2

–8.3
–1.6

–43.9
–1.8

185.0

160.2

144.4

99.9

64.9

29.7

–6.7

–42.1

12
a higher expected rate of inflation increases interest
rates, while lower expected inflation reduces rates.
Changes in real GDP growth or inflation have a much
greater cumulative effect on the budget over time if
they are sustained for several years than if they last
for only one year.
Highlights of the budget effects of the above rules
of thumb are shown in Table 1–7.
If real GDP growth is lower by one percentage point
in calendar 1996 only and the unemployment rate rises
by one-half percentage point, the 1996 deficit would
increase by $8.0 billion; receipts in 1996 would be lower
by about $6.8 billion, and outlays would be higher by
about $1.2 billion, primarily for unemployment-sensitive programs. In 1997, the receipts shortfall would
grow further to about $14.7 billion, and outlays would
be increased by about $6.0 billion relative to the base,
even though the growth rate in calendar 1997 follows
the path originally assumed. This is because the level
of real (and nominal) GDP and taxable incomes would
be permanently lower and unemployment higher. The
budget effects (including growing interest costs associated with the higher deficits) would continue to grow
slightly in later years.
The budget effects are much larger if the real growth
rate is assumed to be one percentage point less in each
year (1996–2002) and the unemployment rate to rise
one-half percentage point in each year. With these assumptions, the levels of real and nominal GDP would
be below the base case by a growing percentage. The
deficit would be $177.2 billion higher than under the
base case by 2002.
The effects of slower productivity growth are shown
in a third example, where real growth is one percentage
point lower per year while the unemployment rate is
unchanged. In this case, the estimated budget effects
mount steadily over the years, but more slowly, reaching a $145.8 billion deficit add-on by 2002.
Joint changes in interest rates and inflation have
a smaller effect on the deficit than equal percentage
point changes in real GDP growth because their effects
on receipts and outlays are substantially offsetting. An

ANALYTICAL PERSPECTIVES

example is the effect of a one percentage point higher
rate of inflation and one percentage point higher interest rates during calendar year 1996 only. In subsequent
years, the price level and nominal GDP would be one
percent higher than in the base case, but interest rates
are assumed to return to their base levels. Outlays
for 1996 rise by $6.5 billion 5 and receipts by $7.9 billion, for a decrease of $1.4 billion in the 1996 deficit.
In 1997, outlays would be above the base by $15.1
billion, due in part to lagged cost-of-living adjustments;
receipts would rise $15.9 billion above the base, however, resulting in a $0.8 billion decrease in the deficit.
In subsequent years, the amounts added to receipts
would continue to be larger than the additions to outlays.
If the rate of inflation and the level of interest rates
are higher by one percentage point in all years, the
price level and nominal GDP would rise by a cumulatively growing percentage above their base levels. In
this case, the effects on receipts and outlays mount
steadily in successive years, adding $81.3 billion to outlays and $114.6 billion to receipts in 2002, for a net
reduction in the deficit of $33.3 billion.
The table also shows the interest rate and the inflation effects separately, and rules of thumb for the added
interest cost associated with higher or lower deficits
(increased or reduced borrowing).
The effects of changes in economic assumptions in
the opposite direction are approximately symmetric to
those shown in the table. The impact of a one percentage point lower rate of inflation or higher real growth
would have about the same magnitude as the effects
shown in the table, but with the opposite sign.
These rules of thumb are computed while holding
the income share composition of GDP constant. Because
different income components are subject to different
taxes and tax rates, estimates of total receipts can be
affected significantly by changing income shares. These
relationships, however, have proved too complex to be
reduced to simple rules.
5 This excludes any adjustment to discretionary programs, which are capped in nominal
terms.

ECONOMIC ASSUMPTIONS
Table 1–7.

SENSITIVITY OF THE BUDGET TO ECONOMIC ASSUMPTIONS
(In billions of dollars)

Budget effect

1996

1997

1998

1999

2000

2001

2002

Real Growth and Employment
Budgetary effects of 1 percent lower real GDP growth:
For calendar year 1996 only: 1
Receipts ................................................................................................
Outlays ..................................................................................................

–6.8
1.2

–14.7
6.0

–16.9
7.1

–17.1
8.4

–17.5
9.6

–18.1
10.9

–18.8
12.4

Deficit increase (+) ....................................................................................

8.0

20.6

24.0

25.5

27.1

29.0

31.2

Sustained during 1996–2002: 1
Receipts ................................................................................................
Outlays ..................................................................................................

–6.8
1.2

–21.7
8.2

–39.2
14.3

–57.6
23.9

–77.1
32.5

–97.7
45.1

–119.8
57.4

Deficit increase (+) ....................................................................................

8.0

29.9

53.5

81.5

109.6

142.8

177.2

Sustained during 1996–2002, with no change in unemployment:
Receipts ................................................................................................
Outlays ..................................................................................................

–6.8
0.2

–22.0
0.9

–40.2
2.4

–60.0
4.8

–81.1
7.8

–103.8
12.1

–128.2
17.6

Deficit increase (+) ....................................................................................

7.0

22.9

42.6

64.7

88.9

115.9

145.8

Budgetary effects of 1 percentage point higher rate of:
Inflation and interest rates during calendar year 1996 only:
Receipts ................................................................................................
Outlays ..................................................................................................

7.9
6.5

15.9
15.1

15.5
11.8

14.1
10.1

14.6
9.6

15.3
9.2

16.0
8.2

Deficit increase (+) ....................................................................................

–1.4

–0.8

–3.7

–4.1

–5.0

–6.1

–7.8

Inflation and interest rates, sustained during 1996–2002:
Receipts ................................................................................................
Outlays ..................................................................................................

7.9
6.5

24.2
22.0

40.8
35.2

57.1
47.4

74.7
59.4

93.8
70.6

114.6
81.3

Deficit increase (+) ....................................................................................

–1.4

–2.2

–5.6

–9.7

–15.3

–23.2

–33.3

Interest rates only, sustained during 1996–2002:
Receipts ................................................................................................
Outlays ..................................................................................................

1.0
6.0

2.7
17.7

3.4
24.9

3.7
30.3

4.0
34.8

4.2
38.8

4.5
41.2

Deficit increase (+) ....................................................................................

5.0

15.0

21.5

26.6

30.9

34.5

36.7

Inflation only, sustained during 1996–2002:
Receipts ................................................................................................
Outlays ..................................................................................................

6.9
0.5

21.5
4.3

37.4
10.3

53.4
17.1

70.7
24.6

89.6
31.8

110.1
40.1

Deficit increase (+) ....................................................................................

–6.4

–17.2

–27.1

–36.3

–46.2

–57.7

–70.0

2.8

5.1

5.0

5.2

5.3

5.5

Inflation and Interest Rates

Interest Cost of Higher Federal Borrowing
Effect of $100 billion additional borrowing during 1996 ..............................
1 The

unemployment rate is assumed to be 0.5 percentage point higher per 1.0 percent shortfall in the level of real GDP.

2. STEWARDSHIP: TOWARD A FEDERAL BALANCE SHEET
Introduction
This chapter presents a framework for describing the
financial condition of the Federal Government and its
performance as a steward of publicly owned assets.
Although parts of the presentation are similar in appearance to a business balance sheet, they are not the
same. The Government’s sovereign powers have no
counterparts in the business world, and its resources
and responsibilities are broader than the assets and
liabilities found on a typical balance sheet. For this
reason, it is not possible to judge how well the Government is discharging its stewardship obligations simply
from an examination of its formal assets and liabilities.
A review of how national welfare and security are
faring in light of Government policy is also needed.
Because of the differences between Government and
business, and the serious limitations that exist in the
available data, the material presented below must be
interpreted cautiously. The conclusions are necessarily
tentative and subject to future revision as the estimating methods are improved and better data become
available.
The presentation consists of three parts:
• The first part is summarized in Table 2–1, which
shows what the Federal Government owns and
what it owes. This table is closest in appearance
to a business balance sheet. The assets and liabilities shown here are strictly defined. The assets
are only those owned by the Government, while
the liabilities result from past Government actions
that have created binding commitments to make
future payments. Government assets and liabilities could be defined more broadly than this, but
if they were, they would no longer correspond to
the assets and liabilities that appear on a balance
sheet.
• The second part is summarized in Table 2–2,
which presents possible paths for the Federal
budget extending into the distant future. The section shows how the deficit is affected in the long
run by changes in policy and by changes in economic or demographic behavior. This is the best
context in which to examine the balance between
Federal resources and responsibilities, and it is
the clearest way to indicate the long-run financial
burdens that the Government faces. Some future
claims deserve special emphasis because of their
importance in individual retirement planning.
Table 2–3 summarizes the condition of the social
security and Medicare trust funds under current
law and how and why that condition has changed
since 1994.

• The final part of the presentation is intended to
show some of the ways in which Federal activities
contribute to social and economic well-being. Table
2–4 indicates how Federal investments have contributed to national wealth. Table 2–5 offers a
set of economic and social indicators. The measures of well- or ill-being in this table are all affected to a greater or lesser degree by Government
actions.
The Federal Government does not have a single bottom line that would reveal its financial status at a
glance, but this presentation offers a balanced view
of the condition of the Government’s finances and its
stewardship of resources.
The Government’s formal liabilities exceed the value
of assets in its possession, and the gap has widened
markedly over the last 15 years. Even so, national
wealth has continued to rise, partly as a result of investments the Government has made or sponsored in
physical and human capital. The Government’s net liabilities are very large but they amount to only about
6 percent of total national wealth. Furthermore, if the
President’s 1997 budget is enacted, Federal debt in the
hands of the public—the main category of Federal liabilities—will expand much less rapidly in the future
than it did prior to 1993. By the year 2002 the deficit
would be eliminated, and for several years after that
Federal debt held by the public would actually decline.
Eventually, a deficit is likely to reemerge if action is
not taken to confront the demographic transition caused
by the retirement of the baby boom, but that problem
will be much easier to deal with because of actions
taken by this Administration.
Relationship with FASAB Objectives
The framework presented here meets one of the four
objectives 1 of Federal financial reporting recommended
by the Federal Accounting Standards Advisory Board
and adopted for use by the Federal Government in September 1993. This Stewardship objective says:
Federal financial reporting should assist report users in
assessing the impact on the country of the Government’s
operations and investments for the period and how, as a
result, the Government’s and the Nation’s financial conditions have changed and may change in the future. Federal
financial reporting should provide information that helps the
reader to determine:
3a. Whether the Government’s financial position improved
or deteriorated over the period.
3b. Whether future budgetary resources will likely be sufficient to sustain public services and to meet obligations as
they come due.
1 Objectives of Federal Financial Reporting, Statement of Federal Financial Accounting
Concepts Number 1, September 2, 1993. The other three objectives relate to budgetary
integrity, operating performance, and systems and controls.

ANALYTICAL PERSPECTIVES
3c. Whether Government operations have contributed to
the Nation’s current and future well-being.

The Board is in the process of developing recommendations as to the specific accounting standards
that would meet this objective. This experimental presentation explores one possible approach for meeting the
objective at the Government-wide level.
What Can Be Learned from a Balance Sheet
Approach
The budget is an essential tool for allotting resources
within the Federal Government and between public and
private sectors, but the standard budget presentation,
with its focus on annual outlays, receipts, and the deficit, does not provide sufficient information for a full
analysis of the Government’s financial and investment
decisions. It is useful to project the deficit forward to
see how current decisions will affect the future balance
of Federal resources and responsibilities. The information about the stocks of Federal assets and liabilities
can be useful as well. It is also important to examine
the effects of Government financial decisions on the
private sector and State and local Governments. This
is especially true for Federal investments, which often
generate returns that flow mainly to households, private businesses or other levels of Government, rather
than back to the Federal Treasury. The framework presented here is a first step toward filling some of these
needs.
The Government’s sovereign powers to tax, regulate
commerce, and set monetary policy give it resources
that no private individual or business possesses.
Although these resources are not assets in any conventional sense, they need to be considered in a comprehensive review of the Government’s financial condition. Formal Government obligations such as Treasury
notes clearly belong on the other side of the ledger.
These debts have obvious counterparts in the business
world.
There are other Government obligations, however,
which have no obvious analogues in business accounting. For example, the Government’s obligation to promote the general welfare has led in the twentieth century to the establishment of a number of social policy
programs. These programs are at the center of the
debate over how best to discharge the Federal Government’s responsibilities. Although changes in these programs are inevitable and even desirable, it is very likely that many of them will remain as Federal obligations
for the foreseeable future. Programs such as Medicare
may be changed, but they are unlikely to be eliminated.
In its budget planning, it would be prudent for the
Federal Government to assume that there will be a

continuing need to fund such programs. They are not
legally binding liabilities, however, and they would not
be included on a business balance sheet.
Almost all of the broader Federal resources and responsibilities are subject to change through the political
process, and future decisions by Congress and the
President are likely to alter them. In a financial sense,
the discounted present value of such obligations is
much more uncertain than is the current value of the
official Government debt, or even the value of Government-owned assets. This is another reason for keeping
such constitutional and moral obligations separate from
the Government’s liabilities strictly defined.
The best way to see how future resources line up
with future responsibilities is to project the Federal
budget forward in time. The budget offers a comprehensive picture of Federal receipts and spending, and by
projecting it forward it is possible to learn the implications of current and past policy decisions. Some projections of this sort are presented below. The budget does
not show, however, whether the public is receiving
value for its tax dollars. Knowing that would require
comprehensive performance measures for Government
programs, and broad statistical information about conditions in the U.S. economy and society for which Government is wholly or partly responsible. Some of these
data are currently available but much more would need
to be developed to obtain a full picture.
The presentation that follows consists of a series of
tables and charts. No one of these is a ‘‘Government
balance sheet,’’ but all of them together serve many
of the functions of a balance sheet. The schematic diagram, Chart 2–1, shows how they fit together. The tables and charts should be viewed as an ensemble, the
main elements of which can be grouped together in
two broad categories—assets/resources and liabilities/
responsibilities.
• Reading down the left-hand side of the diagram
shows the range of Federal resources, including
assets the Government owns, tax receipts it can
expect to collect, and national wealth that provides the base for Government revenues.
• Reading down the right-hand side reveals the full
range of Federal obligations and responsibilities,
beginning with Government’s acknowledged liabilities (such as the debt held by the public) based
on past actions, and going on to include future
budget outlays. This column potentially would include a set of indicators highlighting areas where
Government activity might require adjustment, either through new investment or through reductions or reallocations of existing resources.

2. STEWARDSHIP: TOWARD A FEDERAL BALANCE SHEET

CHART 2-1. A BALANCE SHEET PRESENTATION
FOR THE FEDERAL GOVERNMENT
ASSETS/RESOURCES

LIABILITIES/RESPONSIBILITIES

Federal Assets

Federal Liabilities

Financial Assets
Gold and Foreign Exchange
Other Monetary Assets
Mortgages and Other Loans
Less Expected Loan Losses
Other Financial Assets
Physical Assets
Fixed Reproducible Capital
Defense
Nondefense
Inventories
Non-reproducible Capital
Land
Mineral Rights

AAAA
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AAA
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AAAA
AAAA
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AAA
Federal
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AAAA
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AAAA
AAA
AAAA
AAAA
AAAA
AAAA
AAAA
AAA
AAAA
AAAA
AAAA
AAAA
AAAA
AAA
Governmental
AAAAAAAAAAAAAAAAAAAAAAA
AAA
AAAA
AAAA
AAAA
AAAA
AAAA
AAAA
AAAA
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AAAA
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AAA
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Assets
AAAA
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AAA
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andAAAA
Liabilities
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AAAA
AAAA
AAA
AAAA
AAAA
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AAAA
AAAA
(Table
2-1)
AAAAAAAAAAAAAAAAAAAAAAA
AAAAAAAAAAAAAAAAAAAAAAA
AAA

Net Balance

Resources/Receipts
Projected Receipts

Financial Liabilities
Currency and Bank Reserves
Debt Held by the Public
Miscellaneous
Guarantees and Insurance Liabilities
Deposit Insurance
Pension Benefit Guarantees
Loan Guarantees
Other Insurance
Federal Pension Liabilities

Responsibilities/Outlays
AAAA
AAAA
AAAALong-Run
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AAAA
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AAAA
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Federal
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AAAA
AAA
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Budget
AAAA
AAAA
AAAA
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AAAA
AAAA
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AAAAProjections
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(Table
2-2)
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Discretionary Outlays
Mandatory Outlays
Social Security
Health Programs
Other Programs
Net Interest
Deficit

National Assets/Resources
Federally Owned Physical Assets
State & Local Physical Assets
Federal Contribution
Privately Owned Physical Assets
Education Capital
Federal Contribution
R&D Capital
Federal Contribution

National Needs/Conditions
AAAAAAAA
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National
AAAA
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Wealth
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(Table
2-4)
AAAAAAAAAAAAAAAAAAAAAAA
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Indicators of economic, social,
educational, and environmental
conditions to be used as a guide
to Government investment and
management.

ANALYTICAL PERSPECTIVES
Table 2–1.

GOVERNMENT ASSETS AND LIABILITIES *

(As of the end of the fiscal year, in billions of 1995 dollars)
1960

1965

1970

1975

1980

1985

1990

1993

1994

1995

ASSETS

Financial assets:
Gold and Foreign Exchange ..................................
Other Monetary Assets ..........................................
Mortgages and Other Loans ..................................
Less Expected Loan Losses .............................
Other Financial Assets ...........................................

98
37
122
–1
58

69
53
156
–2
77

58
32
202
–4
64

130
15
202
–9
64

322
38
278
–16
84

154
24
341
–16
108

194
31
276
–18
166

171
39
230
–24
202

171
31
218
–26
190

183
34
193
–22
188

Subtotal ...............................................................
Physical Assets:
Fixed Reproducible Capital:
Defense ..............................................................
Nondefense ........................................................
Inventories ...............................................................
Nonreproducible Capital:
Land ....................................................................
Mineral Rights ....................................................

314

353

351

403

706

611

648

618

584

576

826
146
252

842
175
218

839
189
203

683
216
181

586
248
220

694
249
252

771
254
219

782
251
179

780
256
170

744
255
168

87
314

121
291

151
241

234
334

296
607

318
683

315
457

241
388

237
360

235
335

Subtotal ..........................................................

1,626

1,646

1,622

1,647

1,958

2,197

2,016

1,841

1,803

1,737

Total assets ..............................................

1,940

2,000

1,972

2,050

2,664

2,808

2,664

2,459

2,387

2,313

220
954
28

241
941
29

267
800
31

272
787
33

273
1,019
44

290
1,809
55

348
2,483
82

396
3,072
59

422
3,158
60

437
3,219
61

Subtotal ...............................................................
Insurance Liabilities:
Deposit Insurance ...................................................
Pension Benefit Guarantee Corp ...........................
Loan Guarantees ....................................................
Other Insurance ......................................................

1,202

1,211

1,097

1,092

1,336

2,153

2,913

3,527

3,640

3,717

0
0
0
30

0
0
0
27

0
0
2
21

0
41
6
19

2
30
12
26

9
41
10
16

67
40
14
19

13
63
28
18

8
31
30
17

4
19
27
16

Subtotal ...............................................................
Federal Pension Liabilities ..........................................

30
734

27
930

23
1,104

67
1,256

69
1,707

76
1,693

140
1,625

122
1,563

86
1,541

66
1,513

Total liabilities ..............................................
Balance ..........................................................
Per capita (in 1995 dollars) ....................
Ratio to GDP (in percent) ......................

1,966
–26
–146
–1.1

2,168
–169
–867
–5.4

2,225
–252
–1,231
–6.9

2,414
–364
–1,686
–8.7

3,112
–448
–1,961
–9.0

3,922
–1,114
–4,658
–19.1

4,678
–2,014
–8,034
–30.4

5,212
–2,753
–10,635
–39.5

5,267
–2,880
–11,018
–39.9

5,296
–2,983
–11,312
–40.7

LIABILITIES

Financial liabilities:
Currency and Bank Reserves ................................
Debt held by the Public .........................................
Miscellaneous .........................................................

* This table shows assets and liabilites for the Government as a whole, including the Federal Reserve System. Therefore, it does not break out separately the assets held in Government accounts, such as social security, that
are the obligation of specific Government agencies. Estimates for 1995 are extrapolated in some cases.

THE FEDERAL GOVERNMENT’S ASSETS AND LIABILITIES
Table 2–1 summarizes what the Government owes
as a result of its past operations, along with the value
of what it owns, for a number of years beginning in
1960. The values of assets and liabilities are measured
in terms of constant 1995 dollars. For all of this period,
Government liabilities have exceeded the value of assets, but until the early 1980s the disparity was relatively small, and for many years it deteriorated only
gradually.
In the late 1970s, a speculative run-up in the prices
of oil, gold, and other real assets temporarily boosted
Federal asset values, but since then they have declined.2 Currently, the total real value of Federal assets
2 This temporary improvement highlights the importance of the other tables in this presentation. What is good for the Federal Government as an asset holder is not necessarily
favorable to the economy. The decline in inflation in the early 1980s reversed the speculative

is estimated to be about 20 percent greater than it
was in 1960. Meanwhile, Federal liabilities have increased by almost 170 percent in real terms. The sharp
decline in the Federal net asset position that began
in the 1980s was principally due to the large Federal
budget deficits that began at that time along with the
drop in asset values. Currently, the net excess of liabilities over assets is about $3 trillion or over $11,000
per capita.
Assets
The assets in Table 2–1 reflect a comprehensive list
of the financial and physical resources owned by the
Federal Government. The list corresponds to items that
runup in gold and other commodity prices. This reduced the balance of Federal net assets,
but it was good for the economy.

2. STEWARDSHIP: TOWARD A FEDERAL BALANCE SHEET

would appear on a typical balance sheet, but it does
not constitute an exhaustive catalogue of Federal resources. For example, the Government’s most important
financial resource, its ability to tax, is not reflected.
Financial Assets: At the end of 1995, the Federal
Government’s holdings of financial assets amounted to
about $570 billion. Government-held mortgages and
other loans (measured in constant dollars) reached a
peak in the mid-1980s. Since then, Federal loans have
declined. The holdings of mortgages, in particular, have
declined sharply over the last three years as the holdings acquired from failed Savings and Loan institutions
have been liquidated.
The face value of mortgages and other loans overstates their economic value because of future losses
and the interest subsidy on these loans. These estimated losses are subtracted from the face value of outstanding loans to obtain a better estimate of their economic worth.
Over time, variations in the price of gold have accounted for major swings in this category. Since 1980,
gold prices have fallen, and the real value of U.S. gold
and foreign exchange holdings have dropped by over
40 percent. Last year, for the first time in several years,
these assets rose in value.
Reproducible Capital: The Federal Government is a
major investor in physical capital. Government-owned
stocks of fixed capital amounted to about $1.0 trillion
in 1995. About three-quarters of this capital took the
form of defense equipment or structures. From 1960
to 1981, the net stock of defense capital fell as a share
of GDP, but between 1982 and 1991, the ratio generally
held steady. Since 1991, the reduction in defense purchases following the end of the Cold War has caused
a decline in the ratio of these stocks to GDP of about
11⁄2 percentage point.
Non-reproducible Capital: The Government owns significant amounts of land and mineral deposits. There
are no official estimates of the market value of these
holdings. Researchers in the private sector have estimated what they are worth, and these estimates are
extrapolated in Table 2–1. Private land values are
about 20 percent lower than they were at the end of
the 1980s, although they have risen somewhat since
1993. It is assumed here that Federal land has shared
in this decline. Oil prices have fluctuated but are lower
now than they were five years ago. These shifts are
likely to have pulled down the value of Federal mineral
deposits.
Total Assets: The total real value of Government assets has declined about 15 percent over the last 10
years, principally because of declines in the real prices
of gold, land, and minerals. At the end of 1995, the
Government’s holdings of all assets were worth about
$2.3 trillion.

3 These pension liabilities are expressed as the actuarial present value of benefits accruedto-date based on past and projected salaries. The cost of retiree health benefits is not
included. The 1995 liability is extrapolated from recent trends.

19
Liabilities
The liabilities listed in Table 2–1 are analogous to
those of a business corporation. They include public
debt, Federal trade credit, and Federal pension obligations owed to its workers. Other potential claims on
Federal resources are not reflected.
Financial Liabilities: These amounted to about $3.7
trillion at the end of 1995. The largest component was
Federal debt held by the public, amounting to over
$3.2 trillion. This measure of Federal debt is net of
the holdings of the Federal Reserve System. Those holdings exceeded $380 billion in 1995. Although independent in its policy deliberations, the Federal Reserve is
part of the Federal Government, and for that reason
its assets and liabilities are included here in the Federal totals. In addition to debt held by the public, the
Government’s financial liabilities include $440 billion
in currency and bank reserves, which are mainly obligations of the Federal Reserve System, and about $60
billion in miscellaneous liabilities.
Guarantees and Insurance Liabilities: The Federal
Government has contingent liabilities arising from loan
guarantees and insurance programs. When the Government offers insurance, the initial outlays may be small
or, if a fee is charged, they may even be negative,
but the risk of future outlays associated with such commitments can be huge. In the past, the cost of such
risks was not recognized until after a loss was realized.
In the last few years, however, techniques have been
developed which permit estimates to be made of the
accruing costs arising from these commitments. The estimates are reported in Table 2–1. The resolution of
the many failures in the Savings and Loan and banking
industries have helped to reduce the losses in this category by about half since 1990.
Federal Pension Liabilities: The Federal Government
owes pension benefits to its retired workers and to current employees who will eventually retire. The amount
of these liabilities is large. As of 1995, the discounted
present value of the benefits is estimated to have been
around $1.5 trillion.3
The Balance of Net Liabilities
The balance between Federal liabilities and Federal
assets has deteriorated over the past 15 years at a
rapid rate. In 1980, the negative balance was less than
11 percent of GDP. Currently, it is estimated to be
over 40 percent. The budget deficit has declined since
1992, however, and this has slowed the rate of decline
in the net asset position. If the Administration’s budget
proposals were to be enacted, it is likely that the rate
of decline in the net asset position would be halted
and even reversed.

ANALYTICAL PERSPECTIVES

THE BALANCE OF RESOURCES AND RESPONSIBILITIES
The data summarized in Table 2–1 are useful in
showing the consequences of past Government policies,
but Government’s continuing commitments to provide
public services are not reflected there, nor can the Government’s broader resources be displayed in a table
limited only to the assets that it owns. A better way
to examine the balance between future Government obligations and resources is by projecting the overall
budget. The budget offers the most comprehensive
measure of the Government’s financial burdens and its
resources. By projecting total receipts and outlays, it
is possible to examine whether there will be sufficient
resources to support all of the Government’s ongoing
obligations.
The Federal Government’s responsibilities extend
well beyond the five-year window (or the expanded
seven-year window) that has been the focus of recent
budget analysis and debate. There is no time limit on
Government’s constitutional responsibilities, and programs like social security are clearly expected to continue indefinitely.
This part of the presentation shows some alternative
long-run projections of the Federal budget that extend
through the year 2050. Forecasting the economy and
the budget over such a long period is highly uncertain.
Future budget outcomes depend on a host of unknowns—constantly changing economic conditions, unforeseen international developments, unexpected demographic shifts, the unpredictable forces of technological
advance, and unknown future political preferences.
Those uncertainties increase the further projections are
pushed into the future. Even so, long-run budget projections are needed to assess the full implications of current action or inaction.
It is evident even now that there will be mounting
challenges to the budget after the turn of the century.
The huge baby-boom generation born in the years after
World War II is aging and will begin to retire in little
more than a decade. By 2008, the first baby-boomers
will become eligible for social security. In the years
that follow there will be serious strains on the budget
because of increased expenditures for both social security and Medicare. Long-range projections can offer a
sense of the seriousness of these strains and what may
be needed to withstand them.
The Long-Range Outlook for the Budget.—Since
the Administration took office there have been major
changes in the long-run budget outlook. In January
1993, the deficit was clearly on an unsustainable trajectory. Had current policies continued unchanged the deficit would have steadily mounted not only in dollar
terms, but relative to the size of the economy.4 The
Omnibus Budget Reconciliation Act of 1993 (OBRA)
4 Over very long periods when the rate of inflation is positive, comparisons of dollar
values are meaningless. Even the low rate of inflation assumed in this budget will reduce
the value of a 1995 dollar by over 60 percent by 2030, and by almost 80 percent by
the year 2050. For long-run comparisons, it is much more useful to examine the ratio
of the deficit and other budget categories to the overall size of the economy as measured
by GDP.

changed that. Not only did it produce a decline in the
near-term deficit, but it also brought down the longterm budget deficit as well. The policies in OBRA were
sufficient to maintain the deficit as a stable share of
GDP into the next century. This was a marked improvement over the long-term outlook that the Administration inherited.
Despite this improvement, the long-run picture for
the budget has remained threatening. A GAO study
released in 1992 concluded that, ‘‘the economic and political reality is that the nation cannot continue on the
current path’’ of increasing long-run deficits. More recently, the 1994 report of the Bipartisan Commission
on Entitlement and Tax Reform found that there exists
a ‘‘long-term imbalance between the Government’s entitlement promises and the funds it will have available
to pay for them.’’ On a narrower front, the annual trustees’ reports for both the social security and Medicare
trust funds project a long-run actuarial deficiency for
these programs, and have for some time.
Economic and Demographic Projections.—Longrun budget projections must be based on a long-run
demographic and economic forecast. Otherwise, it is impossible to estimate either future resources or the potential claims on them. The forecast used here is an
extension of the Administration’s economic projections
described in the first chapter of this volume. Inflation,
unemployment and interest rates are assumed to hold
stable at their values in the year 2006. The real rate
of economic growth is determined by the expected
growth of the labor force and labor productivity. Productivity is assumed to continue rising at the same
rate as in the Administration’s medium-term projections, approximately 1.2 percent per year.5
Population growth is expected to slow over the next
several decades. This is consistent with recent trends
in the birth rate and an expected decline in the proportion of women in their childbearing years. The slowdown is expected to lower the rate of population growth
from over 1 percent per year to about half that rate
by the year 2020.6 Labor force participation is also expected to decline as the population ages. Together these
trends imply a slowdown in real economic growth beginning around the year 2005. The rate of real GDP
growth slows to less than 1.5 percent per year after
2020 because of these trends.
The Deficit Outlook.—Chart 2–2 shows three alternative deficit projections: a projection based on the policies in place prior to enactment of OBRA, the current
outlook before incorporating the President’s proposals
to balance the budget, and a projection that shows the
long-run outlook assuming those proposals are adopted.
5 This projection is stated in terms of the new chain-weighted measures for GDP introduced
by the Bureau of Economic Analysis in January. On the unrevised basis, the projected
growth rate is about one-half percentage point higher.
6 The population growth assumptions in these projections are based on the intermediate
assumptions in the 1995 social security trustees’ report for the period after 2006.

2. STEWARDSHIP: TOWARD A FEDERAL BALANCE SHEET

CHART 2-2. ALTERNATIVE LONG-RUN DEFICIT PROJECTIONS
PERCENT OF GDP
- 40

- 30
DEFICIT

CURRENT OUTLOOK
WITHOUT
A BALANCED BUDGET

- 20

PRE - CLINTON BASELINE

- 10

SURPLUS

PRESIDENTIAL POLICY
0

+-10

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 2040 2045 2050

The chart clearly illustrates the dramatic improvement
in the deficit that has already been achieved and shows
that more is possible, not only in the short run but
also in the long run. If the budget were balanced by
2002, the task of achieving fiscal stability when the
demographic bulge hits after 2005 would be substantially reduced.
Along the pre-OBRA baseline, the deficit reaches over
40 percent of GDP by the year 2030. OBRA reduced
the deficit by extending the caps on discretionary outlays; reforming Medicare; changing the rules for other
entitlement programs; and raising tax rates on upperincome taxpayers, among other measures. A strengthening of the economic outlook also improved the deficit
projection following the enactment of OBRA. In the current context, it is notable that OBRA lowered the deficit
in the long term as well as in the short term. This
would require that the discretionary savings achieved
in 1994–1998 be preserved by holding the level of real
discretionary spending constant thereafter. A return to
the prior spending trajectory would partially undo these
savings. Similarly, the savings in Medicare and other
entitlements would need to be preserved.

Despite the improvement in the outlook after the passage of OBRA, serious long-run problems remain. Beginning around the year 2010 and continuing throughout the next several decades, the deficit would rise,
eventually reaching unsustainable levels. The initial increase is caused by the expected retirement of the babyboom generation that puts new strains on social security and Medicare. By 2030, the deficit reaches 12 percent of GDP, and by 2050, it is 26 percent. Table 2–2
shows alternative long-range budget projections for the
major spending categories. The table shows that the
entitlement programs are the major driving force behind the rise in the deficit in the long run.
Social security benefits, driven by the retirement of
the baby-boom generation, rise from around 5 percent
of GDP in 2000 to over 7 percent in 2030. The rise
in Federal health care is even greater. Without the
President’s policies, Medicare and Medicaid together
would reach 4 percent of GDP in 2000 and then continue to rise to 11 percent by the year 2030. As entitlement spending rises, if no corrective action is taken,
the deficit grows rapidly. Initially, the programmatic
spending is responsible for the increase, but as time
passes a vicious spiral takes hold in which more bor-

ANALYTICAL PERSPECTIVES
Table 2–2.

ALTERNATIVE BUDGET PROJECTIONS
(Percent of GDP)
1995

Current outlook without a balanced budget:
Receipts ............................................................................................................................................................
Outlays ..............................................................................................................................................................
Discretionary .................................................................................................................................................
Mandatory .....................................................................................................................................................
Social security ..........................................................................................................................................
Medicare and Medicaid ...........................................................................................................................
Net interest ...................................................................................................................................................
Deficit ................................................................................................................................................................
Federal debt held by public .............................................................................................................................
Presidential policy (balanced budget):
Receipts ............................................................................................................................................................
Outlays ..............................................................................................................................................................
Discretionary .................................................................................................................................................
Mandatory .....................................................................................................................................................
Social security ..........................................................................................................................................
Medicare and Medicaid ...........................................................................................................................
Net interest ...................................................................................................................................................
Deficit ................................................................................................................................................................
Federal debt held by public .............................................................................................................................

rowing leads to higher Federal interest payments on
the growing debt, which is financed in turn by yet
more borrowing. The spiral is unstable in that if it
continued unchecked it would eventually drive the debt
and the deficit to infinity. Long before that point, a
financial crisis would surely be triggered that would
force some type of action on the Federal Government—
action that was certain to be drastic and painful.
The long-run deficit outlook would be much improved
if the President’s budget proposals were enacted. Balancing the budget would set it on a solid footing for
several decades. There is no justification in these projections for the concern sometimes expressed that a
balanced budget would be a transitory phenomenon,
to be followed quickly by a return of large and growing
deficits. Under the Administration’s economic and demographic assumptions that would not happen. The additional savings projected for the entitlements and the
further reduction in discretionary spending leave the
budget in a much improved position compared with the
outlook in the absence of these changes. The lower level
of Federal debt and interest that result from a balanced
budget also help to maintain a budget surplus in these
projections in the period beyond 2006.
Even with the improvements caused by a balanced
budget, a very long-run deficit problem would remain
as a result of the expected strains on social security
and the health programs in the period following the
retirement of the baby-boom generation. Balancing the
budget would enable the Government to run a surplus
over the following decades without further major policy
initiatives. Eventually, the surplus would dissipate to
be followed by a reappearance of the unified budget
deficit.7 By the year 2050, however, the deficit would
still be lower, as a percentage of GDP, than it was
7 These projections assume that any surplus is used to reduce the debt. This depends
on political choices in future years.

2000

2005

2010

2020

2030

2040

2050

19.3
21.7
7.8
10.6
4.8
3.5
3.3
–2.3
51.4

19.3
21.3
6.5
11.7
4.7
4.3
3.1
–1.9
50.8

19.2
21.2
5.8
12.4
4.7
5.2
3.0
–2.0
49.5

19.2
21.8
5.3
13.4
4.8
6.2
3.1
–2.6
50.5

19.2
25.0
4.5
16.4
6.0
8.3
4.1
–5.8
68.4

19.4
30.9
4.0
19.7
7.1
10.7
7.3
–11.6
121.0

19.4
37.4
3.4
21.5
7.6
12.3
12.5
–18.0
207.8

19.5
45.3
3.0
22.5
8.0
13.0
19.8
–25.8
327.0

19.3
21.7
7.8
10.6
4.8
3.5
3.3
–2.3
51.4

19.4
19.7
6.0
11.1
4.7
3.9
2.6
–0.3
47.0

19.4
18.7
5.4
11.4
4.7
4.3
1.9
0.7
35.6

19.3
18.1
4.9
12.0
4.8
4.9
1.2
1.2
24.1

19.4
18.5
4.2
14.0
6.0
6.0
0.3
0.9
6.5

19.5
20.0
3.7
16.1
7.1
7.2
0.2
–0.5
3.7

19.5
20.5
3.2
16.8
7.6
7.7
0.4
–0.9
9.5

19.6
20.6
2.8
17.1
8.0
7.7
0.7
–1.0
14.2

in 1992. To prevent the reemergence of a deficit, policies would have to be changed to reform social security
and check the growth of Medicare and Medicaid.
Alternative Scenarios.—Budget projections are uncertain, and long-run projections are especially so.
Therefore, it is essential to study how such projections
can vary under reasonable variations in assumptions.
A number of such alternative scenarios have been developed for these projections. Each alternative focuses
on one of the key uncertainties in the outlook. Generally, the scenarios highlight negative possibilities
rather than positive ones to show the risks in the outlook.
1. Discretionary Spending. The projections assume
that discretionary spending is held constant in real
terms once budget balance is reached. This is a strong
assumption in a long-run context, although it is the
usual assumption when current services projections are
made, and currently discretionary spending is only half
as large as a percent of GDP as it was 30 years ago.
What makes it questionable is the fact that with real
economic growth occurring and population rising, the
public demand for Government services—more national
parks, better transportation, additional Federal support
for scientific research—might be expected to increase
as well. It also assumes that the Nation’s real defense
needs will not vary from the proposed levels at the
end of the current budget period. Alternative assumptions that allow for these programs to grow with population or overall economic activity are shown in Chart
2–3. These alternative assumptions worsen the deficit
outlook.
2. Health Spending: The most volatile element of recent budgets has been Federal health spending. Expenditures for Medicare and Medicaid have grown faster than other entitlements, and even after the reforms

2. STEWARDSHIP: TOWARD A FEDERAL BALANCE SHEET

CHART 2-3. DISCRETIONARY SPENDING ALTERNATIVES
PERCENT OF GDP

-15

SPENDING GROWS WITH GDP

DEFICIT

-10

SPENDING GROWS WITH POPULATION AND INFLATION

-5

SURPLUS

0
SPENDING GROWS WITH INFLATION

+5
1995

2000

2005

2010

2015

2020

in the President’s budget, which go a long way toward
reining in their growth, they continue to rise more rapidly. In the long-run projections, the growth of real
per capita spending for Medicare, following the Medicare trustees’ assumptions, is assumed to slow down
gradually. Per capita Medicaid spending is constrained
by the proposed cap on per capita spending. The beneficiary populations vary with the demographic assumptions. The alternative scenario shows what would happen instead if faster trends in spending for these programs resumed after 2006. Chart 2–4 shows the resulting deficit outlook from such assumptions.
3. Productivity: The slowdown in productivity growth
in the U.S. economy that began in 1973 is responsible
for much of the weaker performance of U.S. income
growth since that time. Indeed, over the long run, productivity gains are the principal source of higher incomes, so slower growth of productivity necessarily
means a slower rise in living standards. Productivity
can be affected by changes in the budget deficit, but
many other factors influence it as well. Educational
achievement, R&D, energy prices, regulation, changes
in business organization, and competition all affect productivity. The alternative scenarios illustrate what
would happen to the budget deficit in the long run
if productivity growth were higher or lower. A higher

2025

2030

2035

2040

2045

2050

rate of growth would make the task of preserving a
balanced budget much easier; a lower growth rate
would have the opposite effect. Chart 2–5 shows how
the deficit varies with changes of one-half percentage
point of average productivity growth.
4. Population: In the long-run, demographics dominate the projections. Changes in population growth feed
into real economic growth through the effect on labor
supply and employment. Changes in demographics also
affect spending under the entitlement programs. Much
of the long-run problem that remains even with a balanced budget is due to expected demographic shifts.
Chart 2–6 illustrates how important these are by showing what would happen to the deficit under the alternative demographic assumptions used by the social security trustees in their most recent report.
Conclusion.—OBRA improved the long-run deficit
outlook dramatically, but even so the deficit is still
projected to increase beginning around the year 2010,
and to rise to unacceptable levels by mid-century. The
President’s current budget proposals would not only
balance the budget, but go some distance toward resolving the long-run deficit problem as well. The long-run
budget problem is not the result of irresponsible discretionary spending, and while it is necessary to control
discretionary spending, and while it is necessary to con-

ANALYTICAL PERSPECTIVES

CHART 2-4. ALTERNATIVE HEALTH SPENDING ASSUMPTIONS
PERCENT OF GDP

-15

DEFICIT

REAL PER CAPITA SPENDING FOR MEDICARE AND MEDICAID
GROWS 1% PER YEAR FASTER
-10

-5
PRESIDENTIAL POLICY

SURPLUS

+10

ZERO INCREASE IN REAL PER CAPITA SPENDING
FOR MEDICARE AND MEDICAID AFTER 2005

+15
1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

CHART 2-5. ALTERNATIVE PRODUCTIVITY ASSUMPTIONS
PERCENT OF GDP
-25

DEFICIT

-20

WITH 0.5 PERCENT PER YEAR LOWER PRODUCTIVITY GROWTH

-15

-10

-5

PRESIDENTIAL POLICY

SURPLUS

+10

WITH 0.5 PERCENT PER YEAR HIGHER PRODUCTIVITY GROWTH

+15
1995

2000

2005

2010

2015

2020

2025

2030

2035

2040

2045

2050

2. STEWARDSHIP: TOWARD A FEDERAL BALANCE SHEET

CHART 2-6. ALTERNATIVE DEMOGRAPHIC ASSUMPTIONS
PERCENT OF GDP
-10

-8

DEFICIT

HIGH COST
-6

-4

PRESIDENTIAL POLICY (INTERMEDIATE)

-2

SURPLUS

LOW COST

+6
1995

2000

2005

2010

2015

2020

trol discretionary spending, doing this alone will not
be enough to solve the long-run problem.
Actuarial Balance in the Social Security and
Medicare Trust Funds.—Because of the critical role
of the social security and Medicare programs to the
long-range budget outlook, it is worthwhile to examine
the status of these programs more closely. Table 2–3
shows the changes in the 75-year actuarial balances
of the social security and Medicare Trust Funds since
1994. There was only a small change in the consolidated balance for the OASDI Trust Funds which combines the separate funds set up for retirement and disability insurance. Legislation to shift resources from
the retirement fund to the disability fund prevented
the latter from becoming insolvent. The combined
OASDI fund is not projected to become depleted until
2030. In 1995, the trustees for the Hospital Insurance
Trust Fund projected that under intermediate assumptions, the HI trust fund would be insolvent in 2002,

2025

2030

2035

2040

2045

2050

one year later than projected in 1994. More recent data
has shown, however, that outlays exceeded income in
1995, sooner than was expected. In addition, baseline
spending for HI has slightly increased from Mid-Session
Review baseline estimates, primarily to reflect anticipated growth in home health spending. The trustees
are expected to revise the projected exhaustion date
for HI later this Spring in their 1996 Report. Because
the trustees’ analysis considers a wide range of factors,
including additional experience in the current fiscal
year, new analyses of the factors affecting HI benefit
growth during fiscal years 1990–95, updated projections
of HI payroll tax income and current interest rate expectations, it is not possible to accurately predict the
exhaustion date until the Report is completed. Furthermore, the trustees’ estimates do not take account of
possible legislative changes, such as those proposed in
this budget, that would postpone the date at which
the fund is depleted.

ANALYTICAL PERSPECTIVES
TABLE 2–3.

CHANGE IN 75–YEAR ACTUARIAL BALANCE FOR OASDI AND HI TRUST FUNDS (INTERMEDIATE
ASSUMPTIONS)
(As a percent of taxable payroll)
OASI

OASDI

Actuarial balance in 1994 report ...............................................................................
Changes in balance due to changes in:
Valuation period .........................................................................................................
Economic and demographic assumptions ................................................................
Disability assumptions ...............................................................................................
Legislation ..................................................................................................................
Methods .....................................................................................................................
Hospital costs ............................................................................................................
Other ..........................................................................................................................

–1.46

–0.66

–2.13

–4.14

–0.06
0.13
0.00
–0.40
–0.06
0.00
0.00

–0.01
0.01
–0.05
0.40
–0.01
0.00
0.00

–0.07
0.14
–0.05
0.00
–0.07
0.00
0.00

–0.10
0.01
0.00
0.00
0.00
0.64
0.07

Total changes ........................................................................................................
Actuarial balance in 1995 report ...............................................................................

–0.40
–1.87

0.35
–0.31

–0.05
–2.17

0.62
–3.52

NATIONAL WEALTH AND WELFARE
Unlike a private corporation, the Federal Government
routinely invests in ways that do not add directly to
its own assets. For example, Federal grants are frequently used to fund capital projects by State or local
Governments for highways and other purposes. Such
investments are valuable to the public which pays for
them with taxes, but they are not owned by the Federal
Government.
The Federal Government also invests in education
and research and development (R&D). These outlays
contribute to future productivity and are in that sense
analogous to investments in physical capital. Indeed,
economists have computed stocks of human and knowledge capital to reflect the accumulation of such investments. Nonetheless, these capital stocks are not owned
by the Federal Government, nor would they appear on
a business balance sheet.
Table 2–4 presents a national balance sheet. It includes estimates of total national wealth classified in
three categories: physical assets, education capital, and
R&D capital. The Federal Government has made contributions to each of these categories, and these contributions are also shown in the table. Data in this
table are especially uncertain because of the assumptions needed to prepare the estimates. Overall, the Federal contribution to the current level of national wealth
is about 71⁄2 percent, which is down from around 8
percent at the end of the 1980s, and from over 12
percent in 1960.
Physical Assets
These include stocks of plant and equipment, office
buildings, residential structures, land, and Government’s physical assets such as military hardware, office
buildings, and highways. Automobiles and consumer
appliances are also included in this category. The total
amount of such capital is vast, amounting to around
$26 trillion in 1995; by comparison, GDP was about
$7 trillion.

The Federal Government’s contribution to this stock
of capital includes its own physical assets plus $0.6
trillion in accumulated grants to State and local governments for capital projects. The Federal Government has
financed about one-quarter of the physical capital held
by other levels of Government.
Education Capital
Economists have developed the concept of human capital to reflect the notion that individuals and society
invest in people as well as in physical assets. Investment in education is a good example of how human
capital is accumulated.
For this table, an estimate has been made of the
stock of capital represented by the Nation’s investment
in education. The estimate is based on the cost of replacing the years of schooling embodied in the U.S.
population aged 16 and over. The idea is to measure
how much it would cost to reeducate the U.S. workforce
at today’s prices.
This is a crude measure, but it can provide a rough
order of magnitude. According to this measure, the
stock of education capital amounted to $28 trillion in
1995, of which about 3 percent was financed by the
Federal Government. The total exceeds the Nation’s
stock of physical capital. The main investors in education capital have been State and local Governments,
parents, and the students themselves who forgo earning
opportunities in order to acquire education.
Even broader concepts of human capital have been
considered. Not all useful training occurs in school, or
formal training programs at work. Much informal and
yet invaluable learning occurs within families or on
the job. Labor compensation amounts to about twothirds of national income. Therefore, it is conceivable
that the total value of human capital might be as large
as three times the estimated value of physical capital.
Thus, it can be seen that the estimates offered here
are in a sense conservative, because they reflect only
the costs of acquiring formal education.

2. STEWARDSHIP: TOWARD A FEDERAL BALANCE SHEET
TABLE 2–4.

NATIONAL WEALTH

(As of the end of the fiscal year, in trillions of 1995 dollars)
1960

1965

1970

1975

1980

1985

1990

1993

1994

1995

ASSETS

Publicly owned physical assets:
Structures and Equipment ......................................
Federally owned or financed .............................
Federally owned ............................................
Grants to State & Local ................................
Funded by State and local Governments .........
Other Federal assets ..............................................

2.0
1.1
1.0
0.1
0.9
0.7

2.3
1.2
1.0
0.2
1.1
0.7

2.8
1.3
1.0
0.2
1.5
0.6

3.4
1.3
0.9
0.4
2.1
0.9

3.7
1.4
0.8
0.5
2.4
1.4

3.7
1.5
0.9
0.5
2.2
1.4

3.9
1.6
1.0
0.6
2.3
1.1

4.0
1.6
1.0
0.6
2.4
0.9

4.1
1.6
1.0
0.6
2.5
0.9

Subtotal ......................................................
Privately Owned Physical Assets:
Reproducible Assets ...............................................
Residential Structures ........................................
Nonresidential Plant and equipment .................
Inventories ..........................................................
Consumer Durables ...........................................
Land ........................................................................

2.7

3.0

3.5

4.3

5.2

5.1

5.0

4.9

5.4
1.9
1.9
0.7
0.9
1.9

6.2
2.2
2.3
0.7
1.0
2.3

7.9
2.7
3.0
0.9
1.3
2.6

10.2
3.6
4.0
1.1
1.5
3.4

13.0
4.9
5.0
1.3
1.7
5.1

13.6
4.9
5.6
1.2
1.9
5.9

15.0
5.4
6.0
1.3
2.3
5.9

15.3
5.7
6.0
1.2
2.4
4.5

15.8
5.9
6.1
1.2
2.5
4.5

16.2
6.1
6.3
1.3
2.6
4.4

Subtotal ......................................................
Education Capital:
Federally Financed .................................................
Financed from Other Sources ................................

7.3

8.5

10.5

13.6

18.1

19.4

20.9

19.8

20.3

20.7

0.1
6.1

0.1
7.9

0.2
10.6

0.3
12.3

0.4
15.0

0.5
18.1

0.7
22.8

0.8
25.0

0.8
25.9

0.8
26.7

Subtotal ......................................................
Research and Development Capital:
Federally Financed R&D ........................................
R&D Financed from Other Sources ......................

6.1

8.0

10.8

12.6

15.4

18.6

23.5

25.8

26.7

27.5

0.2
0.1

0.3
0.2

0.5
0.3

0.5
0.4

0.6
0.4

0.7
0.6

0.8
0.8

0.8
0.9

0.8
1.0

0.9
1.0

Subtotal ......................................................

0.3

0.5

0.7

0.9

1.0

1.3

1.6

1.8

1.9

Total assets .........................................

16.5

20.1

25.5

31.3

39.7

44.4

51.0

52.3

53.7

55.0

Net Claims of Foreigners on U.S. .........................

(0.2)

(0.5)

(0.2)

0.3

0.6

0.7

0.9

Balance .................................................
Per capita (thousands of 1995 dollars) .....................

16.7
92.2

20.3
104.4

25.7
125.5

31.5
145.8

40.2
176.1

44.6
186.5

50.7
202.1

51.7
199.7

52.9
202.6

54.1
205.1

2.1
12.3

2.3
11.3

2.6
10.2

3.0
9.5

3.8
9.4

4.1
9.1

4.2
8.2

4.1
8.0

4.1
7.8

4.1
7.6

LIABILITIES:

ADDENDA:

Total Federally funded capital ................................
Percent of national wealth .....................................

Research and Development Capital
Research and Development can also be thought of
as an investment, because R&D represents a current
expenditure for which there is a prospect of future returns. After adjusting for depreciation, the flow of R&D
investment can be added up to provide an estimate
of the current R&D stock.8 That stock is estimated
to have been about $1.9 trillion in 1995. Although this
is a large amount of research, it is a relatively small
portion of total National wealth. About half of this stock
was funded by the Federal Government.
Liabilities
When considering the debts of the Nation as a whole,
the debts that Americans owe to one another cancel
out. This does not mean they are unimportant. The
buildup in debt largely owed to other Americans was
partly responsible for the sluggishness of the recovery
8 R&D depreciates in the sense that the economic value of applied research and development tends to decline with the passage of time which leads to movement in the technological
frontier.

from the 1990–1991 recession in its early stages. Indeed, the debt explosion in the 1980s may have helped
to bring on the recession in the first place.
However, these debts do not belong on the national
balance sheet. If they were included, there would have
to be offsetting entries. Only the net debt that is owed
to foreigners belongs on the national balance sheet.
America’s foreign debt has been increasing rapidly in
recent years, as a consequence of the U.S. trade deficit,
but the size of this debt is small compared with the
total stock of assets. It amounted to about 11⁄2 percent
of the total in 1995.
Most of the Federal debt held by the public is owned
by Americans, so it does not appear in Table 2–4. Only
that portion of the Federal debt held by foreigners is
included. Even so, it is of interest to compare the imbalance between Federal assets and liabilities with national wealth. The Government will have to service the
debt or repay it, and its ability to do so without disrupting the economy will depend in part on the wealth
of the private sector. Currently, the Federal net asset

ANALYTICAL PERSPECTIVES

imbalance, as estimated in Table 2–1, amounts to about
51⁄2 percent of total U.S. wealth as shown in Table
2–4.
Trends in National Wealth
The net stock of wealth in the United States at the
end of 1995 was about $55 trillion. Since 1980 it has
increased in real terms at an annual rate of 2.2 percent
per year—about half the 4.5 percent rate it averaged
from 1960 to 1980. (All comparisons are in terms of
constant 1995 dollars.) Public capital formation slowed
down markedly between the two periods. The real value
of the net stock of publicly owned physical capital was
actually lower in 1995 than in 1980—$4.9 trillion versus $5.1 trillion in the earlier year. Since 1980, Federal
grants to State and local governments for capital
projects have grown less rapidly, while capital funded
directly by State and local governments has grown at
an average rate of only 0.1 percent per year.
Private capital formation in physical assets has also
grown more slowly since 1980. The net stock of
nonresidential plant and equipment grew 1.6 percent
per year from 1980 to 1995 compared with 4.9 percent
in the 1960s and 1970s, and the stock of business inventories actually declined. Overall, the stock of privately owned physical capital grew at an average rate
of just 0.9 percent per year between 1980 and 1995.
The accumulation of education capital, as measured
here, also slowed down in the 1980s, but not nearly
as much. It grew at an average rate of 4.7 percent
per year in the 1960s and 1970s, about the same as
the average rate of growth in private physical capital
during the same period. Since 1980, education capital
has grown at a 4.4 percent annual rate. This reflects
the extra resources devoted to schooling in this period,
and the fact that such resources were rising in relative
value. R&D stocks have grown at about the same rate
as education capital since 1980.
Other Federal Influences on Economic Growth
Many Federal policies have contributed to the slowdown in capital formation shown here. Federal investment policies obviously were important, but the Federal
Government also contributes to wealth in ways that
cannot be easily captured in a formal presentation.
Monetary and fiscal policies affect the rate and direction of capital formation. Regulatory and tax policies
affect how capital is invested, as do the Federal Government’s credit assistance policies.
One important channel of influence is the Federal
budget deficit, which determines the size of the Federal
Government’s borrowing requirements. Smaller deficits
in the 1980s would have resulted in a smaller gap
between Federal liabilities and assets than is shown
in Table 2–1. It is also likely that, had the $3 trillion
in added Federal debt since 1980 been avoided, a significant share of these funds would have gone into private investment. National wealth might have been 2
to 4 percent larger in 1995 had fiscal policy avoided
the buildup in the debt.

Social Indicators
There are certain broad responsibilities that are
unique to the Federal Government. Especially important are the Government’s role in fostering healthy economic conditions, promoting health and social welfare,
and protecting the environment. Table 2–5 offers a
rough cut of information that can be useful in assessing
how well the Federal Government has been doing in
promoting these general objectives.
The indicators shown here are only a limited subset
drawn from the vast array of data available on conditions in the United States. In choosing indicators for
this table, priority was given to measures that were
consistently available over an extended period. Such
indicators make it easier to draw valid comparisons
and evaluate trends. In some cases, however, this
meant choosing indicators with significant limitations.
The individual measures in this table are influenced
in varying degrees by many Government policies and
programs, as well as by external factors beyond the
Government’s control. They are not outcome indicators,
because they do not measure the direct results of Government activities, but they do provide a quantitative
measure of the progress or lack of progress in reaching
some of the ultimate values that Government policy
is intended to promote.
Such a table can serve two functions. First, it highlights areas where the Federal Government might need
to modify its current practices or consider new approaches. Where there are clear signs of deteriorating
conditions, corrective action might be appropriate. Second, the table provides a context for evaluating other
data on Government activities. For example, Government actions that weaken its own financial position
may be appropriate when they promote a broader social
objective.
An example of this occurs during economic recessions
when reductions in tax collections lead to increased
Government borrowing that adds to Federal liabilities.
This deterioration in the Federal balance sheet provides
an automatic stabilizer for the private sector. State
Government, local government and private budgets are
strengthened by allowing the Federal budget to run
a deficit. More stringent Federal budgetary controls
could be used to hold down Federal borrowing during
such periods, but only at the risk of aggravating the
downturn.
The Government cannot avoid making such tradeoffs because of its size and the broad-ranging effects
of its actions. Monitoring these effects and incorporating them in the Government’s policy making is a major
challenge.
An Interactive Analytical Framework
No single framework can encompass all of the factors
that affect the financial condition of the Federal Government. Nor can any framework serve as a substitute
for actual analysis. Nevertheless, the framework presented above offers a useful way to examine the financial aspects of Federal policies. Increased Federal sup-

2. STEWARDSHIP: TOWARD A FEDERAL BALANCE SHEET
Table 2–5.
General categories

ECONOMIC AND SOCIAL INDICATORS

Specific measures

Economic:
Living Standards ...........

Employment prospects .
Wealth creation .............
Innovation .....................
Social:
Families .........................
Safe communities .........

Health and illness .........

Learning ........................

Participation ..................

Environment:
Air quality ......................
Water quality .................

Real GDP per person (1992 dollars) ............................................
Average annual percent change ...................................................
Median family income (1994 dollars):
All families ..................................................................................
Married couple families .............................................................
Female householder, no husband present ...............................
Income share of middle three quintiles (%) .................................
Poverty rate (%) 2 ..........................................................................
Economic security inflation and unemployment:
Civilian unemployment (%) ........................................................
CPI-U (year over year % change) ............................................
Increase in total payroll employment (millions, Dec. to Dec.) .....
Managerial or professional jobs (% of civilian employment) .......
Net national saving rate (% of NNP) ............................................
Patents issued to U.S. residents (thous.) .....................................
Multifactor productivity (average percent change) ........................

1960

1965

1970

1975

1980

1985

1990

1991

1992

1993

1994 1

1995

12,512 14,792 16,521 17,896 20,252 22,345 24,559 24,058 24,447 24,728 25,335 25,591
0.4
3.4
2.2
1.6
2.5
2.0
1.9
–2.0
1.6
1.2
2.5
1.0
25,866 30,147 35,407 36,177 37,857 38,200 40,087 39,105 38,632 37,905 38,782
27,030 31,482 37,735 39,204 41,671 42,835 45,237 44,607 44,249 44,106 44,959
13,660 15,305 18,276 18,048 18,742 18,814 19,199 18,163 17,984 17,890 18,236
54.0
53.9
53.6
53.5
53.4
52.0
51.2
51.4
51.0
43.9
49.0
22.2
17.3
12.6
12.3
13.0
14.0
13.5
14.2
14.8
15.1
14.5

NA
NA
NA
NA
NA

5.5
2.0
–0.5
NA
11.4
42.0
1.1

4.5
1.3
2.9
NA
13.3
53.6
3.2

4.9
4.3
–0.5
NA
9.3
50.1
1.1

8.5
6.8
0.4
NA
6.8
51.4
1.3

7.1
8.9
0.2
22.2
7.3
40.8
0.7

7.2
5.5
2.5
24.1
6.2
43.4
0.6

5.5
4.0
0.3
26.0
4.2
53.0
0.3

6.7
4.2
–0.9
26.5
4.1
57.8
–1.0

7.4
3.0
1.2
26.5
2.7
58.7
1.4

6.8
3.0
2.8
27.1
2.8
61.1
0.5

6.1
2.6
3.5
27.5
3.9
64.2
0.8

5.6
2.8
1.7
28.3
4.7
64.4
NA

Children living with a single parent (% of all children) ................
Violent crime rate (per 100,000 population) 3 ...............................
Murder rate (per 100,000 population) ...........................................
Juvenile crime (murders per 100,000 persons age 14–17) .........
Infant mortality (per 1,000 live births) ...........................................
Low birthweight (<2,500 gms) babies (%) ....................................
Life expectancy at birth (years) .....................................................
Cigarette smokers (% population 18 and oover) .........................
Bed disability days (average days per person) ............................
National health expenditures (% of GDP) ....................................
High school graduates (% of population 25 and older) ...............
College graduates (% of population 25 and older) ......................
National assessment of educational progress 4.
Mathematics ...............................................................................
Science ......................................................................................
Voting for President (% eligible population) .................................
Voting for Congress (% of eligible population) .............................
Individual charitable giving per capita (1994 dollars) ...................

9.2
160
5.1
NA
26.0
7.7
69.7
NA
6.0
5.2
44.6
8.4

10.2
199
5.1
NA
24.7
8.3
70.2
42.4
6.2
5.8
49.0
9.4

12.9
364
7.8
NA
20.0
7.9
70.8
39.5
6.1
7.2
55.2
11.0

16.4
482
9.6
NA
16.1
7.4
72.6
36.4
6.6
8.1
62.5
13.9

18.6
597
10.2
8.2
12.6
6.8
73.7
33.2
7.0
9.0
68.6
17.0

20.2
557
7.9
7.1
10.6
6.8
74.7
30.1
6.1
10.4
73.9
19.4

21.6
732
9.4
15.8
9.2
7.0
75.4
25.5
6.2
12.1
77.6
21.3

22.4
758
9.8
17.3
8.9
7.1
75.5
25.6
6.5
12.8
78.4
21.4

22.8
758
9.3
17.5
8.5
7.1
75.8
26.5
6.3
13.1
79.4
21.4

23.3
746
9.5
18.6
8.4
7.2
75.5
25.0
6.7
13.5
80.2
21.9

23.1
716
9.0
NA
7.9
NA
75.7
NA
NA
NA
80.9
22.2

NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA
NA

NA
NA
62.8
58.5
199

NA
NA
NA
NA
238

NA
305
NA
43.5
286

304
296
NA
NA
304

298
283
52.6
47.4
331

302
288
NA
NA
349

305
290
NA
33.1
427

NA
NA
NA
NA
423

307
294
55.2
50.8
422

NA
NA
NA
NA
419

NA
NA
NA
36.0
NA

NA
NA
NA
NA
NA

Population living in counties with ozone levels exceeding the
standard (millions) .....................................................................
Population served by secondary treatment or better (millions) ...

NA
NA

76
134

63
155

70
157

43
159

51
162

50
164

NA
166

1 Data

are preliminary for infant mortality and life expectancy.
poverty rate does not reflect noncash government transfers such as Medicaid or food stamps.
all crimes are reported, and the fraction that go unreported may have varied over time.
4 Dates shown in table for the national educational assessments are approximate.
2 The
3 Not

port for investment, the reduction in Federal absorption
of saving through deficit reduction, and other Administration policies to enhance economic growth are expected to promote national wealth and improve the fu-

ture financial condition of the Federal Government. As
that occurs, the efforts will be clearly revealed in these
tables.

TECHNICAL NOTE: SOURCES OF DATA AND METHOD OF ESTIMATING
Federally Owned Assets and Liabilities
Assets
Financial Assets: The source of data is the Federal
Reserve Board’s Flow-of-Funds Accounts. Two adjustments were made to these data. First, U.S. Government
holdings of financial assets were consolidated with the
holdings of the monetary authority, i.e., the Federal
Reserve System. Second, the gold stock, which is valued
in the Flow-of-Funds at a constant historical price, is
revalued using the market value for gold.

Physical Assets
Fixed Reproducible Capital: Estimates were developed from the OMB historical database for physical
capital outlays. The database extends back to 1940 and
was supplemented by data from other selected sources
for 1915–1939. The source data are in current dollars.
To estimate investment flows in constant dollars, it
is necessary to deflate the nominal investment series.
This was done using BEA price deflators for Federal
purchases of durables and structures. These price
deflators are available going back as far as 1940. For
earlier years, deflators were based on Census Bureau
historical statistics for constant price public capital for-

ANALYTICAL PERSPECTIVES

mation. The capital stock series were adjusted for depreciation on a straight-line basis, assuming useful
lives of 46 years for water and power projects; 40 years
for other direct Federal construction; and 16 years for
major nondefense equipment and for defense procurement.
Fixed Nonreproducible Capital: Historical estimates
for 1960–1985 were based on estimates in Michael J.
Boskin, Marc S. Robinson, and Alan M. Huber, ‘‘Government Saving, Capital Formation and Wealth in the
United States, 1947–1985,’’ published in The Measurement of Saving, Investment, and Wealth, edited by Robert E. Lipsey and Helen Stone Tice (The University
of Chicago Press, 1989).
Estimates were updated using changes in the value
of private land from the Flow-of-Funds Balance Sheets
and in the Producer Price Index for Crude Energy Materials. The Bureau of Economic Analysis is in the process of preparing satellite accounts to accompany the
National Income and Product Accounts that will report
on changes in mineral deposits for the Nation as a
whole, but this work is not yet completed.

rate of growth implied by the budget’s economic assumptions. The economic forecast used to project the
budget in the absence of the President’s balanced budget proposals is altered to reflect the higher interest
rates and lower profits that would be expected to prevail under these circumstances.
Budget Projections: For the years 1996–2006, the projections follow the budget. After 2006, receipts are projected using simple rules of thumb linking income
taxes, payroll taxes, excise taxes, and other receipts
to projected tax bases derived from the economic forecast. Outlays are computed in different ways. Discretionary spending grows at the rate of inflation. Social
security, Medicare, and Federal pension outlays are
projected using the most recent actuarial forecasts
available at the time the budget was prepared (April
1995 for social security). These projections are repriced
using Administration inflation assumptions. Other entitlement programs are projected based on rules of thumb
linking program spending to elements of the economic
and demographic forecast such as the poverty rate.

Liabilities
Financial Liabilities: The principal source of data is
the Federal Reserve’s Flow-of-Funds Accounts.
Contingent Liabilities: Sources of data are the OMB
Deposit Insurance Model and the OMB Pension Guarantee Model. Historical data on contingent liabilities
for deposit insurance were also drawn from the Congressional Budget Office’s study, The Economic Effects
of the Savings and Loan Crisis, issued January 1992.
Pension Liabilities: For 1979–1994, the estimates are
the actuarial accrued liabilities as reported in the annual reports for the Civil Service Retirement System,
the Federal Employees Retirement System, and the
Military Retirement System (adjusted for inflation).
Estimates for the years before 1979 are not actuarial;
they are extrapolations. The estimate for 1994 is a projection.

National Balance Sheet Data

Long-Run Budget Projections
The long-run budget projections are based on longrun demographic and economic projections. A model of
the Federal budget developed at OMB computes the
budgetary implications of this forecast.
Demographic and Economic Projections: For the years
1996–2006 the assumptions are identical to those used
in the budget. As always, these budget assumptions
reflect the President’s policy proposals, in this case that
the budget be balanced. The long-run projections extend
these budget assumptions by holding inflation, interest
rates, and unemployment constant at the levels assumed in the budget for 2006. Population growth and
labor force participation are extended using the intermediate assumptions from the 1995 social security
trustees’ report and Bureau of Labor Statistics projections. The projected rate of growth for real GDP is
built up from the labor force assumptions and an assumed rate of productivity growth. The assumed rate
of productivity growth is held constant at the average

Publicly Owned Physical Assets: Basic sources of data
for the federally owned or financed stocks of capital
are the investment flows computed by OMB from the
budget database. Federal grants for State and local
Government capital were added together with adjustments for inflation and depreciation in the same way
as described above for direct Federal investment. Data
for total State and local Government capital come from
the capital stock data prepared by the BEA.
Privately Owned Physical Assets: Data are from the
Flow-of-Funds national balance sheet. Preliminary estimates for 1995 were prepared based on net investment
from the National Income and Product Accounts.
Education Capital: The stock of education capital is
computed by valuing the cost of replacing the total
years of education embodied in the U.S. population 16
years of age and older at the current cost of providing
schooling. The estimated cost includes both direct expenditures in the private and public sectors and an
estimate of students’ forgone earnings, i.e., it reflects
the opportunity cost of education.
For this presentation, Federal investment in education capital is a portion of the Federal outlays included in the conduct of education and training. This
portion includes direct Federal outlays and grants for
elementary, secondary, and vocational education and
for higher education. The data exclude Federal outlays
for physical capital at educational institutions and for
research and development conducted at colleges and
universities because these outlays are classified elsewhere as investment in physical capital and investment
in R&D capital. The data also exclude outlays under
the GI Bill; outlays for graduate and post-graduate education spending in HHS, Defense and Agriculture; and
most outlays for vocational training.
Data on investment in education financed from other
sources come from educational institution reports on

2. STEWARDSHIP: TOWARD A FEDERAL BALANCE SHEET

the sources of their funds, published in U.S. Department of Education, Digest of Education Statistics. Education capital is assumed not to depreciate, but to be
retired when a person dies. An education capital stock
computed using this method with different source data
can be found in Walter McMahon, ‘‘Relative Returns
To Human and Physical Capital in the U.S. and Efficient Investment Strategies,’’ Economics of Education
Review, Vol. 10, No. 4, 1991. The method is described
in detail in Walter McMahon, Investment in Higher
Education, 1974.
Research and Development Capital: The stock of R&D
capital financed by the Federal Government was developed from a database that measures the conduct of
R&D. The data exclude Federal outlays for physical
capital used in R&D because such outlays are classified
elsewhere as investment in federally financed physical
capital. Nominal outlays were deflated using the GDP
deflator to convert them to constant dollar values.
Federally funded capital stock estimates were prepared using the perpetual inventory method in which
annual investment flows are cumulated to arrive at
a capital stock. This stock was adjusted for depreciation
by assuming an annual rate of depreciation of 10 percent on the outstanding balance for applied research
and development. Basic research is assumed not to depreciate. The 1993 Budget contains additional details
on the estimates of the total federally financed R&D
stock, as well as its national defense and nondefense

components (see Budget for Fiscal Year 1993, January
1992, Part Three, pages 39–40).
A similar method was used to estimate the stock
of R&D capital financed from sources other than the
Federal Government. The component financed by universities, colleges, and other nonprofit organizations is
based on data from the National Science Foundation,
Surveys of Science Resources. The industry-financed
R&D stock component is from that source and from
the U.S. Department of Labor, The Impact of Research
and Development on Productivity Growth, Bulletin
2331, September 1989.
Experimental estimates of R&D capital stocks have
recently been prepared by BEA. The results are described in ‘‘A Satellite Account for Research and Development,’’ Survey of Current Business, November 1994.
These BEA estimates are lower than those presented
here primarily because BEA assumes that the stock
of basic research depreciates, while the estimates in
Table 2–4 assume that basic research does not depreciate. BEA also assumes a slightly higher rate of depreciation for applied research and development, 11 percent, compared with the 10 percent rate used here.
Social Indicators
The main sources for the data in this table are the
Government statistical agencies. Generally, the data
are publicly available in the President’s annual Economic Report and the Statistical Abstract of the United
States.

FEDERAL RECEIPTS AND COLLECTIONS

FEDERAL RECEIPTS

Receipts (budget and off-budget) are taxes and other
collections from the public that result from the exercise
of the Government’s sovereign or governmental powers.
The difference between receipts and outlays determines
the surplus or deficit.
Growth in receipts.—Total receipts in 1997 are estimated to be $1,495.2 billion, an increase of $68.5 billion
or 4.8 percent relative to 1996. This increase is largely

Table 3–1.

due to assumed increases in incomes resulting from
both real economic growth and inflation. Receipts are
projected to grow at an average annual rate of 5.0
percent between 1997 and 2002, rising to $1912.2 billion.
As a share of GDP, receipts are projected to remain
fairly constant, declining from 19.0 percent in 1996 to
18.9 percent in 2002.

RECEIPTS BY SOURCE—SUMMARY
(In billions of dollars)
Estimate

Source

1995 actual
1996

1997

1998

1999

2000

2001

2002

Individual income taxes ..........................................
Corporation income taxes .......................................
Social insurance taxes and contributions ..............
(On-budget) .........................................................
(Off-budget) .........................................................
Excise taxes ............................................................
Estate and gift taxes ...............................................
Customs duties .......................................................
Miscellaneous receipts ............................................

590.2
157.0
484.5
(133.4)
(351.1)
57.5
14.8
19.3
31.9

630.9
167.1
507.5
(140.1)
(367.4)
53.9
15.9
19.3
32.1

645.1
185.0
536.2
(148.2)
(388.0)
59.6
17.1
20.5
31.8

683.4
201.7
560.9
(154.6)
(406.3)
60.4
18.1
20.8
32.7

714.2
212.7
589.4
(161.6)
(427.8)
61.7
19.5
20.9
34.2

748.7
225.4
618.8
(168.8)
(450.0)
62.8
20.9
21.9
35.3

790.0
236.7
647.0
(175.8)
(471.2)
64.2
22.5
22.4
37.1

834.5
245.8
679.5
(184.8)
(494.6)
65.6
24.1
24.3
38.4

Total receipts ....................................................
(On-budget) ....................................................
(Off-budget) ....................................................

1,355.2
(1,004.1)
(351.1)

1,426.8
(1,059.3)
(367.4)

1,495.2
(1,107.2)
( 388.0)

1,577.9
(1,171.6)
(406.3)

1,652.5
( 1,224.8)
(427.8)

1,733.8
(1,283.9)
(450.0)

1,819.8
(1,348.6)
(471.2)

1,912.2
(1,417.6)
(494.6)

Table 3–2.

CHANGES IN RECEIPTS
(In billions of dollars)
Estimate
1996

1997

1998

1999

2000

2001

2002

Receipts under tax rates and structure in effect January 1, 1996 1 ..................................
Telecommunications Act of 1996 ............................................................................................
Social security (OASDI) taxable earnings base increases:.
$62,700 to $65,100 on Jan. 1, 1997 .................................................................................
$65,100 to $68,100 on Jan. 1, 1998 .................................................................................
$68,100 to $71,100 on Jan. 1, 1999 .................................................................................
$71,100 to $74,100 on Jan. 1, 2000 .................................................................................
$74,100 to $76,800 on Jan. 1, 2001 .................................................................................
$76,800 to $80,100 on Jan. 1, 2002 .................................................................................
Proposals 2 ..................................................................................................................................
Extension of expired trust fund excise taxes 2 .....................................................................

1,423.6
4.3

1,495.8
4.7

1,569.0
5.5

1,640.2
6.3

1,719.4
7.0

1,800.3
7.7

1,886.0
7.9

...............
...............
...............
...............
...............
...............
–1.6
0.5

1.0
...............
...............
...............
...............
...............
–11.7
5.5

2.8
1.3
...............
...............
...............
...............
–6.3
5.7

3.1
3.5
1.3
...............
...............
...............
–7.8
6.0

3.5
3.9
3.5
1.3
...............
...............
–11.0
6.3

3.9
4.3
3.9
3.5
1.2
...............
–11.6
6.7

4.3
4.9
4.3
3.9
3.2
1.4
–10.7
7.0

Total, receipts under existing and proposed legislation ............................................

1,426.8

1,495.2

1,577.9

1,652.5

1,733.8

1,819.8

1,912.2

1 These

estimates assume a social security taxable earnings base of $62,700 through 2002.
2 Net of income offsets.

ANALYTICAL PERSPECTIVES

ENACTED LEGISLATION
Self-Employed Health Insurance Act.—This Act
restored the 25 percent health insurance deduction for
the self-employed for 1994 and increased it to 30 percent thereafter. The associated revenue losses were
more than offset by other revenue and outlay provisions. The major provisions of the Act that affected
receipts are described below.
Restore and increase deduction for health insurance
costs of self-employed individuals.—The 25 percent
health insurance deduction for self-employed individuals and their dependents, which had expired for taxable years beginning after December 31, 1993, was
retroactively reinstated. In addition, the deduction was
permanently increased to 30 percent for taxable years
beginning after December 31, 1994.
Repeal special rules applicable to Federal Communications Commission (FCC) certified sales of broadcast
property.—Under prior law, sellers of FCC-licensed
broadcast facilities were allowed to defer taxes on gains
realized in the sale or exchange of FCC-licensed broadcast properties to minority owners. Such deferrals were
executed through FCC-issued tax certificates. Under
this Act, deferral was repealed effective for all sales
and exchanges on or after January 17, 1995 and for
all sales and exchanges occuring before that date for
which the FCC tax certificate was issued on or after
January 17, 1995. The repeal did not apply to binding
written contracts for which the seller had applied to
the FCC for a certificate of deferral before January
17, 1995.
Modify earned income tax credit (EITC) eligibility.—
Effective for taxable years beginning after December
31, 1995, taxpayers with annual aggregate interest, dividend, tax-exempt interest and net rental and royalty
income exceeding $2,350 would no longer be eligible
for the EITC.

Prohibit nonrecognition of gain on involuntary conversions in certain related-party transactions.—Section
1033 of the Internal Revenue Code allows certain taxpayers to defer a gain realized from certain involuntary
conversions of property if the taxpayer purchases similar or related property within a specified period. Under
this Act, taxpayers would no longer be allowed to defer
gain on involuntary conversions occurring on or after
February 6, 1995 if the replacement property or stock
were purchased from a related person.
Extend New York State hospital surcharge provision.—Under the Omnibus Budget Reconciliation Act
of 1993, certain employers were prohibited from receiving a Federal tax deduction for health insurance expenses if they failed to comply with New York State’s
hospital rate-setting/surcharge laws. This provision,
which expired on May 12, 1995, was extended through
December 31, 1995.
Telecommunications Act of 1996.—This Act, which
provided for a major restructuring of the Nation’s communications laws, fulfilled this Administration’s promise to reform telecommunications laws in a manner that
leads to competition and private investment, promotes
universal service and open access to information networks, and provides for flexible government regulation.
Under the Act, all interstate telecommunications carriers would be required to contribute funds, as prescribed by the FCC, to the preservation and advancement of universal service. The contributions would be
used to provide and upgrade facilities and services, as
prescribed by the FCC. Telecommunications carriers
would receive credit toward their contribution by providing discount service to schools, libraries, and health
care providers in rural areas. Because the amounts collected would be spent, the net budget effect would be
zero.

ADMINISTRATION PROPOSALS
Provide Tax Relief
The President’s plan targets tax relief to middle-income Americans through his Middle Class Bill of
Rights, which was originally proposed in last year’s
budget. His plan also includes estate tax relief for small
businesses and family farms, expanded expensing for
small businesses, pension simplification, and initiatives
for economically distressed areas.
Middle Class Bill of Rights.—The Administration
is again proposing the three features of its Middle Class
Bill of Rights designed to give middle-income families
the tax relief they need to help them raise their children, save for the future and pay for postsecondary
education. These provisions would be subject to triggeroff (that is, would cease to be effective) on January
1, 2001 in the event that the Federal budget deficit

is not at least $20 billion below the Congressional
Budget Office’s (CBO’s) estimate for the year 2000.
Provide tax credit for dependent children.—A non-refundable credit would be allowed for each dependent
child under the age of 13. The credit would equal $300
for 1996, 1997 and 1998, and would rise to $500 for
1999 and subsequent years. The credit would be phased
out for taxpayers with adjusted gross income (AGI) between $60,000 and $75,000. Both the credit amount
and the phase-out range would be indexed for inflation
beginning in 2000. The credit would be applied before
the earned income tax credit but could not be used
to offset alternative minimum tax liability.
Expand Individual Retirement Accounts (IRAs).—
Under present law, eligibility for deductible IRAs is
phased out for single taxpayers with AGI between
$25,000 and $35,000 and for couples filing a joint return with AGI between $40,000 and $50,000, if the

FEDERAL RECEIPTS

individual (or the individual’s spouse) is an active participant in an employer-sponsored retirement plan.
Under the Administration’s proposal, the AGI thresholds and phase-out ranges would be doubled over time.
For 1996 through 1998, eligibility would be phased out
for single taxpayers with AGI between $45,000 and
$65,000, and for couples filing a joint return with AGI
between $70,000 and $90,000. For 1999 and later years,
eligibility would be phased out for single taxpayers with
AGI between $50,000 and $70,000 and for couples filing
a joint return with AGI between $80,000 and $100,000.
These thresholds and the present law annual contribution limit of $2,000 would be indexed for inflation.
Withdrawals from IRAs would not be subject to the
10 percent early withdrawal tax if the proceeds were
used to pay post-secondary education costs, to buy or
build a first home, to cover living expenses if unemployed for at least 12 consecutive weeks, or to pay
catastrophic medical expenses (including nursing home
or other costs associated with caring for an incapacitated parent or grandparent). In addition, each individual eligible for a deductible IRA would have the option
of contributing an amount up to the contribution limit
to a traditional deductible IRA or to a new back-loaded
special IRA. Contributions to this special IRA would
not be tax deductible, but distributions of the contributions would be tax-free. If the contributions remained
in the account for at least five years, earnings on the
contributions also would be tax-free when withdrawn.
Withdrawals of account balances from special IRAs during the five-year period would be subject to ordinary
income tax and a 10 percent early withdrawal tax.
However, withdrawals during the five-year period for
the purposes described above (or upon death or disability of the taxpayer) would not be subject to the early
withdrawal tax. Individuals whose AGI for a year fell
within the eligibility thresholds would be allowed to
convert an existing IRA into a special IRA, and for
conversions before 1998, income inclusion would be
spread over four years.
Provide tax incentive for education and training.—
Effective January 1, 1996, a deduction would be permitted for up to $5,000 in expenditures on post-secondary school education and training for the taxpayer, the
taxpayer’s spouse and dependents. The maximum allowable deduction would increase to $10,000 effective
January 1, 1999. The maximum allowable deduction
would be phased out for taxpayers filing a joint return
with AGI (before the proposed deduction) between
$100,000 and $120,000. For taxpayers filing a headof-household or single return, the maximum allowable
deduction would be phased out for those with AGI between $70,000 and $90,000. The phase-out ranges
would be indexed for inflation beginning in 2000. Qualifying education expenses are those related to post-secondary education paid to institutions and programs eligible for Federal assistance. Deductible expenses would
include tuition and fees, but would not include meals,
lodging, books or transportation.

37
Increase deduction for self-employed health insurance.—For a discussion of this proposal, see ‘‘Other
Provisions’’ category below.
Increase expensing for small business.—In lieu
of depreciation, a taxpayer with a sufficiently small
amount of annual investment may elect to deduct up
to $17,500 of the cost of qualifying property placed in
service during the taxable year. The amount of tangible
depreciable property that small businesses can expense
each year would be increased to $25,000 under the
Administration’s proposal. The increase would be effective for property placed in service in taxable years beginning after December 31, 1995 and would be phased
in, starting at $19,000 in 1996, and then increasing
over a six-year period in annual increments of $1,000.
This provision would be subject to trigger-off (that is,
the amount of tangible depreciable property that small
businesses can expense each year would revert to
$17,500) on January 1, 2001 in the event that the Federal budget deficit is not at least $20 billion below
CBO’s estimate for the year 2000.
Provide estate tax relief for small business.—Estate tax attributable to certain interests in closely held
businesses may be paid in installments over a period
of up to 14 years. A special four percent interest rate
is provided for the tax deferred on the first $1 million
of value. The $1 million cap has been in effect since
1976. To address the liquidity problems that may arise
upon the death of a farmer or small business owner,
and to adjust for inflation, the Administration proposes
to increase the amount of property eligible for the special interest rate from $1 million to $2.5 million. The
proposal also simplifies current law by eliminating distinctions based on the form of ownership, providing alternatives to the estate tax lien, and reducing the interest rate by 50 percent or more in exchange for making
the interest payments nondeductible. The proposal
would be effective for decedents who die after December
31, 1996.
Simplify pension plan rules.—The Administration
proposes to simplify the design and administration of
retirement plans sponsored by businesses of all sizes,
nonprofit organizations, and State and local governments, as well as for multiemployer plans. These measures not only would simplify the rules governing these
plans, but also would potentially expand pension coverage and stimulate private savings, particularly for
employees of small firms. These measures include, a
new, simple retirement savings plan (the National Employee Savings Trust or the NEST) for small businesses. It combines the most attractive features of the
IRA and the 401(k) plan, minimizes administrative and
compliance costs, and eliminates the need for employer
involvement with the Government. The NEST is designed to encourage retirement savings by middle- and
low-income workers, not only the highly paid, without
complicated forms or calculations.

38
Provide tax incentives for distressed areas.—The
Administration is proposing tax incentives for the cleanup of polluted urban and rural areas and is proposing
an expansion of the empowerment zone and enterprise
community program, as described below. The proposal
would be subject to trigger-off for qualified expenses
incurred after December 31, 2000 in the event that
the Federal budget deficit is not at least $20 billion
below CBO’s estimate for the year 2000.
Provide tax incentives to clean up environmentally
contaminated areas known as brownfields in distressed
communities.—To encourage the cleanup of polluted
urban and rural areas known as brownfields, the Administration proposes to allow certain nondeductible
costs incurred by businesses to remediate environmentally contaminated land in certain areas to be capitalized and amortized over a 60-month period. Qualified sites generally would be limited to those properties
located in high-poverty areas, Federal empowerment
zones and enterprise communities, and areas subject
to current Environmental Protection Agency (EPA)
Brownfields Pilots. To claim this incentive, taxpayers
would be required to obtain from the appropriate State
or local agency, or the EPA in certain circumstances,
verification that the site satisfies the geographic requirement. The proposal would be effective for qualified
expenses incurred after the date of enactment.
Expand Empowerment Zone and Enterprise Community program.—Under the Omnibus Budget Reconciliation Act of 1993, certain tax incentives were provided
for nine empowerment zones and 95 enterprise communities. The tax incentives were a 20-percent employer
wage credit, increased Section 179 expensing, and a
new category of tax-exempt financing. Qualifying businesses in empowerment zones were eligible for all three
incentives, while businesses in enterprise communities
were eligible for the tax-exempt financing. Over 500
communities submitted applications for these 104 designations that were announced in December 1994. The
Administration proposes a three-part expansion of this
program. First, the designation of two additional urban
empowerment zones would be authorized, to be made
within 180 days of enactment. Second, the restrictions
on the tax-exempt financing would be loosened to make
this incentive more accessible. Third, the designation
of 40 additional empowerment zones and 65 additional
enterprise communities would be authorized. Businesses in the new enterprise communities would be
eligible for the current-law tax-exempt financing, as revised, as well as the brownfields tax incentive described
above on an additional 500 acres. Businesses in the
new empowerment zones would be eligible for the current-law section 179 expensing, the brownfields tax incentive on an additional 1,000 acres, and tax-exempt
financing that would not be subject to the current-law
State volume caps, but rather would only be subject
to zone-by-zone volume caps. The current-law wage
credit would not be applicable in any of the new zones
and communities. The designations of these new zones
and communities would be required to occur before

ANALYTICAL PERSPECTIVES

1998, and the designations would generally be effective
for 10 years.
Provide tax relief for troops involved in the
Bosnian peacekeeping operations.—For a discussion
of this proposal, see ‘‘Other Provisions’’ category below.
Eliminate Unwarranted Benefits and Adopt
Other Revenue Measures
The President’s plan cuts unwarranted corporate tax
subsidies, closes tax loopholes, improves tax compliance
and adopts other revenue measures. These reforms,
which are estimated to save $43.6 billion during the
7-year period, 1996–2002, are described below.
Disallow interest deduction for corporate-owned
life insurance (COLI) policy loans.—Under existing
law, a company that sets up a COLI program may
borrow against the cash value of the life insurance contracts on the lives of its employees. The interest paid
on such loans generally is deductible by the company,
subject to certain limitations. However, the earnings
credited to the COLI policies are not subject to current
tax. In addition, benefits that the company receives
upon the deaths of insured employees are not taxed,
ensuring that the income credited under the contracts
is never subject to tax. To restrict further this taxarbitrage opportunity, the Administration proposes to
phase out the deduction of interest on COLI contracts.
The proposal generally would be effective with respect
to interest paid or accrued after December 31, 1995.
Deny interest deduction on certain debt instruments.—If an instrument qualifies as equity, the issuer
generally does not receive a deduction for dividends
paid. If an instrument qualifies as debt, the issuer may
receive a deduction for accrued interest and the holder
generally includes interest in income, subject to certain
limitations. The line between debt and equity is uncertain and it has proven difficult to formulate general
rules of classification. Taxpayers have exploited this
lack of guidance by issuing instruments that have substantial equity features, but for which they claim interest deductions. Generally effective for instruments issued on or after December 7, 1995, subject to certain
transition rules, the Administration proposes that no
deduction be allowed for interest or original issue discount (OID) on an instrument issued by a corporation
that has a maximum term of more than 40 years, or
is payable in stock of the issuer or a related party.
The proposal also modifies the rules for indebtedness
that is reflected as equity on the issuer’s financial statements.
Defer original issue discount deduction on convertible debt.—If a debt instrument is convertible into
stock and provides no payment of, or adjustment for,
accrued interest on conversion, no deduction is allowed
for accrued but unpaid stated interest. In contrast, the
accrued but unpaid discount on a convertible debt instrument with OID generally is deductible, even if the

FEDERAL RECEIPTS

instrument is converted before the issuer pays any OID.
The Administration proposal would defer the deduction
for OID on convertible debt until payment and would
be effective for convertible debt issued on or after December 7, 1995, subject to certain transition rules.
Reduce dividends-received deduction to 50 percent.—A corporate holder of stock generally is entitled
to a deduction for dividends received on stock in the
following amounts: 70 percent if the recipient owns less
than 20 percent of the stock of the payor, 80 percent
if the recipient owns 20 percent or more of the stock,
and 100 percent if the recipient owns 80 percent or
more of the stock. The Administration proposes to reduce the deduction to 50 percent for corporations owning less than 20 percent of the stock of a U.S. corporation because the existing 70-percent deduction is too
generous for corporations that do not have a sufficient
ownership interest in the issuing corporation. The proposal would be effective for dividends paid or accrued
more than 30 days after the date of enactment.
Modify holding period for dividends-received deduction.—The dividends-received deduction is allowed
to a corporate shareholder only if the shareholder satisfies a 46-day holding period for the dividend-paying
stock or a 91-day period for certain dividends on preferred stock. The 46- or 91-day holding period generally
does not include any time in which the shareholder
is protected from the risk of loss otherwise inherent
in the ownership of an equity interest. However, the
holding period requirement does not have to be proximate to the time the dividend distribution is made.
Effective for dividends paid or accrued more than 30
days after the date of enactment, the Administration
proposes that in order for a dividend to be eligible
for the dividends-received deduction, the holding period
requirement must be satisfied with respect to that dividend over a period immediately before or immediately
after the taxpayer becomes entitled to receive the dividend.
Extend pro rata disallowance of tax-exempt interest expense to all corporations.—No income tax
deduction is allowed for interest on debt used directly
or indirectly to acquire or hold investments the income
on which is tax-exempt. The determination of whether
debt is used to acquire or hold tax-exempt investments
depends on the holder of the instrument. For financial
institutions and dealers in tax-exempt investments,
debt generally is treated as financing all of the taxpayer’s assets proportionately. For corporations, other
than financial institutions and dealers, and for individuals, deductions are disallowed only when indebtedness
is incurred or continued for the purpose of purchasing
or carrying tax-exempt investments. These corporations
are therefore able to reduce their tax liabilities inappropriately through the double Federal tax benefits of interest expense deductions and tax-exempt interest income. Effective for taxable years beginning after the
date of enactment, with respect to obligations acquired

39
after December 7, 1995, the Administration proposes
that all corporations other than insurance companies
be treated the same as financial institutions are treated
under current law with regard to deductions for interest
on debt used directly or indirectly to acquire or hold
tax-exempt obligations. The proposal also would expressly apply these rules to related parties, by treating
all members of a consolidated group (other than members that are insurance companies) as a single entity
and by tracing debt and tax-exempt holdings among
other related parties.
Require average-cost basis for stocks, securities,
etc.—A taxpayer who sells stock or other securities is
allowed to account for the transaction by specifically
identifying the stock or securities or by using an accounting system such as first-in, first-out or last-in,
first-out. The Administration proposes to require taxpayers to determine their basis in substantially identical securities using the average of all their holdings
in the securities. Holding period would be determined
on a first-in, first-out basis. The method of determining
basis and holding period would apply to all securities,
including stocks, notes, bonds, and derivative financial
instruments. A special rule would allow the Treasury
to treat securities that are substantially identical as
not subject to the average-cost rule if they have a special status under a provision of the Code (such as builtin gain with respect to a partnership). Securities not
subject to average cost under this rule would be treated
as sold on a first-in, first-out basis. The proposal would
be effective 30 days after the date of enactment.
Require recognition of gain on certain stocks,
indebtedness and partnership interests.—Gain and
loss are generally taken into account for tax purposes
when realized. Gain or loss is usually realized with
respect to a capital asset at the time the asset is sold.
Many transactions designed to reduce or eliminate risk
of loss and opportunity for gain on financial assets generally do not cause realization. For example, taxpayers
may lock in gain on securities by entering into a ‘‘short
against the box,’’ that is, the taxpayer owns securities
that are the same as or substantially identical to the
securities borrowed and sold short. It is inappropriate
for taxpayers to be able to dispose of the economic
risks and rewards of owning appreciated property without realizing income for tax purposes. Therefore, the
Administration proposes to require a taxpayer to recognize gain (but not loss) upon entering into a constructive sale of any appreciated position in stock, a debt
instrument, or a partnership interest. A taxpayer would
be treated as making a constructive sale of an appreciated position when the taxpayer (or in certain limited
circumstances, a person related to the taxpayer) substantially eliminates risk of loss and opportunity for
gain by entering into one or more positions with respect
to the same or substantially identical property. The
proposal would generally be effective for constructive
sales entered into after the date of enactment.

40
Change the treatment of gains and losses on extinguishment.—The tax law distinguishes between the
sale of a right or obligation to a third party and the
extinguishment or retirement of the right or obligation.
A sale to a third party can give rise to capital treatment
while an extinguishment is ordinary. Extinguishment
treatment has been eliminated for all debt instruments
except those issued by natural persons and for most
options and other positions in actively traded property.
The application of the extinguishment doctrine in other
contexts is unclear. The extinguishment doctrine allows
taxpayers to control whether gain or loss is capital or
ordinary by deciding whether to sell or extinguish a
contract. The Administration proposes to eliminate the
remaining portions of the extinguishment doctrine so
that gain or loss attributable to the cancellation, lapse,
expiration, or other termination of any right or obligation with respect to property that is or would be a
capital asset in the hands of the taxpayer would be
treated as gain or loss from the sale or exchange of
a capital asset. In addition, the proposal would repeal
the natural person exception for debt instruments. The
proposal would be effective 30 days after the date of
enactment.
Require reasonable payment assumptions for interest accruals on certain debt instruments.—The
original issue discount (OID) rules do not measure income appropriately for certain debt instruments that
are prepayable. If the instruments are held in large
pools, it can be statistically predicted that a certain
portion will prepay. Prepayment assumptions are used
to account for certain debt instruments with payments
based on mortgages, but the OID rules otherwise ignore
these probabilities. The proposal would require taxpayers that hold prepayable debt instruments in large
pools to use prepayment assumptions similar to the
rules that apply for debt instruments with payments
based on mortgages. The proposal would be effective
for taxable years beginning after the date of enactment.
Require gain recognition for certain extraordinary dividends.—A corporate shareholder is generally allowed to deduct a percentage of dividends received from another domestic corporation. Certain dividends and dividend equivalent transactions are treated
as ‘‘extraordinary’’ dividends. If a corporate shareholder
receives an extraordinary dividend, the corporate shareholder must reduce the basis of the stock to which
the distribution relates by the amount of the nontaxed
portion of the dividend (generally the amount of the
dividend that was deducted). If the nontaxed portion
of the dividend exceeds the basis of the stock, the excess is deferred and recognized on a later disposition
of the stock. If a shareholder’s stock is redeemed, the
redemption may be treated as a dividend if the shareholder’s interest in the corporation has not been meaningfully reduced. In determining if a shareholder’s interest has been meaningfully reduced, the ownership
of options to purchase stock may be treated as actual
stock ownership. The exclusion of a substantial portion

ANALYTICAL PERSPECTIVES

of the amount received by a corporate shareholder on
the redemption of its stock is inappropriate in certain
cases when options are used to create stock ownership.
Also, it is inappropriate to defer gain recognition when
the portion of the distribution that is excluded due to
the dividends received deduction exceeds the basis of
the stock with respect to which the extraordinary dividend is received. The Administration proposes that corporate shareholders will recognize gain on redemptions
of stock that are treated as dividends because of options
when the nontaxed portion of the dividend exceeds the
basis of the shares surrendered. In addition, immediate
gain recognition would be required whenever the basis
of stock with respect to which any extraordinary dividend was received was reduced below zero. The proposed change generally would be effective for distributions after May 3, 1995.
Repeal percentage depletion for non-fuel minerals mined on Federal and formerly Federal
lands.—Taxpayers are allowed to deduct a reasonable
allowance for depletion relating to certain mineral deposits. The depletion deduction for any taxable year
is calculated under either the cost depletion method
or the percentage depletion method, whichever results
in the greater allowance for depletion for the year. The
percentage depletion method is viewed as an incentive
for mineral production rather than as a normative rule
for recovering the taxpayer’s investment in the property. This incentive is excessive with respect to minerals mined on Federal and formerly Federal lands
under the 1872 mining act, in light of the minimal
costs of acquiring the mining rights ($5.00 or less per
acre). Effective for taxable years beginning after the
date of enactment, the Administration proposes to repeal percentage depletion for non-fuel minerals mined
on lands where the mining rights were originally acquired under the 1872 law.
Modify loss carryback and carryforward rules.—
Net operating losses (NOLs) generally can be used to
offset taxable income from the prior three taxable years
(carrybacks) and the succeeding 15 taxable years
(carryforwards). Because of the increased complexity
and administrative burden associated with carrybacks,
the carryback period should be shortened. The
carryforward period could be lengthened, however, to
allow taxpayers more time to utilize their NOLs without increasing either complexity or administrative burdens. The Administration proposes to limit carrybacks
of NOLs to one year and to extend carryforwards to
20 years, effective for NOLs arising in taxable years
beginning after the date of enactment.
Treat certain preferred stock as ‘‘boot.’’—In reorganization transactions, no gain or loss is recognized
except to the extent ‘‘other property’’ (boot) is received;
that is, property other than certain stock, including
preferred stock. Upon the receipt of ‘‘other property,’’
gain but not loss can be recognized. Because preferred
stock has an enhanced likelihood of recovery of prin-

FEDERAL RECEIPTS

cipal or of maintaining a dividend or both, such taxfree treatment is inappropriate. The Administration
therefore proposes to treat certain preferred stock as
‘‘other property,’’ subject to certain exceptions. The proposal generally would be effective for transactions after
December 7, 1995.
Repeal tax-free conversions of large C corporations to S corporations.—A corporation can avoid the
existing two-tier tax by electing to be treated as an
S corporation or by converting to a partnership. Converting to a partnership is a taxable event that generally requires the corporation to recognize any builtin gain on its assets and requires the shareholders to
recognize any built-in gain on their stock. By contrast,
the conversion to an S corporation is generally taxfree, except that the S corporation generally must recognize the built-in gain on assets held at the time of
conversion if the assets are sold within 10 years. Under
the Administration’s proposal, the conversion of a C
corporation with a value of more than $5 million into
an S corporation would be treated as a liquidation of
the C corporation followed by a contribution of the assets to an S corporation by the recipient shareholders.
Thus, the proposal would require immediate gain recognition by both the corporation (with respect to its
appreciated assets) and its shareholders (with respect
to their stock). This proposal makes the tax treatment
of conversions to an S corporation generally consistent
with conversions to a partnership. The proposal would
apply to elections that are first effective for a taxable
year beginning after January 1, 1997 and to acquisitions of a C corporation by an S corporation made after
December 31, 1996.
Require gain recognition on certain distributions of controlled corporation stock.—A corporation is generally required to recognize gain on a distribution of property (including stock of a controlled
corporation) unless the distribution meets certain requirements. If various requirements are met, including
restrictions relating to acquisitions and dispositions of
stock of the distributing corporation or the controlled
corporation, a distribution of the stock of a controlled
corporation will be tax-free to the distributing corporation. Certain distributions may effectively be dispositions of a business, in which case tax-free treatment
for the distributing corporation is inappropriate. Accordingly, the Administration proposes to adopt additional restrictions on acquisitions and dispositions of
the stock of a distributing corporation or controlled corporation that are related to the distribution. Under this
proposal, the distributing corporation would recognize
gain on the distribution of the stock of the controlled
corporation if the shareholders of the distributing corporation do not retain a sufficient stock interest (generally 50 percent) in the distributing and controlled
corporations during the four-year period commencing
two years prior to the distribution. For this purpose,
unrelated transactions (such as public trading on the
stock market) would be disregarded. This proposal

41
would be effective generally for distributions occurring
after the date of announcement.
Reform the treatment of certain stock transfers.—Certain sales of stock to a related corporation
are treated as the payment of a dividend by the purchaser. In cases where the seller is a corporation that
does not actually own stock in the purchaser, taxpayers
may take the position that the transaction produces
tax benefits that would be unavailable if the purchaser
distributed a dividend to its actual shareholders. For
example, if a foreign-controlled domestic corporation
sells the stock of a subsidiary to a foreign sister corporation, the domestic corporation may take the position that it is entitled to credit foreign taxes that were
paid by the foreign sister corporation. In such cases,
the Administration proposes to limit the amount treated as a dividend (and the associated foreign tax credits)
from the purchaser to the amount of the purchaser’s
earnings and profits attributable to stock owned by U.S.
persons related to the seller. If the purchaser is a domestic corporation, taxpayers may take the position
that stock basis need not be reduced by the nontaxed
portion of the dividend. The proposal would also clarify
that a deemed dividend from a purchaser that is a
domestic corporation should generally be treated as an
extraordinary dividend requiring a basis reduction. The
proposal would further require gain recognition to the
extent that the nontaxed portion exceeds the basis of
the shares transferred. The proposal generally would
be effective for transactions after the date of announcement.
Reformulate Puerto Rico and possessions tax
credit.—Domestic corporations with business operations in U.S. possessions may elect the Section 936
credit, which generally eliminates the U.S. tax on certain income that is related to their possession-based
operations. Income exempt from U.S. tax under this
provision falls into two broad categories: (1) possession
business income derived from the active conduct of a
trade or business within a possession or from the sale
or exchange of substantially all of the assets used in
such a trade or business; and (2) possession source
investment income (QPSII), which is attributable to investment in the possession or in certain Caribbean
Basin countries. The amount of the credit attributable
to possession business income is subject to limitations
enacted under the Omnibus Budget Reconciliation Act
of 1993; Section 936 companies may elect either a reduced percentage of the profits-based credit as allowed
under prior law (60 percent in 1994, phasing down
to 40 percent beginning in 1998), or a limitation based
on the company’s economic activity in the possessions
(measured by wages and other compensation, depreciation, and certain taxes paid). To provide a more efficient
tax incentive for the economic development of Puerto
Rico and other U.S. possessions, and to continue the
effort toward this goal that was begun in the 1993
Act, the Administration proposes to (1) phase out the
profits-based branch of the active-business portion of

42
the credit over five years, beginning in 1997, and (2)
allow excess amounts of economic-activity limitation to
be carried foward for up to five years. The proposal
would retain the economic-activity limitation on the active-business portion of the credit, as well as the passive-income portion of the credit for taxes otherwise
payable on QPSII, as under present law. Revenues
raised would be made available to Puerto Rico for programs under the Social Security Act and to promote
job creation.
Expand Subpart F provisions regarding income
from notional principal contracts and stock lending transactions.—Subpart F income includes income
from notional principal contracts referenced to foreign
currency, commodities, or interest rates, or to indices
based thereon. It also includes income with respect to
the lending of debt securities. Subpart F income does
not include income from equity swaps or other types
of notional principal contracts or income from transfers
of equities. Subpart F income should include income
from all types of notional principal contracts and from
stock-lending transactions, because such income is indistinguishable on policy grounds from other types of
highly mobile income already targeted by Subpart F.
The Administration is proposing to include in Subpart
F income the net income from equity swaps and certain
categories of notional principal contracts that are not
reached by current law, as well as income from stock
lending transactions. An ordinary-course-of-business exception would be provided for regular dealers in property, forwards, options, notional principal contracts, and
similar financial instruments. The proposal would be
effective for taxable years beginning after the date of
enactment.
Modify taxation of captive ‘‘insurance’’ companies.—For tax purposes, ‘‘insurance’’ has been defined
by the courts to require ‘‘risk shifting’’ or ‘‘risk distribution.’’ In the case of a ‘‘captive’’ insurance company,
one court has held that risk-shifting and risk-distribution requirements are satisfied even if the captive’s ‘‘related person insurance income’’ accounts for nearly 70
percent of its total business. The Administration proposes that an insurance arrangement between a captive
insurer and a large shareholder of the captive generally
would not be respected as a valid insurance arrangement if more than 50 percent of the captive’s net written premiums were attributable to the insurance or
reinsurance of large-shareholder risks. In addition, such
a captive would not be considered an insurance company for tax purposes. The proposal would be effective
generally for the first taxable year beginning after the
date of enactment.
Reform foreign tax credit.—The Administration
proposes the following foreign tax credit reforms.
Eliminate interest allocation exception for certain nonfinancial corporation.—For foreign tax credit purposes,
taxpayers generally are required to allocate and apportion interest expense between U.S. and foreign source

ANALYTICAL PERSPECTIVES

income based on the proportion of the taxpayer’s total
assets in each location. Such allocation and apportionment is required to be made for affiliated groups as
a whole rather than on a subsidiary-by-subsidiary
basis. However, certain types of financial institutions
that are members of an affiliated group are treated
as members of a separate affiliated group for purposes
of the allocation and apportionment of interest expense.
The Tax Reform Act of 1986 included a targeted rule
that treats a certain corporation as a financial institution for this purpose. The Administration believes that
this relief should not be provided. The proposal would
repeal the targeted exception provided by the Tax Reform Act of 1986, effective for taxable years beginning
after the date of enactment.
Modify foreign tax credit carryback and carryforward
rules.—The United States permits taxpayers to credit
income taxes paid to a foreign government against U.S.
tax on foreign source income. Through the foreign tax
credit limitations, the Code prevents the use of foreign
tax credits to reduce U.S. tax on U.S. source income.
Under the foreign tax credit mechanism, current foreign
income taxes in excess of the relevant current-year foreign tax credit limitation are not creditable against current U.S. tax liabilities. However, such excess foreign
tax credits generally may be carried back for two years
and carried forward for five years, and used as a credit
to the extent there is excess foreign tax credit limitation
(that is, an excess of the foreign tax credit limitation
over creditable foreign taxes) in any of those years.
Experience over the years has shown, however, that
carrybacks are associated with increased complexity
and
administrative
burdens
as
compared
to
carryforwards. Therefore, to reduce such complexity and
burdens, the proposal would limit foreign tax credit
carrybacks to one year and extend foreign tax credit
carryforwards to seven years. The proposal would be
effective for foreign taxes paid or accrued or deemed
paid or accrued in taxable years beginning after December 31, 1996.
Modify rules relating to foreign oil and gas extraction income.—To be eligible for the U.S. foreign
tax credit, a foreign levy must be the substantial equivalent of an income tax in the U.S. sense, regardless
of the label the foreign government attaches to it.
Under regulations, a foreign levy is a tax if it is a
compulsory payment under the authority of a foreign
government to levy taxes and is not compensation for
a specific economic benefit provided by the foreign country. Taxpayers that are subject to a foreign levy and
that also receive (directly or indirectly) a specific economic benefit from the levying country are referred to
as ‘‘dual capacity’’ taxpayers and may not claim a credit
for that portion of the foreign levy paid as compensation
for the specific economic benefit received. The proposal
would treat as taxes payments by a dual-capacity taxpayer to a foreign country that would otherwise qualify
as income taxes or ‘‘in lieu of’’ taxes, only if there is
a ‘‘generally applicable income tax’’ in that country.
For this purpose, a generally applicable income tax is

FEDERAL RECEIPTS

an income tax (or a series of income taxes) that applies
to trade or business income from sources in that country, so long as the levy has substantial application both
to non-dual-capacity taxpayers and to persons who are
citizens or residents of that country. Where the foreign
country does generally impose an income tax, as under
present law, credits would be allowed up to the level
of taxation that would be imposed under that general
tax, so long as the tax satisfies the new statutory definition of a ‘‘generally applicable income tax.’’ The proposal would treat foreign oil and gas income as Subpart
F income. It also would create a new foreign tax credit
basket within Section 904 for foreign oil and gas income. The proposal would be effective for taxable years
beginning after the date of enactment. The proposal
would yield to U.S. treaty obligations that allow a credit
for taxes paid or accrued on certain oil or gas income.
Require thrifts to account for bad debts in the
same manner as banks.—A thrift institution that
holds at least 60 percent of its portfolio in home mortgages, cash, and government obligations is permitted
to maintain a reserve for bad debts. Annual additions
to its bad debt reserve may be calculated under either
the ‘‘percentage of taxable income’’ method or the ‘‘experience’’ method. These methods can be more generous
than the rules applicable to commercial banks. As a
result of the increasing convergence of the banking and
thrift industries, the special rules applicable to thrifts
are no longer warranted. The Administration proposes
that effective for taxable years beginning after the date
of enactment, thrifts must account for bad debts in
the same manner as banks. Specifically, the percentageof-taxable-income method of computing bad debt reserves would no longer be available; thrifts with $500
million or less of adjusted bases in their assets would
be permitted to use the experience method and thrifts
with greater than $500 million in adjusted bases in
their assets would be required to use the specific
charge-off method. Post-1987 reserves would be recaptured over six years, unless the former thrift meets
mortgage loan requirements, in which case recapture
would be delayed up to two years.
Reform depreciation under the income forecast
method.—All estimated income from the use of property or the sale of merchandise would be taken into
account in determining depreciation under the income
forecast method. This change, which would generally
be effective for property placed in service after September 13, 1995, would eliminate the inappropriate acceleration of depreciation of the cost of motion picture
films, video tapes, sound recordings, and other similar
property that occurs under current law. Interest would
be charged or credited to compensate for errors in estimates.
Phase out preferential tax deferral for certain
large farm corporations required to use accrual
accounting.—Under the Revenue Act of 1987, family
farm corporations were required to change to the ac-

43
crual method of accounting if their gross receipts exceeded $25 million in any taxable year beginning after
1985. However, in lieu of including in gross income
the entire amount of the adjustment attributable to
the change in accounting method, a family farm corporation could establish a suspense account. The
amount of the suspense account was to be included
in gross income if the corporation ceased to be a family
corporation or to the extent the gross receipts of the
corporation from farming declined. To eliminate the potential indefinite deferral of the adjustment, the Administration proposes to repeal the ability of family farm
corporations to establish such suspense accounts. Any
taxpayer subsequently required to change to the accrual
method of accounting would be required to take the
adjustment into account generally over a ten-year period. Any existing suspense accounts would be restored
to income ratably over a ten-year period, or sooner to
the extent provided under existing law. This provision
would be effective for taxable years beginning after September 13, 1995.
Repeal lower of cost or market inventory accounting method.—Taxpayers required to maintain
inventories are permitted to use a variety of methods
to determine the cost of their ending inventories, including the last-in, first-out (LIFO) method, the firstin, first-out (FIFO) method, and the retail method. Taxpayers not using a LIFO method may determine the
carrying values of their inventories by applying the
lower of cost or market (LCM) method and by writing
down the cost of goods that are unsalable at normal
prices or unusable in the normal way because of damage, imperfection or other causes (subnormal goods
method). The allowance of write-downs under the LCM
and subnormal goods methods is essentially a one-way
mark-to-market method that understates taxable income. The Administration proposes to repeal the LCM
and subnormal goods methods, effective for taxable
years beginning after the date of enactment.
Repeal components of cost inventory accounting
method.—Taxpayers that use the LIFO method to determine the cost of their ending inventories may use
a variety of dollar-value methods, including double extension, link-chain and other index methods, in order
to determine whether an increment has occurred and
the cost of that increment. Certain taxpayers are permitted to use simplified LIFO methods based on externally developed price indexes. Some taxpayers that use
a dollar-value, double-extension method make their
computations with respect to the three components of
cost (materials, labor and overhead) of their finished
goods and work-in-process inventories (the COC method), rather than the aggregate cost of these goods (the
total product cost method). The COC method, in many
cases, does not adequately account for technological efficiencies in which skilled labor is substituted for lessskilled labor or where overhead costs replace direct
labor costs. The Administration is proposing to repeal

ANALYTICAL PERSPECTIVES

the COC method effective for taxable years beginning
after the date of enactment.

sonal property located outside the United States would
not be treated as like kind.

Modify basis adjustment rules under Section
1033.—The Administration proposes that when a taxpayer acquires a controlling interest in the stock of
a corporation as replacement property after an involuntary conversion, the corporation must be required to
reduce its adjusted bases in its assets by the same
amount as the taxpayer is required to reduce its basis
in the acquired stock. The corporation’s adjusted bases
in its assets would not be reduced, in the aggregate,
below the taxpayer’s basis in its stock. In addition,
the basis of any individual asset would not be reduced
below zero. This proposal, which would allow deferral
of gain recognition, but not the avoidance of that gain,
would generally be effective for involuntary conversions
occurring after September 13, 1995.

Disallow rollover and one-time exclusion on sale
of residence to the extent of previously claimed
depreciation.—Generally, under Section 1034, no gain
is recognized on the sale or exchange of a principal
residence to the extent that the amount of the sales
price is reinvested in a new residence within a specified
period. In addition, Section 121 generally provides a
taxpayer with a one-time election to exclude from gross
income up to $125,000 of gain from the sale of a principal residence if the taxpayer has attained the age
of 55 before the sale and has used the residence as
a principal residence for three or more of the five years
preceding the sale. Because depreciation is allowed with
respect to a portion of a residence when that portion
is used for business purposes and those deductions reduce the owner’s basis in the residence, the Administration is proposing to require gain recognition on the
sale of a principal residence to the extent of any depreciation allowable after December 31, 1995. Similarly,
the amount of otherwise allowable one-time exclusion
would be reduced to the extent of depreciation allowable
after December 31, 1995.

Expand requirement that involuntarily converted property be replaced with property acquired
from an unrelated party.—Gain realized by taxpayers from certain involuntary conversions is deferred
to the extent the taxpayer purchases property similar
or related in service or use to the converted property
within a specified period of time. C corporations (and
partnerships with one or more corporate partners that
own more than 50 percent of the capital or profits interest in the partnership) generally are not entitled to
defer gain if the replacement property is purchased
from a related person. The Administration proposes to
extend this rule to any other taxpayer, including an
individual, that acquires replacement property from a
related person, unless the taxpayer has an aggregate
realized gain of $100,000 or less during the year as
a result of involuntary conversions. In the case of a
partnership or S corporation, the $100,000 annual limitation would apply to the entity and each partner or
shareholder. The proposal would generally be effective
for involuntary conversions occurring after September
13, 1995.
Place further restrictions on like-kind exchanges
involving personal property.—An exchange of property, like a sale, is generally a taxable transaction.
However, no gain or loss is recognized if property held
for productive use in a trade or business or for investment is exchanged for property of a like kind that is
to be held for productive use in a trade or business
or for investment. In general, any kind of real estate
is treated as of a like kind with other real property;
however real property located in the United States and
real property located outside the United State are not
of a like kind. For personal property, property of a
‘‘like class’’ is treated as being of a like kind; no restrictions apply with regard to location in or outside the
United States. To conform the limitations on exchanges
of personal property to the limitations on exchanges
of real property, the Administration proposes that effective generally for exchanges after December 6, 1995,
personal property located in the United States and per-

Require registration of certain confidential corporate tax shelters.—Many corporate tax shelters are
not registered with the Internal Revenue Service (IRS).
Requiring registration of corporate tax shelters would
allow the IRS to make better informed judgments regarding the audit of corporate tax returns and to monitor whether legislation or administrative action is necessary regarding the type of transactions being registered. The Administration is therefore proposing the
registration of any investment, plan, arrangement or
transaction: (1) a significant purpose of the structure
of which is tax avoidance or evasion by a corporate
participant, (2) that is offered to any potential participant under conditions of confidentiality, and (3) for
which the tax shelter promoter may receive total fees
in excess of $100,000. The proposal would be effective
for any tax shelter offered to potential participants after
the date the Secretary of the Treasury prescribes guidance regarding the filing requirements.
Require reporting of payments to corporations
rendering services to Federal agencies.—All persons
engaged in a trade or business and making payments
of $600 or more to another person in remuneration
for services generally must report those payments to
the IRS and to the recipient. No reporting is required
if the recipient is a corporation, permitting significant
amounts of income to escape the tax system. To ensure
that corporations that do business with the Federal
Government appropriately report as income their payments from the Federal Government, the Administration proposes to require executive agencies to report
payments of $600 or more made to corporations for
services rendered. The proposal would be effective for

FEDERAL RECEIPTS

returns the due date of which is more than 90 days
after the date of enactment.
Increase penalties for failure to file correct information returns.—All persons engaged in a trade
or business and making payments of $600 or more to
another person in remuneration for services generally
must report those payments to the IRS. Any person
who fails to report such payments in a timely manner
or incorrectly reports such payments is subject to penalties. For taxpayers filing large volumes of information
returns or reporting significant payments, existing penalties ($15 per return, not to exceed $75,000 if corrected
within 30 days; $30 per return not to exceed $150,000
if corrected by August 1; and $50 per return if not
corrected at all) may not be sufficient to encourage
timely and accurate reporting. The Administration proposes to increase the general penalty amount to the
greater of $50 per return or five percent of the total
amount required to be reported. The increased penalty
would not apply if the aggregate amount actually reported by the taxpayer on all returns filed for that
calendar year was at least 97 percent of the amount
required to be reported. The increased penalty would
be effective for returns the due date for which is more
than 90 days after the date of enactment.
Extend Internal Revenue Service (IRS) user
fees.—The IRS provides written responses to questions
of individuals, corporations, and organizations relating
to their tax status or the effects of particular transactions for tax purposes. The IRS responds to these
inquiries through the issuance of letter rulings, determination letters, and opinion letters. The authority to
charge fees for these requests, which is scheduled to
expire effective with requests made after September
30, 2000, is proposed to be extended for two years
through September 30, 2002.
Apply failure-to-pay penalty to substitute returns.—The failure-to-pay penalty, which is a percentage of the tax due, generally runs from the due date
of a return until the tax is paid. If, however, a taxpayer
fails to file a return, and the Commissioner prepares
a substitute return for the taxpayer, then the tax on
which the penalty is measured is considered a deficiency and the penalty begins to run only ten days
after the IRS sends the taxpayer notice and demand
for payment of the tax. There is no reason to treat
a taxpayer for whom the Commissioner prepares a substitute return more favorably than taxpayers who pay
late but nevertheless file their own returns. Therefore,
the proposal would require that the failure-to-pay penalty apply to taxpayers for whom the Commissioner
prepares substitute returns, in the same manner as
it applies to delinquent taxpayers (that is, that the
penalty commences running from the due date of the
return). The proposal would be effective for returns due
after the date of enactment.

45
Repeal exemption for withholding on gambling
winnings from bingo and keno in excess of
$5,000.—Proceeds of most wagers with odds of less
than 300 to 1 are exempt from withholding, as are
all bingo and keno winnings. The proposal would impose withholding on proceeds of bingo or keno in excess
of $5,000 at a rate of 28 percent, regardless of the
odds of the wager, effective for payments made after
the date of enactment.
Require tax reporting for payments to attorneys.—Tax information reporting is required for persons engaged in a trade or business making payments
in the course of the trade or business of rent, salaries,
wages, or other fixed or determinable income. Treasury
regulations require a payor to report payments of attorney’s fees if the payments are made in the course of
a trade or business, although generally a payor is not
required to report payments made to corporations. If
a payment to an attorney is a gross amount, and it
cannot be determined what portion is the attorney’s
fee (as in the case of lump-sum judgments or settlements made jointly payable to a lawyer and a plaintiff),
then no reporting is required. The Administration proposes requiring that any person making a payment in
the course of a trade or business to a lawyer or a
law firm, whether as sole or joint payee, report the
payment to the IRS. When the portion that constitutes
fees cannot be determined, the amount paid would be
reported as gross proceeds. A lawyer receiving a payment would be required to provide his or her taxpayer
identification number to the payor or be subject to applicable penalties and backup withholding. The exception for payments to corporations would not apply to
payments of attorney’s fees. The proposal would be effective for payments made after December 31, 1996.
Repeal advance refunds of diesel fuel tax for
diesel cars and light trucks.—The first purchaser
of a diesel-powered automobile or light truck is entitled
to a payment in the nature of an advance refund of
the difference between the diesel fuel excise tax and
the gasoline excise tax. The amount of the refund typically is small, not warranting the resources required
to effectively administer the procedure. Accordingly, the
Administration proposes to repeal the provision allowing these payments, effective for vehicles purchased
after the date of enactment.
Extend oil spill excise tax.—Before January 1,
1995, a five-cents-per-barrel excise tax was imposed on
domestic crude oil and imported petroleum products.
The tax was dedicated to the Oil Spill Liability Trust
Fund to finance the cleanup of oil spills and was not
imposed for a calendar quarter if the unobligated balance in the Trust Fund exceeded $1 billion at the close
of the preceding quarter. The Administration proposes
to reinstate this tax for the period after the date of
enactment and before October 1, 2006. The tax would
be suspended for a given calendar quarter if the unobli-

ANALYTICAL PERSPECTIVES

gated Trust Fund balances at the end of the preceding
quarter exceeded $2.5 billion.
Impose excise taxes on kerosene as diesel fuel.—
A 24.3-cents-per-gallon excise tax is imposed on diesel
fuel upon removal from a registered terminal facility
unless the fuel is indelibly dyed and is destined for
a nontaxable use. Treasury regulations provide that
kerosene is not treated as a diesel fuel for this purpose;
thus, undyed kerosene is not subject to the diesel fuel
excise tax when it is removed from a terminal. Undyed
kerosene is subject to tax, however, when it is blended
with diesel fuel. Distributors of this blended fuel frequently do not pay the tax, thereby placing complying
taxpayers at a competitive disadvantage and resulting
in revenue losses to the Federal government. Effective
July 1, 1997, the Administration proposes to tax kerosene as diesel fuel when it is removed from a terminal,
unless the kerosene qualifies as aviation fuel. Exceptions would be provided for aviation fuel and, to the
extent provided in regulations, for feedstock uses. In
addition, special refund rules would apply in certain
cases of kerosene used for heating purposes.
Permanently extend luxury excise tax on passenger vehicles.—A 10 percent luxury excise tax is
levied on the retail price of passenger vehicles in excess
of an inflation-adjusted threshold ($34,000 in 1996).
The Administration proposes to permanently extend
this tax, which is scheduled to expire after December
31, 1999.
Extend and modify Federal Unemployment Act
(FUTA) provisions.—The temporary unemployment
surtax of 0.2 percent imposed on employers, which is
scheduled to expire with respect to wages paid after
December 31, 1998, is proposed to be extended through
December 31, 2006. Beginning in 2002, the Administration proposes to require an employer to pay Federal
and State unemployment taxes monthly (instead of
quarterly) in a given year, if the employer’s FUTA tax
liability in the immediately prior year was $1,100 or
more.
Other Provisions That Affect Receipts
Assess fees for examination of FDIC-insured
banks and bank holding companies (receipt effect).—The Administration proposes to require the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve to assess fees for examination of FDICinsured banks and bank holding companies. The Federal Reserve currently funds the costs of such examinations from earnings; therefore, deposits of earnings by
the Federal Reserve, which are classified as governmental receipts, will increase by the amount of the
fees.
Expand fees collected under the securities
laws.—The Administration proposes to expand certain
fees collected under the securities laws as part of a
legislative package to provide the Securities and Ex-

change Commission with a sound and stable long term
funding structure. The Administration intends to work
with Congress to secure early enactment of such a legislative proposal.
Establish IRS continuous levy.—The Administration seeks to strengthen the enforcement tools available
to the IRS to recover delinquent tax debt. New authority is proposed for the IRS to effect a continuous levy
on non-means tested Federal payments, such as Federal
salaries and pensions, received by individuals who owe
delinquent tax debt.
Extend the Generalized System of Preferences
(GSP) and modify other trade provisions.—Under
GSP duty-free access is provided to over 4,000 items
from about 142 eligible developing countries that meet
certain worker rights and other criteria. This program
is proposed to apply retroactively to July 31, 1995,
when it expired, and to be extended through September
30, 2000. The Administration also proposes to provide
expanded trade benefits mainly on textiles and apparel
to Caribbean Basin countries who meet new eligibility
criteria needed to prepare for a future free trade agreement with the U.S. The program is proposed to expire
on September 30, 2001.
Increase deduction for self-employed health insurance.—The Administration proposes to increase the
30 percent deduction for health insurance expenses of
self-employed individuals and their dependents to 35
percent for 1996 and 1997, 40 percent for 1998, 45
percent for 1999, and 50 percent for 2000 and subsequent years. The increased deduction would be subject
to trigger-off (that is, the deductible percentage would
revert to 30 percent) on January 1, 2001 in the event
that the Federal budget deficit is not at least $20 billion
below CBO’s estimate for the year 2000.
Increase employee contributions to the Civil
Service Retirement System (CSRS) and the Federal
Employees Retirement System (FERS).—The Administration proposes to increase employee contributions
to CSRS and FERS by 0.5 percent of base pay in three
steps. Contributions would increase by 0.25 percent of
base pay on April 1, 1996, another 0.15 percent on
January 1, 1997 and a final 0.10 percent on January
1, 1998. These higher contribution rates would be effective through 2002; on January 1, 2003, contribution
rates would return to the levels in effect on March
31, 1996.
Deter expatriation tax avoidance.—The United
States requires U.S. citizens and residents to pay tax
on their worldwide income. However, some U.S. taxpayers relinquish their U.S. citizenship or residence
and thereby avoid future U.S. tax on unrealized gains.
To ensure that these individuals pay their fair share
of U.S. tax, when a U.S. citizen renounces U.S. citizenship or when a noncitizen who has been a lawful permanent resident of the United States for at least 10

FEDERAL RECEIPTS

years becomes a nonresident of the United States, the
Administration is proposing that such individual’s assets be deemed to be disposed of and reacquired at
their fair market value in a transaction in which gain
or loss is recognized. There would be an exemption
for up to $600,000 of gain and for U.S. real property
interests. The provision would apply to any expatriation
after February 6, 1995.
Tighten rules for taxing foreign trusts.—Some
U.S. taxpayers avoid paying applicable U.S. tax on their
share of income earned by foreign trusts. To ensure
that U.S. tax is collected on this income, the Administration is proposing enhanced information reporting requirements for assets transferred to foreign trusts, effective generally for taxable years beginning after the
date of enactment. In addition, under current law, distributions received by U.S. taxpayers from certain foreign trusts may be treated as nontaxable gifts. The
Administration is proposing that, effective generally on
the date of enactment, U.S. taxpayers who receive such
distributions pay U.S. tax on the distributions that represent trust income, unless U.S. law treats a U.S taxpayer as owning the trust assets.
Extend environmental tax on corporate taxable
income deposited in the Hazardous Substance
Superfund Trust Fund.—A tax equal to 0.12 percent
of alternative minimum taxable income in excess of
$2 million is levied on all corporations and deposited
in the Hazardous Substance Superfund Trust Fund.
The Administration proposes to reinstate this tax,
which expired on December 31, 1995, for taxable years
beginning after December 31, 1995 and before January
1, 2007.
Improve compliance by tax-exempt entities
through intermediate sanctions and other measures.—The Administration proposes to add new excise
taxes on parties that use their control over charitable
and nonprofit organizations to extract benefits without
providing property or services of at least equal value
in return (effective generally for transactions occurring
on or after September 14, 1995). In addition, the Administration is proposing to expand the reporting and
disclosure requirements that relate to information returns filed by tax-exempt organizations and to increase
the penalties for failure to comply with these requirements, generally effective 90 days after the date of enactment.
Modify Federal pay raise (receipt effect).—The
Administration is proposing a pay raise of 3 percent
for 1997, less than the raise that would take effect
under normal operation of the law. This 3 percent raise
would cover both the national schedule and the locality
pay adjustments. The lower proposed pay raise affects
Federal employees’ contributions to CSRS and FERS.
Provide tax relief for troops involved in the
Bosnia peacekeeping operations.—The Administra-

tion is proposing tax relief for troops involved in the
Bosnia peacekeeping operations. All of the military pay
of enlisted personnel and part of the pay of officers
would be exempt from income tax, and filing deadlines
would be extended, similar to the relief afforded personnel in the Persian Gulf. The Bosnia peacekeeping operation involves the dangers of combat situations; this
benefit is proposed in recognition of our troops’ sacrifice.
The Administration will work with Congress to ensure
early enactment of tax relief for these troops.
Modify Earned Income Tax Credit
Modify earned income tax credit (EITC).—The
Administration is proposing the following modifications
designed to target the EITC to intended recipients: (1)
Individuals who are living in the U.S. illegally or who
do not have proper documentation for employment purposes would not be eligible to claim the EITC. (2) The
IRS would be allowed to use mathematical error procedures to deny claims for the EITC and the dependency
exemption. (3) The definition of adjusted gross income
used for phasing out the credit would be modified to
disregard net capital losses, net losses from
nonbusiness rents and royalties, net losses from trusts
and estates, and 50 percent of net losses from sole
proprietorships, partnerships and S corporations. (4)
The definition of disqualified income for purposes of
determining eligibility for the EITC would be expanded
to include net passive income that is not included in
self-employment income and net capital gain; in addition, the disqualified income threshold would be lowered to $2,200 in 1996 and indexed for inflation in
subsequent years. (5) Demonstration projects in up to
four states would be authorized to test the provision
of advance payment of the EITC through State agencies, generally effective 90 days after the date of enactment.
Extend Expired Trust Fund Excise Taxes
The President’s plan includes extension of the following excise taxes that have been previously reflected in
the baseline.
Extend excise taxes deposited in the Hazardous
Substance Superfund Trust Fund.—The excise taxes
that are levied on petroleum, chemicals, and imported
substances and deposited in the Hazardous Substance
Superfund Trust Fund, are proposed to be reinstated
for the period after the date of enactment and before
October 1, 2006. These taxes expired on December 31,
1995.
Extend excise taxes deposited in the Airport and
Airway Trust Fund.—The excise taxes that are levied
on domestic air passenger tickets, international departures, domestic air cargo and non-commercial aviation
fuels and deposited in the Airport and Airway Trust
Fund, are proposed to be reinstated for the period after
the date of enactment and before October 1, 2006.
These taxes (except for 14 cents per gallon of the tax

ANALYTICAL PERSPECTIVES

on gasoline used in non-commercial aviation, which is
being deposited in the Highway Trust Fund absent authority to transfer the tax to the Airport and Airway
Trust Fund) expired on December 31, 1995.
Extend excise taxes deposited in the Leaking Underground Storage Tank (LUST) Trust Fund.—The
excise taxes that are levied on gasoline, other motor
fuels, methanol and ethanol fuels, and on fuels used
in inland waterways and deposited in the LUST Trust
Fund, expired on December 31, 1995. The Administration proposes to reinstate these taxes for the period
after the date of enactment and before October 1, 2006.
Other Expired Provisions
A number of tax provisions have expired. The Administration supports the revenue-neutral extension of
these provisions as discussed below and looks forward
to working with the Congress to achieve that goal.
These provisions include the following:
Exclusion for employer-provided educational assistance.—Certain amounts paid by an employer for educational assistance provided to an employee are excluded from the employee’s gross income for income
and payroll tax purposes. This exclusion expired with
respect to amounts paid after December 31, 1994. The
Administration has previously proposed permanent extension of this provision.
Targeted jobs tax credit.—A tax credit, generally
equal to 40 percent of up to $6,000 of qualified first
year wages, is provided to employers who hire individuals from several targeted groups. The credit expired
with respect to individuals hired after December 31,
1994. The Administration strongly supports the goals
of this program but has serious concerns over the costeffectiveness of its current design. The Administration
would support extension if the problems undermining
the credit’s effectiveness are addressed.

Table 3–3.

Research and experimentation (R&E) tax credit.—The
20 percent tax credit provided for certain research and
experimentation expenditures expired with respect to
expenditures made after June 30, 1995. The Administration has previously proposed permanent extension
of this provision.
Tax credit for orphan drug clinical testing expenses.—
A 50 percent non-refundable tax credit is allowed for
a taxpayer’s qualified clinical testing expenses paid or
incurred in the testing of certain drugs, generally referred to as orphan drugs, for rare diseases or conditions. This credit expired with respect to expenses incurred after December 31, 1994.
Tax deduction for contributions to private foundations.—The deduction for a contribution to a private
foundation is generally limited to the adjusted basis
of the contributed property. However, a taxpayer who
contributed qualified appreciated stock to a private
foundation before January 1, 1995 was allowed to deduct the full fair market value of the stock, rather
than the adjusted basis of the contributed stock.
Tax Simplification and Taxpayers’ Rights
The Administration continues to support revenueneutral initiatives designed to promote sensible and equitable administration of the tax laws. These include
simplification, technical corrections, and taxpayer compliance measures. In addition to legislative initiatives,
such as the pension simplification proposals described
above, the Administration is committed to taking appropriate administrative action to simplify tax laws and
enhance procedural safeguards for taxpayers. For instance, the Administration recently has announced its
intent to simplify the current complex rules for
classifying business organizations as either corporations
or partnerships for Federal income tax purposes. In
addition, the Administration recently has adopted administratively a number of measures included in pending Taxpayer Bill of Rights legislation.

EFFECT OF PROPOSALS ON RECEIPTS
(In billions of dollars)
Estimate
1996

1997

1998

1999

2000

2001

2002

1996–2002

Provide tax relief:
Middle Class Bill of Rights:
Provide tax credit for dependent children .....................................................................
Expand Individual Retirement Accounts (IRAs) ............................................................
Provide tax incentive for education and training ..........................................................

–1.1
.............
–0.2

–9.7
–1.4
–5.8

–7.0
–0.4
–5.6

–8.9
–0.7
–6.2

–10.7
–1.1
–7.5

–10.7
–1.6
–7.8

–10.6
–2.5
–8.0

–58.6
–7.7
–41.2

Subtotal, Middle Class Bill of Rights ........................................................................

–1.3

–17.0

–13.0

–15.8

–19.3

–20.0

–21.1

–107.5

Increase expensing for small business .............................................................................
Provide estate tax relief for small business ......................................................................
Simplify pension plan rules 1 ..............................................................................................
Provide tax incentives for distressed areas ......................................................................

.............
.............
*
–*

–0.6
.............
–*
–*

–0.5
–0.2
–0.1
–0.3

–0.6
–0.2
–0.3
–0.6

–0.7
–0.2
–0.3
–0.8

–0.9
–0.2
–0.3
–0.9

–0.8
–0.2
–0.3
–0.8

–4.1
–1.0
–1.4
–3.4

Subtotal, Provide tax relief ............................................................................................

–1.3

–17.6

–14.1

–17.5

–21.4

–22.4

–23.2

–117.4

Eliminate unwarranted benefits and adopt other revenue measures:
Disallow interest deduction for corporate-owned life insurance policy loans ...................

.............

0.6

0.5

0.6

0.7

0.8

3.9

FEDERAL RECEIPTS
Table 3–3.

EFFECT OF PROPOSALS ON RECEIPTS—Continued
(In billions of dollars)
Estimate
1996

Deny interest deduction on certain debt instruments .......................................................
Defer original issue discount deduction on convertible debt ............................................
Limit dividends-received deduction (DRD):
Reduce DRD to 50 percent ...........................................................................................
Modify holding period for DRD ......................................................................................
Interaction .......................................................................................................................
Extend pro rata disallowance of tax-exempt interest expense to all corporations ..........
Require average-cost basis for stocks, securities, etc. ....................................................
Require recognition of gain on certain stocks, indebtedness and partnership interests .
Change the treatment of gains and losses on extinguishment ........................................
Require reasonable payment assumptions for interest accruals on certain debt instruments ..............................................................................................................................
Require gain recognition for certain extraordinary dividends ...........................................
Repeal percentage depletion for non-fuel minerals mined on Federal and formerly
Federal lands ..................................................................................................................
Modify loss carryback and carryforward rules ...................................................................
Treat certain preferred stock as ‘‘boot’’ .............................................................................
Repeal tax-free conversions of large C corporations to S corporations ..........................
Require gain recognition in certain distributions of controlled corporation stock ............
Reform treatment of certain stock transfers ......................................................................
Reformulate Puerto Rico and possessions tax credit .......................................................
Expand Subpart F provisions regarding certain income ...................................................
Modify taxation of captive ‘‘insurance’’ companies ...........................................................
Reform foreign tax credit ...................................................................................................
Modify rules relating to foreign oil and gas extraction income ........................................
Require thrifts to account for bad debts in same manner as banks ...............................
Reform depreciation under the income forecast method .................................................
Phase out preferential tax deferral for certain large farm corporations required to use
accrual accounting .........................................................................................................
Initiate inventory reform:
Repeal lower of cost or market method .......................................................................
Repeal components of cost method .............................................................................
Modify basis adjustment rules under Section 1033 ..........................................................
Expand requirement that involuntarily converted property be replaced with property
acquired from an unrelated party ..................................................................................
Place further restrictions on like-kind exchanges involving personal property ................
Disallow rollover and one-time exclusion on sale of residence to the extent of previously claimed depreciation ..........................................................................................
Require registration of certain corporate tax shelters .......................................................
Require reporting of payments to corporations rendering services to Federal agencies
Increase penalties for failure to file correct information returns .......................................
Extend IRS user fees .........................................................................................................
Apply failure-to-pay penalty to substitute returns ..............................................................
Repeal exemption for withholding on gambling winnings from bingo and keno in excess of $5,000 ...............................................................................................................
Require tax reporting for payments to attorneys ..............................................................
Repeal advance refunds of diesel fuel tax for diesel cars and light trucks 1 ..................
Extend oil spill excise tax 1 ................................................................................................
Impose excise taxes on kerosene as diesel fuel 1 ...........................................................
Permanently extend luxury excise tax on passenger vehicles 1 ......................................
Extend and modify FUTA provisions:
Extend FUTA surtax 1 ....................................................................................................
Accelerate deposit of unemployment insurance taxes .................................................

1997

1998

1999

2000

2001

2002

1996–2002

.............
.............

0.1
*

0.2
*

0.3
*

0.4
0.1

1.3
0.2

.............
.............
.............
.............
.............
.............
.............

0.2
*
–*
*
0.6
0.2
*

0.4
*
–*
0.1
0.7
–*
*

0.4
*
–*
0.1
0.6
0.1
*

0.4
*
–*
0.1
0.7
0.1
*

2.0
0.2
–*
0.5
4.1
0.4
*

.............
.............

0.1
–0.1

0.2
0.1

0.3
0.1

0.2
0.1

0.1
0.1

1.1
0.3

.............
–*
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............
.............

0.1
*
0.2
*
0.1
0.1
0.1
*
*
0.2
*
0.2
0.1

0.1
0.7
0.2
*
0.1
0.1
0.2
*
*
0.9
*
0.2
0.1

0.1
0.8
0.2
*
0.1
0.1
0.5
*
*
1.1
0.1
0.3
0.1

0.1
0.7
0.2
*
0.1
0.1
0.8
*
*
1.0
0.1
0.3
*

0.1
0.6
0.1
*
0.1
0.1
1.0
*
*
0.9
0.1
0.3
*

0.1
0.6
*
0.1
0.1
0.2
1.1
*
*
0.9
0.1
0.3
*

0.5
3.4
0.9
0.2
0.5
0.8
3.7
0.2
0.1
4.9
0.4
1.6
0.3

0.1

0.8

.............
.............
*

0.2
0.2
*

0.3
0.2
*

0.1
0.2
*

*
0.2
*

1.2
1.1
0.1

.............
.............

*
*

*
0.1

.............
.............
.............
.............
.............
*

*
.............
*
*
.............
*

*
*
*
*
.............
*

*
*
0.1
*
*
*

*
*
0.3
0.1
0.1
0.1

*
.............
*
*
.............
.............

*
.............
*
0.2
*
.............

*
*
*
0.2
*
.............

*
*
*
0.2
*
0.2

*
*
*
0.2
*
0.3

*
*
0.1
1.4
0.2
0.7

.............
.............

0.8
.............

1.2
.............

1.2
1.3

4.4
1.3

Subtotal, Eliminate unwarranted benefits .................................................................

0.1

3.8

5.6

7.5

8.3

8.5

9.9

43.6

Other provisions that affect receipts:
Assess fees for examination of FDIC-insured banks and bank holding companies
(receipt effect) 1 ..............................................................................................................
Expand fees collected under the securities laws ..............................................................
Establish IRS continuous levy ...........................................................................................
Extend GSP and modify other trade provisions 1 .............................................................
Increase deduction for self-employed health insurance ....................................................
Increase employee contributions to CSRS and FERS .....................................................
Deter expatriation tax avoidance .......................................................................................
Tighten rules for taxing foreign trusts ................................................................................
Extend corporate environmental tax 2 ................................................................................
Improve compliance by tax-exempt entities through intermediate sanctions and other
measures ........................................................................................................................

.............
.............
.............
–0.6
–*
0.1
*
0.1
.............

0.1
0.3
0.4
–0.6
–0.1
0.4
0.2
0.3
1.0

0.1
0.3
0.4
–0.5
–0.1
0.5
0.2
0.3
0.6

0.1
0.3
0.4
–0.6
–0.2
0.6
0.4
0.3
0.7

0.1
0.3
0.3
–0.6
–0.4
0.6
0.4
0.3
0.7

0.1
0.4
0.2
–0.3
–0.5
0.6
0.5
0.3
0.7

0.1
0.4
0.1
.............
–0.5
0.6
0.5
0.3
0.8

0.5
2.0
1.8
–3.2
–1.9
3.4
2.3
2.1
4.5

ANALYTICAL PERSPECTIVES
Table 3–3.

EFFECT OF PROPOSALS ON RECEIPTS—Continued
(In billions of dollars)
Estimate
1996

1997

1998

1999

2000

2001

2002

1996–2002

Modify Federal pay raise (receipt effect) ...........................................................................
Provide tax relief to troops in Bosnia ................................................................................

.............
–*

–0.1
–*

–0.1
.............

–0.8
–*

Subtotal, Other ...........................................................................................................

–0.4

1.8

1.7

1.9

2.2

10.7

Subtotal, Eliminate unwarranted benefits and other provisions that affect receipts .................................................................................................................

–0.3

5.6

7.3

9.3

10.0

10.3

12.1

54.3

Modify earned income tax credit (EITC) ................................................................................

0.3

0.4

2.3

Total effect of proposals 1 ...................................................................................................

–1.6

–11.7

–6.3

–7.8

–11.0

–11.6

–10.7

–60.8

Extend expired trust fund excise taxes:
Extend superfund trust fund excise taxes 1 .......................................................................
Extend airport and airway trust fund taxes 1 .....................................................................
Extend LUST trust fund taxes 1 .........................................................................................

0.1
0.4
*

0.7
4.7
0.1

0.7
4.9
0.1

0.7
5.2
0.1

0.7
5.5
0.1

0.7
5.9
0.1

0.7
6.2
0.1

4.2
32.8
0.8

Total effect of extending expired trust fund excise taxes 1 ..........................................

0.5

5.5

5.7

6.0

6.3

6.7

7.0

37.7

* $50 million or less.
1 Net of income offsets.
2 Net of deductibility for income tax purposes.

FEDERAL RECEIPTS

Table 3–4.

RECEIPTS BY SOURCE

(In millions of dollars)
Source

1995
actual

1996
estimate

1997
estimate

Individual income taxes (federal funds):
Withheld ................................................................
499,927 535,566 567,153
Proposed Legislation (PAYGO) ............................ ................. ¥1,285 ¥17,201
Other .....................................................................
175,855 186,071 187,818
Refunds ................................................................. ¥85,538 ¥89,479 ¥92,668
Total net individual income taxes ........................

590,244

630,873

645,102

Corporation income taxes:
Federal funds:
Gross Collections .............................................
173,810 184,632 200,143
Proposed Legislation (PAYGO) ....................... .................
136
2,113
Refunds ............................................................. ¥17,418 ¥18,019 ¥18,510
Total Federal funds net corporation income
taxes .................................................................

166,749

183,746

Trust funds:
Gross Collections (Hazardous substance
superfund) ....................................................
612
359
Proposed Legislation (PAYGO) ....................... ................. .................

10
1,222

Total net corporation income taxes .....................

156,392

157,004

167,108

184,978

Social insurance taxes and contributions (trust
funds):
Employment taxes and contributions:
Old-age and survivors insurance (Off-budget)
Disability insurance (Off-budget) ......................
Hospital insurance ............................................
Railroad retirement:
Social Security equivalent account .............
Rail pension and supplemental annuity ......

284,091
66,988
96,024

311,713
55,728
101,848

333,335
54,680
108,770

1,518
2,424

1,498
2,399

1,508
2,451

Total employment taxes and contributions ..........

451,045

473,186

500,744

On-budget .........................................................
Off-budget .........................................................

99,966
351,079

105,745
367,441

112,729
388,015

Source

Proposed Legislation (PAYGO) ................... .................
Total Federal fund excise taxes ...........................
Trust funds:
Highway ............................................................
Proposed Legislation (PAYGO) ...................
Airport and airway ............................................
Proposed Legislation (PAYGO) ...................
Aquatic resources .............................................
Black lung disability insurance .........................
Inland waterway ................................................
Hazardous substance superfund .....................
Proposed Legislation (PAYGO) ...................
Oil spill liability ..................................................
Proposed Legislation (PAYGO) ...................
Vaccine injury compensation ...........................
Leaking underground storage tank ..................
Proposed Legislation (PAYGO) ...................

25,412

25,910

22,611
24,564
24,900
.................
¥10
4
5,534
1,383 .................
.................
898
6,251
306
320
325
608
620
633
103
125
131
867
261 .................
.................
102
883
211 ................. .................
.................
34
294
138
123
123
165
41 .................
.................
13
174
33,718

Total excise taxes ...................................................

57,484

53,886

59,628

Estate and gift taxes ..............................................
14,763
15,924
Proposed Legislation (PAYGO) ............................ ................. .................

17,067
10

Total estate and gift taxes .....................................

14,763

15,924

17,077

Customs duties:
Federal funds ........................................................
18,573
Proposed Legislation (PAYGO) ....................... .................
Trust funds ............................................................
728

19,231
¥706
788

20,253
¥675
876

Total customs duties ..............................................

19,301

19,313

20,454

138

149

153

336
281
23,378
23,752
................. .................

251
22,580
92

6,180
6,233
................. .................
1,781
1,580

6,690
307
1,598

24,047
5,739
24

25,006
5,806
29

Total unemployment insurance ............................

28,878

29,810

30,841

Other retirement contributions:
Federal employees’ retirement—employee
contributions .................................................
4,461
Proposed Legislation (PAYGO) ................... .................
Contributions for non-Federal employees 2 ....
89
Proposed Legislation (PAYGO) ................... .................

4,359
90
89
1

4,144
356
88
2

Total other retirement contributions .....................

4,550

4,539

4,590

Total miscellaneous receipts .................................

Total social insurance taxes and contributions .

484,473

507,535

536,175

On-budget .............................................................
Off-budget .............................................................

133,394
351,079

140,094
367,441

148,160
388,015

Total budget receipts .............................................
On-budget .............................................................
Off-budget .............................................................

7,173
5,796
7,162
4,241
13
1,520

¥382

28,474

23,158
5,696
24

7,189
5,872
6,920
4,010
205
1,598

1997
estimate

30,543

Unemployment insurance:
State taxes deposited in Treasury 1 ................
Federal unemployment tax receipts 1 .............
Railroad unemployment tax receipts 1 ............

7,216
5,878
8,491
3,794
616
946

26,941

1996
estimate

Total trust funds excise taxes ..............................

MISCELLANEOUS RECEIPTS: 3
Miscellaneous taxes ..............................................
United Mine Workers of America combined benefit fund .............................................................
Deposit of earnings, Federal Reserve System ....
Proposed Legislation (PAYGO) .......................
Fees for permits and regulatory and judicial
services .............................................................
Proposed Legislation (PAYGO) .......................
Fines, penalties, and forfeitures ...........................
Restitutions, reparations, and recoveries under
military occupation ............................................
Gifts and contributions ..........................................
Refunds and recoveries .......................................

Excise taxes:
Federal funds:
Alcohol taxes ....................................................
Tobacco taxes ..................................................
Transportation fuels tax ...................................
Telephone and teletype services .....................
Ozone depleting chemicals and products .......
Other Federal fund excise taxes .....................

1995
actual

.................
131
.................

7
139
¥5

7
151
¥5

31,944

32,136

31,824

1,355,213 1,426,775 1,495,238
1,004,134 1,059,334 1,107,223
351,079 367,441 388,015

MEMORANDUM
Federal funds ........................................................
842,214 893,132 926,831
Trust funds ............................................................
326,739 355,579 377,918
Interfund transactions ........................................... ¥164,819 ¥189,377 ¥197,526
Total on-budget .......................................................
Off-budget (trust funds) .........................................

1,004,134 1,059,334 1,107,223
351,079

367,441

388,015

ANALYTICAL PERSPECTIVES

Table 3–4.

RECEIPTS BY SOURCE—Continued
(In millions of dollars)

Source
Total ..........................................................................

1995
actual

1996
estimate

1997
estimate

1,355,213 1,426,775 1,495,238

1 Deposits by States are State payroll taxes that cover the benefit part of the program. Federal unemployment tax receipts cover administrative costs at both the Federal and State level. Railroad unemployment tax receipts cover both the benefits and
adminstrative costs of the program for the railroads.

2 Represents employer and employee contributions to the civil service retirement and
disability fund for covered employees of Government-sponsored, privately owned enterprises and the District of Columbia municipal government.
3 Includes both Federal and trust funds. Trust fund amounts in miscellaneous receipts are 1995: $619 million; 1996: $575 million; and 1997: $571 million.

4. USER FEES AND OTHER COLLECTIONS
In addition to collecting taxes and other governmental receipts by the exercise of its sovereign powers,
the Federal Government earns income from its various
business-type activities. Examples of this income include the sale of postage stamps and electricity, the
collection of fees for admittance to national parks, premiums for deposit insurance, and rents and royalties
for the right to extract oil from the Outer Continental
shelf. Because these collections stem from business-type
activities, as opposed to exercise of sovereign powers,
they are subtracted from gross outlays rather than
added to the taxes and other governmental receipts
discussed in the previous chapter. Because these collections reduce outlays, they are called ‘‘offsetting collections.’’ The purpose of this treatment is to produce
budget totals for receipts, outlays, and budget authority
in terms of the amount of resources allocated governmentally, through collective political choice rather than
through the market.
Offsetting collections are classified into two major
categories: offsetting receipts, which are deposited in
receipt accounts; and offsetting collections credited to
appropriations (expenditure) accounts, which are deposited directly in these accounts and usually can be spent
without further action by the Congress. Both categories
include collections from other accounts within the Government as well as the public. Chapter 24, ‘‘Budget
System and Concepts,’’ explains the budgetary treatment of these collections more fully.

Table 4–1.

The term ‘‘user fee’’ is not a budgetary category.
It is a general term that refers to amounts assessed
against identifiable recipients for special benefits derived from Federal activities beyond those received by
the general public. Depending primarily on whether the
user charge is based on the Government’s sovereign
power or business-type activity, it may be classified
as a governmental receipt or an offsetting collection.
As shown in Table 4–1, total offsetting collections
from the public (including those proposed in this budget) are estimated to be $190.4 billion in 1997. This
is only 13 percent as large as the governmental receipts
discussed in the previous chapter. Table 4–1 divides
this total between offsetting receipts and offsetting collections credited to appropriations accounts and shows
major subcategories of each. Table 4–3 provides more
detail for offsetting receipts collected from the public
and offsetting receipts collected from other accounts
within the Government.
The budget contains a variety of user fee and other
collections proposals that would yield $1.4 billion in
1997 and $11.2 billion from 1997 through 2002. These
proposals establish, increase, or extend fees in order
to recover more of the costs of providing government
services. Table 4–2 splits the proposals between discretionary and mandatory categories for the appropriate
scoring under the Budget Enforcement Act of 1990
(BEA). It includes offsetting collections and user fees
classified as governmental receipts.

OFFSETTING COLLECTIONS FROM THE PUBLIC
(In millions of dollars)
Estimate
Type

1995 actual
1996

Collections deposited in receipt accounts:
Medicare premiums ...................................................................................................................................................................................................
Military assistance trust fund property sales ............................................................................................................................................................
Outer Continental Shelf payments, naval petroleum reserve lease and other undistributed offsetting receipts ...................................................
Spectrum auction proceeds, undistributed ................................................................................................................................................................
Sale of property and services, interest income and all other collections deposited in receipt accounts ..............................................................

1997

20,241
12,469
2,419
7,644
20,343

19,842
13,020
4,489
4,350
21,710

20,287
12,230
4,098
3,600
20,129

Subtotal, collections from the public deposited in receipt accounts ...................................................................................................................
Collections credited to appropriations accounts:
Postal Service stamp sales and other collections ....................................................................................................................................................
Deposit insurance funds ............................................................................................................................................................................................
Tennessee Valley Authority and Power Administration collections .........................................................................................................................
Commodity Credit Corporation loan repayments and other collections ..................................................................................................................
Other loan repayments ..............................................................................................................................................................................................
Loan guaranty and other insurance premiums, interest income and all other collections credited to appropriations accounts ..........................

63,116

63,411

60,344

53,311
26,272
8,956
10,824
7,028
45,335

55,779
16,715
9,040
7,257
7,967
43,681

57,724
5,483
9,006
7,604
7,069
43,201

Subtotal, collections from the public credited to appropriation accounts ............................................................................................................
Offsetting collections from the public ........................................................................................................................................................................
Offsetting collections from the public excluding off-budget Postal Service collections ..........................................................................................

151,726
214,842
161,531

140,439
203,850
148,071

130,087
190,431
132,707

ANALYTICAL PERSPECTIVES

Table 4–2.

PROPOSED USER FEES AND OTHER COLLECTIONS
(In millions of dollars)
1997

User fees
Discretionary:
Department of Agriculture:
Animal and Plant Health Inspection Service—inspection, licensing, and permit fees—Collections and spending authority ..
Grain Inspection—Packers and Stockyards Administration—standardization and licensing activities: Collections and
spending authority ...................................................................................................................................................................
Food Safety and Inspection Service—meat, poultry and eggs overtime inspection fees: Collections and spending authority .............................................................................................................................................................................................
Department of Energy:
Decontamination and decommissioning fee extended to foreign purchasers of U.S. enrichment services—Collections .......
Department of Health and Human Services—Food and Drug Administration:
Import user fee to cover inspection/regulatory compliance program—Collections and spending authority ............................
Medical device review and approval—Collections and spending authority ..............................................................................
Department of Transportation:
Aviation-related user fees—Collections and spending authority ................................................................................................
Surface Transportation Board—Collections and spending authority .........................................................................................
Army Corps of Engineers: Wetlands dredging permit application fees—Collections ................................................................
Environmental Protection Agency: Registration fee for pesticide manufacturers—Collections ................................................
Securities and Exchange Commission: Tier 3 fees credited to appropriation—Collections and spending authority .............
Subtotal, discretionary user fees:
Collections ....................................................................................................................................................................................
Spending authority .......................................................................................................................................................................
Net savings ..................................................................................................................................................................................
Mandatory:
Department of Agriculture: Recover costs for oversight of marketing agreements and orders—Collections and spending
authority .......................................................................................................................................................................................
Department of Commerce:
Fisheries management program fees—Collections and spending authority .............................................................................
Patent and Trademark Office surcharges—Collections .............................................................................................................
Department of Education:
Federal Family Education Loan Program fees:
Secondary market offset fee—Collections and spending authority ......................................................................................
Lender and holder subsidy rebate—Collections and spending authority .............................................................................
Increase lender origination fee—Collections and spending authority ...................................................................................
Department of the Interior:
Expand authority for Park Service, BLM and Forest Service fees:
Collections ...............................................................................................................................................................................
Spending authority ..................................................................................................................................................................
Hetch Hetchy Dam rental payments—Collections .....................................................................................................................
Hardrock mining claim and location fee extension—Collections ...............................................................................................
Department of Transportation:
Oil Spill Liability Trust Fund excise tax—Collections .................................................................................................................
Railroad safety inspection fees—Collections ..............................................................................................................................
Vessel tonnage fees—Collections and spending authority ........................................................................................................
Department of the Treasury: Internal Revenue Service letter ruling fees extension—Collections ...........................................
Department of Veterans Affairs: Nonservice-connected medical copayments and per diems extension—Collections ...........
Environmental Protection Agency: Pesticide reregistration fee—Collections and spending authority .....................................
Federal Deposit Insurance Corporation/Federal Reserve: Examination fees for FDIC-insured banks and bank holding
companies:
Bank Insurance Fund—Collections and spending authority ..................................................................................................
Federal Reserve—Collections 1 ..............................................................................................................................................
Federal Emergency Management Agency: Fee to cover 100% of radiological emergency preparedness program—
Collections ....................................................................................................................................................................................
Nuclear Regulatory Commission: Nuclear facility fees—Collections and spending authority ..................................................
Securities and Exchange Commission:
Tier 1 fees—increases in existing fees—Collections 1 ...............................................................................................................
Tier 2 fees—new permanent fees deposited in special fund—Collections and spending authority 1 .....................................

1998

1999

2000

2001

2002

109

15
24

150
150
150
150
150
150
15
15
15
15
15
15
7
7
7
7
7
7
15 ........... ........... ........... ........... ...........
49
49
49
49
49
49
456
388
68

441
388
53

10
10
........... ...........

10
119

35
27
45

35
24
52

32
22
42

33
22
40

34
23
49

36
25
53

12
...........
1
1

17
11
1
2

27
16
1
34

33
25
1
36

43
31
1
37

47
40
1
38

294
294
296
298
299
300
47
49
51
53
55
57
........... ........... ...........
62
62
62
........... ........... ........... ...........
31
31
........... ...........
39
41
42
43
5
19
19
14 ........... ...........
75
92

79
96

82
100

86
104

89
109

93
114

12
12
........... ...........

12
310

47
260

48
270

49
281

50
292

52
304

53
316

Subtotal, mandatory user fees:
Collections ....................................................................................................................................................................................
Spending authority .......................................................................................................................................................................
Net savings ..................................................................................................................................................................................

973
467
506

1,019
511
508

1,537
515
1,022

1,627
595
1,032

1,692
613
1,079

1,731
646
1,085

Total, user fees:
Collections ........................................................................................................................................................................................
Spending authority ...........................................................................................................................................................................
Net savings ......................................................................................................................................................................................

1,429
855
574

1,460
899
561

1,978
903
1,075

2,068
983
1,085

2,133
1,001
1,132

2,172
1,034
1,138

1 Governmental

receipts.

4. USER FEES AND OTHER COLLECTIONS

Discretionary: The following proposed fees are classified as discretionary because action is required by
the Appropriations Committees. In most cases, the proposed levels are tied to the appropriations requests for
the specific activity.
Department of Agriculture
Animal and Plant Health Inspection Service (APHIS)
fees.—The budget proposes to establish three fees for
certain APHIS activities:
• Fees to cover cost of providing animal welfare inspections would be charged to recipients of APHIS
services such as animal research centers, humane
societies and kennels.
• Fees to cover cost of issuance of biotechnology permits would be charged to firms that manufacture
genetically engineered fruit and vegetable commodities, parasitic insects, and animals.
• Fees to cover cost of veterinary biologic licensing,
inspection, and testing activities would be paid
by veterinary biologic companies that specialize
in the production and distribution of animal
sperm.
Grain inspection standardization and packers and
stockyards licensing fees.—The Administration proposes
to allow the Grain Inspection, Packers and Stockyards
Administration to charge a fee for equipment testing,
quality control, and other services necessary to maintain uniform grain standards. In addition, a licensing
fee is proposed to be charged to livestock market dealers and market agencies, meat packers, and live poultry
dealers equal to the cost of administering programs
under the Packers and Stockyards Act.
Meat, poultry, and egg overtime inspection fee.—The
budget includes a proposal to require the meat, poultry,
and egg industries to reimburse the Federal Government for the cost of all overtime inspections provided
by the Food Safety and Inspection Service. Currently,
such fees are required at some FSIS-inspected establishments, but not at others. The Government would
continue to pay the full cost of a primary, eight-hour
shift.
Department of Energy
Decontamination and decommissioning fee.—The
budget includes a proposal to assess a fee on foreign
customers of Government enrichment services, similar
to the fee paid by domestic purchasers. The fees would
be deposited in the Uranium Enrichment Decontamination and Decommissioning fund to carry out environmental cleanup of the Government’s three uranium enrichment plants.
Department of Health and Human Services,
Food and Drug Administration (FDA)
Import inspection fees.—Legislation will be proposed
to assess food importers a fee for import entry inspections. FDA is responsible for inspection of imported food
products at the port of entry. Fee proceeds would be

used to improve the effectiveness of FDA’s regulatory
compliance program.
Medical device user fee.—Legislation will be proposed
to assess fees on medical device manufacturers who
present medical devices for pre-market review. The proceeds would be used to expedite the device review and
approval process.
Department of Transportation
Aviation-related user fees.—Legislation will be proposed to establish fees for services or products provided
by the Federal Aviation Administration. These fees
would be used to offset the cost of supporting the operation and maintenance of a continued safe and efficient
National Airspace System.
Surface Transportation Board.—The Administration
proposes to create a fee mechanism to completely offset
the expenses of the Surface Transportation Board
(STB), the successor to the Interstate Commerce Commission (ICC). The fees would be collected from those
who benefit from the continuation of the ICC functions
transferred to the STB, i.e., railroads and shippers.
Army Corps of Engineers
Wetlands permit fees.—Legislation will be proposed
to increase fees for the issuance of wetlands regulatory
permits for commercial activities. The fees would be
deposited in a special Treasury account and would be
available to be used for the regulatory program to the
extent provided in appropriations acts.
Environmental Protection Agency (EPA)
Pesticide registration fee.—Legislation will be proposed to impose fees on manufacturers of pesticides
to recover the cost of the Pesticide Registration program. Congressional action is required to activate a
user fee rule promulgated by EPA that was subsequently suspended by Congress through 1997. The proceeds would be subject to appropriations.
Mandatory fees: The following fees are classified as
mandatory because they will be included in authorizing
legislation.
Department of Agriculture
Agricultural Marketing Service (AMS) fees.—The
Administration proposes to authorize local marketing
administrators to collect fees to recover AMS’ cost of
administering commodity marketing orders and agreements. Marketing orders help stabilize market prices
for milk, fruit, and other specialty crops by prescribing
certain sale, quality, and quantity guidelines. Currently, costs at the local level are financed by assessments on commodity producers and handlers, while
costs of these orders at the national level are funded
through appropriations. The proposal would increase
the existing assessments.

ANALYTICAL PERSPECTIVES

Department of Commerce

Department of Transportation

Fisheries management program fees.—The Administration proposes to require the Secretary of Commerce
to collect fees from holders of fishing quotas. The fees
would be set as percentages of the authorized harvest
and would be used for the development and implementation of fishery programs, including social and economic studies, and fisheries management.
Extend surcharge on patent fees.—The budget proposes to extend the Patent and Trademark Office’s authority to collect the patent surcharge fee through 2002.
The current authority expires in 1998. The fee is
charged to patent applicants to pay for processing applications and granting patents.

Oil Spill Liability Trust Fund.—The budget proposes
to reauthorize the Oil Spill Liability Trust Fund excise
tax of $.05/barrel that expired on December 31, 1994.
In addition to reauthorizing the tax, the proposal lifts
the cap on the fund from $1.0 billion to $2.5 billion.
The proceeds of the tax on oil importers are used to
fund numerous activities related to oil spill prevention
and clean-up. Some of these activities, such as Coast
Guard operations funding, are subject to appropriation,
while others, such as emergency clean-up are automatically available. The fund balance, (currently over $1.0
billion) is maintained to be available for clean-up in
case of a major oil spill.
Railroad safety inspection fee.—Legislation will be
proposed to permanently extend the railroad safety inspection fees that were enacted in the Omnibus Budget
Reconciliation Act of 1990. This fee offsets the costs
incurred by the Federal Railroad Administration for
inspection, enforcement, and related activities to ensure
the safe operation of passenger and freight railroads.
The fee expired at the end of 1995.
Vessel tonnage fees.—The budget proposes to extend
fees collected by the Customs Service based on the
cargo-carrying capacity of a vessel entering a U.S. port.
These fees were set to expire at the end of 1998. The
collections are credited to the Department of Transportation to offset costs incurred by the Coast Guard for
services provided to the Merchant Marine industry.

Department of Education
Federal Family Education Loan (FFEL) program
lender and secondary market fees.—The budget includes
a proposal to establish two new fees to offset the generous profits lenders and secondary markets achieve
through participation in the FFEL program. These fees
are (1) a monthly fee on all secondary markets that
hold Federally guaranteed student loans, equivalent to
the fee that the Student Loan Marketing Association
is now required to pay; and (2) a lender and holder
subsidy rebate, paid to the Secretary twice each year,
based on the unpaid principal amount of each loan
held. Legislation will also be proposed to increase the
current lender origination fee.
Department of the Interior
Admission, recreation, and commercial user fees.—
The budget proposes to authorize the National Park
Service to increase certain admission, recreation, and
commercial user fees. In addition, eighty percent of new
receipts collected by the National Park Service, Bureau
of Land Management, and Forest Service would be
automatically available to the bureau collecting the fees
in the following year, beginning in fiscal year 1998,
for visitor services and facilities.
Hetch Hetchy Dam rental payments.—The budget includes a proposal to raise the annual rental for the
use of land within Yosemite National Park by the City
of San Francisco for a dam and reservoir that supplies
drinking water to the city. The amount would be determined annually by the Secretary of the Interior, but
must not be less than $597,000. The collections would
be placed in a separate fund, to be used subject to
appropriations for the annual operation of Yosemite or
other national parks in California.
Hardrock mining fees.—The Administration proposes
to extend, beyond 1998, the $100 hardrock claim maintenance fee and the $25 location fee assessed on
hardrock mine claimants on Federal lands. These fees
were initially established in the Omnibus Budget Reconciliation Act of 1993. In addition, the fees would be
adjusted annually based on the Consumer Price Index.
The fees are used to offset the cost associated with
operating the mining law program. They are subject
to appropriation.

Department of the Treasury—Internal Revenue
Service
Internal Revenue Service fees.—The Administration
proposes to extend the IRS’ authority to charge fees
for letter rulings, determination letters, and opinion letters. The IRS provides written responses to questions
from individuals, corporations and organizations relating to their tax status or the effects of particular transactions for tax purposes. The fees charged for these
requests, which are scheduled to expire on September
30, 2000, are proposed to be extended through September 30, 2002.
Department of Veterans Affairs
Medical care prescription co-payments and per
diems.—The budget proposes to permanently extend
VA’s authority to collect prescription co-payments and
per diems for hospital and nursing home visits from
veterans for the treatment of nonservice-connected disabilities. The current authority expires in 1998.
Environmental Protection Agency
Pesticide reregistration fee.—Legislation will be proposed to increase fees collected from pesticide manufacturers in support of re-registration of pesticides currently in use. The fees would also be extended beyond
the current expiration date in order to fund timely completion of the reregistration program. Fees are paid
by industry to offset costs incurred by the accelerated
reregistration and expedited processing of pesticides.

4. USER FEES AND OTHER COLLECTIONS

Federal Deposit Insurance Corporation (FDIC)
and Federal Reserve (Fed)
State bank examination fee.—The Administration proposes to require the FDIC and the Federal Reserve
to assess fees for examinations of FDIC-insured banks
and bank-holding companies. The costs of such examinations are currently funded from deposit insurance
premiums and Fed earnings from monetary policy activities. The FDIC fee proceeds would be used to finance
the examinations operation. The Fed proceeds would
be transferred to Treasury annually in the form of surplus earnings.
Federal Emergency Management Agency (FEMA)
Radiological emergency preparedness fee.—The budget
includes a proposal to reauthorize FEMA’s assessments
on Nuclear Regulatory Commission (NRC) licensees to
cover 100 percent of the cost of providing site-specific
services that directly contribute to the fulfillment of
emergency preparedness requirements needed for NRC
licensing. This proposal would extend the authority
through 2002.

Securities and Exchange Commission
Securities-related fees.—The Administration proposes
to increase certain fees collected under the securities
laws as part of a legislative package to provide the
Securities and Exchange Commission (SEC) with a
sound and stable funding structure. This proposal calls
for three tiers of fee income. Tier 1 would be comprised
of permanent increases in existing registration and tender offer receipts collected under the securities laws.
Tier 2 would establish a new set of permanent transaction fees in the securities laws affecting the overthe-counter market and certain bonds. These fees would
be credited to a special fund in the Treasury and the
SEC would have authority to spend such sums as may
be deposited in this fund. The authority for Tiers 1
and 2 is mandatory. Tier 3 would provide the appropriations committee with authority to increase certain
specified receipts collected under the securities laws,
which would be deposited as offsetting collections to
the SEC’s appropriation. The collection and use of the
Tier 3 fees are discretionary, and thus would be contingent on appropriation action.

Nuclear Regulatory Commission
Nuclear Regulatory Commission (NRC) fees.—Under
current law, the NRC must recover 100% of its costs
from licensing, inspection and annual fees charged to
its applicants and licensees through 1998. Unless the
law is extended, the fee coverage requirement will revert to 33 percent of NRC costs. The budget includes
a proposal to extend the fees at 100 percent of NRC’s
cost of operations through 2002.

OFFSETTING RECEIPTS
Table 4–3 itemizes all offsetting collections deposited
in receipt accounts. These include payments from one
part of the Government to another, called intragovernmental transactions, and collections from the public.
These receipts are offset (deducted) from outlays in the
Federal budget. In total, offsetting receipts are estimated at $328.4 billion in 1997.

ANALYTICAL PERSPECTIVES

Table 4–3.

OFFSETTING RECEIPTS BY TYPE
(In millions of dollars)

Source

1995
actual

INTRAGOVERNMENTAL TRANSACTIONS
On-budget receipts:
Federal intrafund transactions:
Distributed by agency:
Interest from the Federal Financing Bank ..............
7,422
Interest on Government capital in enterprises ........
1,828
Other .........................................................................
997
Proposed Legislation (PAYGO) ........................... .............
Total Federal intrafunds ...........................................

10,247

1996
1997
estimate estimate

6,116 4,702
1,729 1,545
1,074 1,058
37 .............
8,956

7,305

3,770
67

3,838
¥13

Total trust intrafunds ................................................

4,121

3,837

3,825

14,368 12,793 11,130

Interfund transactions:
Distributed by agency:
Federal fund payments to trust funds:
Contributions to insurance programs:
Military retirement fund ................................... 11,470 10,699 11,181
Supplementary medical insurance .................. 36,988 61,331 59,456
Proposed Legislation (non-PAYGO) ........... ............. ............. 7,867
Hospital insurance ...........................................
4,504 4,627 4,973
Railroad social security equivalent fund .........
3,126 3,239 3,305
Rail industry pension fund ..............................
177
181
186
Civilian supplementary retirement contributions ............................................................. 20,277 20,900 21,316
Proposed Legislation (PAYGO) .................. ............. .............
¥23
Unemployment insurance ................................
1,233
675
687
Other contributions ..........................................
706
955
886
Miscellaneous payments .....................................
505
544
580
78,986 103,151 110,414

Trust fund payments to Federal funds:
Repayment of loans or advances to trust funds
3,024
Quinquennial adjustment for military service
credits .............................................................. .............
Other ....................................................................
976
Subtotal ................................................................
Total interfunds distributed by agency ....................

4,000

3,081

3,195

332 .............
1,035
993
4,448

4,188

82,986 107,599 114,602

Undistributed by agency:
Employer share, employee retirement (on-budget): 2
Civil service retirement and disability insurance
CSRDI from Postal Service ................................
Hospital insurance (contribution as employer) 1
Postal employer contributions to FHI .................
Military retirement fund ........................................
Other Federal employees retirement ..................

7,732 7,767 7,927
5,431 5,637 5,825
1,885 1,817 1,868
564
549
562
12,238 11,250 11,192
111
118
125

Total employer share, employee retirement (onbudget) .............................................................

27,961 27,138 27,499

Interest received by on-budget trust funds ......... 59,867 61,163 61,066
Proposed Legislation (non-PAYGO) ............... .............
¥5
746
Total interfund transactions undistributed by agency ..........................................................................

1996
1997
estimate estimate

Total on-budget receipts ................................................... 185,182 208,688 215,043

4,120
1

Subtotal ................................................................

1995
actual

Total interfund transactions .......................................... 170,814 195,895 203,913

Trust intrafund transactions:
Distributed by agency:
Payments to railroad retirement ..............................
Other .........................................................................

Total intrafund transactions ..........................................

Source

87,828 88,296 89,311

Off-budget receipts:
Interfund transactions:
Distributed by agency:
Federal fund payments to trust funds:
Old-age, survivors, and disability insurance .......
Undistributed by agency:
Employer share, employee retirement (off-budget) .....................................................................
Interest received by off-budget trust funds .........

6,432 6,291 6,664
33,305 36,440 39,361

Total off-budget receipts: ..................................................

45,212 48,834 53,044

5,475

6,103

7,019

Total intragovernmental transactions .............................. 230,394 257,522 268,087
PROPRIETARY RECEIPTS FROM THE PUBLIC
Distributed by agency:
Interest:
Interest on foreign loans and deferred foreign collections ..........................................................................
Interest on deposits in tax and loan accounts ............
Other interest (domestic—civil) 3 .................................

1,018
946
3,010

679
933
2,077

644
1,078
3,188

Total interest .................................................................

4,974

3,689

4,910

Royalties and rents ...........................................................
1,090 1,138
Proposed Legislation (PAYGO) ................................... ............. .............

1,154
1

Sale of products:
Sale of timber and other natural land products ..........
564
Sale of minerals and mineral products .......................
423
Proposed Legislation (PAYGO) ............................... .............
Sale of power and other utilities ..................................
737
Other 3 ...........................................................................
102
Total sale of products ..................................................

1,826

824
572
21
796
47

816
416
79
852
39

2,260

2,202

Fees and other charges for services and special benefits:
Medicare premiums and other charges (trust funds) . 20,241 19,842 20,287
Proposed Legislation (PAYGO) ............................... ............. ............. ¥288
Nuclear waste disposal revenues ................................
597
630
637
Veterans life insurance (trust funds) ...........................
272
281
258
Other 3 ..........................................................................
2,095 2,010 2,135
Proposed Legislation (PAYGO) ............................... ............. .............
57
Total fees and other charges ......................................

23,205 22,763 23,086

Sale of Government property:
Military assistance program sales (trust funds) ..........
Other .............................................................................

12,469 13,020 12,230
57
38
39

Total sale of Government property ..............................

12,526 13,058 12,269

Realization upon loans and investments:
Dollar repayments of loans, Agency for International
Development ............................................................
539 ............. .............
Foreign military credit sales .........................................
674
634
613
Negative subsidies and downward reestimates ..........
1,087 3,364 1,593
Proposed Legislation (non-PAYGO) ........................ .............
161
260
Proposed Legislation (PAYGO) ............................... ............. 1,386 .............
Repayment of loans to United Kingdom .....................
104
106
108
Other .............................................................................
162
123
128
Total realization upon loans and investments .............

2,566

5,774

2,702

4. USER FEES AND OTHER COLLECTIONS

Table 4–3.

OFFSETTING RECEIPTS BY TYPE—Continued
(In millions of dollars)

Source

1995
actual

1996
1997
estimate estimate

Recoveries and refunds 3 ................................................
1,932 1,717
Proposed Legislation (non-PAYGO) ............................ .............
11
Proposed Legislation (PAYGO) ................................... ............. .............
Miscellaneous receipt accounts 3 ....................................
2,304 1,572
Proposed Legislation (non-PAYGO) ............................ ............. .............
Total proprietary receipts from the public distributed by
agency ..........................................................................

1,877
49
100
1,547
7

50,423 51,982 49,904

Undistributed by agency:
Other interest: Interest received from Outer Continental
Shelf escrow account ...................................................
1 .............
905
Rents and royalties on the Outer Continental Shelf:
Rents and bonuses ......................................................
414
401
839
Royalties .......................................................................
2,004 2,288 2,269
Sale of major assets ........................................................ ............. .............
85
Proposed Legislation (PAYGO) ................................... ............. 1,800 .............
Total proprietary receipts from the public undistributed
by agency .....................................................................
Total proprietary receipts from the public 4 ...................

2,419

4,489

4,098

52,842 56,471 54,002

Source

1995
actual

1996
1997
estimate estimate

OFFSETTING GOVERNMENTAL RECEIPTS
Distributed by agency:
Regulatory fees .................................................................
2,565 2,505
Proposed Legislation (non-PAYGO) ............................ ............. .............
Proposed Legislation (PAYGO) ................................... .............
22
Other .................................................................................
65
63
Undistributed by agency:
Spectrum auction proceeds ..............................................
7,644 4,200
Proposed Legislation (PAYGO) ................................... .............
150
Total offsetting governmental receipts ............................

10,274

6,940

2,598
22
59
63
1,600
2,000
6,342

Total offsetting receipts ................................................. 293,510 320,933 328,431
1 Interchange

receipts between the social security and railroad retirement funds place the social
security funds in the same position they would have been if there were no separate railroad retirement system.
2 Includes provision for covered Federal civilian employees and military personnel.
3 Includes both Federal funds and trust funds.
4 Consists of:
1995
1996
1997
actual
estimate
estimate
On-budget:
Federal funds .......................................................................
Trust funds ...........................................................................
Off-budget:
Trust funds ...........................................................................

18,389
34,444

22,259
34,200

20,452
33,538

5. TAX EXPENDITURES
Tax expenditures are revenue losses due to preferential provisions of the Federal tax laws, such as
special exclusions, exemptions, deductions, credits, deferrals, or tax rates. Tax expenditures are an alternative to other Government policy instruments, such
as direct expenditures and regulations. The Congressional Budget Act of 1974 (Public Law 93–344) requires
that a list of tax expenditures be included in the budget.
Tax expenditures relating to the individual and corporate income taxes are considered first in this chapter,

followed by those relating to the unified transfer tax.
The supplement at the end of the chapter presents
major tax expenditures in the income tax ranked by
revenue loss.
Tax expenditures are estimated for fiscal years
1995–2001 using three methods of accounting: revenue
loss, outlay equivalent, and present value. The present
value approach provides estimates of the revenue losses
for tax expenditures that involve deferrals of tax payments into the future or have similar long-term effects.

TAX EXPENDITURES IN THE INCOME TAX
Tax Expenditure Estimates
The Treasury Department prepared all tax expenditure estimates presented here based upon income tax
law enacted as of December 31, 1995. Expired or repealed provisions are not listed if their revenue effects
result only from taxpayer activity occurring before fiscal
year 1995.
The total revenue loss estimates for tax expenditures
for fiscal years 1995–2001 are displayed by the budget’s
functional categories in table 5–1. Descriptions of the
specific tax expenditure provisions follow the tables of
estimates and discussion of general features of the tax
expenditure concept.
As in prior years, two baseline concepts—the normal
tax baseline and the reference tax law baseline—are
used to identify tax expenditures. For the most part,
the two concepts coincide. However, items treated as
tax expenditures under the normal tax baseline, but
not the reference tax law baseline, are indicated by
the designation ‘‘normal tax method’’ in the tables. The

revenue losses for these items are zero using the reference tax rules. The alternative baseline concepts are
discussed in detail following the estimates.
Table 5–2 reports the respective portions of the total
revenue losses that arise under the individual and corporate income taxes. Listing revenue loss estimates
under the individual and corporate headings does not
imply that these categories of filers benefit from the
special tax provisions in proportion to the respective
tax expenditure amounts shown. Rather, these breakdowns show the specific tax accounts through which
the various provisions are cleared. The ultimate beneficiaries of corporate tax expenditures, for example,
could be stockholders, employees, customers, or others,
depending on the circumstances.
Table 5–6 at the end of this chapter ranks the major
tax expenditures by fiscal year 1997 revenue loss. This
table merges several individual entries provided in
table 5–1; for example, table 5–6 contains one merged
entry for charitable contributions instead of the three
separate entries found in table 5–1.

ANALYTICAL PERSPECTIVES

TABLE 5–1.

TOTAL REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES IN THE INCOME TAX
(In millions of dollars)
Total Revenue Loss
Provision
1995

1996

1997

1998

1999

2000

2001

National defense:
Exclusion of benefits and allowances to armed forces personnel ....................................................................................................

2,000

2,060

2,080

2,095

2,120

2,140

2,160

10,595

International affairs:
Exclusion of income earned abroad by United States citizens .........................................................................................................
Exclusion of income of foreign sales corporations ............................................................................................................................
Inventory property sales source rules exception ...............................................................................................................................
Interest allocation rules exception for certain financial operations ...................................................................................................
Deferral of income from controlled foreign corporations (normal tax method) .................................................................................

1,670
1,400
1,300
95
1,700

1,870
1,500
1,400
95
1,800

2,100
1,600
1,500
95
2,000

2,355
1,700
1,600
95
2,200

2,645
1,800
1,700
95
2,400

2,965
1,900
1,800
95
2,600

3,330
2,000
1,900
95
2,900

13,395
9,000
8,500
475
12,100

1,635 1,740 1,840 1,945 2,065 2,190 2,320
10,360
1,185
675
285
120
40
5 ...........
450
325 ........... ........... ........... ........... ........... ........... ...................

Energy:
Expensing of exploration and development costs:
Oil and gas ......................................................................................................................................................................................
Other fuels .......................................................................................................................................................................................
Excess of percentage over cost depletion:
Oil and gas ......................................................................................................................................................................................
Other fuels .......................................................................................................................................................................................
Alternative fuel production credit ........................................................................................................................................................
Exception from passive loss limitation for working interests in oil and gas properties ...................................................................
Capital gains treatment of royalties on coal ......................................................................................................................................
Exclusion of interest on State and local IDBs for energy facilities ...................................................................................................
New technology credit .........................................................................................................................................................................
Alcohol fuel credit 1 .............................................................................................................................................................................
Tax credit and deduction for clean-fuel burning vehicles and properties .........................................................................................
Exclusion from income of conservation subsidies provided by public utilities .................................................................................

1997–2001

–300
15

–255
15

–165
15

–75
15

0
15

95
15

80
20

–65
80

945
120
970
55
15
175
140
10
65
130

985
120
1,000
60
15
180
140
10
65
155

1,020
125
990
60
15
180
145
10
65
165

1,060
140
940
65
15
175
155
10
75
165

1,105
140
880
65
15
175
165
10
80
155

1,145
155
820
70
15
165
175
10
85
155

1,195
155
760
75
15
160
185
10
90
145

5,525
715
4,390
335
75
855
825
50
395
785

Natural resources and environment:
Expensing of exploration and development costs, nonfuel minerals ................................................................................................
Excess of percentage over cost depletion, nonfuel minerals ............................................................................................................
Capital gains treatment of iron ore .....................................................................................................................................................
Special rules for mining reclamation reserves ...................................................................................................................................
Exclusion of interest on State and local IDBs for pollution control and sewage and waste disposal facilities ..............................
Capital gains treatment of certain timber income ..............................................................................................................................
Expensing of multiperiod timber growing costs .................................................................................................................................
Investment credit and seven-year amortization for reforestation expenditures ................................................................................
Tax incentives for preservation of historic structures ........................................................................................................................

35
220
0
50
635
15
370
45
125

35
225
0
50
630
15
395
45
125

35
235
0
50
615
15
415
50
120

35
240
0
50
605
15
440
50
115

35
245
0
50
600
15
460
50
115

35
245
0
50
575
15
485
50
110

35
255
0
50
555
15
505
50
105

175
1,220
0
250
2,950
75
2,305
250
565

Agriculture:
Expensing of certain capital outlays ...................................................................................................................................................
Expensing of certain multiperiod production costs ............................................................................................................................
Treatment of loans forgiven solvent farmers as if insolvent .............................................................................................................
Capital gains treatment of certain income .........................................................................................................................................

70
85
10
145

65
80
10
145

65
80
10
140

65
80
10
145

70
85
10
145

70
85
10
150

70
85
10
155

340
415
50
735

630
650
710
780
860
940 1,030
95
105
115
125
135
150
160
9,905 10,670 11,470 12,340 13,260 14,255 14,950
5
5
5
5
5
5
5
235
240
245
255
260
280
300
110
115
120
130
135
140
145

4,320
685
66,275
25
1,340
670

1,810 1,810 1,770 1,710 1,655 1,605 1,540
925
875
815
760
700
630
545
48,080 50,575 53,075 55,750 58,590 61,655 64,915
15,275 16,070 16,860 17,710 18,615 19,590 20,620
935
955
975
995 1,015 1,035 1,055
14,180 14,605 15,040 15,490 15,955 16,435 16,930
5,160 5,185 5,075 5,465 5,280 5,755 5,480
4,515 4,235 3,985 3,745 3,520 3,305 3,070
1,045 1,170 1,305 1,485 1,675 2,165 2,455

8,280
3,450
293,985
93,395
5,075
79,850
27,055
17,625
9,085

Commerce and housing:
Financial institutions and insurance:
Exemption of credit union income ..................................................................................................................................................
Excess bad debt reserves of financial institutions ........................................................................................................................
Exclusion of interest on life insurance savings .............................................................................................................................
Special alternative tax on small property and casualty insurance companies .............................................................................
Tax exemption of certain insurance companies ............................................................................................................................
Small life insurance company deduction .......................................................................................................................................
Housing:
Exclusion of interest on owner-occupied mortgage subsidy bonds ..............................................................................................
Exclusion of interest on State and local debt for rental housing .................................................................................................
Deductibility of mortgage interest on owner-occupied homes ......................................................................................................
Deductibility of State and local property tax on owner-occupied homes .....................................................................................
Deferral of income from post 1987 installment sales ...................................................................................................................
Deferral of capital gains on home sales ........................................................................................................................................
Exclusion of capital gains on home sales for persons age 55 and over ....................................................................................
Exception from passive loss rules for $25,000 of rental loss .......................................................................................................
Accelerated depreciation on rental housing (normal tax method) ................................................................................................
Commerce:
Cancellation of indebtedness ..........................................................................................................................................................
Permanent exceptions from imputed interest rules .......................................................................................................................
Capital gains (other than agriculture, timber, iron ore, and coal) (normal tax method) ..............................................................
Capital gains exclusion of small corporation stock .......................................................................................................................

105
150
7,125
0

70
150
7,000
0

40
155
6,920
0

15
155
7,035
5

0
160
7,195
30

–10
160
7,385
70

–5
160
7,560
110

40
790
36,095
215

5. TAX EXPENDITURES

TABLE 5–1.

TOTAL REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES IN THE INCOME TAX—Continued
(In millions of dollars)
Total Revenue Loss
Provision
1995

Step-up basis of capital gains at death .........................................................................................................................................
Carryover basis of capital gains on gifts .......................................................................................................................................
Ordinary income treatment of loss from small business corporation stock sale .........................................................................
Accelerated depreciation of buildings other than rental housing (normal tax method) ...............................................................
Accelerated depreciation of machinery and equipment (normal tax method) ..............................................................................
Expensing of certain small investments (normal tax method) ......................................................................................................
Amortization of start-up costs (normal tax method) ......................................................................................................................
Graduated corporation income tax rate (normal tax method) .......................................................................................................
Exclusion of interest on small issue IDBs .....................................................................................................................................
Deferral of gains from sale of broadcasting facilities to minority owned business ......................................................................
Treatment of Alaska Native Corporations ......................................................................................................................................

1996

1997

1998

1999

2000

2001

1997–2001

28,305 29,480 30,265 30,710 31,160 31,615 32,075
155,825
130
140
150
160
170
180
190
850
105
215
305
370
380
355
305
1,715
7,440 6,735 5,720 4,590 3,410 2,420 1,600
17,740
24,460 27,160 29,500 31,210 33,030 33,575 32,240
159,555
1,815 1,520 1,120
795
600
320
155
2,990
185
195
200
205
210
210
220
1,045
4,105 4,435 4,730 5,015 5,345 5,710 6,085
26,885
555
435
345
295
280
265
260
1,445
285 ........... ........... ........... ........... ........... ........... ...................
30
20
15
10
5
5
5
40

Transportation:
Deferral of tax on shipping companies ..............................................................................................................................................
Exclusion of reimbursed employee parking expenses .......................................................................................................................
Exclusion for employer-provided transit passes .................................................................................................................................

20
1,215
35

20
1,255
50

20
1,290
60

20
1,330
70

20
1,370
85

20
1,410
100

20
1,455
120

100
6,855
435

Community and regional development:
Credit for low-income housing investments .......................................................................................................................................
Investment credit for rehabilitation of structures (other than historic) ...............................................................................................
Exclusion of interest on IDBs for airports, docks, and sports and convention facilities ..................................................................
Exemption of certain mutuals’ and cooperatives’ income .................................................................................................................
Empowerment zones ...........................................................................................................................................................................

2,260
80
855
50
250

2,600
80
910
50
330

2,945
80
965
50
385

3,270
70
1,025
55
425

3,500
70
1,090
55
450

3,595
70
1,145
60
475

3,445
65
1,205
60
490

16,755
355
5,430
280
2,225

Education, training, employment, and social services:
Education:
Exclusion of scholarship and fellowship income (normal tax method) .........................................................................................
Exclusion of interest on State and local student loan bonds .......................................................................................................
Exclusion of interest on State and local debt for private nonprofit educational facilities ............................................................
Exclusion of interest on savings bonds transferred to educational institutions ............................................................................
Parental personal exemption for students age 19 or over ...........................................................................................................
Deductibility of charitable contributions (education) ......................................................................................................................
Exclusion of employer provided educational assistance ...............................................................................................................
Training, employment, and social services:
Targeted jobs credit ........................................................................................................................................................................
Exclusion of employer provided child care ....................................................................................................................................
Exclusion of employee meals and lodging (other than military) ...................................................................................................
Credit for child and dependent care expenses .............................................................................................................................
Credit for disabled access expenditures ........................................................................................................................................
Expensing of costs of removing certain architectural barriers to the handicapped .....................................................................
Deductibility of charitable contributions, other than education and health ...................................................................................
Exclusion of certain foster care payments .....................................................................................................................................
Exclusion of parsonage allowances ...............................................................................................................................................

395
325
60
40
20
5 ...........
725
775
830
890
955 1,025 1,100
545
570
600
630
665
700
735
2,730 2,865 3,005 3,155 3,315 3,480 3,655
160
160
165
165
165
170
170
20
20
20
20
20
20
20
19,565 20,565 21,600 22,675 23,815 25,000 26,240
30
30
35
35
35
40
40
265
285
300
320
345
365
390

Health:
Exclusion of employer contributions for medical insurance premiums and medical care ...............................................................
Deductibility of medical expenses ......................................................................................................................................................
Exclusion of interest on State and local debt for private nonprofit health facilities .........................................................................
Deductibility of charitable contributions (health) .................................................................................................................................
Tax credit for orphan drug research ..................................................................................................................................................
Special Blue Cross/Blue Shield deduction .........................................................................................................................................

59,440 64,520 70,490 77,040 84,125 91,620 99,925
423,200
3,495 3,785 4,125 4,510 4,930 5,395 5,895
24,855
1,535 1,595 1,675 1,750 1,845 1,935 2,015
9,220
2,280 2,395 2,510 2,630 2,755 2,885 3,020
13,800
15 ........... ........... ........... ........... ........... ........... ...................
125
140
100
170
185
220
280
955

Income security:
Exclusion of railroad retirement system benefits ...............................................................................................................................
Exclusion of workmen’s compensation benefits .................................................................................................................................
Exclusion of public assistance benefits (normal tax method) ...........................................................................................................
Exclusion of special benefits for disabled coal miners ......................................................................................................................
Exclusion of military disability pensions .............................................................................................................................................
Net exclusion of pension contributions and earnings:
Employer plans ...............................................................................................................................................................................
Individual Retirement Accounts ......................................................................................................................................................
Keogh plans ....................................................................................................................................................................................
Exclusion of employer provided death benefits .................................................................................................................................
Exclusion of other employee benefits:
Premiums on group term life insurance .........................................................................................................................................
Premiums on accident and disability insurance ............................................................................................................................
Income of trusts to finance supplementary unemployment benefits ............................................................................................
Special ESOP rules (other than investment credit) ...........................................................................................................................
Additional deduction for the blind .......................................................................................................................................................
Additional deduction for the elderly ....................................................................................................................................................

825
835
845
850
860
870
875
4,300
315
305
290
275
260
250
240
1,315
770
795
830
870
910
955
990
4,555
5
5
10
10
15
15
15
65
820
825
835
870
905
955 1,015
4,580
1,780 1,870 1,965 2,065 2,165 2,275 2,385
10,855
100 ........... ........... ........... ........... ........... ........... ...................

430
4,475
570
95
130

470
6,205
850
70
130

2,300
27,825
3,715
395
650

52,070 55,370 55,770 56,205 56,625 57,045 57,470
7,720 7,830 7,940 8,335 8,420 8,455 8,490
3,315 3,345 3,580 3,780 3,935 4,090 4,240
30
35
35
35
40
40
45

283,115
41,640
19,625
195

2,880
150
20
2,125
25
1,305

445
4,855
590
90
130

3,020
155
20
1,745
25
1,320

450
5,050
635
85
130

3,170
165
20
1,540
25
1,340

455
5,255
695
85
130

3,325
175
20
1,405
25
1,355

460
5,515
740
80
130

3,485
185
20
1,280
25
1,365

465
5,800
795
75
130

125
4,800
3,330
16,610
835
100
119,330
185
1,720

3,660
195
20
1,170
30
1,375

3,865
205
20
1,065
30
1,385

17,505
925
100
6,460
135
6,820

ANALYTICAL PERSPECTIVES

TABLE 5–1.

TOTAL REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES IN THE INCOME TAX—Continued
(In millions of dollars)
Total Revenue Loss
Provision

Tax credit for the elderly and disabled ..............................................................................................................................................
Deductibility of casualty losses ...........................................................................................................................................................
Earned income credit 2 .......................................................................................................................................................................
Social Security:
Exclusion of social security benefits:
OASI benefits for retired workers ...................................................................................................................................................
Disability insurance benefits ...........................................................................................................................................................
Benefits for dependents and survivors ..........................................................................................................................................
Veterans benefits and services:
Exclusion of veterans disability compensation ...................................................................................................................................
Exclusion of veterans pensions ..........................................................................................................................................................
Exclusion of GI bill benefits ................................................................................................................................................................
Exclusion of interest on State and local debt for veterans housing .................................................................................................
General purpose fiscal assistance:
Exclusion of interest on public purpose State and local debt ...........................................................................................................
Deductibility of nonbusiness State and local taxes other than on owner-occupied homes .............................................................
Tax credit for corporations receiving income from doing business in U.S. possessions ................................................................
Interest:
Deferral of interest on savings bonds ................................................................................................................................................
Addendum—Aid to State and local governments:
Deductibility of:
Property taxes on owner-occupied homes ....................................................................................................................................
Nonbusiness State and local taxes other than on owner-occupied homes .................................................................................
Exclusion of interest on:
Public purpose State and local debt ..............................................................................................................................................
IDBs for certain energy facilities ....................................................................................................................................................
IDBs for pollution control and sewage and waste disposal facilities ............................................................................................
Small-issue IDBs .............................................................................................................................................................................
Owner-occupied mortgage revenue bonds ....................................................................................................................................
State and local debt for rental housing .........................................................................................................................................
IDBs for airports, docks, and sports and convention facilities ......................................................................................................
State and local student loan bonds ...............................................................................................................................................
State and local debt for private nonprofit educational facilities ....................................................................................................
State and local debt for private nonprofit health facilities .............................................................................................................
State and local debt for veterans housing .....................................................................................................................................

1995

1996

1997

1998

1999

2000

2001

50
800
4,920

55
445
5,670

55
465
6,250

60
490
6,460

60
515
6,820

65
540
7,105

65
570
7,510

305
2,580
34,145

16,015 16,465 17,285 18,080 18,880 19,525 20,515
1,975 2,180 2,375 2,580 2,800 3,030 3,265
3,630 3,820 4,030 4,245 4,470 4,695 4,935

94,285
14,050
22,375

2,665
75
50
85

3,720
90
100
90

16,715
390
435
420

12,700 13,175 13,775 14,455 15,195 15,905 16,535
27,735 29,175 30,620 32,160 33,800 35,570 37,445
2,745 2,795 2,855 3,025 3,205 3,400 3,600

75,865
169,595
16,085

1,100

2,820
70
65
80

1,160

2,985
70
70
80

1,210

3,160
70
80
80

1,280

3,335
75
90
85

1,340

3,515
85
95
85

1997–2001

1,410

1,480

6,720

15,275 16,070 16,860 17,710 18,615 19,590 20,620
27,735 29,175 30,620 32,160 33,800 35,570 37,445

93,395
169,595

12,700 13,175 13,775 14,455 15,195 15,905 16,535
175
180
180
175
175
165
160
635
630
615
605
600
575
555
555
435
345
295
280
265
260
1,810 1,810 1,770 1,710 1,655 1,605 1,540
925
875
815
760
700
630
545
855
910
965 1,025 1,090 1,145 1,205
315
305
290
275
260
250
240
770
795
830
870
910
955
990
1,535 1,595 1,675 1,750 1,845 1,935 2,015
85
80
80
80
85
85
90

75,865
855
2,950
1,445
8,280
3,450
5,430
1,315
4,555
9,220
420

1 In addition, the partial exemption from the excise tax for alcohol fuels results in a reduction in excise tax receipts (in millions of dollars) as follows: 1995: $615; 1996: $645; 1997: $665; 1998: $685;
1999: $705; 2000: $730; and 2001: $750.
2 The figures in the table indicate the effect of the earned income tax credit on receipts. The effect on outlays (in millions of dollars) is as follows: 1995: $15,245; 1996: $18,655; 1997: $20,450; 1998:
$21,255; 1999: $22,175; 2000: $23,210; and 2001: $24,115.
Note: Provisions with estimates denoted ‘‘normal tax method’’ have no revenue loss under the reference tax law method.
All estimates have been rounded to the nearest $5 million.
Figures in table 5–1 are the arithmetic sums of corporate and individual income tax revenue loss estimates from table 5–2, and do not reflect possible interactions across these two taxes.

5. TAX EXPENDITURES

TABLE 5–2.

CORPORATE AND INDIVIDUAL INCOME TAX REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES
(In millions of dollars)
Revenue Loss
Provision

Corporations
1995

1996

1997

1998

Individuals
1999

2000

2001

1995

1996

1997

1998

1999

2000

2001

2,000

2,060

2,080

National defense:
Exclusion of benefits and allowances to armed forces personnel ..................

........... ........... ........... ........... ........... ........... ...........

2,095

2,120

2,140

2,160

International affairs:
Exclusion of income earned abroad by United States citizens .......................
Exclusion of income of foreign sales corporations ..........................................
Inventory property sales source rules exception ..............................................
Interest allocation rules exception for certain financial operations ..................
Deferral of income from controlled foreign corporations (normal tax method)

........... ........... ........... ........... ........... ........... ........... 1,670 1,870 2,100 2,355
1,400 1,500 1,600 1,700 1,800 1,900 2,000 ........... ........... ........... ...........
1,300 1,400 1,500 1,600 1,700 1,800 1,900 ........... ........... ........... ...........
95
95
95
95
95
95
95 ........... ........... ........... ...........
1,700 1,800 2,000 2,200 2,400 2,600 2,900 ........... ........... ........... ...........

2,645
...........
...........
...........
...........

2,965
...........
...........
...........
...........

3,330
...........
...........
...........
...........

General science, space, and technology:
Expensing of research and experimentation expenditures (normal tax method) ..................................................................................................................
Credit for increasing research activities ............................................................
Suspension of the allocation of research and experimentation expenditures .
Energy:
Expensing of exploration and development costs:
Oil and gas ....................................................................................................
Other fuels .....................................................................................................
Excess of percentage over cost depletion:
Oil and gas ....................................................................................................
Other fuels .....................................................................................................
Alternative fuel production credit .......................................................................
Exception from passive loss limitation for working interests in oil and gas
properties .......................................................................................................
Capital gains treatment of royalties on coal .....................................................
Exclusion of interest on State and local IDBs for energy facilities .................
New technology credit .......................................................................................
Alcohol fuel credit 1 ...........................................................................................
Tax credit and deduction for clean-fuel burning vehicles and properties .......
Exclusion from income of conservation subsidies provided by public utilities

1,605 1,705 1,805 1,910 2,025 2,150 2,275
30
35
35
35
40
40
45
1,155
665
285
120
40
5 ...........
30
10 ........... ........... ........... ........... ...........
325 ........... ........... ........... ........... ........... ........... ........... ........... ........... ........... ........... ........... ...........

–225
10

–190
10

–125
10

–55
10

0
10

70
10

60
15

–75
5

–65
5

–40
5

–20
5

0
5

25
5

20
5

710
90
820

740
90
850

765
95
840

795
105
800

830
105
750

860
115
700

895
115
650

235
30
150

245
30
150

255
30
150

265
35
140

275
35
130

285
40
120

300
40
110

55
15
105
0
5
10
50

60
15
110
0
5
10
55

60
15
110
0
5
10
60

65
15
105
0
5
15
65

65
15
105
0
5
20
65

70
15
100
0
5
25
70

75
15
95
0
5
25
70

Natural resources and environment:
Expensing of exploration and development costs, nonfuel minerals ..............
Excess of percentage over cost depletion, nonfuel minerals ..........................
Capital gains treatment of iron ore ...................................................................
Special rules for mining reclamation reserves .................................................
Exclusion of interest on State and local IDBs for pollution control and sewage and waste disposal facilities ..................................................................
Capital gains treatment of certain timber income ............................................
Expensing of multiperiod timber growing costs ................................................
Investment credit and seven-year amortization for reforestation expenditures
Tax incentives for preservation of historic structures ......................................

25
25
25
25
25
25
25
165
170
175
180
185
185
190
........... ........... ........... ........... ........... ........... ...........
45
45
45
45
45
45
45

10
55
0
5

10
60
0
5

10
65
0
5

255
250
245
240
235
230
220
........... ........... ........... ........... ........... ........... ...........
210
225
235
250
260
275
285
20
20
20
20
20
20
20
25
25
25
25
25
20
20

380
15
160
25
100

380
15
170
25
100

370
15
180
30
95

365
15
190
30
90

365
15
200
30
90

345
15
210
30
90

335
15
220
30
85

Agriculture:
Expensing of certain capital outlays .................................................................
Expensing of certain multiperiod production costs ...........................................
Treatment of loans forgiven solvent farmers as if insolvent ............................
Capital gains treatment of certain income ........................................................

10
10
10
10
10
10
10
10
10
10
10
10
10
10
........... ........... ........... ........... ........... ........... ...........
........... ........... ........... ........... ........... ........... ...........

60
75
10
145

55
70
10
145

55
70
10
140

55
70
10
145

60
75
10
145

60
75
10
150

60
75
10
155

Commerce and housing:
Financial institutions and insurance:
Exemption of credit union income ................................................................
Excess bad debt reserves of financial institutions .......................................
Exclusion of interest on life insurance savings ............................................
Special alternative tax on small property and casualty insurance companies ............................................................................................................
Tax exemption of certain insurance companies ..........................................
Small life insurance company deduction ......................................................
Housing:
Exclusion of interest on owner-occupied mortgage subsidy bonds ............
Exclusion of interest on State and local debt for rental housing ................
Deductibility of mortgage interest on owner-occupied homes .....................
Deductibility of State and local property tax on owner-occupied homes ...
Deferral of income from post 1987 installment sales ..................................
Deferral of capital gains on home sales ......................................................
Exclusion of capital gains on home sales for persons age 55 and over ...
Exception from passive loss rules for $25,000 of rental loss .....................
Accelerated depreciation on rental housing (normal tax method) ..............

630
95
275

650
105
295

710
115
320

780
125
340

860
135
375

940
150
400

1,030 ........... ........... ........... ........... ........... ........... ...........
160 ........... ........... ........... ........... ........... ........... ...........
415 9,630 10,375 11,150 12,000 12,885 13,855 14,535

5
235
110

5
240
115

5
245
120

5
255
130

5
260
135

5
280
140

5 ........... ........... ........... ........... ........... ........... ...........
300 ........... ........... ........... ........... ........... ........... ...........
145 ........... ........... ........... ........... ........... ........... ...........

725
365
...........
...........
235
...........
...........
...........
660

720
345
...........
...........
245
...........
...........
...........
735

705
320
...........
...........
255
...........
...........
...........
820

680
300
...........
...........
265
...........
...........
...........
945

660
275
...........
...........
275
...........
...........
...........
1,080

635
245
...........
...........
285
...........
...........
...........
1,495

610 1,085 1,090 1,065 1,030
995
970
930
215
560
530
495
460
425
385
330
........... 48,080 50,575 53,075 55,750 58,590 61,655 64,915
........... 15,275 16,070 16,860 17,710 18,615 19,590 20,620
295
700
710
720
730
740
750
760
........... 14,180 14,605 15,040 15,490 15,955 16,435 16,930
........... 5,160 5,185 5,075 5,465 5,280 5,755 5,480
........... 4,515 4,235 3,985 3,745 3,520 3,305 3,070
1,730
385
435
485
540
595
670
725

ANALYTICAL PERSPECTIVES

TABLE 5–2.

CORPORATE AND INDIVIDUAL INCOME TAX REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES—Continued
(In millions of dollars)
Revenue Loss
Provision

Corporations
1995

Commerce:
Cancellation of indebtedness ........................................................................
Permanent exceptions from imputed interest rules .....................................
Capital gains (other than agriculture, timber, iron ore, and coal) (normal
tax method) ...............................................................................................
Capital gains exclusion of small corporation stock ......................................
Step-up basis of capital gains at death .......................................................
Carryover basis of capital gains on gifts .....................................................
Ordinary income treatment of loss from small business corporation stock
sale ............................................................................................................
Accelerated depreciation of buildings other than rental housing (normal
tax method) ...............................................................................................
Accelerated depreciation of machinery and equipment (normal tax method) .............................................................................................................
Expensing of certain small investments (normal tax method) ....................
Amortization of start-up costs (normal tax method) ....................................
Graduated corporation income tax rate (normal tax method) .....................
Exclusion of interest on small issue IDBs ...................................................
Deferral of gains from sale of broadcasting facilities to minority owned
business ....................................................................................................
Treatment of Alaska Native Corporations ....................................................
Transportation:
Deferral of tax on shipping companies .............................................................
Exclusion of reimbursed employee parking expenses .....................................
Exclusion for employer-provided transit passes ...............................................
Community and regional development:
Credit for low-income housing investments ......................................................
Investment credit for rehabilitation of structures (other than historic) .............
Exclusion of interest on IDBs for airports, docks, and sports and convention
facilities ..........................................................................................................
Exemption of certain mutuals’ and cooperatives’ income ................................
Empowerment zones .........................................................................................
Education, training, employment, and social services:
Education:
Exclusion of scholarship and fellowship income (normal tax method) .......
Exclusion of interest on State and local student loan bonds .....................
Exclusion of interest on State and local debt for private nonprofit educational facilities ........................................................................................
Exclusion of interest on savings bonds transferred to educational institutions ...........................................................................................................
Parental personal exemption for students age 19 or over ..........................
Deductibility of charitable contributions (education) .....................................
Exclusion of employer provided educational assistance .............................
Training, employment, and social services:
Targeted jobs credit ......................................................................................
Exclusion of employer provided child care ..................................................
Exclusion of employee meals and lodging (other than military) .................
Credit for child and dependent care expenses ............................................
Credit for disabled access expenditures ......................................................
Expensing of costs of removing certain architectural barriers to the
handicapped ..............................................................................................
Deductibility of charitable contributions, other than education and health .
Exclusion of certain foster care payments ...................................................
Exclusion of parsonage allowances .............................................................
Health:
Exclusion of employer contributions for medical insurance premiums and
medical care ..................................................................................................
Deductibility of medical expenses .....................................................................
Exclusion of interest on State and local debt for private nonprofit health facilities .............................................................................................................
Deductibility of charitable contributions (health) ...............................................
Tax credit for orphan drug research .................................................................
Special Blue Cross/Blue Shield deduction .......................................................
Income security:
Exclusion of railroad retirement system benefits ..............................................

1996

1997

1998

Individuals
1999

2000

2001

...........
...........
...........
...........

4,730

4,000

3,200

2,380

1,735

105
150

1996

70
150

1997

40
155

1998

15
155

1999

0
160

2000

–10
160

2001

–5
160

........... 7,125 7,000 6,920 7,035 7,195 7,385 7,560
...........
0
0
0
5
30
70
110
........... 28,305 29,480 30,265 30,710 31,160 31,615 32,075
...........
130
140
150
160
170
180
190

........... ........... ........... ........... ........... ........... ...........
5,270

1995

1,150

105

215

305

370

380

355

305

2,170

2,005

1,720

1,390

1,030

685

450

19,760 21,575 23,235 24,460 25,790 26,115 25,040 4,700 5,585 6,265 6,750 7,240 7,460 7,200
1,120
930
685
500
385
220
135
695
590
435
295
215
100
20
85
90
90
95
95
95
100
100
105
110
110
115
115
120
4,105 4,435 4,730 5,015 5,345 5,710 6,085 ........... ........... ........... ........... ........... ........... ...........
215
165
135
115
110
105
105
340
270
210
180
170
160
155
285 ........... ........... ........... ........... ........... ........... ........... ........... ........... ........... ........... ........... ...........
30
20
15
10
5
5
5 ........... ........... ........... ........... ........... ........... ...........
20
20
20
20
20
20
20 ........... ........... ........... ........... ........... ........... ...........
........... ........... ........... ........... ........... ........... ........... 1,215 1,255 1,290 1,330 1,370 1,410 1,455
........... ........... ........... ........... ........... ........... ...........
35
50
60
70
85
100
120
450
15

520
15

590
15

655
15

700
15

720
15

690
15

345
50
75

365
50
100

390
50
120

415
55
135

440
55
140

460
60
150

485
510
545
575
610
650
685
720
60 ........... ........... ........... ........... ........... ........... ...........
150
175
230
265
290
310
325
340

........... ........... ........... ........... ........... ........... ...........
125
120
115
110
105
100
95
310

320

335

350

365

385

400

1,810
65

2,080
65

2,355
65

2,615
55

2,800
55

2,875
55

2,755
50

825
190

835
185

845
175

850
165

860
155

870
150

875
145

460

475

495

520

545

570

590

5
5
10
10
15
15
15
820
825
835
870
905
955 1,015
1,610 1,690 1,775 1,865 1,955 2,055 2,155
100 ........... ........... ........... ........... ........... ...........

320
270
50
30
15
5 ...........
........... ........... ........... ........... ........... ........... ...........
........... ........... ........... ........... ........... ........... ...........
........... ........... ........... ........... ........... ........... ...........
130
130
130
130
130
135
135

75
725
545
2,730
30

55
775
570
2,865
30

10
830
600
3,005
35

10
890
630
3,155
35

5 ........... ...........
955 1,025 1,100
665
700
735
3,315 3,480 3,655
35
35
35

15
15
15
15
15
15
15
5
5
5
5
5
5
5
4,895 5,160 5,425 5,695 5,985 6,280 6,580 14,670 15,405 16,175 16,980 17,830 18,720 19,660
........... ........... ........... ........... ........... ........... ...........
30
30
35
35
35
40
40
........... ........... ........... ........... ........... ........... ...........
265
285
300
320
345
365
390

........... ........... ........... ........... ........... ........... ........... 59,440 64,520 70,490 77,040 84,125 91,620 99,925
........... ........... ........... ........... ........... ........... ........... 3,495 3,785 4,125 4,510 4,930 5,395 5,895
615
640
675
705
745
780
810
920
955 1,000 1,045 1,100 1,155 1,205
640
670
700
730
760
790
820 1,640 1,725 1,810 1,900 1,995 2,095 2,200
15 ........... ........... ........... ........... ........... ........... ........... ........... ........... ........... ........... ........... ...........
125
140
100
170
185
220
280 ........... ........... ........... ........... ........... ........... ...........
........... ........... ........... ........... ........... ........... ...........

430

445

450

455

460

465

470

5. TAX EXPENDITURES

TABLE 5–2.

CORPORATE AND INDIVIDUAL INCOME TAX REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES—Continued
(In millions of dollars)
Revenue Loss
Provision

Exclusion of workmen’s compensation benefits ...............................................
Exclusion of public assistance benefits (normal tax method) ..........................
Exclusion of special benefits for disabled coal miners ....................................
Exclusion of military disability pensions ............................................................
Net exclusion of pension contributions and earnings:
Employer plans ..............................................................................................
Individual Retirement Accounts ....................................................................
Keogh plans ...................................................................................................
Exclusion of employer provided death benefits ...............................................
Exclusion of other employee benefits:
Premiums on group term life insurance .......................................................
Premiums on accident and disability insurance ...........................................
Income of trusts to finance supplementary unemployment benefits ...........
Special ESOP rules (other than investment credit) .........................................
Additional deduction for the blind .....................................................................
Additional deduction for the elderly ..................................................................
Tax credit for the elderly and disabled .............................................................
Deductibility of casualty losses .........................................................................
Earned income credit 2 .....................................................................................

Corporations

Individuals

1995

1996

1997

1998

1999

2000

2001

1995

1996

1997

1998

1999

2000

2001

...........
...........
...........
...........

4,475
570
95
130

4,855
590
90
130

5,050
635
85
130

5,255
695
85
130

5,515
740
80
130

5,800
795
75
130

6,205
850
70
130

...........
...........
...........
...........

........... 52,070 55,370 55,770 56,205 56,625 57,045 57,470
........... 7,720 7,830 7,940 8,335 8,420 8,455 8,490
........... 3,315 3,345 3,580 3,780 3,935 4,090 4,240
...........
30
35
35
35
40
40
45

...........
...........
...........
2,125
...........
...........
...........
...........
...........

...........
...........
...........
1,745
...........
...........
...........
...........
...........

...........
...........
...........
1,540
...........
...........
...........
...........
...........

...........
...........
...........
1,405
...........
...........
...........
...........
...........

...........
...........
...........
1,280
...........
...........
...........
...........
...........

...........
...........
...........
1,170
...........
...........
...........
...........
...........

........... 2,880 3,020 3,170 3,325 3,485 3,660 3,865
...........
150
155
165
175
185
195
205
...........
20
20
20
20
20
20
20
1,065 ........... ........... ........... ........... ........... ........... ...........
...........
25
25
25
25
25
30
30
........... 1,305 1,320 1,340 1,355 1,365 1,375 1,385
...........
50
55
55
60
60
65
65
...........
800
445
465
490
515
540
570
........... 4,920 5,670 6,250 6,460 6,820 7,105 7,510

Social Security:
Exclusion of social security benefits:
OASI benefits for retired workers .................................................................
Disability insurance benefits .........................................................................
Benefits for dependents and survivors .........................................................

........... ........... ........... ........... ........... ........... ........... 16,015 16,465 17,285 18,080 18,880 19,525 20,515
........... ........... ........... ........... ........... ........... ........... 1,975 2,180 2,375 2,580 2,800 3,030 3,265
........... ........... ........... ........... ........... ........... ........... 3,630 3,820 4,030 4,245 4,470 4,695 4,935

Veterans benefits and services:
Exclusion of veterans disability compensation .................................................
Exclusion of veterans pensions ........................................................................
Exclusion of GI bill benefits ..............................................................................
Exclusion of interest on State and local debt for veterans housing ...............

General purpose fiscal assistance:
Exclusion of interest on public purpose State and local debt .........................
Deductibility of nonbusiness State and local taxes other than on owner-occupied homes ................................................................................................
Tax credit for corporations receiving income from doing business in U.S.
possessions ...................................................................................................
Interest:
Deferral of interest on savings bonds ..............................................................
Addendum—Aid to State and local governments:
Deductibility of:
Property taxes on owner-occupied homes ...................................................
Nonbusiness State and local taxes other than on owner-occupied homes
Exclusion of interest on:
Public purpose State and local debt ............................................................
IDBs for certain energy facilities ...................................................................
IDBs for pollution control and sewage and waste disposal facilities ..........
Small-issue IDBs ...........................................................................................
Owner-occupied mortgage revenue bonds ..................................................
State and local debt for rental housing ........................................................
IDBs for airports, docks, and sports and convention facilities ....................
State and local student loan bonds .............................................................
State and local debt for private nonprofit educational facilities ..................
State and local debt for private nonprofit health facilities ...........................
State and local debt for veterans housing ...................................................

5,100

5,300

5,545

5,820

6,120

6,395

6,645

2,665
75
50
50

2,820
70
65
50

2,985
70
70
50

3,160
70
80
50

3,335
75
90
50

3,515
85
95
50

3,720
90
100
55

7,600

7,875

8,230

8,635

9,075

9,510

9,890

........... ........... ........... ........... ........... ........... ........... 27,735 29,175 30,620 32,160 33,800 35,570 37,445
2,745

2,795

2,855

3,025

3,205

3,400

3,600 ........... ........... ........... ........... ........... ........... ...........

........... ........... ........... ........... ........... ........... ...........

1,100

1,160

1,210

1,280

1,340

1,410

1,480

........... ........... ........... ........... ........... ........... ........... 15,275 16,070 16,860 17,710 18,615 19,590 20,620
........... ........... ........... ........... ........... ........... ........... 27,735 29,175 30,620 32,160 33,800 35,570 37,445
5,100
70
255
215
725
365
345
125
310
615
35

5,300
70
250
165
720
345
365
120
320
640
30

5,545
70
245
135
705
320
390
115
335
675
30

5,820
70
240
115
680
300
415
110
350
705
30

6,120
70
235
110
660
275
440
105
365
745
35

6,395
65
230
105
635
245
460
100
385
780
35

6,645
65
220
105
610
215
485
95
400
810
35

7,600
105
380
340
1,085
560
510
190
460
920
50

7,875
110
380
270
1,090
530
545
185
475
955
50

8,230
110
370
210
1,065
495
575
175
495
1,000
50

8,635
105
365
180
1,030
460
610
165
520
1,045
50

9,075
105
365
170
995
425
650
155
545
1,100
50

9,510
100
345
160
970
385
685
150
570
1,155
50

9,890
95
335
155
930
330
720
145
590
1,205
55

ANALYTICAL PERSPECTIVES

Interpreting Tax Expenditure Estimates
Tax expenditure revenue loss estimates do not necessarily equal the increase in Federal revenues (or the
reduction in budget deficits) that would result from repealing the special provisions, for the following reasons:
• Eliminating a tax expenditure may have incentive
effects that alter economic behavior. These incentives can affect the resulting magnitudes of the
formerly subsidized activity or of other tax preferences or Government programs. For example,
if deductibility of mortgage interest were limited,
some taxpayers would hold smaller mortgages,
with a concomitantly smaller effect on the budget
than if no such limits were in force.
• Tax expenditures are interdependent even without
incentive effects. Repeal of a tax expenditure provision can increase or decrease the revenue losses
associated with other provisions. For example,
even if behavior does not change, repeal of an
itemized deduction could increase the revenue
losses from other deductions because some taxpayers would be moved into higher tax brackets.
Alternatively, repeal of an itemized deduction
could lower the revenue loss from other deductions
if taxpayers are led to claim the standard deduction instead of itemizing. Similarly, if two provisions were repealed simultaneously, the increase
in tax liability could be greater or less than the
sum of the two separate tax expenditures, since
each is estimated assuming that the other remains
in force. In addition, the estimates reported in
Table 5–1 are the totals of individual and corporate income tax revenue losses reported in Table
5–2 and do not reflect any possible interactions
between the individual and corporate income tax
receipts. For this reason, the figures in Table 5–1
(as well as those in Table 5–4, which are also
based on summing individual and corporate estimates) should be regarded as approximations.
• The annual value of tax expenditures for tax deferrals is reported on a cash basis in all tables except
table 5–3. Cash-based estimates reflect the difference between taxes deferred in the current year
and incoming revenues that are received due to
deferrals of taxes from prior years. While such
estimates are useful as a measure of cash flows

into the Government, they do not always accurately reflect the true economic cost of these provisions. For example, for a provision where activity
levels have changed, so that incoming tax receipts
from past deferrals are greater than deferred receipts from new activity, the cash-basis tax expenditure estimate can be negative, despite the
fact that in present-value terms current deferrals
do have a real cost to the Government. Alternatively, in the case of a newly enacted deferral
provision, a cash-based estimate can overstate the
real cost to the Government because the newly
deferred taxes will ultimately be received. Presentvalue estimates, which are a useful supplement
to the cash-basis estimates for provisions involving
deferrals, are discussed below.
• Repeal of some provisions could affect overall levels
of income and rates of economic growth. In principle, repeal of major tax provisions may have
some impact on the budget economic assumptions.
In general, however, most changes in particular
provisions are unlikely to have significant macroeconomic effects.
Present-Value Estimates
Discounted present-value estimates of revenue losses
are presented in table 5–3 for certain provisions that
involve tax deferrals or similar long-term revenue effects. These estimates complement the cash-based tax
expenditure estimates presented in the other tables.
The present-value estimates represent the revenue
losses, net of future tax payments, that follow from
activities undertaken during calendar year 1996 which
cause the deferrals or related revenue effects. For instance, a pension contribution in 1996 would cause a
deferral of tax payments on wages in 1996 and on pension earnings on this contribution (e.g., interest) in
later years. In some future year, however, the 1996
pension contribution and accrued earnings will be paid
out and taxes will be due; these receipts are included
in the present-value estimate. In general, this conceptual approach is similar to the one used for reporting
the budgetary effects of credit programs, where direct
loans and guarantees in a given year affect future cash
flows.

5. TAX EXPENDITURES

TABLE 5–3.

PRESENT VALUE OF SELECTED TAX EXPENDITURES FOR
ACTIVITY IN CALENDAR YEAR 1996
(In millions of dollars)
Present Value
of Revenue
Loss

Provision

Deferral of income from controlled foreign corporations (normal tax method) .............................
Expensing of research and experimentation expenditures (normal tax method) .........................
Expensing of exploration and development costs—oil and gas ....................................................
Expensing of exploration and development costs—other fuels .....................................................
Expensing of exploration and development costs—nonfuels ........................................................
Expensing of multiperiod timber growing costs ..............................................................................
Expensing of certain multiperiod production costs—agriculture ....................................................
Expensing of certain capital outlays—agriculture ...........................................................................
Deferral of capital gains on home sales ........................................................................................
Accelerated depreciation of rental housing (normal tax method) ..................................................
Accelerated depreciation of buildings other than rental housing (normal tax method) ................
Accelerated depreciation of machinery and equipment (normal tax method) ..............................
Expensing of certain small investments (normal tax method) .......................................................
Amortization of start-up costs (normal tax method) .......................................................................
Deferral of tax on shipping companies ...........................................................................................
Credit for low-income housing investments ....................................................................................
Exclusion of pension contributions and earnings—employer plans ..............................................
Exclusion of IRA contributions and earnings .................................................................................
Exclusions of contribution and earnings for Keogh plans .............................................................
Exclusion of interest on State and local public-purpose bonds ....................................................
Exclusion of interest on State and local non-public purpose bonds .............................................
Deferral of interest on U.S. savings bonds ....................................................................................

1,700
2,035
140
10
50
135
80
65
14,395
1,800
415
23,535
1,735
175
10
2,850
50,885
2,240
3,465
16,140
8,780
330

Note: Provisions with estimates denoted ‘‘normal tax method’’ have no revenue loss under the reference tax law method.

Outlay Equivalents
The concept of ‘‘outlay equivalents’’ complements
‘‘revenue losses’’ as a measure of the budget effect of
tax expenditures. It is the amount of outlay that would
be required to provide the taxpayer the same aftertax income as would be received through the tax preference. The outlay equivalent measure allows a comparison of the cost of the tax expenditure with that
of a direct Federal outlay. Outlay equivalents are reported in table 5–4.
The measure is larger than the revenue loss estimate
when the tax expenditure is judged to function as a
Government payment for service. This occurs because

an outlay program would increase the taxpayer’s pretax income. For some tax expenditures, however, the
revenue loss equals the outlay equivalent measure. This
occurs when the tax expenditure is judged to function
like a price reduction or tax deferral that does not
directly enter the taxpayer’s pre-tax income.1
1 Budget outlay figures generally reflect the pre-tax price of the resources. In some instances, however, Government purchases or subsidies are exempted from tax by a special
tax provision. When this occurs, the outlay figure understates the resource cost of the
program and is, therefore, not comparable with other outlay amounts. For example, the
outlays for certain military personnel allowances are not taxed. If this form of compensation
were treated as part of the employee’s taxable income, the Defense Department would
have to make larger cash payments to its military personnel to leave them as well off
after tax as they are now. The tax subsidy must be added to the tax-exempt budget
outlay to make this element of national defense expenditures comparable with other outlays.

ANALYTICAL PERSPECTIVES

TABLE 5–4.

OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES IN THE INCOME TAX
(In millions of dollars)
Outlay Equivalents
Provision
1995

1996

1997

1998

1999

2000

2001

1997–2001

National defense:
Exclusion of benefits and allowances to armed forces personnel ............................................................................................

2,335

2,405

2,425

2,445

2,470

2,495

2,520

12,355

International affairs:
Exclusion of income earned abroad by United States citizens .................................................................................................
Exclusion of income of foreign sales corporations ....................................................................................................................
Inventory property sales source rules exception .......................................................................................................................
Interest allocation rules exception for certain financial operations ...........................................................................................
Deferral of income from controlled foreign corporations (normal tax method) .........................................................................

2,170
2,155
2,000
140
1,700

2,435
2,310
2,155
140
1,800

2,730
2,460
2,310
140
2,000

3,060
2,615
2,460
140
2,200

3,435
2,770
2,615
140
2,400

3,855
2,925
2,770
140
2,600

4,325
3,075
2,925
140
2,900

17,405
13,845
13,080
700
12,100

1,635 1,740 1,840
1,945
2,065
2,190
2,320
10,360
1,820 1,040
440
185
60
10 .............
695
465 ........... ........... ............. ............. ............. ............. ...................

Energy:
Expensing of exploration and development costs:
Oil and gas ..............................................................................................................................................................................
Other fuels ...............................................................................................................................................................................
Excess of percentage over cost depletion:
Oil and gas ..............................................................................................................................................................................
Other fuels ...............................................................................................................................................................................
Alternative fuel production credit ................................................................................................................................................
Exception from passive loss limitation for working interests in oil and gas properties ...........................................................
Capital gains treatment of royalties on coal ..............................................................................................................................
Exclusion of interest on State and local IDBs for energy facilities ...........................................................................................
New technology credit .................................................................................................................................................................
Alcohol fuel credit 1 .....................................................................................................................................................................
Tax credit and deduction for clean-fuel burning vehicles and properties .................................................................................
Exclusion from income of conservation subsidies provided by public utilities .........................................................................

–300
15

–255
15

–165
15

–75
15

0
15

95
15

80
20

–65
80

1,335
165
1,370
55
20
255
195
10
90
175

1,385
175
1,400
60
20
260
195
10
90
210

1,440
180
1,390
60
20
260
205
10
95
225

1,495
195
1,330
65
20
255
220
10
105
220

1,560
200
1,240
65
20
250
230
10
110
210

1,615
215
1,160
70
20
245
245
10
120
205

1,680
220
1,080
75
20
230
260
10
125
195

7,790
1,010
6,200
335
100
1,240
1,160
50
555
1,055

Natural resources and environment:
Expensing of exploration and development costs, nonfuel minerals ........................................................................................
Excess of percentage over cost depletion, nonfuel minerals ....................................................................................................
Capital gains treatment of iron ore .............................................................................................................................................
Special rules for mining reclamation reserves ...........................................................................................................................
Exclusion of interest on State and local IDBs for pollution control and sewage and waste disposal facilities ......................
Capital gains treatment of certain timber income ......................................................................................................................
Expensing of multiperiod timber growing costs .........................................................................................................................
Investment credit and seven-year amortization for reforestation expenditures ........................................................................
Tax incentives for preservation of historic structures ................................................................................................................

35
295
0
50
910
20
370
65
125

35
320
0
50
905
20
395
65
125

35
325
0
50
890
20
415
65
120

35
335
0
50
875
20
440
75
115

35
345
0
50
850
20
460
75
115

35
345
0
50
830
20
485
75
110

35
355
0
50
800
20
505
75
105

175
1,705
0
250
4,245
100
2,305
365
565

Agriculture:
Expensing of certain capital outlays ...........................................................................................................................................
Expensing of certain multiperiod production costs ....................................................................................................................
Treatment of loans forgiven solvent farmers as if insolvent .....................................................................................................
Capital gains treatment of certain income .................................................................................................................................

70
85
10
195

65
80
10
195

65
80
10
185

65
80
10
195

70
85
10
195

70
85
10
200

70
85
10
205

340
415
50
980

805
825
905
145
160
175
13,010 14,015 15,065
5
5
5
330
340
345
155
160
170

995
190
16,210
5
365
185

1,090
205
17,415
5
380
190

1,195
225
18,725
5
395
200

1,310
240
19,645
5
420
205

5,495
1,035
87,060
25
1,905
950

2,610 2,600 2,540
1,330 1,250 1,170
48,080 50,575 53,075
15,275 16,070 16,860
935
955
975
14,180 14,605 15,040
6,880 6,915 6,765
4,515 4,235 3,985
1,045 1,170 1,305

2,455
1,085
55,750
17,710
995
15,490
7,285
3,745
1,485

2,380
1,005
58,590
18,615
1,015
15,955
7,040
3,520
1,675

2,305
900
61,655
19,590
1,035
16,435
7,675
3,305
2,165

2,215
780
64,915
20,620
1,055
16,930
7,305
3,070
2,455

11,895
4,940
293,985
93,395
5,075
79,850
36,070
17,625
9,085

20
155
9,380
5

0
160
9,595
40

–15
160
9,845
95

–10
160
10,080
145

45
790
48,115
285

Commerce and housing:
Financial institutions and insurance:
Exemption of credit union income ..........................................................................................................................................
Excess bad debt reserves of financial institutions ................................................................................................................
Exclusion of interest on life insurance savings .....................................................................................................................
Special alternative tax on small property and casualty insurance companies .....................................................................
Tax exemption of certain insurance companies ....................................................................................................................
Small life insurance company deduction ...............................................................................................................................
Housing:
Exclusion of interest on owner-occupied mortgage subsidy bonds ......................................................................................
Exclusion of interest on State and local debt for rental housing .........................................................................................
Deductibility of mortgage interest on owner-occupied homes ..............................................................................................
Deductibility of State and local property tax on owner-occupied homes .............................................................................
Deferral of income from post 1987 installment sales ...........................................................................................................
Deferral of capital gains on home sales ................................................................................................................................
Exclusion of capital gains on home sales for persons age 55 and over ............................................................................
Exception from passive loss rules for $25,000 of rental loss ...............................................................................................
Accelerated depreciation on rental housing (normal tax method) ........................................................................................
Commerce:
Cancellation of indebtedness ..................................................................................................................................................
Permanent exceptions from imputed interest rules ...............................................................................................................
Capital gains (other than agriculture, timber, iron ore, and coal) .........................................................................................
Capital gain exclusion of small corporation stock .................................................................................................................

140
150
9,500
0

90
150
9,335
0

50
155
9,215
0

5. TAX EXPENDITURES

TABLE 5–4.

OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES IN THE INCOME TAX—Continued
(In millions of dollars)
Outlay Equivalents
Provision
1995

Step-up basis of capital gains at death .................................................................................................................................
Carryover basis of capital gains on gifts ...............................................................................................................................
Ordinary income treatment of loss from small business corporation stock sale .................................................................
Accelerated depreciation of buildings other than rental housing (normal tax method) .......................................................
Accelerated depreciation of machinery and equipment (normal tax method) ......................................................................
Expensing of certain small investments (normal tax method) ..............................................................................................
Amortization of start-up costs (normal tax method) ..............................................................................................................
Graduated corporation income tax rate (normal tax method) ...............................................................................................
Exclusion of interest on small issue IDBs .............................................................................................................................
Deferral of gains from sale of broadcasting facilities to minority owned business ..............................................................
Treatment of Alaska Native Corporations ..............................................................................................................................

1996

1997

1998

1999

2000

2001

1997–2001

37,740 39,305 40,355 40,945 41,545 42,155 42,765
207,765
130
140
150
160
170
180
190
850
40
45
50
50
50
55
55
260
7,440 6,735 5,720
4,590
3,410
2,420
1,600
17,740
24,460 27,160 29,500 31,210 33,030 33,575 32,240
159,555
1,815 1,520 1,120
795
600
320
155
2,990
185
195
200
205
210
210
220
1,045
5,865 6,335 6,760
7,165
7,635
8,155
8,690
38,405
785
615
490
425
400
385
375
2,075
285 ........... ........... ............. ............. ............. ............. ...................
30
20
15
10
5
5
5
40

Transportation:
Deferral of tax on shipping companies ......................................................................................................................................
Exclusion of reimbursed employee parking expenses ...............................................................................................................
Exclusion for employer-provided transit passes .........................................................................................................................

20
1,585
50

20
1,630
65

20
1,680
80

20
1,730
100

20
1,780
115

20
1,835
135

20
1,895
165

100
8,920
595

Community and regional development:
Credit for low-income housing investments ...............................................................................................................................
Investment credit for rehabilitation of structures (other than historic) .......................................................................................
Exclusion of interest on IDBs for airports, docks, and sports and convention facilities ..........................................................
Exemption of certain mutuals’ and cooperatives’ income .........................................................................................................
Empowerment zones ...................................................................................................................................................................

2,260
80
1,240
50
250

2,600
80
1,315
50
330

2,945
80
1,395
50
385

3,270
70
1,480
55
425

3,500
70
1,570
55
450

3,595
70
1,655
60
475

3,445
65
1,735
60
490

16,755
355
7,835
280
2,225

Education, training, employment, and social services:
Education:
Exclusion of scholarship and fellowship income (normal tax method) .................................................................................
Exclusion of interest on State and local student loan bonds ...............................................................................................
Exclusion of interest on State and local debt for private nonprofit educational facilities ....................................................
Exclusion of interest on savings bonds transferred to educational institutions ....................................................................
Parental personal exemption for students age 19 or over ...................................................................................................
Deductibility of charitable contributions (education) ..............................................................................................................
Exclusion of employer provided educational assistance .......................................................................................................
Training, employment, and social services:
Targeted jobs credit ................................................................................................................................................................
Exclusion of employer provided child care ............................................................................................................................
Exclusion of employee meals and lodging (other than military) ...........................................................................................
Credit for child and dependent care expenses .....................................................................................................................
Credit for disabled access expenditures ................................................................................................................................
Expensing of costs of removing certain architectural barriers to the handicapped .............................................................
Deductibility of charitable contributions, other than education and health ...........................................................................
Exclusion of certain foster care payments .............................................................................................................................
Exclusion of parsonage allowances .......................................................................................................................................

395
325
60
965 1,035 1,105
665
695
730
3,640 3,820 4,005
240
240
250
20
20
20
26,085 27,395 28,770
35
40
40
325
350
375

Health:
Exclusion of employer contributions for medical insurance premiums and medical care .......................................................
Deductibility of medical expenses ..............................................................................................................................................
Exclusion of interest on State and local debt for private nonprofit health facilities .................................................................
Deductibility of charitable contributions (health) .........................................................................................................................
Tax credit for orphan drug research ..........................................................................................................................................
Special Blue Cross/Blue Shield deduction .................................................................................................................................

75,630 82,230 89,985 98,510 107,755 117,545 128,420
542,215
3,495 3,785 4,125
4,510
4,930
5,395
5,895
24,855
2,215 2,305 2,410
2,530
2,665
2,795
2,915
13,315
3,040 3,190 3,350
3,520
3,695
3,880
4,075
18,520
25 ........... ........... ............. ............. ............. ............. ...................
175
185
140
240
260
310
395
1,345

Income security:
Exclusion of railroad retirement system benefits .......................................................................................................................
Exclusion of workmen’s compensation benefits .........................................................................................................................
Exclusion of public assistance benefits (normal tax method) ...................................................................................................
Exclusion of special benefits for disabled coal miners ..............................................................................................................
Exclusion of military disability pensions .....................................................................................................................................
Net exclusion of pension contributions and earnings:
Employer plans .......................................................................................................................................................................
Individual Retirement Accounts ..............................................................................................................................................
Keogh plans ............................................................................................................................................................................
Exclusion of employer provided death benefits .........................................................................................................................
Exclusion of other employee benefits:
Premiums on group term life insurance .................................................................................................................................
Premiums on accident and disability insurance ....................................................................................................................
Income of trusts to finance supplementary unemployment benefits ....................................................................................
Special ESOP rules (other than investment credit) ...................................................................................................................
Additional deduction for the blind ...............................................................................................................................................
Additional deduction for the elderly ............................................................................................................................................

910
915
925
935
945
955
965
4,725
455
440
415
395
375
360
345
1,890
1,110 1,150 1,200
1,255
1,315
1,375
1,430
6,575
5
10
10
15
20
20
20
85
910
915
925
960
1,000
1,060
1,125
5,070
2,370 2,485 2,610
2,735
2,870
3,005
3,155
14,375
125 ........... ........... ............. ............. ............. ............. ...................

430
4,475
570
95
130

20
1,275
810
4,420
250
20
31,735
45
425

5 .............
1,365
1,465
855
900
4,640
4,875
255
255
20
20
33,325 35,000
50
50
455
485

125
6,395
4,065
22,145
1,260
100
159,045
230
2,140

450
5,050
635
85
130

455
5,255
695
85
130

460
5,515
740
80
130

465
5,800
795
75
130

470
6,205
850
70
130

2,300
27,825
3,715
395
650

72,145 76,390 76,990
10,600 10,895 11,190
4,365 4,405 4,715
40
40
45

77,570
11,765
4,980
50

78,120
11,945
5,180
50

78,705
12,105
5,385
55

79,295
12,225
5,590
60

390,680
59,230
25,850
260

4,320
225
20
2,005
30
1,635

4,530
235
20
1,830
35
1,650

4,755
250
20
1,675
35
1,660

5,020
260
20
1,525
35
1,675

22,745
1,180
100
9,235
165
8,240

3,745
190
20
3,035
30
1,575

445
4,855
590
90
130

40
1,185
770
4,205
250
20
30,215
45
400

3,925
200
20
2,490
30
1,600

4,120
210
20
2,200
30
1,620

ANALYTICAL PERSPECTIVES

TABLE 5–4.

OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES IN THE INCOME TAX—Continued
(In millions of dollars)
Outlay Equivalents
Provision

Tax credit for the elderly and disabled ......................................................................................................................................
Deductibility of casualty losses ...................................................................................................................................................
Earned income credit 2 ...............................................................................................................................................................
Social Security:
Exclusion of social security benefits:
OASI benefits for retired workers ...........................................................................................................................................
Disability insurance benefits ...................................................................................................................................................
Benefits for dependents and survivors ..................................................................................................................................
Veterans benefits and services:
Exclusion of veterans disability compensation ...........................................................................................................................
Exclusion of veterans pensions ..................................................................................................................................................
Exclusion of GI bill benefits ........................................................................................................................................................
Exclusion of interest on State and local debt for veterans housing .........................................................................................
General purpose fiscal assistance:
Exclusion of interest on public purpose State and local debt ..................................................................................................
Deductibility of nonbusiness State and local taxes other than on owner-occupied homes .....................................................
Tax credit for corporations receiving income from doing business in U.S. possessions ........................................................
Interest:
Deferral of interest on savings bonds ........................................................................................................................................
Addendum—Aid to State and local governments:
Deductibility of:
Property taxes on owner-occupied homes ............................................................................................................................
Nonbusiness State and local taxes other than on owner-occupied homes .........................................................................
Exclusion of interest on:
Public purpose State and local debt ......................................................................................................................................
IDBs for certain energy facilities ............................................................................................................................................
IDBs for pollution control and sewage and waste disposal facilities ....................................................................................
Small-issue IDBs .....................................................................................................................................................................
Owner-occupied mortgage revenue bonds ............................................................................................................................
State and local debt for rental housing .................................................................................................................................
IDBs for airports, docks, and sports and convention facilities ..............................................................................................
State and local student loan bonds .......................................................................................................................................
State and local debt for private nonprofit educational facilities ............................................................................................
State and local debt for private nonprofit health facilities .....................................................................................................
State and local debt for veterans housing ............................................................................................................................

1995

1996

1997

65
1,040
5,470

65
580
6,300

70
605
6,945

75
635
7,180

75
670
7,580

80
705
7,895

80
740
8,345

380
3,355
37,945

16,015 16,465 17,285
1,975 2,180 2,375
3,630 3,820 4,030

18,080
2,580
4,245

18,880
2,800
4,470

19,525
3,030
4,695

20,515
3,265
4,935

94,285
14,050
22,375

2,985
70
70
115

3,160
70
80
115

3,335
75
90
115

3,515
85
95
120

3,720
90
100
125

16,715
390
435
590

18,315 19,010 19,885
27,735 29,175 30,620
3,920 3,995 4,075

20,870
32,160
4,320

21,940
33,800
4,580

22,955
35,570
4,855

23,855
37,445
5,145

109,505
169,595
22,975

1,210

1,280

1,340

1,410

1,480

6,720

15,275 16,070 16,860
27,735 29,175 30,620

17,710
32,160

18,615
33,800

19,590
35,570

20,620
37,445

93,395
169,595

18,315 19,010 19,885
255
260
260
910
905
890
785
615
490
2,610 2,600 2,540
1,330 1,250 1,170
1,240 1,315 1,395
455
440
415
1,110 1,150 1,200
2,215 2,305 2,410
125
115
115

20,870
255
875
425
2,455
1,085
1,480
395
1,255
2,530
115

21,940
250
850
400
2,380
1,005
1,570
375
1,315
2,665
115

22,955
245
830
385
2,305
900
1,655
360
1,375
2,795
120

23,855
230
800
375
2,215
780
1,735
345
1,430
2,915
125

109,505
1,240
4,245
2,075
11,895
4,940
7,835
1,890
6,575
13,315
590

2,665
75
50
125

1,100

2,820
70
65
115

1,160

1998

1999

2000

2001

1997–2001

Tax Expenditure Baselines
A tax expenditure is a preferential exception to the
baseline provisions of the tax structure. The 1974 Congressional Budget Act does not, however, specify the
baseline provisions of the tax law. Deciding whether
provisions are preferential exceptions, therefore, is a
matter of judgement. As in prior years, this year’s tax
expenditure estimates are presented using two baselines: the normal tax baseline, which is used by the
Joint Committee on Taxation, and the reference tax
law baseline, which has been used by the Administration since 1983.
The normal tax baseline is patterned on a comprehensive income tax, which defines income as the
sum of consumption and the change in net wealth in
a given period of time. The normal tax baseline allows
personal exemptions, a standard deduction, and deductions of the expenses incurred in earning income. It

is not limited to a particular structure of tax rates,
or by a specific definition of the taxpaying unit.
The reference tax law baseline is also pattered on
a comprehensive income tax, but in practice is closer
to existing law. Reference law tax expenditures are limited to special exceptions in the tax code that serve
programmatic functions. These functions correspond to
specific budget categories such as national defense, agriculture, or health care. While tax expenditures under
the reference law baseline are generally tax expenditures under the normal tax baseline, the reverse is
not always true.
Both the normal and reference tax baselines allow
several major departures from a pure comprehensive
income tax. For example:
• Income is taxable when realized in exchange. Thus,
neither the deferral of tax on unrealized capital
gains nor the tax exclusion of imputed income
(such as the rental value of owner-occupied hous-

5. TAX EXPENDITURES

ing or farmers’ consumption of their own produce)
is regarded as a tax expenditure. Both accrued
and imputed income would be taxed under a comprehensive income tax.
• There is a separate corporation income tax. Under
a comprehensive income tax corporate income
would be taxed only once—at the shareholder
level, whether or not distributed in the form of
dividends.
• Values of assets and debt are not adjusted for inflation. A comprehensive income tax would adjust
the cost basis of capital assets and debt for
changes in the price level during the time the
assets or debt are held. Thus, under a comprehensive income tax baseline the failure to take account of inflation in measuring depreciation, capital gains, and interest income would be regarded
as a negative tax expenditure (i.e., a tax penalty),
and failure to take account of inflation in measuring interest costs would be regarded as a positive
tax expenditure (i.e., a tax subsidy).
While the reference law and normal tax baselines
are generally similar, areas of difference include:
• Tax rates. The separate schedules applying to the
various taxpaying units are included in the reference law baseline. Thus, corporate tax rates
below the maximum statutory rate do not give
rise to a tax expenditure. The normal tax baseline
is similar, except that it specifies the current maximum rate as the baseline for the corporate income tax. The lower tax rates applied to the first
$10 million of corporate income are thus regarded
as a tax expenditure. Similarly, under the reference law baseline, preferential tax rates for capital gains generally do not yield a tax expenditure;
only capital gains treatment of otherwise ‘‘ordinary income,’’ such as that from coal and iron
ore royalties and the sale of timber and certain
agricultural products, is considered a tax expenditure. The alternative minimum tax is treated as
part of the baseline rate structure under both the
reference and normal tax methods.
• Income subject to the tax. Income subject to tax
is defined as gross income less the costs of earning
that income. The Federal income tax defines gross
income to include: (1) consideration received in
the exchange of goods and services, including labor
services or property; and (2) the taxpayer’s share
of gross or net income earned and/or reported by
another entity (such as a partnership). Under the
reference tax rules, therefore, gross income does
not include gifts—defined as receipts of money or
property that are not consideration in an exchange—or most transfer payments, which can be
thought of as gifts from the Government.2 The
normal tax baseline also excludes gifts between
individuals from gross income. Under the normal
tax baseline, however, all cash transfer payments
2 Gross income does, however, include transfer payments associated with past employment,
such as social security benefits.

from the Government to private individuals are
counted in gross income, and exemptions of such
transfers from tax are identified as tax expenditures. The costs of earning income are generally
deductible in determining taxable income under
both the reference and normal tax baselines.3
• Capital recovery. Under the reference tax law
baseline no tax expenditures arise from accelerated depreciation. Under the normal tax baseline,
the depreciation allowance for machinery and
equipment is determined using straight-line depreciation over tax lives equal to mid-values of
the asset depreciation range (a depreciation system in effect from 1971 through 1980). The normal
tax baseline for real property is computed using
40-year straight-line depreciation.
• Treatment of foreign income. Both the normal and
reference tax baselines allow a tax credit for foreign income taxes paid (up to the amount of U.S.
income taxes that would otherwise be due), which
prevents double taxation of income earned abroad.
Under the normal tax method, however, controlled
foreign corporations (CFCs) are not regarded as
entities separate from their controlling U.S. shareholders. Thus, the deferral of tax on income received by CFCs is regarded as a tax expenditure
under this method. In contrast, except for tax
haven activities, the reference law baseline follows
current law in treating CFCs as separate taxable
entities whose income is not subject to U.S. tax
until distributed to U.S. taxpayers. Under this
baseline, deferral of tax on CFC income is not
a tax expenditure because U.S. taxpayers generally are not taxed on accrued, but unrealized,
income.
In addition to these areas of difference, the Joint
Committee on Taxation considers a somewhat broader
set of tax expenditures under its normal tax baseline
than is considered here.
Performance Measures and the Economic
Effects of Tax Expenditures
Under the Government Performance and Results Act
of 1993 (GPRA), Federal agencies, in conjunction with
the Office of Management and Budget, are directed to
develop performance goals, performance measures, and
strategic plans for their functions and programs. Consistent with this effort, OMB and the Department of
the Treasury have started to develop a framework for
evaluating the performance and economic effects of tax
expenditures; the discussion here summarizes the initial work on this issue. This framework is expected
to evolve over coming years based on additional work
within the Executive branch and consultation with Con3In the cases of individuals who hold ‘‘passive’’ equity interests in businesses, however,
the pro rata shares of sales and expense deductions reportable in a year are limited.
A passive business activity is defined to be one in which the holder of the interest, usually
a partnership interest, does not actively perform managerial or other participatory functions.
The taxpayer may generally report no larger deductions for a year than will reduce taxable
income from such activities to zero. Deductions in excess of the limitation may be taken
in subsequent years, or when the interest is liquidated.

74
gressional units, including the Joint Committee on Taxation and the General Accounting Office.
Tax expenditures have a variety of objectives and
effects. These include promoting certain types of activities (e.g., investment in low-income housing); influencing individual behavior (e.g., encouraging saving for retirement); and reducing the tax burden on individuals
in adverse situations (e.g., those claiming casualty
losses or large medical expenses).
Performance measurement is generally concerned
with inputs, outputs, and outcomes. In the case of tax
expenditures, the principal input is likely to be the
tax revenue loss. Outputs are quantitative or qualitative measures of goods and services, or changes in
income and investment, directly attributable to these
inputs. Outcomes, in turn, represent the changes in
the economy, society, or environment that are the ultimate goals of programs. Thus, for a provision that reduces taxes on investment in a certain activity, an increase in the amount of investment in that activity
would likely be a key output. The resulting production
from that investment, and, in turn, the associated net
changes (positive or negative) in national income, economic welfare, or security, could be the outcomes of
interest.
Estimation of these performance indicators and economic effects may be pursued using economic modeling
and quantitative analysis. It is anticipated that OMB,
Treasury, and other agencies will work together, as
appropriate, on determining a set of useful measures
and quantifying the effects of tax expenditures, as well
as on conceptual issues such as the identification and
measurement of tax expenditures.
The discussion below considers the types of measures
that might be useful for some major programmatic
groups of tax expenditures. The discussion is merely
intended to be illustrative.
A major set of tax expenditures benefits retirement
savings, through employer-provided pensions, individual retirement accounts, and Keogh plans. These provisions might be evaluated in terms of their effects on
boosting retirement savings.
Individuals also benefit from favorable treatment of
employer-provided health insurance. These benefits
could be evaluated in terms of their impact on health
insurance coverage and the corresponding improvements in health status.
Other provisions principally have income distribution,
rather than incentive, effects. For example, tax-favored
treatment of social security benefits provides increased
incomes to low-income retirees. This provision could be
evaluated by measuring the effects on the income of
the elderly and their well-being. The earned-income tax
credit, in contrast, should probably be evaluated both
for its effects on labor force participation as well as
its income redistribution properties.
Housing investment also benefits from tax expenditures such as the mortgage interest deduction and preferential treatment of capital gains on housing. Measures of the effectiveness of these provisions could in-

ANALYTICAL PERSPECTIVES

clude consideration of their effects on increasing home
ownership and the quality of housing. Deductibility of
State and local property taxes might be evaluated in
terms of its effect on making housing more affordable
as well as easing the cost of providing community services.
The above illustrative discussion, while broad, is nevertheless incomplete, both for the provisions mentioned
and the many that are not explicitly cited. Developing
a framework which is appropriately comprehensive, accurate, and flexible to reflect the objectives and effects
of the wide range of tax expenditures will be a significant challenge. It is expected that this framework will
evolve and improve over the next several years with
the objective of eventually producing appropriate quantitative analyses.
Other Considerations
The tax expenditure analysis could be extended beyond the income and transfer taxes to include payroll
and excise taxes. The exclusion of certain forms of compensation from the wage base, for instance, reduces
payroll taxes, as well as income taxes. Payroll tax exclusions are complex to analyze, however, because they
also affect social insurance benefits. Certain targeted
excise tax provisions might also be considered tax expenditures. In this case challenges include determining
an appropriate baseline.
Descriptions of Income Tax Provisions
Descriptions of the individual and corporate income
tax expenditures reported upon in this chapter follow.
NATIONAL DEFENSE
Benefits and allowances to armed forces personnel.—The housing and meals provided military personnel, either in cash or in kind, are excluded from income
subject to tax.
INTERNATIONAL AFFAIRS
Income earned abroad.—A U.S. citizen or resident
alien who resides in a foreign country or who stays
in one or more foreign countries for a minimum of
11 out of the past 12 months may exclude $70,000
per year of foreign-earned income. Eligible taxpayers
also may exclude or deduct reasonable housing costs
in excess of one-sixth of the salary of a civil servant
at grade GS–14, step 1. These provisions do not apply
to Federal employees working abroad; however, the tax
expenditure estimate does reflect certain allowances
that are excluded from their taxable income.
Income of Foreign Sales Corporations.—The Foreign Sales Corporation (FSC) provisions exempt from
tax a portion of U.S. exporters’ foreign trading income
to reflect the FSC’s sales functions as foreign corporations. These provisions conform to the General Agreement on Tariffs and Trade.

5. TAX EXPENDITURES

Source rule exceptions.—The worldwide income of
U.S. persons is taxable by the United States and a
credit for foreign taxes paid is allowed. The amount
of foreign taxes that can be credited is limited to the
pre-credit U.S. tax on the foreign source income. Two
exceptions give rise to tax expenditures: sales of inventory property that reduces the U.S. tax of exporters;
and, for financial institutions and certain financing operations of nonfinancial enterprises, an exception from
the rules that require allocation of interest expenses
between domestic and foreign activities of a U.S. taxpayer.

Allocation of R&E expenditures.—Regulations issued in 1977 were designed to achieve a reasonable
allocation of R&E expenses between corporations’ domestic and foreign activities, but successive legislative
and administrative actions suspended this requirement.
Under legislation that expired on July 31, 1995, 50
percent of both U.S.- and foreign-based R&E expenses
were allocated to their respective income sources. The
remaining R&E expenses then had to be allocated on
the basis of gross sales or gross income.

Income of U.S.-controlled foreign corporations.—
The income of foreign corporations controlled by U.S.
shareholders is not subject to U.S. taxation. The income
becomes taxable only when the controlling U.S. shareholders receive dividends or other distributions from
their foreign stockholding. Under the normal tax method, the currently attributable foreign source pre-tax income from such a controlling interest is subject to U.S.
taxation, whether or not distributed. Thus, under the
normal tax baseline the excess of controlled foreign corporation income over the amount distributed to a U.S.
shareholder gives rise to a tax expenditure in the form
of a tax deferral.

Exploration and development costs.—In the case
of successful investments in domestic oil and gas wells,
intangible drilling costs, such as wages, the costs of
using machinery for grading and drilling, and the cost
of unsalvageable materials used in constructing wells,
may be expensed rather than amortized over the productive life of the property.
Integrated oil companies may currently deduct only
70 percent of such costs and amortize the remaining
30 percent over five years. The same rule applies to
the exploration and development costs of surface stripping and the construction of shafts and tunnels for
other fuel minerals.

GENERAL SCIENCE, SPACE,

AND

TECHNOLOGY

Expensing R&E expenditures.—Research and experimentation (R&E) projects can be viewed as investments because their benefits accrue for several years
when they are successful. It is difficult, however, to
identify whether a specific R&E project is completed
and successful and, if it is successful, what its expected
life will be. For these reasons, the statutory provision
that these expenditures may be expensed is considered
part of the reference law. Under the normal tax method, however, the expensing of R&E expenditures is
viewed as a tax expenditure. The baseline assumed for
the normal tax method is that all R&E expenditures
are successful and have an expected life of five years.
R&E credit.—Under legislation that expired on July
1, 1995, the tax credit was 20 percent of the qualified
expenditures in excess of each year’s base amount. This
threshold was determined by multiplying a ‘‘fixed-base
percentage’’ (limited to a maximum of .16 for existing
companies) by the average amount of the company’s
gross receipts for the four preceding years. The ‘‘fixedbase percentage’’ was the ratio of R&E expenses to
gross receipts for the 1984 to 1988 period. Start-up
companies that did not both incur qualified expenses
and had gross receipts in at least three of the base
years were assigned a ‘‘fixed-base percentage’’ of .03.
A similar credit with its own separate threshold was
provided for taxpayers’ basic research grants to universities. Beginning in 1989, the otherwise deductible
qualified R&E expenditures were reduced by the
amount of the credit.

ENERGY

Percentage depletion.—Independent fuel mineral
producers and royalty owners are generally allowed to
take percentage depletion deductions rather than cost
depletion on limited quantities of output. Under cost
depletion, outlays are deducted over the productive life
of the property based on the fraction of the resource
extracted. Under percentage depletion taxpayers deduct
a percentage of gross income from mineral production
at rates of 22 percent for uranium, 15 percent for oil,
gas and oil shale, and 10 percent for coal. The deduction is limited to 50 percent of net income from the
property, except for oil and gas where the deduction
can be 100 percent of net property income. Production
from geothermal deposits is eligible for percentage depletion at 65 percent of net income, but with no limit
on output and no limitation with respect to qualified
producers. Unlike depreciation or cost depletion, percentage depletion deductions can exceed the cost of the
investment.
Alternative fuel production credit.—A nontaxable
credit of $3 per barrel (in 1979 dollars) of oil-equivalent
production is provided for several forms of alternative
fuels. It is generally available as long as the price of
oil stays below $29.50 (in 1979 dollars).
Oil and gas exception to passive loss limitation.—Although owners of working interests in oil and
gas properties are subject to the alternative minimum
tax, they are exempted from the ‘‘passive income’’ limitations. This means that the working interest-holder,
who manages on behalf of himself and all other owners
the development of wells and incurs all the costs of
their operation, may aggregate negative taxable income

ANALYTICAL PERSPECTIVES

from such interests with his income from all other
sources. Thus, he will be relieved of the minimum tax
rules limit on tax deferrals.
Capital gains treatment of royalties on coal.—
Sales of certain coal under royalty contracts can be
treated as capital gains. While the top statutory rate
on ordinary income is 39.6 percent, the rates on capital
gains are limited to 28 percent.
Tax-exempt bonds for energy facilities.—Certain
energy facilities, such as municipal electric and gas utilities, may benefit from tax-exempt financing.
Enhanced oil recovery credit.—A credit is provided
equal to 15 percent of the taxpayer’s costs for tertiary
oil recovery on projects in the United States. Qualifying
costs include tertiary injectant expenses, intangible
drilling and development costs on a qualified enhanced
oil recovery project, and amounts incurred for tangible
depreciable property.
New technology credits.—A credit of 10 percent is
available for investment in solar and geothermal energy
facilities. In addition, a credit of 1.5 cents is provided
per kilowatt hour of electricity produced from renewable
resources such as wind and biomass. The renewable
resources credit applies only to electricity produced by
a facility placed in service before July 1, 1999.
Alcohol fuel credit.—Gasohol, a motor fuel composed of at least 10 percent alcohol, is exempt from
5.4 of the 18.4 cents per gallon Federal excise tax on
gasoline. Smaller exemptions are allowed for motor fuel
with lower alcohol content. There is a corresponding
income tax credit for alcohol used as a fuel in applications where the excise tax is not assessed. This credit,
equal to a subsidy of 54 cents per gallon for alcohol
used as a motor fuel, is intended to encourage substitution of alcohol for petroleum-based gasoline. In addition, small producers of ethanol are eligible for a 10
cent per gallon credit.
Credit and deduction for clean-fuel vehicles and
property.—A tax credit of 10 percent is provided for
electric vehicles. In addition, a deduction is provided
for other clean-fuel burning vehicles as well as refueling
property.
Exclusion of utility conservation subsidies.—Subsidies by public utilities for customer expenditures on
energy conservation measures are excluded from the
gross income of the customer.
NATURAL RESOURCES

AND

ENVIRONMENT

Exploration and development costs.—As is true
for fuel minerals, certain capital outlays associated with
exploration and development of nonfuel minerals may
be expensed rather than depreciated over the life of
the asset.

Percentage depletion.—Most nonfuel mineral extractors also make use of percentage depletion rather
than cost depletion, with percentage depletion rates
ranging from 22 percent for sulphur down to 5 percent
for sand and gravel.
Capital gains treatment of iron ore and of certain timber income.—Iron ore and certain timber sold
under a royalty contract can be treated as capital gains.
Mining reclamation reserves.—Taxpayers are allowed to establish reserves to cover certain costs of
mine reclamation and of closing solid waste disposal
properties. Net increases in reserves may be taken as
a deduction against taxable income.
Tax-exempt bonds for pollution control and
waste disposal.—Interest on State and local government debt issued to finance private pollution control
and waste disposal facilities was excludable from income subject to tax. This authorization was repealed
for pollution control equipment and limits placed on
the amount of debt that can be issued for private waste
disposal facilities by the Tax Reform Act of 1986.
Expensing multiperiod timber growing costs.—
Generally, costs must be capitalized when goods are
produced for inventory used in one’s own trade or business, or under contract to another party. Timber production, however, was specifically exempted from these
multiperiod cost capitalization rules, creating a special
benefit derived from this deferral of taxable income.
Credit and seven-year amortization for reforestation.—A special 10 percent investment tax credit is
allowed for up to $10,000 invested annually in clearing
land and planting trees for the ultimate production of
timber. The same amount of forestation investment
may also be amortized over a seven-year period. Without this preference, the amount would have to be capitalized and could be recovered (deducted) only when
the trees were sold or harvested 20 or more years later.
Moreover, the amount of forestation investment that
is amortizable is not reduced by any of the investment
credit that is allowed.
Historic preservation.—Expenditures to preserve
and restore historic structures qualify for a 20 percent
investment credit, but the depreciable basis must be
reduced by the full amount of the credit taken.
AGRICULTURE
Expensing certain capital outlays.—Farmers, except for certain agricultural corporations and partnerships, are allowed to deduct certain expenditures for
feed and fertilizer, as well as for soil and water conservation measures. Expensing is allowed, even though
these expenditures are for inventories held beyond the
end of the year, or for capital improvements that would
otherwise be capitalized.

5. TAX EXPENDITURES

Expensing multiperiod livestock and crop production costs.—The production of livestock and crops
with a production period of less than two years is exempted from the uniform cost capitalization rules.
Farmers establishing orchards, constructing farm facilities for their own use, or producing any goods for sale
with a production period of two years or more may
elect not to capitalize costs. If they do, they must apply
straight-line depreciation to all depreciable property
they use in farming.
Loans forgiven solvent farmers.—Farmers are
granted special tax treatment by being forgiven the
tax liability on certain forgiven debt. Normally, the
amount of loan forgiveness is accounted for as a gain
(income) of the debtor and he must either report the
gain, or reduce his recoverable basis in the property
to which the loan relates. If the debtor elects to reduce
basis and the amount of forgiveness exceeds his basis
in the property, the excess forgiveness is taxable. However, in the case of insolvent (bankrupt) debtors, the
amount of loan forgiveness never results in an income
tax liability.4 Farmers with forgiven debt are considered
insolvent for tax purposes, and thus qualify for income
tax forgiveness.
Capital gains treatment of certain income.—Certain agricultural income, such as unharvested crops,
can be treated as capital gains.
COMMERCE AND HOUSING
This category includes a number of tax expenditure
provisions that also affect economic activity in other
functional categories. For example, provisions related
to investment, such as accelerated depreciation, could
also have been classified under the energy, natural resources and environment, agriculture, or transportation
categories.
Credit union income.—The earnings of credit
unions not distributed to members as interest or dividends are exempt from income tax.
Bad debt reserves.—Only commercial banks with
less than $500 million in assets, mutual savings banks,
and savings and loan associations are permitted to deduct additions to bad debt reserves in excess of actually
experienced losses. The deduction for additions to loss
reserves allowed qualifying mutual savings banks and
savings and loan associations is 8 percent of otherwise
taxable income. To qualify, the thrift institutions must
maintain a specified fraction of their assets in the form
of mortgages, primarily residential.
Interest on life insurance savings.—Savings in the
form of policyholder reserves are accumulated from premium payments and interest is earned on the reserves.
Such interest income is not taxed as it accrues nor
4The insolvent taxpayer’s carryover losses and unused credits are extinguished first, and
then his basis in assets reduced to no less than amounts still owed creditors. Finally,
the remainder of the forgiven debt is excluded from tax.

77
when received by beneficiaries upon the death of the
insured.
Small property and casualty insurance companies.— Insurance companies that have annual net premium incomes of less than $350,000 are exempted from
tax; those with $350,000 to $2,100,000 of net premium
incomes may elect to pay tax only on the income earned
by their investment portfolio.
Insurance companies owned by exempt organizations.—Generally, the income generated by life and
property and casualty insurance companies is subject
to tax, albeit by special rules. Insurance operations conducted by such exempt organizations as fraternal societies and voluntary employee benefit associations, however, are exempted from tax.
Mortgage housing bonds.—Interest on all mortgage
revenue bonds issued by State and local governments
is exempt from taxation. Proceeds are used to finance
homes purchased by first-time buyers—with low to
moderate incomes—of dwellings with prices under 90
percent of the average area purchase price.
There are limits imposed on the amount of tax-exempt State and local government bonds that could be
issued to fund private activity. The volume cap for single-family mortgage revenue bonds and multifamily
rental housing bonds is combined with the cap for student loans and industrial development bonds (IDBs).
The cap is set at $50 per capita or a minimum of
$150 million for each State.
States are authorized to issue mortgage credit certificates (MCCs) in lieu of qualified mortgage revenue
bonds because the bonds are relatively inefficient subsidies to first-time home buyers. MCCs entitle home
buyers to income tax credits for a specified percentage
of interest on qualified mortgage loans. In this way,
the entire amount of the subsidy flows directly to the
home buyer without being partly diverted to financial
middlemen or bondholders. A State cannot issue an
aggregate annual amount of MCCs greater than 25 percent of its annual ceiling for qualified mortgage bonds.
Because of the relationship between MCCs and qualified mortgage bonds, their estimates are presented as
one line item in the tables.
Rental housing bonds.—State and local government
issues of IDBs are restricted to multifamily rental housing projects in which 20 percent (15 percent in targeted
areas) of the units are reserved for families whose income does not exceed 50 percent of the area’s median
income; or 40 percent for families with incomes of no
more than 60 percent of the area median income. Other
tax-exempt bonds for multifamily rental projects are
generally issued with the requirement that all tenants
must be low or moderate income families. Rental housing bonds are subject to the volume cap discussed in
the mortgage housing bond section above.

78
Interest and taxes on owner-occupied homes.—
Owner-occupants of homes may deduct mortgage interest and property taxes on their primary and secondary
residences as itemized nonbusiness deductions. The
mortgage interest deduction is limited to interest on
debt no greater than the owner’s basis in the residence
and, for debt incurred after October 13, 1987, it is
limited to no more than $1 million. Interest on up to
$100,000 of other debt secured by a lien on a principal
or second residence is also deductible, irrespective of
the purpose of borrowing, provided the debt does not
exceed the fair market value of the residence. Mortgage
interest deductions on personal residences are tax expenditures because the taxpayers are not required to
report the value of owner-occupied housing services as
gross income.
Real property installment sales.—Dealers in real
and personal property, i.e., sellers that regularly hold
property for sale or resale, cannot defer taxable income
from installment sales until the receipt of the loan repayment. Nondealers, defined as sellers of real property
used in their business, are required to pay interest
to the Federal Government on deferred taxes attributable to their total installment obligations in excess
of $5 million. Only properties with sales prices exceeding $150,000 are includable in the total. The payment
of a market rate of interest eliminates the benefit of
the tax deferral. The tax exemption for nondealers with
total installment obligations of less than $5,000,000 is,
therefore, a tax expenditure.
Capital gains on home sales.—When a primary
residence is sold, the homeowner can defer paying a
capital gains tax on the proceeds by purchasing or constructing a home of value at least equal to that of
the prior home (net of sales and qualified fix-up expenses) within two years. This deferral is a tax expenditure.
Capital gains on sales by owners aged 55 or
older.—A taxpayer who is 55 years of age or older
at the time of the sale of his residence may elect to
exclude from tax up to $125,000 of the gain from its
sale. This is a once-in-a-lifetime election. In effect, this
provision converts some prior deferrals of tax into forgiveness of tax.
Passive loss real estate exemption.—In general,
passive losses may not offset income from other sources.
Losses up to $25,000 attributable to certain rental real
estate activity, however, are exempted from this rule.
Accelerated depreciation of real property, machinery and equipment.—As previously noted, the tax
depreciation allowance provisions are part of the reference law rules, and thus do not cause tax expenditures under the reference method. Under the normal
tax method, however, a 40-year tax life for depreciable
real property is the norm. So, the statutory depreciation
period in effect from 1987 to 1993 for nonresidential

ANALYTICAL PERSPECTIVES

properties of 31.5 years, and the 39-year period for
property placed in service after February 25, 1993, give
rise to tax expenditures. The statutory depreciation period for residential property is 27.5 years, which also
results in tax expenditures. Statutory depreciation of
machinery and equipment also is somewhat accelerated
relative to the normal tax baseline. In addition, tax
expenditures arise from pre-1987 tax allowances for
real and personal property.
Cancellation of indebtedness.—Individuals are not
required to report the cancellation of certain indebtedness as current income. However, if they do not, it
would be included as an adjustment in the basis of
the underlying property.
Imputed interest rules.—Under reference law rules
commonly referred to as original issue discount (OID),
both the holder and seller of a financial contract are
generally required to report interest earned in the period it accrues, not when the contract payments are
made. Moreover, the amount of interest accruable is
determined by the actual price paid for the contract,
not by the stated or nominal principal and interest
stipulated in the contract.5
Exceptions to the general rules for accounting for
interest expense or income include the following: (a)
permission for the mortgagor of his personal residence
to treat the discount from the nominal principal of his
mortgage loan, commonly called ‘‘points,’’ as prepaid
interest which is deductible in the year paid, not the
year accrued; and (b) sellers of farms and small businesses worth less than $1 million, in exchange for the
purchaser’s debt obligation, are exempted from the OID
rules. This is $750,000 more than the $250,000 exemption that the reference tax law generally allows for
such transactions.
Capital gains (other than agriculture, timber,
iron ore and coal).—While the top statutory rate on
ordinary income is 39.6 percent, the rates on capital
gains are limited to 28 percent. This treatment is considered a tax expenditure under the normal tax method
but not under the reference law method.
Capital gains exclusion for small business
stock.—An exclusion of 50 percent is provided for capital gains from qualified small business stock held by
individuals for more than 5 years. A qualified small
business is a corporation whose gross assets do not
exceed $50 million as of the date of issuance of the
stock. Certain activities such as personal services and
banking are ineligible for the exclusion.
Step-up in basis of capital gains at death.—Capital gains on assets held at the owner’s death are not
5Thus, when a borrower on December 31, 1995, issues a promise to pay $1,000 plus
interest at 10 percent on December 30, 1996, for a total repayment of $1,100, and accepts
$900 from a lender in exchange for the contract, the rules require that both parties: (a)
recognize that $900 is the amount lent, so that the effective loan interest rate is not
the nominal 10 percent rate but is 22.2 percent; and (b) both report $200 as interest
paid or received in 1996, as the case may be.

5. TAX EXPENDITURES

subject to capital gains taxes. The cost basis of the
appreciated assets is adjusted upward to the market
value at the owner’s date of death. The step-up in the
heir’s cost basis means that, in effect, the capital gain
is forgiven.
Carryover basis of capital gains on gifts.—When
a gift is made, the transferred property carries to the
donee the donor’s basis—the cost that was incurred
when the property was first acquired. The carryover
of the donor’s basis allows a continued deferral of unrealized capital gains.
Ordinary income treatment of losses from sale
of small business corporate stock shares.—Up to
$100,000 in losses from the sale of such stock may
be treated as ordinary losses, and therefore not be subject to the $3,000 annual capital loss write-off limit
if the corporation’s capitalization is less than $1 million.
Expensing of certain small investments.—Qualifying investments in tangible property up to $17,500
($10,000 prior to 1993) can be expensed rather than
depreciated over time. To the extent that qualifying
investment during the year exceeds $200,000, the
amount eligible for expensing is decreased. The amount
expensed is completely phased out when qualifying investments exceed $217,500.
Business start-up costs.—When an individual or
corporation acquires or otherwise enters into a new
business, certain start-up expenses, such as the costs
of investigating opportunities and legal services, are
normally incurred. The taxpayer may elect to amortize
these outlays over 60 months although they are similar
to other payments he makes for nondepreciable intangible assets that are not recoverable until the business
is sold. Under the normal tax method this gives rise
to a tax expenditure, while under the reference method
it does not.
Graduated corporation income tax rate schedule.—The schedule is graduated, with rates of 15 percent on the first $50,000 of taxable income, 25 percent
on the next $25,000, 34 percent on the next $9.925
million, and a rate of 35 percent on income over $10
million. As compared with a flat 35 percent tax rate,
the lower rates provide a $111,000 reduction in tax
liability for corporations with taxable incomes of $10
million. This benefit is recaptured in the cases of corporations with taxable incomes exceeding $100,000.
This is accomplished by (1) a 5 percent additional tax
on corporate incomes in excess of $100,000, but less
than $335,000 and (2) a 3 percent additional tax on
income over $15 million but less than $18.33 million.
At this point the $111,000 is fully recaptured. Since
this rate schedule is part of the reference tax law, it
does not give rise to a tax expenditure under the reference method. A flat corporation income tax rate is
taken as the baseline under the normal tax method;

therefore the lower rates do yield a tax expenditure
under this concept.
Small issue industrial development bonds.—The
interest on small issue industrial development bonds
(IDBs) issued by State and local governments to finance
private business property is excluded from income subject to tax. Depreciable property financed with small
issue IDBs must be depreciated, however, using the
straight-line method. The tax exemption of small issue
bonds expired in 1986, except for small issue IDBs exclusively issued to finance manufacturing facilities for
which the tax exemption is permanent. The annual volume of small issue IDBs is subject to the unified volume cap discussed in the mortgage housing bond section above.
Deferral of gains from sale of broadcasting facility to minority owned business.—The voluntary
sale of assets generally requires the seller to pay tax
on the gain that has accrued over the period of ownership. However, in the case of an involuntary sale, as
when an owner’s property must be sold in a condemnation preceding, or to implement a change in a government’s regulatory policy, the owner is permitted to
defer payment of tax, provided the proceeds are reinvested in similar property within a specified period.
In 1979, the Federal Communications Commission instituted a policy of encouraging minority group ownership of broadcast licenses. Since that time, the tax laws
have been interpreted to permit voluntary sellers of
licensed broadcasting facilities to defer payment of capital gains tax when the buyer has been certified as
a ‘‘minority business,’’ in effect treating the sale as
‘‘involuntary.’’
Treatment of Alaskan Native Corporations
losses.—Tax law restricts the ability of profitable corporations to reduce their tax liabilities by merging or
buying corporations with accumulated net operating
losses (NOLs) and as yet unrefunded claims to investment credits. Alaska Native Corporations have a limited exemption (fifteen years after the NOL or credit
claim was first experienced) from these restrictions that
includes NOLs and credits claimable prior to April 26,
1988.
TRANSPORTATION
Shipping companies that are U.S. flag carriers.—Certain companies that operate U.S. flag vessels receive a deferral of income taxes on that portion
of their income used for shipping purposes, primarily
construction, modernization and major repairs to ships,
and repayment of loans to finance these qualified investments. Once indefinite, the deferral has been limited to 25 years since January 1, 1987.
Exclusion of reimbursed employee parking expenses.—Parking at or near an employer’s business
premises that is paid for by the employer is excludable

ANALYTICAL PERSPECTIVES

from the income of the employee as a working condition
fringe benefit. The maximum amount of the parking
exclusion is $155 month (in 1993 dollars), indexed in
$5 increments. The tax expenditure estimate does not
include parking at facilities owned by the employer.
Exclusion of employer-provided transit passes.—
Transit passes, tokens, and fare cards provided by an
employer to defray an employee’s commuting costs are
excludable from the employee’s income as a de minimis
fringe benefit, if the total value of the benefit does
not exceed $60 per month (in 1993 dollars), indexed
in $5 increments.
COMMUNITY

AND

REGIONAL DEVELOPMENT

Low-income housing investment.—Through 1989,
a tax credit for investment in new, substantially rehabilitated, and certain unrehabilitated low-income housing was structured to have a present value of 70 percent of construction or rehabilitation costs incurred and
was allowed over 10 years. For Federally subsidized
projects and those involving unrehabilitated existing
low income housing, the credit was structured to have
a present value of 30 percent. Beginning on January
1, 1990, the credit was extended at a present value
of 70 percent, including projects financed with other
Federal subsidies, but only if substantial rehabilitation
was done. Notwithstanding the capital grant character
of this subsidy, the investor’s recoverable basis is not
reduced by the substantial credit allowed.
Rehabilitation of structures.—A 10 percent investment tax credit is available for the rehabilitation of
buildings that are used for business or productive activities and that were erected before 1936 for other
than residential purposes. A full reduction by the
amount of the credit is required in the taxpayer’s recoverable basis.
Tax-exempt bonds for airports and similar facilities.—Government-owned airports, docks and
wharves, as well as high-speed rail facilities that need
not be government-owned, may be financed with taxexempt bonds. These bonds are not covered by a volume
cap.
Exemption of certain mutuals’ and cooperatives’
income.—The incomes of mutual and cooperative telephone and electric companies are exempted from tax
if at least 85 percent of their revenues are derived
from patron service charges.
Empowerment zones.—Qualifying businesses in designated economically depressed areas can receive tax
benefits such as an employer wage credit, increasing
expensing of investment in equipment, tax-exempt financing, and accelerated depreciation. In addition, a
tax credit for contributions to certain community development corporations can be available.

EDUCATION, TRAINING, EMPLOYMENT,
SERVICES

AND

SOCIAL

Scholarship and fellowship income.—Scholarships and fellowships are not excluded from taxable
income to the extent they exceed tuition and courserelated expenses of the grantee. From an economic
point of view, scholarships and fellowships are either
gifts not conditioned on the performance of services,
or they are rebates of educational costs. Thus, under
the reference law method, the exclusion is not a tax
expenditure because this method does not include either
gifts or price reductions in a taxpayer’s gross income.
Under the normal tax method, however, the exclusion
is considered a tax expenditure because under this
method gift-like transfers of government funds—and
many scholarships are derived directly or indirectly
from government funding—are included in gross income.
Tax-exempt bonds for educational purposes.—Interest on State and local government debt issued to
finance student loans or the construction of facilities
used by private nonprofit educational institutions is excluded from income subject to tax. The aggregate volume of such private activity bonds that each State may
issue during any calendar year is limited.
U.S. savings bonds for education.—Interest on
U.S. savings bonds, issued after December 31, 1989,
may be excluded from tax if the bonds, plus accrued
interest, are transferred to an educational institution
as payment for educational expenses. The exclusion
from tax is phased out for joint returns with adjusted
gross incomes of $65,250 to $95,250 and $43,500 to
$58,500 for single and head of household returns in
1995.
Dependent students age 19 or older.—Taxpayers
can claim personal exemptions for dependent children
age 19 or over who receive parental support payments
of $1,000 or more per year, are full-time students, and
do not claim a personal exemption on their own tax
returns. This preferential arrangement usually generates tax savings because the students’ marginal tax
rates are more often than not lower than their parents’
marginal tax rates.
Charitable contributions.—Contributions to charitable, religious, and certain other nonprofit organizations are allowed as an itemized deduction for individuals, generally up to 50 percent of adjusted gross income. Taxpayers who donate capital assets to charitable
or educational organizations can deduct the assets’ current value without the taxation of any appreciation in
value. Corporations can also deduct charitable contributions up to 10 percent of their pre-tax income. Tax
expenditures resulting from the deductibility of contributions are shown separately for educational and
other institutions. Contributions to health institutions
are reported under the health function.

5. TAX EXPENDITURES

Employer provided benefits.—Many employers provide employee benefits that are not counted in employee
income. The employers’ costs for these benefits are deductible business expenses. The exclusion from an employee’s income of the value of educational assistance,
child care, meals and lodging, as well as ministers’
housing allowances and the rental value of parsonages
are tax expenditures. The exclusion for educational assistance expired on December 31, 1994. Health and
other insurance benefits are reported under the health
and income security functions. Certain parking and
transit benefits are reported under the transportation
function.
Targeted jobs credit.—Employers could claim a tax
credit for qualified wages paid to individuals who began
work before January 1, 1995, and who were certified
as members of various targeted groups. The amount
of the credit that could be claimed was 40 percent of
the first $3,000 paid during the first year of employment. The 40 percent credit also applied to the summer
employment wages paid to 16 and 17 year old youths
who were members of low income families. Employers
had to reduce their deduction for wages paid by the
amount of the credit claimed.
Child and dependent care expenses.—A tax credit
may be claimed by married couples for child and dependent care expenses incurred when one spouse works
full time and the other works at least part time or
goes to school. The credit may also be claimed by divorced or separated parents who have custody of children, and by single parents. Expenditures up to a maximum $2,400 for one dependent and $4,800 for two or
more dependents are eligible for the credit. The credit
is equal to 30 percent of qualified expenditures for taxpayers with incomes of $10,000 or less. The credit is
reduced to a minimum of 20 percent by one percentage
point for each $2,000 of income between $10,000 and
$28,000.
Disabled access expenditures.—A credit is provided of 50 percent of eligible disabled access expenditures in excess of $250. The credit is limited to $5,000.
Costs of removing architectural barriers to the
handicapped.—The investment cost of making any
business accessible to persons suffering physical or
mental disabilities may be deducted, rather than capitalized as part of the taxpayer’s basis in such property
and recovered by subsequent depreciation allowances,
as is generally required.
Foster care payments.—Foster parents provide a
home and care for children who are wards of the State,
under contract with the State. Compensation received
for this service is explicitly excluded from the gross
incomes of foster parents, making the expenses they
incur nondeductible. This activity is, in effect, tax-exempt.

HEALTH
Employer paid medical insurance and expenses.—Employee compensation, in the form of payments by employers for health insurance premiums and
other medical expenses, is deducted as a business expense by employers, but it is not included in employee
gross income.
Medical care expenses.—Personal expenditures for
medical care (including the costs of prescription drugs)
exceeding 7.5 percent of the taxpayer’s adjusted gross
income are deductible.
Tax-exempt bonds for hospital construction.—Interest earned on State and local government debt issued to finance hospital construction is excluded from
income subject to tax.
Charitable contributions to health institutions.—Contributions to nonprofit health institutions
are allowed as a deduction for individuals and corporations. Tax expenditures resulting from the deductibility
of contributions to other charitable institutions are listed under the education, training, employment, and social services function.
Orphan drugs.—To encourage the development of
drugs for the treatment of rare diseases or physical
conditions, a tax credit was granted equal to 50 percent
of the costs for clinical testing that must be completed
before manufacture and distribution are approved by
the Food and Drug Administration. Because the drug
firm was not required to reduce its deduction for testing
expenses (an R&D expenditure) by the amount of this
credit, the private cost of clinically testing orphan drugs
was reduced substantially. This tax expenditure expired
December 31, 1994.
Blue Cross and Blue Shield.—Although these organizations are not qualified as exempt, they are provided
exceptions from otherwise applicable insurance company income tax accounting rules that effectively eliminate their tax liabilities.
INCOME SECURITY
Railroad retirement benefits.—These benefits are
not generally subject to the income tax unless the recipient’s gross income reaches a certain threshold discussed more fully under the social security function.
Workmen’s compensation benefits.—Workmen’s
compensation provides payments to disabled workers.
These benefits, although income to the recipients, are
a tax preference because they are not subject to the
income tax.
Public assistance benefits.—The exclusion from
taxable income of public assistance benefits received
by individuals is listed as a tax expenditure under the
normal tax method because, under this method, cash

82
transfers from government are included in gross income. In contrast, gifts not conditioned on the performance of services, including transfers from government,
are not taxable under the reference law. Therefore,
under the reference tax method, the tax exclusion for
public assistance benefits is not shown as a tax expenditure.
Special benefits for disabled coal miners.—Disability payments to former coal miners out of the Black
Lung Trust Fund, although income to the recipient,
are not subject to the income tax.
Military disability pensions.—Most of the military
pension income received by current disabled retired veterans is excluded from their income subject to tax.
Pension contributions and earnings.—Certain
employer contributions to pension plans, along with individual contributions to individual retirement accounts
(IRAs) and amounts set aside by the self-employed, are
excluded from adjusted gross income in the year of
contribution. The investment income earned by pension
funds and other qualifying retirement plans is not taxable when earned, and this deferral is, therefore, also
a tax expenditure.
Limited amounts ($9,500 in 1996) can be excluded
from an employee’s compensation under a qualified
cash or deferred arrangement with the employer (401(k)
plan) or tax-sheltered annuity (403(b) plan).
Employees may deduct annual contributions to an
IRA of $2,000 (or 100 percent of compensation, if less),
or $2,250 on a joint return with only one spouse earning income, if: (a) neither the individual or spouse is
an active participant in an employer-provided retirement plan; or (b) their adjusted gross income falls below
$40,000 ($25,000 for a single taxpayer). The allowable
IRA deduction is phased out between $40,000 and
$50,000 for a joint return and $25,000 and $35,000
for a single return. Beyond these income limits, nondeductible contributions to IRAs are available to taxpayers who are active participants in employer-provided
retirement plans. Self-employed persons can make deductible contributions to their own retirement (Keogh)
plans equal to 25 percent of their income, up to a maximum of $30,000 per year.
Employer provided insurance benefits.—Many
employers cover part or all the cost of premiums or
payments for: (a) employees’ life insurance benefits; (b)
accident and disability benefits; (c) death benefits; and
(d) supplementary unemployment benefits. The
amounts are deductible by the employers and are excluded as well from employees’ gross incomes for tax
purposes.
Employer Stock Ownership Plan (ESOP) provisions.—A special type of employee benefit plan, organized as a trust, is tax-exempt. Employer-paid contributions (the value of stock issued to the ESOP) are deductible by the employer as part of employee compensa-

ANALYTICAL PERSPECTIVES

tion costs. They are not included in the employees’ gross
income for tax purposes, however, until they are paid
out as benefits. The following special income tax provisions for ESOPs are intended to increase ownership
of corporations by their employees: (1) annual employer
contributions are subject to less restrictive limitations
(percentages of employees’ cash compensation); (2)
ESOPs may borrow to purchase employer stock, guaranteed by their agreement with the employer that the
debt will be serviced by his payment (deductible by
him) of a portion of wages (excludable by the employees) to service the loan; (3) ESOPs’ lenders may exclude
half the interest from their gross income; (4) employees
who sell appreciated company stock to the ESOP may
defer any taxes due until they withdraw benefits; and
(5) dividends paid to ESOP-held stock are deductible
by the employer.
Support of the aged and the blind.—Taxpayers
who are blind or 65 years of age or older may take
an additional $1,000 standard deduction if single, or
$800 if married. In addition, individuals who are 65
years of age or older, or who are permanently disabled,
can take a tax credit equal to 15 percent of the sum
of their earned and retirement income. Qualified income
is limited to no more than $2,500 for single individuals
or married couples filing a joint return where only one
spouse is 65 years of age or older, and up to $3,750
for joint returns where both spouses are 65 years of
age or older. These limits are reduced by one-half of
the taxpayer’s adjusted gross income over $7,500 for
single individuals and $10,000 for married couples filing a joint return.
Casualty losses.—Neither the purchase of property
nor insurance premiums to protect its value are deductible as costs of earning income; therefore, reimbursement for insured loss of such property is not reportable
as a part of gross income. However, a special provision
permits relief for taxpayers suffering an uninsured loss.
They may deduct casualty and theft losses of more than
$100 each, but only to the extent that total losses during the year exceed 10 percent of adjusted gross income.
Earned income credit.—This credit may be claimed
by low income workers. For a family with one qualifying child, the credit is 34 percent of the first $6,330
of earned income in 1996. The credit is 40 percent
of the first $8,890 of income for a family with two
or more qualifying children. When the taxpayer’s income exceeds $11,610, the credit is phased out at the
rate of 15.98 percent (21.06 percent if two or more
qualifying children are present). It is completely phased
out at $25,078 of adjusted gross income ($28,495 if two
or more qualifying children are present).
The credit may also be claimed by workers who do
not have children living with them. Qualifying workers
must be at least age 25 and may not be claimed as
a dependent on another taxpayer’s return. The credit
is not available to workers age 65 or older. In 1996,
the credit is 7.65 percent of the first $4,220 of earned

5. TAX EXPENDITURES

income. When the taxpayer’s income exceeds $5,280,
the credit is phased out at the rate of 7.65 percent.
It is completely phased out at $9,500 of adjusted gross
income.
For workers with or without children, the income
level at which the credit’s phase-outs begin and the
maximum amounts of income on which the credit can
be taken are adjusted for inflation. Earned income tax
credits in excess of tax liabilities are refundable to individuals, and as such are paid by the Federal Government. This portion of the credit is included in outlays,
while the amount that offsets tax liabilities is shown
as a tax expenditure.
SOCIAL SECURITY
Old Age and Survivors Insurance (OASI) benefits for retired workers.—Social security benefits that
exceed the beneficiary’s contributions out of taxed income are deferred employee compensation and the deferral of tax on that compensation is a tax expenditure.
These additional retirement benefits are paid for partly
by employers’ contributions that were not included in
employees’ taxable compensation. Portions (reaching as
much as 85 percent) of recipients’ social security and
tier 1 railroad retirement benefits are included in the
income tax base, however, if the recipient’s provisional
income exceeds certain base amounts. Provisional income is equal to adjusted gross income plus foreign
or U.S. possession income and tax-exempt interest, and
one half of social security and tier 1 railroad retirement
benefits. The tax expenditure is limited to the portion
of the benefits received by taxpayers who are below
the base amounts at which 85 percent of the benefits
are taxable.
Social Security benefits for the disabled, dependents and survivors.—Benefit payments from the Social Security Trust Fund, for disability and for dependents and survivors, are excluded from the beneficiaries’
gross incomes, and thus give rise to tax expenditures.
VETERANS BENEFITS

AND

SERVICES

Tax-exempt mortgage bonds for veterans.—Interest earned on general obligation bonds issued by State
and local governments to finance housing for veterans
is excluded from taxable income. The issuance of such
bonds is limited, however, to five pre-existing State programs and to amounts based upon previous volume levels for the period January 1, 1979 to June 22, 1984.
Furthermore, future issues are limited to veterans who
served on active duty before 1977.
GENERAL GOVERNMENT
Public purpose State and local debt.—Interest on
State and local government debt, issued to finance government activities, is excluded from Federal taxation.
State and local governments, therefore, can sell debt
obligations at a lower interest cost than would be possible if such interest were subject to tax. Only the excluded interest on bonds for public purposes, such as
schools, roads, and sewers, is included here.
Nonbusiness State and local taxes excluding
home-owner property taxes.—The deductibility of
nonbusiness State and local income and personal property taxes gives indirect assistance to these governments by reducing the costs of the services they provide.
Business income earned in U.S. possessions.—
Under certain conditions, U.S. corporations receiving
income from an active trade or business, or from investments located in a U.S. possession, can claim a special
credit against U.S. tax otherwise due.
INTEREST
U.S. savings bonds.—The interest on U.S. savings
bonds is not taxable until the bonds are redeemed,
thereby deferring tax liability. The deferral is equivalent to an interest-free loan and, therefore, it is a tax
expenditure.

Veterans benefits.—All compensation due to death
or disability and pensions paid by the Veterans Administration are excluded from taxable income.
TAX EXPENDITURES IN THE UNIFIED TRANSFER TAX
Exceptions to the general terms of the Federal unified
transfer tax favor particular transferees or dispositions
of transferors, similar to Federal direct expenditure or
loan programs. The transfer tax provisions identified
as tax expenditures satisfy the reference law criteria
for inclusion in the tax expenditure budget that were
described above. There is no generally accepted normal
tax baseline for transfer taxes.

Unified Transfer Tax Reference Rules
The reference tax rules for the unified transfer tax
from which departures represent tax expenditures include:
• Definition of the taxpaying unit. The payment of
the tax is the liability of the transferor whether
the transfer of cash or property was made by gift
or bequest.
• Definition of the tax base. The base for the tax
is the transferor’s cumulative, taxable lifetime

ANALYTICAL PERSPECTIVES

gifts made plus the net estate at death. Gifts in
the tax base are all annual transfers in excess
of $10,000 to any donee except the donor’s spouse.
Excluded are, however, payments on behalf of
family members’ educational and medical expenses, as well as the cost of ceremonial gatherings and celebrations that are not in honor of
the donor.
• Property valuation. In general, property is valued
at its fair market value at the time it is transferred. This is not necessarily the case in the valuation of property for transfer tax purposes. Executors of estates are provided the option to value
assets at the time of the testator’s death or up
to six months later.
• Tax rate schedule. A single graduated tax rate
schedule applies to all taxable transfers. This is
reflected in the name of the ‘‘unified transfer tax’’
that has replaced the former separate gift and
estate taxes. The tax rates vary from 18 percent
on the first $10,000 of aggregate taxable transfers,
to 55 percent on amounts exceeding $3 million.
A $192,800 lifetime credit is provided against the
tax in determining the final amount of transfer
taxes that are due and payable. This allows each
taxpayer to make a $600,000 tax-free transfer of
assets that otherwise would be liable to the unified transfer tax.6
• Time when tax is due and payable. Donors are
required to pay the tax annually as gifts are
made. The generation-skipping transfer tax is payable by the donees whenever they accede to the
6An

additional tax, at a flat rate of 55 percent, is imposed on lifetime, generation-skipping
transfers in excess of $1 million. It is considered a generation-skipping transfer whenever
the transferee is at least two generations younger than the transferor, as it would be
in the case of transfers to grandchildren or great-grandchildren. The liability of this tax
is on the recipients of the transfer.

TABLE 5–5.

gift. The net estate tax liability is due and payable
within nine months after the decedent’s death.
The Internal Revenue Service may grant an extension of up to 10 years for a reasonable cause.
Interest is charged on the unpaid tax liability at
a rate equal to the cost of Federal short-term borrowing, plus three percentage points.
Tax Expenditures by Function
The estimates of tax expenditures in the Federal unified transfer tax for fiscal years 1995–2001 are displayed by functional category in table 5–5. Outlay
equivalent estimates are similar to revenue loss estimates for transfer tax expenditures and, therefore, are
not shown separately. A description of the provisions
follows.
NATURAL RESOURCES

AND

ENVIRONMENT

Donations of conservation easements.—Bequests
for conservation are excluded from taxable estates. A
conservation bequest is the value of property and easements (in perpetuity) to such property the use of which
is restricted to any one or more of the following: the
public for outdoor recreation; protection of the natural
habitats of fish, wildlife, plants, etc.; scenic enjoyment
of the public; and preservation of historic land areas
and structures. Similar conservation gifts are excluded
from the gift tax base and are also deductible from
the donor’s otherwise taxable income in the year of
the gift.
AGRICULTURE
Special use valuation of farms.—Farmland owned
and operated by a decedent and/or a member of the
family may be valued for estate tax purposes on the

REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES IN THE FEDERAL UNIFIED
TRANSFER TAX
(In millions of dollars)
Fiscal Years
Description
1995

1996

1997

1998

1999

2000

2001

1997–2001

Natural Resources and Environment:
Deductions for donations of conservation easements ..................

Agriculture:
Special use valuation of farm real property ..................................
Tax deferral of closely held farms .................................................

70
55

75
60

80
65

85
70

90
75

95
80

100
85

450
375

Commerce:
Special use valuation of real property used in closely held businesses ........................................................................................
Tax deferral of closely held business ...........................................

20
10

25
10

25
15

120
65

Education, training, employment, and social services:
Deduction for charitable contributions (education) ........................
Deduction for charitable contributions (other than education and
health) ........................................................................................

515

565

600

640

680

730

775

3,425

1,520

1,650

1,765

1,885

2,005

2,135

2,280

10,070

Health:
Deduction for charitable contributions (health) .............................

465

510

550

590

630

680

730

3,180

General government:
Credit for State death taxes ..........................................................

2,885

3,175

3,420

3,685

3,965

4,250

4,555

19,875

Note: All estimates have been rounded to the nearest $5 million.

5. TAX EXPENDITURES

basis of its ‘‘continued use’’ as a farm if: the farmland
is at least 25 percent of the decedent’s gross estate;
the entire value of all farm property is at least 50
percent of the gross estate; and family heirs to the
farm agree to continue to operate the property as a
farm for at least 10 years. Since continued use valuation of farmland is frequently substantially less than
the fair market value, the resulting reduction in tax
liability serves as a subsidy to the continued operation
of family farms.

Tax deferral of closely held businesses.—Nonfarm
family businesses that satisfy the net estate requirements qualify for preferential 15 year deferred estate
tax payment. To be eligible for this special provision,
the value of stock in closely held corporations must
exceed 35 percent of the decedent’s gross estate, less
debt and funeral expenses.

Tax deferral of closely held farms.—Decedents’ estates may use a preferential, extended installment payment period of five to 15 years to discharge estate tax
liabilities if the value of the farm properties exceeds
35 percent of the net estates. The interest charged is
only 4 percent for the first five years, rather than the
standard Federal short-term borrowing rate plus three
percentage points, which applies during the last 10
years of the repayment period.

Bequests to tax-exempt organizations.—These bequests are deductible from decedent’s otherwise taxable
lifetime transfers.

COMMERCE

AND

HOUSING CREDIT

Special use valuation of closely held businesses.—The two estate tax incentives to family farming are also available to the estates of owners of nonfarm family businesses. If the same three conditions
previously described are met, the real property in their
estates is eligible for continued use valuation.

EDUCATION, TRAINING, EMPLOYMENT,
SERVICES

AND

SOCIAL

HEALTH
Bequests to health providers.—Such bequests, that
are exempt from the income tax, are deductible from
otherwise taxable lifetime transfers of decedents.
GENERAL GOVERNMENT
State and local death taxes.—A credit is allowed
for state death taxes against any Federal estate tax
that otherwise would be due. The amount of the state
death tax credit is determined by a rate schedule that
reaches a limit of 16 percent of the taxable estate in
excess of $60,000.

ANALYTICAL PERSPECTIVES

TABLE 5–6.

MAJOR TAX EXPENDITURES IN THE INCOME TAX, RANKED BY TOTAL 1997 REVENUE LOSS
(In millions of dollars)
Provision

1997

Exclusion of employer contributions for medical insurance premiums and medical care ...................................................................................
Net exclusion of employer pension plan contributions and earnings ..................................................................................................................
Deductibility of mortgage interest on owner-occupied homes ..............................................................................................................................
Deductibility of nonbusiness State and local taxes other than on owner-occupied homes ................................................................................
Step-up basis of capital gains at death ................................................................................................................................................................
Accelerated depreciation of machinery and equipment (normal tax method) .....................................................................................................
Deductibility of charitable contributions (all types) ................................................................................................................................................
Exclusion of OASI benefits for retired workers .....................................................................................................................................................
Deductibility of State and local property tax on owner-occupied homes .............................................................................................................
Deferral of capital gains on home sales ...............................................................................................................................................................
Exclusion of interest on public purpose State and local debt ..............................................................................................................................
Exclusion of interest on life insurance savings .....................................................................................................................................................
Net exclusion of Individual Retirement Account contributions and earnings .......................................................................................................
Exclusion of interest on State and local debt for various non-public purposes ..................................................................................................
Capital gains (other than agriculture, timber, iron ore, and coal) (normal tax method) .....................................................................................
Earned income credit 1 ..........................................................................................................................................................................................
Accelerated depreciation of buildings other than rental housing (normal tax method) .......................................................................................
Exclusion of capital gains on home sales for persons age 55 and over ............................................................................................................
Exclusion of workmen’s compensation benefits ....................................................................................................................................................
Graduated corporation income tax rate (normal tax method) ..............................................................................................................................
Deductibility of medical expenses ..........................................................................................................................................................................
Exclusion of social security benefits for dependents and survivors ....................................................................................................................
Exception from passive loss rules for $25,000 of rental loss ..............................................................................................................................
Net exclusion of Keogh plan contributions and earnings .....................................................................................................................................
Premiums on employer-provided group term life insurance .................................................................................................................................
Credit for child and dependent care expenses .....................................................................................................................................................
Exclusion of veterans disability compensation ......................................................................................................................................................
Credit for low-income housing investments ...........................................................................................................................................................
Tax credit for corporations receiving income from doing business in U.S. possessions ....................................................................................
Exclusion of social security disability insurance benefits .....................................................................................................................................
Exclusion of income earned abroad by United States citizens ............................................................................................................................
Exclusion of benefits and allowances to armed forces personnel .......................................................................................................................
Deferral of income from controlled foreign corporations (normal tax method) ....................................................................................................
Expensing of research and experimentation expenditures (normal tax method) ................................................................................................
Exclusion of income of foreign sales corporations ...............................................................................................................................................
Special ESOP rules (other than investment credit) ..............................................................................................................................................
Inventory property sales source rules exception ..................................................................................................................................................
Additional deduction for the elderly .......................................................................................................................................................................
Accelerated depreciation on rental housing (normal tax method) ........................................................................................................................
Exclusion of reimbursed employee parking expenses ..........................................................................................................................................
Deferral of interest on savings bonds ...................................................................................................................................................................
Excess of percentage over cost depletion (oil, gas, and other fuels) .................................................................................................................
Expensing of certain small investments (normal tax method) ..............................................................................................................................
Alternative fuel production credit ...........................................................................................................................................................................
Deferral of income from post 1987 installment sales ...........................................................................................................................................
Exclusion of scholarship and fellowship income (normal tax method) ................................................................................................................
Parental personal exemption for students age 19 or over ...................................................................................................................................
Exclusion of employer provided child care ...........................................................................................................................................................
Exemption of credit union income .........................................................................................................................................................................
Exclusion of public assistance benefits (normal tax method) ..............................................................................................................................
Exclusion of employee meals and lodging (other than military) ..........................................................................................................................
Deductibility of casualty losses ..............................................................................................................................................................................
Exclusion of railroad retirement system benefits ..................................................................................................................................................
Expensing of multiperiod timber growing costs ....................................................................................................................................................
Empowerment zones ..............................................................................................................................................................................................
Ordinary income treatment of loss from small business corporation stock sale .................................................................................................
Exclusion of parsonage allowances .......................................................................................................................................................................
Credit for increasing research activities ................................................................................................................................................................
Tax exemption of certain insurance companies ...................................................................................................................................................
Excess of percentage over cost depletion, nonfuel minerals ...............................................................................................................................
Amortization of start-up costs (normal tax method) ..............................................................................................................................................
Exclusion from income of conservation subsidies provided by public utilities ....................................................................................................
Premiums on employer-provided accident and disability insurance .....................................................................................................................
Credit for disabled access expenditures ...............................................................................................................................................................
Permanent exceptions from imputed interest rules ..............................................................................................................................................
Carryover basis of capital gains on gifts ...............................................................................................................................................................
New technology credit ............................................................................................................................................................................................
Capital gains treatment of certain income ............................................................................................................................................................
Exclusion of military disability pensions ................................................................................................................................................................

70,490
55,770
53,075
30,620
30,265
29,500
26,075
17,285
16,860
15,040
13,775
11,470
7,940
7,565
6,920
6,250
5,720
5,075
5,050
4,730
4,125
4,030
3,985
3,580
3,170
3,005
2,985
2,945
2,855
2,375
2,100
2,080
2,000
1,840
1,600
1,540
1,500
1,340
1,305
1,290
1,210
1,145
1,120
990
975
845
835
830
710
635
600
465
450
415
385
305
300
285
245
235
200
165
165
165
155
150
145
140
130

1997–2001

423,200
283,115
293,985
169,595
155,825
159,555
143,985
94,285
93,395
79,850
75,865
66,275
41,640
37,920
36,095
34,145
17,740
27,055
27,825
26,885
24,855
22,375
17,625
19,625
17,505
16,610
16,715
16,755
16,085
14,050
13,395
10,595
12,100
10,360
9,000
6,460
8,500
6,820
9,085
6,855
6,720
6,240
2,990
4,390
5,075
4,300
4,580
4,800
4,320
3,715
3,330
2,580
2,300
2,305
2,225
1,715
1,720
450
1,340
1,220
1,045
785
925
835
790
850
825
735
650

5. TAX EXPENDITURES

TABLE 5–6.

MAJOR TAX EXPENDITURES IN THE INCOME TAX, RANKED BY TOTAL 1997 REVENUE LOSS—Continued
(In millions of dollars)
Provision

Small life insurance company deduction ...............................................................................................................................................................
Tax incentives for preservation of historic structures ...........................................................................................................................................
Excess bad debt reserves of financial institutions ................................................................................................................................................
Enhanced oil recovery credit .................................................................................................................................................................................
Special Blue Cross/Blue Shield deduction ............................................................................................................................................................
Interest allocation rules exception for certain financial operations .......................................................................................................................
Exclusion of special benefits for disabled coal miners .........................................................................................................................................
Expensing of certain multiperiod production costs ...............................................................................................................................................
Investment credit for rehabilitation of structures (other than historic) ..................................................................................................................
Exclusion of veterans pensions .............................................................................................................................................................................
Exclusion of GI bill benefits ...................................................................................................................................................................................
Expensing of certain capital outlays ......................................................................................................................................................................
Tax credit and deduction for clean-fuel burning vehicles and properties ............................................................................................................
Exclusion for employer-provided transit passes ....................................................................................................................................................
Targeted jobs credit ...............................................................................................................................................................................................
Exception from passive loss limitation for working interests in oil and gas properties ......................................................................................
Tax credit for the elderly and disabled .................................................................................................................................................................
Investment credit and seven-year amortization for reforestation expenditures ...................................................................................................
Exemption of certain mutuals’ and cooperatives’ income ....................................................................................................................................
Special rules for mining reclamation reserves ......................................................................................................................................................
Cancellation of indebtedness .................................................................................................................................................................................
Exclusion of certain foster care payments ............................................................................................................................................................
Expensing of exploration and development costs, nonfuel minerals ...................................................................................................................
Exclusion of employer provided death benefits ....................................................................................................................................................
Additional deduction for the blind ..........................................................................................................................................................................
Income of trusts to finance supplementary unemployment benefits ....................................................................................................................
Deferral of tax on shipping companies .................................................................................................................................................................
Expensing of costs of removing certain architectural barriers to the handicapped ............................................................................................
Capital gains treatment of royalties on coal .........................................................................................................................................................
Treatment of Alaska Native Corporations .............................................................................................................................................................
Capital gains treatment of certain timber income .................................................................................................................................................
Exclusion of interest on savings bonds transferred to educational institutions ...................................................................................................
Alcohol fuel credit 2 ................................................................................................................................................................................................
Treatment of loans forgiven solvent farmers as if insolvent ................................................................................................................................
Special alternative tax on small property and casualty insurance companies ....................................................................................................
Capital gains exclusion of small corporation stock ...............................................................................................................................................
1 The

effect of the earned income tax credit on outlays is $20,450 million in 1997 and $111,205 million for 1997–2001.
2 In addition, the partial exemption from the excide tax for alcohol fuels results in a reduction in excise tax receipts for 1997 of $665 million and $3,535 million for 1997–2001.
Note: Provisions with estimates denoted normal tax method have no revenue loss under the reference tax law method.
All estimates have been rounded to the nearest $5 million.
Figures in table 5–6 are the arithmetic sums of corporate and individual income tax revenue loss estimates from table 5–2, and do not reflect possible interactions across these two taxes.

1997

120
120
115
100
100
95
85
80
80
70
70
65
65
60
60
60
55
50
50
50
40
35
35
35
25
20
20
20
15
15
15
10
10
10
5
0

1997–2001

670
565
685
520
955
475
395
415
355
390
435
340
395
435
125
335
305
250
280
250
40
185
175
195
135
100
100
100
75
40
75
65
50
50
25
215

SPECIAL ANALYSES AND PRESENTATIONS

FEDERAL INVESTMENT SPENDING AND CAPITAL BUDGETING

Investment spending is spending that yields longterm benefits. Its purpose may be to improve the efficiency of internal Federal agency operations or to increase the Nation’s overall stock of capital for economic
growth. The spending can be direct Federal spending
or grants to State and local governments. It can be
for physical capital, which yields a stream of services
over a period of years, or for research and development
or education and training, which are intangible but also
increase income in the future or provide other longterm benefits.
Most presentations in the Federal budget combine
investment spending with spending for current use.
This chapter focuses solely on Federal and federally
financed investment. These investments are discussed
in the following sections:

• a description of the size and composition of Federal investment spending;
• a discussion of fixed assets used to provide Federal services and efforts to improve planning and
budgeting for these assets;
• a presentation of trends in the stock of federally
financed physical capital, research and development, and education;
• alternative capital budget and capital expenditure
presentations;
• projections of Federal physical capital outlays and
recent assessments of public civilian capital needs,
as required by the Federal Capital Investment
Program Information Act of 1984; and
• a discussion of transportation infrastructure
spending.

Part I: DESCRIPTION OF FEDERAL INVESTMENT
For more than forty years, a chapter in the budget
has shown Federal investment outlays—defined as
those outlays that yield long-term benefits—separately
from outlays for current use. This year, for the second
consecutive year, the discussion of the composition of
investment includes estimates of budget authority as
well as outlays.
The classification of spending into investment and
current outlays is a matter of judgment. The budget
has historically employed a relatively broad classification, including physical investment, research, development, education, and training. But presentations for
particular purposes could adopt different definitions of
investment:
• To suit the purposes of a traditional balance sheet,
investment might include only those physical assets owned by the Federal Government, excluding
capital financed through grants and intangible assets such as research, education, and training.
• Focusing on the role of investment in improving
national productivity and enhancing economic
growth would exclude items such as national defense assets, the benefits of which are enhanced
national security rather than economic growth.
• Concern with the efficiency of Federal operations
would lead to a focus solely on investments to
reduce costs or improve the effectiveness of internal Federal agency operations, such as computer
systems.
• A ‘‘social investment’’ perspective might broaden
the coverage of investment beyond what is included in this chapter to encompass programs
such as childhood immunization, maternal health,
certain nutrition programs, and substance abuse

treatment, which are designed in part to prevent
more costly health problems in future years.
The relatively broad definition of investment used
in this section provides consistency over time: historical
figures on investment outlays back to 1940 can be
found in the separate Historical Tables volume. The
detailed tables at the end of this section allow disaggregation of the data to focus on those investment outlays
that best suit a particular purpose.
In addition to this basic issue of definition, there
are two technical problems in the classification of investment data, involving the treatment of grants to
State and local governments and the classification of
spending that could be shown in more than one category.
First, for some grants to State and local governments,
the recipient jurisdiction, not the Federal Government,
ultimately determines whether the money is used to
finance investment or current purposes. This analysis
classifies all of the outlays in the category where the
recipient jurisdictions are expected to spend most of
the money. Hence, the community development block
grant is classified as physical investment, although
some may be spent for current purposes. General purpose fiscal assistance is classified as current spending,
although some may be spent by recipient jurisdictions
on physical investment.
Second, some spending could be classified in more
than one category of investment. For example, grants
for construction of research facilities finance the acquisition of physical assets, but they also contribute to
research and development. To avoid double counting,
the outlays are classified in the category that is most
commonly recognized as investment. Consequently out-

ANALYTICAL PERSPECTIVES

lays for the conduct of research and development do
not include outlays for research facilities, because these
outlays are included in the category for physical investment. Similarly, physical investment and research and
development related to education and training are included in the categories of physical assets and the conduct of research and development.
When direct loans and loan guarantees are used to
fund investment, the subsidy value is included as investment. The subsidies are classified according to their
program purpose, such as construction, education and
training, or non-investment outlays. For more information about the treatment of Federal credit programs,,
refer to Chapter 8, ‘‘Underwriting Federal Credit and
Insurance.’’
This section presents spending for gross investment,
without adjusting for depreciation. A subsequent section discusses depreciation and shows investment and
capital stocks both gross and net of depreciation.
Composition of Federal Investment Outlays
Major Federal Investment
The composition of major Federal investment outlays
is summarized in Table 6–1. They include major public
physical investment, the conduct of research and development, and the conduct of education and training. Defense and nondefense investment outlays were $233.2
billion in 1995. Because of reductions in defense spending they are estimated to decline to $226.0 billion in
1996 and to $221.7 billion in 1997. Major Federal investment will comprise an estimated 13.6 percent of
total Federal outlays in 1997 and 2.8 percent of the
Nation’s gross domestic product (GDP). Greater detail
on Federal investment is available in tables 6–2 and
6–3 at the end of this section. Those tables include
both budget authority and outlays.
Physical investment.—Outlays for major public physical capital investment (hereafter referred to as physical
investment outlays) are estimated to be $108.1 billion
in 1997. Physical investment outlays are primarily outlays for construction, rehabilitation, and major equipment. Slightly more than three-fifths of these outlays
are for direct physical investment by the Federal Government, with the remaining two-fifths being grants
to State and local governments for physical investment.
Direct physical investment outlays by the Federal
Government are primarily for national defense. Defense
outlays for physical investment were $59.9 billion in
1995 and are estimated to decline to $48.5 billion in
1997. Almost all of these outlays, or $44.2 billion, are
for the procurement of weapons and other military
equipment, and the remainder is primarily for construction of military bases, family housing for military personnel, and Department of Energy defense facilities.
Outlays for direct physical investment for nondefense
purposes are estimated to be $19.3 billion in 1997.
These outlays include $11.8 billion for construction and
rehabilitation. This amount funds water, power, and
natural resources projects of the Army Corps of Engineers, the Bureau of Reclamation within the Depart-

ment of the Interior, the Tennessee Valley Authority,
and the power administrations in the Department of
Energy; construction and rehabilitation of veterans hospitals and Postal Service facilities; and facilities for
space and science programs. Outlays for the acquisition
of major equipment are estimated to be $7.2 billion
in 1997. The largest amounts are for the science and
space programs and the air traffic control system. Net
outlays for the purchase and sale of land and structures
are estimated to be $0.4 billion in 1997. Collections
from the sale of facilities are expected to exceed disbursements by $1.2 billion in 1996, largely due to the
proposed sale of the United States Enrichment Corporation.
Grants to State and local governments for physical
investment are estimated to be $40.2 billion in 1997.
More than three fifths of these outlays, or $24.4 billion,
are to assist States and localities with transportation
infrastructure. Other major grants for physical investment fund sewage treatment plants, community development, and public housing.
Conduct of research and development.—Outlays for
the conduct of research and development are estimated
to be $69.1 billion in 1997. These outlays are devoted
to increasing basic scientific knowledge and promoting
related research and development. They increase the
Nation’s security, improve the productivity of capital
and labor for both public and private purposes, and
enhance the quality of life. Slightly more than half
of these outlays, an estimated $37.3 billion in 1997,
are for national defense. Physical investment for research and development facilities and equipment is included in the physical investment category.
Nondefense outlays for the conduct of research and
development are estimated to be $31.8 billion in 1997.
This is almost entirely direct spending by the Federal
Government, and is largely for the space programs, the
National Science Foundation, the National Institutes
of Health, and research for nuclear and non-nuclear
energy programs.
Conduct of education and training.—Outlays for the
conduct of education and training are estimated to be
$44.6 billion in 1997. These outlays add to the stock
of human capital by developing a more skilled and productive labor force. Grants to State and local governments for this category are estimated to be $26.3 billion
in 1997, more than half of the total. They include education programs for the disadvantaged and the handicapped, vocational and adult education programs, training programs in the Department of Labor, and Head
Start. Direct education and training outlays by the Federal Government are estimated to be $18.3 billion in
1997. Programs in this category are primarily aid for
higher education through student financial assistance,
loan subsidies, the veterans GI bill, and health training
programs.
This category does not include outlays for education
and training of Federal civilian and military employees.
Outlays for education and training that are for physical
investment and for research and development are in

FEDERAL INVESTMENT SPENDING AND CAPITAL BUDGETING
Table 6–1.

COMPOSITION OF FEDERAL INVESTMENT OUTLAYS
(In billions of dollars)
1995
actual

Estimate
1996

1997

MAJOR FEDERAL INVESTMENT OUTLAYS
Major public physical capital investment:
Direct:
National defense ........................................................................
Nondefense ................................................................................

59.9
19.5

52.5
18.4

48.5
19.3

Subtotal, direct major public physical capital investment ....

79.3

70.8

67.8

Grants to State and local governments ........................................

39.6

41.3

40.2

Subtotal, major public physical capital investment ..............
Conduct of research and development:
National defense ............................................................................
Nondefense ....................................................................................

118.9

112.2

108.1

37.7
30.7

37.7
30.8

37.3
31.8

Subtotal, conduct of research and development ......................
Conduct of education and training:
Grants to State and local governments ........................................
Direct ..............................................................................................

68.4

68.5

69.1

24.7
21.2

26.7
18.6

26.3
18.3

Subtotal, conduct of education and training .............................

45.9

45.3

44.6

Major Federal investment outlays ..................................................

233.2

226.0

221.7

MEMORANDUM
Major Federal investment outlays:
National defense ............................................................................
Nondefense ....................................................................................

97.6
135.6

90.2
135.8

85.8
135.9

Total, major Federal investment outlays ...................................

233.2

226.0

221.7

Miscellaneous physical investment:
Commodity inventories ...................................................................
Other physical investment (direct) .................................................

–0.9
4.5

–0.8
4.6

–0.7
4.2

Total, miscellaneous physical investment .................................

3.6

3.8

3.4

Total, Federal investment outlays, including miscellaneous
physical investment ...............................................................

236.8

229.8

225.2

the categories for physical investment and the conduct
of research and development.

includes primarily conservation programs. These outlays are entirely for direct Federal spending.

Miscellaneous Investment Outlays
In addition to the categories of major Federal investment, several miscellaneous categories of investment
outlays are shown in Table 6–1. These items, all for
physical investment, are generally unrelated to improving Government for operations or enhancing economic
activity. Outlays for commodity inventories are for the
purchase or sale of agricultural products pursuant to
farm price support programs and the purchase and sale
of other commodities such as oil and gas. Sales are
estimated to exceed purchases by $0.7 billion in 1997.
Outlays for other miscellaneous physical investment
are estimated to be $4.2 billion in 1997. This category

Detailed Tables on Investment Spending
In order to include more information in the budget
on investment, this section provides data on budget
authority as well as outlays. Table 6–2 displays budget
authority and outlays by major programs according to
defense and nondefense categories. Table 6–3 shows
budget authority and outlays divided according to
grants to State and local governments and direct Federal spending. Table 6–3 displays several allowances
for full funding of fixed assets. These appear for atomic
energy (defense), domestic nuclear energy, space, and
recreational resources. These allowances are discussed
in the next section.

ANALYTICAL PERSPECTIVES
Table 6–2.

FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: DEFENSE AND NONDEFENSE PROGRAMS
(in millions of dollars)
Budget Authority
Source

Outlays

Estimate

1995
actual

1996

Estimate

1995
actual

1997

1996

1997

FEDERAL INVESTMENT:
NATIONAL DEFENSE:
Major public physical investment:
Construction and rehabilitation:
Military construction ........................................................................................................
Family housing ...............................................................................................................
Atomic energy defense activities and other ..................................................................

2,623
592
237

2,826
1,020
410

2,584
750
455

3,654
918
248

3,306
849
248

3,021
934
371

Subtotal, construction and rehabilitation ............................................................................

3,452

4,256

3,789

4,820

4,403

4,326

Acquisition of major equipment:
Procurement ...................................................................................................................
Atomic energy defense activities and other ..................................................................

43,529
–14

42,177
147

38,678
332

54,901
202

47,927
156

44,039
150

Subtotal, acquisition of major equipment ...........................................................................

43,515

42,324

39,010

55,103

48,083

44,189

Purchase or sale of land and structures ...........................................................................

–51

–11

–51

–11

Subtotal, major public physical investment ............................................................................

46,916

46,569

42,788

59,872

52,475

48,504

Conduct of research and development
Defense military ..................................................................................................................
Atomic energy and other ....................................................................................................

35,291
2,222

35,633
2,366

35,482
2,347

35,356
2,343

35,203
2,479

34,945
2,347

Subtotal, conduct of research and development ...................................................................

37,513

37,999

37,829

37,699

37,682

37,292

Conduct of education and training (civilian) ..........................................................................

–66

Subtotal, national defense investment ........................................................................................

84,363

84,576

80,622

97,583

90,166

85,802

20,964
17,611
21,958
3,721
3,517
4,732
212
120
214
111
2,250
1,381
100
144
133
4,819
4,600
4,900
1,547
1,219
1,328
3,228
3,675
3,828
1,827
1,697
1,842
282
236
306
6,066
5,607
6,387
389
430
581
2,939
1,809
1,523
1,234
1,164
1,461
1,004
1,282
946
................... ................... ...................
219
159
220
562
688
784

19,216
3,561
153
1,844
97
4,333
1,254
4,012
2,253
435
6,425
573
2,961
1,294
996
1,008
307
786

20,224
3,801
239
1,689
139
5,093
1,488
3,692
2,196
324
6,719
509
1,963
1,375
1,015
1,252
243
879

19,293
3,645
294
1,554
155
4,931
1,388
3,635
1,886
292
7,055
469
1,604
1,494
860
1,349
267
956

52,524

51,508

52,840

51,127

2,039
1,910
1,821
450
568
629
814
900
1,307
319
262
277
527
682
475
859
2,493
1,104
................... ................... ...................
967
1,351
1,436

2,655
441
1,064
150
290
390
477
707

2,073
465
874
253
612
1,195
536
1,345

1,946
481
746
316
641
1,042
538
1,569

NONDEFENSE:
Major public physical investment:
Construction and rehabilitation:
Highways ........................................................................................................................
Mass transportation ........................................................................................................
Rail transportation ..........................................................................................................
Air transportation ............................................................................................................
Water transportation .......................................................................................................
Community development block grants ..........................................................................
Other community and regional development ................................................................
Pollution control and abatement ....................................................................................
Water resources .............................................................................................................
Other natural resources and environment .....................................................................
Housing assistance ........................................................................................................
General science, space, and technology ......................................................................
Energy .............................................................................................................................
Veterans hospitals and other health ..............................................................................
Postal Service .................................................................................................................
GSA real property activities ...........................................................................................
International affairs .........................................................................................................
Other programs ..............................................................................................................
Subtotal, construction and rehabilitation ............................................................................
Acquisition of major equipment:
Air transportation ............................................................................................................
Other transportation ........................................................................................................
Space flight, research, and supporting activities ..........................................................
General science and basic research .............................................................................
Veterans medical care ...................................................................................................
Postal Service .................................................................................................................
General supply fund .......................................................................................................
Other ...............................................................................................................................

49,224

46,208

Subtotal, acquisition of major equipment ...........................................................................

5,975

8,166

7,049

6,174

7,353

7,279

Purchase or sale of land and structures
International affairs .........................................................................................................

FEDERAL INVESTMENT SPENDING AND CAPITAL BUDGETING
Table 6–2.

FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: DEFENSE AND NONDEFENSE PROGRAMS—Continued
(in millions of dollars)
Budget Authority
Source

1995
actual

Outlays

Estimate
1996

1997

1995
actual

Estimate
1996

1997

Domestic .........................................................................................................................

227

–1,620

167

599

–1,227

346

Subtotal, purchase or sale of land and structures ............................................................

236

–1,610

177

608

–1,216

357

Other physical assets (grants) ...........................................................................................

807

761

879

756

722

804

Subtotal, major public physical investment ............................................................................

56,242

53,525

60,629

59,046

59,699

59,567

Conduct of research and development:
General science, space, and technology:
NASA ..............................................................................................................................
National Science Foundation .........................................................................................
Other general science ....................................................................................................

7,866
2,137
685

7,760
2,204
675

7,797
2,305
1,045

8,243
1,894
700

7,999
2,092
715

7,571
2,202
705

Subtotal, general science, space, technology ...................................................................

10,688

10,639

11,147

10,837

10,806

10,478

Energy .................................................................................................................................
Transportation:
Department of Transportation ........................................................................................
NASA ..............................................................................................................................

2,926

2,933

2,455

3,152

3,079

3,054

649
1,186

596
1,208

677
1,237

604
749

520
1,146

792
1,233

Subtotal, transportation .......................................................................................................

1,835

1,804

1,914

1,353

1,666

2,025

Health:
National Institutes of Health ...........................................................................................
All other health ...............................................................................................................

10,691
980

11,273
921

11,479
954

10,299
1,033

10,335
1,000

11,215
917

Subtotal, health ...................................................................................................................

11,671

12,194

12,433

11,332

11,335

12,132

Agriculture ...........................................................................................................................
Natural resources and environment ...................................................................................
International affairs .............................................................................................................
All other research and development ..................................................................................

1,194
1,963
288
1,124

1,179
1,868
198
1,003

1,193
1,915
204
1,178

1,186
1,662
323
888

1,193
1,615
225
915

1,175
1,668
244
1,020

Subtotal, conduct of research and development ...................................................................

31,689

31,818

32,439

30,733

30,834

31,796

Conduct of education and training:
Education, training, employment and social services:
Elementary, secondary, and vocational education ........................................................
Higher education ............................................................................................................
Research and general education aids ...........................................................................
Training and employment ..............................................................................................
Social services ................................................................................................................

15,177
14,418
1,939
5,267
5,987

15,493
12,039
1,813
5,475
6,143

16,204
10,826
2,140
6,138
6,542

14,635
14,194
1,842
5,699
5,826

15,948
11,435
1,974
5,855
6,328

15,701
10,915
1,904
5,739
6,321

Subtotal, education, training, and social services .............................................................

42,788

40,963

41,850

42,196

41,540

40,580

Income security ...................................................................................................................
Veterans education, training, and rehabilitation ................................................................
Health ..................................................................................................................................
Intenational affairs ...............................................................................................................
Other education and training ..............................................................................................

187
1,338
826
288
1,071

220
1,520
795
223
1,063

220
1,384
799
233
1,094

131
1,374
766
301
1,093

191
1,486
766
263
1,014

225
1,587
898
234
1,024

Subtotal, conduct of education and training ..........................................................................

46,498

44,784

45,580

45,861

45,260

44,548

Subtotal, nondefense investment ................................................................................................

134,429

130,127

138,648

135,640

135,793

135,911

Total, Federal investment ................................................................................................................

218,792

214,703

219,270

233,223

225,959

221,713

ANALYTICAL PERSPECTIVES
Table 6–3.

FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: GRANT AND DIRECT FEDERAL PROGRAMS
(in millions of dollars)
Budget Authority
Source

1995
actual

Outlays

Estimate
1996

1997

1995
actual

Estimate
1996

1997

19,200
3,561
20
1,826
2,671
264
4,333
982
5,762
7
173

20,212
3,801
16
1,622
2,360
294
5,093
1,170
5,801
15
155

19,283
3,645
29
1,483
2,224
179
4,931
1,144
6,278
9
137

FEDERAL INVESTMENT:
GRANTS TO STATE AND LOCAL GOVERNMENTS:
Major public physical investments:
Construction and rehabilitation:
Highways ........................................................................................................................
Mass transportation ........................................................................................................
Rail transportation ..........................................................................................................
Air transportation ............................................................................................................
Pollution control and abatement ....................................................................................
Other natural resources and environment .....................................................................
Community development block grants ..........................................................................
Other community and regional development ................................................................
Housing assistance ........................................................................................................
National defense .............................................................................................................
Other construction ..........................................................................................................

20,961
3,721
18
67
2,066
95
4,819
1,307
4,934
70
136

Subtotal, construction and rehabilitation ............................................................................

38,194

36,119

42,215

38,799

40,539

39,342

Other physical assets .........................................................................................................

862

833

964

780

798

894

Subtotal, major public physical capital ...................................................................................

39,056

36,952

43,179

39,579

41,337

40,236

Conduct of research and development ..................................................................................
Conduct of education and training:
Elementary, secondary, and vocational education ............................................................
Higher education .................................................................................................................
Research and general education aids ...............................................................................
Training and employment ...................................................................................................
Social services ....................................................................................................................
National defense (civilian) ..................................................................................................
Other ...................................................................................................................................

395

386

391

348

363

445

14,336
14,844
15,408
96
27
159
288
243
501
4,064
4,251
4,880
5,742
5,633
6,293
................... ................... ...................
506
508
501

13,677
117
268
4,573
5,584
4
492

15,246
106
315
4,577
5,959
1
495

15,032
48
276
4,501
5,929
...................
494

17,610
21,957
3,517
4,732
1
10
2,214
1,350
2,366
2,379
109
117
4,600
4,900
998
1,066
4,574
5,585
................... ...................
130
119

Subtotal, conduct of education and training ..........................................................................

25,032

25,506

27,742

24,715

26,699

26,280

Subtotal, grants for investment ...................................................................................................

64,483

62,844

71,312

64,642

68,399

66,961

DIRECT FEDERAL PROGRAMS:
Major public physical investment:
Construction and rehabilitation:
National defense .............................................................................................................
International affairs .........................................................................................................
Full funding allowance (general science and space) ...................................................
Other general science, space, and technology .............................................................
Water resources projects ...............................................................................................
Full funding allowance (recreational resources) ............................................................
Other natural resources and environment .....................................................................
Full funding allowance (energy) .....................................................................................
Other energy ...................................................................................................................
Transportation .................................................................................................................
Veterans hospitals and other health facilities ...............................................................
Postal Service .................................................................................................................
Federal Prison System ...................................................................................................
GSA real property activities ...........................................................................................
Other construction ..........................................................................................................

3,382
219
...................
389
1,788
...................
1,388
...................
2,939
340
1,187
1,004
147
...................
1,699

Subtotal, construction and rehabilitation ............................................................................

14,482

Acquisition of major equipment:
Full funding allowance (atomic energy) .........................................................................
Other national defense ...................................................................................................
General science and basic research .............................................................................
Full funding allowance (space programs) .....................................................................
Space flight, research, and supporting activities ..........................................................
Energy .............................................................................................................................
Postal Service .................................................................................................................
Air transportation ............................................................................................................
Water transportation (Coast Guard) ..............................................................................

4,256
3,789
4,813
4,388
4,317
159
220
307
243
267
...................
203 ................... ................... ...................
430
378
573
509
469
1,628
1,757
2,009
1,961
1,768
...................
81 ................... ................... ...................
1,505
1,642
1,756
1,597
1,642
...................
13 ................... ................... ...................
1,809
1,510
2,961
1,963
1,604
299
368
263
440
500
1,117
1,421
1,230
1,334
1,450
1,282
946
996
1,015
860
219
210
420
326
238
................... ...................
1,008
1,252
1,349
1,641
1,560
1,193
1,676
1,647
14,345

14,098

................... ...................
43,515
42,324
319
262
................... ...................
814
900
219
305
859
2,493
2,039
1,910
199
228

182
38,828
277
558
749
208
1,104
1,821
252

17,529

16,704

16,111

................... ................... ...................
55,103
48,083
44,189
150
253
316
................... ................... ...................
1,064
874
746
250
317
238
390
1,195
1,042
2,655
2,073
1,946
177
217
201

FEDERAL INVESTMENT SPENDING AND CAPITAL BUDGETING
Table 6–3.

FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: GRANT AND DIRECT FEDERAL PROGRAMS—Continued
(in millions of dollars)
Budget Authority
Source

1995
actual

Hospital and medical care for veterans ........................................................................
General supply fund .......................................................................................................
Other ...............................................................................................................................
Subtotal, acquisition of major equipment ...........................................................................
Purchase or sale of land and structures:
National defense .............................................................................................................
International affairs .........................................................................................................
Full funding allowance (recreational resources) ............................................................
Other domestic ...............................................................................................................

Outlays

Estimate
1996

1997

527
682
475
................... ................... ...................
944
1,314
1,520
49,435

50,418

45,974

–51
–11
9
10
................... ...................
227
–1,620

–11
10
30
137

1995
actual

Estimate
1996

1997

290
477
697

612
536
1,200

641
538
1,521

61,253

55,360

51,378

–51
–11
–11
9
11
11
................... ................... ...................
599
–1,227
346

Subtotal, purchase or sale of land and structures ............................................................

185

–1,621

166

557

–1,227

346

Subtotal, major public physical investment ............................................................................

64,102

63,142

60,238

79,339

70,837

67,835

37,513
37,999
288
198
................... ...................
31,006
31,234

37,829
204
342
31,502

Conduct of research and development:
National defense .................................................................................................................
International affairs .............................................................................................................
Full funding allowance (space programs) ..........................................................................
Other domestic ....................................................................................................................

37,699
37,682
37,292
323
225
244
................... ................... ...................
30,062
30,246
31,107

Subtotal, conduct of research and development ...................................................................

68,807

69,431

69,877

68,084

68,153

68,643

Conduct of education and training:
Elementary, secondary, and vocational education ............................................................
Higher education .................................................................................................................
Research and general education aids ...............................................................................
Training and employment ...................................................................................................
Health ..................................................................................................................................
Veterans education, training, and rehabilitation ................................................................
National defense .................................................................................................................
International affairs .............................................................................................................
Other ...................................................................................................................................

841
14,322
1,651
1,203
826
1,338
–66
288
997

649
12,012
1,570
1,224
795
1,520
8
223
1,285

796
10,667
1,639
1,258
799
1,384
5
233
1,062

958
14,077
1,574
1,126
766
1,374
8
301
974

702
11,329
1,659
1,278
766
1,486
8
263
1,079

669
10,867
1,628
1,238
898
1,587
6
234
1,147

Subtotal, conduct of education and training ..........................................................................

21,400

19,286

17,843

21,158

18,570

18,274

Subtotal, direct Federal investment ............................................................................................

154,309

151,859

147,958

168,581

157,560

154,752

Total, Federal investment ................................................................................................................

218,792

214,703

219,270

233,223

225,959

221,713

Part II: PLANNING, BUDGETING, AND ACQUISITION OF FIXED ASSETS
The previous section discussed Federal investment
as broadly defined. The focus of this section is much
narrower—the review of planning and budgeting for
fixed assets during the past year and the resultant
budget proposals for fixed assets owned by the Federal
Government and used to deliver primarily domestic
Federal services. These assets include Federal buildings, information technology, and other facilities and
major equipment, including federally owned infrastructure and the space program.1
With proposed major agency restructuring, organizational streamlining and other reforms, it may be appro1 Not included are national defense weapons systems, grants to State and local governments and to others, and the Postal Service. The definition this year is broader than
the definition used last year in the Analytical Perspectives volume that accompanied the
1996 Budget. Last year the definition excluded federally owned infrastructure, such as
water resources projects and the air traffic control system, power marketing activities,
and the space programs, all of which are included this year.

priate to reduce spending for some assets, such as office
buildings, and increase spending for others, such as
information technology, to increase the productivity of
a smaller workforce. In either case, in a time of severely
constrained resources, it is essential that the caliber
of government planning and budgeting for fixed assets
be high.
Improving Planning, Budgeting, and Acquisition
of Fixed Assets
During 1994 and 1995 the Office of Management and
Budget (OMB) devoted particular attention to improving the process of planning, budgeting, and acquiring
fixed assets. After seeking out and analyzing the problems, which differed from agency to agency, OMB reissued the comprehensive guidance to agencies on this
process in 1995 that it had first issued the year before.

98
A separate OMB review focused on fixed assets. The
Administration proposes to make agencies responsible
for the fixed assets they use, and to work throughout
the coming year to improve agency planning, budgeting,
acquisition, management, and accountability for these
assets.
Long-term planning and analysis.—Planning and
managing fixed assets has historically been a low priority for most agencies. Attention focuses on coming-year
appropriations, and justifications are generally lists of
desired projects. The increased use of long-range planning linked to performance goals required by the Government Performance and Results Act would provide
a better basis for justifications. It would increase foresight and improve the odds for cost-effective investments.
The lack of integrated life-cycle planning for fixed
assets at many agencies and their operation was evident in the review. Research equipment was acquired
with inadequate funding for its operation. New medical
facilities sometimes were built without funds for maintenance and operation. New information technology
sometimes was acquired without planning for associated changes in agency operations.
OMB Bulletin 95–03: ‘‘Planning and Budgeting for
the Acquisition of Fixed Assets,’’ provided guidance for
agencies on what fixed asset planning should include.
Agencies were requested to approach planning for fixed
assets in the context of strategic plans to carry out
their missions, and to consider alternative methods of
meeting their goals. Systematic analysis of the full lifecycle expected costs and benefits was required, along
with risk analysis and assessment of alternative means
of acquiring assets. The Bulletin noted other OMB guidance in planning and budgeting for fixed assets.2
The Bulletin is part of an ongoing effort to improve
decision making on the acquisition of fixed assets. OMB
will be working with the President’s Management
Council and the agencies in 1996 to carry it out more
completely.
From Planning to Budgeting.—Long-range agency
plans should channel fully justified budget-year and
out-year proposals into the budget process. Agencies
were asked to submit projections of both budget authority and outlays for all investment spending, not only
for the budget year, but for the four out-years. For
fixed assets, agencies were asked to provide specific
2 Other OMB guidance includes: (1) OMB Circular No. A–109, Major System Acquisitions,
which establishes policies for planning major systems that are generally applicable to fixed
asset acquisitions. (2) OMB Circular No. A–94, Guidelines and Discount Rates for BenefitCost Analysis of Federal Programs, which provides guidance on benefit-cost, cost-effectiveness, and lease-purchase analysis to be used by agencies in evaluating Federal activities
including fixed asset acquisition. It includes guidelines on the discount rate to use in
evaluating future benefits and costs, the measurement of benefits and costs, the treatment
of uncertainty, and other issues. This guidance must be followed in all analyses submitted
to OMB in support of legislative and budget programs. (3) Executive Order No. 12893,
‘‘Principles for Federal Infrastructure Investments,’’ which provides principles for the systematic economic analysis of infrastructure investments and their management. (4) OMB Bulletin No. 94–16, Guidance on Executive Order No. 12893, ‘‘Principles for Federal Infrastructure Investments,’’ which provides guidance for implementing this order and appends the
order itself. (5) The revision of OMB Circular No. A–130, Transmittal 2, Management
of Federal Information Resources (July 15, 1994), which provides principles for internal
management and planning practices for information systems and technology (published in
the Federal Register (Part V), July 25, 1994, pp. 37905–37928).

ANALYTICAL PERSPECTIVES

proposals going beyond the budget year. In addition,
OMB held a separate review on fixed assets in the
1997 Budget Review process. This provided an overview
of requests, flagged issues, and considered cross-cutting
recommendations. Agency-specific fixed asset issues
were highlighted in the agency reviews.
Attention was given to whether the ‘‘lumpiness’’ of
some fixed assets disadvantaged them in the budget
review process. In some cases, agencies aggregate fixed
asset acquisitions into budget accounts containing only
such acquisitions; such accounts tend to smooth out
year-to-year changes in outlays and avoid crowding
other expenditures. In other cases, agencies or program
managers do not hesitate to request ‘‘spikes’’ or ‘‘bulges’’
in spending for asset acquisitions, and the review process accommodates them. But some agencies go out of
their way to avoid such spikes, and some agencies have
trouble accommodating them. The Bulletin encouraged
agencies to accommodate justified spikes in their own
internal reviews, and the OMB review also made special allowance for these one-time increases.
Full Funding of Fixed Assets.—Good budgeting requires that appropriations for the full costs of asset
acquisition be provided up front to help ensure that
all costs and benefits are fully taken into account when
decisions are made about providing resources. In most
cases this rule is followed throughout the Government.
When it is not followed and fixed assets are funded
in increments, without certainty if or when future funding will be available, it can and occasionally does result
in poor planning, acquisition of assets not fully justified, higher acquisition costs, cancellation of major
projects, the loss of sunk costs, and inadequate funding
to maintain and operate the assets.
This budget includes full funding requests for a number of projects that might have been funded in increments in past years. For certain of these projects, budget authority of $1.4 billion is requested for 1997 in
a separate allowance for full funding of fixed assets.
The request appears in the governmentwide general
provisions in the Appendix volume of the 1997 Budget.
These projects are identified below in the discussion
that accompanies Table 6–4. Next year additional effort
will be made to include full upfront funding for all
new projects, or at least economically and programmatically viable segments (or modules) of new projects.
Other Budgeting Issues.—The nature of asset acquisition requires some flexibility in funding. One-year
funding often may not be enough to complete the acquisition process. Most agencies request multi-year funding to complete acquisitions efficiently, and the Bulletin
encourages this. As noted, many agencies aggregate
asset acquisition in budget accounts for this purpose.
In some cases, these are revolving funds which ‘‘rent’’
the assets to the agency’s programs.
To promote better program performance, agencies are
also being encouraged by OMB to examine their budget
account structures to better align them with program
outputs and outcomes and to charge the appropriate

FEDERAL INVESTMENT SPENDING AND CAPITAL BUDGETING

account with significant costs used to achieve these results. The asset acquisition rental accounts, mentioned
above, would contribute to this. Budgeting this way
would provide information and incentives for better resource allocation among programs and a continual
search for better ways to deliver services. It would also
provide incentives for efficient fixed asset acquisition
and management.
Acquisition of Fixed Assets.—Improved planning
and budgeting for fixed assets should increase the ability of agencies to acquire fixed assets within, or close
to, the original estimates of cost, schedule, and performance goals. Agencies have not always been able to do
this in the past on large acquisitions. In conjunction
with efforts to improve planning and budgeting for fixed
assets, Title V of the Federal Acquisition Streamlining
Act (FASA) of 1994 requires agencies to improve the
management of large acquisitions. FASA requires baseline cost, schedule, and performance goals for large acquisitions and management of the acquisitions to
achieve, on average, 90 percent of the baseline goals.
Management to baseline goals will reduce the propensity of agencies to propose acquisition costs lower than
realistically expected to improve the chance of program
approval. Management to realistic goals means that
agencies must put in place performance-based management systems to obtain accurate program management
information. These systems will provide significantly
improved information that will allow management to
analyze the achievement of, or deviation from, baseline
goals and make informed decisions on the continued
viability of ongoing acquisitions.
The Administrator of the Office of Federal Procurement Policy in OMB is required to submit to Congress
an annual assessment of the progress made by civilian
agencies in implementing the above policy. (The Secretary of Defense reports separately for Defense acquisition programs). For the Administrator’s first report, civilian agencies were asked in OMB Bulletin 95–03 to
submit, for fixed asset acquisitions of $20 million or
more, information on their use of performance-based
management systems to accurately measure actual contract accomplishments against the baseline estimates
and to report the extent of achievement of the baseline
goals. As expected for this first report, the information
submitted by the agencies was insufficient to evaluate
the achievement of the average of the cost, schedule,
and performance goals or to demonstrate that adequate
management systems are in place. However, the information submitted by the agencies indicated that many
acquisition programs are falling substantially short of
their original goals. OMB has developed draft guidance
to implement FASA, Title V, throughout the civilian
agencies. The draft guidance has been reviewed by the
President’s Management Council, with final guidance
for the agencies expected in the Spring. Major improvements in acquisition management are expected to be
reported next year.

Outlook.—The effort to improve planning and budgeting for fixed assets will continue in 1996.
• OMB and the President’s Management Council
will work with agencies to improve planning, analysis, and acquisition of fixed assets, as required
in Bulletin 95–03: ‘‘Planning and Budgeting for
the Acquisition of Fixed Assets.’’
• In the OMB review process, proposals for the acquisition of fixed assets and related issues of
lumpiness or ‘‘spikes’’ will continue to receive special attention. Agencies will be encouraged to give
the same special attention to future asset acquisition proposals.
• To ensure that the full costs and benefits of all
budget proposals are fully taken into account in
allocating resources, agencies will be required to
include upfront budget authority for acquisitions
in their budget requests.
• OMB will be working with congressional committees, the President’s Management Council, and the
Chief Financial Officers Council, to help agencies
with their responsibility for fixed assets through
the alignment of budgetary resources with program results.
• OMB will finalize the guidance to implement the
requirements of FASA Title V within the civilian
agencies and develop materials for OMB use in
reviewing agency planning for new acquisitions
and performance information on acquisitions in
process.
Major Acquisition Proposals
For the definition of major fixed assets described
above, this budget requests $19.2 billion of budget authority for 1997. The major requests are shown in the
accompanying Table 6–4: ‘‘Fixed Asset Acquisitions.’’
Buildings
This category includes both general purpose office
buildings as well as special purpose buildings, such as
hospitals, prisons, and courthouses. This budget includes $6.6 billion of budget authority for 1997 for the
major building acquisitions included in the fixed assets
definition.
Military construction and family housing.—The budget includes $3.3 billion for general construction on military bases and family housing. This funding will be
used to:
• support the fielding of new systems;
• enhance operational readiness, including deployment and support of military forces;
• provide housing for military personnel and their
families;
• implement base closure and realignment actions;
and
• correct safety deficiencies and environmental problems.
General Services Administration.—The 1997 budget
requests $1.4 billion for GSA for the construction or
renovation of buildings. These funds will allow for new
construction for U.S. Courts and the acquisition of gen-

100

ANALYTICAL PERSPECTIVES

eral purpose office space in locations where long-term
needs show that ownership is preferable to leasing.
Veterans hospital construction.—The budget requests
$0.4 billion in budget authority for new construction
and rehabilitation of veterans hospitals, clinics, and
other facilities for 1997. This request includes incremental funding for new veterans hospitals at Travis
Air Force Base, California, and Brevard County, Florida, plus full funding for the expansion or renovation
of medical facilities in Wilkes-Barre, Pennsylvania;
Pittsburgh; Salisbury, North Carolina; Marion, Indiana;
and at other locations.
National Institutes of Health (NIH).—The budget requests $0.3 billion to fully fund a new Clinical Research
Center on the NIH campus. This state-of-the-art clinical
research facility will house laboratories and hospital
beds under one roof, and allow for the continuation
of the best research possible and its availability to nearby patients.
Table 6–4.

FIXED ASSET ACQUISITIONS
(Budget authority in billions)

Buildings:
Defense military construction and family housing ...................................................................
General Services Administration ........................
Veterans hospital construction ...........................
National Institutes of Health ...............................
Other agencies ....................................................

1995
actual

1996
proposed

1997
proposed

3.3
1.2
0.5
.............
1.0

3.8
1.2
0.4
*
1.0

3.3
1.4
0.4
0.3
1.1

Subtotal, buildings ...............................................

5.9

6.3

6.6

Information technology:
Department of Defense ......................................
Department of Commerce ..................................
Tax system modernization (IRS) ........................
Social Security Administration ............................
Other agencies ....................................................

2.0
0.3
0.3
0.1
0.5

2.1
0.4
0.3
0.3
0.6

2.1
0.6
0.3
0.3
0.6

Subtotal, information technology ........................

3.2

3.7

3.9

2.2
.............
1.1
1.0
0.8
0.7
3.2

2.1
.............
1.0
1.0
0.6
0.6
2.5

2.1
1.4
1.0
0.9
0.6
0.5
2.2

Subtotal, other acquisitions ................................

9.0

7.9

8.7

Total, fixed assets ...................................................

18.1

18.0

19.2

Addendum: Full funding allowance for fixed assets:
NASA ...................................................................
Department of Energy ........................................
Department of Interior .........................................

.............
.............
.............

0.9
0.4
0.1

Total ....................................................................

.............

1.4

Other acquisitions:
Department of Transportation .............................
Full funding allowance for fixed assets .............
Army Corps of Engineers ...................................
NASA ...................................................................
Department of Energy ........................................
Department of Veterans Affairs ..........................
Other agencies ....................................................

* $50 million or less.

Other building acquisitions.—Other building acquisitions are primarily for Federal prisons; the Research
Triangle Park consolidated facility in North Carolina
for the Environmental Protection Agency; the Depart-

ment of State for buildings abroad; a National Laboratory Center and fire research facility for the Bureau
of Alcohol, Tobacco, and Firearms; and renovation of
aging and obsolete research laboratories for the National Institute of Standards and Technology in the Department of Commerce.
Information Technology
This category includes computer hardware, major
software, and renovations required for this equipment.
This budget includes $3.9 billion in 1997 budget authority for major information technology included in the
fixed assets category.
Department of Defense.—The budget requests $2.1 billion for the Department of Defense for information technology for defense-wide procurement. These funds will
be used to purchase hardware and software to improve
information security for critical computer systems, support worldwide communications to bases and deployed
forces, replace obsolete equipment, and improve the information processing capabilities for the Department.
Department of Commerce.—The budget requests $0.6
billion for the multi-year acquisition of information
technology critical to the National Weather Service
Modernization initiative underway at the Department
of Commerce. The modernization initiative involves the
development and deployment of advanced radar equipment, other ground observing systems, and geostationary (GOES) and polar orbiting satellites. GOES
satellites provide information necessary to make severe
weather predictions, while Polar satellites provide the
data necessary to make routine weather forecasts. The
key integrating system is the Advanced Weather Interactive Processing System (AWIPS) which processes the
massive amounts of incoming data into weather products usable to meteorologists in ‘‘real time.’’ The modernization and cutting-edge information technology has
greatly improved weather warnings and forecasts which
results in lives and property saved.
Internal Revenue Service Tax Systems Modernization.—The budget includes $0.3 billion for 1997 to continue acquisitions for the IRS tax systems modernization (TSM) project. With related spending the total request is $0.8 billion for 1997. This is a large, capitalintensive investment to modernize antiquated systems
and processes. The 1997 funding will finance infrastructure and computing center hardware, telecommunications and security, and customer service workstations. The long-term business vision for TSM includes
providing alternative means of filing returns and paying taxes; improving taxpayer contacts via telephone
and resolving taxpayer issues with a single contact;
enhancing compliance issue identification; and giving
employees immediate access to complete information
and the modern tools to do their jobs.
Social Security Administration.—This request of $0.3
billion for 1997 is to modernize the information technology systems used by the Social Security Administration. The funds will allow for replacement of an antiquated main-frame based architecture that uses ‘‘dumb

FEDERAL INVESTMENT SPENDING AND CAPITAL BUDGETING

terminals’’ with a nation-wide system of modern personal computers and local area networks.
Other.—Other major information technology purchases include funds for the Department of Justice to
acquire communications and ADP equipment to support
law enforcement activities in the Federal Bureau of
Investigation, the Drug Enforcement Administration,
and the Immigration and Naturalization Service; and
to support medical care for veterans’ hospitals.
Other Acquisitions
This category includes facilities and major equipment
not included above. The budget requests $8.7 billion
for the acquisitions included in this fixed assets category, including an allowance of $1.4 billion to fully
fund certain acquisitions now funded incrementally.
Department of Transportation.—The budget requests
$2.1 billion for the Department of Transportation,
which includes $1.8 billion for equipment to modernize
the air traffic control system and $0.3 billion for Coast
Guard vessels and shore facilities.
Full funding allowance for fixed assets.—In a separate allowance the budget requests $1.4 billion to provide full upfront funding for certain fixed assets that
would otherwise have been funded incrementally. The
amounts are proposed in the governmentwide general
provisions in the Appendix volume of the budget, which
requests that the funds be transferred to the parent
accounts in the three agencies acquiring the assets.
The amount is included in the budget totals as a governmentwide allowance, not attributed to the three
agencies. This request is part of an initiative to improve
planning and budgeting for fixed assets and avoid the
problems of incremental funding.
NASA.—The allowance requests that $0.9 billion be
transferred to NASA. This includes $558 million
for the Tracking and Data Relay Satellite Replenishment program and $342 million for the New
Millennium program.
Department of Energy.—The allowance requests that
$0.4 billion be transferred to the Department of

101

Energy. These funds include $182 million for environmental projects, $131 million for the Relativistic
Heavy Ion Collider at Brookhaven National Laboratory, $37 million for the Fermilab Main Injector,
$35 million for the B-factory at the Stanford Linear
Accelerator Center, and $13 million for the Combustion Research Facility, Phase II.
Department of the Interior.—The allowance requests
that $111 million be transferred to the National
Park Service for restoration of the Elwha River
in Olympia National Park, including the removal
of two aging dams, starting in 1998.
Army Corps of Engineers.—The budget requests $1.0
billion for fixed assets for the Corps of Engineers. These
funds finance construction, rehabilitation, and related
activity for water resources development projects that
provide navigation, flood control, water supply, hydroelectric, and other benefits.
NASA.—The budget includes $0.9 billion for NASA
for acquisitions in this category. The acquisitions include the International Space Station, important space
shuttle upgrades, the Cassini mission to Saturn, the
advanced x-ray astrophysics facility, and the Earth observing system, in addition to a wide variety of research
and technology acquisitions.
Department of Energy.—This budget includes $0.6 billion for major facilities. These are largely for general
science and research activities, environmental restoration, weapons activities, nuclear and non-nuclear energy activities, and the Bonneville Power Administration fund.
Department of Veterans Affairs.—The budget requests
$0.5 billion for medical equipment for veterans’ hospitals. This equipment is for new and refurbished medical facilities, for equipment requirements at existing
facilities, and for additional needed medical equipment.
Other.—Other major acquisitions in this category are
for the Tennessee Valley Authority for dams, locks, and
other facilities; and the purchase of vehicles by the
General Services Administration.

Part III: FEDERALLY FINANCED CAPITAL STOCKS
Federal investment spending, by definition, creates
a ‘‘stock’’ of capital that is available in the future for
productive use. Each year, Federal investment outlays
add to the stock of capital. At the same time, however,
wear and tear and obsolescence reduce it. This section
presents very rough measures over time of three different kinds of capital stocks financed by the Federal
Government: public physical capital, research and development (R&D), and education. Capital stocks are not
estimated for training.
Federal spending for physical assets adds to the
Nation’s capital stock of tangible assets, such as roads,
buildings, and aircraft carriers. These assets deliver
a flow of services over their lifetime. The capital depreciates as the asset is used, wears out, or becomes obsolete.

Federal spending for the conduct of research, development, and education adds to an ‘‘intangible’’ asset, the
Nation’s stock of knowledge. Although financed by the
Federal Government, the research and development or
education can be performed by Federal or State government laboratories, universities and other nonprofit organizations, or private industry. Research and development covers a wide range of endeavors, from the investigation of subatomic particles to the exploration of
outer space; it can be ‘‘basic’’ research without particular applications in mind, or it can have a highly specific
practical use. Similarly, education includes a wide variety of programs, assisting people of all ages with basic
education through graduate studies. Like physical assets, the capital stocks of R&D and education provide

102

ANALYTICAL PERSPECTIVES

services over a number of years and depreciate as they
become outdated.
For this analysis, physical and R&D capital stocks
are estimated using the perpetual inventory method.
In this method, the estimates are based on the sum
of net investment in prior years. Each year’s Federal
outlays are treated as gross investment, adding to the
capital stock; depreciation and discards reduce the capital stock. Gross investment less depreciation and discards is net investment. One limitation of the perpetual
inventory method is that investment spending is not
necessarily an accurate measure of the value of the
asset created. However, alternative methods for measuring asset value, such as direct surveys of current
market worth or indirect estimation based on an expected rate of return, are difficult to apply to investments without a private market, such as highways or
defense procurement.
In contrast to physical and R&D stocks, the estimate
of the education stock is based on the replacement cost
method. Data on the cumulative years of education in
the U.S. population are combined with data on the cost
of education and the Federal share of education spending to yield the cost of replacing the Federal share
of the Nation’s stock of education.
Additional detail about the methods used to estimate
capital stocks appears in a methodological note at the
end of this section. It should be stressed that these
estimates are rough approximations, and provide a
basis only for making broad generalizations. Errors may
arise from incomplete data for historical outlays, imprecision in the deflators used to express costs in constant
dollars, and uncertainty about the useful lives and depreciation rates of different types of assets.

The Stock of Physical Capital
This section presents data on stocks of physical capital assets and estimates of the depreciation on these
assets.
Trends.—Table 6–5 shows the value of the net federally financed physical capital stock since 1960, in constant fiscal year 1987 dollars.3 After rising in the
1960s, the total stock held constant through the 1970s
and began rising again in the early 1980s. The stock
reached a high of $1,383 billion in 1994 and is estimated to decline slightly to $1,356 billion by 1997. In
1995, the national defense capital stock accounted for
$651 billion, or 47 percent of the total, and nondefense
stocks for $731 billion, or 53 percent of the total.
Real stocks of defense and nondefense capital show
very different trends. Nondefense stocks have grown
consistently since 1970, increasing from $368 billion
in 1970 to $731 billion in 1995. With the investments
proposed in the budget, nondefense stocks are estimated to grow to $761 billion in 1997. During the
1970s, the nondefense capital stock grew at an average
annual rate of 3.9 percent. In the 1980s, however, the
growth rate slowed to just over half that rate, or 2.0
percent annually, with growth slightly above that rate
since then.
National defense stocks began in 1970 at a relatively
high level, and declined steadily throughout the decade,
as depreciation from the Vietnam era exceeded new
investment in military construction and weapons procurement. Starting in 1983, however, a large defense
buildup began to increase the stock of defense capital.
By 1992, the defense stock had nearly equaled its size
at the height of the Vietnam War. In the last few
years, depreciation on this increased stock and a slower
3 Constant dollar stock estimates do not reflect the revisions to the National Income
and Product Accounts (NIPAs) released in January 1996.

Table 6–5.

NET STOCK OF FEDERALLY FINANCED PHYSICAL CAPITAL
(In billions of constant 1987 dollars)
Direct Federal Capital

Fiscal Year

Five year intervals:
1960 ...............................................
1965 ...............................................
1970 ...............................................
1975 ...............................................
1980 ...............................................
1985 ...............................................
Annual data:
1990 ...............................................
1991 ...............................................
1992 ...............................................
1993 ...............................................
1994 ...............................................
1995 ...............................................
1996 est. ........................................
1997 est. ........................................

Total

National
Defense

Total
Nondefense

Total

Water and
Power

Capital Financed by Federal Grants
Other

Total

Transportation

Community
and
Regional

Natural
Resources

Other

903
974
1,063
1,023
1,009
1,100

689
686
696
583
470
501

214
288
368
441
539
599

119
139
152
162
176
187

73
84
92
101
113
114

46
55
60
61
63
72

95
149
215
278
363
413

62
113
164
195
225
250

15
17
26
45
74
89

11
10
11
21
46
59

7
9
15
17
17
14

1,306
1,339
1,365
1,380
1,383
1,382
1,372
1,356

649
670
680
681
670
651
625
595

657
669
685
699
714
731
747
761

207
212
221
228
232
238
243
247

114
114
115
115
114
114
112
111

93
98
106
113
118
125
130
136

450
457
464
471
481
493
505
514

278
283
289
294
301
307
314
319

92
92
92
92
92
92
94
94

65
66
66
67
67
67
67
67

14
15
17
19
22
26
30
34

103

FEDERAL INVESTMENT SPENDING AND CAPITAL BUDGETING

pace of defense investment have begun to reduce the
stock somewhat from its recent levels.
Another trend in the Federal physical capital stocks
is the shift from direct Federal assets to grant-financed
assets. In 1960, 56 percent of federally financed
nondefense capital was owned by the Federal Government, and 44 percent was owned by State and local
governments but financed by Federal grants. Expansion
in Federal grants for highways and other state and
local capital, coupled with relatively slow growth in
direct Federal investments by agencies such as the Bureau of Reclamation and Corps of Engineers, shifted
the composition of the stock substantially. In 1995, 33
percent of the nondefense stock was owned by the Federal Government and 67 percent by State and local
governments.
The growth in the stock of physical capital financed
by grants has come in several areas. The growth in
the stock for transportation is largely grants for highways, including the Interstate Highway System. The
growth in community and regional development stocks
occurred largely with the enactment of the community
development block grant in the early 1970s. The value
of this capital stock has been unchanged in the past
few years. The growth in the natural resources area
occurred primarily because of construction grants for
sewage treatment facilities. The value of this federally
financed stock has also been relatively stable since the
mid-1980s.
Table 6–6 shows nondefense physical capital outlays
both gross and net of depreciation since 1960. Total
nondefense net investment has been consistently positive over the period covered by the table, indicating
that new investment has exceeded depreciation on the
existing stock. For some categories in the table, such
as water and power programs, net investment has been
Table 6–6.

negative in some years, indicating that new investment
has not been sufficient to offset depreciation. The net
investment in this table is the change in the net
nondefense physical capital stock displayed in Table
6-5.
The Stock of Research and Development Capital
This section presents data on the stock of research
and development, taking into account adjustments for
its depreciation.
Trends.—As shown in Table 6–7, the R&D capital
stock financed by Federal outlays is estimated to be
$655 billion in 1995 in constant 1987 dollars. About
two-fifths is the stock of basic research knowledge;
about three-fifths is the stock of applied research and
development.
The total federally financed R&D stock in 1995 was
about evenly divided between defense and nondefense.
Although investment in defense R&D has exceeded that
of nondefense R&D in every year since 1979, the two
stocks are much closer in size because of the different
emphasis between basic research and applied R&D. Defense R&D spending is heavily concentrated in applied
research and development, which depreciates much
more quickly than basic research. Applied research and
development is assumed to depreciate at a ten percent
geometric rate, while basic research is assumed not
to depreciate at all.
The defense R&D stock rose slowly during the 1970s,
as gross outlays for R&D trended down in constant
dollars and the stock created in the 1960s depreciated.
A renewed emphasis on defense R&D spending from
1980 through 1989 led to a more rapid growth of the
R&D stock. Since then, defense R&D outlays have ta-

COMPOSITION OF GROSS AND NET FEDERAL AND FEDERALLY FINANCED NONDEFENSE PUBLIC PHYSICAL INVESTMENT
(In billions of constant 1987 dollars)
Total nondefense investment

Direct Federal investment

Investment financed by Federal grants

Composition of net
investment
Fiscal Year
Gross

Five year intervals:
1960 ........................
1965 ........................
1970 ........................
1975 ........................
1980 ........................
1985 ........................
Annual data:
1990 ........................
1991 ........................
1992 ........................
1993 ........................
1994 ........................
1995 ........................
1996 est. .................
1997 est. .................
* $50 million or less.

Depreciation

Net

Gross

Depreciation

Net

Water
and
power

Composition of net investment
Gross

Depreciation

Net

Other

Transportation
(mainly
highways)

Community and
regional
development

Natural
resources
and environment

Other

21.0
29.9
29.2
29.9
37.7
37.8

8.3
11.1
14.5
17.6
20.1
23.6

12.7
18.9
14.7
12.3
17.6
14.2

7.3
10.5
7.3
9.3
10.0
12.1

4.6
5.6
6.6
7.3
7.6
8.3

2.7
4.9
0.7
2.0
2.4
3.7

1.4
2.1
1.0
2.0
1.4
0.1

1.3
2.8
–0.3
–*
1.0
3.6

13.7
19.5
21.9
20.6
27.7
25.8

3.7
5.5
7.9
10.3
12.5
15.3

10.0
14.0
14.0
10.3
15.2
10.5

10.2
12.4
8.6
3.8
6.1
6.7

–0.3
1.4
3.8
2.9
4.8
2.3

–0.2
–*
0.4
3.3
4.8
1.9

0.3
0.3
1.2
0.3
–0.5
–0.4

38.8
40.6
45.4
45.7
46.3
51.1
50.4
49.3

27.8
28.8
29.8
30.9
32.0
33.2
34.4
35.6

11.0
11.9
15.6
14.8
14.2
17.9
16.0
13.7

14.1
15.3
19.3
18.2
16.0
18.2
16.9
17.4

9.7
10.1
10.6
11.2
11.6
12.1
12.6
13.0

4.3
5.1
8.6
7.1
4.4
6.2
4.3
4.4

0.2
–0.2
1.1
–0.1
–1.1
–0.1
–1.2
–1.7

4.1
5.4
7.5
7.1
5.5
6.3
5.5
6.1

24.8
25.4
26.1
27.5
30.3
32.8
33.6
31.9

18.1
18.6
19.2
19.8
20.4
21.1
21.8
22.6

6.7
6.7
6.9
7.7
9.9
11.7
11.7
9.3

5.1
5.0
5.1
5.9
6.2
6.7
6.7
4.9

*
–0.1
–0.1
–0.4
0.1
0.6
1.2
0.8

0.7
0.8
0.7
0.3
0.1
0.4
*
–0.2

0.8
1.0
1.3
1.8
3.5
4.0
3.8
3.9

104

ANALYTICAL PERSPECTIVES
Table 6–7.

NET STOCK OF FEDERALLY FINANCED RESEARCH AND DEVELOPMENT 1
(In billions of constant 1987 dollars)
National Defense

Fiscal Year
Total

Five year intervals:
1970 ..............................................................................
1975 ..............................................................................
1980 ..............................................................................
1985 ..............................................................................
Annual data:
1990 ..............................................................................
1991 ..............................................................................
1992 ..............................................................................
1993 ..............................................................................
1994 ..............................................................................
1995 ..............................................................................
1996 est. ......................................................................
1997 est. ......................................................................
1 Excludes

Basic
Research

Nondefense
Applied
Research and
Development

Basic
Research

Total

Total Federal
Applied
Research and
Development

Total

Basic
Research

Applied
Research and
Development

207
217
217
244

13
16
20
24

195
201
197
221

170
206
241
260

54
77
103
135

117
129
138
126

378
423
458
505

66
93
123
158

311
330
335
346

300
303
306
308
310
311
311
311

28
29
30
30
31
32
34
35

272
274
276
278
279
279
278
277

290
300
310
321
332
344
355
367

174
184
193
203
212
221
231
240

116
116
117
118
120
122
124
126

590
603
616
629
642
655
667
678

202
213
223
233
243
254
264
275

387
390
393
396
399
401
402
403

outlays for physical capital for research and development, which are included in Table 6–5.

pered off, depreciation has grown, and, as a result,
the net defense R&D stock has grown more slowly.
The growth of the nondefense R&D stock slowed from
the 1970s to the late 1980s, from an annual rate of
3.6 percent in the 1970s to a rate of 1.6 percent from
1980 to 1988. Gross investment in real terms fell during much of the 1980s, and about three-fourths of new
outlays went to replacing depreciated R&D. Since 1988,
however, nondefense R&D outlays have been on an upward trend while depreciation has edged down. As a
result, the net nondefense R&D capital stock has grown
more rapidly.
The Stock of Education Capital
This section presents estimates of the stock of education capital financed by the Federal government.
As shown in Table 6–8, the federally financed education stock is estimated at $649 billion in 1995 in
constant 1987 dollars, rising to $692 billion in 1997.
Table 6–8.

The vast majority of the Nation’s education stock is
financed by State and local governments, and by students and their families themselves. This federally financed portion of the stock represents about 3 percent
of the Nation’s total education stock.4 Nearly threequarters is for elementary and secondary education,
while the remaining one quarter is for higher education.
In 1970, the federally financed stock of education was
only about half the size of the research and development stock, but with steady growth in the intervening
decades the education stock is nearly equal to the stock
of R&D. Despite a slowdown in growth during the early
1980s, the stock grew at an average annual rate of
4.9 percent from 1970 to 1995, and the expansion of
the education stock is projected to continue under this
budget.
4 For estimates of the total education stock, see Table 2–4 in Chapter 2, ‘‘Stewardship:
Toward a Federal Balance Sheet.’’

NET STOCK OF FEDERALLY FINANCED EDUCATION CAPITAL
(In billions of constant 1987 dollars)

Fiscal Year

Five year intervals:
1960 ...............................................................................
1965 ...............................................................................
1970 ...............................................................................
1975 ...............................................................................
1980 ...............................................................................
1985 ...............................................................................
Annual data:
1990 ...............................................................................
1991 ...............................................................................
1992 ...............................................................................
1993 ...............................................................................
1994 ...............................................................................
1995 ...............................................................................
1996 est. ........................................................................
1997 est. ........................................................................

Total
Education
Stock

Elementary
and Secondary Education

Higher
Education

63
88
194
263
348
424

46
64
155
215
274
318

16
23
39
49
74
105

541
559
575
600
622
649
672
692

400
412
421
435
451
464
478
490

141
148
153
164
171
185
194
203

FEDERAL INVESTMENT SPENDING AND CAPITAL BUDGETING

Methodological Note
This note provides further technical detail about the
estimation of the capital stock series presented in Tables 6–5 through 6–8.
As stated previously, the capital stock estimates are
very rough approximations. Sources of possible error
include:
The historical outlay series.—The historical outlay
series for physical capital was based on budget records
since 1940 and was extended back to 1915 using data
from selected sources. There are no consistent outlay
data on physical capital for this earlier period, and
the estimates are approximations. In addition, the historical outlay series in the budget for physical capital
extending back to 1940 may be incomplete. The historical outlay series for the conduct of research and development began in the early 1950s and required selected
sources to be extended back to 1940. In addition, separate outlay data for basic research and applied R&D
were not available for any years and had to be estimated from obligations and budget authority. For education, data for Federal outlays from the budget were
combined with data for non-Federal spending from the
institution or jurisdiction receiving Federal funds,
which may introduce error because of differing fiscal
years and confusion about whether the Federal Government was the original source of funding.
Price adjustments.—The prices for the components
of the Federal stock of physical, R&D, and education
capital have increased through time, but the rates of
increase are not accurately known. Estimates of costs
in fiscal year 1987 prices were made through the application of price deflators from the National Income and
Product Accounts (NIPAs), but these should be considered only approximations of the costs of these assets
in 1987 prices. Although source data for the NIPA
deflators were revised in January 1996 as part of a
comprehensive statistical revision, the revised data
were not used for the estimates in this chapter, because
detailed historical series on the revised basis were not
available in time to be included in the Budget.
Depreciation.—The useful lives of physical, R&D,
and education capital, as well as the pattern by which
they depreciate, are very uncertain. This is compounded
by using depreciation rates for broad classes of assets,
which do not apply uniformly to all the components
of each group. As a result, the depreciation estimates
should also be considered approximations.
Research continues on the best methods to estimate
these capital stocks. The estimates presented in the
text could change as better information becomes available on the underlying investment data and as improved methods are developed for estimating the stocks
based on those data.
Physical Capital Stocks
For many years, current and constant-cost data on
the stock of most forms of public and private physical

105

capital—e.g., roads, factories, and housing—have been
estimated annually by the Bureau of Economic Analysis
(BEA) in the Department of Commerce. In the January
1996 comprehensive revision of the NIPAs, government
investment takes increased prominence. Government
investment in physical capital is now measured separately from consumption expenditures, and government
consumption includes a measure of the consumption
of the existing capital stock. In addition, estimates of
depreciation are improved based on the results of recent
empirical research.5
The BEA data are not directly linked to the Federal
budget, do not extend to the years covered by the budget, and do not classify as Federal the capital financed
but not owned by the Federal Government. For budgetary purposes, OMB prepares separate estimates.
Method of estimation.—The estimates were developed from the OMB historical data base for physical
capital outlays and grants to State and local governments for physical capital. These are the same major
public physical capital outlays presented in Part I. This
data base extends back to 1940 and was supplemented
by rough estimates for 1915–1939.
The deflators for Federal, State, and local purchases
of durables and structures were used going back to
1940. Specific deflators were not used for subdivisions
of durables and structures. There are no specific price
indices for public purchases of durables and structures
for 1915 through 1939, and estimates were made on
the basis of Census Bureau historical statistics on constant price public capital formation. Using these
deflators, the outlays were converted to constant fiscal
year 1987 dollars.
The resulting series was adjusted for depreciation.
The data were depreciated on a straight-line basis over
the following assumed useful lives: 46 years for water
and power projects; 40 years for other direct Federal
construction and capital financed by grants (primarily
highways); and 16 years for defense procurement and
major nondefense equipment.
Research and Development Capital Stocks
Method of estimation.—The estimates were developed from a data base for the conduct of research and
development largely consistent with the data in the
Historical Tables. Although there is no consistent time
series on basic and applied R&D for defense and
nondefense outlays back to 1940, it was possible to
estimate the data using obligations and budget authority. The data are for the conduct of R&D only and
exclude outlays for physical capital for research and
development, because those are included in the estimates of physical capital. Nominal outlays were deflated by the implicit price deflator for gross domestic
5 The revisions for government investment and depreciation methods are discussed in
‘‘Preview of the Comprehensive Revision of the National Income and Product Accounts:
Recognition of Government Investment and Incorporation of a New Methodology for Calculating Depreciation’’, Survey of Current Business, September 1995, pp. 33–41. BEA’s most
recent published estimates of capital stocks, prepared before the revisions, are contained
in ‘‘Fixed Reproducible Tangible Wealth in the United States’’, Survey of Current Business,
August 1994, pp. 54–62.

106
product (GDP) in fiscal 1987 dollars to obtain estimates
of constant dollar R&D spending.
The appropriate depreciation rate of intangible R&D
capital is even more uncertain than that of physical
capital. Empirical evidence is inconclusive. It was assumed that basic research capital does not depreciate
and that applied research and development capital has
a ten percent geometric depreciation rate. These are
the same assumptions used in a study published by
the Bureau of Labor Statistics estimating the R&D
stock financed by private industry.6 Recent experimental work at the Bureau of Economic Analysis, extending estimates of tangible capital stocks to R&D,
used slightly different assumptions. This work assumed
straight-line depreciation for all R&D over a useful life
of 18 years, which is roughly equivalent to a geometric
depreciation rate of 11 percent. The slightly higher depreciation rate and its extension to basic research
would result in smaller stocks than the method used
here.7

ANALYTICAL PERSPECTIVES

Education Capital Stocks
Method of estimation.—The estimates of the federally financed education capital stock in Table 6–8 were
calculated by first estimating the Nation’s total stock
of education capital, based on the current replacement
cost of the total years of education of the population.
To derive the Federal share of this total stock, the
Federal share of total educational expenditures was applied to the total amount. The percent in any year
was estimated by averaging the prior years’ share of
Federal education outlays in total education costs. For
more information, refer to the technical note in Chapter
2, ‘‘Stewardship: Toward a Federal Balance Sheet.’’
The stock of capital estimated in Table 6-8 is based
only on spending for education. Stocks created by other
human capital investment outlays included in Table
6-1, such as job training and vocational rehabilitation,
were not calculated because of the lack of historical
data prior to 1962 and the absence of estimates of
depreciation rates.

Part IV: ALTERNATIVE CAPITAL BUDGET AND CAPITAL EXPENDITURE PRESENTATIONS
A capital budget would separate Federal expenditures
into two categories: spending for investment and all
other spending. In this sense, Part I of the present
chapter provides a capital budget for the Federal Government, distinguishing outlays that yield long-term
benefits from all others. But alternative capital budget
presentations have also been suggested.
The Federal budget finances investment for two quite
different types of reasons. It invests in capital—such
as office buildings, computers, and weapons systems—
that primarily contributes to its ability to provide governmental services to the public; some of these services,
in turn, are designed to increase economic growth. And
it invests in capital—such as highways, education, and
research—that contributes more directly to the economic growth of the Nation. Most of the capital in
the second category, unlike the first, is not owned or
controlled by the Federal Government. In the discussion
that follows, the first is called ‘‘Federal capital’’ and
the second is called ‘‘national capital.’’ Table 6–9 compares total Federal investment as defined in this chapter with investment in national capital and with that
part of investment in Federal capital which was defined
as ‘‘fixed assets’’ in Part II of this chapter.
Capital budgets and other changes in Federal budgeting have been suggested from time to time for the Government’s investment in both Federal and national capital. These proposals differ widely in coverage, depending on the rationale for the suggestion. Some would
include all the investment shown in Table 6–1, or more,
whereas others would be narrower in various ways.
These proposals also differ in other respects, such as
whether investment would be financed by borrowing
and whether the non-investment budget would nec-

essarily be balanced. Some of these proposals are discussed below and illustrated by alternative capital
budget and other capital expenditure presentations, although the discussion does not address matters of implementation such as the effect on the Budget Enforcement Act. The planning and budgeting process for fixed
assets, which is a different subject, is discussed in Part
II of this chapter together with the steps this Administration is taking to improve it.

6 See U.S. Department of Labor, Bureau of Labor Statistics, The Impact of Research
and Development on Productivity Growth, Bulletin 2331, September 1989.

7 See ‘‘A Satellite Account for Research and Development’’, Survey of Current Business,
November 1994, pp. 37–71.

Investment in Federal Capital
The goal of investment in Federal capital is to deliver
Government services as efficiently and effectively as
possible. The Congress allocates resources to Federal
agencies to accomplish a wide variety of programmatic
goals. Because these goals are diverse and most are
not measured in dollars, they are difficult to compare
with each other. Policy judgments must be made as
to their relative importance.
Once amounts have been allocated for one of these
goals, however, analysis may be able to assist in choosing the most efficient and effective means of delivering
service. This is the context in which decisions are made
on the amount of investment in Federal capital. For
example, budget proposals for the Department of Justice must consider whether to increase the number of
FBI agents, the amount of justice assistance grants
to State and local governments, or the number of prisons in order to accomplish the department’s objectives.
The optimal amount of investment in Federal capital
derives from these decisions. There is no efficient target
for total investment in Federal capital as such.
The universe of Federal capital encompasses federally
owned fixed assets. It excludes Federal grants to States

107

FEDERAL INVESTMENT SPENDING AND CAPITAL BUDGETING
Table 6–9.

ALTERNATIVE DEFINITIONS OF INVESTMENT OUTLAYS, 1997
(In millions of dollars)
All Federal
investment

Construction and rehabilitation:
Grants:
Transportation ........................................................................................................
Natural resources and environment .....................................................................
Community and regional development .................................................................
Housing assistance ...............................................................................................
Other grants ..........................................................................................................
Direct Federal:
National defense ...................................................................................................
General science, space, and technology .............................................................
Natural resources and environment .....................................................................
Energy ...................................................................................................................
Transportation ........................................................................................................
Veterans and other health facilities ......................................................................
Postal Service .......................................................................................................
GSA real property activities ..................................................................................
Other construction .................................................................................................

Fixed assets

National
capital

24,440
2,403
6,075
6,278
1,040

...............
...............
...............
...............
...............

24,440
2,400
1,068
...............
155

4,317
469
3,410
1,604
500
1,450
860
1,349
2,152

4,065
295
1,701
1,403
68
748
...............
1,336
892

...............
469
3,200
1,604
500
1,450
860
...............
564

Total construction and rehabilitation ................................................................
Acquisition of major equipment (direct):
National defense ........................................................................................................
Postal Service ............................................................................................................
Air transportation .......................................................................................................
Other ..........................................................................................................................

56,347

10,508

36,710

44,189
1,042
1,946
4,201

1,945
...............
1,896
3,761

...............
1,042
1,946
2,500

Total major equipment ..........................................................................................
Purchase or sale of land and structures ......................................................................

51,378
346

7,602
...............

5,488
...............

Total physical investment ..........................................................................................
Research and development:
Defense ......................................................................................................................
Nondefense ................................................................................................................

108,071

18,110

42,198

37,292
31,796

...............
...............

1,226
31,411

Total research and development ..........................................................................
Education and training ...................................................................................................

69,088
44,554

...............
...............

32,637
44,067

Total investment outlays ................................................................................................

221,713

18,110

118,902

for infrastructure, such as highways, and it excludes
intangible investment, such as education and research.
Investment in Federal capital in 1997 is estimated to
be $68 billion, or 31 percent of the total Federal investment outlays shown in table 6–1. Of the investment
in Federal capital, 72 percent is for defense and 28
percent for nondefense purposes.
A Capital Budget for Fixed Assets
Discussion of a capital budget has often centered on
the part of Federal capital called ‘‘fixed assets’’ in Part
II of this chapter—buildings, other construction, and
equipment that support the delivery of domestic Federal services. This includes capital commonly available
from the commercial sector, such as office buildings,
computers, military family housing, veterans hospitals,
research and development facilities, and associated
equipment; it also includes nondefense special purpose
capital such as space stations and dams. This definition
excludes Federal capital for weapons systems and military bases, and capital that the Federal Government
has financed but does not own.8
8 This definition of ‘‘fixed assets’’ is broader than the definition used in last year’s budget,
as explained in Part II of this chapter. Expenditures for fixed assets in 1997 under this
definition are $18 billion, as shown in tables 6–9 and 6–10, which is around two and

Some capital budget proposals would partition the
unified budget into a capital budget, an operating budget, and a total budget. Table 6–10 illustrates such a
capital budget for fixed assets as defined above. It is
accompanied by an operating budget and a total budget.
The operating budget consists of all expenditures except
those included in the capital budget, plus depreciation
on the stock of assets of the type purchased through
the capital budget. The capital budget consists of expenditures for fixed assets and, on the income side of
the account, depreciation. The total budget is the
present unified budget, largely based on cash for its
measure of transactions, which records all outlays and
receipts of the Federal Government. It consolidates the
operating and capital budgets by adding them together
and netting out depreciation as an intragovernmental
transaction. The difference between the operating budget deficit and the unified budget deficit is small, reflecting both the relatively small Federal investment in new
fixed assets and the offsetting effect of depreciation on
the existing stock. The figures in table 6–10 and the
subsequent tables of this section are rough estimates
and intended to be illustrative.
a half times larger than under the previous definition.

108
Table 6–10.

ANALYTICAL PERSPECTIVES
CAPITAL, OPERATING, AND UNIFIED BUDGETS: FIXED ASSETS,
1997 1
(In billions of dollars)

Operating Budget
Receipts ..................................................................................................
Expenses:
Depreciation .......................................................................................
Other ..................................................................................................

1,495
20
1,617

Subtotal, expenses ........................................................................

1,637

Surplus or deficit (–) ..........................................................................

–142

Capital Budget
Income: depreciation ..............................................................................
Capital expenditures ...............................................................................

20
18

Surplus or deficit (–) ..........................................................................

Unified Budget
Receipts ..................................................................................................
Outlays ....................................................................................................

1,495
1,635

Surplus or deficit (–) ..........................................................................

–140

1 Historical

data to estimate the capital stocks and calculate depreciation are not readily available for fixed
assets. Depreciation estimates were based on the assumption that outlays for fixed assets were a constant percentage of the larger categories in which such outlays were classified. They are also subject to the limitations
discussed in Part III of this chapter.

Budget Discipline and a Capital Budget
Many proposals for a capital budget, though not all,
would effectively dispense with the unified budget and
make expenditure decisions on fixed asset acquisitions
in terms of the operating budget instead. When the
Government proposed to purchase a fixed asset, the
operating budget would include only the estimated depreciation. For example, suppose that an agency proposed to buy a $50 million building at the beginning
of the year with an estimated life of 25 years and
with depreciation calculated by the straightline method.
Operating expense in the budget year would increase
by $2 million, or only 4 percent of the asset cost. The
same amount of depreciation would be recorded as an
increase in operating expense for each year of the asset’s life.9
Recording the annual depreciation in the operating
budget each year would provide little control over the
decision about whether to invest in the first place. Most
Federal investments are sunk costs and as a practical
matter cannot be recovered by selling or renting the
asset. At the same time, there is a significant risk
that the need for a fixed asset may change over a
period of years, because either the need was not permanent, it was initially misjudged, or other needs became
more important. Since the cost is sunk, however, control
cannot be exercised later on by comparing the annual
benefit of the asset services with depreciation and interest and then selling the asset if its annual services
are not worth this expense. Control can only be exercised up front when the Government commits itself to
9 The amount of depreciation recorded as an expense in the budget year might be overstated by this illustration. First, assets are mostly purchased after the beginning of the
year, in which case less than a full year’s depreciation would be recorded. Second, assets
may be constructed or built to order, in which case no depreciation would be recorded
until the work was completed and the asset put into service. This could be several years
after the initial expenditure.

the full sunk cost. By spreading the real cost of the
project over time, however, use of the operating budget
for expenditure decisions would make the budgetary
cost of the fixed asset appear very cheap when decisions
were being made that compared it to alternative expenditures. As a result, there would be an incentive
to purchase fixed assets with little regard for need,
and also with little regard for the least-cost method
of acquisition.
A budget is a financial plan for allocating resources—
deciding how much the Federal Government should
spend in total, program by program, and for the parts
of each program. The budgetary system provides a process for proposing policies, making decisions, implementing them, and reporting the results. The budget needs
to measure costs accurately so that decision makers
can compare the cost of a program with its benefit,
the cost of one program with another, and the cost
of alternative methods of reaching a specified goal.
These costs need to be fully included in the budget
up front, when the spending decision is made, so that
executive and congressional decision makers have the
information and the incentive to take the total costs
into account.
The unified budget does this for investment. By recording investment on a cash basis, it causes the total
cost to be compared up front in a rough and ready
way with the total expected future net benefits. Since
the budget measures only cost, the benefits with which
these costs are compared, based on policy makers’ judgment, must be presented in supplementary materials.
Such a comparison of total cost with benefits is consistent with the formal method of cost-benefit analysis of
capital projects in government, in which the full cost
of a fixed asset as the cash is paid out is compared
with the full stream of future benefits (all in terms
of present values).10 This comparison is also consistent
with common business practice, in which capital budgeting decisions for the most part are made by comparing cash flows. The cash outflow for the full purchase
price is compared with expected future cash inflows,
either through a relatively sophisticated technique of
discounted cash flows—such as net present value or
internal rate of return—or through cruder methods
such as payback periods.11 Regardless of the specific
technique adopted, it usually requires comparing future
returns with the entire cost of the asset up front—
not spread over time through annual depreciation.12
10 For example, see Edward M. Gramlich, A Guide to Benefit-Cost Analysis (2nd ed.;
Englewood Cliffs: Prentice Hall, 1990), chap. 6; or Joseph E. Stiglitz, Economics of the
Public Sector (2nd ed.; New York: Norton, 1988), chap. 10. This theory is applied in formal
OMB instructions to Federal agencies in OMB Circular No. A–94, Guidelines and Discount
Rates for Benefit-Cost Analysis of Federal Programs (October 29, 1992). General Accounting
Office, Discount Rate Policy, GAO/OCE-17.1.1 (May 1991), discusses the appropriate discount
rate for such analysis but not the foundation of the analysis itself, which is implicitly
assumed.
11 For a full textbook analysis of capital budgeting techniques in business, see Harold
Bierman, Jr., and Seymour Smidt, The Capital Budgeting Decision (7th ed.; New York:
Macmillan, 1988). Shorter analyses may be found, for example, in Charles T. Horngren
and George Foster, Cost Accounting (6th ed.; Englewood Cliffs: Prentice-Hall, 1987), chap.
19 and 20; and in Surendra S. Singhvi, ‘‘The Capital Budgeting Process’’ and ‘‘The Capital
Expenditure Evaluation Methods,’’ chap. 19 and 20 in Robert Rachlin and H.W. Allen
Sweeny, Handbook of Budgeting (3rd ed.; New York: Wiley, 1993).
12 A recent survey of business practice found that such techniques are predominant. See
Glenn H. Petry and James Sprow, ‘‘The Theory and Practice of Finance in the 1990s,’’
The Quarterly Review of Economics and Finance, vol. 33 (Winter 1993), pp. 359-82. Petry

FEDERAL INVESTMENT SPENDING AND CAPITAL BUDGETING

Practice Outside the Federal Government
The proponents of making investment decisions on
the basis of an operating budget with depreciation have
sometimes claimed that this is the common practice
outside the Federal Government. However, while the
practice of others may differ from the Federal budget
and the terms ‘‘capital budget’’ and ‘‘capital budgeting’’
are often used, these terms do not normally mean that
fixed asset acquisitions are decided on the basis of annual depreciation cost. The use of these terms in business and State government also does not mean that
businesses and States finance all their investment by
borrowing. Nor does it mean that under a capital budget the extent of borrowing by the Federal Government
to finance investment would be limited by the same
forces that constrain business and State borrowing for
investment.

109

Private business firms call their investment decision making process ‘‘capital budgeting,’’ and they
record the resulting planned expenditures in a ‘‘capital
budget.’’ However, decisions are normally based on upfront comparisons of the cash outflows needed to make
the investment with the resulting cash inflows expected
in the future, and the capital budget records the periodby-period cash outflows proposed for capital projects.13
This supports the business’s goal of deciding upon and
controlling the use of its resources.
The cash-based focus of business budgeting for capital
is in contrast to business financial statements—the income statement and balance sheet—which use accrual
accounting for a different purpose, namely to record
how well the business is meeting its objectives of earning profit and accumulating wealth for its owners. For
this purpose, the income statement shows the profit
in a year from earning revenue net of the expenses
incurred. These expenses include depreciation, which
is an allocation of the cost of fixed assets over their
estimated useful life. With similar objectives in mind,
the Federal Accounting Standards Advisory Board
(FASAB) has proposed the use of depreciation on general property, plant, and equipment owned by the Federal Government as a measure of expense in financial
statements and cost accounting for Federal agencies.14
Businesses finance investment from net income as
well as borrowing. When they borrow to finance investment, they are constrained in ways that Federal borrowing is not. The amount that a business borrows
is limited by its own profit motive and the market’s
assessment of its capacity to repay. The greater a
business’s indebtedness, other things equal, the more
risky is any additional borrowing and the higher is

the cost of funds it must pay. Since the profit motive
ensures that a business will not want to borrow unless
the expected return is at least as high as the cost
of funds, the amount of investment that a business
will want to finance is limited; and it has an incentive
to borrow only for projects where the expected return
is as high or higher than the cost of funds. Furthermore, if the risk is great enough, a business may not
be able to find a lender.
No such constraint limits the Federal Government—
either in the total amount of its borrowing for investment, or in its choice of which assets to buy—because
of its sovereign power to tax. It can tax to pay for
investment; and, if it borrows, its power to tax ensures
that the credit market will judge U.S. Treasury securities free from any risk of default even if it borrows
‘‘excessively’’ or for projects that do not seem worthwhile.
Most States also have a ‘‘capital budget,’’ but the
operating budget is not like the operating budget envisaged by proponents of making Federal investment decisions on the basis of depreciation. State capital budgets
differ widely in many respects but generally relate some
of the State’s purchases of fixed assets to borrowing
and other earmarked means of financing. For the debtfinanced portion of investment, the interest and repayment of principal are usually recorded in the operating
budget. For the portion of investment purchased in the
capital budget but financed by Federal grants or by
taxes, which may be substantial, State operating budgets do not record any amount. No State operating budget is charged for depreciation.15
States also do not record depreciation expense in the
financial accounting statements for governmental
funds. They record depreciation expense only in their
proprietary (commercial-type) funds and in those trust
funds where net income, expense, or capital maintenance is measured.16
State borrowing to finance investment, like business
borrowing, is subject to limitations that do not apply
to Federal borrowing. Like business borrowing, it is
constrained by the credit market’s assessment of the
State’s capacity to repay. Furthermore, it is usually
designated for specified investments, and it is almost
always subject to constitutional limits or referendum
requirements.
Other developed nations tend to show a more systematic breakdown between investment and operating
expenditures within their budgets than does the United
States, even while they record capital expenditures on
a cash basis within the same budget totals. For example, the United Kingdom shows the capital spending

and Sprow also found that such techniques are recommended by the most widely used
textbooks in managerial finance.
13 A business capital budget is depicted in Glenn A. Welsch et al., Budgeting: Profit
Planning and Control (5th ed.; Englewood Cliffs: Prentice Hall, 1988), pp. 396–99.
14 FASAB, Statement of Recommended Accounting Concepts No. 6, Accounting for Property,
Plant, and Equipment (September 1995), pp. 7–14 and 34–36. Depreciation would not be
used as a measure of expense for weapons systems, space exploration equipment, and
other ‘‘Federal mission property’’ or for heritage assets. Depreciation also would not be
used as a measure of expense for physical property financed by the Federal Government
but owned by State and local governments, or for investment that the Federal Government
financed in human capital and research and development.

15 The characteristics of State capital budgets were examined in a survey of State budget
officers for all 50 States in 1986. See Lawrence W. Hush and Kathleen Peroff, ‘‘The Variety
of State Capital Budgets: A Survey,’’ Public Budgeting and Finance (Summer 1988), pp.
67–79. More detailed results are available in an unpublished OMB document, ‘‘State Capital
Budgets’’ (July 7, 1987). Two GAO reports examined State capital budgets and reached
similar conclusions on the issues in question. See Budget Issues: Capital Budgeting Practices
in the States, GAO/AFMD-86-63FS (July 1986) and Budget Issues: State Practices for Financing Capital Projects, GAO/AFMD-89–64 (July 1989).
16 Governmental Accounting Standards Board (GASB), Codification of Governmental Accounting and Financial Reporting Standards as of June 30, 1995, sections 1100.107 and
1400.114–1400.118.

110

ANALYTICAL PERSPECTIVES

within each agency total and displays the sum of capital spending for the government as a whole. However,
a survey by the Congressional Budget Office found that
all developed nations except Chile and New Zealand
budget on a cash basis.17 New Zealand, moreover, while
budgeting on an accrual basis that generally includes
depreciation, requires the equivalent of appropriations
for the full cost up front before a department can make
net additions to its fixed assets; and it budgets for
infrastructure assets that it owns on the basis of cash
expenditure rather than depreciation.18 Some countries—including Sweden, Denmark, and Finland—formerly had separate capital budgets but abandoned
them a number of years ago.19
Conclusions
It is for reasons such as these that the General Accounting Office issued a report a little over two years
ago that criticized budgeting for capital in terms of
depreciation. Although the criticisms were in the context of what is termed ‘‘national capital’’ in this chapter,
they apply equally to ‘‘Federal capital.’’
‘‘Depreciation is not a practical alternative for the Congress
and the administration to use in making decisions on the
appropriate level of spending intended to enhance the nation’s long-term economic growth for several reasons. Currently, the law requires agencies to have budget authority
before they can obligate or spend funds. Unless the full
amount of budget authority is appropriated up front, the
ability to control decisions when total resources are committed to a particular use is reduced. Appropriating only annual
depreciation, which is only a fraction of the total cost of
an investment, raises this control issue.’’ 20

After further study of the role of depreciation in
budgeting, GAO reiterated that conclusion in another
study last year.21 ‘‘The greatest disadvantage . . . was
that depreciation would result in a loss of budgetary
control under an obligation-based budgeting system.’’ 22
Although this study also focused primarily on what is
termed ‘‘national capital’’ in this chapter, the analysis
applies equally to ‘‘Federal capital’’ as well.
Investment in National Capital
A Target for National Investment
The Federal Government’s investment in national
capital has a much broader and more varied form than
17 Robert W. Hartman, Statement before the Subcommittee on Economic Development,
Committee on Public Works and Transportation, U.S. House of Representatives (May 26,
1993). Hartman stated: ‘‘to our knowledge, only two developed countries, Chile and New
Zealand, recognize depreciation in their budgets.’’
18 New Zealand’s use of depreciation in its budget is discussed in GAO, Budget Issues:
The Role of Depreciation in Budgeting for Certain Federal Investments, GAO/AIMD-95-34
(February 1995), pp. 13 and 16–17.
19 The budgets in Sweden, Great Britain, Germany, and France are described in GAO,
Budget Issues: Budgeting Practices in West Germany, France, Sweden, and Great Britain,
GAO/AFMD-87-8FS (November 1986). Sweden had separate capital and operating budgets
from 1937 to 1981, together with a total combined budget from 1956 onwards. The reasons
for abandoning the capital budget are discussed briefly in the GAO report and more extensively by a government commission established to recommend changes in the Swedish budget
system. One reason was that borrowing was no longer based on the distinction between
current and capital budgets. See Sweden, Ministry of Finance, Proposal for a Reform of
the Swedish Budget System: A Summary of the Report of the Budget Commission Published
by the Ministry of Finance (Stockholm, 1974), chapter 10.
20 GAO, Budget Issues: Incorporating an Investment Component in the Federal Budget,
GAO/AIMD-94-40 (November 1993), p. 11. GAO had made the same recommendation in
earlier reports but with less extensive analysis.
21 GAO, Budget Issues: The Role of Depreciation in Budgeting for Certain Federal Investments, GAO/AIMD-95-34 (February 1995), p. 19.
22 Ibid., p. 17. Also see pp. 1–2 and 16–19.

its investment in Federal capital. The Government’s
goal is to support and accelerate sustainable economic
growth for the Nation as a whole and in some instances
for specific regions or groups of people. The Government’s investment concerns for the Nation are two-fold:
• The effect of its own investment in national capital
on the output and income that the economy can
produce. Reducing expenditure on consumption
and increasing expenditure on investment that
supports economic growth is a major priority for
the Administration. It has reordered priorities in
its budgets by proposing increases in selected investments.
• The effect of Federal taxation, borrowing, and
other policies on private investment. The Administration’s deficit reduction policy has brought about
an expansion of private investment, most notably
in producers’ durable equipment.
In its report a little over two years ago, Incorporating
an Investment Component in the Federal Budget, the
General Accounting Office (GAO) recommended establishing an investment component within the unified
budget—but not a separate capital budget or the use
of depreciation—for this type of investment.23 GAO defines this investment as ‘‘federal spending, either direct
or through grants, that is directly intended to enhance
the private sector’s long-term productivity.’’ 24 To increase investment—both public and private—GAO recommended establishing targets for the level of Federal
investment and for a declining path of unified budget
deficits over time.25 Such a target for investment in
national capital would focus attention on policies for
growth, encourage a conscious decision about the overall level of growth-enhancing investment, and make it
easier to set spending priorities in terms of policy goals
for aggregate formation of national capital. GAO reiterated its recommendation in another report last year.26
Table 6–11 illustrates the unified budget reorganized
as GAO recommends to have a separate component for
investment in national capital. This component is
roughly estimated to be $119 billion in 1997. It includes
infrastructure outlays financed by Federal grants to
State and local governments, such as highways and
sewer projects, as well as direct Federal purchases of
infrastructure, such as electric power generation equipment. It also includes intangible investment for nondefense research and development, for basic research
financed through defense, and for education and training. Much of this expenditure consists of grants and
credit assistance to State and local governments, nonprofit organizations, or individuals. Only 12 percent of
national investment consists of assets to be owned by
the Federal Government. Military investment and some
‘‘fixed assets’’ as defined previously are excluded, because that investment does not primarily enhance economic growth.
23Incorporating

an Investment Component in the Federal Budget., pp. 1–2, 9–10, and

15.
24 Ibid.,

pp. 1 and 5.
25 Ibid., pp. 2 and 13–16.
26 The Role of Depreciation in Budgeting for Certain Investments, pp. 2 and 19–20.

FEDERAL INVESTMENT SPENDING AND CAPITAL BUDGETING
Table 6–11.

UNIFIED BUDGET WITH NATIONAL INVESTMENT COMPONENT,
1997
(In billions of dollars)

Receipts ....................................................................................................
Outlays:
National investment .............................................................................
Other ....................................................................................................

1,495
119
1,516

Subtotal, outlays ..............................................................................

1,635

Surplus or deficit (–) ............................................................................

–140

A Capital Budget for National Investment
Table 6–12 roughly illustrates what a capital budget
and operating budget would look like under this definition of investment—although it must be emphasized
that this is not GAO’s recommendation. Some proponents of a capital budget would make spending decisions within the framework of such a capital budget
and operating budget. But the limitations that apply
to the use of depreciation in deciding on investment
decisions for Federal capital apply even more strongly
in deciding on investment decisions for national capital.
Most national capital is neither owned nor controlled
by the Federal Government. Such investments are sunk
costs completely and can be controlled only by decisions
made up front when the Government commits itself
to the expenditure.27
Table 6–12.

CAPITAL, OPERATING, AND UNIFIED BUDGETS: NATIONAL
CAPITAL, 1997 1
(In billions of dollars)

Operating Budget
Receipts ..................................................................................................
Expenses:
Depreciation 2 .....................................................................................
Other ..................................................................................................

72
1,516

Subtotal, expenses ........................................................................

1,589

Surplus or deficit (–) ..........................................................................

–125

Capital Budget
Income:
Depreciation 2 .....................................................................................
Earmarked tax receipts 3 ...................................................................

72
31

Subtotal, income ............................................................................
Capital expenditures ...............................................................................

103
119

Surplus or deficit (–) ..........................................................................

–15

1,495
1,635

Surplus or deficit (–) ......................................................................

–140

1,464

1 For

the purpose of this illustrative table only, education and training outlays are arbitrarily depreciated over
30 years by the straight-line method. This differs from the treatment of education and training elsewhere in this
chapter and in Chapter 2. All depreciation estimates are subject to the limitations discussed in Part III of this
chapter.
2 Excludes depreciation on capital financed by earmarked tax receipts allocated to the capital budget.
3 Consists of tax receipts of the highway and airport and airways trust funds, which are user charges earmarked for financing capital expenditures.
27 GAO’s conclusions about the loss of budgetary control that were quoted at the end
of the section on Federal capital came from studies that predominantly considered ‘‘national
capital.’’

111

In addition to these basic limitations, the definition
of investment is more malleable for national capital
than Federal capital. Many programs promise long-term
intangible benefits to the Nation, and depreciation rates
are much harder to determine for intangible investment
such as research and education than they are for physical investment such as highways and office buildings.
These and other definitional questions are hard to resolve. The answers could significantly affect budget decisions, because they would determine whether the
budget would record all or only a small part of the
cost of a decision when policy makers were comparing
the budgetary cost of a project with their judgment
of its benefits. The process of reaching an answer with
a capital budget would open the door to manipulation,
because there would be an incentive to make the operating expenses and deficit look smaller by classifying
outlays as investment and using low depreciation rates.
This would ‘‘justify’’ more spending by the program or
the Government overall.28
A Capital Budget and the Analysis of Saving
and Investment
Data from the Federal budget may be classified in
many different ways, including analyses of the Government’s direct effects on saving and investment. As Parts
I and III of this chapter have shown, the unified budget
provides data that can be used to calculate Federal
investment outlays and federally financed capital
stocks. However, the budget totals themselves do not
make this distinction. In particular, the budget surplus
or deficit does not measure the Government’s contribution to the nation’s net saving (after depreciation). A
capital budget, it is contended, is needed for this purpose.
This purpose, however, is being fulfilled beginning
this year by the Federal sector of the national income
and product accounts (NIPAs). The NIPA Federal sector
is an accounting translation of the budget designed to
measure the impact of Federal receipts, expenditures,
and deficit on the national economy. It is part of an
integrated set of measures of aggregate U.S. economic
activity that is prepared by the Bureau of Economic
Analysis in the Department of Commerce in order to
measure gross domestic product (GDP), the income generated in its production, and many other variables used
in macroeconomic analysis. The NIPA Federal sector
for past periods is published monthly in the Survey
of Current Business. Estimates for the President’s proposals through the budget year are normally published
in the budget documents but this year will only appear
in a later issue of the Survey of Current Business.29
The NIPA translation of the budget, rather than the
budget itself, is ordinarily used by economists to ana28 These problems are also pointed out in GAO, Incorporating an Investment Component
in the Federal Budget, pp. 11–12. They are discussed more extensively with respect to
highway grants, research and development, and human capital in GAO, The Role of Depreciation in Budgeting for Certain Federal Investments, pp. 11–14. GAO found no government
that budgets for the depreciation of infrastructure (whether or not owned by that government), human capital, or research and development (except that New Zealand budgets
for the depreciation of research and development if it results in a product that is intended
to be used or marketed).
29 See Chapter 17 of this volume, ‘‘National Income and Product Accounts.’’

112

ANALYTICAL PERSPECTIVES

lyze the effect of Government fiscal policy on the aggregate economy.30
Until this year the NIPA Federal sector did not divide government purchases of goods and services between consumption and investment. With the recent
comprehensive revision of the national income and
product accounts, it now makes that distinction.31 The
revised NIPA Federal sector is a current account or
an operating account for the Federal Government. It
excludes expenditures for structures and equipment
owned by the Federal Government; it includes depreciation on the federally owned stock of structures and
equipment as part of the Federal Government’s consumption. It does this for a broad definition of federally
owned structures and equipment, both ‘‘fixed assets’
such as included in table 6–10 and other types such
as military equipment.32 The ‘‘current surplus or deficit’
of the Federal Government thus measures its direct
accounting contribution to net saving in the economy
for the definition of investment that is employed. A
capital budget is not needed for this purpose.
Borrowing to Finance a Capital Budget
A further issue raised by a capital budget is the
financing of capital expenditures. Some have argued
that the Government ought to balance the operating
budget and borrow to finance the capital budget—capital expenditures less depreciation. The rationale is that
if the Government borrows for net investment and the
rate of return exceeds the interest rate, the additional
debt does not add a burden onto future generations.
Instead, the burden of paying interest on the debt and
repaying its principal is spread over the generations
that will benefit from the investment. The additional
debt is ‘‘justified’’ by the additional assets.
This argument is at best a justification to borrow
to finance net investment, after depreciation is subtracted from gross outlays, not to borrow to finance
gross investment. To the extent that capital is used
up during the year, there are no additional assets to
justify additional debt. If the Government borrows to
finance gross investment, the additional debt exceeds
the additional capital assets. The Government is thus
adding onto the amount of future debt service without
providing the additional capital that would produce the
additional income needed to service that debt.
This justification, furthermore, requires that depreciation be measured in terms of current cost, not historical cost. When prices change, historical cost deprecia30 For a discussion of the NIPA Federal sector and its relationship to the budget prior
to the recent comprehensive revision, see Analytical Perspectives, Budget of the United
States Government, Fiscal Year 1996, Chapter 19, ‘‘National Income and Product Accounts,’’
pp. 267–70.
31 This distinction is also made in the national income accounts of most other countries
and in the System of National Accounts (SNA), which is guidance prepared by the United
Nations and other international organizations. Definitions of investment may vary. Other
countries and the SNA do not include the purchase of military equipment as investment.
32 The revised NIPA Federal sector is explained in Survey of Current Business, ‘‘Preview
of the Comprehensive Revision of the National Income and Product Accounts: Recognition
of Government Investment and Incorporation of a New Methodology for Calculating Depreciation’’ (September 1995), pp. 33–39. Investment does not include expenditures on research
and development or on education and training. The NIPA State and local sector has been
revised in the same way and includes depreciation on structures and equipment owned
by State and local governments but financed by Federal grants.

tion does not measure the extent to which the capital
stock is used up each year.
Table 6–12 shows that the operating deficit, defined
to be net of current cost depreciation, would not be
a great deal less than the unified budget deficit—$125
billion in 1997 compared to $140 billion. Depreciation
(plus the excise taxes earmarked to finance capital expenditures for highways and airports and airways 33)
is high relative to gross new capital outlays, because
the stock of national capital has not been growing very
fast. This justification for borrowing would not justify
the Federal Government borrowing very much to finance its planned investment.
Even with depreciation calculated in current cost, the
rationale for borrowing to finance net investment is
not persuasive. The Federal Government, unlike a business or household, is responsible not only for its own
affairs but also for the general welfare of the Nation.
To maintain and accelerate national economic growth
and development, the Government needs to sustain private investment as well as its own national investment.
For more than the last decade, however, net national
saving and investment have been low, both by historical
standards and in comparison to the amounts needed
to achieve the Administration’s goals for accelerated
growth.
To the extent that the Government finances its own
investment in a way that results in lower private investment, the net increase of total investment in the
economy is less than the increase from the additional
Federal capital outlays alone. The net increase in total
investment is significantly less if the Federal investment is financed by borrowing than if it is financed
by taxation, because borrowing primarily draws upon
the saving available for private (and State and local)
investment whereas much of taxation instead comes
out of private consumption. Therefore, the net effect
of Federal investment on economic growth would be
reduced if it were financed by borrowing. This would
be the result even if the rate of return on Federal
investment was higher than the rate of return on private investment. For example, if a Federal investment
that yielded a 15 percent rate of return crowded out
private investment that yielded 10 percent, the net social return would still be positive but it would only
be 5 percent.34
The first budget of this Administration was a bold
step to increase the saving available for private investment while also increasing Federal investment for national capital. The deficit has been cut nearly in half
during the past three years, and available resources
have been shifted to investment in education and training and in science and technology. The present budget
goes further, proposing budget balance by 2002 while
protecting high priority investments. A capital budget
is not a justification to relax current and proposed
budget constraints. Any easing would undo the gains
33 The operating deficit would be about $15 billion less if depreciation were used instead
of earmarked excise taxes for highways and airports and airways.
34 GAO considered deficit financing of investment but did not recommend it. See Incorporating an Investment Component in the Federal Budget, pp. 12–13.

113

FEDERAL INVESTMENT SPENDING AND CAPITAL BUDGETING

from the deficit reduction already achieved and the further gains from balancing the budget by 2002.
Part V: SUPPLEMENTAL PHYSICAL CAPITAL INFORMATION
The Federal Capital Investment Program Information
Act of 1984 (Title II of Public Law 98–501; hereafter
referred to as the Act) requires that the budget include
projections of Federal physical capital spending and information regarding recent assessments of public civilian physical capital needs. This section is submitted
to fulfill that requirement.
This section is organized in two major parts. The
first part projects Federal outlays for public physical
capital and the second part presents information regarding public civilian physical capital needs.
Projections of Federal Outlays For Public
Physical Capital
Federal public physical capital spending is defined
here to be the same as the ‘‘major public physical capital investment’’ category in Part I of this chapter. It
covers spending for construction and rehabilitation, acquisition of major equipment, and other physical assets.
This section excludes outlays for human capital, such
as the conduct of education, training, and research.
Table 6–13.

The projections are done generally on a current services basis, which means they are based on 1996 enacted
appropriations and adjusted for inflation in later years.
Federal public physical capital spending was $118.9
billion in 1995 and is projected to increase to $126.2
billion by 2006 on a current services basis. The largest
components are for national defense and for roadways
and bridges, which together accounted for more than
two-thirds of Federal public physical capital spending
in 1995.
Table 6–13 shows projected current services outlays
for Federal physical capital by the major categories
specified in the Act. Total Federal outlays for transportation-related physical capital were $27.7 billion in
1995, and current services outlays are estimated to increase to $31.6 billion by 2006. Outlays for nondefense
housing and buildings were $10.7 billion in 1995 and
are estimated to increase to $14.8 billion by 2006. Physical capital outlays for other nondefense categories were
$20.7 billion in 1995 and are projected to be $25.4
billion by 2006. For national defense, this spending was
$59.9 billion in 1995 and is estimated on a current
services basis to be $54.4 billion in 2006.

CURRENT SERVICES OUTLAY PROJECTIONS FOR FEDERAL PHYSICAL CAPITAL SPENDING
(In billions of dollars)
1995
actual

Nondefense:
Transportation-related categories:
Roadways and bridges ........................................................................
Airports and airway facilities ...............................................................
Mass transportation systems ..............................................................
Railroads ..............................................................................................

Estimate
1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

19.2
4.5
3.6
0.4

20.1
3.7
3.8
0.5

19.6
3.6
3.4
0.6

19.8
3.8
3.4
0.6

19.8
3.7
3.3
0.4

20.0
3.8
3.4
0.4

20.3
3.9
3.5
0.5

20.8
4.0
3.6
0.5

20.9
3.9
3.7
0.5

21.7
4.0
3.8
0.5

22.2
4.2
3.9
0.5

22.9
4.3
4.0
0.5

Subtotal, transportation .......................................................................
Housing and buildings categories:
Federally assisted housing ..................................................................
Hospitals ..............................................................................................
Public buildings 1 .................................................................................

27.7

28.1

27.1

27.6

27.2

27.7

28.2

28.7

29.0

30.0

30.7

31.6

6.4
1.4
2.8

6.7
1.8
3.0

7.5
1.7
3.0

7.4
1.7
2.8

7.5
1.6
3.1

7.7
1.7
3.1

7.9
1.7
3.2

8.1
1.7
3.3

8.4
1.8
3.2

8.7
1.9
3.3

9.0
1.9
3.4

9.3
2.0
3.5

Subtotal, housing and buildings categories ........................................
Other nondefense categories:
Wastewater treatment and related facilities .......................................
Water resources projects ....................................................................
Space and communications facilities ..................................................
Energy programs .................................................................................
Community development programs ....................................................
Other nondefense ................................................................................

10.7

11.5

12.1

11.9

12.2

12.5

12.8

13.2

13.5

13.9

14.3

14.8

2.8
2.2
2.9
3.2
5.0
4.5

3.0
2.3
3.4
2.4
5.9
4.8

3.0
2.0
3.5
2.3
5.7
4.9

2.9
1.9
3.5
2.4
5.6
2.5

2.9
1.9
3.5
2.5
5.6
4.9

3.0
2.0
3.6
2.5
5.6
5.1

3.1
2.0
3.7
2.6
5.8
5.2

3.1
2.1
3.9
2.7
5.9
5.4

3.2
2.1
4.0
2.7
6.0
5.3

3.3
2.2
4.1
2.8
6.2
5.4

3.4
2.2
4.2
2.9
6.4
5.6

3.5
2.3
4.3
3.0
6.5
5.8

Subtotal, other nondefense .................................................................

20.7

21.7

21.5

18.8

21.3

21.8

22.5

23.0

23.4

24.0

24.7

25.4

Subtotal, nondefense ...............................................................................
National defense ..........................................................................................

59.0
59.9

61.3
52.6

60.8
49.1

58.3
47.6

60.7
48.7

62.0
49.5

63.4
50.5

64.9
48.9

65.9
50.2

67.9
51.6

69.8
53.0

71.8
54.4

Total ..............................................................................................................

118.9

113.9

109.8

105.9

109.4

111.5

114.0

113.8

116.0

119.5

122.7

126.2

1 Excludes

outlays for public buildings that are included in other categories in this table.

114

ANALYTICAL PERSPECTIVES

Table 6–14 shows current services projections on a
constant dollar basis, using fiscal year 1987 as the base
year.
For outlay details for most programs, see the items
included in major public physical capital in tables 6–2
and 6–3.
Public Civilian Capital Needs Assessments
The Act requires information regarding the state of
major Federal infrastructure programs, including highways and bridges, airports and airway facilities, mass
transit, railroads, federally assisted housing, hospitals,
water resources projects, and space and communications investments. Funding levels, long-term projections, policy issues, needs assessments, and critiques,
are required for each category.
Capital needs assessments change little from year
to year, in part due to the long-term nature of the
facilities themselves, and in part due to the consistency
of the analytical techniques used to develop the assessments and the comparatively steady but slow changes
in underlying demographics. As a result, the practice
has arisen in reports in previous years to refer to earlier discussions, where the relevant information had

Table 6–14.

been carefully presented and changes had been minimal.
The needs assessment material in reports of earlier
years is incorporated this year largely by reference to
earlier editions and by reference to other needs assessments. The needs analyses, their major components,
and their critical evaluations have been fully covered
in past Supplements, such as the 1990 Supplement to
Special Analysis D.
It should be noted that the needs assessment data
referenced here have not been determined on the basis
of cost-benefit analysis. Rather, the data reflect the
level of investment necessary to meet a predefined
standard (such as maintenance of existing highway conditions). The estimates do not address whether the benefits of each investment would actually be greater than
its cost or whether there are more cost-effective alternatives to capital investment, such as initiatives to reduce demand or use existing assets more efficiently.
Before investing in physical capital, it is necessary to
compare the cost of each project with its estimated
benefits, within the overall constraints on Federal
spending.

CURRENT SERVICES OUTLAY PROJECTIONS FOR FEDERAL PHYSICAL CAPITAL SPENDING
(In billions of constant 1987 dollars)
1995
actual

Nondefense:
Transportation-related categories:
Roadways and bridges ..................................................................................................................................
Airports and airway facilities ..........................................................................................................................
Mass transportation systems .........................................................................................................................
Railroads .........................................................................................................................................................

Estimate
1996

1997

1998

1999

2000

2001

2002

15.9
4.0
3.0
0.4

16.3
3.2
3.1
0.4

15.6
3.0
2.7
0.5

15.3
3.2
2.6
0.5

15.0
3.0
2.5
0.4

14.8
3.0
2.5
0.4

14.7
3.0
2.5
0.4

14.6
3.0
2.5
0.4

Subtotal, transportation ..................................................................................................................................
Housing and buildings categories:
Federally assisted housing ............................................................................................................................
Hospitals .........................................................................................................................................................
Public buildings 1 ............................................................................................................................................

23.3

23.1

21.8

21.7

20.9

20.7

20.6

20.5

5.4
1.3
2.7

5.5
1.6
2.7

6.0
1.5
2.7

5.8
1.5
2.5

5.8
1.4
2.6

Subtotal, housing and buildings categories ..................................................................................................
Other nondefense categories:
Wastewater treatment and related facilities ..................................................................................................
Water resources projects ...............................................................................................................................
Space and communications facilities ............................................................................................................
Energy programs ............................................................................................................................................
Community development programs ...............................................................................................................
Other nondefense ..........................................................................................................................................

9.4

9.9

10.2

9.8

9.9

2.4
2.0
2.7
3.0
4.2
4.1

2.4
2.1
3.1
2.2
4.8
4.3

2.4
1.8
3.1
2.1
4.5
4.3

2.3
1.7
3.0
2.1
4.3
2.1

2.2
1.6
3.0
2.1
4.2
4.1

2.2
1.6
3.1
2.1
4.2
4.2

2.3
1.6
3.1
2.1
4.2
4.2

2.2
1.7
3.1
2.1
4.2
4.2

Subtotal, other nondefense ............................................................................................................................

18.4

18.9

18.3

15.5

17.3

17.5

Subtotal, nondefense ..........................................................................................................................................
National defense .....................................................................................................................................................

51.1
52.4

51.9
45.1

50.3
41.2

47.0
39.1

48.0
39.1

47.9
38.9

47.9
38.8

47.9
36.7

Total .........................................................................................................................................................................

103.5

97.0

91.5

86.1

87.1

86.8

86.7

84.7

1 Excludes

outlays for public buildings that are included in other categories in this table.

115

FEDERAL INVESTMENT SPENDING AND CAPITAL BUDGETING

Significant Factors Affecting Infrastructure Needs Assessments
Highways
1. Projected annual growth in travel to the year 2011 ..................................................................................................
2. Annual cost to maintain overall 1993 conditions and performance on highways eligible for Federal-aid ...........
3. Annual cost to maintain overall 1994 conditions on bridges ....................................................................................

2.15 percent
$42.8 billion (1993 dollars)
$5.1 billion (1993 dollars)

Airports and Airway Facilities
1. Airports in the National Plan of Integrated Airport Systems with scheduled passenger traffic ..........................
2. Air traffic control towers ..............................................................................................................................................
3. Airport development eligible under airport improvement program for period 1993–1997 ....................................

554
476
$29.7 billion ($9.4 billion for
capacity) (1992 dollars)

Mass Transportation Systems
1. Yearly cost to maintain condition and performance of rail facilities over a period of 20 years ............................
2. Yearly cost to replace and maintain the urban, rural, and special services bus fleet and facilities .....................

$4.2 billion (1993 dollars)
$3.7 billion (1993 dollars)

Wastewater Treatment
1. Total needs of sewage treatment facilities .................................................................................................................
2. Total Federal expenditures under the Clean Water Act of 1972 .............................................................................
3. Percent of population served by centralized treatment facilities that benefits from at least secondary sewage
treatment systems ........................................................................................................................................................
4. States and territories served by State Revolving Funds ..........................................................................................

$127.1 billion (1992 dollars)
$66 billion
94 percent
51

Housing
1. Total unsubsidized very low income renter households with worst case needs (5.3 million*)
A. In severely substandard units .................................................................................................................................
B. With a rent burden greater than 50 percent .........................................................................................................
* The total is less than the sum because some renter families have both problems.

0.4 million
5.0 million

Indian Health (IHS) Care Facilities
1.
2.
3.
4.
5.

IHS hospital occupancy rates (1993) ..........................................................................................................................
Average length of stay, IHS hospitals (days) (1993) .................................................................................................
Hospital admissions (1994) ..........................................................................................................................................
Outpatient visits (1994) ...............................................................................................................................................
Population (1996) .........................................................................................................................................................

45.8 percent
4.4
60,950
4,184,641
1,405,971

1.
2.
3.
4.
5.

Department of Veterans Affairs (VA) Hospitals (1996)
Hospitals .......................................................................................................................................................................
Outpatient clinics .........................................................................................................................................................
Domiciliaries .................................................................................................................................................................
Centers for veterans .....................................................................................................................................................
VA owned nursing home beds .....................................................................................................................................

173
404
39
203
15,712

Water Resources
The significant factors affecting needs assessments for water resources include the need for navigation (deepwater ports and inland waterways); flood and storm damage protection; irrigation; hydropower; municipal and industrial water supply; recreation; fish and wildlife mitigation, enhancement, and restoration; and soil conservation.
Potential water resources investment needs typically consist of the set of projects that pass both a benefit-cost test for economic feasibility
and a test for environmental acceptability. In the case of fish and wildlife mitigation or restoration projects, the needs consist of those projects
that pass a cost-effectiveness test.

Investment Needs Assessment References
General
U.S. Advisory Commission on Intergovernmental Relations (ACIR). High Performance Public Works: A New
Federal Infrastructure Investment Strategy for America,
Washington, D.C., 1993.
U.S. Advisory Commission on Intergovernmental Relations (ACIR). Toward a Federal Infrastructure Strat-

egy: Issues and Options, A–120, Washington, D.C.,
1992.
U.S. Army Corps of Engineers, Living Within Constraints: An Emerging Vision for High Performance
Public Works. Concluding Report of the Federal Infrastructure Strategy Programs. Institute for Water Resources, Alexandria, VA, 1995

116

ANALYTICAL PERSPECTIVES

U.S. Army Corps of Engineers, A Consolidated Performance Report on the Nation’s Public Works: An Update. Report of the Federal Infrastructure Strategy Program. Institute for Water Resources, Alexandria, VA,
1995.
Surface Transportaton
Department of Transportation. 1995 Status of the Nation’s Surface Transportation System: Conditions and
Performance: Report to Congress. 1995. This report discusses roads, bridges, mass transit, and maritime transportation.
Airports and Airways Facilities
Federal Aviation Administration. The National Plan
of Integrated Airport Systems Report, April 1995.
Federally Assisted Housing
U.S. Department of Housing and Urban Development, Office of Policy Planning and Development, Tabulations of 1993 American Housing Survey.
Indian Health Care Facilities
Indian Health Service. Priority System for Health Facility Construction (Document Number 0820B or
2046T). September 19, 1981.
Indian Health Service. Trends in Indian Health—
1995. 1995.
Office of Audit, Office of Inspector General, U.S. Department of Health and Human Services. Review of

Health Facilities Construction Program. Indian Health
Service Proposed Replacement Hospital at Shiprock,
New Mexico (CIN A-09-88-00008). June, 1989.
Office of Audit, Office of Inspector General, U.S. Department of Health and Human Services. Review of
Health Facilities Construction Program. Indian Health
Service Proposed Construction Project for the Alaska
Native Medical Center at Anchorage Alaska (CIN A09-89-00096). July, 1989.
Office of Technology Assessment. Indian Health Care
(OTA 09H 09290). April, 1986.
Wastewater Treatment
Environmental Protection Agency, Office of Water.
1992 Needs Survey Report to Congress. (EPA 832-R93-002).
Water Resources
National Council on Public Works Improvement. The
Nation’s Public Works, Washington, D.C., May, 1987.
See ‘‘Defining the Issues—Needs Studies,’’ Chapter II;
Report on Water Resources, Shilling et al., and Report
on Water Supply, Miller Associates.
Frederick, Kenneth D., Balancing Water Demands
with Supplies: The Role of Demand Management in a
World of Increasing Scarcity, Report for the International Bank of Reconstruction and Development,
Washington, D.C. 1992.

Part VI: TRANSPORTATION INFRASTRUCTURE SPENDING
Transportation infrastructure is an example of the
Federal Government’s investment in national capital.
Transportation demand accounted for $713 billion, or
11 percent, of America’s gross domestic product in 1994.
A well-functioning transportation infrastructure reduces
the costs of moving people and goods, making products
cheaper for Americans and more competitive overseas.
As stated in Part I, more than half of the outlays
for grants to State and local governments in the 1997
President’s Budget for physical investment are to assist
States and localities with transportation infrastructure.
The average annual investment in public-use infrastructure by the Department of Transportation (DOT)
has increased by $2.4 billion (10.6 percent) since 1993.
This increase occurred across infrastructure types, i.e.,

in roads, bridges, railroads, and transit. In this Budget,
DOT’s investment in public use transportation infrastructure will total $24.9 billion in budgetary resources,
an increase of $1.8 billion above 1993.
Recent Federal transportation infrastructure investment has been characterized by increased private sector
involvement. Through DOT’s Innovative Financing Initiative, 74 projects in 35 States with a total value exceeding $4 billion are being pursued using new financing means that mix Federal with private funds. DOT
also is establishing ten State Infrastructure Banks
(SIBs) which leverage more total investment from Federal funds. The Budget proposes an additional $250
million to help establish these Banks and initiate new
ones.

RESEARCH AND DEVELOPMENT EXPENDITURES

The Administration is proposing $71 billion in research and development (R&D) investments in 1997.
Civilian R&D will increase over $1 billion or three percent to $34 billion. Civilian R&D will increase nearly
16 percent since 1993. In 1997, university-based re-

Table 7–1.

search will increase to roughly $12 billion, a $257 million increase over 1996. Chapter 10 of the Budget of
the United States Government—Supplement includes a
discussion of science and technology that contains more
information on R&D activities.

RESEARCH AND DEVELOPMENT (R&D) EXPENDITURES
(Outlays, dollar amounts in millions)
Actual
1997
Proposed

Dollar
Change
1996 to
1997

Percent
Change
1996 to
1997

1993

1995

1996
Estimate

By agency:
Defense ....................................................................................
Health and Human Services ....................................................
National Aeronautics and Space Administration .....................
Energy ......................................................................................
National Science Foundation ...................................................
Agriculture .................................................................................
Commerce ................................................................................
Interior .......................................................................................
Environmental Protection Agency ............................................
Other .........................................................................................

38,035
9,660
8,885
6,945
1,842
1,455
607
636
519
1,736

35,613
11,111
9,399
6,943
1,999
1,498
740
658
495
1,947

35,269
11,145
9,643
7,128
2,309
1,532
823
653
425
1,722

34,922
12,132
9,218
6,943
2,501
1,510
926
605
523
2,020

–347
987
–425
–185
192
–22
103
–48
98
298

–1%
+9%
–4%
–3%
+8%
–1%
+13%
–7%
+23%
+7%

Total .....................................................................................

70,320

70,403

70,649

71,300

654

+1%

By R&D theme:
Basic research ..........................................................................
Applied research ......................................................................
Development .............................................................................
Equipment .................................................................................
Facilities ....................................................................................

12,625
12,437
42,625
..............
2,633

13,298
13,680
41,461
475
1,489

13,579
13,978
40,830
781
1,481

13,980
14,532
40,435
758
1,595

401
554
–395
–23
114

+3%
+4%
–1%
–3%
+8%

Total .....................................................................................

70,320

70,403

70,649

71,300

651

+1%

By civilian theme:
Basic research ..........................................................................
Applied research ......................................................................
Development .............................................................................
Equipment .................................................................................
Facilities ....................................................................................

11,370
8,511
7,374
..............
1,749

12,172
9,890
8,564
317
1,233

12,405
10,170
8,165
634
1,218

12,754
10,597
8,403
608
1,264

349
427
238
–26
46

+3%
+4%
+3%
–4%
+4%

Subtotal ................................................................................

29,004

32,176

32,592

33,626

1,634

+3%

By defense theme:
Basic research ..........................................................................
Applied research ......................................................................
Development .............................................................................
Equipment .................................................................................
Facilities ....................................................................................

1,255
3,926
35,250
..............
885

1,126
3,790
32,897
158
256

1,174
3,808
32,665
147
263

1,226
3,935
32,032
150
331

52
127
–633
3
68

+4%
+3%
–2%
+2%
+26%

Subtotal ................................................................................

41,316

38,227

38,057

37,674

–383

–1%

R&D support to university researchers ..................................

11,674

11,373

12,130

12,387

257

+2%

117

UNDERWRITING FEDERAL CREDIT AND INSURANCE

In a period of tight budgetary constraints, the Administration has been reexamining the role and design of
Federal credit and insurance programs. In many lines
of credit and insurance, the private market can meet
societal demands and Federal intervention is unnecessary. However, in some situations Federal intervention
can improve the market outcome. Last year, the ‘‘Underwriting Federal Credit and Insurance’’ chapter of
Analytical Perspectives focused on these rationales and
their application to particular credit and insurance programs.
This year, the chapter focuses on the next step in
the analysis. Even when Federal intervention can improve on market outcomes in principle, it is necessary
to judge whether the program is achieving these goals
in practice. Thus, the Administration is highlighting
measurement of program performance. What do these
programs produce? What outcomes and net impacts do
they have on society?

Cost is also a performance measure. For credit and
insurance programs, it is a continuing challenge to understand and control the risks that the Government
assumes and to measure the inherent cost. This is especially true in view of the rapid changes in financial
markets and increasingly complex financial instruments. Ultimately, performance is measured by benefits
(net impact) in relation to cost.
Budgetary constraints are also impinging on administrative resources and program structure, pressing program managers to find more efficient ways to originate,
service, and collect on loans and monitor the financial
risks of guarantees and insurance. In some cases, staff
is diminishing despite rapidly growing portfolios. To
address this problem, improved financial systems are
being implemented, and various forms of private involvement are being explored.

I. Estimated Costs of Federal Credit and Insurance Programs
The Federal Government continues to be the largest
creditor institution in the United States, with $5.5 trillion outstanding at the end of 1995. Of this, $163 billion
is direct loans, $727 billion is loan guarantees, and
$4,613 billion is insurance. Including the Governmentsponsored enterprises (GSEs) pushes the total Federal
and federally assisted credit and insurance outstanding
to $7.0 trillion.
Table 8–l presents the face value and estimated future costs of the largest Federal credit and insurance
programs and the Government-sponsored enterprises.
The face value of these programs is the total amount
of credit outstanding or the insurance in force. The
future costs of these programs is the amount by which
payments from the Federal Government to borrowers,
guaranteed lenders, or insured parties exceeds the repayments, fees, premiums, and other cash inflows to
the Government—whether by intent or in practice.1 The
costs shown in this table assume that program activity
will continue following recent trends.
The amounts shown are not only costs or potential
costs to taxpayers. They are also the means by which
these programs reallocate credit in the economy toward
1 Under the Federal Credit Reform Act of 1990, the budget records as an outlay the
cost of a direct loan or loan guarantee when the loan is disbursed. The cost is defined
as the net present value of the estimated cash outflows from the Government due to
the loan or guarantee over its life minus the present value of estimated cash inflows.
Chapter 23 of Analytical Perspectives, ‘‘Budget System and Concepts and Glossary,’’ explains
concepts and terms used in credit budgeting.

purposes and entities or individuals favored under the
laws authorizing these programs and away from alternative uses. When the Federal Government guarantees
loans, for example to students or small businesses,
those borrowers move ahead of other borrowers in the
credit queue, because the Federal Government bears
the risk of defaults on their loans.
In volume, the fastest growth in Federal assistance
is via Government-sponsored enterprises. These privately owned, federally chartered financial institutions
are transforming mortgage markets; tapping capital
markets to assist agriculture, education, and housing;
making advances to depository institutions; lending for
farming and rural development; and insuring borrowing
for educational institutions. Also growing are loan guarantees and direct loans for home mortgages and student
assistance, and disaster insurance coverage.
Federal costs for credit and insurance programs generally declined last year. Behind this improvement is
the declining trend in long-term interest rates in recent
years as the Federal deficit was reduced, the expectation that interest rates will continue to decline as the
budget moves closer to balance, and the economic
growth and prosperity documented in Chapter 2 of the
Budget—Supplement, ‘‘Three Years of Progress.’’ For
credit programs, there has also been a widespread effort
to reduce subsidies, now that the Federal Credit Reform
Act of 1990 has raised awareness of them.

119

120

ANALYTICAL PERSPECTIVES

Table 8–1.

FACE VALUE AND ESTIMATED COST OF FEDERAL CREDIT AND INSURANCE PROGRAMS
(In billions of dollars)
Program

Face Value 1994

1995 Budget
Estim. Present
Value of Future
Costs 1

Face Value 1995

Current Estimates
Present Value of
Future Costs 1

Direct Loans: 2
Farm Service Agency (excluding CCC) ....................................................................
Rural Electrification Admin. and Rural Telephone Bank ..........................................
Agency for International Development ......................................................................
Public Law 480 ..........................................................................................................
Disaster Assistance (SBA & FEMA) .........................................................................
Foreign Military Financing .........................................................................................
Export-Import Bank ....................................................................................................
Federal Direct Student Loan Program ......................................................................
Small Business Loans (SBA) ....................................................................................
Other Direct ...............................................................................................................

49
38
14
12
N/A
8
8
*
9
17

15–21
2–4
0–1
2–3
N/A
0–1
3–5
11–15
2–3
2–4

43
43
14
12
9
8
8
3
2
19

13–19
2–4
2–3
2–4
3–5
0–1
1–3
6–9
0–1
1–2

Total Direct Loans .....................................................................................................

155

37–57

2 161

30–51

Guaranteed Loans 2 :
FHA Single-Family .....................................................................................................
VA Mortgage ..............................................................................................................
FHA Multi-Family .......................................................................................................
Federal Family Education Loan Program .................................................................
Small Business Administration ..................................................................................
Export-Import Bank ....................................................................................................
Farm Service Agency ................................................................................................
CCC Export Credits ...................................................................................................
Other Guaranteed ......................................................................................................

303
155
79
75
25
17
9
12
23

(13)–0
4–6
5–6
13–23
4–5
6–8
1–2
4–5
2–3

318
154
83
86
26
18
8
5
27

(12)–0
3–5
11–14
5–10
2–3
3–5
1–2
2–3
3–4

26–58

727

18–46

Total Guaranteed Loans ............................................................................................

699

Federal Insurance:
Banks .........................................................................................................................
Thrifts .........................................................................................................................
Credit Unions .............................................................................................................

1,885
691
253

(5)–15
15–25
.....................

1,919
709
266

(6)–(4)
(2)–1
.....................

Subtotal, Deposit Insurance ......................................................................................

2,829

10–40

2,894

(8)–(3)

PBGC .........................................................................................................................
Disaster Insurance .....................................................................................................
Other Insurance .........................................................................................................

950
238
484

20–40
14–15
13–14

853
354
512

30–60
13–14
11–12

Total Federal Insurance ............................................................................................

4,445

57–109

4,613

46–83

Total Federal Credit and Insurance ......................................................................

5,299

120–224

5,501

94–180

787
552
122
.....................
53

.....................
.....................
.....................
.....................
0–1

GSEs: 3
Fannie Mae ................................................................................................................
Freddie Mac ...............................................................................................................
Federal Home Loan Banks .......................................................................................
Sallie Mae 4 ................................................................................................................
Farm Credit System ..................................................................................................

744
567
140
.....................
51

.....................
.....................
.....................
.....................
0–1

Total GSEs ................................................................................................................

1,502

0–1

1,514

0–1

Total Federal and Federally Assisted Credit and Insurance ....................

6,801

120–225

7,015

94–181

* Less than $500,00.
1 Direct loan future costs are program account outlays projected into the future plus the embedded loss from outstanding loans. Loan guarantee costs are program account outlays plus
liquidating account outlays (and outlays from defaulted guarantees that result in loans receivable) projected into the future. Future insurance costs are the equivalent of program plus liquidating costs through 2001, plus the accrued liability remaining at the end of 2001.
2 Excludes loans and guarantees by deposit insurance agencies and programs not included under credit reform, such as CCC farm supports. Defaulted guarantees which become loans
receivable are accounted for in guaranteed loans.
3 Net of borrowing from Federal sources, other GSEs, and federally guaranteed loans.
4 The face value and Federal costs of Federal Family Education Loans in Sallie Mae’s portfolio are included in that account above.

Deposit insurance costs declined sharply, following
the closure of so many insolvent banks and thrifts in
the 1980s. Depository institutions, which tend to borrow
short and lend longer-term, benefited substantially from
the decline in interest rates and the steepening yield
curve of the early 1990s, as well as from the low unemployment, strong incomes and profits, and continued

low interest rates of the past year. Banks especially
had record earnings in 1993–95, built strong capital
positions, and restored the reserves of the Bank Insurance Fund (BIF). The banks’ strong capital cushion will
help to buffer BIF against the effects of interest rate
risk, increasingly complex financial instruments, and

121

UNDERWRITING FEDERAL CREDIT AND INSURANCE

more intense competition as regulatory, geographic, and
functional barriers fall.
Student loan costs, both direct and guaranteed, are
also reduced by declining interest rates, in particular
the expectation that rates will continue down as the
Federal budget moves toward balance. The direct loan
program gains from lower borrowing costs; the guaranteed loan program gains from lower interest supplements while students are in school or when interest
rates are high. Default rates have also been reduced,
primarily by excluding formerly high-default schools
and ineligible students from the program.
Farm Service Agency direct loans, some of which
have very low interest rates by statute, also have lower
interest costs when interest rates come down. These
portfolios also benefited from the recovery in farm income and land values and in rural economies.
The Small Business Administration, in an effort
to ensure the continued availability of credit to small
businesses, has adopted a policy of reducing, even eliminating, subsidies for its primary loan programs. Larger
fee income, increased risk-sharing with guaranteed
lenders, and a proposed shift of the Section 504 Community Development Company program to a direct loan
program, all reduce the subsidies paid by SBA.
Eximbank, too, has adopted a policy of reducing or
eliminating subsidies. Higher fees, collateralization, escrow accounts, and asset-based financing are some of
the methods used.

For one program, FHA multi-family loan guarantees, the current estimate of future costs is higher than
previous estimates. Before now, the cost of this program
did not include the effect of the Federal rental subsidies, which many of these properties receive, on their
financial condition. Current law does not allow for indefinite continuation of these subsidies at their current
levels. Reductions in rental subsidies would create some
mortgage defaults, resulting in payments from the FHA
insurance fund. These costs, along with proposals to
minimize them, have been reflected for the first time
in the estimate of future costs.
Pension guarantee cost estimates amount to $30–60
billion this year, as a result of refinements in the
model, and the effect of lower interest rates on the
value of future pension benefits. However, good economic conditions with high profits reduced sponsor
bankruptcies last year. Rising stock markets and increased funding under the Retirement Protection Act
of 1994 bolstered pension plans. And the Pension Benefit Guaranty Corporation negotiated 30 major settlements under their Early Warning Program that provided $13 billion in new contributions from companies.
In sum, the present value of future costs of Federal
credit and insurance programs is now estimated to total
$94 billion to $181 billion—a substantial improvement
from the $120 billion to $225 billion estimated last
year.

II. Developing A Performance Measurement Framework
It is not enough to have a good rationale for a Federal program and to know its cost; it is also necessary
to assess whether it is achieving its intended results.
The Government Performance and Results Act (GPRA)
is encouraging such assessments by requiring agencies
to define their missions and long-term objectives using
strategic plans, to set annual performance goals, and
to measure actual performance against those goals.
Credit program managers, who have long worked together on credit reform and other matters, established
a Performance Measures Task Force under the Federal
Credit Policy Working Group to develop a common
framework of such measures. These are to be used in
their agencies’ annual performance plans under GPRA
and their budget requests to explain what they intend
to accomplish. The same measures are to be shown
in their annual performance reports and Chief Financial Officer’s Accountability Reports to explain actual
results.
The Task Force believes that a common core of indicators would be useful to program managers, the Executive Branch, the Congress, and the public—helping
them to understand and compare credit programs. The
group sought to identify the most appropriate measures, whether or not data was currently collected on
them by some or all agencies. They expect that agencies
will supplement the core measures with program-spe-

cific measures whenever they are useful to assess their
programs.
The common framework has four main categories of
indicators: inputs (the resources used), outputs (the
goods or services produced), outcomes and net impacts
(the gross and net effects on society). The specific measures below reflect discussion so far, but are still subject
to modification.
Inputs. The group chose three common inputs: program objectives and performance goals (planning inputs), subsidy costs, and administrative costs (both resource inputs).
• When GPRA is fully implemented, one input
would be the program’s objectives from the agency
strategic plan, and the program’s performance
goals from the agency’s annual performance plan.
The objectives would be described in terms of outcomes and net impacts (the effects on society of
the program’s operations) or in cost-effectiveness
terms (the best outcomes per dollar of resources).
These objectives should be defined so as to relate
to annual performance goals that are quantifiable
and measurable.
• Subsidy cost outlays, cumulated over time for all
of the program’s loans or loan guarantees obligated in a given year (a cohort), would be the
second input. The total subsidy cost for each co-

122
hort of loans or guarantees would be subdivided
into three components: the initial subsidy cost, the
cost of any loan modifications, and the cumulative
amount of reestimates of the subsidy cost due to
experience and new information, along with the
interest thereon.
• Outlays for credit program administration would
be the third input. This total would be subdivided
into administrative expenses associated with: credit extension; direct loan servicing and guaranteed
loan monitoring; the cost of collecting delinquent
loans and other write-off or close-out costs; and
other administrative costs such as policymaking
or systems development.
Outputs. The most obvious output of Federal credit
programs is the number and value of direct loans originated or loans guaranteed. This is the ‘‘product’’ that
credit programs produce and provide to the public. But
volume alone does not achieve the objectives of Federal
credit programs; indeed, large volume or market share
may be a sign of excessive competition with private
lenders. Loans must have certain characteristics in
order to achieve the desired outcomes; these characteristics are part of the desired output.
• Federal credit is intended for borrowers who
would not otherwise have access to credit, or is
extended for longer periods or at lower cost to
the borrower in order to assist certain target
groups or encourage certain activities. Therefore,
output measures would include an estimate of the
percent of loans or guarantees originated going
to borrowers who would otherwise not have access
to private credit; and the percent of loans or guarantees originated going to specific target groups
or for specific purposes (e.g., countervailing foreign
subsidies).
• Within the limits imposed by extending credit to
higher-risk borrowers or for higher-risk purposes,
finding ways to assist borrowers to repay loans
is usually associated with achievement of program
objectives. Home ownership requires mortgage repayment. Remaining in business with a good credit rating requires repayment of farm, small business, and export loans. Education that enhances
income is associated with repayment of student
loans. And loan repayment is inherent in program
cost-effectiveness. Therefore, output measures
would include the percent of loans or guarantees
that are current (i.e., performing and not delinquent), compared with the percent expected to be
current at this point in the repayment cycle. If
maintaining currency is enhanced by particular
characteristics of loan structure (e.g., initial borrower equity), of loan origination (e.g., verifying
borrower financial status), of loan servicing (e.g.,
prompt counseling), or of guarantee conditions
(e.g., lender risk-sharing), the percent of loans fitting these categories contribute to output.
• Since defaults will occur, another aspect of output
would be recoveries on defaulted loans (e.g.,

ANALYTICAL PERSPECTIVES

through collections, or sales of loans or collateral)
as a percent of unpaid principal and interest.
• Overall, programs would like to ‘‘produce’’ satisfied
customers, which could be measured by surveying
the percent of borrowers who are pleased with
the timeliness and quality of credit program service.
• Finally, program managers are asked to produce
high quality subsidy estimates, as measured by
the cumulative amount of reestimated cost as a
percent of the original subsidy cost (and any loan
modification cost). It is also important to know
the extent to which reestimates were due to
changes in interest rates, defaults, or other factors.
Outcomes. Outcomes of Federal credit programs are
the effects on society that the program achieves—both
its objectives or intended outcomes and its unintended
effects. The desired outcomes of credit programs are
more diverse than their inputs and outputs. However,
programs providing similar types of credit may seek
common outcomes, and there may be parallels among
the outcomes sought by different types of programs.
Below are some outcomes chosen by credit programs,
clustered to show their common elements.
• Reaching under-served populations and neighborhoods might be measured by indicators such as:
the number of low-income or minority people who
completed education, or acquired and still own
homes or businesses with help from the program;
or the number of homes, businesses, or community
facilities financed in under-served urban or rural
neighborhoods.
• Encouraging start-up of new activities might be
measured as: the number of beginning farmers,
new businesses, new exporters, and first-time
homebuyers financed by the program; or the
amount of private financing leveraged in support
of new activities.
• Supporting investment important to the economy
might use indicators such as: the amount and
quality of education financed; business investment
financed; amount of exports financed; and amount
and quality of low-income housing and community
facilities financed.
• Sustained economic improvement achieved could
be measured by: gross jobs directly or indirectly
created due to this credit; number of placements
in jobs for which credit-financed education prepared students; higher income levels attained;
solid financial condition achieved; and communities developed with facilities up to standard.
• Programs can also have unfavorable consequences
For example, borrowers may accumulate excessive
debt burden or their credit rating may be reduced.
Unviable or low-return activities may be financed.
Private financing for these borrowers or for
projects with higher returns may be crowded out.
Outcome goals could include minimizing such unfavorable consequences.

123

UNDERWRITING FEDERAL CREDIT AND INSURANCE

• For some programs, the outcomes occur long after
credit is extended. Student loans, for example,
may raise borrowers’ lifetime incomes and quality
of life. New farmers or small businesses may take
many years to become financially viable. If such
is the case, programs may want to identify an
intermediate outcome or milestone along the way
toward achievement of the ultimate desired outcome. For student loans, this might be the percent
of low income students who gain access to postsecondary education. For mortgages, it might be
the percent reaching a specified proportion of borrower equity. For businesses, it might be the percent still in business. A general intermediate outcome might be the percent of borrowers who fully
repay their loans.
Net Impacts. Impacts assess the net effect of the
program compared with what would have occurred in
the absence of the program. Some program outcomes
would be achieved in the absence of the program; for
example, Federal credit sometimes substitutes for private credit rather than supplementing it. The Task
Force thought that ‘‘additionality,’’ or supplementation

of private credit, was an important measure of program
success.
Impacts measure the net increase in any outcome
due to the operation of the credit program. Instead
of the number of small businesses financed, it would
measure the number net of any substitution for private
credit. Other examples would be the net increase in
exports, in jobs, or in homeownership due to the existence of Federal credit programs. Such effects are very
difficult to estimate. They usually require a program
evaluation or economic study. To produce such estimates every year is unlikely to be cost-beneficial. But
the group thought that program impacts should be assessed from time to time. The most recent assessment
should be reported annually with appropriate commentary on changes since the last assessment and a
note on the timing of the next scheduled assessment.
Agencies are far from collecting all of the performance measures included in this framework, but they
are making progress toward it. Some of the performance measures already being monitored by particular
programs are discussed in relation to those programs
in the sections below on agricultural credit, business
credit, education credit, and housing credit.

III. Financing the Nation’s Agriculture and Rural Areas
The Nation’s agricultural sector and its lenders are
now on much firmer ground, following recovery from
the financial crisis in the mid-1980’s. Farm income has
improved, helping borrowers to pay down debt and
lenders to augment their capital. Land prices have stabilized and are now rising slowly. Both real interest
rates and inflationary expectations are lower. And management in both farming and farm finance have improved.
Another sign of the increasing health of agricultural
finance is the greater share of credit now provided by
the private sector, particularly commercial banks. In
the decade from 1984 to 1994, commercial banks’ share
of all agricultural finance increased from 24 percent
to 39 percent, while the share of insurance companies
and individuals and others stayed about constant at
6 percent and 24–22 percent respectively. As the agriculture sector recovered, the market share declined for
the Farm Credit System from 33 percent to 24 percent,
and the consolidated Farm Service Agency (successor
to the Farmers’ Home Administration) from 12 percent
to 8 percent.
The Farm Credit System
Despite its declining market share., the recovery in
agriculture has returned the Farm Credit System
(FCS)—the first Government-sponsored enterprise—to
financial health. After losses in 1985–87, the System
has reported positive net income every year, reaching
a record $1.2 billion in 1993. Nonperforming assets declined from $14.3 billion in 1987 to $1.6 billion in 1994

as a result of both repayments and write-offs. An increase in accruing loans and a decline in cost of funds
have widened the FCS’s net interest margin from less
than one percent in 1987 to more than three percent
in 1993–94.
Improved asset conditions and income enabled FCS
to report record capital levels in 1994 of $8.8 billion,
or more than 13 percent of assets. Two-thirds of this
capital ($5.7 billion) was surplus, rather than the borrowers’ equity in these cooperatives, up from 42 percent
in 1982. Included in this capital are investments set
aside to repay about $600 million of the $1.3 billion
of Federal assistance provided through the Financial
Assistance Corporation (FAC) due beginning in 2003,
and the System has adopted an annual repayment
mechanism to cover the remainder.
Moreover, the improvement in the System’s financial
condition is widespread. The Farm Credit Administration, FCS’s Federal regulator, rates each of the System’s institutions for capital, asset quality, management, earnings, and liquidity (CAMEL). At the end of
1990, 94 institutions carried the best ‘‘CAMEL’’ ratings
of ‘‘1’’ or ‘‘2’’, and 40 were rated in the troubled range
of ‘‘4’’ or ‘‘5’’. By 1995, in contrast, 225 institutions
were given the top two ratings and no institutions were
in the troubled categories. Similarly, enforcement actions to correct illegal or unsafe operations applied to
77 institutions with 80 percent of FCS’s assets in 1991
but to only 12 institutions with 11 percent of FCS’s
assets in 1995.

124

ANALYTICAL PERSPECTIVES

GOVERNMENT–SPONSORED ENTERPRISES
Government-sponsored enterprises (GSEs)—the most rapidly growing providers of credit assistance—are highlighted in the sections below. GSEs are privately owned financial institutions, whose policies and operations are determined by their boards of directors, a majority of which are elected by private owners. However, they were chartered by the Federal Government to facilitate
the flow of funds into agriculture, higher education, and housing. Each was established because wholly private financial institutions were thought to be incapable of providing an adequate supply of loanable funds at all times and in all regions.
Federal sponsorship gives the GSEs a borrowing cost advantage that allows them to provide credit more cheaply than other
private financial institutions. Most GSEs also enjoy special legal benefits under Federal law. Typically, these benefits include an
ability to borrow from the Treasury, at Treasury discretion, in amounts ranging up to $4 billion; exemption of their securities
from Securities and Exchange Commission (SEC) registration; exemption of their corporate earnings from State and local income
taxation; and eligibility of their securities to collateralize public deposits and be held in unlimited amount by most banks and
thrifts. With these advantages, GSEs have grown to enjoy considerable economies of scale. Private ownership and control distinguish the GSEs from Federal agencies that make and guarantee loans to similar borrowers; their Federal sponsorship and special legal benefits distinguish them from other privately owned financial institutions that operate in the same credit markets but
have very different, if any, ties to the Federal Government.
There are seven GSEs today: the Farm Credit System, the Federal Agricultural Mortgage Corporation (Farmer Mac), the Student Loan Marketing Association (Sallie Mae), the College Construction Loan Insurance Association (Connie Lee), the Federal
National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Federal
Home Loan Banks (FHLBanks). These institutions (except for Connie Lee, an insurer) raise funds in the securities markets and
use the money to lend to individuals or businesses or to purchase loans originated by private lenders. The GSEs have fostered
the development of credit markets by creating new loan products and services, standardizing the terms of loans and credit market transactions, and providing liquidity to lenders.
Costs and Benefits of Federal Sponsorship
Federal sponsorship imposes limited costs on and conveys substantial benefits to each GSE. Costs are imposed by the restrictions on the types of loans that each may make or purchase, which limit credit risk diversification, and the expectation that it
serve markets in all regions of the country at all times. The GSEs also bear costs associated with statutory requirements to
achieve specific policy objectives such as targeting a proportion of their lending to borrowers of above-average credit risk.
The costs of Government sponsorship are far outweighed, however, by the benefits. The credit market’s perception that each
GSE’s obligations are implicitly backed by the Federal Government enables each GSE to borrow at near-Treasury rates. Investors infer an implicit Federal guarantee from their Federal sponsorship and public purposes, the strong support for their missions, the legal benefits enjoyed by the enterprises, and the huge volume of their outstanding securities.
This market perception has two important consequences for public policy. First, the GSEs are not subject to market discipline
to the same degree as wholly private financial institutions and, therefore, can operate with much lower levels of capital. If a
GSE incurred substantial losses or became insolvent, the Government would have the difficult choice of arranging for it to be recapitalized, perhaps at taxpayers’ expense, or allowing it to increase its risk or even default on its obligations, which would prevent its public purposes from being accomplished, harm the value of all GSE securities, and throw financial markets into turmoil. To avoid such a situation, the Government must ensure that each GSE is well managed and adequately capitalized.
Second, the borrowing cost advantages arising from the perception of an implicit guarantee convey economic subsidies to each
GSE. The greater an enterprise’s overall risk exposure relative to its capital, the greater the economic subsidy. A GSE’s overall
risk depends on its exposure to credit risk, interest rate risk, management and operational risk, and business risk (the risk of
unexpected changes in its business environment). The economic subsidies received by the GSEs affect the allocation of society’s
resources, but are neither recorded in the President’s Budget nor controlled through the Federal budget process. Recently, the
Shadow Financial Regulatory Committee, a group of financial experts, suggested that Federal subsidies to GSEs should be recorded in the Federal budget in a manner similar to credit subsidies.
The Federal Government relies on regulation and oversight to control the GSEs’ activities. Safety and soundness regulation of
the enterprises uses on-site examinations and risk-based capital requirements to manage the Government’s exposure to risk and
the economic subsidy conveyed by investors who perceive implied Federal backing. Programmatic regulation assures that the
GSEs appropriately target their activities and the subsidies they receive.

The Changing Role of FCS. The System’s original
mission was to serve as a market force to ensure an
adequate supply of competitively priced credit to the
benefit of farmers. Loans to farmers and other eligible
borrowers still comprise 74 percent of the System’s
portfolio. Loans to producers surged through the early
1980s, fell back, and then slowly recovered, with lending secured by farm mortgages stagnant in volume
since 1990, but farm operating credit growing.
Since its origination, FCS’s authorities have been
broadened, introducing 26 new types of lending. In particular, the System’s authority to lend to farmer cooperatives has generated a stable or growing volume
for much of the past 20 years. These loans, which fi-

nance processing, exports, and rural utilities, comprised
26 percent of the FCS’s portfolio in 1995. Although
it is little used, FCS also has authority to lend to other
agricultural lenders.
Reducing Recent Risks. The FCS is exposed to concentration risk, from which it suffered in the 1980s.
Because its mission is to lend to agriculture, it cannot
diversify across industries or products other than loans.
Direct lenders in FCS are also geographically limited,
often to areas dependent on one or a few commodities.
In 1994, 32 percent of the direct lending institutions
had portfolio concentrations in Federal farm program

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commodities of 50 percent or more, and 55 percent had
concentrations over 30 percent.
FCS has, however, succeeded in reducing its overall
credit risk, measured by the proportion of loans which
are nonperforming. At the end of 1995, nonperforming
loans were 2.4 percent of all System loans, down from
14 percent in 1990. Measured by a similar concept,
the figures for commercial banks were 0.9 percent,
down from 2.8 percent in 1992.
In the 1970s, the FCS priced its loans based on a
blended cost of debt, primarily long-term, fixed-rate
debt. As interest rates rose in the late-1970s and early
1980s, this average cost pricing led to substantially
below-market loan rates to borrowers—and rapid increases in loan volume, financed by substantial highcost, long-term, fixed-rate borrowing. When interest
rates began to fall in the mid-1980s, the average cost
of System debt made its loan rates over-market, and
loan volume fell sharply. Since then, the FCS has retired all of its high-coupon long-term debt, moved to
marginal cost loan pricing, and adopted management
practices designed to reduce its interest rate risk.
Operating risk is also being reduced. Substantial
wholesale and retail level consolidation has occurred
in the structure of the FCS, as authorized by the Agricultural Credit Act of 1987. But many of the effects
of the massive restructuring have yet to be realized.
Aggregate staff levels have only begun to decline, and
the same is true for noninterest operating expenses.
The operating expense rate declined from 1.49 percent
of total loans in 1994 to 1.44 percent in 1995.
The 1987 Act also established the FCS Insurance
Corporation to insure timely payment of interest and
principal on FCS obligations. This supplemented the
System’s capital, the Federal Credit Administration’s
enforcement authorities, and the joint and several liability of all System banks for FCS obligations. The
Corporation collects insurance premiums from the System banks, and earns investment income on them, providing funds to fulfill its function, which now amount
to $884 million.
Meeting Future Challenges. The Farm Credit System is stronger now than it has been in years. But
it is exposed to future risks arising from changes in
government policies toward agriculture, structural
changes in the agricultural and banking sectors, strong
competition from traditional and nontraditional loan
and service providers, and uncertainties about export
and domestic agricultural markets.
• Changes in U.S. farm policy appear imminent.
While the exact nature of the changes is uncertain, they could result in reduced price protection
and more volatile farm incomes. In turn, credit
risk could increase for farm lenders.
• Both agriculture and banking are becoming more
concentrated and more sophisticated. In banking,
consolidation is driven by adoption of computer/
communications technology and by the breakup
of statutory regimes that have provided geographic and product line separations. In agri-

culture, vertical integration in the food system,
and the growth of input suppliers and other nontraditional sources as creditors have tied farms
to nonfarm businesses.
• FCS’s farm loan growth has been very slow in
recent years, given slow growth in agricultural
credit generally and incursions by commercial
banks and input suppliers. This has made covering operating expenses difficult. With an aging
farm ownership population, substantial land turnover is expected in the next 10–20 years, but it
is unclear how much FCS financing would be involved, because many currently mortgage-free
farms might not be profitable if incumbered with
a mortgage.
These and other uncertainties will challenge the
Farm Credit System to adapt in order to retain its
current financial strength.
Farmer Mac
The Federal Agricultural Mortgage Corporation
(Farmer Mac), another GSE, is a federally chartered,
privately owned corporation established by the Agricultural Credit Act of 1987. Its goal is to create and oversee a secondary market for, and to guarantee securities
based on, agricultural real estate loans. The secondary
market is intended to increase the availability of long
term credit to farmers and ranchers at stable interest
rates, and improve the availability of credit for rural
housing.
Since the 1987 Act, Farmer Mac has been authorized
to issue its own debt securities, and to operate a secondary market in agricultural loans guaranteed by the
Farmers Home Administration (‘‘Farmer Mac II’’). The
Farm Credit System Reform Act of 1996 further expanded its powers, transforming Farmer Mac from just
a guarantor of securities formed from loan pools into
a direct purchaser of mortgages in order to form loan
pools to securitize.
The 1996 Act was passed in response to a steady
erosion of Farmer Mac’s capital base. Revenues from
services as a guarantor, and a pooler under Farmer
Mac II, did not meet expectations and showed no prospect of improvement. The new powers increase banks’
incentives to participate in Farmer Mac and allow
Farmer Mac to serve as pooler.
However, these powers also subject the Corporation
to more credit risk. Prior to the 1996 Act, Farmer Mac
had little risk from defaults in the loan pools since
a 10 percent subordinated interest in loans pooled was
required to be held by originators or other entities outside the pool. As a direct purchaser of loans with no
required subordination, Farmer Mac will be exposed
to such losses, and must estimate them accurately for
fee setting and for determining the appropriate level
of capital reserves. The 1996 Act gave Farmer Mac
three additional years for reaching its minimum and
critical capital requirements, and two years to raise
an additional $25 million in capital.

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The Office of Secondary Market Oversight (OSMO)
in the Farm Credit Administration is responsible for
the regulation of Farmer Mac. It is required to establish
a stress test to determine the amount of regulatory
capital Farmer Mac will be required to hold. The goal
is to allow Farmer Mac to survive worst-case conditions
of credit risk and interest rate risk, using historical
conditions to define the worst cases.
In addition to expanding the powers of Farmer Mac
to allow it to perform all of the functions of a mortgage
purchaser, the 1996 Act removed the requirement that
originating lenders and/or poolers maintain a 10 percent subordinated interest in pooled loans, and removed
diversification requirements. These provisions raise the
possibility of losses, but their precise effects can not
yet be determined. An important curb on loss potential
is the continuing requirement of a 75 percent loanto-value ratio for collateral and maintenance of challenging creditworthiness standards for eligible borrowers. Individuals or businesses are less likely to default
if they have a significant investment in the collateral
and/or would surrender a good credit history as part
of a default process. The Congress has directed the
Farm Credit Administration and the Treasury to periodically evaluate Farmer Mac’s performance.
The Farm Service Agency
Within the Department of Agriculture, farm operating, ownership, and emergency loans are now made
by the Farm Service Agency (FSA). FSA direct and
guaranteed operating loans provide credit for annual
production expenses and purchases of livestock, machinery, and equipment. Direct and guaranteed farm
ownership loans assist producers in acquiring their
farming or ranching operations. In 1997, $546 million
in direct loans are authorized, along with $2.7 billion
in guaranteed loans. Originally intended to be a ‘‘temporary lender of last resort’’, the programs have become
a continual source of subsidized credit.
A permissive emergency loan program enacted in
1975, a series of natural disasters, and the farm financial crisis of the mid-1980s led to FSA holding a large
portfolio of nonperforming loans. The Agriculture Credit
Act of 1987 provided for write-down and write-off of
these loans and generous ‘‘borrower rights.’’ Delinquent
borrowers are eligible for interest rate reductions and
moratoriums on all loan payments for up to five years.
The statute mandates that additional loans must be
made to borrowers delinquent on previous loans. As
a result, between 1978 and 1994, loan losses amounted
to nearly $16 billion, of which 66 percent were on emergency and economic emergency loans.
New loan originations are not expected to perform
as poorly; nonetheless, high default and low recovery
rates are still expected. In part, this results from the
program’s inherent characteristics. As a condition of
eligibility, direct loan borrowers must have been denied
private credit at reasonable rates and terms, or they
must be beginning farmers. Poor performance is also
expected because of overly restrictive requirements in

the 1987 Act. For example, it may take five years for
USDA to dispose of property taken into inventory. During this time, USDA must maintain the property if
it is not leased.
Guaranteed farm loans have not experienced the
same relative losses as direct loans. 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.
Expected Reforms in the 1995 Farm Bill. The Administration has proposed changes to the farm loan
programs to reduce loan loss potential while assuring
that socially disadvantaged groups and beginning farmers have access to credit. Proposals include denying
program eligibility to borrowers whose previous loans
resulted in buy-out or other debt settlement; removing
the requirement that production loans be made to delinquent borrowers; and removing or reducing time frames
for notification, acceptance, and completion of actions
on delinquent loans. The Senate-passed Farm Bill includes most of the Administration proposals. In addition, it would speed up the disposition of acquired assets, tighten eligibility requirements for beginning
farmers, and remove refinancing existing debt as a direct loan purpose. These changes would limit loan
losses and reduce Federal risk.
Rural Electric and Telephone Programs
Rural electric and telephone borrowers range from
multi-billion dollar cooperatives to local telephone companies with as little as one million dollars invested.
The intent of the program was to bring electric and
telephone service to under-served rural areas. Today,
over 99 percent of rural households have electrical service and 97 percent have telephone service.
The Federal risk associated with the over $50 billion
loan portfolio in electric and telephone loans historically
has been relatively small. Aside from several large defaults which were primarily a result of nuclear power
construction loans that failed, expected default rates
are low. However, both industries are moving into a
more competitive environment. Meanwhile, Federal financing has decreased since program reforms were enacted in 1993. This combination of greater competition
and less finance will likely increase the Federal loss
exposure. A 1995 study by Moody’s Investors Service
concluded that the credit quality of electric cooperatives
will likely deteriorate over the next 5 to 10 years.
Rural Business-Cooperative Service
USDA’s assistance for rural businesses and cooperatives is distributed through the Rural Business and
Cooperative Service. USDA provides an array of grant,
direct loan and loan guarantee programs that assist
the creation and expansion of businesses in rural areas
and provide assistance for small infrastructure improvements. The programs provide assistance to small and
large businesses in rural areas with amounts ranging

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from small grants up to $10 million loan guarantees.
The loan and loan guarantee programs have low default
rates.
Changes in the 1995 Farm Bill. The 1997 Budget
and the Administration’s Farm Bill proposals would
combine fourteen rural development programs into one
more flexible program called the Rural Performance
Partnership Program (RPPP). In addition to USDA’s
business assistance programs, USDA’s rural water and
wastewater grants and loans, loans for essential community facilities, and loans for new construction of
rural rental housing and the corresponding rental as-

sistance would be allocated through the new program.
USDA’s Rural Economic and Community Development
State Directors would have authority to transfer up
to 25 percent of the funding between these programs.
These State Directors would work with State and local
governments, other community-based organizations,
and the State Rural Development Councils—whose
members include State, local, and Tribal governments,
and private sector representatives—to direct funds to
each State’s highest rural economic development priorities. Performance measures and incentives are included in the RPPP proposal. The Senate included a
very similar program in its Farm Bill.

IV. Financing Small Business and Exports
The Small Business Administration
The Small Business Administration, the Federal Government’s primary small business lender, provides more
than 80 percent of its funds through the Section 7(a)
General Business Loan Guarantee program. Other SBA
programs provide direct loans to businesses and homeowners who have been victims of natural disasters,
guarantee loans for venture capitalists and for longterm project-based lending, and provide both direct
loans and loan guarantees to microlenders. In recent
years, SBA has coped with rapidly growing loan demand, proposed various program reforms to reduce subsidy costs, undertaken a major effort to analyze historical loan performance data, and developed program performance measures.
A Rapidly Growing Loan Portfolio. The SBA’s
loan portfolio has expanded rapidly in recent years.
• Through the 7(a) loan program in 1991, SBA guaranteed approximately 9,000 loans totaling about
$4 billion. By 1995, those figures had risen to
approximately 56,000 loans totaling about $8 billion, and the loan volume could have been even
higher if additional lending authority had been
available.
• The Section 504 Community Development Company loan guarantee program, SBA’s second largest loan program, has also grown rapidly. In 1991,
the SBA provided about 1,400 financings totaling
nearly $400 million. By 1995, those figures had
increased to about 4,500 financings for $1.5 billion.
And a Declining Staff. During this period, the staff
working on SBA’s credit programs declined over 20 percent. Given that most of these loans have 10 to 20
year maturities where the bulk of defaults occur in
years 3–7, SBA’s loan servicing and liquidation workload is likely to increase rapidly in coming years, at
a time when Federal discretionary resources are almost
certain to decline. While improvements in information
technology and other management efficiencies have allowed SBA to maintain an expanding portfolio with
declining administrative resources thus far, this trend

cannot continue indefinitely. A key goal for SBA and
other credit agencies in the coming years will be to
ensure their ongoing ability to maintain quality upfront credit review and underwriting, loan servicing,
and liquidation procedures in the face of declining Federal discretionary funding.
Reduced Subsidies. Based on SBA’s Reinventing
Government proposals announced in April 1995, the
Congress enacted new fees and other program reforms
to reduce the subsidy rates for the 7(a) and 504 programs in October 1995. For the 7(a) program, the guarantee percentage for all loans was lowered to 75 percent, except for those under $100,000 which was lowered to 80 percent. The up-front guarantee fee was
increased and an annual 50 basis point fee was established in lieu of the existing 40 basis point fee on loans
sold into the secondary market. Combined, these reforms lowered the 1996 7(a) subsidy rate from 2.74
percent to 1.06 percent. A new annual fee of one-eighth
of one percent was established for the 504 program,
lowering its 1996 subsidy rate to zero. These reforms
furthered SBA’s efforts to ensure that its credit subsidy
funds go to borrowers least able to obtain private financing and that among these eligible borrowers, the
most economically viable business proposals are funded.
The higher guarantee percentage on smaller loans, as
well as SBA’s LowDoc program, serve as incentives to
lenders to make more small loans, which are more costly for lenders to make.
Historical Performance Study. During 1995, SBA
undertook a comprehensive study of its loan records
dating back to 1982, collecting time-series data from
multiple sources. For the first time, SBA is now able
to quickly review data on historical loan performance,
calculating performance by various loan characteristics
such as size, maturity, guarantee percentage, lending
institution, and type of business of the borrower. The
availability of this data has greatly improved SBA’s
credit management capacities in key areas including
accurate budgeting for credit programs; performance
measurement; monitoring, managing and reducing program risk; and program design and effectiveness.

128
Subsidy Estimates and Reestimates. The most immediate use of the historical loan performance data
has been for subsidy rate estimates and reestimates
for this budget. Prior to this review, most of SBA’s
subsidy rates were based on a small-scale study conducted in 1991. The subsidy rate estimates included
in the 1997 Budget for the 7(a) and 504 loan guarantee
programs are based on 13 years of historical performance. To estimate the 1997 cohort subsidy rates, the
historical cash flows were adjusted for program reforms
enacted in October 1995 and anticipated characteristics
of the 1997 cohort of loans (such as the expected
weighted guarantee percentage and the volume of loans
processed by preferred and certified lenders). For both
7(a) and 504, the data analysis showed that previous
estimates of recoveries were substantially higher than
SBA’s actual recoveries. The previous estimate of defaults for the 504 program was also considerably lower
than the historical default rate. In addition, the timing
of defaults and recoveries differed from previous estimates. Consequently, the baseline (current services)
subsidy rates for both of these programs was increased
significantly.
It is worth noting that recent trends appear to demonstrate a gradual improvement in portfolio quality for
the 7(a) program. These trends, as well as the program
changes enacted in October 1995, were incorporated
into the 1997 subsidy estimate. If these positive trends
continue, the 7(a) subsidy will begin to decline next
year. The Administration will continue to closely monitor loan performance and revise the subsidy estimates
annually, as appropriate.
In addition, the Administration intends to continue
econometric analysis, measuring the relative impact of
various loan characteristics (e.g., loan size, maturity,
guarantee percentage, lending institution, type of business of the borrower) on defaults and recoveries. This
analysis will provide additional capacity for determining the effects of various program changes on ultimate
loss expectations.
Performance Measures. The historical data review
has also enhanced SBA’s efforts to define and measure
performance for its credit programs. Because financial
performance and public policy objectives often conflict
with one another, having good data available for analysis is especially valuable in helping policy officials make
the difficult trade-offs often required between these two
important criteria. For assessing financial performance,
SBA has identified measures such as administrative
and subsidy costs, percent of the portfolio that is current, and percent of defaults that are recovered. With
its new data analysis capacities, SBA will be able to
assess these factors at a more sophisticated level, determining for example, the impact the type of lending
institution has on default and recovery rates. Relatedly,
SBA’s new data capacity will also enhance the agency’s
ability to manage program risk. For example, with easily accessible information on lenders’ performance, SBA
will be able to better monitor individual lenders’ default
and recovery statistics. This information will enable

ANALYTICAL PERSPECTIVES

SBA to identify and facilitate resolution of problem
areas more quickly.
As a measure of the extent to which its programs
are meeting their public policy objectives of providing
loans to creditworthy borrowers who otherwise would
not have access to capital, SBA monitors the portion
of its loans which go to the most under-served segments
of the small business market, such as minority and
women business owners and small exporters. With its
new data analysis capacities, SBA will be able to better
target particular groups by identifying which types of
loan products are best suited for specified borrowers.
SBA will also be able to identify which lenders best
reach these borrowers. SBA continues to seek additional
measures of program impact. However, devising performance measures to assess the extent to which the
agency’s programs are supplementing, not acting as a
substitute for, private capital is inherently challenging
because of the difficulties in determining what would
have taken place if the borrower had not received an
SBA loan or guarantee.
Reducing Program Costs. Given the results of
SBA’s historical loan performance study, this budget
proposes a number of changes to reduce the taxpayers’
cost of SBA’s largest loan programs. In order to keep
the 504 subsidy rate at zero in 1997, the budget proposes to transform Section 504 from a 100 percent guarantee to a direct loan program. Under this proposal,
SBA would lend directly to Certified Development Companies, rather than guaranteeing their debentures. This
change would eliminate the cost of underwriters and
other financial intermediaries. Importantly, these
changes would not increase the cost of capital to the
Certified Development Companies and would not increase the cost of borrowing to small businesses. This
revision would lower the baseline 504 subsidy rate from
6.85 percent to zero. Second, the budget proposes to
lower the taxpayers’ cost of the Small Business Investment Company program by increasing fees for both participating securities and debenture loan programs. The
establishment of an interest pass-through fee of one
percent and an increase in the up-front funding fee
from 2 percent to 3 percent for both programs would
reduce subsidy costs significantly. Finally, the budget
proposes raising the interest rate on disaster loans to
the prevailing rate on Treasury securities of comparable
maturity. Providing subsidized loans after a disaster
discourages citizens from purchasing private disaster
insurance.
Export and Investment Credit
Several Federal programs provide credit assistance
to U.S. companies that export goods or services overseas or invest in overseas businesses or projects. In
recent years, these programs have been characterized
by two trends:
• A number of new programs have been created,
or have been expanded in scope and size. As a
result, there are a larger number of more flexible

UNDERWRITING FEDERAL CREDIT AND INSURANCE

options for Government credit assistance for potential U.S. exporters or overseas investors.
• Many of the export and investment credit programs have made efforts to lower subsidy rates,
either across the board or for specific segments
of their programs, by reducing the risk of their
credits or increasing the fees they charge. Some
of the newest programs aim for (or in one case
are legislatively required to have) a subsidy rate
of zero or less.
New or Expanded Programs. The U.S. ExportImport Bank and the Overseas Private Investment Corporation (OPIC), U.S. Government agencies that provide, respectively, export and investment credits, have
both expanded the scope of their programs, and OPIC
has greatly increased the overall size of its credit programs (from $400 million in 1993 to $1.9 billion in
1995). Eximbank has created a new project finance program and has significantly increased its use of nonsovereign credits (direct loans and loan guarantees that
do not carry the full faith and credit of a foreign government), while OPIC has expanded its support of investment funds in developing countries. Both agencies
have also significantly expanded their activities in East
Central Europe and the states of the former Soviet
Union.
In 1995, Title XI of the Merchant Marine Act was
amended to allow the Maritime Administration to provide loan guarantees for the export of ships constructed
in the United States. Similarly, the 1996 Defense Authorization Act created a loan guarantee program for
financing the commercial export sales of U.S. defense
articles and services. While both the Maritime Administration and the Department of Defense already administer credit programs, neither has been responsible for
a commercial export credit program in the past.
Reducing Program Costs. In recent years, export
and investment credit programs have made an effort
to reduce their subsidy rates through program changes
aimed at sharing or reducing risk. For example, ExportImport Bank has the explicit goal of making certain
programs, such as project finance and short-term multibuyer insurance, ‘‘zero subsidy’’ programs. Export and
investment credit programs are increasingly using
methods such as higher fees, collateralization, escrow
accounts, and asset-based financing in order to reduce
subsidy costs and expand direct loan and loan guarantee levels. In the case of the new defense export loan
guarantee program, the legislation attempts to limit
cost and increase the borrower’s share of risk by requiring that borrowers pay, through fees, all subsidy costs
initially—though the legislation is written to allow appropriation of subsidies in the future—and prohibiting
the financing of the exposure fees in the guaranteed
loans.
Implications for Management. These trends raise
a number of questions that cut across Federal export
credit programs:

129
• As the number, size and diversity of Federal export and investment credit programs increase,
comparison of the costs and benefits of these programs would ensure that the scarce resources are
allocated to the most effective programs. Preliminary efforts to conduct this analysis have been
started by the Federal Credit Policy Working
Group and Trade Promotion Coordinating Committee (TPCC); however, this effort is hampered
by the inherent difficulty in measuring the outcomes and net impacts of export credit programs.
A number of performance measures have been
identified, but further refinement in the quantification of these measures is required for an effective cost-benefit analysis.
• As programs propose changes to achieve lower
subsidy rates, including zero or negative subsidies,
this may indicate that similar activities could be
done by the private sector for a profit, although
the separate appropriation of administrative expenses means that the likely cost to the private
sector is not entirely captured in the subsidy calculation. A recent study of the possibility of
privatizing OPIC is likely to be followed by other
analyses of effects of privatizing other export and
investment credit programs. The OPIC study determined that any ‘‘privatization’’ of OPIC would
likely require continued Government support as
well as discounting, for sale purposes, the face
value of OPIC’s existing portfolio. The increased
diversity of the programs may also mean that specific aspects of programs, rather than the programs in their entirety, could be subject to privatization efforts. A key issue here is additionality,
or the additional exports or foreign investment
that a Government export or investment credit
program makes possible. If a program moves towards zero or negative subsidy, and it is not possible to identify ‘‘failures’’ in the private sector’s
ability to provide credit to competitive U.S. exporters or investors, then it is likely that the Government program in question could be privatized or
eliminated without significant detrimental effects
to exporters or investors.
• The rapid increase in the size of certain export
and investment credit programs, the expansion of
certain programs into particularly risky countries,
and the recent creation of entirely new export
credit programs could raise concerns regarding the
administration of these programs, and, in particular, regarding the ability to conduct adequate due
diligence and perform overall portfolio risk management. Agencies responsible for administering
these programs will review and, where necessary,
improve program administration, including upgrading information management systems, analyzing historical default data, and incorporating this
information into subsidy calculations.

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ANALYTICAL PERSPECTIVES

Spectrum Auction
The 1997 Budget includes a spectrum auction proposal that expands the Federal Communications Commission’s successful spectrum auctions. The auction proposal allows for some of the winning bids to be paid
in installment payments. This is substantively a direct
loan and, as such, is covered by credit reform.

It is OMB’s intent to score the installment payments
associated with spectrum auctions under credit reform.
However, the credit reform impacts of the spectrum
auction were inadvertently omitted from the Budget Appendix and they have not been included in the tables
in this chapter.

V. Education Credit
Student Loans
The Federal Government helps to finance student
loans through two major programs: the Federal Family
Education Loan (FFEL) program and the Federal Direct
Student Loan (FDSL) program. Eligible institutions of
higher education, including public and private 2-year
and 4-year institutions as well as vocational training
schools, may choose to participate in either program.
Loans are available to students and their parents regardless of income. Borrowers with lower family incomes are eligible for higher interest subsidies.
Overall student loan volume is expected to increase
by more than 60 percent over the next seven years.
In 1996, total loan volume (excluding amounts for
promissory notes that never result in loans) is expected
to be $30 billion, of which $5 billion is for consolidation
of existing loans and the remainder is for new loans.
By 2003, total loan volume is expected to increase to
$47 billion, of which $12 billion is for consolidations.
The projected volume increase continues current trends,
which have seen loan levels rise dramatically over the
past 10 years. The principal causes of this increase—
both to date and in the future—are steadily rising educational costs, higher loan limits, and a growing population of eligible borrowers.
The Federal Family Education Loan program provides loans to students and parents through a complex
administrative structure involving over 7,000 lenders,
36 State and private guaranty agencies, 90 participants
in the secondary market, and 7,300 participating
schools. Under FFEL, banks loan private capital to students and parents, guaranty agencies insure the loans,
and the Federal Government reinsures the loans
against borrower default. In addition to paying for defaults, the Federal Government provides interest and
administrative subsidies to banks and guaranty agencies.
The Federal Direct Student Loan program was authorized by the Student Loan Reform Act of 1993 to
enable students and parents more easily to obtain and
repay loans than was possible under the FFEL program. Under FDSL, the Federal Government provides
loans directly to borrowers, thus eliminating the reinsurance and subsidization of private lenders. The program has several key advantages over the FFEL program:
• Borrowers may choose from a variety of repayment options, including income contingent repayment. This gives them a wider range of options

in pursuing public service careers and managing
their finances.
• Application and repayment processes are streamlined for borrowers and schools, eliminating substantial paperwork and long lines at campus
financial aid offices.
• Loan servicing and default collection is handled
by contractors selected through competitive bidding processes. This ensures that the Federal
Government obtains high quality administrative
services at the lowest price possible. The FFEL
program, by contrast, guarantees payments to all
participating lenders and guaranty agencies based
on fixed rates set by law, without regard to how
well their services are performed.
• The simplified program structure is more manageable and significantly less vulnerable to fraud and
abuse. In 1995, the Inspector General issued a
clean audit opinion of the program, the first time
a clean audit has ever been received by any of
the Department’s student loan programs.
Since the inception of the Federal Direct Student
Loan program, lenders and guaranty agencies have
made notable improvements in their own processes for
delivering Federal student aid because of the competition with the Direct Loan program. The 1997 Budget
assumes the continuation of current law: beginning
July 1, 1996, any eligible institution may select which
program will best meet the needs of their students.
The Administration is proposing legislative changes
to both programs that would save $4.4 billion over
seven years through reductions in payments to lenders,
guaranty agencies, secondary markets, and postsecondary institutions, as well as cut Federal administrative
funds. This proposal establishes a competitive framework that requires all participants in the loan delivery
process to operate with greater efficiency. The Budget
does not propose curtailing benefits or increasing costs
to borrowers.
The Federal Government has also played a limited
role in helping to make capital available for higher
education infrastructure. The Historically Black College
and University Capital Financing Program insures
bonds for construction and repair of facilities at these
institutions. The Department of Education made its last
direct loans for postsecondary facilities construction in
1993 under the College Housing and Academic Facilities Loans program. Financing for postsecondary facilities is available through alternative sources: municipal
bonds, private loans, and fund-raising. Many schools

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UNDERWRITING FEDERAL CREDIT AND INSURANCE

have access to the tax-exempt bond market and thus
can borrow at favorable long-term interest rates. In
addition, the College Construction Loan Insurance Association, a private corporation established by the Federal Government, and other municipal bond insurers
enable many schools to obtain private capital.
Performance Measures. A key Department of Education objective is to promote access to postsecondary
education for students at all income levels by removing
financial barriers through an appropriate combination
of grants, loans, and work-study funds. A variety of
measures have been established to track how well the
student loan programs contribute to this objective.
These include the effect of loan availability (both subsidized and unsubsidized) on the percentage of lowincome students who enroll in postsecondary education,
the gap in college participation between high-performing students with low and high income, persistence in
an educational program, and degree attainment.
Other measures of the student loan programs include
the incidence of new defaults, recoveries on prior defaults, and implementation of management simplifications that better serve both borrowers and institutions.
On these measures, the Department has demonstrated
success. For example, the Federal Direct Student Loan
program has been successfully implemented in over
1,300 schools. This has dramatically reduced paperwork, shortened processing times, and opened up a
variety of alternative repayment options better suited
to many students.
Default Estimates. Over the past few years students
have tended to borrow more, stay in school longer, and
default less. We expect these trends to continue.
The Department uses two different methods for determining default rates. The lifetime rates, which drive
credit subsidy rates, are based primarily on recommendations of the Department of Education’s independent auditor and reflect long-term historical rates
for the number of defaults that occur over the life of
a cohort of student loans. The Department also uses
a short-term rate for determining program eligibility.
This rate tracks the number of students who default
over a two-year period following the year they are
scheduled to enter repayment. The latest available data
show that students scheduled to enter repayment in
1993 had a default rate in 1993–94 of 11.6 percent,
a dramatic decline from the peak 22.4 percent rate
three years earlier and even from the 19.6 percent average of 1988–1991. Schools with default rates above 25
percent for three consecutive years lose eligibility to
participate in the student loan programs.
The Department has implemented a series of reforms
to reduce default rates. These include:
• imposition of serious sanctions for default, including Federal income tax refund offset, wage garnishment, denial of further student aid, and loss
of other forms of loans and credit;
• removal of schools with high default rates from
participation in Federal loan programs. Since

1993, some 600 schools with high default rates
have become ineligible; and
• screening of student aid applicants through the
National Student Loan Data System to prevent
ineligible students, and students who provide false
information, from receiving Federal funds. In academic year 1995–96, this screening blocked issuance of $230 million in loans to ineligible applicants.
Because the lifetime default rates used to calculate
loan subsidies are based on long-term experience, they
have remained relatively stable and do not reflect the
dramatic recent declines in the short term rate.
Administrative Costs
Under the Federal Credit Reform Act, the Federal
administrative costs of operating credit programs are
funded on a cash basis and are not included in the
subsidy. Hence, administrative costs for a given year
reflect the amount needed to support loan management
activities in that year, whether they are associated with
new loans or loans made in prior years. Most of the
guaranteed loan program is carried out by banks and
guaranty agencies, and a portion of their administrative
costs are covered by the subsidy. However, in the direct
loan program, where most of the administrative activity
is performed by Federal contractors, these costs are
not included in the subsidy. For this reason, the subsidy
calculation captures a greater share of administrative
costs for guaranteed loans.
This past year, Congress attempted to ‘‘level the playing field’’ for these two programs by requiring that direct Federal administrative costs for the direct loan
program be included in the FDSL subsidy. This approach was flawed, however, because it failed to make
comparable changes in the guaranteed loan subsidy.
Since Federal contractors perform many of the same
activities (e.g., loan application processing, default collection) for both programs, adjustments would be needed in both subsidies. Until a sound methodology can
be developed for incorporating administrative costs appropriately into both subsidy estimates, the Federal
Credit Reform Act treatment should continue to be followed.
Sallie Mae
The Student Loan Marketing Association (Sallie
Mae), a GSE, is a for-profit, share-holder owned corporation chartered by Congress in 1972. Its purpose
is to expand funds available for student loans by providing liquidity to lenders participating in the Federal
Family Education Loan program. Sallie Mae purchases
insured student loans from eligible lenders and makes
warehousing advances (loans to lenders secured by insured student loans, Government or agency securities,
or other collateral). Sallie Mae has authority to provide
additional services that are supportive of student credit
needs, and to provide financing for academic facilities
and equipment. Sallie Mae currently holds about onethird of all outstanding guaranteed student loans.

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ANALYTICAL PERSPECTIVES

The Administration submitted legislation last year
that would privatize Sallie Mae. Similar legislation developed by the Education Committees is under active
consideration by the Congress.
Connie Lee
The College Construction Loan Insurance Association
(Connie Lee), another GSE, was created by the Higher
Education Amendments of 1986 to insure and reinsure
the financing of postsecondary education facilities
projects. The Department of Education helped provide
initial financing of the corporation by purchasing, with
appropriated funds, $19 million of newly issued common stock. Subsequently, additional stock was issued
and sold to institutional investors.
Legislation establishing Connie Lee restricts it to
serving only postsecondary institutions with relatively
low credit ratings. However, the Corporation has had
to maintain a balanced portfolio in order to support
its own credit rating, and to comply with State insurance laws. Because two States in which Connie Lee

operates require bond insurance companies to have 95
percent of their business in investment grade bonds,
Connie Lee must meet this 95-percent standard in all
jurisdictions in which it operates. These restrictions
have prevented the corporation from insuring and reinsuring many of the lowest-rated schools it was established to serve.
Last year, the Administration proposed legislation to
privatize Connie Lee by selling the Federal Government’s stock and repealing the corporation’s enabling
legislation. This would enable Connie Lee to expand
its insurance volume and thus make bond insurance
available to more lower-rated schools. It would also free
Connie Lee to enter other sectors, including elementary
and secondary education, where insurance could make
more readily available capital for badly needed infrastructure improvements. Both House and Senate passed
legislation similar to the Administration’s proposal last
year. Enactment of legislation to privatize Connie Lee
is likely this year.

VI. Financing Housing
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac, the largest GSEs,
dominate the secondary market for conventional mortgage loans. At year-end 1995, the two GSEs had financed $1.46 trillion in mortgages and other assets.
The institutions engage in two principal lines of business: they issue and guarantee mortgage-backed securities (MBS), and they hold debt-financed portfolios of
mortgages, mortgage-related securities, and other assets. In the last decade, the activities of Fannie Mae
and Freddie Mac have expanded greatly, and their role
in the housing finance system has changed subtly. The
growth in the GSEs’ market share and the changes
in their role have exposed them to greater risk and
have made the task of managing their risks more complex.
Since the mid-1980s, the reduced role of thrift institutions and two major waves of mortgage refinancings
enabled Fannie Mae and Freddie Mac to increase dramatically their penetration of the conventional mortgage market. Between 1991 and mid-year 1995, the
two institutions purchased $1.4 trillion in conventional
single-family mortgages, an amount equal to 54 percent
of the $2.6 trillion in such loans originated during that
period. The two GSEs’ purchases of fixed-rate loans
have comprised an even larger percentage of new originations of fixed-rate loans. As a result, the share of
outstanding conventional single-family mortgage debt
financed by Fannie Mae and Freddie Mac has increased
from 18 percent at the end of 1985 to 42 percent at
the end of 1994.
In recent years Fannie Mae and Freddie Mac have
expanded their purchases of mortgages that are designed to be affordable to first-time homebuyers or
households with low and moderate incomes. Both GSEs
purchase mortgages with LTV ratios of 95 percent

where the borrower has made a downpayment of 3 percent, and Fannie Mae purchases loans with 97 percent
LTV ratios. The Secretary of Housing and Urban Development (HUD) recently established new, higher goals
for each category for 1996 through 1999. Each GSE
will be required to achieve goals in three categories:
housing for low- and moderate-income families; housing
in central cities, rural areas, and other under-served
areas; and specially targeted affordable housing. In
order to achieve the goals, Fannie Mae and Freddie
Mac may need to purchase some loans that pose greater
than average credit risk or offer below-average returns.
Fannie Mae and Freddie Mac have also recently increased the proportion of mortgages that they retain
on their balance sheets rather than securitize. Fannie
Mae’s retained mortgage portfolio grew from 26 percent
of all mortgages financed at year-end 1991 to 33 percent of all mortgages at the end of 1995. During the
same period, Freddie Mac’s retained mortgage portfolio
grew from less than 7 percent to over 19 percent of
all mortgages financed. At the end of 1995, Fannie
Mae’s retained mortgage portfolio totaled over $253 billion and Freddie Mac’s was $107 billion. Financing
mortgages with debt is generally more profitable for
the two GSEs than securitizing the loans, but it exposes
them to more interest rate risk. Hence, the rapid
growth in the two Enterprises’ retained portfolios has
increased the importance of good interest rate risk
management.
In the last two years, Fannie Mae and Freddie Mac
have offered more software and on-line services for
lease by mortgage lenders. The most prominent of the
new offerings are the GSEs’ automated underwriting
systems (AUS), which became commercially available
in 1994. Lenders can use each AUS to obtain underwriting evaluations of and commitments to purchase

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UNDERWRITING FEDERAL CREDIT AND INSURANCE

single-family mortgages, to order credit reports from
credit reporting companies, and, in the case of Freddie
Mac’s system, to order appraisals and other less-intensive assessments of the value of properties pledged as
loan collateral. The GSEs are marketing these new
products and services in an effort to increase their profitability by increasing their respective market shares,
improving the credit quality of the loans they buy, and
earning additional fee income. The initiatives pose new
management and operational risks, however.
Monitoring Fannie’s and Freddie’s Risk
Fannie Mae and Freddie Mac are highly profitable
institutions. Despite a 15 percent decline in the volume
of single-family mortgage originations in 1995, both Enterprises posted record profits. Fannie Mae earned net
income of $2.14 billion in 1995, up slightly from $2.13
billion earned in 1994. Freddie Mac recorded net income of $1.09 billion in 1995, an 11 percent increase
over 1994 earnings of $983 million.
Despite large cyclical changes in interest rates and
in the volume of conventional mortgage originations,
in each year since 1986, Fannie Mae and Freddie Mac
have achieved returns on average common equity in
excess of 20 percent—far more than the average returns
on equity of federally insured commercial banks or savings institutions. In recent years the GSEs have used
their high incomes to increase their equity as a share
of on-balance sheet assets and off-balance sheet MBS.
Federal sponsorship of Fannie Mae and Freddie Mac
does not expose the government to any immediate danger of loss. However, over the long term the government
is exposed to material risk that could become quite
large if either GSE was poorly managed or became
undercapitalized. Current law provides for the government to manage its exposure by conducting on-site examinations and imposing risk-based capital requirements. Risk-based user fees are another potential risk
management tool that would compensate for a portion
of the economic subsidy that Federal sponsorship conveys to the GSEs. On-site examinations and risk-based
capital requirements must be implemented in a sophisticated way that takes into account the rapid evolution
of the mortgage industry and the activities of Fannie
Mae and Freddie Mac. Three ways in which their operations and risk exposure are evolving illustrate this
point.
• The reliance of Freddie Mac’s automated underwriting system on a customized application scoring model and the commitment by both GSEs to
using credit scoring in the underwriting and quality control processes represent watershed changes
in credit risk management practices, altering each
institution’s credit risk exposure, profitability, and
approach to pricing new business.
• The recently mandated increase in the two GSEs’
goals for purchases of mortgages that finance affordable housing, and the higher delinquency rates
on such loans, highlights the importance of managing this risk.

• As Fannie Mae and Freddie Mac rapidly grow
their portfolios, they are increasingly investing in
mortgage derivatives, using non-mortgage derivatives to manage their interest rate risk, and using
nondollar borrowings to lower their borrowing
costs. These activities increase their exposure to
counterparty, currency, and other risks and make
managing the risks in their portfolios more complex.
Risk-based capital requirements complement on-site
examinations and off-site monitoring by protecting the
government from increases in its risk exposure due to
changes in the credit risk of conventional mortgages,
in interest rates, or in the GSEs’ business strategies.
The Federal Housing Enterprises Safety and Soundness
Act of 1992 requires the Office of Federal Housing Enterprise Oversight (OFHEO) to use a stress test model
to promulgate risk-based capital requirements for
Fannie Mae and Freddie Mac. A sophisticated stress
test model can reflect the risks of each GSE’s operations
and produce capital requirements that are dynamic and
forward-looking. This will allow the standards to reflect
changes over time in the risk exposure and risk management techniques of Fannie Mae and Freddie Mac.
Risk-based capital requirements that accurately reflect the risk of Fannie Mae and Freddie Mac may
also limit the distortion of competitive outcomes created
by the economic subsidy conveyed by government sponsorship. The share of mortgage debt financed by Fannie
Mae and Freddie Mac is likely to increase in the future
as new technologies reduce the costs of originating conventional mortgages and affordable lending programs
and credit scoring qualify more borrowers for conventional loans.
Federal Home Loan Bank System
In the six years since the enactment of the Financial
Institutions Reform, Recovery and Enforcement Act
(FIRREA) of 1989, the Federal Home Loan Bank System (FHLBS) has undergone major changes in its membership and its financial practices. FIRREA opened
membership in the System to commercial banks and
credit unions for the first time. Currently, commercial
banks, credit unions, and state chartered thrifts are
voluntary members of the FHLBS. Federally chartered
thrifts, however, are required to be FHLBS members.
Voluntary members currently comprise about 80 percent of the System’s total members.
System membership continued its strong growth in
1995, with commercial banks now comprising 62 percent of total members. The System included 5,690 members at year-end 1995, a net increase of 383 members
over the year-end 1994 total. Membership in the Federal Home Loan Bank System has expanded by 77 percent since membership eligibility was first extended to
commercial banks and credit unions in 1989.
The Federal Home Loan Bank System’s financial performance and condition continued to be strong in 1995.
Outstanding advances to members reached $122.1 billion at year-end 1995, up from $116.2 billion at the

134

ANALYTICAL PERSPECTIVES

NEW DIRECTIONS IN THE SINGLE–FAMILY MORTGAGE INDUSTRY
Several trends are rapidly reshaping the single-family mortgage industry: consolidation among lenders, new technologies that
promise to reduce the cost of and expedite the origination process, greater origination of higher-risk loans, and growing use of
credit scoring to manage risk. These trends are likely to transform the industry in fundamental ways by the end of the decade.
The rapid pace and multidimensional nature of these changes are making risk management more complex for all parties, including the Federal Government.
Consolidation among mortgage originators and servicers has accelerated since the waning of the 1992–93 refinancing boom.
According to data published in Inside Mortgage Finance, the 25 largest originators increased their collective share of the market
from 31 percent at year-end 1992 to 38 percent at year-end 1995, while the market share of the 25 largest servicers rose from 28
percent to 38 percent in the same period. Originators and servicers are enlarging their operations to achieve the economies of
scale or, deciding that they cannot compete, are exiting the industry. At the same time, some banks are increasing their investment in mortgage lending, often through the acquisition of mortgage banking subsidiaries.
Many originators are taking advantage of new technologies to redesign how they make loans, reducing underwriting and processing costs and slashing the time between loan application and closing. Some originators are offering their services through real
estate brokers and home builders, on computer networks, or at video kiosks in shopping malls or at financial institution branch
offices. The reengineering of the origination process will soon allow many borrowers to have their loans approved very quickly
without ever entering a lender’s office.
The proportion of newly originated conventional (not federally insured or guaranteed) mortgages that pose a high level of credit risk has been increasing.
• Borrowers have been making lower downpayments, which mean that the ratios between loan principal and collateral
value(LTV ratios) are higher, posing greater credit risk for lenders. The proportion of conventional mortgages with LTV ratios
over 90 percent rose from 7 percent in 1989 to 27 percent in 1994. The average LTV ratio of conventional mortgages rose from
75 percent in 1989 to over 80 percent in 1995. Data from Freddie Mac indicate that the default rates of conventional mortgages with LTV ratios over 90 percent are six times higher than the default rates on conventional loans with 80 percent LTV
ratios.
• Depository institutions, Fannie Mae, and Freddie Mac have increased their commitment to affordable lending programs that
allow borrowers to make downpayments of 5 percent or less while loosening other underwriting guidelines. Compensating factors lessen, but may not wholly offset, the resulting increase in risk.
• When the volume of single-family originations declined by 24 percent in 1994 and further in 1995, many originators entered
the markets for home equity loans and lines of credit and for first mortgage loans to borrowers with checkered credit histories
(so-called B- to D-quality loans), causing the volume of such loans to increase.
The use of credit scoring in the single-family mortgage market will increase at an accelerating rate in the next few years.
Credit scores are numerical assessments that rank borrowers by their relative default risk. Scores are calculated by statistical
models that use information proven to be predictive of loan performance drawing on data from borrower credit reports to predict
a borrower’s future performance on consumer debt (auto, credit card, or installment debt) or on a mortgage loan.
Credit scores have been used to evaluate applications for nonmortgage debt for nearly 40 years, but have been used in singlefamily mortgage lending only in the last five years. Industry research has found a strong relationship between low consumer
credit scores at origination and the likelihood of future default on mortgage loans. Fannie Mae has found that, although borrowers with scores below 620 represent only a small percentage of all borrowers, as a group they account for about 50 percent of the
defaults that eventually occur.
In 1995, first Freddie Mac and then Fannie Mae urged lenders to use generic credit scores in the underwriting process,
provided guidance about how lenders should do so, and indicated that they would use consumer credit scores as part of the postpurchase review process. The potential benefits of scoring and the commitment of Fannie Mae and Freddie Mac to using credit
scores are likely to accelerate the industry’s development and use of scores.

end of 1994. Total System capital at the end of 1995
was $14.7 billion, compared to $12.9 billion at the end
of 1994. For calendar year 1995, the System’s reported
net income rose to $1.2 billion, up from $0.9 billion
in 1994. Return on equity in 1995, after adjustment
for payment of interest to REFCorp and other expenses,
was approximately 6.5 percent.
The Federal Home Loan Banks are required to pay
the greater of $300 million or 20 percent of their annual
net income to help pay the cost of interest on bonds
issued by the Resolution Funding Corporation,
REFCorp. REFCorp was created by FIRREA to provide
initial capital for the Resolution Trust Corporation. The
need to generate income to meet this obligation to
REFCorp and provide a return on members’ investment
is a driving force behind the large increase in the System’s investment activity in recent years. Investments

other than advances were $146.8 billion as of December
31, 1995, an increase of 28 percent over just one year
earlier. Thus, the need to generate the funds to pay
REFCorp has encouraged the System to expose itself
to new kinds of risk and resulted in a departure from
the System’s focus—making advances to members.
Historically, the System’s exposure to credit risk has
been virtually nonexistent. All advances to member institutions are collateralized, and the FHLBanks have
the ability to call for additional or substitute collateral
during the life of an advance. In the over sixty years
of the System’s existence, no FHLBank has ever experienced a loss on an advance. The System’s increasing
investment activities, however, have added new sources
of credit risk, for example, to the extent that there
is a risk of default by the FHLBanks’ counterparties
to off-balance sheet interest rate exchange agreements.

UNDERWRITING FEDERAL CREDIT AND INSURANCE

The System is also exposed to interest rate risk. The
Financial Management Policy issued by the FHLBanks’
regulator, the Federal Housing Finance Board, requires
the FHLBanks to take a number of specific steps to
manage their interest rate risk. The FHLBanks manage
their interest rate risk by analyzing the sensitivity of
the market value of their equity to changes in interest
rates, charging prepayment fees on advances to members, restricting the types of mortgage-backed securities
that they can invest in, and using interest rate exchange agreements. The System’s exposure to risk will
continue to be monitored carefully to ensure that it
remains safe and sound.
Despite the System’s current profitability and apparent strength, there is a need to strengthen the capital
structure of the System in order to protect against future downturns. The Housing and Community Development Act of 1992 required that studies of the FHLBS
be performed by the Congressional Budget Office, the
General Accounting Office, the Department of Housing
and Urban Development, the Federal Housing Finance
Board, and System shareholders. All of these studies
agreed that risk-based capital standards should be
adopted for the System.
In response to these studies of the FHLBS which
were completed in 1993 and 1994, last year the Administration and Congress proposed legislation to reform
and modernize the Federal Home Loan Bank System.
Both legislative proposals addressed the System’s mission, capital structure, and capacity to pay interest obligations on the REFCorp bonds. The House of Representatives conducted hearings on the two proposals
in 1995, and it is anticipated that the issue will be
taken up again in 1996.
The Administration’s proposal attempts to keep the
System safe, sound, and focused on its public purpose.
It would maintain the System’s important role in housing finance, particularly its role in supporting portfolio
lending. It would make System membership fully voluntary, with equal rights and responsibilities for all
members. Perhaps most importantly, the Administration’s proposal would enhance the safety and soundness
of the System by creating minimum capital standards,
including risk-based capital requirements, for each Federal Home Loan Bank and for the System as a whole,
and by instituting a set of procedures for correcting
capital deficiencies.
The role and risks of the FHLBS must continue to
be examined and monitored in the face of rapidly
changing financial markets. The increased use of credit
scoring systems by mortgage lenders may eventually
lead to less of a role for portfolio lenders in housing
finance markets. In addition, it is important to continue
to evaluate the System’s role in housing finance in light
of potential changes in the structure of the industry
it serves.

135
mitments in the FHA Mutual Mortgage Insurance
(MMI) single-family program fell to $50 billion in 1995,
after a volume of $89 billion in 1994. FHA service to
low-income and minority home buyers, however, remained strong. The proportion of FHA-insured home
purchase loans to African-American and Hispanic home
buyers continued at more than twice the proportion
of conventional home purchase loans to these groups,
and increased from 1994 to 1995.
National Homeownership Strategy. In June of
1995, the President announced a National Homeownership Strategy to add up to 8 million new families to
America’s homeownership rolls by the end of the year
2000, lifting the country’s homeownership rate to an
all-time high. This Strategy will strive to eliminate barriers that prevent lower-income working families, minorities, and immigrants from becoming homeowners.
For example, it will actively promote wider use of flexible underwriting criteria, which would allow more buyers to qualify for mortgages, and it will increase homeownership counseling programs, which help first-time
buyers find homes, qualify for mortgages, and budget
their incomes to meet their mortgage payments.
FHA will be a full partner in this Strategy. In 1995,
FHA took action to increase the availability of affordable homeownership, particularly in the central cities,
by simplifying its rehabilitation mortgage insurance
program, and establishing the Single Family Property
Disposition program to sell FHA-foreclosed homes at
a discount to nonprofit groups for rehabilitation and
resale to lower-income buyers.
FHA as a Performance-Based Organization. In
1997, the Administration will seek to transform FHA
into a ‘‘Performance-Based Organization’’ with flexibility in human resources management, procurement, and
other administrative functions. FHA will continue to
operate within HUD; it will be led by executives operating under term, performance-based contracts negotiated
by the Secretary.

Federal Housing Administration (FHA)

FHA Assignment Alternative. FHA is now preparing to implement legislation, expected to be passed soon
by the Congress, establishing an alternative to FHA’s
current assignment program for delinquent borrowers.
Currently, if an otherwise qualified FHA homeowner
experiences temporary financial trouble and becomes
90 days delinquent, FHA can pay a full claim on their
behalf and take over servicing of the mortgage. The
borrower is then allowed up to 3 years to bring the
loan to current status. The proposed alternative would
provide FHA with tools to encourage private lenders
to forebear instead of assigning the mortgage to HUD.
This alternative would improve the targeting and efficiency of forbearance, while allowing FHA homeowners
experiencing temporary economic distress to stay in
their homes.

Trends in Program Size. As the national surge in
single-family refinancing business ebbed in 1995, com-

Potential Effects of Credit Scoring. As the use
of credit scoring in the underwriting of conventional

136
mortgages increases, some borrowers who have little
cash but excellent credit histories and would have traditionally been served by FHA’s single-family mortgage
insurance program will find that they are eligible for
conventional financing on attractive terms. More importantly, applicants who have checkered credit histories
will face tighter conventional underwriting constraints
and may often be unable to obtain a conventional loan
unless they can make downpayments of 20 percent or
more. Those who can not and whose mortgages are
small enough to qualify for FHA insurance will be shifted to FHA. Although the magnitude of this potential
shifting of credit risk to FHA is uncertain, research
on the relationship between consumer credit scores and
likelihood of mortgage default suggests that it could
significantly increase FHA default rates.
Sale of Single- and Multi-Family Assets. In
March, 1994, the FHA launched an aggressive program
to sell HUD-held mortgages. The goals of the program
are to maximize value of HUD-held assets and assist
in redeployment of its staff and resources to manage
the insured portfolio, particularly in light of downsizing
of the organization. The initiative was a key element
in the Administration’s larger effort to reinvent HUD.
To date, FHA has sold 769 multi-family mortgages,
28,243 single family mortgages, and 2,700 Title I notes.
These mortgage sales have not only succeeded in
streamlining the agency’s operation and management,
they have generated proceeds which exceed the expected value to HUD (if the loans were held) of more
than $500 million in 1995. In 1996 and 1997 FHA
plans to sell an additional 600 multi-family and 65,000
single family mortgages with a total outstanding principal balance of approximately $6 billion.
Multi-family Portfolio Reengineering. Last year,
the Administration proposed ‘‘Mark-to-Market,’’ legislation intended to address long-standing problems in the
portfolio of properties which have mortgages insured
by FHA and also receive rental subsidies for low-income
tenants. This Budget includes a proposal, ‘‘Portfolio
Reengineering,’’ which retains many of the features of
last year’s proposal. The core principles of this initiative
are the use of market incentives to improve the efficiency and quality of assisted housing and expanded
housing choices for residents and communities. This
initiative would recognize economic losses that have occurred in FHA’s multi-family portfolio, eliminate oversubsidization of some properties, and provide an orderly
way of managing its restructuring. This portfolio provides housing to nearly 850,000 lower-income households in 8,500 privately owned but HUD-subsidized
projects, who would be protected if eligible by receiving
housing subsidies.
This initiative will generate savings in rental subsidies since many properties receive subsidies in excess
of market rents. Allowing the rents of projects to adjust
to market levels will in some cases reduce project income and necessitate writing down the mortgages of
these properties to reflect their true economic value.

ANALYTICAL PERSPECTIVES

This will result in claims being paid out of the FHA
fund. HUD will use third-party partners to produce
efficient and proactive mortgage restructuring. In 1997,
HUD intends to focus restructuring on projects where
contracts expire and the current rents are above market. The Administration is willing to discuss with Congress mechanisms to take account of consequences (including tax effects) for owners who enter into restructuring agreements with HUD. The effect of the proposal
would be a savings of $1.4 billion in claims costs.
Department of Veterans Affairs
Trends in Program Size. As interest rates declined
in the 1990s, lending in DVA’s loan guaranty program
increased dramatically, from $15.7 billion in 1990 to
$55 billion in 1994. It has since fallen, to $22 billion
in 1995. In the long term, loan volume in this program
is driven by the size and composition of the veterans
population. As this population continues to diminish
over the next several years, loan volume is expected
to fall gradually, from $22 billion in 1995 to about
$20 billion in 2001.
Performance Measures. DVA uses a cross-section
of several performance measures to track the status
of its guaranteed loan portfolio and the quality of its
management of this portfolio. For example, the early
foreclosure rate, which is the percent of loans in foreclosure within three years of origination, measures the
quality of underwriting. The foreclosure avoidance
through servicing ratio, which is the percentage of seriously delinquent loans that do not go into foreclosure,
measures the success of VA’s supplemental servicing
program at helping veterans keep their homes. The
six-month pipeline of property in inventory measures
the quality of property disposition.
Rural Housing Insurance Fund
The primary Rural Housing Service (RHS) programs
are the Section-502 single-family direct and guaranteed
loan programs and the Section-515 multi-family direct
loan program. The 502 direct loan program provides
qualified borrowers with loans for the purchase, rehabilitation, or repair of rural single-family homes. Participants qualify if their income is less than 80 percent
of State median income, they live in a legislatively defined ‘‘rural’’ area, and they are unable to obtain credit
at affordable terms from a private institution. The 502
guaranteed loan program guarantees up to 90 percent
of a loan on an unsubsidized basis for the purchase
of new or existing housing. The 515 program, which
generally lends to private developers, finances both the
construction of new rural 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. Currently, re-authorization of the 515 program is needed in order for any new construction to
be financed from 1996 appropriated funds.

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Cost and Risk. The primary costs in the 502 guaranteed program come from loan defaults. The default rate
is 7.5 percent, and an average of 21 percent of the
principal amount of the defaulted loan is not recovered.
Both direct loan programs subsidize loans by setting
interest rates below the Treasury rate. The primary
cost in the direct programs is due to the interest rate
subsidy. The rate charged 502 borrowers depends on
their income; currently, the average effective interest
rate for the outstanding subsidized portfolio is 3.4 percent. A 515 borrower’s effective interest rate is generally fixed at 1 percent.
The riskiness in the RHS portfolio is most notable
in the 502 direct loan program, whose risk is significantly greater than for conventional private sector loans
for two reasons. First, RHS lends to very low- and
moderate-income households who, as an eligibility requirement, are unable to obtain private credit. Second,
because RHS’ 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, incomes
go down, more defaults and delinquencies are likely,
and the effective interest rate paid by borrowers drops.
At the same time, the 502 interest subsidy costs increase.
Progress in Reducing Costs. RHS implemented a
new rule in 1996 that would save costs in the 502
direct loan program. Two major changes include how
RHS determines repayment ability and the amount of
payment assistance that a borrower receives. Instead
of using a family budget to determine repayment ability, RHS now uses two expenditure-to-income ratios.

The loan principal, interest, taxes and insurance (PITI)
cannot exceed 29 percent of adjusted family income for
very low income borrowers and 33 percent for low income borrowers. The total debt ratio (TD) is capped
at 38 percent of income for all borrowers. This reduces
the complexity of making loans, is more objective, and
imposes a smaller administrative burden. RHS also implemented an escalating interest rate structure which
insures that lower payment assistance is provided as
borrower income increases.
RHS has also begun implementing the Dedicated
Loan Origination Service (DLOS), consolidating the
servicing of the 502 direct single family housing loan
portfolio in one location, rather than in county offices.
DLOS objectives include establishing an escrowing system; reducing the foreclosure rate; lowering delinquency
rates, loan losses and operating costs; and bringing the
accounting more in line with the commercial sector.
The new efficiencies will improve servicing of the portfolio with 1,500 fewer employees. The current implementation plan would save approximately $250 million
from 1996–2000. The 1997 subsidy rate reflects the .83
percentage point reduction in the subsidy rate that is
a direct result of the DLOS-related changes.
For 1997, RHS will propose a ‘‘balloon payment’’ for
the 515 Multifamily housing loan program. The proposal would require that all new 515 loans be for 30
years while amortized over 50 years. This would create
a lump sum payment in the 30th year for the balance
of the loan. This legislative proposal would lower the
515 loan subsidy rate by 8 percentage points because
of the accelerated repayment to the Treasury that occurs in the 30th year.

VII. Federal Insurance Programs
Deposit Insurance
Federal deposit insurance was instituted in the 1930s
to protect individual depositors from losses caused by
failures of insured institutions. Deposit insurance also
protects against widespread disruption in financial markets by reducing the probability that the failure of one
financial institution will lead to a cascade of other failures. The Federal Deposit Insurance Corporation
(FDIC) insures the deposits of banks and thrifts
through two separate insurance funds, the Bank Insurance Fund (BIF) and the Savings Association Insurance
Fund (SAIF). Deposits of credit unions are insured
through the National Credit Union Administration
(NCUA). Currently, deposits are insured up to a limit
of $100,000 per account.
The 1980s and early 1990s were a turbulent period
for the bank and thrift industries, with over 1400 bank
failures and 1100 thrift failures. The Federal Government responded with the Financial Institutions Reform,
Recovery and Enforcement Act (FIRREA) of 1989 and
the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991. These legislative reforms,
combined with more favorable economic conditions,

helped to restore the health of depository institutions
and to enhance public confidence in the deposit insurance system.
Prior to the enactment of FIRREA, thrift deposits
were insured by the Federal Savings and Loan Insurance Corporation (FSLIC). FIRREA abolished FSLIC
and established the Resolution Trust Corporation (RTC)
as a temporary agency to handle the unprecedented
number of failures created by the thrift crisis. In July
1995, responsibility for handling new thrift failures was
transferred from RTC to SAIF, and the remaining assets and liabilities of RTC were transferred to FDIC’s
FSLIC Resolution Fund on December 31, 1995. During
its life, the RTC handled over 747 failed thrifts with
over $400 billion in assets, at a cost to taxpayers of
about $90 billion.
Current Industry and Insurance Fund Conditions. The National Credit Union Share Insurance
Fund continues to remain strong with assets of $3.4
billion. In fiscal year 1995, the income generated from
the 1 percent deposit eliminated the need to assess
the annual premium. In fact, earlier this year the Fund

138
paid a $106 million dividend to federally insured credit
unions due to an excess over the 1.30 percent reserve
requirement. The level of reserves had reached 1.33
percent at the end of fiscal year 1995. In addition,
the Fund did not report any insurance losses from
failed credit unions during fiscal year 1995. For insurance year 1996, the required annual insurance premium of one-twelfth of 1 percent of total member share
accounts has been waived.
The health of the banking industry has improved dramatically over the last few years. Banks achieved
record levels of earnings in 1993 and 1994. This strong
performance enabled banks to recapitalize the BIF,
which reached its statutorily-designated reserve ratio
of 1.25 percent in mid-1995. As a result of BIF’s recapitalization, the FDIC has lowered deposit insurance premiums for banks. The rate for the healthiest banks
is currently only the statutory minimum of $2,000 per
year.
The earnings of the thrift industry also have showed
strong improvement in the last few years. The thrift
industry reported net income of $1.2 billion in 1991,
$5.1 billion in 1992, $4.9 billion in 1993, and $4.3 billion in 1994. For the first nine months of 1995, the
industry reported net income of $3.2 billion. Despite
the continued profitability of the industry, the longterm outlook for thrifts is uncertain. Deposit insurance
premiums for thrifts remain high, at 23 cents per $100
of deposits for the healthiest thrifts. Thus, a healthy
thrift with $100 million in deposits would pay $230,000
for deposit insurance this year, while a healthy bank
of the same size would pay only $2,000. This large
disparity between the deposit insurance premiums paid
by banks and thrifts threatens to destabilize the thrift
industry and its deposit insurance fund, SAIF. In addition, the thrift industry remains vulnerable to geographic asset concentration, swings in interest rates,
and increasing competition from banks and other financial institutions.
In contrast to BIF’s recapitalization, SAIF’s reserve
ratio stood at about 0.46 percent at the end of fiscal
year 1995, only about one-third of the required 1.25
percent. One reason that SAIF’s reserves have grown
so slowly compared to BIF’s is that SAIF-insured institutions are obligated under current law to pay the interest on Financing Corporation (FICO) bonds that
were used to finance part of the cost of the recent
thrift crisis. The SAIF is required by law to maintain
its premium rates at about 23 cents per $100 of deposits until the fund is recapitalized. The FICO obligation
currently consumes about 45 percent of premium income that would otherwise be available to build up
the reserves of SAIF.
The Administration’s Proposal to Address the
Problems of SAIF. The Administration projects that
the current 23-basis point differential between SAIF
and BIF insurance premiums will have a detrimental
effect on SAIF’s assessment base. Because of the differential, thrifts have an incentive to find ways of reducing their reliance on SAIF-insured deposits. Thrifts

ANALYTICAL PERSPECTIVES

might do this by shifting deposits to BIF-insured affiliates, shrinking their balance sheets, or relying more
heavily on non-deposit liabilities such as advances from
the Federal Home Loan Bank System. Preliminary evidence indicates that thrifts are indeed moving to reduce
their reliance on SAIF-insured deposits. As the available SAIF assessment base shrinks, the proportion of
SAIF’s premium income that must go to pay FICO obligations will increase. Within only a few years, the portion of SAIF premiums available to pay FICO interest
could be insufficient to cover the $793 million annual
cost.
Without legislative action, the current BIF-SAIF premium disparity will persist for many years. The Administration does not currently project that SAIF will recapitalize on its own within the 10-year budget horizon.
Even more optimistic forecasts do not project that SAIF
will recapitalize within the next 5 years. Even if SAIF
recapitalizes on its own without legislation, a significant premium disparity would continue to exist until
2019 because of SAIF-insured institutions’ obligation
to pay FICO bond interest.
Last year, the Administration proposed legislation to
remedy the problems of SAIF. The main elements of
the proposal are a one-time special assessment on
SAIF-insured deposits to immediately bring SAIF’s reserve ratio up to the required 1.25 percent, a requirement that the FICO interest payments be shared across
banks and thrifts on a pro rata basis, and a merger
of BIF and SAIF. Congress adopted a very similar proposal in its seven-year balanced budget plan. As the
prospect of a significant BIF-SAIF premium disparity
has become reality, and preliminary evidence that the
deposit insurance premium disparity is having a harmful impact on SAIF’s assessment base has emerged,
the Administration believes it is increasingly urgent
that action be taken to address this problem through
legislation like that proposed by the Administration last
year.
Projecting Deposit Insurance Losses in a Changing Environment. Predicting failures of depository institutions and the associated impact on the deposit insurance funds is a significant challenge. In recent
years, rapidly changing conditions in depository institutions’ operating environment have made predicting insured institution failures more difficult. First, depository institutions face increasing competition from nonbank financial institutions. Depository institutions are
responding to this challenge by changing their products,
investments, and their role in the economy. Second,
it is extremely difficult to assess the potential impact
that increasing off-balance sheet activity, such as investment in derivatives, has had on the risk exposure
of the deposit insurance funds. Finally, it is too soon
to tell with certainty how much the legislative changes
of the past few years will affect deposit insurance
losses. For example, stricter regulatory and capital requirements imposed by FDICIA should have the longterm effect of reducing losses borne by the deposit insurance funds.

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The Administration is continuing to examine and
monitor the effectiveness and efficiency of the current
regulatory system. In addition, the Administration will
continue to study the need for policy changes to protect
the health of the deposit insurance funds, to improve
the long run profitability of the bank and thrift industry, and to support the growth of the financial services
sector.
Pension Insurance
The Pension Benefit Guaranty Corporation (PBGC)
insures defined benefit pension plans of private employers. PBGC steps in when a company becomes insolvent
and its pension plan cannot pay the full value of benefits guaranteed by law. At any given time, PBGC’s exposure to claims relates to the underfunding of pension
plans, that is, to any amount by which expected future
benefits exceed plan assets.
The Retirement Protection Act (RPA), signed into law
December 1994, strengthens pension safeguards and
improves program operations. The RPA:
• requires companies to accelerate their contributions to underfunded plans;
• more fairly relates the premiums that companies
pay to PBGC’s exposure by increasing insurance
premiums for those pension plans that are the
most underfunded;
• requires privately-held companies with seriously
underfunded plans to give PBGC advance notice
of any transactions that potentially are harmful
to their plans. When this ‘‘Early Warning Program’’ shows benefits to pensioners to be seriously
at risk, PBGC begins negotiating funding and
other arrangements in order to forestall its taking
over the plan.
• standardizes both the interest rates and the mortality tables that companies use to calculate: (1)
any underfunding, (2) the premiums to PBGC, and
(3) the companies’ legally required funding contributions to their plans.
• expands PBGC’s ‘‘missing participants’’ program.
Some workers about to retire simply forget about
the pensions they have earned at a job many years
past; some plans may have become insolvent; and
some plans may be unable to locate retirees. When
a company either has failed or cannot locate a
previous employee entitled to a pension, PBGC
endeavors to locate the missing participant and
then pays the benefits owed.
The long-term impact of these pension reforms should
be significant. Having successfully improved the PBGC
insurance program, no additional reforms of pension
insurance are included in the budget. However the Administration will continue to explore better methods
for quantifying, forecasting, and pricing the Federal
cost of pension insurance.
Over the past three years under the Early Warning
Program, PBGC has negotiated 30 major settlements
that provided $13 billion in new pension contributions
from companies. The added contributions strengthened

pension security for one million people. In 1995, the
Early Warning Program was one of the first six Federal
programs to receive an award from the Ford Foundation and Harvard’s Kennedy School of Government. The
program also received the National Performance Review’s Hammer Award.
Legislation passed by the Congress in 1995 would
have allowed ‘‘pension asset reversions’’ whereby companies could take money out of pension plans that at
the time are considered to be overfunded (i.e., if assets
exceeded 125 percent of actuarial liability). Those companies could effectively devote to any purpose the
money they withdraw.
In the early- and mid-1980s (until reversions were
greatly restricted), $20 billion was withdrawn from pension funds. The lure of quick cash made some companies with ‘‘overfunded’’ plans the target of hostile takeovers. In other cases, one company would finance a
leveraged buyout of another by taking a reversion from
its own plan. Some of these overfunded plans then became underfunded later.
The 1995 legislation could have led to the removal
of $15–18 billion in pension assets for non-retirement
purposes. But overfunded plans can quickly become underfunded with fluctuations in interest rates and with
fluctuations in the value of stocks and the value of
other financial assets. PBGC has estimated that an
interest-rate drop of two percentage points could reduce
a plan’s funding level from 125 percent down to as
little as 92 percent.
Concerned that this legislation would undo the reforms of the previous year, the President vetoed it.
And in his 1996 State of the Union address, he said
that he would veto reversion proposals again.
Happily, for the first time in a decade, the continued
growth of underfunding in insured pension plans has
reversed. Data collected for 1994—and reported late in
1995—showed pension underfunding dropping to an estimated $31 billion, from $71 billion for 1993. Much
of this underfunding is in plans of financially healthy
companies, but approximately $11 billion is in plans
sponsored by companies with bonds rated at below investment grade.
Underfunding fell in 1994 primarily because of the
rise in interest rates, which reduced pension liabilities.
The other important factor was companies’ additional
pension contributions—almost $12 billion above the required amount—which often were prompted by the
Early Warning Program. Of course, underfunding has
not disappeared; it can easily rebound with future decreases in interest rates. But the RPA is intended to
resist this future risk; now as it is being phased in,
it is accelerating company contributions to underfunded
pension plans.
Natural Disaster Insurance
In recent years, there has been growing recognition
that new policies are needed to reduce the high cost
of natural disasters to society; to the Federal, State,
and local governments: and to insurance companies.

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ANALYTICAL PERSPECTIVES

Since September 1989, private insurers have paid out
over $35 billion in claims, and the Federal Government
has paid a roughly similar amount for seven major
disasters. In addition, individuals and businesses have
incurred huge costs as well.
Although the Federal Government provides flood and
crop insurance and private insurance companies cover
other types of disasters, there are still widespread gaps
in disaster coverage. Homeowners’ policies, for example,
generally do not cover shake damage from earthquakes
or wind damage in hurricane-prone States. Although
these are available as supplemental riders at additional
cost, homeowners often do not purchase coverage, in
part because of the perceived high cost. At the same
time, some insurance companies have attempted to reduce or even pull out entirely from the insurance business in high-risk disaster areas because they cannot
charge rates sufficient to cover expected losses.
In order to respond to this situation, in February
1995 the Administration proposed an integrated, comprehensive set of recommendations for legislation to
deal with disaster assistance and disaster-related insurance. The major elements of the proposals would: reduce the losses from natural disasters by encouraging
communities to enhance and upgrade their building
codes; fund cost-effective retrofit of public buildings
used for critical functions in high risk areas; reform
Federal post-disaster assistance; require that, after a
phase-in period, most homeowners purchase insurance
to cover all natural disasters except floods; and auction
Federal excess-of-loss contracts to insurance companies.
Under these contracts, insurance and reinsurance
companies that suffer losses and purchased a contract
would receive a payment from the Federal Government
if there were a catastrophe that caused industry losses
between $25 to $50 billion. The objective of the contracts is to enable insurance companies to expand their
underwriting of homeowners’ policies by reducing the
risk that a huge disaster might push a company into
insolvency. The program would be fully funded by the
auction receipts; there would be no Federal subsidy
or adverse budget scoring impact.
The Administration is working with Congress, the
insurance industry and other interested groups to
produce effective legislation that addresses the multifaceted issues involving disaster insurance. It is especially important that such legislation not create a new,
costly Federal insurance program, that it explicitly define and bound any Federal liability, and that it enable
the Federal Government to respond flexibly and appropriately after a catastrophic event. The Administration’s proposal meets these criteria.
National Flood Insurance
The Federal Government provides flood insurance
through the National Flood Insurance Program (NFIP)
administered by the Federal Emergency Management
Agency (FEMA). The NFIP provides flood insurance to
property owners living in communities that have adopted and enforced appropriate floodplain management

measures. Policies for structures built before a community joined the flood insurance program are by law subsidized, while policies for structures built after a community joins the NFIP are actuarially rated.
The flood insurance program was created in the early
1970s principally because damage from flooding was
increasing. Because communities were not adopting
building standards and there was insufficient information on the risks of flooding in each geographic area,
private insurance companies had deemed flood risk uninsurable. To address these concerns, the NFIP was
established to provide insurance coverage, to require
loss mitigation efforts designed to reduce flood damage,
and to begin a flood hazard mapping project to quantify
the risk of flooding in each geographic area. The Federal flood program has been successful in meeting these
goals.
In 1997, the NFIP plans to increase premiums to
policyholders to implement expanded mitigation insurance authorized by the National Flood Insurance Reform Act of 1994. The mandatory Increased Cost of
Construction (ICC) coverage will allow substantiallydamaged structures to be rebuilt in accordance with
existing floodplain management requirements. This will
reduce future losses and allow the structure to be actuarially rated.
To increase compliance with flood insurance purchase
requirements, the 1994 Reform Act also imposed significant new obligations on both mortgage originators and
servicers, including mandatory escrow requirements for
flood insurance, and mandatory provisions for ‘‘forced
placement’’ of flood insurance. In addition, it required
that Fannie Mae and Freddie Mac implement procedures to assure that loans they purchase are covered
by flood insurance for the life of the loan. Many of
the reforms affecting the financial community were implemented in 1995.
In the past, appropriations were required to replenish
the program’s borrowing authority when income to the
flood insurance fund was insufficient. Since 1986,
FEMA has not requested appropriations; however in
early 1996, the NFIP had to borrow substantially from
the Treasury to cover claims. Several major floods over
the past few years led to extremely high losses and
substantially depleted the fund’s reserves.
Federal Crop Insurance Program
Subsidized Federal crop insurance helps farmers in
managing catastrophic yield shortfalls due to adverse
weather or other natural disasters. Private sector companies are unwilling to offer multi-peril crop insurance
because losses tend to be correlated across geographic
areas, and the companies are therefore exposed to large
losses. For example, a drought will affect many farms
at the same time. Damage from hail, on the other hand,
tends to be more localized, and a private market for
hail insurance has existed for over 100 years. The Federal program was operated as a pilot program up to
1980, when the program was expanded nationwide to
most major crops. The program is a cooperative effort

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between the Federal Government and the private insurance industry. The Federal Government reimburses private insurance companies for a portion of the administrative expenses associated with extending crop insurance and reinsures the private companies for excess
insurance losses on all policies. Private companies sell
and adjust crop insurance policies.
In 1994, a major program reform was enacted to address a growing problem caused by the availability of
Federal ad hoc disaster payments. Between 1980 and
1994, participation in the crop insurance program was
kept low by the availability of post-event disaster aid
from the Federal Government. Because disaster payments were grants to affected individuals, farmers had
little incentive to purchase Federal crop insurance. As
a result, the cost of ad hoc disaster payments rose
over the past seven years, and the crop insurance program accumulated an $8 billion actuarial deficit. The
1994 reform repealed existing agricultural disaster payment authorities and authorized a new catastrophic insurance policy that indemnifies farmers at a rate roughly equal to the previous free disaster payments. The
catastrophic insurance policy is free to the farmer except for an administrative fee. Private companies may
sell and adjust the catastrophic portion of the crop insurance policy, and also provide higher levels of coverage (which are also federally subsidized). In addition,
the reform required participants in other Federal farm
programs to purchase crop insurance, at least at the
catastrophic coverage level. This was intended to improve the actuarial soundness of the program by reducing adverse selection in the crop insurance program.
The reform was implemented in crop year 1995. To
date, no ad hoc disaster assistance bill has been enacted
for the 1995 crop, although several bills were introduced. This is the first time in over 10 years that
an ad hoc crop disaster assistance bill has not been
enacted. However, the Administration, in response to
a wet spring in the Midwest, announced changes to
the underlying crop insurance policy in 1995 without
corresponding premium changes. These changes, additional ‘‘prevented-planting’’ coverage, were essentially
post-event changes. Based on the most recent loss settlement data from crop year 1995, these changes added
roughly 20 basis points to the 1995 loss ratio, or roughly $225 million to total indemnities.
While the underlying risk of the crop insurance program remains large, the actuarial performance is much
improved in the past two years. Crop year 1994 was
the first year that the loss ratio for crop insurance
program was below 1.0; the historical average is 1.4.
The 1995 loss ratio for the entire line of insurance
business is estimated to be 1.05. That is, for every
dollar in premium, indemnity payments of $1.05 will
be made. Absent the prevented-planting changes mentioned above, the loss ratio would have been below 1.0
for the second year in a row. In large part, the 1995
loss ratio is lower than historical levels because of the
additional business in 1995, a direct result of the reform, and the changes that have been made over the

past 3 years in the methods for setting individual farm
yields and premium rates.
A 1996 Farm Bill may further change the program.
As this document was being prepared, Congress was
considering a Farm Bill that would sever the link between farm program eligibility and crop insurance. It
would reverse a fundamental 1994 reform, in that farmers would again not be required to buy crop insurance.
The Administration has expressed its objection to this
provision, as it may lead to a reversion to ad hoc disaster assistance and exacerbate adverse selection problems.
VA Life Insurance Programs
The Federal Government has provided life insurance
to service members and veterans since World War I.
These programs can be broadly divided into two categories: pre-Viet Nam, and Viet Nam and thereafter.
DVA administers six programs of life insurance for veterans of WWI, WWII, and Korea, as well as for disabled
veterans. About 2.8 million veterans are insured. Almost 80 percent of those insured through DVA are
World War II veterans, and they are, on average, about
72 years old. Except for paid up additional insurance
purchased with dividends, and certain disabled veterans’ policies, insurance has a maximum face value of
$10,000.
Four of the DVA-administered programs operate essentially like mutual life insurance companies, with the
trust funds’ gains and savings returned to insureds as
dividends. The other two programs are for disabled veterans and require an annual subsidy from an appropriated account (Veterans Insurance and Indemnities).
The only programs that are still open to new issue
are those for disabled veterans.
The cost-per-policy for administering DVA-run life insurance programs is approximately $12, while the average cost of administering commercial policies was $53
in 1994. The 1996 continuing resolution for DVA (P.L.
104–99), which is based on Conference action, provides
that the administrative expenses of operating most of
these programs will be paid from the trust funds—
they have been funded from discretionary resources
heretofore. DVA is currently reviewing whether there
would be savings by privatizing these programs. As
of this writing, the study is not complete.
The second broad category of life insurance is for
current veterans and members of the service. Since
1965, VA has purchased a group policy from a commercial company. The commercial company is responsible
for administration of these insurance programs and
DVA provides oversight and program management.
Servicemembers can be insured for up to $200,000
under these programs, and can retain their coverage
indefinitely after separation. All claims and expenses,
except the extra hazards of military service are borne
by the insureds (there have been no extra hazard payments since 1975).
The VA Insurance programs have laid out five key
objectives in their business plan (under the auspices

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ANALYTICAL PERSPECTIVES

of the Government Performance and Results Act). Performance indicators include customer surveys; measurements of timeliness and accuracy of service; complaint

rates; blockage rates and hold times on the Insurance
nationwide toll-free lines; and other measures.

VIII. Implementing Credit Reform and Improving Debt Collection
Implementation of Credit Reform
The Federal Credit Reform Act (FCRA) of 1990 dramatically improved the budgetary treatment of credit
programs. Because these changes were fundamental,
implementation has been challenging. As the fifth year
of credit reform nears completion, it is appropriate to
review its implementation, successes, and next steps.
Prior to 1992, budget rules did not measure the true
costs of credit programs. Outlays were measured on
a cash basis. When direct loans were made, the budget
recorded the full amount disbursed as an outlay; when
they were repaid, the budget recorded the full amount
repaid as an offset to outlays; and when loan guarantees were made, the budget recorded no outlay until
default payments or other payments were made in later
years, unless fees were received, in which case the
budget recorded a reduction in outlays. Furthermore,
many direct loans were disbursed from revolving funds,
which had the authority to make new loans on the
basis of repayments and interest received without needing new appropriations from the Congress. As a result,
the cost of new direct loans was overstated; loan guarantee costs were understated; the budget did not accurately compare the costs of loans to guarantees, or credit programs to grants and other forms of assistance;
and appropriations control was not exercised over much
of the direct lending.
It was only with passage of FCRA in 1990 that credit
programs were put on an equal footing with other programs. The budget now records the cost of the direct
loan or loan guarantee when the loan is disbursed.
The cost is defined as the net present value of the
loan or guarantee: the present value of the estimated
cash outflows due to the loan or guarantee over its
life minus the present value of the estimated cash
inflows. Cash outflows include the principal amount of
direct loans disbursed, the payment of default claims,
interest supplements paid to lenders, and so forth; cash
inflows include the principal amount of direct loans
repaid, interest received on direct loans, fees, recoveries
on foreclosed property, and so forth. Appropriations are
required before a program can incur subsidy cost, except for grandfathered mandatory loan programs such
as student loans and veterans housing guarantees.2
FCRA therefore created incentives for managers and
policy officials to ask the right questions: What is the
most appropriate form of assistance for a given group
of beneficiaries? What will this assistance cost? And,
indirectly, what can be done to reduce the cost (subsidy)
of existing assistance programs? It also created the in2 The structure of credit reform is further explained in Chapter VIII.A of the 1992 Budget,
Part Two, pp. 223–26. For the distinction in budgetary treatment between the cost of
credit programs and the financing of cash flows, also see chapter 11 of this volume, ‘‘Federal
Borrowing and Debt,’’ and chapter 20, ‘‘Off-Budget Federal Entities.’’

centives for the Executive Branch and the Congress
to allocate resources where the benefits are greatest.
Agency Implementation. The merits of credit reform had been discussed for decades, but it could have
been enacted in many different forms. When the FCRA
was passed, most agencies were not prepared for the
significant changes the law required. Credit reform affected agencies at many different levels. First, credit
reform required agencies to rethink the way they budgeted and accounted for credit programs. The focus was
no longer solely on output, but also on long-term program costs. Since most agencies had never estimated
the long-term cost to the Government of their credit
programs, developing subsidy estimates demanded extensive and unfamiliar analysis. Second, budget analysts and accountants had to quickly learn the mechanics of credit reform. Since OMB and Treasury guidance
was in the formative stage, this was an on-going, and
occasionally frustrating, process. Third, new accounting
and reporting requirements obligated agencies to significantly modify their financial systems. Agencies met
credit reform with varying levels of systems capabilities. Within existing resources, agencies attempted to
alter their systems to meet the more complex credit
reform requirements. Inevitably, there were many imperfections.
Financial Accounting Standards. In the same
year that FCRA changed the budgeting for Federal
credit programs, OMB, Treasury, and GAO (General
Accounting Office) established the Federal Accounting
Standards Advisory Board (FASAB) to recommend financial accounting standards for the Federal Government. If approved by the heads of these three agencies,
these standards are effective for financial statements
prepared under the Chief Financial Officers Act of 1990
and other financial accounting purposes. One of the
earliest projects undertaken by FASAB was to develop
accounting standards for Federal credit programs. The
Board endorsed the logic underlying credit reform as
appropriate for financial accounting as well as budgeting, and it recognized the value of having financial
accounting support the budget. It therefore recommended accounting standards for credit that were
consistent with budgeting under credit reform. Its recommendations were approved by OMB, Treasury, and
GAO and published in August 1993 as Statement of
Federal Financial Accounting Standards No. 2, Accounting for Direct Loans and Loan Guarantees.
Recent Initiatives
Over the past year, OMB and the agencies have focused on two areas: simplifying requirements and im-

143

UNDERWRITING FEDERAL CREDIT AND INSURANCE

proving the quality of subsidy estimates. While significant progress has been made, both initiatives are ongoing.
Simplifying Requirements. OMB continues to work
with agencies to streamline credit reform requirements.
In February 1995, the five major credit agencies, OMB,
and Treasury established the CFO Council Credit Reform Committee, which meets regularly to discuss
methods for complying with credit reform at the lowest
possible cost to the agencies. An initial set of recommendations has been made by the Committee, such
as reducing the frequency of subsidy reestimates when
the amount of the reestimates is expected to be relatively small. These recommendations were endorsed
by the CFO Council and have already been partially
implemented. OMB and Treasury have worked together
on other streamlining initiatives, such as reporting data
on budget execution for credit programs on the same
forms as for other programs. This simplification, supported by the CFO Council Credit Reform Committee,
is scheduled to go into effect later this year.
Improving the Quality of Subsidy Estimates.
Credit reform is only as strong as agencies’ subsidy
estimates. Given the limited amount of time agencies
had to comply with credit reform, early underlying subsidy assumptions, such as default and recovery rates,
were rough at best. Over the past year, OMB has
worked closely with agencies to improve their cost estimates. With the initial loans having been outstanding
for several years, and some medium-term loans beginning to mature, it will be possible to judge the accuracy
of previously projected cash flows by comparing the projected cash flows to the actuals.
Therefore, OMB has drawn increasing attention to
the importance of reestimates. FCRA requires agencies
to periodically update their subsidy estimates for previous loans and guarantees and to record the change
in the estimated cost as an increase or decrease in
outlays of the current year. The 1997 Federal Credit
Supplement (issued with the President’s Budget) will
contain all previous reestimates, for the first time, and
the last part of this section discusses the reestimate
process and the reestimates made this year.
A further impetus toward accurate subsidy estimation is the requirement in the Government Management Reform Act of 1994 that the Treasury Department
submit an audited financial statement for 1997 and
subsequent years covering all accounts of the Executive
branch of the Government. The General Accounting Office is required to do the auditing. GAO, Treasury, and
OMB have established a task force to develop auditing
guidance for these statements, and one of its subgroups
is on direct loans and loan guarantees. This subgroup,
composed of staff from GAO, Treasury, OMB, and several credit agencies, is working to provide guidance that
will help to improve and standardize the auditing process. Audits will provide incentives for agencies to improve their databases, documentation, tracking, and estimation procedures, which should lead to stronger his-

torical data and more attention to the accuracy of cash
flow projections.
Next Steps. Agencies have made great strides in implementing credit reform. However, few have utilized
credit reform as a management tool. OMB is encouraging agencies to integrate credit reform concepts into
internal management decisions. First, as outlined
above, OMB is working with agencies to improve their
subsidy estimates, through increased attention to subsidy rate assumptions and subsidy rate audits. Once
agencies have developed historical databases, this same
information can be used for internal management decisions. Second, OMB continues to place strong emphasis
on credit reform training. As agencies become more
comfortable working with credit reform concepts, compliance will improve. Third, the Federal Credit Policy
Working Group will help agencies establish indicators
to judge program performance within the framework
of the performance measurement requirements of GPRA
(Government Performance and Results Act of 1993).
While the FCRA focuses on program costs, proper measures of performance focus not only on program costs,
but also on program goals.
Subsidy Reestimates
As noted above, a key tool for improving the quality
of subsidy estimates is the annual review of past subsidy estimates. With four years of credit reform completed (1992–1995), agencies now are able to better test
the accuracy of their original subsidy estimates. Section
504(f) of FCRA requires that the subsidy cost for a
cohort of loans (typically all loans approved in a fiscal
year) be ‘‘reestimated’’ in subsequent years. If the
reestimated cost differs from the original subsidy estimate, the subsidy funds for this cohort in the financing
account must be increased or decreased to ensure that
adequate resources—but no more—are available to
cover the life-time costs of that cohort.
The authors of credit reform believed that agencies
should be encouraged to make the most accurate subsidy estimates possible. Therefore, FCRA provided permanent indefinite budget authority to cover the cost
of reestimates. While agencies are not penalized for
the inaccuracy of past subsidy estimates in the appropriations they request from Congress, they are required
to incorporate this improved knowledge into the subsidy
estimates of future loan cohorts.
Findings from Recent Subsidy Reestimates. Since
subsidy rates represent estimates of the Government’s
net present value of cash flows over future years,
reestimates of the original subsidy cost are common.
Due to changes in interest rates, economic conditions,
and the projected timing of cash flows, some cohorts
have already experienced both downward and upward
reestimates during the past four years.
Table 8–2 lists the cost of reestimates for the past
three years. While subsidy estimates as a whole were
adjusted downward in 1994, reestimates in the last two
years have required $1.2 billion and $238 million in

144

ANALYTICAL PERSPECTIVES

permanent indefinite budget authority respectively. The
causes of reestimates in 1996 are discussed below.
Department of Education reestimates of prior year
cohorts reflect the following factors: 1) lower interest
rate projections; 2) revised projections for defaults, collections, and other technical assumptions; and 3) technical improvements in the Department’s forecasting
models. FFEL costs increased $595 million under the
1996 reestimate, primarily because reductions in the
discount rate increase the cost of future defaults; conversely, reestimated Direct Loan costs fell $271 million
because decreasing interest rates reduce Government
borrowing costs.
As a result of the change in the financial condition
of certain countries, as rated by the Inter-Agency Country Risk Assessment System (ICRAS), subsidy estimates of international lending was adjusted in 1996.
For example, the subsidy cost of the Food For Progress
program lending in Russia, which is financed by Commodity Credit Corporation, was adjusted downward by
$38 million. 1996 reestimates were adjusted upward
by $50 million for Export-Import Bank cohorts, because
of a reduction in ICRAS ratings of certain countries
where the agency has high exposure. Downward reestimates for the P.L. 480 loan program of $37 million
resulted from improved ICRAS ratings for several countries, as well as technical changes in the loan terms.

The Department of Veterans Affairs home loan programs incurred substantial upward and downward subsidy reestimates in 1996. Subsidy costs were
reestimated upward by $315 million due to an increase
in estimated loan volume for 1995 and prior cohorts.
Subsidy costs were reestimated downward by -$710 million due in small part to changes in interest rates but
mostly to an increase in the expected recovery rate
on defaulted loans. Recent evidence suggests that DVA
obtains 100 percent of appraised value when it sells
property acquired through default.
Based on extensive data analysis over the past year,
the Small Business Administration determined that its
estimated subsidy cost of the Section 504 and 7(a) programs had been understated. Therefore, the subsidy
cost of the 1992–95 cohorts has been increased by $257
million. Consistent with this reestimate, the estimated
subsidy cost of 1997 Section 504 and 7(a) loans has
been increased.
Improving Debt Collection
In measuring costs of credit programs one critical
element is the timing and amount of recoveries of defaulted loans. Recoveries are also an important element
in measuring program performance. For the Federal
Government, debt collection is especially significant
since direct loans, loans acquired as a result of claims

Table 8–2. REESTIMATES OF CREDIT SUBSIDIES ON LOANS DISBURSED IN 1992, 1993,
1994, and 1995 1
(In millions of dollars)
Program

1994

1995

1996

Direct Loans:
P.L. 480 Title I loan program ....................................................................................
Agriculture credit insurance fund ..............................................................................
Agricultural conservation ...........................................................................................
Rural development loan program .............................................................................
Rural electrification and telephone loans .................................................................
Rural telephone bank ................................................................................................
Rural housing insurance fund ...................................................................................
Direct student loans ...................................................................................................
VA-Guaranty and indemnity ......................................................................................
VA-Loan guaranty direct loans .................................................................................
Export-Import Bank direct loans ...............................................................................
Loan Guarantees:
AID housing guaranty ................................................................................................
P.L. 480 Title I Food for Progress credits ...............................................................
Agriculture credit insurance .......................................................................................
Commodity Credit Corporation export guarantees ...................................................
Rural development insurance fund ...........................................................................
Federal family education (formerly GSL)*: ...............................................................
Technical reestimate .............................................................................................
Volume reestimate 2 ..............................................................................................
FHA-General and special risk ...................................................................................
SBA-Business loans ..................................................................................................
VA-Guaranty and indemnity program: ......................................................................
Technical reestimate .............................................................................................
Volume reestimate 2 ..............................................................................................
Export-Import bank guarantees .................................................................................

...............
–72
–1
...............
*
1
2
...............
7
–46
–28

...............
28
...............
1
61
...............
139
...............
8
22
–16

–37
...............
...............
...............
1
...............
...............
–271
16
60
37

...............
...............
5
3
49
...............
97
...............
–175
...............
...............
1
...............
–11

–3
84
14
107
...............
...............
421
...............
...............
...............
...............
343
...............
–59

...............
–38
...............
...............
...............
...............
30
565
...............
257
...............
–710
315
13

Total ................................................................................................................................

–168

1,150

1 Additional

238

information on credit reform subsidy rates is contained in the Federal Credit and Insurance Supplement to the budget for 1996.
2 Volume reestimates in mandatory programs represent a change in volume of loans disbursed in the prior years. These estimates are the result of
guarantee programs where data from loan issuers on actual disbursements of loans are not received until after the close of the fiscal year.

145

UNDERWRITING FEDERAL CREDIT AND INSURANCE

paid on defaulted guaranteed loans, and other receivables totaled $256 billion at the end of 1995. Of that
amount, $51 billion were delinquent. This is an increase
of over $6 billion during 1995. Over $43 billion have
been delinquent for more than a year and collectibility
is considered doubtful.
At each stage in the Government’s credit and debt
management program, there are specific tools that can
be used to prevent default, convert delinquent accounts
into repayment, and, if appropriate, enforce a Federal
claim through the judicial system. As shown in Chart
8–1, using the key debt collection tools, cumulative collections increased by 28% from $8.5 billion in 1994
to $10.9 billion in 1995. The Tax Refund Offset program, which intercepts debtors’ income tax refunds, collected over $1 billion in 1995. The chart below depicts
cumulate collections by the key debt collection tools
from 1990 through 1995.
The Department of Education is a leader in the use
of modern debt collection tools. During 1995, the De-

partment of Education collected $605 million in defaulted student loans, an increase of over $300 million
from 1994. A total of $2 billion in defaulted student
loans was collected in 1995 through efforts from the
Department of Education, IRS Offset, and the Guaranty
agencies.
The Administration’s proposed Debt Collection Improvement Act would create incentives for Treasury and
other debt collection agencies to invest in systems that
support improved electronic payment and collection of
tax and non-tax delinquent debt. The proposed Debt
Collection Improvement Act is designed to maximize
collections of delinquent debts by ensuring quick action
to enforce recovery of debts, and using all appropriate
collection tools, including private sector services. The
legislation would reduce losses by proper screening, aggressive monitoring of accounts, and sharing of information within and among Federal agencies.

Chart 8-1. KEY DEBT COLLECTION TOOLS
(Cumulative collections)
DOLLARS IN BILLIONS

12
$10.9B

ADMINISTRATIVE OFFSET

8
6

SALARY OFFSET

PRIVATE COLLECTION AGENCIES
LITIGATION

$3.2B

2
0
1990

TAX REFUND OFFSET

1991

1992

1993

1994

1995

146

ANALYTICAL PERSPECTIVES

Chart 8-2. FACE VALUE OF FEDERAL CREDIT OUTSTANDING
DOLLARS IN BILLIONS

900
800
LOAN GUARANTEES

700
600
500
400
300
200

DIRECT LOANS

100
0
1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

147

UNDERWRITING FEDERAL CREDIT AND INSURANCE

Table 8–3. ESTIMATED 1997 SUBSIDY RATES, BUDGET AUTHORITY, AND LOAN LEVELS FOR
DIRECT LOANS 1
(In millions of dollars)
Agency and Program

Funds Appropriated to the President:
Micro and small enterprise development ..................................................................
Foreign Military Financing .........................................................................................
Overseas Private Investment Corporation ................................................................
Agriculture:
Agricultural credit insurance fund .............................................................................
Rural housing insurance fund ...................................................................................
Rural economic development loans ..........................................................................
Rural electrification and telephone ...........................................................................
Public Law 480 direct loans ......................................................................................
Distance learning and medical link loan program ....................................................
Rural community facility loan program .....................................................................
Rural business and industry loans ...........................................................................
Rural telephone bank ................................................................................................
Rural development loan fund ....................................................................................
Rural water and waste disposal loan program ........................................................
Education:
Federal direct student loan program ........................................................................
Interior:
Bureau of Reclamation loans ....................................................................................
State Department: Repatriation loans ...........................................................................
Transportation:
Minority business resource center program .............................................................
Alameda Corridor project loan program ...................................................................
Treasury:
Community development financial institutions fund .................................................
Veterans Affairs:
Direct loan ..................................................................................................................
Loan guarantee fund .................................................................................................
Guaranty and indemnity fund ....................................................................................
Vocational rehabilitation .............................................................................................
Native american veteran housing loan program ......................................................
Other Independent Agencies:
Export-Import Bank 2 ..................................................................................................
Federal Emergency Management Agency:
Disaster assistance ...............................................................................................
Small Business Administration:
Disaster loans ........................................................................................................
Total ................................................................................................................................

1997 Weighted
average subsidy as
a percent of disbursements

1997 Subsidy
budget authority

1997 Estimated
loan levels

12.20
10.81
5.00

—*
40
4

1
370
80

12.85
5.81
22.11
2.52
81.79
1.62
7.44
–1.56
1.33
46.16
8.57

70
225
3
41
179
2
15
–1
2
37
69

546
1,668
14
1,620
219
125
200
50
175
80
800

0.35

15,101

40.00
80.00

13
1

36
1

10.00
14.67

—*
59

15
400

35.83

46.77
1.56
0.95
1.75
7.72

—*
14
13
—*
1

—*
894
1,417
2
18

4.00

136

3,396

5.54

7.90

667

3.80

1,064

27,976

* Less than $500,000.
1 Additional information on credit reform subsidy rates is contained in the Federal Credit and Insurance Supplement to the budget for 1996.
2 Includes 1996 carryover budget authority.

148

ANALYTICAL PERSPECTIVES

Table 8–4. ESTIMATED 1997 SUBSIDY RATES, BUDGET AUTHORITY, AND LOAN LEVELS FOR
LOAN GUARANTEES 1
(In millions of dollars)
Agency and Program

Funds Appropriated to the President:
Micro and small enterprise development .............................................................
AID housing and other credit guarantees ............................................................
Overseas Private Investment Corporation ............................................................
Agriculture:
Agricultural credit insurance fund .............................................................................
Commodity Credit Corporation: Export credits .........................................................
Rural housing insurance fund ...................................................................................
Rural business and industry loan program ..............................................................
Rural community facility loan program .....................................................................
Commerce:
Fishing vessel obligations .........................................................................................
Defense:
Family Housing Improvement Fund ..........................................................................
Education:
Federal family education loan program ....................................................................
Health and Human Services:
Health professions graduate student loan program .................................................
Housing and Urban Development:
Community development (Sec. 108) ........................................................................
Federal Housing Administration general and special risk ........................................
Federal Housing Administration mutual mortgage ...................................................
GNMA secondary mortgage guarantees ..................................................................
Indian housing guarantee ..........................................................................................
Interior:
Indian loan guaranty and insurance fund .................................................................
Transportation:
Title XI maritime guaranteed loans ...........................................................................
Veterans Affairs:
Guaranty and indemnity fund ....................................................................................
Loan guaranty fund ...................................................................................................
Other Independent Agencies:
Export-Import Bank 5 .................................................................................................
Small Business Administration:
Business Loans .....................................................................................................
Total 4 ....................................................................................................................

1997 Weighted-average subsidy as a
percent of disbursements

1997 Subsidy
budget authority

1997 Estimated
loan levels

3.73
11.83
2.50

1
5
65

38
41
2,250

2.60
8.00
0.27
0.94
0.41

69
390
6
7
–*

2,650
5,500
2,400
750
100

1.00

–*

2 10.00

.......................

10.04

1,918

19,114

0.34

–*

140

2.30
1.06
–2.88
.......................
8.13
13.00

2,000

3 41

4 12,933

–1,255
.......................
3

70,721
110,000
37

800

1.47
15.04

361
–*

24,547
1

4.45

636

14,294

2.68

203

11,653

9.50

2,660

280,030

* Less than $500,00.
1 Additional information on credit reform subsidy rates is contained in the Federal Credit and Insurance Supplement to the budget for Fiscal Year 1996.
2 The subsidy rate is an estimated weighted average subsidy rate. Actual rates will be calculated on a transaction by transaction basis at the time of loan obligation.
3 Subsidy BA represents the net amount resulting from new loans in both positive and negative subsidy programs. Since appropriations requested are for the gross
amount of subsidy BA for positive subsidy programs (to be offset by the negative subsidy), the BA amount in this table does not represent the total gross appropriations request.
4 Loan levels do not include standby commitment authority and therefore do not match levels requested in appropriations.
5 Includes 1996 carryover budget authority.

149

UNDERWRITING FEDERAL CREDIT AND INSURANCE

Table 8–5. SUMMARY OF FEDERAL DIRECT LOANS AND LOAN GUARANTEES
(In billions of dollars)
Actual
1993

1994

Estimate
1995

1996

1997

Direct Loans:
Obligations ....................................................................................
Disbursements ..............................................................................
Subsidy budget authority .............................................................

22.1
27.1
2.1

22.7
19.3
2.8

30.9
22
2.6

34.4
27.7
1.6

45.4
34.7
1.0

Loan Guarantees:
Commitments ...............................................................................
Lender Disbursements .................................................................
Subsidy budget authority .............................................................

169.9
144.3
4.1

204.1
194.2
2.6

138.5
117.9
5.1

179.0
139.2
4.4

172.0
152
3.7

Table 8–6. NEW DIRECT LOAN OBLIGATIONS AND GUARANTEED LOAN COMMITMENTS BY FUNCTION
(In millions of dollars)
Direct loan obligations
Function

Guaranteed loan commitments

1995
actual

1996
estimate

1997
estimate

1995
actual

1996
estimate

1997
estimate

National Defense ...........................................................................................................
International affairs ........................................................................................................
Energy ............................................................................................................................
Natural resources and environment ..............................................................................
Agriculture ......................................................................................................................
Commerce and housing credit 1 ....................................................................................
Transportation ................................................................................................................
Community and regional development .........................................................................
Education, training, employment, and social services .................................................
Health .............................................................................................................................
Income security ..............................................................................................................
Veterans benefits and services .....................................................................................
General government ......................................................................................................
Multiple functions ...........................................................................................................

.............
2,476
1,320
16
9,794
2,496
98
1,427
11,547
.............
.............
1,535
147
45

.............
3,992
1,426
33
6,463
2,537
15
1,052
16,317
.............
.............
2,104
379
55

.............
4,067
1,620
36
7,605
5,536
415
1,952
21,770
.............
.............
2,344
.............
106

300
14,354
.............
.............
7,638
71,057
118
2,366
19,960
275
22
22,162
.............
.............

342
17,906
.............
.............
8,150
105,263
229
2,360
20,433
210
37
24,033
.............
.............

229
18,624
.............
.............
8,150
97,707
571
2,885
19,114
140
37
24,548
.............

Total ................................................................................................................................

30,901

34,373

45,451

138,272

178,963

172,005

ADDENDUM
Secondary guaranteed loans ...................................................................................................

.............

142,000

110,000

050
150
270
300
350
370
400
450
500
550
600
700
800
990

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.

150

ANALYTICAL PERSPECTIVES

Table 8–7. DIRECT LOAN WRITE-OFFS AND GUARANTEED LOAN TERMINATIONS FOR DEFAULTS
In millions of dollars
Agency or Program

As percentage of outstanding loans 1

1995
actual

1996
estimate

1997
estimate

1995
actual

1996
estimate

1997
estimate

32
.............
94

.............
3
39

.............
4
39

0.24
.............
1.11

.............
0.67
0.47

.............
0.92
0.48

50
579
99
168

.............
515
101
.............

.............
520
100
63

0.15
4.79
0.32
1.43

.............
4.58
0.33
.............

.............
5.04
0.33
0.54

0.49

0.15

0.27

.............

2.94

.............

17.74

14.81

7.41

1.81

0.79

0.96

346
45

296
.............

260
.............

3.07
.60

2.6
.............

2.11
.............

1,463

982

1,061

.............

10
19
.............
.............
1,167
9

25
14
1
.............
579
7

25
15
1
8
693
2

0.49
1.54
.............
.............
22.96
0.14

1.25
0.51
2.22
.............
7.19
0.11

1.28
0.36
1.25
14.55
6.91
0.03

18
21
1
1
.............
.............

17
27
11
.............
54
1

12
23
14
.............
.............
1

0.29
3.48
22.00
0.20
.............
.............

0.25
4.86
46.00
100.00
59.34
0.05

0.15
4.98
54.00
.............
.............
0.06

1,286

1,767

2,384

3.10

2.62

2.78

1.89

3.20

3.85

1,033
3,969

1,956
3,658

1,875
4,124

1.24
1.25

2.34
1.10

2.16
1.17

0.46

2.40

1.92

1,664

2,500

2,360

1.07

1.55

1.34

635
353

629
16

816
78

2.40
2.56

2.16
0.11

2.36
0.54

10,198

11,318

12,489

.............

1
31

35
10

39
23

0.23
4.61

8.20
1.49

8.86
3.42

2.38

4.21

4.60

DIRECT LOANS
Funds Appropriated to the President:
Economic assistance loans .................................................................................................
International debt reduction .................................................................................................
Foreign military loans ..........................................................................................................
Department of Agriculture:
Rural electrification and telephone revolving fund .............................................................
Agricultural credit insurance fund ........................................................................................
Rural housing insurance fund .............................................................................................
Public Law 480 Food Aid ....................................................................................................
Department of Education:
Federal direct student loan program ...................................................................................
Department of Commerce:
Economic development revolving fund (EDA) ....................................................................
Department of Interior:
Bureau of Indian Affairs direct loans ..................................................................................
Department of Veterans Affairs:
Veterans housing programs ................................................................................................
Independent Agencies:
Small Business Administration ............................................................................................
Export-Import Bank ..............................................................................................................
Total, direct loan writeoffs ...........................................................................................
GUARANTEED LOANS
Funds Appropriated to the President
Housing and other credit guaranty programs .....................................................................
Overseas Private Investment Corporation ..........................................................................
Microenterprise and other development guaranteed ..........................................................
Assistance for the New Independent States of the Soviet Union .....................................
CCC export credit guarantees ............................................................................................
Foreign military loans ..........................................................................................................
Department of Agriculture:
Agricultural credit insurance fund ........................................................................................
Rural development insurance fund .....................................................................................
Rural housing insurance fund .............................................................................................
Rural water and waste water disposal fund .......................................................................
Rural community facility loans fund ....................................................................................
Rural business and industry loans ......................................................................................
Department of Education:
Federal family education loans ...........................................................................................
Department of Interior:
Indian loan guaranty and insurance fund ...........................................................................
Department of Housing and Urban Development:
FHA-General and special risk guaranteed loans ...............................................................
FHA-mutual mortgage and cooperative housing loans ......................................................
Department of Transportation:
MARAD ship financing fund ................................................................................................
Department of Veterans Affairs:
Veterans housing programs ................................................................................................
Independent Agencies:
Small business administration .............................................................................................
Export-Import Bank ..............................................................................................................
Total, guaranteed loan terminations for default .......................................................
DEFAULTED GUARANTEED LOANS THAT RESULT IN LOANS RECEIVABLE
Funds Appropriated to the President:
Housing and other credit guaranty programs .....................................................................
Foreign military loans ..........................................................................................................
Department of Education:
Federal family education loans ...........................................................................................

151

UNDERWRITING FEDERAL CREDIT AND INSURANCE

Table 8–7. DIRECT LOAN WRITE-OFFS AND GUARANTEED LOAN TERMINATIONS FOR DEFAULTS—Continued
In millions of dollars
Agency or Program

Department of Housing and Urban Development:
FHA-mutual mortgage and cooperative housing loans ......................................................
FHA-general and special risk guaranteed loans ................................................................
Department of Health and Human Services:
Health professions guaranteed student loans ....................................................................
Department of Veterans Affairs:
Veterans housing programs ............................................................................................
Independent Agencies:
Small Business Administration ............................................................................................

1995
actual

1996
estimate

As percentage of outstanding loans 1
1997
estimate

1995
actual

1996
estimate

1997
estimate

139
321

851
2,376

510
1,752

3.23
6.07

32.21
66.31

53.80
92.50

2.06

3.20

2.95

584

693

711

37.58

45.56

49.4

184

2.45

4.50

7.76

Total, writeoffs of loans receivable ............................................................................

1,447

4,067

3,903

.............

Grand Total ....................................................................................................................

13,108

16,637

17,453

.............

1 Average

of loans outstanding over year.

152

ANALYTICAL PERSPECTIVES

Table 8–8. APPROPRIATIONS ACTS LIMITATIONS ON CREDIT LOAN LEVELS
(In millions of dollars)
Estimate
Agency or Program

1995 Actual
1996

1997

LIMITATIONS ON DIRECT LOAN OBLIGATIONS
Funds Appropriated to the President:
Foreign military financing ..........................................................................................

558

544

370

Agriculture: 1
Farm Service Agency:
Agricultural credit insurance fund .........................................................................

564

763

546

Rural Utilities Service:
Rural electric and telephone .................................................................................
Rural telephone bank ............................................................................................
Distance learning and medical link loans ............................................................
Rural development insurance fund 1 ....................................................................
Rural water and waste disposal loans .................................................................

1,320
175
.................
1,131
.................

1,426
175
.................
.................
547

1,620
175
125
.................
800

Rural Housing Service:
Rural housing insurance fund ...............................................................................
Rural community facility loans ..............................................................................

1,472
.................

1,223
208

1,668
200

Rural Business—Cooperative Service:
Rural development loan fund ................................................................................
Rural economic development loans .....................................................................
Rural business and industry loans .......................................................................

85
13
.................

38
14
.................

80
14
50

Foreign Assistance Programs:
Public Law 480 direct credit .................................................................................

303

291

219

Housing and Urban Development:
FHA-General and special risk ...................................................................................
FHA-Mutual mortgage insurance ..............................................................................

220
180

120
200

Interior:
Bureau of Reclamation direct loans .........................................................................
Indian direct loan .......................................................................................................

23
11

37
.................

36
.................

State Department:
Repatriation Loans .....................................................................................................

Transportation:
Alameda Corridor project improvement ....................................................................
High priority corridors ................................................................................................
Orange County (CA) toll road ...................................................................................
Minority business resource center ............................................................................

.................
40
100
15

.................
.................
20
15

400
.................
.................
15

Veterans Affairs:
Direct loans ................................................................................................................
Vocational rehabilitation .............................................................................................
FEMA—Disaster assistance ..........................................................................................

1
2
175

.................
2
36

.................
2
25

Total, limitations on direct loan obligations .....................................................

6,389

5,660

6,666

Funds Appropriated to the President:
Loan guarantees to Israel .........................................................................................
Assistance for the New Independent States of the Former Soviet Union ..............

2,000
.................

2,000
106

2,000
.................

Agriculture:
Agricultural credit insurance fund .............................................................................
Rural development insurance fund ...........................................................................
Rural business and industry loan fund .....................................................................
Rural housing insurance fund ...................................................................................
Rural community facility loan fund ............................................................................

1,938
575
.................
1,049
.................

2,450
50
700
1,700
75

2,650
.................
750
2,400
100

Education:
Historically black colleges/universities ......................................................................

357

.................

Health and Human Services:
Health professions graduate student loan insurance ...............................................

275

210

140

Housing and Urban Development:
FHA—General and special risk .................................................................................
FHA—Mutual mortgage insurance ............................................................................
Community development loan guarantees ...............................................................
Indian housing loan guarantee .................................................................................

20,885
100,000
2,054
22

17,400
110,000
1,500
37

17,400
110,000
2,000
37

LIMITATIONS ON GUARANTEED LOAN COMMITMENTS

153

UNDERWRITING FEDERAL CREDIT AND INSURANCE

Table 8–8. APPROPRIATIONS ACTS LIMITATIONS ON CREDIT LOAN LEVELS—Continued
(In millions of dollars)
Estimate
Agency or Program

1995 Actual
1996

1997

Interior:
Indian loan guaranty and insurance .........................................................................

Total, limitations on guaranteed loan commitments .....................................

129,202

136,263

137,512

142,000

110,000

ADDENDUM
Secondary guaranteed loan commitment limitations:
GNMA, mortgage-backed securities .........................................................................
1 In

1995, this included water and waste, community facility, and business and industry funds.

154

ANALYTICAL PERSPECTIVES

Table 8–9.

DIRECT LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT
(in millions of dollars)

Agency or Program

1995
actual

Estimate
Agency or Program
1996

1997

1995
actual

Estimate
1996

1997

Department of Agriculture

Funds Appropriated to the President

Farm Service Agency

International Security Assistance
Foreign military loan liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
461
30
9
Change in outstandings ...............................................
¥716 ¥943 ¥886
Outstandings ...............................................................
7,911 6,968 6,082

Agricultural credit insurance fund liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
4
3
3
Change in outstandings ............................................... ¥1,082 ¥1,174 ¥1,174
Outstandings ............................................................... 10,426 9,252 8,078

Foreign military financing direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

370
829
807
2,079

Agricultural credit insurance fund direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

564
583
143
1,655

763
813
328
1,983

546
777
247
2,230

............. ............. .............
.............
15
4
.............
15
4
.............
15
19

Commodity credit corporation fund: 1
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

9,230
9,230
¥343
2,786

5,700
5,700
¥665
2,121

7,059
7,059
186
2,307

Military debt reduction financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

558
266
266
539

544
743
733
1,272

Multilateral Assistance
International organizations and programs:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥2
¥2
¥2
Outstandings ...............................................................
36
34
32
Agency for International Development
Economic assistance loans—liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
11
13 .............
Change in outstandings ...............................................
¥486 ¥599 ¥616
Outstandings ............................................................... 13,279 12,680 12,064
Debt reduction, financing account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... .............
51
47
Change in outstandings ...............................................
¥47
¥6
¥10
Outstandings ...............................................................
453
447
437
Private sector revolving fund liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥1
¥4 .............
Outstandings ...............................................................
7
3
3

Rural Utilities Service
Rural communication development fund liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥1
¥1
¥1
Outstandings ...............................................................
10
9
8
Distance learning and medical link direct loan financing
account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

.............
.............
.............
.............

125
38
38
38

Rural development insurance fund liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
65
29
24
Change in outstandings ...............................................
¥127 ¥159 ¥158
Outstandings ...............................................................
4,471 4,312 4,154
Rural electrification and telephone direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

1,320
830
787
2,740

1,426
1,192
1,155
3,895

1,620
1,275
1,208
5,103

1
1
3
1
3 .............
4
4

Rural telephone bank direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

175
37
33
118

175
223
220
338

175
179
176
514

Overseas Private Investment Corporation liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥11
¥5
¥6
Outstandings ...............................................................
28
23
17

Rural development insurance fund direct loan financing
account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

1,004
608
593
1,218

.............
.............
¥1,218
.............

.............
.............
.............
.............

Overseas private investment corporation direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

Rural water and waste disposal loans direct financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

.............
.............
.............
.............

547
600
1,567
1,567

800
677
655
2,222

Microenterprise and other development credit direct loan
financing account:
Obligations ....................................................................
1
Loan disbursements ..................................................... .............
Change in outstandings ............................................... .............
Outstandings ...............................................................
1
Overseas Private Investment Corporation

15
46
45
53

200
62
61
114

85
75
74
188

155

UNDERWRITING FEDERAL CREDIT AND INSURANCE

Table 8–9.

DIRECT LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT—Continued
(in millions of dollars)

Agency or Program

1995
actual

Estimate
Agency or Program
1996

1997

Rural electrification and telephone revolving fund liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
432
227
178
Change in outstandings ...............................................
¥998 ¥1,326 ¥1,153
Outstandings ............................................................... 33,101 31,775 30,622
Rural telephone bank liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
36
33
33
Change in outstandings ...............................................
¥45
¥60
¥61
Outstandings ...............................................................
1,414 1,354 1,293
Rural Housing
Rural housing insurance fund liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
9
5
1
Change in outstandings ............................................... ¥1,163 ¥1,233 ¥1,214
Outstandings ............................................................... 23,675 22,442 21,228
Rural housing insurance fund direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................
Rural community facility loans direct financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

1,162
1,584
1,491
6,797

1,223
1,252
1,145
7,942

1,668
1,567
1,404
9,346

1995
actual

Estimate
1996

1997

Foreign Agricultural Service
Expenses, Public Law 480, foreign assistance programs,
Agriculture liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥118 ¥272 ¥255
Outstandings ............................................................... 10,697 10,425 10,170
P.L. 480 Direct credit financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

303
186
175
1,024

291
270
270
1,294

219
191
145
1,439

P.L. 480 Title I Food for Progress Credits, financing account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
52 ............. .............
Change in outstandings ...............................................
52 ............. .............
Outstandings ...............................................................
508
508
508
Debt reduction—financing account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥1
¥1
¥2
Outstandings ...............................................................
66
65
63
Department of Commerce
Economic Development Administration

.............
.............
.............
.............

208
134
366
366

200
161
149
515

Rural Business-Cooperative Service

Economic development revolving fund liquidating account :
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥7
¥7
¥6
Outstandings ...............................................................
68
61
55
Department of Defense—Military

Rural economic development liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... .............
1 .............
Change in outstandings ...............................................
¥1 .............
¥2
Outstandings ...............................................................
8
8
6
Rural economic development loan direct financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

12
12
10
30

14
11
7
37

14
12
7
44

Rural development loan fund direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

85
47
47
74

38
63
63
137

80
57
56
193

Rural business and industry direct loans financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

.............
.............
.............
.............

50
12
12
12

Rural development loan fund liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
5
3
2
Change in outstandings ............................................... .............
¥1
¥2
Outstandings ...............................................................
85
84
82

Revolving and Management Funds
Defense business operations fund:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥47
¥49
¥75
Outstandings ...............................................................
1,433 1,384 1,309
Department of Education
Office of Postsecondary Education
Student financial assistance:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥136
2
3
Outstandings ...............................................................
187
189
192
Higher education facilities loans:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥7
¥6
¥6
Outstandings ...............................................................
55
49
43
College housing and academic facilities loans liquidating
account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
4
4
4
Change in outstandings ...............................................
2
2
1
Outstandings ...............................................................
138
140
141
College housing loans:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥35
¥35
¥32
Outstandings ...............................................................
484
449
417

156

ANALYTICAL PERSPECTIVES

Table 8–9.

DIRECT LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT—Continued
(in millions of dollars)

Agency or Program

1995
actual

Estimate
Agency or Program
1996

1997

College housing and academic facilities direct loan financing account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
6
13
9
Change in outstandings ...............................................
6
13
9
Outstandings ...............................................................
7
20
29
Federal direct student loan program, financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

11,547 16,317 21,770
2,332 9,600 13,763
2,324 9,417 13,213
2,801 12,218 25,431

Department of Energy
Power Marketing Administration
Bonneville Power Administration fund:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ............................................... ............. ............. .............
Outstandings ...............................................................
3
3
3
Department of Health and Human Services
Health Resources and Services Administration
Health Resources and Services:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
17
17
18
Change in outstandings ...............................................
266
3
4
Outstandings ...............................................................
797
800
804
Health loan funds:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
2
1
1
Change in outstandings ...............................................
¥19
¥11
¥10
Outstandings ...............................................................
45
34
24
Department of Housing and Urban Development
Public and Indian Housing Programs
Low-rent public housing—loans and other expenses :
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥58
¥62
¥65
Outstandings ...............................................................
1,689 1,627 1,562
Community Planning and Development
Revolving fund (liquidating programs):
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥58
¥52
¥46
Outstandings ...............................................................
388
336
290
Community development loan guarantees liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥21
¥20
¥15
Outstandings ...............................................................
89
69
54
Housing Programs
Nonprofit sponsor assistance liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ............................................... ............. ............. .............
Outstandings ...............................................................
1
1
1

1995
actual

Estimate
1996

1997

Flexible Subsidy Fund:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
126
159
56
Change in outstandings ...............................................
125
157
54
Outstandings ...............................................................
584
741
795
FHA mutual mortgage and cooperative housing insurance
funds liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥2
¥2
¥2
Outstandings ...............................................................
15
13
11
FHA general and special risk insurance funds liquidating
account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥5
¥6
¥6
Outstandings ...............................................................
107
101
95
FHA-General and special risk direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

.............
.............
.............
.............

120
120
120
120

120
120
120
240

Housing for the elderly or handicapped fund liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
7
192 .............
Change in outstandings ...............................................
¥131
131
¥63
Outstandings ...............................................................
8,331 8,462 8,399
FHA-Mutual mortgage insurance direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

.............
.............
.............
.............

200
200
200
200

200
200
199
399

Government National Mortgage Association
Guarantees of mortgage-backed securities liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
149
314
378
Change in outstandings ...............................................
¥16
27
49
Outstandings ...............................................................
333
360
409
Department of the Interior
Bureau of Reclamation
Bureau of reclamation loan liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ............................................... .............
¥3
¥3
Outstandings ...............................................................
83
80
77
Bureau of Reclamation direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

16
12
12
31

33
28
28
59

36
34
34
93

Emergency fund:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥1
¥1
¥1
Outstandings ...............................................................
6
5
4

157

UNDERWRITING FEDERAL CREDIT AND INSURANCE

Table 8–9.

DIRECT LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT—Continued
(in millions of dollars)

Agency or Program

1995
actual

Estimate
Agency or Program
1996

1997

National Park Service

1995
actual

Estimate
1996

1997

Federal Railroad Administration

Construction:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥1 .............
¥1
Outstandings ...............................................................
7
7
6
Bureau of Indian Affairs

Amtrak corridor improvement loans liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ............................................... .............
¥1
¥1
Outstandings ...............................................................
7
6
5

Revolving fund for loans liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥9
¥7
¥8
Outstandings ...............................................................
67
60
52

Amtrak corridor improvement direct loan financing account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... .............
2 .............
Change in outstandings ............................................... .............
2 .............
Outstandings ...............................................................
3
5
5

Indian loan guaranty and insurance fund liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
3
4
4
Change in outstandings ...............................................
3 ............. .............
Outstandings ...............................................................
40
40
40

Railroad rehabilitation and improvement liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥3
¥3
¥3
Outstandings ...............................................................
67
64
61

Indian direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

Railroad rehabilitation and improvement direct loan financing account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
6 ............. .............
Change in outstandings ...............................................
4 ............. .............
Outstandings ...............................................................
4
4
4

11 ............. .............
¥14 ............. .............
¥5
¥5
¥3
22
17
14

Insular Affairs
Assistance to territories:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥1
¥1
¥1
Outstandings ...............................................................
21
20
19
Department of State
Administration of Foreign Affairs

Maritime Administration
Federal ship financing fund liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
8
50
50
Change in outstandings ...............................................
¥185
42
43
Outstandings ...............................................................
33
75
118
Office of the Secretary

Repatriation loans financing account:
Obligations ....................................................................
1
Loan disbursements ..................................................... .............
Change in outstandings ............................................... .............
Outstandings ...............................................................
1

1
1
1
2

1
1
1
3

Department of Transportation
Federal Highway Administration

Minority business resource center direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

15
15
15
9
21
15
2 ............. .............
9
9
9

Department of the Treasury

Alameda corridor project direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

.............
.............
.............
.............

.............
400
............. .............
............. .............
............. .............

Orange County (CA) toll road demonstration project direct
loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

.............
.............
.............
.............

24
24
25
25

Departmental Offices
Community development financial institutions fund direct
loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

.............
.............
.............
.............

34
7
7
7

56
25
25
32

Department of Veterans Affairs
Veterans Benefits Administration

High priority corridors loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

40 ............. .............
37 ............. .............
37 .............
¥37
37
37 .............

Guaranty and indemnity fund liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
4 ............. .............
Change in outstandings ...............................................
¥9
¥1 .............
Outstandings ...............................................................
13
12
12

Right-of-way revolving fund liquidating account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

43 ............. .............
26
24
25
2
¥6
¥5
153
147
142

Direct loan revolving fund liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥3
¥3
¥3
Outstandings ...............................................................
14
11
8

158

ANALYTICAL PERSPECTIVES

Table 8–9.

DIRECT LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT—Continued
(in millions of dollars)

Agency or Program

Estimate

1995
actual

Agency or Program
1996

1997

Loan guaranty revolving fund liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
24 ............. .............
Change in outstandings ...............................................
¥100
¥44
¥44
Outstandings ...............................................................
528
484
440
Vocational rehabilitation direct loan financing account:
Obligations ....................................................................
2
2
2
Loan disbursements .....................................................
2
2
2
Change in outstandings ............................................... ............. ............. .............
Outstandings ...............................................................
1
1
1
Education loan fund liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ............................................... ............. .............
¥1
Outstandings ...............................................................
3
3
2
Loan guaranty direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

923
933
45
473

885
885
196
669

894
894
191
860

Guaranty and indemnity direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

604
604
77
227

1,197
1,197
319
546

1,417
1,417
256
802

Direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

6
6
5
6

20
20
21
27

31
31
31
58

Environmental Protection Agency
Environmental Protection Agency
Abatement, control, and compliance direct loan liquidating
account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
2
1 .............
Change in outstandings ...............................................
¥7
¥8
¥9
Outstandings ...............................................................
96
88
79
Abatement, control, and compliance direct loan financing
account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
21
10
6
Change in outstandings ...............................................
17
5
1
Outstandings ...............................................................
60
65
66
Small Business Administration
Small Business Administration
Business direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

23
33
10
126

60
41
11
137

2,684
1,367
1,267
1,404

Disaster direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

1,311
1,811
1,748
7,157

932
923
734
7,891

1,260
1,057
797
8,688

Disaster loan fund liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
5 ............. .............
Change in outstandings ...............................................
¥277 ¥298 ¥252
Outstandings ...............................................................
1,918 1,620 1,368

1995
actual

Estimate
1996

1997

Business loan fund liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
199
226
159
Change in outstandings ...............................................
¥530 ¥208 ¥229
Outstandings ...............................................................
2,037 1,829 1,600
Other Independent Agencies
District of Columbia
Loans to the District of Columbia for capital projects:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥12
¥13
¥12
Outstandings ...............................................................
75
62
50
Repayable advances to the District of Columbia direct
loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

147
147
147
147

379 .............
379 .............
232 ¥379
379 .............

Export-Import Bank of the United States
Export-Import Bank of the United States liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
193
140
102
Change in outstandings ...............................................
¥520 ¥1,538 ¥829
Outstandings ...............................................................
6,138 4,600 3,771
Debt reduction financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................
Export-Import Bank direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

............. ............. .............
.............
64
30
.............
64
30
.............
64
94
1,598
673
580
1,407

2,955
1,388
1,056
2,463

3,396
1,573
1,222
3,685

Farm Credit System Financial Assistance Corporation
Financial assistance corporation assistance fund, liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥48
¥41
¥42
Outstandings ...............................................................
1,010
969
927
Bank Insurance
Bank insurance fund:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥5
¥19 .............
Outstandings ...............................................................
132
113
113
FSLIC Resolution
FSLIC resolution fund:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ...............................................
¥31
¥32
¥31
Outstandings ...............................................................
95
63
32
Federal Emergency Management Agency
Disaster assistance direct loan liquidating account:
Obligations .................................................................... ............. ............. .............
Loan disbursements ..................................................... ............. ............. .............
Change in outstandings ............................................... .............
¥44 .............
Outstandings ...............................................................
59
15
15

159

UNDERWRITING FEDERAL CREDIT AND INSURANCE

Table 8–9.

DIRECT LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT—Continued
(in millions of dollars)

Agency or Program

Disaster assistance direct loan financing account:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

1995
actual

140
44
14
90

Estimate
Agency or Program
1996

1997

36
112
89
179

25
25
¥48
131

Estimate
1996

1997

Community development credit union revolving loan fund:
Obligations .................................................................... ............. ............. .............
Loan disbursements .....................................................
2
2
2
Change in outstandings ............................................... ............. ............. .............
Outstandings ...............................................................
5
5
5

National Credit Union Administration

Tennessee Valley Authority

Credit union share insurance fund:
Obligations .................................................................... .............
Loan disbursements ..................................................... .............
Change in outstandings ...............................................
¥3
Outstandings ............................................................... .............
Central liquidity facility:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

1995
actual

.............
.............
.............
.............

2
2
5
1
2 .............
2
2
.............
.............
.............
.............

.............
.............
.............
.............

Tennessee Valley Authority fund:
Obligations ....................................................................
Loan disbursements .....................................................
Change in outstandings ...............................................
Outstandings ...............................................................

45
45
¥6
150

55
55
2
152

106
106
31
183

Total, Direct loan transactions:
Obligations .................................................................... 30,901 34,373 45,451
Loan disbursements ..................................................... 21,982 27,683 34,710
Change in outstandings ...............................................
1,628 8,621 14,964
Outstandings ............................................................... 163,323 171,944 186,908
1 CCC

direct loans for crop price support, by law, are not subject to credit reform treatment.

160

ANALYTICAL PERSPECTIVES

Table 8–10.

GUARANTEED LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT
(in millions of dollars)

Agency or Program

Estimate

1995
actual

Agency or Program
1996

1997

1995
actual

Estimate
1996

1997

Department of Agriculture

Funds Appropriated to the President

Farm Service Agency

International Security Assistance
Foreign military loan liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥536
¥442
¥395
Outstandings ...................................................
6,610
6,168
5,773
Agency for International Development

Agricultural credit insurance fund liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans .....................................
3 ................. .................
Change in outstandings ...................................
¥674
¥317
¥212
Outstandings ...................................................
1,316
999
787

2,000
2,000
2,000
9,286

Agricultural credit insurance fund guaranteed loan
financing account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

1,938
1,878
1,029
4,979

2,450
1,922
827
5,806

2,650
2,573
1,296
7,102

Housing and other credit guaranty programs liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans .....................................
34
27
50
Change in outstandings ...................................
¥28
¥45
¥24
Outstandings ...................................................
2,009
1,964
1,940

Commodity credit corporation export guarantee financing account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

5,700
2,518
¥5,888
4,874

5,700
5,700
3,091
7,965

5,500
5,500
2,048
10,013

Private sector revolving fund liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ................................... ................. .................
¥17
Outstandings ...................................................
19
19
2

Commodity credit corporation guaranteed loans liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥1,723
¥114
¥75
Outstandings ...................................................
206
92
17

Loan guarantees to Israel financing account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

1,783
1,783
1,783
5,346

1,940
1,940
1,940
7,286

Microenterprise and other development guaranteed
loan financing account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

48
4
4
26

38
20
19
45

38
36
35
80

Housing and other credit guaranty programs guaranteed loan financing account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

148
120
120
179

41
131
131
310

42
112
112
422

Assistance for the New Independent States of the
Former Soviet Union: Ukraine export credit insurance financing account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

.................
.................
.................
.................

106 .................
90
16
90
¥35
90
55

Overseas Private Investment Corporation
Overseas Private Investment Corporation liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥69
¥69
¥61
Outstandings ...................................................
287
218
157
Overseas private investment corporation guaranteed loan financing account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

1,891
575
561
948

2,000
1,627
1,602
2,550

2,250
1,765
1,465
4,015

Natural Resources Conservation Service
Agricultural resource conservation demonstration
guaranteed loan financing account:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ................................... ................. ................. .................
Outstandings ...................................................
17
17
17
Rural Utilities Service
Rural communication development fund liquidating
account:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ................................... ................. ................. .................
Outstandings ...................................................
5
5
5
Rural development insurance fund liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans .....................................
7
19 .................
Change in outstandings ...................................
¥102
¥94
¥94
Outstandings ...................................................
602
508
414
Rural water and waste water disposal guaranteed
loan financing account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

475
217
183
494

50 .................
3
12
¥484
12
10
22

Rural electrification and telephone revolving fund
liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥17
¥20
¥22
Outstandings ...................................................
687
667
645

161

UNDERWRITING FEDERAL CREDIT AND INSURANCE

Table 8–10.

GUARANTEED LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT—Continued
(in millions of dollars)

Agency or Program

Estimate

1995
actual

Agency or Program
1996

1997

Rural Housing Service
Rural housing insurance fund liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥5
¥4
¥3
Outstandings ...................................................
36
32
29

1,049
859
809
2,085

1,700
1,466
1,373
3,458

2,400
2,161
2,009
5,467

Rural community facility loans guaranteed financing
account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

.................
.................
.................
.................

75
40
91
91

100
45
40
131

.................
.................
.................
.................

700
515
1,183
1,183

750
638
507
1,690

Department of Commerce
Economic Development Administration
Economic development revolving fund liquidating
account:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥11
¥2
¥1
Outstandings ...................................................
19
17
16
National Oceanic and Atmospheric Administration

75
32
5
54

25 .................
25 .................
19
¥6
73
67

Federal ship financing fund, fishing vessels liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥21 ................. .................
Outstandings ...................................................
142
142
142
Department of Education
Office of Postsecondary Education
Federal family education loan liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans .....................................
19
19
5
Change in outstandings ...................................
¥6,801 ¥6,801 ¥5,188
Outstandings ...................................................
29,573
22,772
17,584
Federal family education loan program, financing
account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

1997

Historically Black College and University Capital financing—Financing account:
Commitments ....................................................
357 ................. .................
New guaranteed loans ..................................... .................
65
75
Change in outstandings ................................... .................
64
74
Outstandings ................................................... .................
64
138
Health Resources and Services Administration

Rural Business-Cooperative Service

Fishing vessel obligations guarantees financing account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

Estimate
1996

Department of Health and Human Services

Rural housing insurance fund guaranteed loan financing account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

Rural business and industry loans guaranteed financing account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

1995
actual

19,603
20,321
16,289
56,557

20,433
18,369
18,620
75,177

19,114
18,587
13,447
88,624

Health Resources and Services:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥2
¥1
¥1
Outstandings ...................................................
11
10
9
Health professions graduate student loan guaranteed loan financing account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

275
275
274
1,163

210
210
207
1,370

140
140
132
1,502

Health professions graduate student loan insurance
fund liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥64
¥68
¥73
Outstandings ...................................................
1,657
1,589
1,516
Health loan funds:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥48
¥39
¥31
Outstandings ...................................................
261
222
191
Department of Housing and Urban Development
Public and Indian Housing Programs
Low-rent public housing—loans and other expenses:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥281
¥300
¥325
Outstandings ...................................................
4,132
3,832
3,507
Indian housing loan guarantee—financing account:
Commitments ....................................................
22
New guaranteed loans ..................................... .................
Change in outstandings ................................... .................
Outstandings ................................................... .................

37
28
28
28

37
33
33
61

Community Planning and Development
Revolving fund (liquidating programs) :
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥4
¥1
¥1
Outstandings ...................................................
4
3
2
Community development loan guarantees financing
account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

1,844
243
202
317

1,500
1,672
1,632
1,949

2,000
1,750
1,685
3,634

Community development loan guarantees liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans .....................................
27
20
15
Change in outstandings ...................................
¥51
¥50
¥45
Outstandings ...................................................
246
196
151

162

ANALYTICAL PERSPECTIVES

Table 8–10.

GUARANTEED LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT—Continued
(in millions of dollars)

Agency or Program

1995
actual

Estimate
Agency or Program
1996

1997

Housing Programs

1995
actual

Estimate
1996

1997

Maritime Administration

FHA mutual mortgage and cooperative housing insurance funds liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ................................... ¥22,543 ¥14,610 ¥10,526
Outstandings ...................................................
96,145
81,535
71,009
FHA general and special risk insurance funds liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥5,025 ¥2,971 ¥2,210
Outstandings ...................................................
47,729
44,758
42,548

Federal ship financing fund liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥166
¥199
¥179
Outstandings ...................................................
981
782
603
Maritime guaranteed loan (Title XI) financing account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

418
418
428
742

571
571
515
1,257

800
800
694
1,951

Department of Veterans Affairs

FHA-General and special risk guaranteed loan financing account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

10,138
9,622
9,229
35,457

11,824
9,971
3,515
38,972

12,933
10,741
5,417
44,389

Mutual mortgage insurance guaranteed loan financing account :
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

50,323
40,142
37,831
222,021

77,793
51,543
30,358
252,379

70,721
58,592
28,530
280,909

Veterans Benefits Administration

Government National Mortgage Association
Guarantees of mortgage-backed securities liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans .....................................
63,727
94,440
81,575
Change in outstandings ...................................
18,858
25,749
9,354
Outstandings ...................................................
463,848 489,597 498,951
Guarantees of mortgage-backed securities financing account:
Commitments ....................................................
142,000 110,000 110,000
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ................................... ................. ................. .................
Outstandings ................................................... ................. ................. .................
Department of the Interior

Guaranty and indemnity fund liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥1,099 ¥1,102 ¥1,022
Outstandings ...................................................
16,569
15,467
14,445
Loan guaranty revolving fund liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ................................... ¥22,891 ¥8,466 ¥3,319
Outstandings ...................................................
15,774
7,308
3,989
Loan guaranty guaranteed loan financing account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

1
1
834
836

1
1
674
1,510

1
1
685
2,195

Guaranty and indemnity guaranteed loan financing
account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

22,161
22,161
20,213
121,307

24,032
24,032
21,462
142,769

24,547
24,547
21,716
164,485

Small Business Administration
Small Business Administration

Bureau of Indian Affairs
Indian loan guaranty and insurance fund liquidating
account:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥43
¥25
¥19
Outstandings ...................................................
103
78
59

Pollution control equipment fund liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥11
¥9
¥8
Outstandings ...................................................
95
86
78

Indian guaranteed loan financing account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

Business guaranteed loan financing account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

47
67
55
109

35
43
32
141

35
50
34
175

Department of Transportation
Federal Aviation Administration
Aircraft purchase loan guarantee program:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥3
¥2 .................
Outstandings ...................................................
2 ................. .................

9,709
8,402
5,611
18,618

13,921
10,413
6,607
25,225

11,653
11,864
6,789
32,014

Business loan fund liquidating account:
Commitments .................................................... ................. ................. .................
New guaranteed loans .....................................
4 ................. .................
Change in outstandings ...................................
¥1,804 ¥1,302 ¥1,030
Outstandings ...................................................
7,675
6,373
5,343

163

UNDERWRITING FEDERAL CREDIT AND INSURANCE

Table 8–10.

GUARANTEED LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT—Continued
(in millions of dollars)

Agency or Program

1995
actual

Estimate
Agency or Program
1996

1997

Other Independent Agencies

Estimate
1996

1997

Tennessee Valley Authority

Export-Import Bank of the United States
Export-Import Bank of the United States liquidating
account:
Commitments .................................................... ................. ................. .................
New guaranteed loans .....................................
288
300
275
Change in outstandings ...................................
¥1,010 ¥1,193
¥913
Outstandings ...................................................
4,010
2,817
1,904
Export-Import Bank guaranteed loan financing account:
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

1995
actual

10,267
7,854
1,990
13,736

13,781
8,455
423
14,159

14,294
9,618
323
14,482

FSLIC Resolution
FSLIC resolution fund:
Commitments .................................................... ................. ................. .................
New guaranteed loans ..................................... ................. ................. .................
Change in outstandings ...................................
¥360 ................. .................
Outstandings ................................................... ................. ................. .................

Tennessee Valley Authority fund:
Commitments .................................................... ................. ................. .................
New guaranteed loans .....................................
1 .................
1
Change in outstandings ................................... ................. ................. .................
Outstandings ................................................... ................. ................. .................
Subtotal, Guaranteed loans (gross):
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

280,272 288,963 282,005
181,602 233,677 233,577
45,028
81,522
72,602
1,190,618 1,272,140 1,344,742

Less, secondary guaranteed loans: 1
GNMA guarantees of FmHA/VA/FHA pools:
Commitments .................................................... ¥142,000 ¥110,000 ¥110,000
New guaranteed loans ..................................... ¥63,727 ¥94,440 ¥81,575
Change in outstandings ................................... ¥18,858 ¥25,749 ¥9,354
Outstandings ................................................... ¥463,848 ¥489,597 ¥498,951
Total, primary guaranteed loans: 2
Commitments ....................................................
New guaranteed loans .....................................
Change in outstandings ...................................
Outstandings ...................................................

138,272
117,875
26,170
726,770

178,963
139,237
55,773
782,543

172,005
152,002
63,248
845,791

1 Loans guaranteed by FHA, VA, or FmHA are included above. GNMA places a secondary guarantee on
these loans, so they are deducted here to avoid double counting.
2 When guaranteed loans result in loans receivable, they are shown in the direct loan table.

164

ANALYTICAL PERSPECTIVES

Table 8–11. LENDING AND BORROWING BY GOVERNMENT-SPONSORED ENTERPRISES (GSEs)
(In millions of dollars)
Estimate
Enterprise

1995 actual

LENDING
Student Loan Marketing Association .................................................

Federal National Mortgage Association:
Corporation Accounts .....................................................................

Mortgage-backed securities ...........................................................

Farm Credit System:
Banks for cooperatives ..................................................................

Farm Credit Banks .........................................................................

Agricultural credit banks .................................................................

Federal Home Loan Bank system:
Federal home loan banks ..............................................................

Federal Home Loan Mortgage Corporation:
Corporation accounts .....................................................................

Participation certificate pools .........................................................

Subtotal, lending (gross) ............................................................

Less guaranteed loans held as direct loans by:
Federal National Mortgage Association ........................................
Student Loan Marketing

Association 1

...........................................

Other ...............................................................................................
Total GSE lending (net) ............................................................

BORROWING
Student Loan Marketing Association 1 ...............................................
Federal National Mortgage Association .............................................
Farm Credit System:
Banks for cooperatives ..................................................................
Farm credit banks ..........................................................................
Agricultural credit banks .................................................................
Federal Housing Finance Board:
Federal home loan banks ..............................................................
The Financing Corporation ............................................................
Resolution Funding Corporation ....................................................

1996

1997

Obligations ..................................
New transactions ........................
Net change .................................
Outstandings ...............................

11,021
11,021
3,565
41,636

10,553
10,553
¥3,434
38,202

10,441
10,441
¥1,866
36,336

44,501
44,574
28,608
250,374
¥51,497
89,130
36,073
559,585

64,526
63,686
31,691
282,065
129,045
129,045
58,802
618,387

69,773
67,815
33,202
315,267
129,247
129,247
54,204
672,591

Obligations ..................................
New transactions ........................
Net change .................................
Outstandings ...............................
Obligations ..................................
New transactions ........................
Net change .................................
Outstandings ...............................
Obligations ..................................
New transactions ........................
Net change .................................
Outstandings ...............................

8,690
8,690
619
2,273
22,036
22,036
345
14,231
42,644
42,638
1,357
14,231

9,976
9,976
205
2,478
22,103
22,492
568
14,800
44,000
44,000
569
14,800

10,076
10,076
208
2,686
22,436
22,880
542
15,600
45,000
45,000
800
15,600

Obligations ..................................
New transactions ........................
Net change .................................
Outstandings ...............................

724,349
724,349
5,561
122,128

725,000
725,000
¥1,628
120,500

725,000
725,000
...................
120,500

37,389
37,389
28,373
95,052
70,071
70,071
¥6,626
457,046
909,204
1,049,898
97,875
1,578,860

48,876
48,876
32,502
127,554
110,877
110,877
21,017
478,063
1,164,956
1,164,505
140,292
1,719,152

41,615
41,615
24,854
152,408
108,540
108,540
30,493
508,556
1,162,128
1,160,614
142,437
1,861,589

Net change .................................
Outstandings ...............................
Net change .................................
Outstandings ...............................
Net change .................................
Outstandings ...............................

2,247
23,027
3,565
41,636
3,405
7,860

¥346
22,681
¥3,434
38,202
...................
7,860

¥122
22,559
¥1,866
36,336
...................
7,860

Obligations ..................................
New transactions ........................
Net change .................................
Outstandings ...............................

909,204
1,049,898
88,658
1,506,337

1,164,956
1,164,505
144,072
1,650,409

1,162,128
1,160,614
144,425
1,794,834

Net change .................................
Outstandings ...............................
Net change .................................
Outstandings ...............................

1,980
51,672
73,945
836,777

¥5,915
45,757
91,506
928,283

¥1,558
44,199
90,068
1,018,351

759
2,458
922
39,041
1,583
15,319

¥7
2,451
734
39,775
465
15,784

¥32
2,419
1,083
40,858
884
16,668

63,027
226,406
1
8,141
¥3

¥9,406
217,000
1
8,142
¥2

...................
217,000
2
8,144
¥2

165

UNDERWRITING FEDERAL CREDIT AND INSURANCE

Table 8–11. LENDING AND BORROWING BY GOVERNMENT-SPONSORED ENTERPRISES (GSEs)—Continued
(In millions of dollars)
Estimate
Enterprise

1995 actual

Federal Home Loan Mortgage Corporation .......................................
Subtotal, borrowing (gross) .......................................................
Less borrowing from other GSEs ......................................................
Less investment in Federal Securities ...............................................
Less borrowing for guaranteed loans held as direct loans by:
Federal National Mortgage Association ........................................
Student Loan Marketing

Association 1

...........................................

Other ...............................................................................................
Total GSE borrowing (net) ........................................................
1 All

1996

1997

Outstandings ...............................
Net change .................................
Outstandings ...............................
Net change .................................
Outstandings ...............................
Net change .................................
Outstandings ...............................
Net change .................................
Outstandings ...............................

30,076
21,038
568,656
163,252
1,778,546
¥3,421
36,387
¥1,375
8,674

30,074
50,536
619,192
127,912
1,906,458
...................
36,387
1,712
10,386

30,072
62,449
681,641
152,894
2,059,352
...................
36,387
491
10,877

2,247
23,027
3,565
41,636
3,935
7,860

¥346
22,681
¥3,434
38,202
...................
7,860

¥122
22,559
¥1,866
36,336
...................
7,860

Net change .................................
Outstandings ...............................

158,301
1,660,962

129,980
1,790,942

154,391
1,945,333

SLMA loans shown in the table above are guaranteed by the Federal Government and therefore also counted as guaranteed loans.

AID TO STATE AND LOCAL GOVERNMENTS 1

State and local governments have a vital constitutional responsibility to provide government services.
They have the major role in providing domestic public
services, such as public education, law enforcement,
roads, water supply, and sewage treatment. The Federal Government contributes to 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, infrastructure, education, and social services. Federal grant outlays were
$225.0 billion in 1995 and are estimated to increase
from $236.7 billion in 1996 to $249.3 billion in 1997.
Grant outlays for payments for individuals, such as
Medicaid, are estimated to be 63 percent of total grants
in 1997; for physical capital investment, 16 percent;
and for all other purposes, largely education, training,
and social services, 21 percent.
States and localities receive Federal loans and guarantees mostly for the purpose of rural development.
Outlays for direct loan and loan guarantee subsidies
to State and local governments are estimated to be
$0.2 billion in both 1996 and 1997. Information on Federal credit activities appears in Chapter 8, ‘‘Underwriting Federal Credit and Insurance.’’
Federal aid to State and local governments is also
provided through tax expenditures. Tax expenditures
are revenue losses due to preferential provisions of the
Federal tax laws, such as special exclusions, exemptions, deductions, credits, deferrals, or tax rates.
The two major tax expenditures benefiting State and
local governments are the deductibility of most nonbusiness State and local taxes, except sales and excise
taxes, from gross income for Federal income tax purposes, and the exclusion of interest on State and local
securities from Federal taxation. These provisions, on
an outlay equivalent basis, are estimated to be $75.2

billion in 1996 and $78.3 billion in 1997. A detailed
discussion of the measurement and definition of tax
expenditures and a complete list of the amount of specific tax expenditures are in Chapter 5, ‘‘Tax Expenditures.’’ As discussed in that chapter, there are generally
interactions among tax expenditure provisions, so that
the estimates above only approximate the aggregate
effect of these provisions.
Tax expenditures that especially aid State and local
governments are displayed separately at the end of
Table 5–4 in that chapter.
TABLE 9–1.

FEDERAL GRANT OUTLAYS BY AGENCY
(in billions of dollars)
Estimate

1995
Actual

1996

1997

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 Interior .........................................................
Department of Justice .........................................................
Department of Labor ...........................................................
Department of Transportation .............................................
Department of Treasury ......................................................
Environmental Protection Agency ......................................
Federal Emergency Management Agency .........................
Welfare allowance ...............................................................
Other agencies ....................................................................

16.4
0.4
16.0
0.2
126.1
22.8
1.8
1.1
7.3
25.8
0.4
2.9
2.0
0.0
1.8

17.6
0.6
17.8
0.2
132.3
22.0
1.8
2.0
7.4
26.6
0.4
2.8
3.4
-0.1
1.8

17.8
0.6
17.5
0.2
145.4
23.3
1.9
3.5
7.4
25.5
0.5
2.8
3.0
-2.1
1.9

Total ...................................................................

225.0

236.7

249.3

Agency

Federal Grants by Agency
Table 9–1 shows the distribution of grants by agency.
Grant outlays for the Department of Health and
Human Services are estimated to be $145.4 billion in
1997, 58 percent of total grants, much more than any
other agency.

HIGHLIGHTS OF THE FEDERAL AID PROGRAM
Major proposals in this budget affect Federal aid to
State and local governments and the important relationships between the levels of government. Through
the use of grants, the Federal government can share
with State and local governments the cost and, ultimately, the benefits of a smarter, healthier, and safer
citizenry. The Administration is committed to a Federal
system that is more efficient and effective and to improving the design and administration of Federal
grants.

State and local governments will enjoy an increased
level of flexibility under the proposals in this Budget.
The Administration supports a fundamental change in
the way the Federal Government finances and administers more than six hundred intergovernmental service
delivery programs—concentrating on the outcomes,
rather than regulating the inputs. Proposed, bipartisan
legislation, the Local Empowerment and Flexibility Act,
provides State and local governments with the opportunity to coordinate better Federal, State, local, and

1 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, loans, and tax expenditures.

167

168
nonprofit funds and services, and to request waivers
from Federal laws and regulations that impede innovation. Nonetheless, greater responsibility accompanies
greater flexibility. Performance-based partnerships will
help ensure that State and local governments will be
held accountable for not only the results they achieve,
but also how these results are achieved.
Medicaid.—Medicaid is the largest grant program
and has estimated outlays of $105.6 billion in 1997.
The President’s budget proposes reforms to Medicaid
that would reduce the rate of growth in Federal spending, while preserving the entitlement to health coverage
for the most vulnerable Americans—children, people
with disabilities, and the elderly. The plan reduces the
growth in Medicaid costs by imposing a ‘‘per capita
cap’’ on Federal Medicaid spending and reducing and
retargeting Disproportionate Share Hospital payments.
Special payments to States and facilities to ease the
transition into the new Medicaid system would be provided. Finally, the plan gives States unprecedented
flexibility to administer their programs more efficiently.
For example, the so-called ‘‘Boren Amendment’’ is repealed, eliminating Federal provider payment requirements for hospitals and nursing homes, and States are
allowed to mandate enrollment in managed care without having to seek Federal waivers. This initiative is
estimated to achieve savings of $59.0 billion over seven
years.
Health Insurance.—States would receive Federal
funds to design and administer a program to assist
people who lose health coverage if they lose their job.
This program would help them purchase coverage for
up to six months. The Administration is requesting $1.5
billion in 1997 for this initiative.
To make insurance more affordable for small businesses, the Federal Government would provide grants
to States for technical assistance in designing and implementing voluntary health insurance purchasing cooperatives. These grants would total $25 million per
year beginning in 1997 and continuing through 2001.
Welfare reform.—The budget seeks to move families
from welfare to work and to reform a range of related
programs. Aid to Families with Dependent Children
would be replaced with a work-oriented, time-limited
conditional entitlement for cash assistance. States
would have broad flexibility in designing programs and
could automatically receive increased funding during
economic downturns. There would be added funding for
child care and work programs. Child support enforcement would be strengthened with new tools for States,
and targeting would be improved in a number of programs.
Education.—This budget includes funds to increase
the technological literacy of children by proposing to
help ensure that all students have access to technologyrich learning environments and to help charter schools
meet the specific needs of a community’s children. The
Administration is requesting $250 million in budget authority for 1997 and $2.0 billion over five years for
the Technology Literacy Challenge Fund designed to

ANALYTICAL PERSPECTIVES

help State and local communities leverage public and
private sector resources necessary to integrate technology into schools. Charter schools would be allowed
to customize their curriculum and obtain waivers from
State and local rules and regulations in exchange for
increasing student achievements. The Administration
is requesting $40 million in budget authority for this
initiative for 1997.
Transportation.—Through the use of Federal-aid
funds for revolving loans and other non-traditional
forms of financial assistance, the State Infrastructure
Banks (SIBs) program would provide States with greater flexibility in developing and financing transportation
projects. The Administration is requesting $250 million
in funding to capitalize SIBs in 1997.
Training.—Opportunity Areas for Out-of-School
Youth would provide grants to selected empowerment
zones (EZ), empowerment communities (EC), and other
communities meeting EZ/EC criteria in order to reduce
significant unemployment among out-of-school youth
through employment and training assistance, combined
with other Federal assistance. Jobs for Residents will
link unemployed youth and adults residing in
empowerment zones and empowerment communities
with jobs outside those areas. The Administration is
requesting $250 million and $50 million, respectively,
for these proposals.
Housing.—The Administration proposes to consolidate HUD programs into three flexible, performancebased funds. It will award most of the funding by formula in the form of a block grant, but focus on clearly
stated national goals. The use of funds by communities
will be judged against measures that are consistent
with national goals but tailored to the situation of each
community. To support this reinvention, HUD will be
transformed into a ‘‘right-side-up, community-first’’
agency by creating single points of contact for all major
localities. HUD will move much of its staff out of Washington and into the communities to operate as problemsolvers.
Agriculture.—The budget proposes a new, more flexible program for distributing the Department of Agriculture’s rural development assistance. The Rural Performance Partnership Program would combine fourteen
existing rural development programs into three funding
streams: rural utilities, rural community facility infrastructure, and rural businesses. USDA’s Rural Economic and Community Development State Directors
would have authority to transfer funding among the
three funding streams. Using performance measures
and incentives, the State Directors would work with
State and local governments, and other communitybased organizations to direct funds to each State’s highest rural economic development priorities. The budget
requests $879 million in budget authority for this initiative for State and local governments and other
intermediaries in 1997.
Environment.—The Administration proposes two performance partnerships in the environmental area. One
would allow States and tribes to combine several cat-

169

AID TO STATE AND LOCAL GOVERNMENTS

egorical grants (i.e., grants that specifically address air
and water quality, or hazardous waste) and the other
proposes to allow States to consolidate the clean water
and drinking water State revolving funds. In addition,
the budget requests funds for grants to expand and
complement the Environmental Protection Agency’s
‘‘brownfields’’ initiative to cleanup polluted urban and
rural areas.
Additional information on these and other Federal
aid proposals are in the 1997 Budget-Supplement vol-

ume. The consolidations noted above are discussed in
Chapters 13 and 14, ‘‘Improving Government Performance’’ and ‘‘Building on Success.’’ Chapter 6, ‘‘Strengthening Health Care,’’ focuses on health issues. Chapter
7, ‘‘Making Work Pay,’’ details welfare reforms. Chapter
8, ‘‘Investing in Education and Training,’’ discusses increases in assistance to help State and local and community schools. Chapter 9, ‘‘Protecting the Environment,’’ discusses environmental issues.

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 for
States that received the grants, as is characteristic of
the present grant programs. 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
Federal Government expenditures until after World
War II.
Table 9–2 displays trends in Federal grants to State
and local governments. Section A shows Federal grants
by function. Functions with a substantial amount of
grants are shown separately. Grants for the national
defense, energy, veterans benefits and services, and the
administration of justice functions are combined in the
‘‘other functions’’ line in the table.
Federal grants for transportation increased to $3.0
billion, or 43 percent of all Federal grants, in 1960
after 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 amounts for education, training, employment,
social services, and health (largely Medicaid).
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 amounts among
functions reflected steady growth of grants for health
(Medicaid) and income security and restraint in most
other areas. The functions with the largest amount of
grants are health and income security, with combined
grant outlays of $166.9 billion or 67 percent of total
grant outlays in 1997.
Section B of the Table shows the composition of
grants divided into three major categories: payments
for individuals, physical capital, and other grants. 2
2 Certain

grants are classified in the budget as both payments for individuals and physical

Grant outlays for payments for individuals, which are
mainly entitlement programs in which the Federal Government and the States share the costs, have grown
significantly as a percent of total grants. In 1980, they
were 36 percent of the total, and by 1995 they had
grown to 63 percent of the total.
These grants are distributed 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 $89.1 billion in 1995, increasing to an
estimated $105.6 billion in 1997. Family support payments to States (AFDC), child nutrition programs, and
housing assistance are also large grants in this category.
Grants for physical capital assist States and localities
with construction and other physical capital activities.
The major capital grants are for highways, but there
are also grants for airports, mass transit, sewage treatment plant construction, community development, and
other facilities. Grants for physical capital were almost
half of total grants in 1960, shortly after grants began
for construction of the Interstate Highway System. The
relative share of these outlays has declined, as payments for individuals have grown. In 1995, grants for
physical capital were 18 percent of total grants.
The other grants are primarily for education, training, employment, and social services. These grants increased to 45 percent of total grants by 1975, but declined to 20 percent of total grants in 1995.
Section B of Table 9–2 also shows these three categories in constant dollars. In constant 1987 dollars,
total grants increased from $127.5 billion in 1980 to
$172.7 billion in 1995, an average annual increase of
2.0 percent. From 1980 to 1995, payments for individuals grew from $46.2 billion to $106.8 billion, an average annual increase of 5.7 percent; grants for physical
capital increased from $27.7 billion to $32.8 billion, an
average annual increase of 1.1 percent, and other
grants decreased from $53.5 billion to $33.1 billion, an
average annual decrease of 3.2 percent.
Section C of this table shows grants as a percent
of Federal outlays, State and local expenditures, and
gross domestic product. Grants declined as a percent
of total Federal outlays from 15 percent in 1980 to
capital spending. In the text and tables in this section, these grants are included in the
category for physical capital spending.

170

ANALYTICAL PERSPECTIVES
Table 9–2.

TRENDS IN FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS
(Outlays; dollar amounts in billions)
Actual

1960

1965

1970

1975

Estimate

1980

1985

1990

1995

1996

1997

1998

2000

2001

2002

A. 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 ...............................................

0.1
0.2
3.0

0.2
0.5
4.1

0.4
0.6
4.6

2.4
0.4
5.9

5.4
0.6
13.0

4.1
2.4
17.0

3.7
1.3
19.2

4.1
0.8
25.8

4.0
0.7
26.6

4.0
0.7
24.5

4.0
0.7
25.0

4.0
0.7
23.5

4.1
0.6
21.8

4.2
0.6
20.6

4.1
0.7
21.5

0.1

0.6

1.8

2.8

6.5

5.2

5.0

7.2

9.7

9.1

8.1

7.2

6.1

5.7

0.5
0.2
2.6
0.2
*

1.1
0.6
3.5
0.2
0.1

6.4
3.8
5.8
0.5
0.1

12.1
8.8
9.4
7.1
0.9

21.9
15.8
18.5
8.6
1.2

17.8
24.5
27.2
6.8
0.9

23.4
43.9
35.2
2.3
1.4

34.1
93.6
55.1
2.2
2.0

36.6
99.2
54.9
2.2
2.9

36.4
111.2
55.7
2.3
5.4

38.0
117.5
56.7
2.4
5.6

39.2
122.9
57.8
2.7
5.9

40.4
128.4
58.4
3.0
6.4

42.0
131.9
59.8
3.2
6.4

43.9
136.7
61.0
3.4
5.3

Total .......................................

7.0

10.9

24.1

49.8

91.4

105.9

135.3

225.0

236.7

249.3

257.9

263.9

269.1

274.4

282.3

Current dollars:
Payments for individuals 1 .........
Physical capital 1 ........................
Other grants ...............................

2.5
3.3
1.2

3.7
5.0
2.2

8.7
7.1
8.3

16.8
10.9
22.2

32.6
22.5
36.2

49.3
24.9
31.6

75.7
27.2
32.5

141.2
39.6
44.2

146.0
41.3
49.3

156.3
40.2
52.8

163.0
39.5
55.4

169.2
37.8
56.8

175.1
35.8
58.2

182.9
34.0
57.5

189.1
34.5
58.7

B. Composition:

Total .......................................

7.0

10.9

24.1

49.8

91.4

105.9

135.3

225.0

236.7

249.3

257.9

263.9

269.1

274.4

282.3

Percentage of total grants:
Payments for individuals 1 .........
Physical capital 1 ........................
Other grants ...............................

35%
47
17

34%
46
20

36%
29
34

34%
22
45

36%
25
40

47%
24
30

56%
20
24

63%
18
20

62%
17
21

63%
16
21

63%
15
21

64%
14
22

65%
13
22

67%
12
21

Total .......................................

100%

Constant (FY 1987) dollars:
Payments for individuals 1 .........
Physical capital 1 ........................
Other grants ...............................

9.0
13.7
6.3

12.5
19.5
9.8

24.7
21.9
26.9

35.1
20.6
49.6

46.2
27.7
53.5

52.9
25.8
34.1

66.1
24.9
28.5

106.8
32.8
33.1

107.6
33.6
36.1

111.8
31.9
37.8

113.3
30.6
38.7

114.4
28.6
38.8

115.1
26.4
38.8

116.9
24.5
37.4

117.6
24.3
37.3

Total .......................................

29.1

41.8

73.6

105.4

127.5

112.9

119.5

172.7

177.3

181.5

182.6

181.8

180.4

178.9

179.2

8%
18%
15%
1%

9%
18%
16%
2%

12%
23%
20%
2%

15%
22%
24%
3%

15%
22%
28%
3%

11%
18%
23%
3%

11%
17%
20%
2%

15%
22%
23%
3%

15%
22%
N/A
3%

15%
21%
N/A
3%

15%
20%
N/A
3%

Federal capital grants ....................
State and local source financing ...

25%
75

26%
74

37%
63

31%
69

23%
77

26%
74

N/A
N/A

Total .......................................

100%

C. Total grants as a percent of:
Federal outlays:
Total ...........................................
Domestic programs 2 .................
State and local expenditures .........
Gross domestic product .................
D. As a share of total State and
local capital spending:

NA: Not available.
* $50 million or less.
1 Grants that are both payments for individuals and capital investment are shown under capital investment.
2 Excludes national defense, international affairs, net interest, and undistributed offsetting receipts.

11 percent in 1985 and 1990, and are estimated to
increase to 15 percent in 1996 and 1997, the same
as in 1980. Grants as a percentage of domestic spending
are estimated to be 21 percent in 1997.
As a percent of total State and local expenditures,
grants have declined from 28 percent in 1980 to 23
percent in 1995.

Section D 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 37
percent in 1980 to 26 percent in 1995, reflecting restraint in Federal spending and increased capital
spending by States and localities financed from their
own sources, such as taxes or borrowing.

171

AID TO STATE AND LOCAL GOVERNMENTS

OTHER INFORMATION ON FEDERAL AID TO STATE AND LOCAL GOVERNMENTS
Additional information regarding aid to State and
local governments can be found elsewhere in this budget and in other documents.
Major public physical capital investment programs
providing Federal grants to State and local governments are identified in Chapter 6, ‘‘Federal Investment
Spending and Capital Budgeting.’’
Data for summary and detailed grants to State and
local governments can be found in many sections of
a separate document entitled Historical Tables. Section
12 of that document 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 Investment: Major Physical Capital, Research and Development, and Education and
Training); Section 11 (Federal Government Payments
for Individuals); and Section 15 (Total (Federal and
State and Local) Government Finances).
In addition to these sources, 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.
Government 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 broad 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 volume

in Chapter 19, ‘‘National Income and Product Accounts.’’
Budget Information for States (BIS) provides estimates of State-by-State funding allocations for the largest formula grant programs for the past, present, and
budget year. These programs comprise approximately
85 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, a report prepared by
the Bureau of the Census, shows Federal spending by
State for grants and other spending for the most recently completed fiscal year.
Consolidated Federal Funds Report is an annual document that shows the distribution of Federal spending
by State and 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 for Federal Domestic Assistance is a primary reference source for communities wishing to apply
for grants and other domestic assistance. The Catalog
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.

172

ANALYTICAL PERSPECTIVES

DETAILED FEDERAL AID TABLE
Table 9–3, ‘‘Federal Grants to State and Local Governments-Budget Authority and Outlays,’’ provides detailed budget authority and outlay data for grants.
Table 9–3. FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS—BUDGET AUTHORITY AND OUTLAYS
(in millions of dollars)
Budget Authority
Function, Agency and Program

1995
Actual

1996
Estimate

Outlays
1997
Estimate

1995
Actual

National defense:
Department of Defense—Military:
Military Construction:
Military construction, Army National Guard .................................................................................
70 ................... ...................
Federal Emergency Management Agency:
Emergency management planning and assistance .................................................................... ................... ................... ...................
Total, national defense ..............................................................................................................

70 ................... ...................

1996
Estimate

1997
Estimate

10 ...................

Energy:
Department of Energy:
Energy Programs:
Energy conservation .....................................................................................................................
Tennessee Valley Authority:
Tennessee Valley Authority fund .................................................................................................

268

149

168

240

228

173

252

254

265

252

254

265

Total, energy ...............................................................................................................................

520

403

433

492

482

438

................... ................... ...................
39
69
85

5
244

3
235

2
118

103

5
3
3
56
40
32
................... ................... ...................

3
11
–3

1
51
8

1
56
4

Natural resources and environment:
Department of Agriculture:
Natural Resources Conservation Service:
Resource conservation and development ...................................................................................
Watershed and flood prevention operations ...............................................................................
Forest Service:
State and private forestry ............................................................................................................
Department of Commerce:
National Oceanic and Atmospheric Administration:
Operations, research, and facilities .............................................................................................
Construction ..................................................................................................................................
Coastal zone management fund .................................................................................................
Department of the Interior:
Bureau of Land Management:
Miscellaneous permanent payment accounts .............................................................................
Minerals Management Service:
National forests fund, payment to States ....................................................................................
Leases of lands acquired for flood control, navigation, and allied purposes ............................
Office of Surface Mining Reclamation and Enforcement:
Regulation and technology ..........................................................................................................
Abandoned mine reclamation fund ..............................................................................................
Bureau of Reclamation:
Bureau of reclamation loan subsidy ............................................................................................
United States Fish and Wildlife Service:
Cooperative endangered species conservation fund ..................................................................
Wildlife conservation and appreciation fund ...............................................................................
Sport fish restoration ....................................................................................................................
Miscellaneous permanent appropriations ....................................................................................
National Park Service:
Urban park and recreation fund ..................................................................................................
Land acquisition and State assistance ........................................................................................
Historic preservation fund ............................................................................................................
Everglades restoration fund .........................................................................................................
Miscellaneous permanent appropriations ....................................................................................
Environmental Protection Agency:
State and tribal assistance grants ...............................................................................................
Environmental programs and management ................................................................................
Abatement, control, and compliance loan subsidy .....................................................................
Hazardous substance superfund .................................................................................................
Leaking underground storage tank trust fund .............................................................................

103

163

2
1

52
138

48
140

51
146

31
160

53
121

50
159

9
1
243
247

8
1
266
240

16
1
300
231

7
1
237
191

8
1
228
207

9
1
237
229

................... ................... ...................
4
5
25
2
2
23
28
46
36
38
47
48
................... ...................
80 ................... ...................
...................
1
1 ...................
1

3
20
41
40
1

1,885
2,863
2,852
456 ................... ...................
................... ................... ...................
120
120
145
61
41
58

2,455
232
9
153
63

2,500
128
4
153
43

2,579
55
2
125
49

173

AID TO STATE AND LOCAL GOVERNMENTS

Table 9–3. FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS—BUDGET AUTHORITY AND OUTLAYS—Continued
(in millions of dollars)
Budget Authority
Function, Agency and Program

Total, natural resources and environment .............................................................................
Agriculture:
Department of Agriculture:
Cooperative State Research, Education, and Extension Service:
Extension activities .......................................................................................................................
Cooperative state research activities ...........................................................................................
Agricultural Marketing Service:
Payments to States and possessions .........................................................................................
Farm Service Agency:
State mediation grants .................................................................................................................
Outreach for socially disadvantaged farmers ..............................................................................
Commodity credit corporation fund .............................................................................................
Total, agriculture ........................................................................................................................
Commerce and housing credit:
Department of Commerce:
National Oceanic and Atmospheric Administration:
Promote and develop fishery products and research pertaining to American fisheries ...........
National Institute of Standards and Technology:
Industrial technology services ......................................................................................................
Total, commerce and housing credit ..................................................................................
Transportation:
Department of Transportation:
Federal Highway Administration:
High priority corridors loan subsidy .............................................................................................
Alameda corridor project loan program .......................................................................................
Orange County (CA) toll road demonstration project subsidy ...................................................
Highway-related safety grants .....................................................................................................
Motor carrier safety grants ..........................................................................................................
Federal-aid highways ...................................................................................................................
State infrastructure banks ............................................................................................................
Miscellaneous appropriations .......................................................................................................
Miscellaneous highway trust funds ..............................................................................................
National Highway Traffic Safety Administration:
Highway traffic safety grants .......................................................................................................
Federal Railroad Administration:
Office of the Administrator ...........................................................................................................
Local rail freight assistance .........................................................................................................
Alaska railroad rehabilitation ........................................................................................................
Railroad research and development ...........................................................................................
Conrail commuter transition assistance .......................................................................................
Northeast corridor high-speed rail infrastructure program ..........................................................
Federal Transit Administration:
Research, training, and human resources ..................................................................................
Interstate transfer grants-transit ...................................................................................................
Washington metropolitan area transit authority ..........................................................................
Formula grants .............................................................................................................................
Transit planning and research .....................................................................................................
Discretionary grants (trust fund) ..................................................................................................
Miscellaneous expired accounts ..................................................................................................
Federal Aviation Administration:
Grants-in-aid for airports (Airport and airway trust fund) ...........................................................
Research, engineering and development (Airport and airway trust fund) .................................
Coast Guard:
Research, development, test, and evaluation .............................................................................
Boat safety ...................................................................................................................................
Research and Special Programs Administration:
Pipeline safety ..............................................................................................................................
Emergency preparedness grants .................................................................................................
Total, transportation ..................................................................................................................

1995
Actual

1996
Estimate

Outlays
1997
Estimate

1995
Actual

1996
Estimate

1997
Estimate

3,579

4,053

4,220

4,148

4,009

3,958

439
226

428
222

423
222

435
225

429
231

425
222

3
3
115

2
1
10

3
3
54

3
1
115

2
3
10

3
2
54

787

664

706

780

676

707

6
...................
8
...................
82
20,719
...................
321
–11

...................
...................
...................
2
73
17,671
...................
...................
...................

190

169

...................
6 ................... ...................
59 ................... ...................
21
................... ................... ...................
2
...................
9
12
8
89
66
75
79
21,720
18,945
19,842
19,090
250 ................... ...................
37
...................
192
295
175
...................
102
97
70
185

155

146

165

3 ................... ...................
3 ................... ...................
10 ................... ...................
16
13
11
...................
10 ................... ...................
4
6
...................
6
1
2
6
4
................... ................... ...................
1
2
13
5
1
10 ...................
1
5
................... ................... ...................
48 ................... ...................
200
200
200
2,492
2,052
2,152
55
54
54
1,691
1,665
2,880
................... ................... ...................

2
152
218
1,901
43
2,025
12

5
27
206
2,109
45
1,978
14

5
12
159
1,972
56
1,983
10

67
41

2,214
60

1,350
60

1,826
33

1,622
57

1,483
63

1
50

1
60

1
45

1
62

1
43

1
42

12
5

12
6

14
6

10
5

11
6

14
6

25,995

24,256

29,076

25,787

26,617

25,492

174

ANALYTICAL PERSPECTIVES

Table 9–3. FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS—BUDGET AUTHORITY AND OUTLAYS—Continued
(in millions of dollars)
Budget Authority
Function, Agency and Program

Community and regional development:
Department of Agriculture:
Rural Utilities Service:
Distance learning and medical link grants ..................................................................................
Rural water and waste disposal loans subsidy ..........................................................................
Emergency community water assistance grants .........................................................................
Rural water and waste disposal grants .......................................................................................
Rural development insurance fund subsidy ................................................................................
Rural Housing and Community Development Service:
Rural community facility loans subsidy .......................................................................................
Rural community fire protection grants .......................................................................................
Rural Business and Cooperative Development Service:
Rural technology and cooperative development grants .............................................................
Rural business and industry loans subsidy ................................................................................
Rural business enterprise grants .................................................................................................
Department of Commerce:
Economic Development Administration:
Economic development assistance programs .............................................................................
Department of Housing and Urban Development:
Community Planning and Development:
Community development grants fund ..........................................................................................
Urban development action grants ...............................................................................................
Supplemental assistance for facilities to assist the homeless ...................................................
Community development loan guarantees subsidy ....................................................................
Department of the Interior:
Bureau of Indian Affairs:
Operation of Indian programs ......................................................................................................
Indian direct loan subsidy ............................................................................................................
Indian guaranteed loan subsidy ..................................................................................................
Appalachian Regional Commission:
Appalachian regional development programs .............................................................................
Federal Emergency Management Agency:
Emergency management planning and assistance ....................................................................
Disaster relief ...............................................................................................................................
Total, community and regional development .........................................................................

1995
Actual

1996
Estimate

Outlays
1997
Estimate

1995
Actual

1996
Estimate

1997
Estimate

8
8
20
6
26
17
...................
109
61 ...................
86
95
10 ................... ...................
15
12
6
415
331
490
295
379
357
212 ................... ...................
150 ................... ...................
...................
3

42
2

13
2

...................
3

27
3

20
2

2
...................
34

2
6
32

3
7
32

...................
...................
23

1
6
29

2
7
31

431

339

334

322

441

417

4,819
4,600
4,900
4,333
–18 ................... ...................
20
................... ................... ...................
8
...................
33
47 ...................

5,093
37
6
17

4,931
30
3
40

91
101
102
1 ................... ...................
10
5
5

91
93
111
1 ................... ...................
9
10
6

266

164

182

170

192

124
2,874

122
2,798

125
256

79
1,693

112
3,142

124
2,735

9,282

8,694

6,561

7,230

9,690

9,126

15
9

28
31

21
44

69
803
6
60
6,785
1,288

75
808
7
530
7,098
1,473

66
687
5
647
7,423
1,268

189

200

159

2,938
2,113
7

3,511
2,359
6

3,281
2,381
6

1,449

1,481

1,413

82
35

76
30

3
45

109
22

155
21

117
44

358

Education, training, employment, and social services:
Department of Commerce:
National Telecommunications and Information Administration:
Public broadcasting facilities, planning and construction ...........................................................
19
8
8
Information infrastructure grants ..................................................................................................
37
50
56
Department of Education:
Office of Elementary and Secondary Education:
Indian education ...........................................................................................................................
78
59
79
Impact aid .....................................................................................................................................
728
660
614
Chicago litigation settlement ........................................................................................................ ................... ................... ...................
Education Reform .........................................................................................................................
487
671
691
Education for the disadvantaged .................................................................................................
7,173
7,302
7,662
School improvement programs ....................................................................................................
1,226
1,217
1,304
Office of Bilingual Education and Minority Languages Affairs:
Bilingual and immigrant education ..............................................................................................
179
134
234
Office of Special Education and Rehabilitative Services:
Special education .........................................................................................................................
3,006
3,343
3,336
Rehabilitation services and disability research ...........................................................................
2,171
2,227
2,296
American printing house for the blind .........................................................................................
7
6
6
Office of Vocational and Adult Education:
Vocational and adult education ...................................................................................................
1,364
1,368
1,393
Office of Postsecondary Education:
Student financial assistance ........................................................................................................
63 ................... ...................
Higher education ..........................................................................................................................
33
27
159
Office of Educational Research and Improvement:
Libraries ........................................................................................................................................
133
108
110
Education research, statistics, and improvement .......................................................................
17
13
260
Department of Health and Human Services:
Administration for Children and Families:
State legalization impact assistance grants ................................................................................
195 ................... ...................

175

AID TO STATE AND LOCAL GOVERNMENTS

Table 9–3. FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS—BUDGET AUTHORITY AND OUTLAYS—Continued
(in millions of dollars)
Budget Authority
Function, Agency and Program

1995
Actual

Payments to States for the job opportunities and basic skills training program .......................
1,300
Family preservation and support .................................................................................................
150
Social services block grant ..........................................................................................................
2,800
Children and families services programs ....................................................................................
4,604
Payments to states for foster care and adoption assistance .....................................................
3,597
Administration on Aging:
Aging services programs .............................................................................................................
877
Department of the Interior:
Bureau of Indian Affairs:
Operation of Indian programs ......................................................................................................
88
Department of Labor:
Employment and Training Administration:
Training and employment services ..............................................................................................
2,764
Community service employment for older Americans ................................................................
87
State unemployment insurance and employment service operations ........................................
127
Federal unemployment benefits and allowances ........................................................................
101
Unemployment trust fund .............................................................................................................
1,103
Corporation for National and Community Service:
Domestic volunteer service programs, operating expenses .......................................................
136
National and community service programs, operating expenses ...............................................
84
Corporation for Public Broadcasting:
Corporation for public broadcasting ............................................................................................
95
National Endowment for the Arts:
National endowment for the arts: Grants and administration ....................................................
44
Institute of Museum Services:
Institute of Museum Services: Grants and administration ..........................................................
7
Allowances:
Welfare reform .............................................................................................................................. ...................
Total, education, training, employment, and social services ..............................................

34,880

1996
Estimate

93,912

1995
Actual

1996
Estimate

1997
Estimate

1,000
225
2,800
4,298
4,322

1,000
240
2,800
4,967
4,445

953
38
2,797
4,463
3,244

959
132
3,183
4,528
3,740

988
201
2,839
4,574
4,144

828

1,328

951

776

1,006

3,251
3,880
77 ...................
150
176
101
114
1,004
1,029

3,620
77
34
103
1,080

3,618
82
132
95
1,065

3,513
78
140
121
1,012

116
86

176
98

140
52

121
82

166
92

–70

–280

...................

–63

–259

35,597

38,399

34,125

36,561

36,437

1,782

1,435

1,530

1,518

1,127

521

594

767

2,098

2,444

2,105

2,024

................... ...................
89,070
94,892

1,544
105,571

Health:
Department of Agriculture:
Food Safety and Inspection Service:
Salaries and expenses .................................................................................................................
41
40
Department of Health and Human Services:
Health Resources and Services Administration:
Health Resources and Services ..................................................................................................
1,756
1,692
Centers for Disease Control and Prevention:
Disease control, research, and training ......................................................................................
602
621
Substance Abuse and Mental Health Services Administration:
Substance abuse and mental health services ............................................................................
2,195
1,854
Health Care Financing Administration:
Grants for cooperatives/health insurance for the temporarily unemployed ............................... ................... ...................
Grants to States for Medicaid .....................................................................................................
89,241
83,252
Department of Labor:
Occupational Safety and Health Administration:
Salaries and expenses .................................................................................................................
71
71
Mine Safety and Health Administration:
Salaries and expenses .................................................................................................................
6
6
Allowances:
Welfare reform .............................................................................................................................. ...................
–63
Total, health ................................................................................................................................

Outlays
1997
Estimate

87,473

1,544
104,470
73

–327

...................

–63

–327

110,815

93,587

99,173

111,217

431

400

26
1
8

19
1
5

217
3,061
166

91
3,084
186

Income security:
Department of Agriculture:
Agricultural Marketing Service:
Funds for strengthening markets, income, and supply (section 32) ..........................................
461
431
400
480
Rural Housing and Community Development Service:
Rural housing for domestic farm labor grants ............................................................................
11
10
10
11
Supervisory and technical assistance grants .............................................................................. ................... ................... ................... ...................
Rural housing preservation grants ..............................................................................................
7
4
4
7
Food and Consumer Service:
Food donations programs for selected groups ...........................................................................
183
215
65
209
Food stamp program ....................................................................................................................
2,925
2,976
3,089
2,740
Commodity assistance program ..................................................................................................
190
166
172
194

176

ANALYTICAL PERSPECTIVES

Table 9–3. FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS—BUDGET AUTHORITY AND OUTLAYS—Continued
(in millions of dollars)
Budget Authority
Function, Agency and Program

Special supplemental nutrition program for women, infants, and children (WIC) .....................
State child nutrition programs ......................................................................................................
Department of Health and Human Services:
Administration for Children and Families:
Family support payments to States .............................................................................................
Low income home energy assistance .........................................................................................
Refugee and entrant assistance ..................................................................................................
Payments to States for the child care and development block grant .......................................
Department of Housing and Urban Development:
Public and Indian Housing Programs:
Public housing operating fund .....................................................................................................
Drug elimination grants for low-income housing .........................................................................
Revitalization of severely distressed public housing projects ....................................................
Housing certificate fund ...............................................................................................................
Public housing capital fund ..........................................................................................................
Community Planning and Development:
Emergency shelter grants program .............................................................................................
Supportive housing program ........................................................................................................
Homeless assistance fund ...........................................................................................................
Shelter plus care ..........................................................................................................................
Home fund ....................................................................................................................................
Youthbuild program ......................................................................................................................
Innovative homeless initiatives demonstration program .............................................................
Housing opportunities for persons with AIDS .............................................................................
Housing Programs:
Annual contributions for assisted housing ..................................................................................
Congregate services ....................................................................................................................
Section 8 moderate rehabilitation, single room occupancy ........................................................
Homeownership and opportunity for people everywhere grants (HOPE grants) ......................
Department of Labor:
Employment and Training Administration:
Unemployment trust fund .............................................................................................................
Federal Emergency Management Agency:
Emergency food and shelter program .........................................................................................
Allowances:
Welfare reform ..............................................................................................................................

1995
Actual

1996
Estimate

Outlays
1997
Estimate

1995
Actual

1996
Estimate

1997
Estimate

3,447
7,365

3,691
7,846

3,877
8,559

3,401
7,387

3,684
8,111

3,823
8,445

17,491
1,419
358
935

17,094
1,000
357
935

18,101
1,000
337
1,049

17,133
1,419
346
933

17,366
1,252
352
935

17,956
1,025
344
946

2,900
2,900
290
290
500
500
................... ...................
................... ...................

2,900
290
650
290
3,200

2,762
2,874
178
180
31
128
................... ...................
................... ...................

2,894
308
283
29
4,276

...................
84
35
...................
115
158
1,120
12
198
...................
17
50
1,550
1,179
1,240
...................
20
21
...................
17
19
171 ................... ...................

1
157
412
50
1,401
18
19
138

...................
...................
1,120
...................
1,400
40
...................
...................

...................
...................
823
...................
1,400
...................
...................
...................

5,666
7,220
3,652
–12 ................... ...................
................... ................... ...................
62 ................... ...................

13,903
6
17
75

11,776
9
41
96

8,107
9
51
87

2,317

2,376

2,565

2,317

2,308

2,497

130

100

130

100

...................

–1,526

...................

–1,472

Total, income security ...............................................................................................................

49,205

50,402

51,625

55,123

54,909

55,690

Veterans benefits and services:
Department of Veterans Affairs:
Veterans Health Administration:
Medical care .................................................................................................................................
Construction:
Grants for construction of State extended care facilities ...........................................................
Grants for the construction of State veterans cemeteries .........................................................

186

208

232

186

208

232

47
5

47
1

40
1

64
3

41
5

44
3

Total, veterans benefits and services .....................................................................................

238

256

273

253

254

279

Administration of justice:
Department of Housing and Urban Development:
Public and Indian Housing Programs:
Violent crime reduction programs ................................................................................................ ................... ...................
3 ................... ...................
Fair Housing and Equal Opportunity:
Fair housing activities ..................................................................................................................
33
30
33
27
21
Department of Justice:
General Administration:
Community oriented policing services .........................................................................................
1,100
1,803
1,976
45
638
Legal Activities:
Assets forfeiture fund ...................................................................................................................
224
205
205
224
205
Office of Justice Programs:
Justice assistance ........................................................................................................................
58
58
62
571
43
State and local law enforcement assistance ..............................................................................
289
388 ...................
19
144
Juvenile justice program ..............................................................................................................
128
128
127
7
55
Crime victims fund .......................................................................................................................
178
230
164
137
201
Violent crime reduction programs ................................................................................................
742
1,405
1,924
74
743

3
29
1,542
205
101
250
124
134
1,158

177

AID TO STATE AND LOCAL GOVERNMENTS

Table 9–3. FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS—BUDGET AUTHORITY AND OUTLAYS—Continued
(in millions of dollars)
Budget Authority
Function, Agency and Program

1995
Actual

1996
Estimate

Department of Transportation:
Federal Transit Administration:
Violent crime reduction programs ................................................................................................ ................... ...................
Department of the Treasury:
Departmental Offices:
Department of the Treasury forfeiture fund ................................................................................
81
86
Violent crime reduction programs:
Violent crime reduction programs ................................................................................................
9
7
Equal Employment Opportunity Commission:
Salaries and expenses .................................................................................................................
26
26
Ounce of Prevention Council:
Ounce of prevention council ........................................................................................................
2
2
State Justice Institute:
State Justice Institute: Salaries and expenses ...........................................................................
12
5
Total, administration of justice ................................................................................................

2,882

4,373

Outlays
1997
Estimate

1995
Actual

1996
Estimate

1997
Estimate

................... ...................

8
5

4,638

1,222

2,142

3,656

320

295

291

101

100

102

474

508

515

60
23
83

70
2
84

66
2
86

206

232

297

135

149

153

General government:
Department of Agriculture:
Forest Service:
Forest Service permanent appropriations ...................................................................................
86
295
291
Department of Defense—Civil:
Corps of Engineers—Civil:
Permanent appropriations ............................................................................................................
5
6
6
Department of Energy:
Energy Programs:
Payments to States under Federal Power Act ...........................................................................
2
2
2
Department of the Interior:
Bureau of Land Management:
Payments in lieu of taxes ............................................................................................................
101
100
102
Minerals Management Service:
Mineral leasing and associated payments ..................................................................................
474
508
515
United States Fish and Wildlife Service:
National wildlife refuge fund ........................................................................................................
19
18
18
Insular Affairs:
Assistance to territories ................................................................................................................
78
67
67
Trust Territory of the Pacific Islands ...........................................................................................
–12 ................... ...................
Payments to the United States territories, fiscal assistance ......................................................
83
84
86
Department of the Treasury:
Bureau of Alcohol, Tobacco and Firearms:
Internal revenue collections for Puerto Rico ...............................................................................
206
232
297
United States Customs Service:
Miscellaneous permanent appropriations ....................................................................................
138
149
153
Commission on National and Community Service:
Salaries and expenses ................................................................................................................. ................... ................... ...................
District of Columbia:
Federal payment to the District of Columbia ..............................................................................
712
712
770

28 ................... ...................
714

712

770

Total, general government ........................................................................................................

1,892

2,173

2,307

2,172

2,178

2,308

Total, grants ................................................................................................................................

223,251

218,356

249,066

224,992

236,730

249,332

10.

FEDERAL EMPLOYMENT

This section provides data on civilian and military
employment, as well as personnel compensation and
benefits, in the Executive Branch, the Legislative
Branch and the Judiciary. A comparison of Federal employment levels, State and local government employment, and the United States population appears in the
Historical Tables. Additional tables on civilian employment reductions in Executive Branch agencies appears
in the Budget volume.
Total Federal Employment in the Executive
Branch
Civilian employment in the Executive Branch is
measured on the basis of full-time equivalents (FTEs).
One FTE is equal to one work year or 2,080 non-overtime hours. Put simply, one full-time employee counts
as one FTE, and two half-time employees also count
as one FTE.
The Federal Workforce Restructuring Act (FWRA) of
1994 (P.L. 103–226) was enacted March 30, 1994. The
Act provided agencies with authority to offer voluntary
separation incentive payments (‘‘VSIPs’’ or ‘‘buyouts’’)
to aid in their downsizing and restructuring activities
and established FTE limitations (‘‘ceilings’’) for the Executive Branch through 1999. The 1997 budget continues the implementation of the reductions pursuant to
the Act. The limitations established by the Act are as
follows:
1994–2,084,600
1995–2,043,300
1996–2,003,300
1997–1,963,300
1998–1,922,300
1999–1,882,300
The starting point used to calculate FTE reductions
required by the FWRA is called the 1993 base—the
estimate of FTEs for 1993 made in January of that
year. As shown in Table 10–1, a total reduction of
244,700 FTEs or 11.3 percent from the 1993 base is
anticipated in 1997. The budgeted 1997 FTE level of
1,904,600 (subject to ceiling) is more than 58,000 FTEs
lower than the limitation required by law.

Allocations of FTE resources by agency are made
based upon Presidential priorities and other factors.
Thus, while many of the agencies in Table 10–1 show
FTE reductions from 1993–1997, some agencies, such
as the Department of Justice and the Federal Emergency Management Agency, show an increase in FTEs.
Total Federal Employment Levels
The tables that follow show total Federal employment
in all branches of Government, as well as the U.S.
Postal Service, Postal Rate Commission, and active
duty uniformed military personnel. Table 10–2 displays
total Federal employment as measured by actual positions filled at the end of the fiscal year. Table 10–3
shows total Federal employment as measured on an
FTE basis.
Personnel Compensation and Benefits
Table 10–4 displays personnel compensation and benefits for all branches of Government, as well as for
military personnel.
Direct compensation of the Federal work force includes base pay and premium pay, such as overtime.
In addition, it includes other cash components, such
as geographic pay differentials (i.e., locality pay, interim geographic adjustments, special pay adjustments
for law enforcement officers), recruitment and relocation bonuses, retention allowances, performance
awards, and cost-of-living and overseas allowances.
In the case of military personnel, compensation includes basic pay, special and incentive pay (including
enlistment and reenlistment bonuses), and allowances
for clothing, housing, and subsistence.
Related compensation in the form of personnel benefits for current and former personnel consists primarily
of the Government’s share (as an employer) of health
insurance, life insurance, old age survivors’ disability
and health insurance, and payments to the Department
of Defense’s Military Retirement Fund, the Civil Service
Retirement and Disability Fund, and the Federal Employees Retirement System to finance future retirement
benefits.

179

180

ANALYTICAL PERSPECTIVES
Table 10–1.

FEDERAL EMPLOYMENT IN THE EXECUTIVE BRANCH

(Civilian employment as measured by Full-Time Equivalents, in thousands)
Actual
Agency

Estimate

Change: 1993 base to
1997

1993 Base
1993

1994

1995

1996

1997

FTE’s

Percent

Cabinet agencies:
Agriculture ...........................................................................................................................
Commerce ...........................................................................................................................
Defense—military functions ................................................................................................
Education ............................................................................................................................
Energy .................................................................................................................................
Health and Human Services 1 2 .........................................................................................
Health and Human Services, exempt FTEs ......................................................................
Social Security Administration 2 .........................................................................................
Housing and Urban Development ......................................................................................
Interior .................................................................................................................................
Justice .................................................................................................................................
Labor ...................................................................................................................................
State ....................................................................................................................................
Transportation .....................................................................................................................
Treasury ..............................................................................................................................
Veterans Affairs 1 ................................................................................................................
Veterans Affairs, exempt FTEs ..........................................................................................
Other agencies (excluding Postal Service):
Agency for International Development 1 ............................................................................
Agency for International Development, exempt FTEs ......................................................
Corps of Engineers .............................................................................................................
Environmental Protection Agency ......................................................................................
Equal Employment Opportunity Commission ....................................................................
Federal Emergency Management Agency ........................................................................
Federal Deposit Insurance Corp./Resolution Trust Corp. .................................................
General Services Administration ........................................................................................
National Aeronautics and Space Administration ...............................................................
National Archives and Records Administration .................................................................
National Labor Relations Board .........................................................................................
National Science Foundation .............................................................................................
Nuclear Regulatory Commission ........................................................................................
Office of Personnel Management ......................................................................................
Panama Canal Commission ...............................................................................................
Peace Corps .......................................................................................................................
Railroad Retirement Board .................................................................................................
Securities and Exchange Commission ..............................................................................
Small Business Administration ...........................................................................................
Smithsonian Institution ........................................................................................................
Tennessee Valley Authority ................................................................................................
United States Information Agency .....................................................................................
All other small agencies .....................................................................................................
Allowance for welfare reform 3 ...........................................................................................

115.6
36.7
931.3
5.0
20.6
64.5
0.5
65.4
13.6
79.3
99.4
18.3
26.0
70.3
166.1
227.0
5.4

114.4
36.1
931.8
4.9
20.3
65.6
0.5
64.8
13.3
78.1
95.4
18.0
25.6
69.1
161.1
229.1
5.1

109.8
36.0
868.3
4.8
19.8
62.4
0.5
64.5
13.1
76.3
95.3
17.5
25.2
66.4
157.3
227.8
5.3

103.8
35.3
821.7
4.8
19.7
59.0
0.3
64.6
12.1
72.0
97.9
16.8
23.9
63.2
157.5
223.1
5.4

105.5
35.2
800.0
4.8
19.7
58.5
0.3
64.8
11.9
70.5
106.3
16.7
23.7
63.9
153.3
218.2
5.5

104.6
35.5
767.4
4.6
18.5
58.9
0.3
64.8
11.4
72.2
112.5
17.1
23.5
63.9
156.8
217.3
5.5

–11.1
–1.2
–163.9
–0.4
–2.1
–5.6
–0.1
–0.6
–2.2
–7.2
13.1
–1.3
–2.5
–6.5
–9.3
–9.7
0.2

–9.5%
–3.3%
–17.6%
–8.1%
–10.3%
–8.6%
–28.7%
–0.9%
–16.4%
–9.0%
13.1%
–6.8%
–9.7%
–9.1%
–5.6%
–4.2%
3.3%

4.4
.............
29.2
18.6
2.9
2.7
21.6
20.6
25.7
2.8
2.1
1.3
3.4
6.2
8.7
1.3
1.9
2.7
4.0
5.9
19.1
8.7
16.1
.............

4.1
.............
28.4
17.9
2.8
4.0
21.9
20.2
24.9
2.6
2.1
1.2
3.4
5.9
8.5
1.2
1.8
2.7
5.6
5.5
17.3
8.3
15.4
.............

3.9
*
27.9
17.6
2.8
4.9
20.0
19.5
23.9
2.6
2.1
1.2
3.3
5.3
8.5
1.2
1.7
2.7
6.3
5.4
18.6
8.1
15.0
.............

3.6
*
27.7
17.5
2.8
4.6
15.7
17.0
22.4
2.4
2.0
1.2
3.2
4.2
8.8
1.2
1.6
2.7
5.7
5.3
16.7
7.7
15.1
.............

3.4
*
27.6
18.1
2.8
3.9
12.8
16.2
21.8
2.5
2.0
1.3
3.2
4.0
9.0
1.2
1.5
2.8
4.3
5.3
16.4
7.3
14.8
.............

3.1
*
27.2
18.0
3.0
4.0
9.2
14.8
21.2
2.5
2.0
1.3
3.1
3.6
9.1
1.2
1.4
2.8
4.2
5.3
16.4
7.1
14.8
0.5

–1.3
.............
–2.0
–0.6
0.2
1.2
–12.3
–5.9
–4.5
–0.2
–0.1
–0.1
–0.3
–2.7
0.4
–0.1
–0.4
–0.1
0.2
–0.6
–2.7
–1.6
–1.3
0.5

–29.2%
.............
–6.8%
–3.3%
5.8%
43.8%
–57.1%
–28.4%
–17.5%
–8.5%
–4.8%
–6.2%
–8.3%
–42.7%
4.8%
–3.4%
–24.0%
–2.2%
5.2%
–10.4%
–14.1%
–18.6%
–8.3%
100.0%

Total, Executive Branch civilian employment ...................................................................
Total, Defense .........................................................................................................................
Total, Non-Defense .................................................................................................................
FTEs exempt from Ceiling ......................................................................................................
Total, Executive Branch subject to Ceiling ............................................................................
FTE Ceiling 4 ...........................................................................................................................

2,155.2
931.3
1,223.9
.............
.............
.............

2,138.8
931.8
1,207.1
.............
.............
.............

2,052.7
868.3
1,184.4
5.8
2,047.0
2,084.6

1,970.2
821.7
1,148.4
5.7
1,964.4
2,043.3

1,940.8
800.0
1,140.8
5.9
1,934.9
2,003.3

1,910.5
767.4
1,143.1
5.9
1,904.6
1,963.3

–244.7
–163.9
–80.8
.............
.............
.............

–11.3%
–17.6%
–6.3%
.............
.............
.............

Total FTE reduction from the 1993 base ..........................................................................

.............

–16.4

–102.5

–185.0

–214.4

–244.7

.............

* Less than 50 FTEs.
1 The Departments of Health and Human Services, Veterans Affairs, and the Agency for International Development have components that are exempt from FTE controls.
2 The Social Security Administration became a separate agency, no longer part of Health and Human Services, on March 31, 1995.
3 This allowance is for an estimated 500 FTEs for the Social Security Administration to conduct additional continuing disability reviews.
4 FTE limitations are set for the Executive Branch in the Federal Workforce Restructuring Act of 1994 (P.L. 103–226).

10.

181

FEDERAL EMPLOYMENT
Table 10–2.

TOTAL FEDERAL EMPLOYMENT

(As measured by total positions filled)
Actual as of September 30

Change: 1993 to 1995

Description
1993

1994

1995

Positions

Percent

Executive branch civilian employment:
All agencies except Postal Service and Postal Rate Commission:
Full-time permanent ..............................................................................................
Other than full-time permanent 1 ..........................................................................

1,892,290
264,500

1,831,671
253,767

1,767,460
244,463

–124,830
–20,037

–6.6%
–7.6%

Subtotal .............................................................................................................

2,156,790

2,085,438

2,011,923

–144,867

–6.7%

Postal Service: 2
Full-time permanent ...................................................................................................
Other than full-time permanent .................................................................................

623,088
167,252

634,878
187,876

647,269
198,179

24,181
30,927

3.9%
18.5%

Subtotal ..................................................................................................................

790,340

822,754

845,448

55,108

7.0%

Subtotal, executive branch civilian employment .......................................................

2,947,130

2,908,192

2,857,371

–89,759

–3.0%

Military personnel on active duty: 3
Department of Defense .............................................................................................
Department of Transportation (Coast Guard) ...........................................................

1,705,103
39,234

1,610,490
37,474

1,518,224
36,731

–186,879
–2,503

–11.0%
–6.4%

Subtotal, military personnel ...................................................................................

1,744,337

1,647,964

1,554,955

–189,382

–10.9%

Subtotal, Executive Branch ..............................................................................

4,691,467

4,556,156

4,412,326

–279,141

–5.9%

Legislative branch:
Full-time permanent ...................................................................................................
Other than full-time permanent .................................................................................

16,460
21,798

15,066
20,291

14,603
18,764

–1,857
–3,034

–11.3%
–13.9%

Subtotal, Legislative Branch .................................................................................

38,258

35,357

33,367

–4,891

–12.8%

Judicial Branch:
Full-time permanent ...................................................................................................
Other than full-time permanent .................................................................................

25,900
2,220

25,907
2,128

26,555
2,438

655
218

2.5%
9.8%

Subtotal, Judicial Branch ......................................................................................

28,120

28,035

28,993

873

3.1%

Grand total .....................................................................................................................

4,757,845

4,619,548

4,474,686

–283,159

–6.0%

Executive branch civilian personnel (excluding Postal Service):
DOD-Military functions 4 .............................................................................................
All other executive branch ........................................................................................

890,628
1,266,162

850,137
1,235,301

831,806
1,208,101

–58,822
–58,061

–6.6%
–4.6%

Total 5 .....................................................................................................................

2,156,790

2,085,438

2,039,907

–116,883

–5.4%

ADDENDUM

1 Includes

Summer Aides, Stay-in-school, Junior Fellowship, Worker-Trainee Opportunity Program, formerly exempt from employment controls.
2 Includes Postal Rate Commission.
3 Excludes reserve components.
4 Excludes Defense Intelligence Agency.
5 Includes disadvantaged youth programs.

182

ANALYTICAL PERSPECTIVES
Table 10–3.

TOTAL FEDERAL EMPLOYMENT

(As measured by Full-Time Equivalents)
Estimate
Description

Change: 1995 to 1997

1995 actual
1996

1997

FTE’s

Percent

Executive branch civilian personnel:
All agencies except Postal Service and Defense ...............................................
Defense-Military functions (civilians) ....................................................................

1,148,441
821,739

1,140,787
800,008

1,143,119
767,417

–5,322
–54,322

–0.5%
–6.6%

Subtotal, excluding Postal Service ..............................................................
Postal Service 1 .....................................................................................................

1,970,180
806,243

1,940,795
822,885

1,910,536
835,084

–59,644
28,841

–3.0%
3.6%

Subtotal, Executive Branch civilian personnel ............................................

2,776,423

2,763,680

2,745,620

–30,803

–1.1%

Executive branch uniformed personnel: 2
Department of Defense ........................................................................................
Department of Transportation (Coast Guard) ......................................................

1,564,393
37,311

1,499,785
37,297

1,468,995
36,746

–95,398
–565

–6.1%
–1.5%

Subtotal, uniformed military personnel ........................................................

1,601,704

1,537,082

1,505,741

–95,963

–6.0%

Subtotal, Executive Branch .........................................................................

4,378,127

4,300,762

4,251,361

–126,766

–2.9%

Legislative Branch: 3 Total FTE ....................................................................................

33,456

32,543

32,218

–1,238

–3.7%

Judicial branch: Total FTE ............................................................................................

27,903

29,724

31,071

3,168

11.4%

Grand total ..................................................................................................

4,439,486

4,363,029

4,314,650

–124,836

–2.8%

1 Includes

Postal Rate Commission.
2 Military personnel on active duty. Excludes reserve components. Data shown are average strength.
3 Actual 1995 FTE data not available for legislative branch. Data shown are estimates.

10.

183

FEDERAL EMPLOYMENT
TABLE 10–4.

PERSONNEL COMPENSATION AND BENEFITS
(In millions of dollars)
Estimate

Description

Civilian personnel costs:
Executive Branch (excluding Postal Service):
Direct compensation:
DOD—military functions ....................................................................................
All other executive branch ................................................................................

Change: 1995 to 1997

1995 actual
1996

1997

Dollars

Percent

32,919
51,309

33,230
52,653

32,872
54,196

–47
2,887

–0.1%
5.6%

Subtotal, direct compensation ......................................................................
Personnel benefits:
DOD—military functions ....................................................................................
All other executive branch 1 .............................................................................

84,228

85,883

87,068

2,840

3.4%

7,175
19,774

7,209
20,269

7,207
21,121

32
1,347

0.4%
6.8%

Subtotal, personnel benefits .........................................................................

26,949

27,478

28,328

1,379

5.1%

Subtotal, executive branch ......................................................................

111,177

113,361

115,396

4,219

3.8%

Postal Service:
Direct compensation ..............................................................................................
Personnel benefits .................................................................................................

32,157
8,632

33,126
9,593

34,643
10,020

2,486
1,388

7.7%
16.1%

Subtotal .............................................................................................................

40,789

42,719

44,663

3,874

9.5%

Legislative Branch: 2
Direct compensation ..............................................................................................
Personnel benefits .................................................................................................

777
148

744
149

759
152

–18
4

–2.3%
2.7%

Subtotal .............................................................................................................
Judicial Branch:
Direct compensation ..............................................................................................
Personnel benefits .................................................................................................

925

893

911

–14

–1.5%

1,335
319

1,512
361

1,613
394

278
75

20.8%
23.5%

Subtotal .............................................................................................................
Total, civilian personnel costs ..........................................................................

1,654
154,545

1,873
158,846

2,007
162,977

353
8,432

21.3%
5.5%

Military personnel costs:
DOD—Military Functions:
Direct compensation ..............................................................................................
Personnel benefits .................................................................................................

49,770
19,583

48,728
18,112

48,403
18,329

–1,367
–1,254

–2.7%
–6.4%

Subtotal .............................................................................................................
All other executive branch, uniformed personnel:
Direct compensation ..................................................................................................
Personnel benefits .....................................................................................................

69,353

66,840

66,732

–2,621

–3.8%

1,162
110

1,160
110

1,174
113

12
3

1.0%
2.7%

Subtotal .............................................................................................................

1,272

1,270

1,287

1.2%

Total, military personnel costs 3 ...........................................................................

70,625

68,110

68,019

–2,606

–3.7%

Grand total, personnel costs .........................................................................................

225,170

226,956

230,996

5,826

2.6%

39,224

40,549

42,482

3,258

8.3%

3,813
22

3,910
28

4,187
33

374
11

9.8%
50.0%

43,059

44,487

46,702

3,643

8.5%

29,143

29,087

30,297

1,154

4.0%

ADDENDUM
Former Civilian Personnel:
Retired pay for former personnel ..............................................................................
Government payment for Annuitants:
Employee health benefits .................................................................................
Employee life insurance ...................................................................................
Total Former Civilian Personnel ...........................................................................
Former Military personnel:
Retired pay for former personnel ..............................................................................
1 In

addition to the employing agency’s contribution to the costs of life and health insurance, retirement and Medicare Hospital insurance, this amount includes transfers from general revenues to amortize the effects of
general pay increases on Federal retirement systems for employees in the Legislative and Judicial Branches as well as employees (non-Postal) in the Executive Branch and to amortize supplemental liabilities under
FERS. The transfers amounted to $7,488 million in 1995 and are estimated to be $7,717 million in 1996 and $7,989 million in 1997.
2 Excludes members and officers of Congress.
3 Excludes reserve components.

FEDERAL BORROWING AND DEBT

185

11.

FEDERAL BORROWING AND DEBT

Debt is the largest legally binding obligation of the
Federal Government. At the end of 1995 the Government owed $3,603 billion of principal to the people who
had loaned it the money to pay for past deficits. The
gross Federal debt, which also includes the securities
held by trust funds and other Government accounts,
was $4,921 billion. This year the Government is estimated to pay about $247 billion of interest to the public
on its debt.
The present deficit is continuing to increase the
amount of Federal debt held by the public. However,
the Omnibus Budget Reconciliation Act of 1993 and
the strong economic expansion have reduced the size
of the deficit for three consecutive years, and the Administration is proposing steps to meet its goal of balancing the budget by 2002. The reduction in the deficit
Table 11–1.

over the next few years will lower the growth of the
debt further and will decrease debt held by the public
as a percentage of the Nation’s gross domestic product
(GDP).
Trends in Federal Debt
Federal debt held by the public has increased fivefold since 1980, as shown in Table 11–1. In 1980 it
was $709.8 billion; by the end of 1995 it stood at
$3,603.4 billion. The data in this table are supplemented for earlier years by Tables 7.1–7.3 in Historical
Tables, which is published as a separate volume of the
budget.
At the end of World War II, Federal debt was more
than 100 percent of GDP. From then until the 1970s,
Federal debt grew gradually, but, due to inflation, it

TRENDS IN FEDERAL DEBT HELD BY THE PUBLIC
(Dollar amounts in billions)
Debt held by the public

Fiscal year
Current dollars

Constant CY
1992 dollars 1

Debt held by the public as a percent
of:
GDP 2

Credit market
debt 3

Interest on debt held by the public
as a percent of: 4
Total outlays

GDP

1950
1955
1960
1965
1970
1975

..............................................................................................................................
..............................................................................................................................
..............................................................................................................................
..............................................................................................................................
..............................................................................................................................
..............................................................................................................................

219.0
226.6
236.8
260.8
283.2
394.7

1,235.3
1,092.9
1,025.3
1,051.5
950.3
699.3

80.1
57.3
45.6
38.0
28.1
25.4

55.3
43.3
33.8
26.9
20.8
18.4

11.4
7.6
8.5
8.1
7.9
7.5

1.8
1.3
1.5
1.4
1.5
1.7

1980
1981
1982
1983
1984

709.8
785.3
919.8
1,131.6
1,300.5

1,203.1
1,213.8
1,329.2
1,563.0
1,727.1

26.1
25.8
28.6
33.1
34.0

18.4
18.5
19.8
21.9
22.1

10.6
12.1
13.6
13.8
15.7

2.3
2.7
3.1
3.3
3.5

1985
1986
1987
1988
1989

1,499.9
1,736.7
1,888.7
2,050.8
2,189.9

1,927.9
2,170.9
2,292.1
2,404.2
2,463.3

36.5
39.8
41.0
41.4
40.9

22.3
22.6
22.3
22.3
22.0

16.2
16.1
16.0
16.2
16.5

3.7
3.6
3.5
3.5
3.5

1990
1991
1992
1993
1994

2,410.7
2,688.1
2,998.8
3,247.5
3,432.1

2,606.2
2,785.6
3,016.9
3,183.8
3,287.5

42.4
45.9
48.8
50.2
50.2

22.5
24.0
25.5
26.4
26.5

16.2
16.2
15.5
14.9
14.4

3.6
3.7
3.5
3.2
3.1

1995
1996
1997
1998
1999

..............................................................................................................................
estimate ...............................................................................................................
estimate ...............................................................................................................
estimate ...............................................................................................................
estimate ...............................................................................................................

3,603.4
3,768.7
3,933.0
4,057.5
4,150.6

3,370.8
3,429.2
3,483.6
3,500.8
3,485.0

50.2
50.1
49.7
48.8
47.5

26.3
.....................
.....................
.....................
.....................

15.7
15.7
15.0
14.4
14.0

3.3
3.3
3.1
2.9
2.8

2000 estimate ...............................................................................................................
2001 estimate ...............................................................................................................
2002 estimate ...............................................................................................................

4,207.1
4,226.7
4,209.6

3,442.8
3,365.2
3,265.8

45.8
43.8
41.5

.....................
.....................
.....................

13.5
13.0
12.4

2.6
2.4
2.3

1 Debt in current dollars deflated by the GDP chain-type price index with calendar year 1992 equal to 100. For 1950 and 1955, indexes were not available from the recent comprehensive revision of the national income and
product accounts. Estimates of the index for those years were based on the ratio between the GDP chain-type price index and the unrevised implicit GDP deflator for FY 1960.
2 GDP from the recent comprehensive revision of the national income and product accounts except for 1950 and 1955. Estimates of GDP for those years were based on the ratio between revised and unrevised GDP for FY
1960.
3 Total credit market debt owed by domestic nonfinancial sectors, modified to be consistent with budget concepts for the measurement of Federal debt. Financial sectors are omitted to avoid double counting, since financial
intermediaries both borrow and lend in the credit market. Source: Federal Reserve Board flow of funds accounts. Projections are not available.
4 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 interest on public debt received by other Government accounts.

187

188
declined significantly in real terms. Because of an expanding economy as well as inflation, Federal debt as
a percentage of GDP decreased almost every year. 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 the
total credit market debt outstanding. The cumulative
effect was impressive. From 1950 to 1975, debt held
by the public declined from 80.1 percent of GDP to
25.4 percent, and from 55.3 percent of credit market
debt to 18.4 percent. At the same time, despite rising
interest rates, interest outlays became a smaller share
of the budget and were roughly stable as a percentage
of GDP.
During the 1970s, large budget deficits emerged as
the economy was disrupted by oil shocks and inflation.
The nominal amount of Federal debt more than doubled, and, despite high inflation, the real value of Federal debt increased by a fourth. The ratios of Federal
debt to GDP and credit market debt stopped declining
after the middle of the decade.
The growth of Federal debt held by the public accelerated during the early 1980s due to very large budget
deficits. Since the deficits have continued to be large,
debt has continued to grow substantially, although the
rate of increase has been slowed. With inflation reduced, the rapid growth in nominal debt has meant
a rapid growth in real debt as well. The ratio of Federal
debt to GDP rose from 26.1 percent in 1980 to 50.2
percent in 1993, the highest ratio since the mid-1950s.
The ratio of Federal debt to credit market debt also
rose, though to a much lesser extent, from 18.4 percent
to 26.4 percent. Interest outlays on debt held by the
public, calculated as a percentage of both total Federal
outlays and GDP, increased by about two-fifths.
Federal debt held by the public increased more slowly
in 1994 than in any year since 1979, and it increased
more slowly still in 1995. In both years it approximately
stayed the same relative to GDP and total credit market debt. Table 11–1 shows that debt as a percentage
of GDP is estimated to decline further from 50.2 percent in 1995 to 41.5 percent in 2002. The improvement
in the past two years reflects the $505 billion deficit
reduction package enacted by the Omnibus Budget Reconciliation Act of 1993 and the continuing economic
expansion. The further improvement to 2002 reflects
the proposal for a balanced budget and the expectation
that economic growth will continue at a moderate pace
for the foreseeable future.1 Interest outlays on the debt
held by the public are estimated to decline relative
to both total outlays and GDP over the next few years.
Debt Held by the Public and Gross Federal
Debt
The Federal Government issues debt for two principal
purposes. First, it borrows from the public in order
to finance the Federal deficit. Second, it issues debt
1 Chapter 1 of this volume, ‘‘Economic Assumptions,’’ reviews recent economic developments
and explains the economic assumptions for this budget.

ANALYTICAL PERSPECTIVES

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 defined to consist of both the debt held
by the public and the debt held 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.’’ 2
Borrowing from the public, whether by the Treasury
or by some other Federal agency, has a significant impact on the economy. Borrowing from the public is normally a good approximation to the Federal demand on
credit markets. Even if the proceeds are used productively for tangible or intangible investment, the Federal
demand on credit markets has to be financed out of
the saving of households and businesses, the State and
local sector, or the rest of the world.3 Federal borrowing
therefore competes with the borrowing of other sectors
for financial resources in the credit market and affects
interest rates. Borrowing from the public moreover affects the size and composition of assets held by the
private sector and the perceived wealth of the public.
It also affects the amount of taxes required to pay
interest to the public on Federal debt. Borrowing from
the public is therefore an important concern of Federal
fiscal policy.
Issuing debt securities to Government accounts performs an essential function 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 the 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
collections 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.
However, issuing 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 is not
a current transaction of the Government with the public; it does not compete with the private sector for available funds in the credit market; and it does not represent the estimated amount of the account’s future
transactions with the public. For example, if the account records the transactions of a social insurance program, the debt that it holds does not represent the
2 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 11–3
but also the debt of the Government-sponsored enterprises listed in Table 8–11 at the
end of Chapter 8 and certain Government-guaranteed securities.
3 The Federal sector of the national income and product accounts is a better measure
of the deficit for analyzing the effect of Federal fiscal policy on national saving than is
the budget deficit or Federal borrowing from the public. The Federal sector as defined
prior to the recent comprehensive revisions, and its differences from the budget, are discussed in Analytical Perspectives for Fiscal Year 1996, Chapter 19, ‘‘National Income and
Product Accounts,’’ pp. 267–70. For a major conceptual change due to the recent revisions,
see chapter 6 of this volume, Part IV.

11.

189

FEDERAL BORROWING AND DEBT
Table 11–2.

FEDERAL GOVERNMENT FINANCING AND DEBT 1
(In billions of dollars)
1995 Actual

Financing:
Surplus or deficit (–) ...................................................................................................................................
(On-budget) .............................................................................................................................................
(Off-budget) .............................................................................................................................................
Means of financing other than borrowing from the public:
Changes in: 2
Treasury operating cash balance ......................................................................................................
Checks outstanding, etc.3 ..................................................................................................................
Deposit fund balances ........................................................................................................................
Seigniorage on coins ..............................................................................................................................
Less: Net financing disbursements:
Direct loan financing accounts ...........................................................................................................
Guaranteed loan financing accounts .................................................................................................
Total, means of financing other than borrowing from the public ..........................................................
Total, requirement for borrowing from the public ......................................................................................
Change in debt held by the public .............................................................................................................
Debt Outstanding, End of Year:
Gross Federal debt:
Debt issued by Treasury ........................................................................................................................
Debt issued by other agencies ..............................................................................................................

Estimate
1996

1997

1998

1999

2000

–163.9 –145.6 –140.1 –98.0 –64.4 –27.5
–226.3 –211.0 –210.4 –175.3 –150.2 –119.7
62.4
65.3
70.3
77.3
85.8
92.1
–2.0
–2.8
0.9
0.7

2001

8.3
–90.6
98.9

2002

43.9
–62.2
106.1

–2.1 ............. ............. ............. ............. ............. .............
–*
–3.3 ............. ............. ............. ............. .............
0.1
–1.5 ............. ............. ............. ............. .............
0.7
0.6
0.7
0.7
0.8
0.8
0.8

–7.0
2.9

–17.9
–0.4

–20.8
0.8

–25.2
–2.0

–27.3
–2.2

–27.3
–2.4

–26.7
–1.9

–25.7
–1.9

–7.4

–19.6

–24.2

–26.5

–28.7

–29.0

–27.8

–26.8

–171.3 –165.3 –164.3 –124.5
171.3 165.3 164.3 124.5

–93.1
93.1

–56.5
56.5

–19.6
19.6

17.1
–17.1

4,894.0 5,172.1 5,465.4 5,720.3 5,948.5 6,154.8 6,330.5 6,477.3
27.0
35.2
33.4
30.1
30.0
29.9
29.6
29.2

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 .............................................................................................................................
Less: Treasury debt not subject to limitation 4 ..........................................................................................
Agency debt subject to limitation ...............................................................................................................
Adjustment for discount and premium 5 .....................................................................................................

4,921.0 5,207.3 5,498.9 5,750.4 5,978.5 6,184.7 6,360.2 6,506.5

4,894.0 5,172.1 5,465.4 5,720.3 5,948.5 6,154.8 6,330.5 6,477.3
–15.6 –15.6 –15.6 –15.6 –15.6 –15.6 –15.6 –15.6
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
6.1
6.1
6.1
6.1
6.1
6.1
6.1
6.1

Total, debt subject to statutory limitation 6 .................................................................................................

4,884.6 5,162.7 5,456.0 5,710.9 5,939.2 6,145.5 6,321.2 6,467.9

1,317.6
3,603.4
374.1
3,229.3

1,438.6
3,768.7
.............
.............

1,565.8
3,933.0
.............
.............

1,692.9
4,057.5
.............
.............

1,827.9
4,150.6
.............
.............

1,977.6
4,207.1
.............
.............

2,133.5
4,226.7
.............
.............

2,296.8
4,209.6
.............
.............

* $50 million or less.
1 Treasury securities held by the public and zero-coupon bonds held by Government accounts are almost entirely measured at sales price plus amortized discount or less amortized premium. Agency debt is almost entirely
measured at face value. Treasury securities in the Government account series are measured at face value less unrealized discount (if any).
2 A decrease in the Treasury operating cash balance (which is an asset) would be a means of financing the deficit and therefore have a positive sign. An increase in checks outstanding or deposit fund balances (which are liabilities) would also be a means of financing the deficit and therefore have a positive sign.
3 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 on the sale of gold.
4 Consists primarily of Federal Financing Bank debt.
5 Consists of unamortized discount (less premium) on public issues of Treasury notes and bonds (other than zero-coupon bonds) and unrealized discount on Government account series securities.
6 The statutory debt limit is $4,900 billion.

actuarial present value of expected future benefits. The
future transactions of Federal social insurance and employee retirement programs, which own over four-fifths
of the debt held by Government accounts, are important
in their own right and need to be considered separately;
this can be done through information published in actuarial and financial reports.4 Debt held by the public
is therefore a better concept than gross Federal debt
for analyzing the effect of the budget on the economy.5
4 A summary of actuarial estimates for many of these programs is prepared annually
by the Financial Management Service, Department of the Treasury, in ‘‘Statement of Liabilities and Other Financial Commitments of the United States Government.’’ The estimates
in that report are not, however, all comparable with one another in concept or actuarial
assumptions.
5 Debt held by the public was measured until several years ago 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. Treasury debt held by the public is now measured
as the sales price plus the amortized discount (or less the amortized premium). At the
time of sale, the value equals the sales price. Subsequently, the value equals the sales
price plus the amount of the discount that has been amortized up to that time. In equivalent
terms, the value equals par less the unamortized discount. (For a security sold at a premium,

Borrowing and Government Deficits
Table 11–2 summarizes Federal borrowing and debt
from 1995 through 2002. In 1995 the borrowing from
the public was $171.3 billion, and Federal debt held
by the public increased to $3,603.4 billion. The issuance
of debt to Government accounts was $106.0 billion, and
gross Federal debt increased to $4,921.0 billion. Borrowing from the public is estimated to decline to $164.3
billion in 1997.
Borrowing from the public depends both on the Federal Government’s expenditure programs and tax laws
and on economic conditions. The sensitivity of the budget to economic conditions is analyzed in Chapter 1 of
this volume.
the definition is symmetrical.) Agency debt, except for zero-coupon certificates, is recorded
at par. For further analysis of these concepts, 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, although some of the practices it describes have been changed.

190
Debt held by the public.—Table 11–2 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 social security trust funds (old-age and survivors
insurance and disability insurance) and the Postal Service fund.6 Since social security had a large surplus in
1995 and is estimated to have even larger surpluses
over the next few years, the off-budget surplus reduces
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 the other means shown in
Table 11–2, such as a decrease in Treasury’s cash balance. In 1995 these other accounts added up to a negative amount, –$7.4 billion, which increased the need
to borrow from the public. In some past years, the
net amount of these items was positive and reduced
the Government’s borrowing requirements.
Many of 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.
However, a new and larger ‘‘other means of financing’’ was created by the Federal Credit Reform Act of
1990. Budget outlays for direct loans and loan guarantees consist of the estimated subsidy cost of the loans
or guarantees at the time when the direct loans or
guaranteed loans are disbursed. The portion of the net
cash flow that does not represent a cost to the Government is non-budgetary in nature and is recorded as
a transaction of the financing account for each credit
program.7
The ‘‘net financing disbursements’’ of a financing account are defined in the same way as the ‘‘outlays’’
of a budgetary account and may be either positive or
negative. They are positive if the gross disbursements
by the account—whether to the public or to a budgetary
account—exceed the collections from both of these
sources; they are negative if the collections exceed the
gross disbursements. If the net financing disbursements
are positive, they must be paid in cash and thus increase the requirement for Treasury borrowing; if the
net financing disbursements are negative, they provide
cash to the Treasury that can be used to pay the Government’s bills in the same way as tax receipts, borrowing, or any other cash collection. The financing accounts
are therefore a means of financing the Government,
positive or negative, just like the other means listed
in Table 11–2. A positive amount of net financing dis6 For further explanation of the off-budget Federal entities, see Chapter 20, ‘‘Off-Budget
Federal Entities.’’
7 The Federal Credit Reform Act of 1990 (sec. 505(b)) requires that the financing accounts
be non-budgetary. As explained in Chapter 20, ‘‘Off-Budget Federal Entities,’’ they are
non-budgetary in concept because they do not measure cost. For additional discussion of
credit reform, see Chapter 8, ‘‘Underwriting Federal Credit and Insurance,’’ and Chapter
24, ‘‘Budget System and Concepts and Glossary.’’

ANALYTICAL PERSPECTIVES

bursements is shown in the table by the financing account having a negative sign, like the deficit, so that
it is shown adding to the requirement for borrowing
from the public.
The financing accounts added $4.1 billion to borrowing requirements in 1995. They are estimated to add
substantially more in 1996 and later years, mainly because of the growth of the direct student loan program
expected under current law. Beginning this year, eligible educational institutions may select either the direct
lending or the guaranteed lending program for their
students. Since direct loans require cash disbursements
equal to the full amount of the loans when the loans
are made, Federal borrowing requirements are initially
increased. The conversion of a Small Business Administration program from loan guarantees to direct loans
will also contribute to this effect. The total net financing disbursements for all credit programs are estimated
to reach a peak in 2000 and then to decline gradually
because of loan repayments.
Debt held by Government accounts.—The amount
of Federal debt issued to Government accounts depends
largely on the surpluses of the trust funds, both onbudget and off-budget, which owned 95 percent of the
total Federal debt held by Government accounts at the
e

Full text of Budget of the United States Government - Analytical Perspectives : Fiscal Year 1997

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