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FISCAL YEAR 2013 ANALYTICAL PERSPECTIVES BUDGET OF THE U.S. GOVERNMENT OFFICE OF MANAGEMENT AND BUDGET BUDGET.GOV Scan here to go to our website. THE BUDGET DOCUMENTS Budget of the United States Government, Fiscal Year 2013 contains the Budget Message of the President, information on the President’s priorities, budget overviews organized by agency, and summary tables. Analytical Perspectives, Budget of the United States Government, Fiscal Year 2013 contains analyses that are designed to highlight specified subject areas or provide other significant presentations of budget data that place the budget in perspective. This volume includes economic and accounting analyses; information on Federal receipts and collections; analyses of Federal spending; information on Federal borrowing and debt; baseline or current services estimates; and other technical presentations. The Analytical Perspectives volume also contains supplemental material with several detailed tables, including tables showing the budget by agency and account and by function, subfunction, and program, that is available on the Internet and as a CD-ROM in the printed document. Historical Tables, Budget of the United States Government, Fiscal Year 2013 provides data on budget receipts, outlays, surpluses or deficits, Federal debt, and Federal employment over an extended time period, generally from 1940 or earlier to 2013 or 2017. To the extent feasible, the data have been adjusted to provide consistency with the 2013 Budget and to provide comparability over time. Appendix, Budget of the United States Government, Fiscal Year 2013 contains detailed information on the various appropriations and funds that constitute the budget and is designed primarily for the use of the Appropriations Committees. The Appendix contains more detailed financial information on individual pro- -16-090044-0 grams 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; 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. Information is also provided on certain activities whose transactions are not part of the budget totals. AUTOMATED SOURCES OF BUDGET INFORMATION The information contained in these documents is available in electronic format from the following sources: Internet. All budget documents, including documents that are released at a future date, spreadsheets of many of the budget tables, and a public use budget database are available for downloading in several formats from the Internet at www.budget.gov/budget. Links to documents and materials from budgets of prior years are also provided. Budget CD-ROM. The CD-ROM contains all of the budget documents in fully indexed PDF format along with the software required for viewing the documents. The CD-ROM has many of the budget tables in spreadsheet format and also contains the materials that are included on the separate Analytical Perspectives CD-ROM. For more information on access to electronic versions of the budget documents (except CD-ROMs), call (202) 512-1530 in the D.C. area or toll-free (888) 293-6498. To purchase the budget CD-ROM or printed documents call (202) 512-1800. GENERAL NOTES 1. All years referenced for budget data are fiscal years unless otherwise noted. All years referenced for economic data are calendar years unless otherwise noted. 2. Detail in this document may not add to the totals due to rounding. 3. Under the President’s Government consolidation proposal announced on January 13, 2012, a number of agencies and programs would be consolidated into a new department focused on supporting the growth of American business and the resulting job creation, with the goal of improving services and reducing costs. The specific proposal to create the new department will be submitted to the Congress once the consolidation authority requested by the President is enacted. The Administration’s budget proposal, including the request in this Budget and agencies’ supporting materials, is presented in terms of the existing agency structures, and appropriate adjustments will be submitted once consolidation authority is enacted. U.S. GOVERNMENT PRINTING OFFICE, WASHINGTON 2012 90000 For sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC area (202) 512-1800 Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001 I S B N 978-0-16-090044-0 TABLE OF CONTENTS Page List of Charts and Tables��������������������������������������������������������������������������������������������������������������������� iii Introduction 1. Introduction ��������������������������������������������������������������������������������������������������������������������������������3 Economic and Budget Analyses 2. Economic Assumptions����������������������������������������������������������������������������������������������������������������9 3. Interactions Between the Economy and the Budget���������������������������������������������������������������23 4. Financial Stabilization Efforts and Their Budgetary Effects�������������������������������������������������31 5. Long Term Budget Outlook�������������������������������������������������������������������������������������������������������57 6. Federal Borrowing and Debt�����������������������������������������������������������������������������������������������������67 Performance and Management 7. Delivering a High-Performance Government ��������������������������������������������������������������������������85 8. Program Evaluation and Data Analytics ��������������������������������������������������������������������������������91 9. Benefit-Cost Analysis����������������������������������������������������������������������������������������������������������������95 10. Social Indicators����������������������������������������������������������������������������������������������������������������������105 11. Improving the Federal Workforce�������������������������������������������������������������������������������������������113 Budget Concepts and Budget Process 12. Budget Concepts����������������������������������������������������������������������������������������������������������������������125 13. Coverage of the Budget�����������������������������������������������������������������������������������������������������������149 14. Budget Process�������������������������������������������������������������������������������������������������������������������������157 Federal Receipts 15. Governmental Receipts�����������������������������������������������������������������������������������������������������������187 16. Offsetting Collections and Offsetting Receipts����������������������������������������������������������������������227 17. Tax Expenditures���������������������������������������������������������������������������������������������������������������������247 Special topics 18. Aid to State and Local Governments��������������������������������������������������������������������������������������287 19. Strengthening Federal Statistics��������������������������������������������������������������������������������������������343 20. Information Technology�����������������������������������������������������������������������������������������������������������347 21. Federal Investment������������������������������������������������������������������������������������������������������������������355 i Page 22. Research and Development�����������������������������������������������������������������������������������������������������365 23. Credit and Insurance���������������������������������������������������������������������������������������������������������������373 24. Homeland Security Funding Analysis������������������������������������������������������������������������������������417 25. Federal Drug Control Funding�����������������������������������������������������������������������������������������������425 26. California Bay-Delta Federal Budget Crosscut����������������������������������������������������������������������427 Technical Budget Analyses 27. Current Services Estimates����������������������������������������������������������������������������������������������������431 28. Trust Funds and Federal Funds���������������������������������������������������������������������������������������������455 29. National Income and Product Accounts���������������������������������������������������������������������������������471 30. Comparison of Actual to Estimated Totals�����������������������������������������������������������������������������477 31. Budget and Financial Reporting���������������������������������������������������������������������������������������������485 32. Detailed Functional Tables ������������������������������������������������������������������������������������������ CD-ROM 33. Federal Programs by Agency and Account ������������������������������������������������������������������ CD-ROM ii LIST OF CHARTS AND TABLES iii LIST OF CHARTS AND TABLES LIST OF CHARTS Page 2–1. Real House Prices Have Declined���������������������������������������������������������������������������������������������10 2–2. The One-Month LIBOR Spread over the One-Month Treasury Yields�����������������������������������10 2–3. Personal Saving Rate�����������������������������������������������������������������������������������������������������������������11 2–4. Real Business Fixed Investment����������������������������������������������������������������������������������������������12 2–5. Private Job Gains and Losses During Recent Recoveries�������������������������������������������������������13 2–6. Real GDP Growth Following a Recession: Seven-Year Average����������������������������������������������16 2–7. Real Per Capita GDP 1890-2010 ����������������������������������������������������������������������������������������������16 3–1. Real GDP: Alternative Projections��������������������������������������������������������������������������������������������26 3–2. Range of Uncertainty for the Budget Deficit����������������������������������������������������������������������������28 4–1. Estimate of TARP’s Deficit Impact�������������������������������������������������������������������������������������������39 5–1. Publicly Held Debt Under 2013 Budget Policy Extended�������������������������������������������������������58 5–2. Alternative Health Care Costs��������������������������������������������������������������������������������������������������61 5–3. Alternative Discretionary Projections��������������������������������������������������������������������������������������61 5–4 Alternative Revenue Projections�����������������������������������������������������������������������������������������������62 5–5. Alternative Productivity Assumptions�������������������������������������������������������������������������������������62 5–6. Alternative Fertility Assumptions��������������������������������������������������������������������������������������������63 5–7. Alternative Immigration Assumptions�������������������������������������������������������������������������������������63 5–8. Alternative Mortality Assumptions������������������������������������������������������������������������������������������64 7–1. Safe Indian Communities Priority Goal�����������������������������������������������������������������������������������86 11–1. Federal Civilian Workforce as Share of U.S. Population��������������������������������������������������������113 11–2. Pay Raises for Federal vs. Private Workforce�������������������������������������������������������������������������115 11–3. Education Level Distribution in Federal vs. Private Workforce�������������������������������������������117 11–4. Federal vs. Private Age Distribution��������������������������������������������������������������������������������������118 12–1. Relationship of Budget Authority to Outlays for 2013����������������������������������������������������������138 20–1. Trends in IT Spending for Major Agencies�����������������������������������������������������������������������������348 20–2. The Evolution of the TechStat Review Process����������������������������������������������������������������������350 23–1. Face Value of Federal Credit Outstanding�����������������������������������������������������������������������������400 31–1. Net Federal Liabilities�������������������������������������������������������������������������������������������������������������492 v LIST OF TABLES Page Economic and Budget Analyses Economic Assumptions 2–1. Economic Assumptions ���������������������������������������������������������������������������������������������������� 17 2–2. Comparison of Economic Assumptions���������������������������������������������������������������������������� 19 2–3. Comparison of Economic Assumptions in the 2012 and 2013 Budgets������������������������� 21 Interactions Between the Economy and the Budget 3–1. Sensitivity of the Budget to Economic Assumptions������������������������������������������������������ 3–2. Forecast Errors, January 1982-Present�������������������������������������������������������������������������� 3–3. Budget Effects of Alternative Scenarios�������������������������������������������������������������������������� 3–4. The Structural Balance���������������������������������������������������������������������������������������������������� Financial Stabilization Efforts and Their Budgetary Effects 4–1. Change in Programmatic Costs of Troubled Asset Relief Actions (Excluding Debt Service) ���������������������������������������������������������������������������������������������� 4–2. Troubled Asset Relief Program Current Value �������������������������������������������������������������� 4–3. Troubled Asset Relief Program Face Value of TARP Outstanding ������������������������������� 4–4. Troubled Asset Relief Program Effects on the Deficit and Debt ����������������������������������� 4–5. Troubled Asset Relief Program Effects on the Deficit and Debt Calculated on a Cash Basis ��������������������������������������������������������������������������������� 4–6. Troubled Asset Relief Program Reestimates������������������������������������������������������������������ 4–7. Detailed TARP Program Levels and Costs��������������������������������������������������������������������� 4–8. Comparison of OMB and CBO TARP Costs�������������������������������������������������������������������� 4–9. Comparison of EESA and FCRA TARP Subsidy Costs Using 2013 Budget Valuations���������������������������������������������������������������������������� 24 25 27 28 46 47 48 49 50 52 53 54 55 Long Term Budget Outlook 5–1. Long-Run Budget Projections������������������������������������������������������������������������������������������ 59 5–2. 75-Year Fiscal Gap under Alternative Budget Scenarios����������������������������������������������� 64 5–3. Intermediate Actuarial Projections For OASDI and HI������������������������������������������������� 65 Federal Borrowing and Debt 6–1. Trends in Federal Debt Held By the Public�������������������������������������������������������������������� 6–2. Federal Government Financing and Debt����������������������������������������������������������������������� 6–3. Debt Held by the Public Net of Financial Assets and Liabilities���������������������������������� 6–4. Agency Debt���������������������������������������������������������������������������������������������������������������������� 6–5. Debt Held By Government Accounts ������������������������������������������������������������������������������ 6–6. Federal Funds Financing and Change in Debt Subject to Statutory Limit������������������ 6–7. Foreign Holdings of Federal Debt������������������������������������������������������������������������������������ 68 70 73 75 76 80 82 Performance and Management Benefit-Cost Analysis 9–1. Estimates of the Total Annual Benefits and Costs of Major Rules Reviewed By OMB in 2010���������������������������������������������������������������������� 97 9–2. Estimates of the Net Costs Per Life Saved of Selected Health and Safety Rules Recently Reviewed by OMB ������������������������������������������������������������ 99 vii Page Social Indicators 10–1. Economic and Social Indicators������������������������������������������������������������������������������������� 108 10–2. Economic and Social Indicators������������������������������������������������������������������������������������� 109 10–3. Sources for Economic and Social Indicators����������������������������������������������������������������� 110 Improving the Federal Workforce 11–1. Occupations of Federal and Private Sector Workforces������������������������������������������������ 11–2. Federal Civilian Employment in the Executive Branch����������������������������������������������� 11–3. Total Federal Employment��������������������������������������������������������������������������������������������� 11–4. Personnel Compensation and Benefits�������������������������������������������������������������������������� 116 120 121 122 Budget Concepts and Budget Process Budget Concepts Budget Calendar������������������������������������������������������������������������������������������������������������������������ 126 12–1. Totals for the Budget and the Federal Government����������������������������������������������������� 131 Coverage of the Budget 13–1. Comparison of Total, On-Budget, and Off-Budget Transactions �������������������������������� 150 Budget Process 14–1. Overview of Changes to Discretionary Spending Limits and the President’s Proposed Limits in the 2013 Budget������������������������������������������������� 14–2. Preview Report Discretionary Spending Limits����������������������������������������������������������� 14–3. Proposed Changes to the Discretionary Spending Limits�������������������������������������������� 14–4. Mandatory and Receipt Savings from Discretionary Program Integrity Base Funding and Cap Adjustments���������������������������������������������������������� 14–5. Discretionary Program Integrity Base Funding and Cap Adjustments���������������������� 14–6. Mandatory and Receipt Savings from Other Program Integrity Initiatives���������������� 14–7. Funds Enacted in 2012 and Funds Requested in the Fiscal Year 2013 Budget to be Designated for Disaster Relief Pursuant to Section 251(b)(2)(D) of the Balanced Budget and Emergency Deficit Control Act of 1985, As Amended�������������������������������������������������������������������������������� 14–8. Funding, Spending, Revenues, and Deposits Associated With the Transportation Trust Fund�������������������������������������������������������������������������� 14–9. Effect of Student Aid Proposals On Discretionary Pell Funding Gap������������������������� 158 160 160 164 165 168 171 175 177 Federal Receipts Governmental Receipts 15–1. Receipts By Source—Summary������������������������������������������������������������������������������������� 15–2. Adjustments to the Budget Enforcement Act (BEA) Baseline Estimates of Governmental Receipts ��������������������������������������������������������� 15–3. Effect of Proposals���������������������������������������������������������������������������������������������������������� 15–4. Effect of Program Integrity Initiatives ������������������������������������������������������������������������� 15–5. Receipts By Source��������������������������������������������������������������������������������������������������������� 187 193 217 222 223 Offsetting Collections and Offsetting Receipts 16–1. Offsetting Collections and Offsetting Receipts From the Public��������������������������������� 228 16–2 Offsetting Receipts by Type Summary��������������������������������������������������������������������������� 229 viii Page 16–3. Gross Outlays to the Public, User Charges, Other Offsetting Collections and Offsetting Receipts From the Public, and Net Outlays������������������� 230 16–4. User Charge Proposals in the FY 2013 Budget ����������������������������������������������������������� 232 16–5 Offsetting Receipts by Type�������������������������������������������������������������������������������������������� 239 Tax Expenditures 17–1. Estimates of Total Income Tax Expenditures For Fiscal Years 2011-2017����������������� 17–2. Estimates of Tax Expenditures for the Corporate and Individual Income Taxes for Fiscal Years 2011–2017������������������������������������������������ 17–3. Income Tax Expenditures Ranked By Total Fiscal Year 2013-2017 Projected Revenue Effect��������������������������������������������������������������������������������������������� 17–4. Present Value of Selected Tax Expenditures For Activity in Calendar Year 2011������ 249 254 261 264 Special topics Aid to State and Local Governments 18–1. Federal Grants to State and Local Governments—Budget Authority and Outlays��� 18–2. Trends in Federal Grants to State and Local Governments���������������������������������������� 18–3. Summary of Programs by Agency, Bureau, and Program�������������������������������������������� 18–4. Summary of Programs by State������������������������������������������������������������������������������������� 18–5. School Breakfast Program (10.553)������������������������������������������������������������������������������� 18–6. National School Lunch Program (10.555)��������������������������������������������������������������������� 18–7. Special Supplemental Nutrition Program for Women, Infants, and Children (WIC) (10.557)������������������������������������������������������������������������� 18–8. Child and Adult Care Food Program (10.558)��������������������������������������������������������������� 18–9. State Administrative Matching Grants for the Supplemental Nutrition Assistance Program (Food Stamps) (10.561)��������������������������������������������� 18–10. Title I College-And-Career-Ready Students (Formerly Title I Grants to Local Educational Agencies) (84.010)�������������������������������������������������������� 18–11. Improving Teacher Quality State Grants (84.367)������������������������������������������������������� 18–12. Effective Teachers and Leaders State Grants��������������������������������������������������������������� 18–13. Vocational Rehabilitation Grants (84.126)�������������������������������������������������������������������� 18–14. Special Education-Grants to States (84.027)���������������������������������������������������������������� 18–15. Children’s Health Insurance Program (93.767)������������������������������������������������������������ 18–16. Grants to States for Medicaid (93.778)������������������������������������������������������������������������� 18–17. Temporary Assistance for Needy Families (TANF)-Family Assistance Grants (93.558)����������������������������������������������������������������������������������������� 18–18. Child Support Enforcement-Federal Share of State and Local Administrative Costs and Incentives (93.563)����������������������������������������������������������� 18–19. Low Income Home Energy Assistance Program (93.568)��������������������������������������������� 18–20. Child Care and Development Block Grant (93.575)����������������������������������������������������� 18–21. Child Care and Development Fund-Mandatory (93.596A)������������������������������������������ 18–22. Child Care and Development Fund-Matching (93.596B)��������������������������������������������� 18–23. Head Start (93.600)�������������������������������������������������������������������������������������������������������� 18–24. Foster Care-Title IV-E (93.658)�������������������������������������������������������������������������������������� 18–25. Adoption Assistance (93.659)����������������������������������������������������������������������������������������� 18–26. Social Services Block Grant (93.667)����������������������������������������������������������������������������� 294 304 306 307 308 309 310 311 312 313 314 315 316 317 318 319 320 321 322 323 324 325 326 327 328 329 ix Page 18–27. Ryan White HIV/AIDS Treatment Modernization Act-Part B HIV Care Grants (93.917)������������������������������������������������������������������������������������������� 18–28. Public Housing Operating Fund (14.850)��������������������������������������������������������������������� 18–29. Section 8 Housing Choice Vouchers (14.871)���������������������������������������������������������������� 18–30. Public Housing Capital Fund (14.872)�������������������������������������������������������������������������� 18–31. Community Development Block Grant (14.218)����������������������������������������������������������� 18–32. Unemployment Insurance (17.225)������������������������������������������������������������������������������� 18–33. Airport Improvement Program (20.106)������������������������������������������������������������������������ 18–34. Highway Planning and Construction (20.205)�������������������������������������������������������������� 18–35. Transit Formula Grants Programs (20.507)����������������������������������������������������������������� 18–36. Capitalization Grants for Clean Water State Revolving Fund (66.458)���������������������� 18–37. Capitalization Grants for Drinking Water State Revolving Fund (66.468)���������������� 18–38. Universal Service Fund E-Rate������������������������������������������������������������������������������������� 330 331 332 333 334 335 336 337 338 339 340 341 Strengthening Federal Statistics 19–1. 2011–2013 Budget Authority for Principal Statistical Agencies �������������������������������� 346 Information Technology 20–1. Federal IT Spending 2011-2013, Including Major Federal IT Investments���������������� 348 Federal Investment 21–1. Composition of Federal Investment Outlays���������������������������������������������������������������� 21–2. Federal Investment Budget Authority and Outlays: Grant and Direct Federal Programs��������������������������������������������������������������������������� 21–3. Net Stock of Federally Financed Physical Capital������������������������������������������������������� 21–4. Net Stock of Federally Financed Research and Development ������������������������������������ 21–5. Net Stock of Federally Financed Education Capital���������������������������������������������������� 356 358 361 362 363 Research and Development 22–1. Federal Research and Development Spending ������������������������������������������������������������ 370 Credit and Insurance 23–1. Top 10 Firms Presenting Claims (1975-2011) �������������������������������������������������������������� 389 23–2. Estimated Future Cost of Outstanding Federal Credit Programs������������������������������ 401 23–3. Reestimates of Credit Subsidies on Loans Disbursed Between 1992–2011 ��������������� 402 23–4. Direct Loan Subsidy Rates, Budget Authority, and Loan Levels, 2011–2013������������� 405 23–5. Loan Guarantee Subsidy Rates, Budget Authority, and Loan Levels, 2011–2013������ 407 23–6. Summary of Federal Direct Loans and Loan Guarantees������������������������������������������� 408 23–7. Direct Loan Write-Offs and Guaranteed Loan Terminations For Defaults���������������� 409 23–8. Appropriations Acts Limitations on Credit Loan Levels ��������������������������������������������� 412 23–9. Face Value of Government-Sponsored Lending ����������������������������������������������������������� 413 23–10. Lending and Borrowing By Government-Sponsored Enterprises (GSES) ����������������� 414 23–11. Direct Loan Transactions of the Federal Government ��������������������������������������� CD-ROM 23–12. Guaranteed Loan Transactions of the Federal Government ������������������������������ CD-ROM Homeland Security Funding Analysis 24–1. Homeland Security Funding by Agency������������������������������������������������������������������������ 417 24–2. Prevent and Disrupt Terrorist Attacks������������������������������������������������������������������������� 418 24–3. Protect the American People, Our Critical Infrastructure, and Key Resources���������� 419 24–4 Respond To and Recover From Incidents����������������������������������������������������������������������� 420 x Page 24–5. Discretionary Fee-Funded Homeland Security Activities by Agency�������������������������� 422 24–6. Mandatory Homeland Security Funding by Agency����������������������������������������������������� 422 24–7. Baseline Estimates—Total Homeland Security Funding by Agency��������������������������� 423 24–8. Homeland Security Funding by Budget Function�������������������������������������������������������� 424 24–9. Baseline Estimates—Homeland Security Funding by Budget Function�������������������� 424 Appendix—Homeland Security Mission Funding by Agency and Budget Account ������ CD-ROM Federal Drug Control Funding 25–1. Federal Drug Control Funding, 2011–2013 ����������������������������������������������������������������� 425 California Bay-Delta Federal Budget Crosscut 26–1. Bay-Delta Federal Funding Budget Crosscut��������������������������������������������������������������� 427 Bay-Delta Federal Agency Funding—Summary by Category and Agency Breakout ��� CD-ROM Bay-Delta Project Descriptions ���������������������������������������������������������������������������������������� CD-ROM Bay-Delta Year by Year Funding �������������������������������������������������������������������������������������� CD-ROM Technical Budget Analyses Current Services Estimates 27–1. Category Totals for the Adjusted Baseline�������������������������������������������������������������������� 431 27–2. Alternative Baseline Assumptions�������������������������������������������������������������������������������� 434 27–3. Summary of Economic Assumptions����������������������������������������������������������������������������� 435 27–4. Baseline Beneficiary Projections For Major Benefit Programs������������������������������������ 438 27–5. Impact of Regulations, Expiring Authorizations, and Other Assumptions in the Baseline���������������������������������������������������������������������������� 439 27–6. Receipts by Source in the Adjusted Baseline���������������������������������������������������������������� 448 27–7. Effect On Receipts of Changes in the Social Security Taxable Earnings Base����������� 449 27–8. Change in Outlays By Category in the Adjusted Baseline������������������������������������������ 450 27–9. Outlays by Function in the Adjusted Baseline������������������������������������������������������������� 451 27–10. Outlays by Agency in the Adjusted Baseline���������������������������������������������������������������� 452 27–11. Budget Authority by Function in the Adjusted Baseline��������������������������������������������� 453 27–12. Budget Authority By Agency in the Adjusted Baseline������������������������������������������������ 454 27–13. Current Services Budget Authority and Outlays by Function, Category, and Program ���������������������������������������������������������������� CD-ROM Trust Funds and Federal Funds 28–1. Receipts, Outlays, and Surplus or Deficit By Fund Group������������������������������������������� 28–2. Comparison of Total Federal Fund and Trust Fund Receipts to Unified Budget Receipts, 2011 ���������������������������������������������������������������� 28–3. Income, Outgo, and Balances of Trust Funds Group���������������������������������������������������� 28–4. Income, Outgo, and Balance of Major Trust Funds������������������������������������������������������ 28–5. Income, Outgo, and Balance of Major Federal Funds��������������������������������������������������� 456 458 459 461 468 National Income and Product Accounts 29–1. Federal Transactions in the National Income and Product Accounts, 2002–2013����� 473 29–2. Relationship of the Budget to the Federal Sector, NIPAs�������������������������������������������� 474 xi Page Comparison of Actual to Estimated Totals 30–1. Comparison of Actual 2011 Receipts with the Initial Current Services Estimates ��������������������������������������������������������������������������������������� 30–2. Comparison of Actual 2011 Outlays with the Initial Current Services Estimates���������������������������������������������������������������������������������������� 30–3. Comparison of the Actual 2011 Deficit with the Initial Current Services Estimate������������������������������������������������������������������������������������������ 30–4. Comparison of Actual and Estimated Outlays for Mandatory and Related Programs under Current Law���������������������������������������������������������������� 30–5. Reconciliation of Final Amounts for 2011��������������������������������������������������������������������� 30–6. Comparison of Estimated and Actual Surpluses or Deficits Since 1982��������������������� 30–7. Differences Between Estimated and Actual Surpluses or Deficits for Five-Year Budget Estimates Since 1982������������������������������������������������� 477 479 479 480 481 482 483 Budget and Financial Reporting 31–1. 2010 Budget and Financial Measures and CY 2010 Integrated Accounts Measures�������������������������������������������������������������������� 488 31–2. Government Assets and Liabilities ������������������������������������������������������������������������������ 491 Detailed Functional Tables 32–1. Policy Budget Authority and Outlays by Function, Category, and Program ����� CD-ROM Federal Programs by Agency and Account 33–1. Federal Programs by Agency and Account ���������������������������������������������������������� CD-ROM xii INTRODUCTION 1 1. INTRODUCTION Purpose of this Volume The Analytical Perspectives volume presents analyses that highlight specific subject areas or provide other significant data that place the Budget in context and assist the public, policymakers, researchers, and the media to better understand the budget’s effects on the Nation. This volume also provides background information to help readers understand the analyses presented. Presidential budgets have included separate analytical presentations of this kind for many years. The 1947 Budget and subsequent budgets included a separate section entitled “Special Analyses and Tables” that covered four and sometimes more topics. For the 1952 Budget, the section was expanded to 10 analyses, including many subjects still covered today, such as receipts, investment, credit programs, and aid to State and local governments. With the 1967 Budget this material became a separate volume entitled “Special Analyses,” and included 13 chapters. The material has remained a separate volume since then, with the exception of the Budgets for 1991–1994, when all of the budget material was included in one large volume. Beginning with the 1995 Budget, the volume has been named Analytical Perspectives. As in previous years, several large supplemental tables are included at www.whitehouse.gov/omb/budget/ fy2013/spec.html and on the Analytical Perspectives CDROM enclosed with the printed version of this volume. A list of these items is in the Table of Contents. Overview of the Chapters Economic and Budget Analyses Economic Assumptions. This chapter reviews recent economic developments; presents the Administration’s assessment of the economic situation and outlook, including the effects of macroeconomic policies; and compares the economic assumptions on which the Budget is based with the assumptions for last year’s Budget and those of other forecasters. Interactions Between the Economy and the Budget. This chapter illustrates how different economic paths would produce different budget results even if current law remained unchanged, and provides sensitivity estimates for the effects on the Budget of changes in specified economic assumptions. It also provides estimates of the cyclical and structural components of the budget deficit. Past errors in economic projections are reviewed. Financial Stabilization Efforts and Their Budgetary Effects. This chapter focuses on Federal efforts to stabilize the economy and promote financial recovery in the wake of the deep recession of 2008, including the Troubled Asset Relief Program (TARP), reform of financial regulation, and other measures. The chapter also includes special analyses of the TARP as described in Section 203(a) of the Emergency Economic Stabilization Act of 2008. Long-Term Budget Outlook. This chapter assesses the long-term budget outlook and the sustainability of current budget policy by focusing on 75-year projections of the Federal budget and showing how alternative longterm budget assumptions would produce different results. The chapter presents information on the size of the fiscal gap, and the budgetary effects of growing health costs. The chapter also explains why long-term primary surpluses (surpluses when interest costs are not counted) are needed to achieve sustainability. Federal Borrowing and Debt. This chapter analyzes Federal borrowing and debt and explains the budget estimates. It includes sections on special topics such as the trends in debt, agency debt, investment by Government accounts, and the statutory debt limit. Performance and Management Delivering a High-Performance Government. This chapter describes this Administration’s approach to performance management, the Federal Government’s use of performance goals, measurement, and regular datadriven reviews to drive significant performance gains. Starting with the 2011 Budget process, leaders of the 15 Cabinet departments and 9 other large Federal agencies were asked to identify a small number of ambitious, outcome-focused, near-term Agency Priority Goals (formerly High Priority Performance Goals) achievable with existing resources and legislation, and which rely primarily on strong execution to accomplish. The Administration also identified specific Government-wide management goals to cut waste and modernize the systems that power Government operations—in information, finance, acquisition, and human resource management. This chapter provides an update on the Administration’s progress in these areas, and introduces 2012-13 Agency and Cross-Agency Priority Goals, now required by the newly enacted GPRA Modernization Act. In addition, the chapter explains how the Administration expects agencies to use outcomefocused performance information to lead and learn to improve outcomes; candidly communicate the priorities, problems, and progress implementing Government programs; and tap into problem-solving networks to deliver more public value for each taxpayer dollar. Program Evaluation and Data Analytics. This chapter underscores this Administration’s commitment to measuring what works and what does not. It highlights the 3 4 Administration’s efforts to encourage rigorous evaluations, to improve program evaluation activities across the Federal government (including increasing their transparency), and to better integrate program evaluation into agency performance measurement and decision-making. Benefit-Cost Analysis. This chapter discusses the use of benefit-cost analysis to design programs and policies to ensure that they achieve the maximal benefit to society and do not impose unjustified or excessive costs. Social Indicators. This chapter presents a selection of statistics that offer a numerical picture of the United States. Included are economic statistics such as real GDP per capita, household income, and measures of income equality. There are also environmental and energy indicators. A second table shows health, education, and other social indicators. Improving the Federal Workforce. Strengthening the Federal workforce is essential to building a high-performing Government. This chapter presents summary data on Federal employment and compensation; examines the challenges posed by an aging Federal workforce and strengthening the personnel system to achieve critical agency missions; and discusses progress in improving employee performance and human capital management. Budget Concepts and Budget Process Budget Concepts. This chapter includes a basic description of the budget process, concepts, laws, and terminology, and includes a glossary of budget terms. Coverage of the Budget. This chapter describes activities that are included in budget receipts and outlays (and classified as “budgetary”) and those activities that are not included in the budget (and classified as “non-budgetary”). It also defines the terms “on-budget” and “off-budget.” Budget Process. This chapter includes the OMB Sequestration Preview Report for discretionary programs required by section 254 of the Balanced Budget and Emergency Deficit Control Act, a status report regarding scoring mandatory and revenue legislation for purposes of the Statutory Pay-As-You-Go Act of 2010, and descriptions of the Administration’s proposals to make the budget process more responsible and to make budgets more transparent, accurate, and comprehensive. Federal Receipts Governmental Receipts. This chapter presents information on receipts estimates, enacted tax legislation, and the receipts proposals in the Budget. Offsetting Collections and Offsetting Receipts. This chapter presents information on collections that offset outlays, including collections from transactions with the public and intragovernmental transactions. In addition, this chapter presents information on “user fees,” charges associated with market-oriented activities and regulatory fees. The user fee information includes a description of each of the user fee proposals in the Budget. ANALYTICAL PERSPECTIVES Tax Expenditures. This chapter describes and presents estimates of tax expenditures, which are defined as revenue losses from special exemptions, credits, or other preferences in the tax code. Special Topics Aid to State and Local Governments. This chapter presents crosscutting information on Federal grants to State and local governments, including highlights of Administration proposals, a table displaying budget authority and outlays for all grant programs, and historical trends and data. An Appendix to this chapter includes State-by-State spending estimates of major grant programs. Strengthening Federal Statistics. This chapter discusses 2013 Budget proposals for the Government’s principal statistical programs. Information Technology. This chapter gives an overview of Federal spending on information technology, and the major initiatives through which the Administration is seeking to improve Federal information technology to deliver better value to taxpayers through improved program performance, greater efficiency and cost savings, and extending the transparency of Government and participation of citizens. The chapter also discusses the Administration’s plans to extend its accomplishments in Federal information technology from its first three years while continuing to provide strong information security and protection of privacy information. Federal Investment. This chapter discusses federally financed spending that yields long-term benefits. It presents information on annual spending on physical capital, research and development, and education and training, and on the cumulative capital stocks resulting from that spending. Research and Development. This chapter presents a crosscutting review of research and development funding in the Budget, including discussions about priorities and coordination across agencies. Credit and Insurance. This chapter provides crosscutting analyses of the roles, risks, and performance of Federal credit and insurance programs and Governmentsponsored enterprises (GSEs). The general portion of the chapter covers the categories of Federal credit (housing, education, small business and farming, energy and infrastructure, and international) and insurance programs (deposit insurance, pension guarantees, disaster insurance, and insurance against terrorism-related risks). It also offers occasional discussions of special issues. The focus this year is on issues relating to fair value cost estimates for Federal credit programs. Additionally, two detailed tables, “Table 23–11, Direct Loan Transactions of the Federal Government” and “Table 23–12, Guaranteed Loan Transactions of the Federal Government,” are available at the Internet address cited above for the electronic version of this volume and on the Analytical Perspectives CD-ROM enclosed with the printed version of this volume. 5 1. INTRODUCTION Homeland Security Funding Analysis. This chapter discusses homeland security funding and provides information on homeland security program requirements, performance, and priorities. Additional detailed information is available at the Internet address cited above for the electronic version of this volume and on the Analytical Perspectives CD-ROM enclosed with the printed version of this volume. Federal Drug Control Funding. This chapter displays enacted and proposed drug control funding for Federal departments and agencies. California Bay-Delta Federal Budget Crosscut (formerly CALFED). This chapter presents information on Federal funding for the environmental restoration of California’s Bay-Delta, one of the President’s five priority ecosystems. Additional detailed tables on Bay-Delta funding and project descriptions are available at the Internet address cited above for the electronic version of this volume and on the Analytical Perspectives CD-ROM enclosed with the printed version of this volume. Technical Budget Analyses Current Services Estimates. This chapter presents estimates of what receipts, outlays, and the deficit would be if current policies remained in effect, using modified versions of baseline rules in the Budget Enforcement Act (BEA). A detailed table, “Table 27–14, Current Services Budget Authority and Outlays by Function, Category, and Program” is available at the Internet address cited above for the electronic version of this volume and on the Analytical Perspectives CD-ROM enclosed with the printed version of this volume. Trust Funds and Federal Funds. This chapter provides summary information about the two fund groups— Federal funds and trust funds. In addition, for the major trust funds and several Federal fund programs, the chapter provides detailed information about income, outgo, and balances. National Income and Product Accounts. This chapter discusses how Federal receipts and outlays fit into the framework of the National Income and Product Accounts (NIPAs) prepared by the Department of Commerce. The NIPA measures are the basis for reporting Federal trans- actions in the gross domestic product (GDP) and for analyzing the effect of the Budget on aggregate economic activity. Comparison of Actual to Estimated Totals. This chapter compares the actual receipts, outlays, and deficit for 2011 with the estimates for that year published in the 2011 Budget. It also includes a historical comparison of the differences between receipts, outlays, and the deficit as originally proposed with final outcomes. Budget and Financial Reporting. This chapter summarizes information about the Government’s financial performance that is provided by three complementary sources—the Budget, the financial statements, and the integrated macroeconomic accounts. This chapter also provides alternative measures of the Government’s assets and liabilities. The following materials are available at the Internet address cited above for the electronic version of this volume and on the Analytical Perspectives CD-ROM enclosed with the printed version of this volume. Detailed Functional Table Detailed Functional Table. Table 32–1, “Budget Authority and Outlays by Function, Category, and Program,” displays budget authority and outlays for major Federal program categories, organized by budget function, BEA category, and program. This table is available at the Internet address cited above for the electronic version of this volume and on the Analytical Perspectives CDROM enclosed with the printed version of this volume. Federal Programs by Agency and Account Federal Programs by Agency and Account. Table 33– 1, “Federal Programs by Agency and Account,” displays budget authority and outlays for each account, organized by agency, bureau, fund type, and account. This table is available at the Internet address cited above for the electronic version of this volume and on the Analytical Perspectives CD-ROM enclosed with the printed version of this volume. ECONOMIC AND BUDGET ANALYSES 7 2. ECONOMIC ASSUMPTIONS This chapter presents the economic forecast on which the 2013 Budget projections are based.1 When the President took office in January 2009, the economy was in the midst of an historic economic crisis. The first order of business for the new Administration was to arrest the rapid decline in economic activity that threatened to plunge the country into a second Great Depression. The President and Congress took unprecedented actions to restore demand, stabilize financial markets, and put people back to work. These steps included passage of the American Recovery and Reinvestment Act (ARRA), signed by the President just 28 days after taking office. They also included the Financial Stability Plan, announced in February 2009, which encompassed wide-ranging measures to strengthen the banking system, increase consumer and business lending, and stem foreclosures and support the housing market. These and a host of other actions walked the economy back from the brink. Production bottomed out during the spring, and the recession officially ended in June 2009.2 This marked the end of the decline in production, but businesses were still shedding jobs. The unemployment rate reached a peak of 10.0 percent in October 2009, and payroll employment continued to fall until February 2010. The two years that followed have seen the economy gradually begin to recover. Over the past 10 quarters, through the fourth quarter of 2011, real Gross Domestic Product (GDP) has grown at an average rate of 2.4 percent, and since February 2010, 3.2 million jobs have been added in the private sector. Meanwhile, the unemployment rate has fallen from its October 2009 peak of 10.0 percent to 8.5 percent (as of December 2011). The recovery is projected to gain momentum in 20122013 and to strengthen further in 2014. Unfortunately, even with healthy economic growth, unemployment is expected to be higher than normal for several more years. The Administration is projecting a full recovery from the recession of 2008-2009, but one that is drawn out because of the lingering effects of the financial crisis. A similar pattern of delayed growth is expected by the Federal Reserve and the Congressional Budget Office (see the discussion below on forecast comparisons). Recent Economic Performance The accumulated stresses from a contracting housing market and the resulting strains on financial markets brought the 2001-2007 expansion to an end in December 1 In the Budget, economic performance is discussed in terms of calendar years. Budget figures are discussed in terms of fiscal years. 2 The dating of U.S. business cycles is done by the National Bureau of Economic Research, a private institution that has supported economic research on business cycles and other topics for many decades. 2007. In its early stages, the 2008-2009 recession was relatively mild, but financial conditions worsened sharply in the fall of 2008, and from that point forward the recession became much more severe. Before it ended, real GDP had fallen further and the downturn had lasted longer than any previous post-World War II recession. Looking ahead, the likely strength of the recovery is one of the key issues for the forecast, and the aftermath of the housing and financial crises has an important bearing on the expected strength of the recovery. Housing Markets.—The economy’s contraction had its origin in the housing market. In hindsight, it is clear that in the early years of the previous decade housing prices became caught up in a speculative bubble that finally burst. In 2006-2007, housing prices peaked, and from 2007 through 2008, housing prices fell sharply according to most measures.3 Since 2009, housing prices measured in real terms relative to the Consumer Price Index (CPI) have not increased, which has limited the recovery in household wealth (see chart below). During the downturn, as prices fell, investment in housing plummeted, reducing the annualized rate of real GDP growth by an average of 1 percentage point per quarter. With the slower decline of house prices since 2009, housing investment has begun to stabilize, neither adding nor subtracting from real GDP growth on average since 2009:Q2. However, so far housing investment has not made a positive contribution to growth on a sustained basis as it has done in past expansions. In April 2009, monthly housing starts fell to an annual rate of just 478,000 units, the lowest level ever recorded for this series, which dates from 1959. Housing starts have fluctuated since then, responding to new tax incentives for home purchase and their expiration. The monthly data show housing starts of 657,000 at an annual rate in December 2011. In normal times, at least 1.5 million starts a year are needed to accommodate the needs of an expanding population and to replace older units, indicating that there is potential for a substantial housing rebound. A large overhang of vacant homes must be reduced, however, before a robust housing recovery can become established. The foreclosure rate in the third quarter of 2011 was 1.1 percent, which is down 0.2 percentage points from its rate in 2010:Q3, but remains one of the highest on record. With new foreclosures continuing to add to the stock of vacant homes, housing prices and new investment have remained subdued. The Administration forecast assumes a gradual recovery in housing activity that adds moderately to real GDP growth. 3 There are several measures of national housing prices. Two respected measures that attempt to correct for variations in housing quality are the S&P/Case-Shiller Home Price Index and the Federal Housing Finance Agency (FHFA) Purchase-Only House Price Index. The Case-Shiller index peaked in 2006, while the FHFA index peaked in 2007. 9 10 ANALYTICAL PERSPECTIVES Chart 2-1. Real House Prices Have Declined Case-Shiller National Home Price Index Divided by the CPI-U Research Series 1987:Q1=100 200 180 160 140 120 100 80 60 40 20 0 1987 1991 1995 The Financial Crisis.—In August 2007, the United States subprime mortgage market became the focal point for a worldwide financial crisis. Subprime mortgages are provided to borrowers who do not meet the standard criteria for borrowing at the lowest prevailing interest rate, because of low income, a poor credit history, lack of a down payment, or other reasons. In the spring of 2007, there were over $1 trillion outstanding in such mortgages, and because of falling house prices, many of these mortgages were on the brink of default. As banks and other investors lost confidence in the value of these high-risk mortgages and the mortgage-backed securities based on them, lending between banks froze. Non-bank lenders also became unwilling to lend. Financial market participants of all kinds were uncertain of the degree to which other participants’ balance sheets had been contaminated. The heightened uncertainty was reflected 1999 2003 2007 2011 in unprecedented spreads between interest rates on Treasury securities and those on various types of financial market debt. One especially telling differential was the spread between the yield on short-term U.S. Treasury securities, and the London interbank lending rate (LIBOR) which banks trading in the London money market charge one another for short-term lending in dollars. Historically, this differential has been 30 or 40 basis points. In August 2007, it shot up to over 200 basis points, and it spiked again, most dramatically, in September 2008 following the bankruptcy of Lehman Brothers (see chart). The policy response following the Lehman Brothers bankruptcy was crucial in restoring confidence and limiting the financial panic. Over the course of the following three months, the Federal Reserve lowered its short-term interest rate target to near zero, while creating new programs Chart 2-2. The One-Month LIBOR Spread over the One-Month Treasury Yields Percentage Points 4.50 4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Jan 6 2006 Mar 16 2007 May 23 2008 Jul 31 2009 Oct 8 2010 Dec 16 2011 11 2. ECONOMIC ASSUMPTIONS to provide credit to markets where financial institutions were no longer lending. The Troubled Asset Relief Program (TARP) provided the Treasury with the financial resources to bolster banks’ capital position and to remove troubled assets from banks’ balance sheets. In the spring of 2009, the Treasury and bank regulators conducted the Supervisory Capital Assessment Program, a stress test to determine the health of the 19 largest U.S. banks. The test provided more transparency for banks’ financial positions, which reassured investors. Consequently, the banks have been able to raise private capital, providing further evidence that the credit crisis has eased. As these actions were taken, the LIBOR spread narrowed sharply, and other measures of credit risk also declined. During 2009, the spreads between Treasury yields and other interest rates generally regained pre-crisis levels, and they held these levels through 2011. This is the clearest evidence that the U.S. financial crisis has abated, although the access to credit for small businesses and homebuyers remains constrained. While the U.S. crisis has eased, that is definitely not true worldwide. Europe continues to confront financial uncertainty stemming from the troubled financial condition of several countries in the Euro zone. After the Euro was established as the common currency for 17 European countries in 1999, interest rates in those countries moved close together as their inflation rates tended to converge. However, recent events have led markets to reassess the long-run solvency of some of the countries using the Euro, and the result has been a striking divergence in the interest rates charged to the various countries. High interest rates on their debt make it difficult for the most threatened of these countries to address the pressing fiscal issues that have put their longrun solvency in danger. The United States would certainly suffer if the crisis in the Euro zone were to intensify. U.S. banks and other financial institutions have investments in Europe that would be at risk. Uncertainty about these possibilities has troubled U.S. financial markets along with other markets around the world throughout the past year. The atmosphere of financial uncertainty has contributed to the reluctance of many lenders to lend except for the safest of investments. Negative Wealth Effects and Consumption.— Between the third quarter of 2007 and the first quarter of 2009, the real net worth of American households declined by 27 percent – the equivalent of more than one year’s GDP. A precipitous decline in the stock market, along with falling house prices over this period, were the main reasons for the drop in household wealth. Since then, real wealth has risen, but the increase through the third quarter of 2011 was only 8 percent. House prices nationally are falling less rapidly, and the stock market has partially recovered, but real net worth remains 21 percent below its 2007 peak level.4 Americans have reacted to this massive loss of wealth by saving more. The personal saving rate had been declining since the 1980s, and it reached a low point of 1.3 percent in the third quarter of 2005. It remained low, averaging only 2.2 percent through the end of 2007, but since then, as wealth has declined, the saving rate has increased. It rose to a temporary high point of 6.2 percent in the second quarter of 2009, following a distribution of special $250 payments to Social Security recipients and the implementation of other Recovery Act provisions. Since then, the saving rate has averaged 4.7 percent, although it dipped below 4.0 percent in the second half of 2011. In the long-run, increased saving is essential for future living standards to rise. However, a sudden increase in the desire to save implies a corresponding reduction in consumer demand, and a fall-off in consumption had a negative effect on the economy during the recession of 2008 and early 2009. During that period, real consumer spending fell at an annual rate of 2.3 percent. Since then, real consumer spending has recovered and now exceeds its 4 Real wealth is computed by deflating household net worth from the Flow-of-Funds Accounts by the Chain Price Index for Personal Consumption Expenditures. Data are available through 2011:Q3. Chart 2-3. Personal Saving Rate Percent of Disposable Personal Income 14 12 10 8 6 4 2 0 1980 1984 1989 1993 1998 2002 2007 2011 12 ANALYTICAL PERSPECTIVES Chart 2-4. Real Business Fixed Investment Billions of 2005 dollars 1,700 1,600 1,500 1,400 1,300 1,200 1,100 2000 2002 2004 previous peak level. Continued growth in consumption is essential to a healthy recovery, and, if income also grows, increased consumption is compatible with a higher but stable saving rate. Investment.—Business fixed investment fell sharply during the 2008-2009 contraction. It rose rapidly in 2010, and 2011, but even after the substantial increases in business spending for structures, equipment and software over the past 10 quarters, real investment remains well below its pre-recession levels implying room for further growth (see chart). The cost of capital is low and American corporations at the end of 2011 held substantial levels of cash reserves, which could provide funding for future investments as the economy continues to recover. The main constraint on business investment is poor sales expectations, which have been dampened by the slow pace of recovery. However, if consumption continues to expand, businesses are in a good position to expand investment. Strengthened by tax incentives, the outlook for investment is encouraging. Nevertheless, the pace of future growth could prove to be uneven, as investment tends to be volatile. Net Exports.— Over the last two decades, the U.S. trade deficit expanded as foreign investors increased investment in the United States. The inflow of foreign capital helped fuel the housing bubble. The financial crisis and the resulting economic downturn sharply curtailed the flow of trade and foreign investment. In the third quarter of 2008, before the worst moment of the financial crisis, net exports measured at an annual rate, in the National Income Accounts, were -$757 billion. Over the next three quarters, the deficit in net exports was more than cut in half, falling to -$338 billion in the second quarter of 2009. Since then, as the U.S. economy has recovered, U.S. imports have grown at a faster pace than U.S. exports. Consequently, the net export balance has declined to -$582 billion. It is unhealthy for the world economy to be too dependent on U.S. consumption spending, so further reductions in the U.S. trade deficit 2006 2009 2011 would be desirable. The Administration’s National Export Initiative is intended to increase U.S. exports to help reduce worldwide trade imbalances. The Labor Market.—The unemployment rate peaked in 2009. It has declined since then, but it remains well above its historical average of under 6 percent, and the rate of long-term unemployment (those out of work for more than 6 months) is higher than at any other period since before World War II. The high rate of unemployment has had devastating effects on American families, and the recovery will not be real for most Americans until the job market also turns around. Historically, when the economy grows so does employment, and there are signs that this pattern is repeating itself in the current recovery, albeit slowly. Private employment has grown for 22 straight months, although at a relatively modest rate. The positive job growth has exceeded the job gains during similar periods in the two previous recoveries (see Chart 2-5). The Recovery in 2011.— At the beginning of 2011, many private forecasters were expecting the recovery to pick up momentum over the course of the year. Instead, 2011 saw subpar growth due to unexpected headwinds. Global events weighed on the economy. Political uncertainty in the Middle East caused world oil markets to tighten, especially for the high-quality crude oil that is most useful in refining gasoline. The price of oil rose by 16 percent between September and December 2010 and then rose another 20 percent in March and April 2011. Consumers were pinched by the rising cost of fuel. Although the U.S. economy is less sensitive to oil price shocks than it was in the 1970s, higher fuel prices still exact a toll. On March 11, 2011, a severe earthquake followed by a devastating tsunami seriously damaged the coastal regions of northeastern Japan. These natural disasters had a worldwide impact as they curtailed production of parts needed for Japanese automobiles manufactured both in Japan and abroad. In the United States, for example, production of motor vehicles fell 6.3 13 2. ECONOMIC ASSUMPTIONS Chart 2-5. Private Job Gains and Losses During Recent Recoveries Thousands 4,000 3,500 3,000 Average Monthly Change First Six Months of Recovery Next Twenty-Four Months of Recovery 3,093 2,576 2,500 2,000 1,500 933 1,000 500 0 (500) (304) (761) (1,000) (1,500) (1,101) March 1991 November 2001 NBERRecession RecessionTrough TroughMonth Month NBER percent (0.5 million units at an annual rate) in the second quarter, with most of the decline at the American facilities of Japanese automakers. The combination of higher oil and gas prices along with the repercussions from the production cutbacks at motor vehicle assembly plants worked to offset the stimulative effects of lower payroll taxes and extended unemployment benefits enacted at the end of 2010. Fortunately, these particular headwinds are likely to be transitory. Oil prices have fluctuated over the last six months, but they were no higher in January 2012 than in May 2011. Meanwhile, Japanese manufacturing production has recovered from the effects of the earthquake allowing motor vehicle assemblies and sales in the United States to return to the levels reached before the disaster. As these shocks faded, economic growth picked up in the second half of 2011. A more persistent source of sluggishness has been the sovereign debt crisis in Europe, which has repeatedly impinged on global equity markets and which threatens to place a new drag on consumer confidence and the global recovery going forward. In 2010, several European countries encountered difficulty in obtaining credit, and financial markets around the world responded negatively to these developments spreading the effects of the crisis to the United States and elsewhere. The European Union acted to confront these issues when they first emerged, and the affected governments have attempted to restrain their budget deficits. Even with these actions, however, the European recovery remains at risk because of increased uncertainty and because the measures taken to address the fiscal crisis have had the effect in some cases of limiting demand and hampering recovery. Concerns over sovereign debt returned in 2011 and spread to larger June 2009 countries in the European Union, creating renewed volatility in global financial markets. Policy Background Over the last 36 months, the Administration and the Federal Reserve have taken a series of fiscal and monetary policy actions to bring the recession to an end and expedite the recovery. On the fiscal policy side, the passage of ARRA was a crucial step early in the Administration, other important actions followed, and the 2013 Budget includes new proposals to promote growth and employment. Meanwhile, the Federal Reserve has kept its target interest rate near zero, and it has pursued other novel measures to unfreeze the Nation’s credit markets and bolster economic growth. Several Administration policy initiatives have been pursued to stabilize the Nation’s financial and housing markets. Fiscal Policy.—The Federal budget affects the economy through many channels. For an economy coming out of a deep recession, the most important of these is the budget’s effect on total demand. In a slumping economy, with substantial spare capacity, the level of demand is the main determinant of how much is produced and how many workers will be employed. Government spending on goods and services can substitute for missing private spending while changes in taxes and transfers can contribute to demand by enabling people to spend more than they otherwise could or would. ARRA bolstered aggregate demand in several ways helping to spark the recovery. It increased spending on goods and services at the Federal level; it provided assistance to State Governments; it included large tax reductions for middle-class families; and it also extended unemployment insurance and 14 COBRA benefits, which have allowed people to maintain spending at levels higher than would have been possible without it. Job losses in 2009-2010 would have been much greater without ARRA as the steep slump was likely to have continued without intervention. In the first three months of 2009, private payroll employment was falling at an average rate of 783,000 jobs per month. By the last three months of 2009, the rate of job loss had declined to 129,000 per month. The private sector began to add jobs in March 2010, and has added jobs every month since then (through December 2011). In the last three months of 2011, the economy added an average of 155,000 privatesector jobs per month, and almost 2 million private sector jobs over the course of the year. It is not possible to judge the effectiveness of a macroeconomic policy without some idea of the alternative. Critics of Administration fiscal policy have argued that the poor job market is evidence of its ineffectiveness. However, the only way to know that is through a macroeconomic model that can be used to project the employment outcome under an alternative policy. In fact, results from a range of models imply that employment was significantly increased by ARRA. The Council of Economic Advisers’ (CEA) latest assessment estimates that ARRA increased employment by between 2.2 million and 4.2 million jobs through the second quarter of 2011, an estimate that is in line with private forecasters.5 The Administration has continued to pursue policies to reduce unemployment and create jobs. In 2010, the President launched the National Export Initiative, to support new jobs in American export industries. In March 2010, the President signed the Hiring Incentives to Restore Employment (HIRE) Act, which provided subsidies for firms that hired unemployed workers and provided other incentives. In September 2010, the President signed the Small Business Jobs Act, which provided tax relief and better access to credit to small businesses. In December 2010, the President reached agreement with Congress to extend several expiring tax provisions and avoid a large tax increase in 2011: the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act. The agreement included expanded tax incentives for business investment, a temporary reduction in payroll taxes, and extended long-term unemployment insurance benefits. These measures helped support economic growth in 2011. Although growth was held back by higher energy prices, the Japanese earthquake and tsunami, and the renewed financial crisis in Europe; growth would likely have been even weaker without the policy changes agreed to at the end of 2010. The President has continued to call for measures that would strengthen growth and employment in the near term while also proposing fiscally responsible measures to reduce the long-run budget deficit. In the fall of 2011, the Administration proposed the American Jobs Act (AJA), 5 The CEA “multipliers” used for these estimates are similar to those used by the Congressional Budget Office (CBO) and private forecasters such as Macroeconomic Advisers LLC. See Council of Economic Advisers, “The Economic Impact of the American Recovery and Reinvestment Act of 2009: Eighth Quarterly Report,” December 9, 2011. ANALYTICAL PERSPECTIVES which would have extended and expanded the payroll tax cut enacted in December 2010. The AJA would also have extended unemployment insurance benefits for those out of work more than 26 weeks. The bill proposed new incentives for hiring long-term unemployed workers; new protections for the jobs of teachers, fire fighters, and police; more investment in community colleges and public schools; and creation of a national infrastructure bank to foster needed investments in public infrastructure. At the end of 2011, Congress extended the existing payroll tax cut and long-term unemployment insurance benefits for two months. This extension protected the average American family from an immediate tax increase that would have amounted to $1,000 over the entire year. However, Congress must still act to extend this tax holiday for the full year and enact other measures that the President has proposed. The 2013 Budget includes many of the initiatives in the AJA, with enactment assumed for many of them by March 2012. Economic recovery efforts increase the Federal budget deficit. This was the appropriate response to the crisis the Administration inherited, and it is expected to be temporary. The 2013 Budget provides a path to lower deficits over time. Once the economy recovers, unsustainably large deficits are bad for the economy. When private demand strengthens, deficits can raise interest rates and decrease private investment, as the Federal Government competes with investors in the credit markets. Deficits also contribute to the amount that the United States borrows from abroad. Persistently large deficits reduce future standards of living in two ways: higher interest rates and lower investment reduce productivity and future income, and an increase in foreign borrowing acts like a mortgage entailing future payments to foreign creditors. Deficits also limit the Government’s maneuvering room to handle future crises. For these reasons, it is important to control the budget deficit and maintain fiscal discipline in the long run. But when unemployment is as high as it is today, budget deficits are essential to support demand in the private economy, and higher deficits can be used to reduce unemployment and strengthen economic growth. The Administration’s policy proposals would use Federal borrowing to support economic growth in the near term, while constraining borrowing over time. Monetary Policy.—The Federal Reserve is responsible for monetary policy. Traditionally, it has relied on a relatively narrow range of instruments to achieve its policy goals, but in the recent crisis the Fed has been forced to consider a broader approach. The short-term interest rate, the traditional tool of monetary policy, has been close to zero since the end of 2008, and the Fed has announced it will hold it near that level into 2014. Further cuts in short-term nominal rates are not possible, yet with unemployment high the Federal Reserve has needed to act in novel ways to achieve its dual mandate of stable prices and healthy economic growth. Consequently, the Federal Reserve has created new facilities to provide credit directly to the financial markets and has also bought longer-term securities for its portfolio. 15 2. ECONOMIC ASSUMPTIONS The combination of aggressive monetary and fiscal policies helped reverse the economic downturn in 2009 and set the stage for an economic recovery in the summer of 2009. However, following an initial burst of growth in late 2009 and early 2010, the economy slowed. To help counter the slowdown, the Federal Reserve expanded its balance sheet even further in another round of purchases of longterm Treasury securities. In 2011, the Fed undertook to shift the composition of its portfolio in such a way as to reduce the yield on longer term Treasury securities. Because much of the increase in Federal Reserve liabilities has gone into idle reserves of banks, and because of the considerable slack in the economy, current inflation risks remain low despite these aggressive measures. The Federal Reserve is prepared to reduce the assets on its balance sheet promptly and take other actions to reduce the growth of the money supply when the recovery gains strength and the unemployment rate falls. Financial Stabilization Policies.—Over the course of the last 36 months, the U.S. financial system has been pulled back from the brink of a catastrophic collapse. The very real danger that the system would disintegrate in a cascade of failing institutions and crashing asset prices has been averted. The Administration’s Financial Stability Plan played a key role in cleaning up and strengthening the Nation’s banking system. This plan began with a forward-looking capital assessment exercise for the 19 U.S. banking institutions with assets in excess of $100 billion. This was the so-called “stress test” aimed at determining whether these institutions had sufficient capital to withstand stressful deterioration in economic conditions. The resulting transparency and resolution of uncertainty about banks’ potential losses boosted confidence and allowed banks to raise substantial funds in private markets and repay tens of billions of dollars in taxpayer investments. The Financial Stability Plan also aimed to unfreeze secondary markets for loans to consumers and businesses. The Administration has undertaken the Making Home Affordable plan to help distressed homeowners avoid foreclosure and stabilize the housing market. More than 5.5 million modification arrangements were started between April 2009 and the end of November 2011 – including more than 1.7 million Home Affordable Modification Program (HAMP) trial modification starts, 1.1 million Federal Housing Administration (FHA) loss mitigation and early delinquency interventions, and more than 2.6 million proprietary modifications under the public-private HOPE Now program. Many of these modifications are a direct result of the standards and processes the Administration’s programs have established. While some homeowners may have received help from more than one program, the total number of agreements offered continues to be more than double the number of foreclosure completions for the same period. Another crucial response to the financial crisis was the implementation of the Troubled Asset Relief Program (TARP), which was established in the fall of 2008. TARP provided the Treasury with the financial resources to bolster banks’ capital positions and to remove troubled assets from banks’ balance sheets. Under the Obama Administration, the focus of TARP was shifted from large financial institutions to households, small banks, and small businesses. Since the Administration took office, the projected cost of TARP has decreased dramatically and programs are being successfully wound down. On October 3, 2010, authority to make new investments under TARP expired. Today, the Federal Government maintains TARP programs only where it has existing contracts and commitments. The net cost of TARP is now projected to be only a small fraction of its originally projected cost. Economic Projections The economic projections underlying the 2013 Budget estimates are summarized in Table 2–1. The assumptions are based on information available as of mid-November 2011. This section discusses the Administration’s projections and the next section compares these projections with those of the Federal Reserve’s Open Market Committee (FOMC), the Congressional Budget Office (CBO), and the Blue Chip Consensus of private forecasters. Real GDP.—The Administration projects the economic recovery that began in 2009 will continue in 2012-2013 with real GDP growing at an annual rate of 3.0 percent (fourth quarter over fourth quarter). Although growth is projected to be stable, the key supports for growth are expected to shift over the two years. In 2012, the Administration’s budget proposals underpin growth, while in 2013 increased private demand is expected to play a larger role in supporting continued recovery. This economic forecast is based on the assumption that the Administration’s budget proposals are enacted in full. The Administration recognizes that not all forecasters share this assumption, and it is the main reason the Administration projections for real growth in 2012 are stronger than the consensus expectation. In 2014, growth is projected to increase to around 4 percent annually as the job market improves and residential investment recovers. Real GDP is projected to return to its long-run “potential” level by 2020, and to grow at a steady 2.5 percent rate for the remaining years of the forecast. As shown in Chart 2-6, the Administration’s projections for real GDP growth over the first seven years of the expected recovery imply an average growth rate below the average for historical recoveries. Recent recoveries have been somewhat weaker than average, but the last two expansions were preceded by mild recessions with relatively little pent-up demand when conditions improved. Because of the depth of the recent recession, there is much more room for a rebound in spending and production than was true either in 1991 or 2001. On the other hand, lingering effects from the credit crisis and other special factors have limited the pace of the recovery until now. Thus, the Administration is forecasting a slower than normal recovery, but one that eventually restores GDP to near the level of potential that would have prevailed in the absence of a downturn. Some international economic organizations have argued that a financial recession permanently scars an economy, and this view is also shared by some American forecasters. On 16 ANALYTICAL PERSPECTIVES Percent 8 7 Chart 2-6. Real GDP Growth Following a Recession: Seven-Year Average 7.2 6 5 4.9 4.7 5.2 4.3 4 3.1 3 4.1 3.6 3.4 3.2 2.7 2.2 2 1 0 1933 1949 1954 1958 1961 1970 1975 1982 1991 2001 Average Forecast Trough Year that view, there is no reason to expect a full recovery to the previous trend of real GDP. The statistical evidence for permanent scarring comes mostly from the experiences of developing countries and its relevance to the current situation in the United States is debatable. Historically, economic growth in the United States economy has shown considerable stability over time as displayed in Chart 2-7. Since the late 19th century, following every recession, the economy has returned to the long-term trend in per capita real GDP. This was true even following the only previous recession in which the United States experienced a disastrous financial crisis – 1929-1933 – although the recovery from the Great Depression was not complete until World War II restored demand. The U.S. economy has enormous room for growth, although there are factors that could continue to limit that growth in the years ahead. On the positive side, the unemployment rate fell sharply at the end of 2011, and if the President’s budget proposals are adopted, 2012 should get off to a solid start. The Federal Reserve’s commitment to achieving its dual mandate means that monetary policy will continue to seek a robust recovery. However, financial markets here and in Europe have been troubled by concerns about weak economic growth and the sustainability of fiscal policy in some European countries. The drag from a European slowdown could hold back the U.S. economy. Chart 2-7. Real Per Capita GDP 1890-2010 Natural Log 11.0 10.5 10.0 9.5 Long Run Trend 9.0 Actual 8.5 8.0 7.5 1890 1914 1938 1962 1986 Sources: Angus Maddison, The World Economy, Historical Statistics 1890-1929 and Bureau of Economic Analyis, National Income and Product Accounts, 1929-2010. 2010 17 2. ECONOMIC ASSUMPTIONS Table 2–1. ECONOMIC ASSUMPTIONS1 (Calendar years; dollar amounts in billions) 2010 Actual Projections 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Gross Domestic Product (GDP): Levels, dollar amounts in billions: Current dollars ������������������������������������������������ Real, chained (2005) dollars ��������������������������� Chained price index (2005 = 100) ������������������ 14,527 13,088 111.0 15,106 13,323 113.4 15,779 13,687 115.3 16,522 14,097 117.2 17,397 14,606 119.1 18,448 15,211 121.3 19,533 15,821 123.5 20,651 16,431 125.7 21,689 16,952 127.9 22,666 17,403 130.2 23,659 17,844 132.6 24,688 18,290 135.0 25,760 18,748 137.4 Percent change, fourth quarter over fourth quarter: Current dollars ������������������������������������������������ Real, chained (2005) dollars ��������������������������� Chained price index (2005 = 100) ������������������ 4.7 3.1 1.6 4.0 1.7 2.2 4.6 3.0 1.6 4.7 3.0 1.6 5.8 4.0 1.7 6.1 4.2 1.8 5.8 3.9 1.8 5.7 3.8 1.8 4.6 2.8 1.8 4.4 2.6 1.8 4.3 2.5 1.8 4.3 2.5 1.8 4.3 2.5 1.8 Percent change, year over year: Current dollars ������������������������������������������������ Real, chained (2005) dollars ��������������������������� Chained price index (2005 = 100) ������������������ 4.2 3.0 1.2 4.0 1.8 2.1 4.5 2.7 1.7 4.7 3.0 1.7 5.3 3.6 1.6 6.0 4.1 1.8 5.9 4.0 1.8 5.7 3.9 1.8 5.0 3.2 1.8 4.5 2.7 1.8 4.4 2.5 1.8 4.3 2.5 1.8 4.3 2.5 1.8 Incomes, billions of current dollars: Domestic corporate profits ������������������������������ Employee compensation �������������������������������� Wages and salaries ���������������������������������������� Other taxable income2 ������������������������������������ 1,418 7,971 6,408 3,108 1,588 8,278 6,668 3,308 1,782 8,595 7,025 3,495 1,750 8,955 7,253 3,697 1,779 9,433 7,601 3,899 1,884 9,992 8,063 4,164 1,936 10,622 8,578 4,475 1,973 11,297 9,150 4,766 1,946 11,953 9,696 5,022 1,906 12,586 10,219 5,251 1,842 13,230 10,749 5,464 1,761 13,885 11,277 5,655 1,678 14,587 11,850 5,794 218.1 225.1 230.0 234.5 239.1 244.0 249.0 254.3 259.6 265.1 270.7 276.4 282.2 1.2 1.6 3.6 3.2 1.9 2.2 1.9 1.9 2.0 2.0 2.0 2.0 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 Unemployment rate, civilian, percent: Fourth quarter level ���������������������������������������� Annual average ����������������������������������������������� 9.6 9.6 9.0 9.0 8.8 8.9 8.6 8.6 7.8 8.1 7.0 7.3 6.3 6.5 5.6 5.8 5.5 5.5 5.4 5.4 5.4 5.4 5.4 5.4 5.4 5.4 Federal pay raises, January, percent: Military4 ����������������������������������������������������������� Civilian5 ����������������������������������������������������������� 3.4 2.0 1.4 0.0 1.6 0.0 1.7 0.5 NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA Interest rates, percent: 91-day Treasury bills6 �������������������������������������� 10-year Treasury notes ����������������������������������� 0.1 3.2 0.1 2.8 0.1 2.8 0.2 3.5 1.4 3.9 2.7 4.4 3.8 4.7 4.1 5.0 4.1 5.1 4.1 5.1 4.1 5.1 4.1 5.3 4.1 5.3 Consumer Price Index (all urban):3 Level (1982–84 = 100), annual average ��������� Percent change, fourth quarter over fourth quarter ������������������������������������������������������� Percent change, year over year ���������������������� NA = Not Available on information available as of mid-November 2011. 2Rent, interest, dividend, and proprietors' income components of personal income. 3Seasonally adjusted CPI for all urban consumers. 4Percentages apply to basic pay only; percentages to be proposed for years after 2013 have not yet been determined. 5Overall average increase, including locality pay adjustments. Percentages to be proposed for years after 2013 have not yet been determined. 6Average rate, secondary market (bank discount basis). 1Based Long-Term Growth.—The Administration forecast does not attempt to project cyclical developments beyond the next few years. The long-run projection for real economic growth and unemployment assumes that they will maintain trend values in the years following the return to full employment. In the non-farm business sector, productivity is assumed to grow at 2.3 percent per year in the long run, while nonfarm labor supply grows at a rate of 0.7 percent per year, so nonfarm business output grows approximately 3.0 percent per year. Real GDP growth, reflecting the slower measured growth in productivity outside the nonfarm business sector, proceeds at a rate of 2.5 percent. That is markedly slower than the average growth rate of real GDP since 1947 — 3.2 percent per year. In the 21st century, real GDP growth in the United States is likely to be permanently slower than it was in earlier eras because of a slowdown in labor force growth initially due to the retirement of the post-World War II “baby boom” generation, and later by a decline in the growth of the working-age population. 18 Unemployment.—In December 2011, the overall unemployment rate was 8.5 percent. It had shown little movement since early 2011, before beginning to decline in September. When the forecast for the unemployment rate for the Budget was finalized in mid-November 2011, the reported unemployment rate for the latest month available, October 2011, was 9.0 percent. The Administration’s forecast seeks to be a balanced reflection of the most likely outcomes, and this is a cautious forecast reflecting information available at the time of the forecast and expected relationships among economic variables. Were it possible to update the forecast for the Budget, the unemployment rate in these projections would be lower, reflecting the sharp decline in the unemployment rate near the end of last the year. Inflation.— Over the four quarters ending in 2011:Q4, the price index for Personal Consumption Expenditures rose 2.6 percent, significantly higher than the 1.3 percent increase over the previous four quarters. Meanwhile, the Consumer Price Index for all urban consumers (CPI-U) rose by 3.0 percent for the twelve months ending in December 2011. Over the previous 12 months it had risen by just 1.4 percent. The increase in inflation in 2011 was due almost entirely to sharp movements in food and energy prices. The “core” CPI, excluding both food and energy, was up only 2.2 percent through the 12 months ending in December and the GDP price index for consumption excluding food and energy was up only 1.7 percent over the most recent four quarters. There was some increase in the rate of core inflation, but mainly as a result of temporary factors such as higher rent increases and the pass-through of higher prices for food and energy goods into the prices of such goods and services as airline fares. Weak demand continues to hold down prices for many goods and services, and continued high unemployment is expected to preserve a relatively low inflation rate. As the economy recovers and the unemployment rate declines, the rate of inflation should remain near the Federal Reserve’s implicit target of around 2 percent per year. With the recovery path assumed in the Administration forecast, the risk of outright deflation appears minimal. The Administration assumes that the rate of change in the CPI will average 2.1 percent and that the GDP price index will increase at a 1.8 percent annual rate in the long run. Interest Rates.—Interest rates on Treasury securities fell sharply in late 2008, as both short-term and long-term rates declined to their lowest levels in decades. Since then Treasury rates have fluctuated, but they have not returned to their levels before the financial crisis, and at the end of 2011 long-term rates were especially low. In the last week of December, the yield on 10-year Treasuries was just 1.9 percent. Investors have sought the security of Treasury debt during the heightened financial uncertainty of the last few years, which has kept yields low. At the short end of the yield curve, the Federal Reserve is holding short-term rates near zero as it seeks to foster economic growth and lower unemployment. The Federal Reserve’s policy of purchasing long-term Treasury securities may ANALYTICAL PERSPECTIVES also be helping to hold down long-term rates. In the Administration projections, interest rates are expected to rise, but only gradually as financial concerns are alleviated and the economy recovers from recession. The 91-day Treasury bill rate is projected to remain near zero into 2013 consistent with the Fed’s announced intentions, and then to rise to 4.1 percent by 2017. The 10-year rate begins to rise in 2013 and reaches 5.3 percent by 2017. These forecast rates are historically low, reflecting lower inflation in the forecast than for most of the post-World War II period. After adjusting for inflation, the projected real interest rates are close to their historical averages. Income Shares.—The share of labor compensation in GDP was extremely low by historical standards in 2011. It is expected to remain low for the next few years falling to a low point of 54.2 percent of GDP in 2013-2015. As the economy grows faster in the middle years of the forecast period, compensation is projected to rise, reaching 56.6 percent of GDP in 2022. In the expansion that ended in 2007, labor compensation tended to lag behind the growth in productivity, and that has also been true for the recent surge in productivity growth in 2009-2010. The share of taxable wages, which is strongly affected by changes in health insurance costs, is expected to rise from 44.1 percent of GDP in 2010 to 46.0 percent in 2022. Health reform is expected to limit the rise in employer-sponsored health insurance costs and allow for an increase in takehome pay. The share of domestic corporate profits was 9.8 percent of GDP in 2010. Profits dropped sharply in 2008-2009, but have recovered in 2010 and 2011. In the forecast, the ratio of domestic corporate profits to GDP falls to about 6.5 percent by the end of the 10-year projection period as the share of employee compensation slowly recovers. Comparison with Other Forecasts Table 2–2 compares the economic assumptions for the 2013 Budget with projections by CBO, the Blue Chip Consensus — an average of about 50 privatesector economic forecasts — and, for some variables, the Federal Reserve Open Market Committee. These other forecasts differ from the Administration’s projections, but the forecast differences are relatively small compared with the margin of error in all economic forecasts. Like the Administration, the other forecasts project that real GDP will continue to grow as the economy recovers. The forecasts also agree that inflation will be low while outright deflation is avoided, and that the unemployment rate will decline while interest rates eventually rise. There are some conceptual differences between the Administration forecast and the other economic forecasts. The Administration forecast assumes that the President’s Budget proposals will be enacted. The 50 or so private forecasters in the Blue Chip Consensus make differing policy assumptions, but none would necessarily assume that the Budget is adopted in full. CBO is required to assume that current law will continue in making its projections, although CBO has recently begun to report alternative economic assumptions assuming a more 19 2. ECONOMIC ASSUMPTIONS Table 2–2. COMPARISON OF ECONOMIC ASSUMPTIONS (Calendar years) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Nominal GDP: 2013 Budget1������������������������������������������������������������� Blue Chip ������������������������������������������������������������������ CBO �������������������������������������������������������������������������� 15,106 15,108 15,093 15,779 15,727 15,633 16,522 16,435 16,015 17,397 17,273 16,817 18,448 18,136 17,899 19,533 19,043 18,962 20,651 19,957 19,949 21,689 20,895 20,897 22,666 21,877 21,859 23,659 22,906 22,853 24,688 23,982 23,870 25,760 25,109 24,921 Real GDP (year-over-year): 2013 Budget1������������������������������������������������������������� Blue Chip Consensus������������������������������������������������ CBO �������������������������������������������������������������������������� 1.8 1.7 1.7 2.7 2.2 2.2 3.0 2.6 1.0 3.6 2.9 3.6 4.1 2.9 4.9 4.0 2.9 4.2 3.9 2.7 3.3 3.2 2.5 2.8 2.7 2.5 2.6 2.5 2.5 2.5 2.5 2.5 2.4 2.5 2.5 2.4 Real GDP (fourth-quarter-over-fourth-quarter): 2013 Budget1 ������������������������������������������������������������ Blue Chip ������������������������������������������������������������������ Federal Reserve Central Tendency ........................... CBO �������������������������������������������������������������������������� 1.7 1.6 1.6–1.7 1.6 3.0 2.3 2.2–2.7 2.0 3.0 2.8 2.8–3.2 1.1 4.0 – 3.3–4.0 4.6 4.2 – – 4.9 3.9 – – 3.8 3.8 – – 3.0 2.8 – – 2.6 2.6 – – 2.6 2.5 – – 2.5 2.5 – – 2.4 2.5 – – 2.4 GDP Price Index:2 2013 Budget1 ������������������������������������������������������������ Blue Chip ������������������������������������������������������������������ CBO �������������������������������������������������������������������������� 2.1 2.2 2.1 1.7 1.9 1.3 1.7 1.9 1.4 1.6 2.1 1.4 1.8 2.1 1.5 1.8 2.1 1.7 1.8 2.2 1.9 1.8 2.1 1.9 1.8 2.1 2.0 1.8 2.1 2.0 1.8 2.1 2.0 1.8 2.1 2.0 Consumer Price Index (CPI-U):2 2013 Budget1������������������������������������������������������������� Blue Chip ������������������������������������������������������������������ CBO �������������������������������������������������������������������������� 3.2 3.2 3.2 2.2 2.1 1.7 1.9 2.1 1.5 2.0 2.4 1.5 2.0 2.4 1.7 2.1 2.4 2.0 2.1 2.5 2.2 2.1 2.5 2.3 2.1 2.5 2.3 2.1 2.5 2.3 2.1 2.5 2.3 2.1 2.5 2.3 Unemployment Rate:3 2013 Budget1������������������������������������������������������������� Blue Chip ������������������������������������������������������������������ Federal Reserve Central Tendency4 ......................... CBO �������������������������������������������������������������������������� 9.0 9.0 8.7 9.0 8.9 8.7 8.2–8.5 8.8 8.6 8.3 7.4–8.1 9.1 8.1 7.7 6.7–7.6 8.7 7.3 7.1 – 7.4 6.5 6.6 – 6.3 5.8 6.2 – 5.7 5.5 6.0 – 5.5 5.4 6.0 – 5.5 5.4 6.0 – 5.4 5.4 6.0 – 5.4 5.4 6.0 – 5.3 0.1 0.1 0.1 0.1 0.1 0.1 0.2 0.4 0.1 1.4 1.9 0.4 2.7 3.0 1.6 3.9 3.4 2.6 4.1 3.7 3.2 4.1 3.7 3.6 4.1 3.7 3.8 4.1 3.7 3.8 4.1 3.7 3.8 4.1 3.7 3.8 5.1 4.9 5.0 5.1 4.9 5.0 5.3 4.9 5.0 5.3 4.9 5.0 Interest Rates:3 91-Day Treasury Bills (discount basis): 2013 Budget1������������������������������������������������������������� Blue Chip ������������������������������������������������������������������ CBO �������������������������������������������������������������������������� 10-Year Treasury Notes: 2013 Budget1������������������������������������������������������������� 2.8 2.8 3.5 3.9 4.4 4.7 5.0 5.1 Blue Chip ������������������������������������������������������������������ 2.8 2.3 3.0 4.1 4.5 4.7 4.9 4.9 CBO �������������������������������������������������������������������������� 2.8 2.3 2.5 2.9 3.5 4.1 4.6 4.8 NA = Not Available Sources:Administration; October 2011 and January 2012 Blue Chip Economic Indicators, Aspen Publishers, Inc.; Federal Reserve Open Market Committee Press Release, January 25, 2012; and CBO, The Budget and Economic Outlook: January 2012. 1 The 2013 Budget forecast was finalized in mid-November 2011. 2 Year-over-year percent change. 3 Annual averages, percent. 4 Fourth quarter values. plausible path for policy. The current law assumption implies, for example, that the 2001 and 2003 tax cuts expire at the end of 2012, which is why real GDP growth is so low and unemployment so high in the CBO projections for 2013. In addition, the forecasts in the table were made at different times. The Administration projections were completed in mid-November. The three-month lag between that date and the Budget release date occurs because the budget process requires a lengthy lead time to complete the estimates for agency programs that are incorporated in the Budget. Forecasts made at different dates will differ if there is economic news between the two dates that alters the economic outlook. The Blue Chip Consensus for 2012-2013 displayed in this table was the latest available, from early January; the Blue 20 Chip projections for 2014 to 2022, however, date to last October, as the Blue Chip extends its forecast beyond a two-year horizon only twice a year. The Federal Reserve forecast shown in Table 2-3 is from January 2012. The CBO forecast is from its January 2012 report. Real GDP Growth.— In 2012, the Administration expects more growth than the other forecasters, mainly because the forecast assumes that all of the Budget proposals will be enacted. Other forecasters, make different assumptions. In 2013, the Administration holds growth steady while most other forecasters look for an increase. The Administration expects private demand to strengthen while fiscal policy shifts further toward constraint. The most important difference among these forecasts is the expected rate of real GDP growth in the medium term. The Administration projects that real GDP will eventually recover most of the loss from the 2008-2009 recession. This implies a few years of higher than normal growth as real GDP makes up the lost ground. The Blue Chip average shows only a very limited recovery in this sense. In the Blue Chip projections, real GDP growth exceeds its long-run average only briefly throughout the 11-year forecast period, and much of the loss of real GDP experienced during the recession is permanent. Although somewhat higher than Blue Chip, CBO, anticipates only a partial recovery that would not return real GDP to the same level as in the Administration forecast. In the long run, the real growth rates projected by the forecasters are similar. CBO projects a long-run growth rate of 2.4 percent per year, while the Blue Chip Consensus anticipates the same long-run growth rate as the Administration – 2.5 percent per year. Most of the difference between the Administration and CBO’s long-run growth projection comes from a difference in the expected rate of growth of the labor force. Both forecasts assume that the labor force will grow more slowly than in the past because of population aging, but the Administration bases its population projections on the Census Bureau’s projections, which tend to run about 0.1 percentage point higher than the CBO projections, which are based on population projections from the Social Security Administration. All economic forecasts are subject to error, and the forecast errors are usually much larger than the forecast ANALYTICAL PERSPECTIVES differences discussed above. As discussed in chapter 3, past forecast errors among the Administration, CBO, and the Blue Chip have been roughly similar. Unemployment, Inflation, and Interest Rates.— The Administration forecast of the unemployment rate was completed before the large drop in the unemployment rate in November-December 2011 and the downward revision to October’s rate were known. The Blue Chip consensus forecast for 2012 has been lowered by 0.4 percentage points since mid-November when the Budget forecast was finalized. In the long-run perhaps reflecting slower average growth projections, the Blue Chip unemployment projection remains above the Administration’s projections, but in 2012-2015 it is lower. The Federal Reserve forecast range for unemployment is also below the Administration’s projections. These projections were made after observing the large decline in unemployment in late 2011. CBO’s projections were completed after observing the decline in unemployment in late 2011. Nevertheless, the CBO projection of unemployment is only slightly below the Administration projection in 2012 and higher than the Administration in 2013-2015 reflecting the different policy assumptions underlying the two forecasts. Over time the Administration projects a return to the average unemployment rate that prevailed in the 1990s and 2000s. The Administration, CBO, and the Blue Chip Consensus anticipate a subdued rate of inflation over the next two years. In the medium term, inflation is projected to return to a rate of around 2 percent per year, which is consistent with the Federal Reserve’s long-run policy goal for inflation. The forecasts are also similar in their projections for the path of interest rates. Short-term rates are expected to be near zero in 2011-2012, but then to increase beginning in 2013. The Administration projects a somewhat stronger rise in short-term rates than either the Blue Chip or CBO. The Administration projections are closer to market expectations as of late 2011. The interest rate on 10-year Treasury notes is projected to rise to 5.3 percent in the Administration projections. This is above the CBO and the Blue Chip projections. Changes in Economic Assumptions Some of the economic assumptions underlying this Budget have changed compared with those used for the 21 2. ECONOMIC ASSUMPTIONS 2012 Budget, but many of the forecast values are similar, especially in the long run (see Table 2–3). The previous Budget anticipated more rapid growth in 2011-2014 than the current Budget. The recovery began as anticipated in 2009, but the pace of growth through 2011 was somewhat slower than expected. The Administration continues to believe that the economy will regain most of the ground lost in 2008-2009. This implies rapid growth in the future continuing for a few years. That growth will help return unemployment to its long-run average. As in last year’s projections, inflation is also projected to return to its long-run averages, while interest rates, measured in real terms, also return to their historical averages. Table 2–3. COMPARISON OF ECONOMIC ASSUMPTIONS IN THE 2012 AND 2013 BUDGETS (Calendar years; dollar amounts in billions) 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Nominal GDP: 2012 Budget Assumptions 1 ������������������������������������������ 2013 Budget Assumptions �������������������������������������������� 15,037 15,106 15,819 15,779 16,780 16,522 17,803 17,397 18,799 18,448 19,770 19,533 20,706 20,651 21,619 21,689 22,562 22,666 23,542 23,659 24,565 24,688 Real GDP (2005 dollars): 2012 Budget Assumptions 1 ������������������������������������������ 2013 Budget Assumptions �������������������������������������������� 13,380 13,323 13,868 13,687 14,475 14,097 15,104 14,606 15,676 15,211 16,201 15,821 16,663 16,431 17,092 16,952 17,519 17,403 17,957 17,844 18,406 18,290 Real GDP (percent change): 2 2012 Budget Assumptions �������������������������������������������� 2013 Budget Assumptions �������������������������������������������� 2.7 1.8 3.6 2.7 4.4 3.0 4.3 3.6 3.8 4.1 3.3 4.0 2.9 3.9 2.6 3.2 2.5 2.7 2.5 2.5 2.5 2.5 GDP Price Index (percent change): 2 2012 Budget Assumptions �������������������������������������������� 2013 Budget Assumptions �������������������������������������������� 1.3 2.1 1.5 1.7 1.6 1.7 1.7 1.6 1.7 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 1.8 Consumer Price Index (all-urban; percent change): 2 2012 Budget Assumptions �������������������������������������������� 2013 Budget Assumptions �������������������������������������������� 1.3 3.2 1.8 2.2 1.9 1.9 2.0 2.0 2.0 2.0 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 2.1 Civilian Unemployment Rate (percent): 3 2012 Budget Assumptions �������������������������������������������� 2013 Budget Assumptions �������������������������������������������� 9.3 9.0 8.6 8.9 7.5 8.6 6.6 8.1 5.9 7.3 5.5 6.5 5.3 5.8 5.3 5.5 5.3 5.4 5.3 5.4 5.3 5.4 91-day Treasury bill rate (percent): 3 2012 Budget Assumptions �������������������������������������������� 2013 Budget Assumptions �������������������������������������������� 0.2 0.1 1.0 0.1 2.6 0.2 3.7 1.4 4.0 2.7 4.1 3.9 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 4.1 10-year Treasury note rate (percent): 3 2012 Budget Assumptions �������������������������������������������� 2013 Budget Assumptions �������������������������������������������� 3.0 2.8 3.6 2.8 4.2 3.5 4.6 3.9 5.0 4.4 5.2 4.7 5.3 5.0 5.3 5.1 5.3 5.1 5.3 5.1 5.3 5.3 1 Adjusted for July 2011 NIPA revisions. year over calendar year. 3 Calendar year average. 2 Calendar 3. INTERACTIONS BETWEEN THE ECONOMY AND THE BUDGET The economy and the budget are interrelated. Both budget outlays and the tax structure have substantial effects on national output, employment, and inflation; and economic conditions significantly affect the budget in various ways. Because of the complex interrelationships between the budget and the economy, budget estimates depend to a very significant extent upon assumptions about the economy. This chapter attempts to quantify the relationship between macroeconomic outcomes and budget outcomes and to illustrate the challenges that uncertainty about the future path of the economy poses for making budget projections.1 The first section of the chapter describes how changes in economic variables result in changes in receipts, outlays, and the deficit. The second section presents information on forecast errors for growth, inflation, and interest rates and how these forecast errors compare to those in forecasts made by the Congressional Budget Office (CBO) and the private-sector Blue Chip Consensus forecast. The third section presents specific alternatives to the current Administration forecast—both more optimistic and less optimistic with respect to real economic growth and unemployment—and describes the resulting effects on the deficit. The fourth section shows a probabilistic range of budget outcomes based on past errors in projecting the deficit. The last section discusses the relationship between structural and cyclical deficits, showing how much of the actual deficit is related to the economic cycle (e.g., the recent recession) and how much would persist even if the economy were at full employment. Sensitivity of the Budget to Economic Assumptions Both receipts and outlays are affected by changes in economic conditions. Budget receipts vary with individual and corporate incomes, which respond both to real economic growth and inflation. At the same time, outlays for many Federal programs are directly linked to developments in the economy. For example, most retirement and other social insurance benefit payments are tied by law to cost-of-living indices. Medicare and Medicaid outlays are 1 While this chapter highlights uncertainty with respect to budget projections in the aggregate, estimates for many programs capture uncertainty using stochastic modeling. Stochastic models measure program costs as the probability-weighted average of costs under different scenarios, with economic, financial, and other variables differing across scenarios. Stochastic modeling is essential to properly measure the cost of programs that respond asymmetrically to deviations of actual economic and other variables from forecast values. In such programs, the Federal Government is subject to “one-sided bets” where costs go up when variables move in one direction but do not go down when they move in the opposite direction. The cost estimates for the Pension Benefit Guarantee Corporation, student loan programs, the Troubled Asset Relief Program (TARP), and agriculture programs with price triggers all employ stochastic modeling. affected directly by the price of medical services. Interest on the debt is linked to market interest rates and the size of the budget surplus or deficit, both of which in turn are influenced by economic conditions. Outlays for certain benefits such as unemployment compensation and the Supplemental Nutrition Assistance Program vary with the unemployment rate. This sensitivity complicates budget planning because differences in economic assumptions lead to changes in the budget projections. Economic forecasting inherently entails uncertainty. It is therefore useful to examine the implications of possible changes in economic assumptions. Many of the budgetary effects of such changes are fairly predictable, and a set of general principles or “rules of thumb” embodying these relationships can aid in estimating how changes in the economic assumptions would alter outlays, receipts, and the surplus or deficit. These rules of thumb should be understood as suggesting orders of magnitude; they do not account for potential secondary effects. The rules of thumb show how the changes in economic variables affect Administration estimates for receipts and outlays, holding other factors constant. They are not a prediction of how receipts or outlays would actually turn out if the economic changes actually materialized. The rules of thumb are based on a fixed budget policy that is not always a good predictor of what might actually happen to the budget should the economic outlook change substantially. For example, unexpected downturns in real economic growth, and attendant job losses, usually give rise to legislative actions to stimulate the economy with additional countercyclical policies. Also, the rules of thumb do not reflect certain “technical” changes that often accompany the economic changes. For example, changes in capital gains realizations often accompany changes in the economic outlook. On the spending side of the budget, the rules of thumb do not capture changes in deposit insurance outlays, even though bank failures are generally associated with weak economic growth and rising unemployment. Economic variables that affect the budget do not always change independently of one another. Output and employment tend to move together in the short run: a high rate of real GDP growth is generally associated with a declining rate of unemployment, while slow or negative growth is usually accompanied by rising unemployment, a relationship known as Okun’s Law. 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 the labor force, and are not necessarily associated with changes in the average rate of unemployment. Expected inflation and interest rates are also closely interrelated: a higher expected rate of inflation increases nominal interest rates, while lower expected inflation reduces nominal interest rates. 23 24 ANALYTICAL PERSPECTIVES Changes in real GDP growth or inflation have a much greater cumulative effect on the budget if they are sustained for several years than if they last for only one year. However, even temporary changes can have permanent effects if they permanently raise the level of the tax base or the level of Government spending. Moreover, temporary economic changes that affect the deficit or surplus change the level of the debt, affecting future interest payments on the debt. Highlights of the budgetary effects of these rules of thumb are shown in Table 3–1. For real growth and employment: • The first block shows the effect of a temporary reduction in real GDP growth by one percentage point sustained for one year, followed by a recovery of GDP to the base-case level (the Budget assumptions) over the ensuing two years. In this case, the unemployment rate is assumed to rise by one-half percentage point relative to the Budget assumptions by the end Table 3–1. SENSITIVITY OF THE BUDGET TO ECONOMIC ASSUMPTIONS (Fiscal years; in billions of dollars) Budget effect 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Total of Effects, 2012– 2022 Real Growth and Employment Budgetary effects of 1 percent lower real GDP growth: (1) For calendar year 2012 only, with real GDP recovery in 2013–14:1 Receipts ���������������������������������������������������������������������������������������������������������� –14.1 –21.8 –10.2 Outlays ������������������������������������������������������������������������������������������������������������ 3.6 8.4 4.9 –1.1 2.0 0.2 2.4 0.2 2.7 0.2 2.8 0.2 2.8 0.2 2.9 0.2 3.0 0.2 3.2 –45.9 38.8 3.1 2.2 2.5 2.6 2.7 2.8 2.8 3.0 84.7 (2) For calendar year 2012 only, with no subsequent recovery:1 Receipts ���������������������������������������������������������������������������������������������������������� –14.1 –29.3 –33.9 –36.1 –38.5 –40.9 –43.2 –45.6 –48.1 –50.6 –53.2 Outlays ������������������������������������������������������������������������������������������������������������ 3.6 10.2 12.4 16.1 21.5 26.5 31.2 35.2 39.4 43.9 48.7 –433.5 288.6 Increase in deficit (+) ��������������������������������������������������������������������������������� Increase in deficit (+) ��������������������������������������������������������������������������������� 17.7 17.7 30.2 39.4 15.2 46.3 52.3 60.0 67.3 74.4 80.8 87.5 94.4 101.9 722.1 (3) Sustained during 2012 - 2022, with no change in unemployment: Receipts ���������������������������������������������������������������������������������������������������������� –14.2 –45.3 –84.2 –127.8 –177.0 –231.5 –291.1 –355.2 –423.4 –496.2 –574.3 –2,820.5 Outlays ������������������������������������������������������������������������������������������������������������ –0.4 –0.8 –0.1 3.2 10.3 18.9 29.3 41.4 56.3 74.0 95.6 327.7 Increase in deficit (+) ��������������������������������������������������������������������������������� 13.8 44.5 84.2 131.0 187.3 250.5 320.4 396.6 479.7 570.2 669.9 3,148.2 (4) Inflation and interest rates during calendar year 2012 only: Receipts ���������������������������������������������������������������������������������������������������������� Outlays ������������������������������������������������������������������������������������������������������������ 19.7 30.0 39.6 52.3 39.1 42.1 37.5 40.3 39.8 39.1 42.5 38.5 45.1 36.0 56.1 35.7 470.9 419.6 2.9 2.8 –0.7 –4.0 –9.1 –11.8 –16.0 –18.1 –20.4 –51.3 Inflation and Interest Rates Budgetary effects of 1 percentage point higher rate of: 47.8 36.0 50.4 34.4 53.4 35.3 Decrease in deficit (–) �������������������������������������������������������������������������������� 10.3 12.7 (5) Inflation and interest rates, sustained during 2012 - 2022: Receipts ���������������������������������������������������������������������������������������������������������� Outlays ������������������������������������������������������������������������������������������������������������ 19.7 26.4 61.0 106.1 153.4 208.0 267.6 334.2 407.7 486.2 570.3 659.3 3,273.4 78.0 120.2 161.8 205.0 247.3 288.2 334.5 381.0 430.3 484.9 2,757.4 Decrease in deficit (–) �������������������������������������������������������������������������������� 6.7 17.0 14.1 (6) Interest rates only, sustained during 2012 - 2022: Receipts ���������������������������������������������������������������������������������������������������������� Outlays ������������������������������������������������������������������������������������������������������������ 5.5 18.5 16.1 53.4 23.5 75.5 28.6 34.0 38.5 43.3 50.2 56.1 59.8 62.6 418.1 93.8 111.7 130.2 145.7 160.9 175.7 191.1 206.1 1,362.6 Increase in deficit (+) ��������������������������������������������������������������������������������� 13.0 37.3 51.9 65.1 (7) Inflation only, sustained during 2012 - 2022: Receipts ���������������������������������������������������������������������������������������������������������� Outlays ������������������������������������������������������������������������������������������������������������ 14.2 7.9 44.7 24.8 82.1 124.1 173.1 227.9 289.4 355.6 427.9 508.0 593.7 2,840.5 45.2 69.1 95.3 120.3 147.2 180.3 214.7 251.6 294.8 1,451.3 Decrease in deficit (–) �������������������������������������������������������������������������������� 8.4 –3.1 –20.3 –46.0 –73.2 –105.2 –140.1 –174.4 77.7 91.7 102.5 110.7 119.6 131.3 143.5 –516.0 944.5 –6.2 –19.8 –36.9 –54.9 –77.8 –107.5 –142.2 –175.3 –213.2 –256.4 –298.9 –1,389.2 Interest Cost of Higher Federal Borrowing (8) Outlay effect of $100 billion increase in borrowing in 2012 ������������������������������� 0.1 0.4 1.2 2.5 3.9 * $50 million or less. 1 The unemployment rate is assumed to be 0.5 percentage point higher per 1.0 percent shortfall in the level of real GDP. 4.6 4.9 5.2 5.4 5.7 5.9 40.0 25 3. INTERACTIONS BETWEEN THE ECONOMY AND THE BUDGET of the first year, then return to the base case rate over the ensuing two years. After real GDP and the unemployment rate have returned to their base case levels, most budget effects vanish except for persistent out-year interest costs associated with larger near-term deficits. • The second block shows the effect of a reduction in real GDP growth by one percentage point sustained for one year, with no subsequent “catch up,” accompanying a permanent increase in the natural rate of unemployment (and of the actual unemployment rate) of one-half percentage point relative to the Budget assumptions. In this scenario, the level of GDP and taxable incomes are permanently lowered by the reduced growth rate in the first year. For that reason and because unemployment is permanently higher, the budget effects (including growing interest costs associated with larger deficits) continue to grow in each successive year. • The budgetary effects are much larger if the growth rate of real GDP is permanently reduced by one percentage point even leaving the unemployment rate unchanged, as might result from a shock to productivity growth. These effects are shown in the third block. In this example, the cumulative increase in the budget deficit is many times larger than the effects in the first and second blocks. For inflation and interest rates: • The fourth block shows the effect of a one percentage point higher rate of inflation and one percentage point higher nominal interest rates maintained for the first year only. In subsequent years, the price level and nominal GDP would both be one percentage point higher than in the base case, but interest rates and future inflation rates are assumed to return to their base case levels. Receipts increase by somewhat more than outlays. This is partly due to the fact that outlays for annually appropriated spending are assumed to remain constant when projected inflation changes. Despite the apparent implication of these estimates, inflation cannot be relied upon to lower the budget deficit, mainly because policy-makers have traditionally prevented inflation Table 3–2. FORECAST ERRORS, JANUARY 1982-PRESENT REAL GDP ERRORS 2-Year Average Annual Real GDP Growth Mean Error ������������������������������������������������������������������������������ Mean Absolute Error ��������������������������������������������������������������� Root Mean Square Error �������������������������������������������������������� Admin. CBO Blue Chip 0.0 1.2 1.6 –0.1 1.1 1.5 –0.2 1.1 1.5 0.1 0.8 1.0 –0.2 0.8 1.0 –0.2 0.8 1.0 6-Year Average Annual Real GDP Growth Mean Error ������������������������������������������������������������������������������ Mean Absolute Error ��������������������������������������������������������������� Root Mean Square Error �������������������������������������������������������� INFLATION ERRORS 2-Year Average Annual Change in the GDP Price Index Mean Error ������������������������������������������������������������������������������ Mean Absolute Error ��������������������������������������������������������������� Root Mean Square Error �������������������������������������������������������� Admin. CBO Blue Chip 0.3 0.7 0.9 0.3 0.8 0.9 0.5 0.8 1.0 0.4 0.7 0.9 0.6 0.9 1.0 0.8 1.1 1.3 6-Year Average Annual Change in the GDP Price Index Mean Error ������������������������������������������������������������������������������ Mean Absolute Error ��������������������������������������������������������������� Root Mean Square Error �������������������������������������������������������� INTEREST RATE ERRORS 2-Year Average 91-Day Treasury Bill Rate Mean Error ������������������������������������������������������������������������������ Mean Absolute Error ��������������������������������������������������������������� Root Mean Square Error �������������������������������������������������������� Admin. CBO Blue Chip 0.3 1.0 1.3 0.5 0.9 1.2 0.7 1.1 1.3 0.4 0.9 1.1 0.9 1.2 1.3 1.1 1.2 1.4 6-Year Average 91-Day Treasury Bill Rate Mean Error ������������������������������������������������������������������������������ Mean Absolute Error ��������������������������������������������������������������� Root Mean Square Error �������������������������������������������������������� 26 ANALYTICAL PERSPECTIVES from permanently eroding the real value of spending. • In the fifth block, the rate of inflation and the level of nominal interest rates are higher by one percentage point in all years. As a result, the price level and nominal GDP rise by a cumulatively growing percentage above their base levels. In this case, again the effect on receipts is more than the effect on outlays. As in the previous case, these results assume that annually appropriated spending remains fixed under the discretionary spending limits. Over the time period covered by the budget, leaving the discretionary limits unchanged would significantly erode the real value of this category of spending. • The effects of a one percentage point increase in interest rates alone are shown in the sixth block. The outlay effect mainly reflects higher interest costs for Federal debt. The receipts portion of this ruleof-thumb is due to the Federal Reserve’s deposit of earnings on its securities portfolio and the effect of interest rate changes on both individuals’ income (and taxes) and financial corporations’ profits (and taxes). • The seventh block shows that a sustained one percentage point increase in CPI and GDP price index inflation decreases cumulative deficits substantially, due in part to the assumed erosion in the real value of appropriated spending. Note that the separate effects of higher inflation and higher interest rates shown in the sixth and seventh blocks do not sum to the effects for simultaneous changes in both shown in the fifth block. This is because the gains in budget receipts due to higher inflation result in higher debt service savings when interest rates are also assumed to be higher in the fifth block than when interest rates are assumed to be unchanged in the seventh block. • The last entry in the table shows rules of thumb for the added interest cost associated with changes in the budget deficit, holding interest rates and other economic assumptions constant. 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. Forecast Errors for Growth, Inflation, and Interest Rates As can be seen in Table 3-1, the single most important variable that affects the accuracy of the budget projections is the forecast of the growth rate of real GDP. The rate of inflation and the level of interest rates also have substantial effects on the accuracy of projections. Table Chart 3-1. Real GDP: Alternative Projections Billions of 2005 dollars 21,000 1987-2007 Trend 20,000 5-Year Expansion Average 19,000 Extended Blue Chip Administration Forecast 18,000 17,000 16,000 15,000 14,000 13,000 12,000 2007 2009 2011 2013 2015 2017 2019 2021 27 3. INTERACTIONS BETWEEN THE ECONOMY AND THE BUDGET Table 3–3. BUDGET EFFECTS OF ALTERNATIVE SCENARIOS (Fiscal years; dollar amounts in billions) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Alternative Budget Deficit Projections: Administration Economic Assumptions ����������������������������� Percent of GDP ������������������������������������������������������������� Alternative Scenario 1 ������������������������������������������������������� Percent of GDP ������������������������������������������������������������� Alternative Scenario 2 ������������������������������������������������������� Percent of GDP ������������������������������������������������������������� 1,327 8.5% 1,152 7.4% 1,341 8.6% 901 5.5% 701 4.3% 927 5.7% 668 3.9% 441 2.6% 715 4.2% 3-2 shows errors in short- and long-term projections for past Administrations, and compares these errors to those of CBO and the Blue Chip Consensus of private forecasters for real GDP, inflation and short-term interest rates.2 Over both a two-year and six-year horizon, the average annual real GDP growth rate was very slightly overestimated by the Administration and slightly underestimated by the CBO and Blue Chip in the forecasts made since 1982. Overall, the differences between the three forecasters were minor. The mean absolute error in the annual average growth rate was about 1.5 percent per year for all forecasters for two-year projections, and was about onethird smaller for all three for the six-year projections. The greater accuracy in the six-year projections could reflect a tendency of real GDP to revert at least partly to trend, though the overall evidence on whether GDP is mean reverting is mixed. Another way to interpret the result is that it is hard to predict GDP around turning points in the business cycle, but somewhat easier to project the sixyear growth rate based on assumptions about the labor force, productivity, and other factors that affect GDP. Inflation, as measured by the GDP price index, was overestimated by all forecasters for both the two-year and six-year projections, with larger errors for the six-year projections. This reflects the gradual disinflation over the 1980s and early 1990s, which was greater than most forecasters expected. Average errors for all three sets of forecasts since 1994 were close to zero (not shown). The interest rate on the 91-day Treasury bill was also overestimated by all three forecasters, with errors larger for the 6-year time horizon. Again this reflects the secular decline in interest rates over the past 30 years, reflecting lower inflation for most of the period, as well as a decline in real interest rates since 2000 resulting from weakness in the economy and Federal Reserve policy. The errors were somewhat less for the Administration than for CBO and the Blue Chip forecasts. 2 Two-year errors for real GDP and the GDP price index are the average annual errors in percentage points for year-over-year growth rates for the current year and budget year. For interest rates, the error is based on the average error for the level of the 91-day Treasury bill rate for the two-year and six-year period. Administration forecasts are from the budgets released starting in February 1982 (1983 Budget) and through February 2009 (2010 Budget), so that the last year included in the projections is 2010. The six-year forecasts are constructed similarly, but the last forecast used is from February 2005 (2006 Budget). CBO forecasts are from ‘The Budget and Economic Outlook’ publications in January each year, and the Blue Chip forecasts are from their January projections. 610 3.4% 402 2.2% 704 3.9% 649 3.4% 481 2.5% 801 4.2% 612 3.0% 492 2.4% 830 4.1% 575 2.7% 490 2.3% 851 4.0% 626 2.8% 553 2.5% 940 4.2% 658 2.8% 587 2.5% 1002 4.3% 681 2.8% 608 2.5% 1053 4.3% 704 2.8% 630 2.5% 1106 4.3% Alternative Scenarios The rules of thumb described above can be used in combination to show the effect on the budget of alternative economic scenarios. Considering explicit alternative scenarios can also be useful in gauging some of the risks to the current budget projections. For example, the strength of the recovery over the next few years remains highly uncertain. Those possibilities are explored in the two alternative scenarios presented in this section and which are shown in Chart 3-1. In the first alternative, the projected growth rate follows the average strength of the expansions that followed previous recessions in the period since World War II. Real growth beginning in the third quarter of 2009, the start of the current recovery, averages 5.9 percent over the next four quarters, followed by growth rates of 3.8 percent, 3.7 percent, 3.1 percent, and 3.8 percent, respectively, over succeeding four-quarter intervals. The unemployment rate is also adjusted for the difference in growth rates using Okun’s Law. In this case, the level of real GDP is substantially higher at the beginning of the current forecast period than in the Administration’s projections, because the current recovery got off to a relatively slow start in 2009-2010. However, real GDP growth in the Administration’s projections is similar to this alternative in the out years, and the unemployment rates are also similar by the end of the period. The Administration is projecting an average postwar recovery, but one that takes longer to gain traction because of the depth of the recession and the lingering effects of the financial crisis. The second alternative scenario assumes that real GDP growth and unemployment beginning in 2010:Q4 follow the projections in the January Blue Chip forecast through the end of 2013 and that growth in 2014-2022 follows the path laid out in the October 2011 extension of the Blue Chip forecast. In this case, after 2011, the level of GDP remains lower than the Administration’s forecast throughout the projection period. This alternative does not include a real recovery from the loss of output during the 2008-2009 downturn. Growth returns to normal, but without a substantial catch-up to make up for previous output losses. In effect, this alternative assumes there was a permanent loss of output resulting from the shocks experienced during the downturn. Table 3-3 shows the budget effects of these alternative scenarios compared with the Administration’s 28 ANALYTICAL PERSPECTIVES Table 3–4. THE STRUCTURAL BALANCE (Fiscal years; in billions of dollars) 2007 Unadjusted surplus (–) or deficit �������������������� 160.7 Cyclical component ���������������������������������� –106.3 Structural surplus (–) or deficit ��������������������� 267.0 2008 2009 2010 2011 2012 458.6 1,412.7 1,293.5 1,299.6 1,326.9 –24.4 375.4 502.4 527.3 572.6 483.0 1,037.3 791.1 772.3 754.4 2013 901.4 584.4 317.0 2014 2015 667.8 593.3 74.5 2016 2017 2018 2019 2020 2021 2022 609.7 452.5 157.2 648.8 300.0 348.7 612.4 159.3 453.1 575.5 47.6 527.8 625.7 13.4 612.4 657.9 1.3 656.6 680.7 0.0 680.7 704.3 0.0 704.3 3.4% 2.5% 0.9% 3.4% 1.6% 1.8% 3.0% 0.8% 2.2% 2.7% 0.2% 2.5% 2.8% 0.1% 2.7% 2.8% 0.0% 2.8% 2.8% 0.0% 2.8% 2.8% 0.0% 2.8% (Fiscal years; percent of Gross Domestic Product) Unadjusted surplus (–) or deficit ������������������� 1.2% 3.2% 10.1% Cyclical component ���������������������������������� –0.8% –0.2% 2.7% Structural surplus (–) or deficit ��������������������� 1.9% 3.4% 7.4% 9.0% 3.5% 5.5% 8.7% 3.5% 5.2% 8.5% 3.7% 4.8% 5.5% 3.6% 1.9% 3.9% 3.5% 0.4% NOTE: The NAIRU is assumed to be 5.4%. economic forecast. Under the first alternative, budget deficits are modestly lower in each year compared to the Administration’s forecast. In the second alternative, the deficit becomes progressively larger than the Administration’s projection. Many other scenarios are possible, of course, but the point is that the most important influences on the budget projections beyond the next year or two are the rate at which output and employment recover from the recession and the extent to which potential GDP returns to its pre-recession trend. 30-7). The error measures can be used to show a probabilistic range of uncertainty of what the range of deficit outcomes may be over the next five years relative to the Administration’s deficit projection. Chart 3-2 shows this cone of uncertainty, which is constructed under the assumption that future forecast errors would be governed by the normal distribution with a mean of zero and standard error equal to the root mean squared error, as a percent of GDP, of past forecasts. The deficit is projected to be 3.0 percent of GDP in 2017, but has a 90 percent chance of being within a range of a surplus of 3.8 percent of GDP and a deficit of 9.8 percent of GDP. Uncertainty and the Deficit Projections The accuracy of budget projections depends not only on the accuracy of economic projections, but also on technical factors and the differences between proposed policy and enacted legislation. Chapter 30 provides detailed information on these factors for the budget year projections (Table 30-6), and also shows how the deficit projections compared to actual outcomes, on average, over a five-year window using historical data from 1982 to 2011 (Table Structural and Cyclical Deficits As shown above, the budget deficit is highly sensitive to the business cycle. When the economy is operating below its potential and the unemployment rate exceeds the level consistent with price stability, receipts are lower, outlays are higher, and the deficit is larger than it would be otherwise. These features serve as “automatic stabilizers” for the economy by restraining output when the Chart 3-2. Range of Uncertainty for the Budget Deficit Percent of GDP 10 Percentiles: 95th 90th 5 0 75th Forecast -5 25th 10th 5th -10 -15 2012 2013 2014 2015 2016 2017 3. INTERACTIONS BETWEEN THE ECONOMY AND THE BUDGET economy threatens to overheat and cushioning economic downturns. They also make it hard to judge the overall stance of fiscal policy simply by looking at the unadjusted budget deficit. An alternative measure of the budget deficit is called the structural deficit. This measure provides a more useful perspective on the stance of fiscal policy than does the unadjusted unified budget deficit. The portion of the deficit traceable to the automatic effects of the business cycle is called the cyclical component. The remaining portion of the deficit is called the structural deficit. The structural deficit is a better gauge of the underlying stance of fiscal policy than the unadjusted unified deficit because it removes most of the effects of the business cycle. So, for example, the structural deficit would include fiscal policy changes such as the 2009 Recovery Act, but not the automatic changes in unemployment insurance or reduction in tax receipts that would have occurred without the Act. Estimates of the structural deficit, shown in Table 3-4, are based on the historical relationship between changes in the unemployment rate and real GDP growth, as well as relationships of unemployment and real GDP growth with receipts and outlays. These estimated relationships take account of the major cyclical changes in the economy and their effects on the budget, but they do not reflect all the possible cyclical effects on the budget, because economists have not been able to identify the cyclical factor in some of these other effects. For example, the sharp decline in the stock market in 2008 pulled down capital gainsrelated receipts and increased the deficit in 2009 and beyond. Some of this decline is cyclical in nature, but economists have not pinned down the cyclical component of the stock market with any precision, and for that reason, all of the stock market’s contribution to receipts is counted in the structural deficit. Another factor that can affect the deficit and is related to the business cycle is labor force participation. Since the official unemployment rate does not include workers who have left the labor force, the conventional measures 29 of potential GDP, incomes, and Government receipts understate the extent to which potential work hours are under-utilized because of a decline in labor force participation. The key unresolved question here is to what extent changes in labor force participation are cyclical and to what extent they are structural. By convention, in estimating the structural budget deficit, all changes in labor force participation are treated as structural. There are also lags in the collection of tax revenue that can delay the impact of cyclical effects beyond the year in which they occur. The result is that even after the unemployment rate has fallen, receipts may remain cyclically depressed for some time until these lagged effects have dissipated. The recent recession has added substantially to the estimated cyclical component of the deficit, but for all the reasons stated above, the cyclical component is probably an understatement. As the economy recovers, the cyclical deficit is projected to decline and after unemployment reaches 5.4 percent, the level assumed to be consistent with stable inflation, the estimated cyclical component vanishes, leaving only the structural deficit, although some lagged cyclical effects would arguably still be present. Despite these limitations, the distinction between cyclical and structural deficits is helpful in understanding the path of fiscal policy. The large increase in the deficit in 2009 and 2010 is due to a combination of both components of the deficit. There is a large increase in the cyclical component because of the rise in unemployment. That is what would be expected considering the severity of the recent recession. Finally, there is a large increase in the structural deficit because of the policy measures taken to combat the recession. This reflects the Government’s decision to make active use of fiscal policy to lessen the severity of the recession and to hasten economic recovery. In 2011–2017, the cyclical component of the deficit is projected to decline sharply as the economy recovers. The structural deficit shrinks during 2011–2013 as the temporary spending and tax measures in the Recovery Act end. 4. FINANCIAL STABILIZATION EFFORTS AND THEIR BUDGETARY EFFECTS In response to the financial crisis of 2008, the U.S. Government took unprecedented and decisive action to mitigate damage to the U.S. economy and financial markets. The Department of the Treasury, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the National Credit Union Administration, the Securities and Exchange Commission, and the Commodity Futures Trading Commission worked cooperatively under the direction of the Administration to expand access to credit, strengthen financial institutions, restore confidence in U.S. financial markets, and stabilize the housing sector. In 2010, the President signed into law comprehensive Wall Street reform to ensure that the Government has the tools and authority to prevent another crisis of this magnitude, to resolve significant financial institution failures more effectively, and to protect consumers of financial products. In 2011, the Administration continued its work to operationalize these Wall Street reforms, including taking the necessary steps to ensure that the Consumer Financial Protection Bureau is able to exercise the full range of its statutory consumer protection authorities. This chapter provides a summary of key Government programs supporting economic recovery and financial market reforms, followed by a report analyzing the cost and budgetary effects of the Treasury’s Troubled Asset Relief Program (TARP), consistent with Sections 202 and 203 of the Emergency Economic Stabilization Act (EESA) of 2008 (P.L. 110–343), as amended. This report analyzes transactions as of November 30, 2011, and expected transactions as reflected in the Budget. The TARP costs discussed in the report and included in the Budget are the estimated present value of the TARP investments, reflecting the actual and expected dividends, interest, and principal redemptions the Government receives against its investments; this credit reform treatment of TARP transactions is authorized by Section 123 of EESA. The Treasury’s authority to make new TARP commitments expired on October 3, 2010. However, Treasury continues to manage the outstanding TARP investments, and is authorized to expend additional TARP funds pursuant to obligations entered into prior to October 3, 2010. In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act reduced total TARP purchase authority to $475 billion. The Administration’s current estimate of TARP’s deficit cost for its cumulative $470.7 billion in obligations is $68 billion (see Tables 4–1 and 4–7). This estimated direct impact of TARP on the deficit has been reduced by $273 billion from the highest cost estimate, published in the Mid-Session Review of the 2010 Budget (2010 MSR), due to improvements in the estimated returns on TARP investments and lower overall TARP obligations. The Treasury has received higher-than-expected repayments and redemptions from TARP recipients. Notably, a total of $245 billion was invested in banking institutions, and as of December 31, 2011, Treasury had recovered more than $258 billion from these institutions through repayments, dividends, interest, and other income. The 2012 MSR estimated a $47 billion deficit cost of purchases and guarantees associated with an estimated $471 billion in obligations. Section 123 of EESA requires TARP costs to be estimated on a net present value basis adjusted to reflect a premium for market risk. As investments are liquidated, their actual costs (including any market risk effects) become known and are reflected in reestimates. It is likely that the total cost of TARP to taxpayers will eventually be lower than current estimates using the market-risk adjusted discount rate, but that cost will not be fully known until all TARP investments have been extinguished. (See Table 4–9 for an estimate of TARP subsidy costs stripped of the market-risk adjustment.) Progress in Implementation of Wall Street Reforms On July 21, 2010, just over a year after the Administration delivered its financial reform proposal to Congress, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act1 (the “Wall Street Reform Act” or the “Act”). The Act implements the Administration’s critical objectives, which include: to help prevent future financial crises in part by filling gaps in the U.S. regulatory regime; to better protect consumers of financial products and services; to prevent unnecessary and harmful risk taking that threatens the economy; and to provide the Government with more effective tools to manage financial crises. Important milestones in the implementation of the Act include: Orderly Liquidation Authority (OLA): The Act makes clear that no financial firm will be considered “too big to fail” in the future. Instead, the Federal Deposit Insurance Corporation (FDIC) now has the ability to unwind failing systemically-significant, nonbank financial institutions in an orderly manner to prevent widespread disruptions to U.S. financial stability. Through its new orderly liquidation authority under the Act, the FDIC serves as receiver of financial institutions whose failure is determined to pose a significant systemic risk to U.S. financial stability. On July 6, 2011, the FDIC, in consultation with the Financial Stability Oversight Council (FSOC), approved a final rule with respect to OLA which, among other things, clarified provisions governing clawback of executive compensation and identified the treatment of secured creditors and contingent claims. On September 13, 2011, the FDIC and the Federal Reserve Board (FRB) issued a joint final rule to implement resolution plan requirements or 1 P.L. 111-203. 31 32 “living wills” for certain nonbank financial companies and bank holding companies, which in the case of default are essential to ensuring organized and least-costly resolutions for large and complex financial institutions. Moreover, as of preparation of this Budget, the FDIC, in consultation with the FSOC, had approved a Notice of Proposed Rulemaking (NPR) governing the calculation of the Maximum Obligation Limit, which would dictate the amount that the FDIC may borrow from Treasury in the event of an orderly liquidation. The Act requires that all net costs of liquidation be recovered by assessing fees after the fact on large financial institutions so that taxpayers incur no costs. According to Title II of the Act, FDIC costs associated with administering OLA are covered by the FSOC and are included in this Budget. While the Budget includes an estimated cost to the Government that is based on the probability of default under this enhanced orderly liquidation authority, the total costs of any liquidation will be, by law, recovered in full, so there is no cost to the taxpayer. The displayed cost from this authority of $19 billion over the budget period is due to the fact that cost recovery occurs only after liquidation expenses are incurred. Monitoring Systemic Risk: The Act also established the Financial Stability Oversight Council (FSOC) to identify, monitor, and respond to emerging threats to U.S. financial stability. The FSOC is charged with coordinating the financial regulatory framework across the various Federal agencies by harmonizing prudential standards and addressing gaps in the U.S. regulatory regime. The FSOC in an independent council chaired by the Secretary of the Treasury, with the heads of the Federal financial regulators and an independent insurance expert serving as voting members. The FSOC has held 12 meetings, with the initial focus on fulfilling statutory requirements established by the Wall Street Reform Act. The FSOC has moved quickly, while emphasizing the importance of transparency and stakeholder collaboration throughout the process. As part of its macro-prudential mandate, the FSOC published an NPR in January 2011, establishing the criteria for which nonbank, systemically-significant financial institutions will be designated for heightened supervision by the Federal Reserve. This rule received a significant number of public comments and, therefore, the FSOC re-proposed this NPR in October 2011 in order to bring more clarity to the market and provide market participants additional time to comment on this substantial rulemaking. On July 18, 2011, the FSOC also finalized a rule regarding the criteria for designating financial market utilities (FMU), such as clearinghouses, as systemically important, thus requiring designated FMUs to meet certain risk management standards and undergo additional examinations. The FSOC has also conducted studies and made recommendations on a number of topics, notably the effective implementation of the Volcker Rule as established in the Wall Street Reform Act. The Volcker Rule was authorized to reduce risk-taking and increase stability in the banking sector by prohibiting Federallyinsured banking institutions, subject to certain exceptions, from engaging in proprietary trading and investing ANALYTICAL PERSPECTIVES in hedge funds and private equity firms. Going forward, the FSOC will continue to monitor and track the prevalent risk in the financial system with a focus on housing, commodity market volatility, the European financial markets, and the U.S. fiscal position. The Act established the Financial Research Fund (FRF) to fund the FSOC and the Office of Financial Research (OFR), which is a component of the FSOC created, to improve the quality of financial data available to policymakers and to facilitate more robust and sophisticated analysis of the financial system. The OFR is in the process of comprehensively cataloguing the data that are currently collected by U.S. financial regulators in order to identify deficiencies and redundancies in the existing regulatory framework, as well as enhancing the quality of the financial data infrastructure through the promotion of a global Legal Entity Identifier (LEI) for financial institutions. There is no net taxpayer cost for these activities. As specified in the Act, the Budget reflects funding for the FSOC and OFR through transfers from the Federal Reserve for 2011 and 2012; thereafter, both entities will be fee-funded. Enhanced Consumer Protection: The Wall Street Reform Act created a single independent regulator – the Consumer Financial Protection Bureau (CFPB) – whose sole mission is to look out for consumers in the increasingly complex financial marketplace. The CFPB consolidates the regulation and enforcement of existing consumer financial products, services and laws, and issues and enforces new regulations on nonbank financial institutions (e.g., payday lenders and credit providers). On July 21, 2011, the Treasury Department transferred power to the CFPB, one year after the agency was created by the Wall Street Reform Act. On January 4, 2012, Richard Cordray was appointed Director of the Bureau, and with his appointment, the CFPB is now able to implement the full range of its authorities. The CFPB is authorized to enforce existing consumer financial protection regulations affecting banks and affiliates (those with over $10 billion in assets), as transferred to the CFPB by the seven regulatory agencies whose regulatory authority was consolidated in the Bureau under the Act. Notable existing regulations include the Fair Credit Reporting Act, Truth in Lending Act, and the Real Estate Settlement Procedures Act. The CFPB is also authorized to issue and enforce new rulemakings pertaining to prohibiting unfair, deceptive, or abusive practices and ensuring that the features of a consumer financial product or service are fairly, accurately, and effectively disclosed. In addition, the CFPB is charged with supervising nonbank financial firms in specific markets regardless of size, such as mortgage lenders, consumer reporting agencies, debt collectors, private education lenders, and payday lenders. In July, the CFPB debuted its toll-free telephone number for consumers to file and track complaints, along with a Web-based system for consumers to file credit card complaints. The CFPB has also proposed new, simplified mortgage disclosure forms to aid consumers in comparing mortgage products, and unveiled its Know Before You Owe prototype credit card disclosure form. On January 5, 2012, the CFPB 4. FINANCIAL STABILIZATION EFFORTS AND THEIR BUDGETARY EFFECTS launched the Nation’s first nonbank supervision program. The Bureau’s approach to nonbank examination will be the same as its approach for banks. In October 2011 and January 2012, respectively, the Bureau released a general CFPB Examination Manual to guide examination processes for banks and nonbanks, as well as the Mortgage Origination Examination Manual, which specifically outlines procedures for supervising mortgage originators in both the banking and non-banking sectors. The CFPB is funded through transfers from the Federal Reserve and has authority, in the event of a funding shortfall, to request that Congress appropriate additional discretionary funds from 2010 to 2014. No such request is expected over the Budget horizon. The Budget reflects funding for the CFPB through these authorized transfers from the Federal Reserve, estimated at $448 million in 2013. Deposit and Share Insurance and their Coverage: The Wall Street Reform Act permanently increased the standard maximum deposit and share insurance amounts from $100,000 to $250,000, which applies to both the FDIC and the National Credit Union Administration, and requires the FDIC to base deposit insurance premiums on an insured depository institution’s total liabilities instead of total insured deposits. To improve the security of the FDIC fund backing this insurance, the Act requires the FDIC to increase the reserve ratio of the Deposit Insurance Fund (DIF) to at least 1.35 percent of total insured deposits by September 30, 2020, resulting in an increase in assessments on deposit institutions. These changes are reflected in the Budget and their effects are discussed in greater detail in the Credit and Insurance chapter in this volume. Increased Transparency in Financial Markets: As the regulators of U.S. financial markets, the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) are key components of the Administration’s efforts to reform dangerous Wall Street practices that threaten economic stability. Both agencies have worked tirelessly over the past three years to address many of the root causes of the crisis, to adapt their organizations to more effectively monitor regulated industries and activities, and to implement enforcement strategies designed to both punish noncompliant actors and deter noncompliance system-wide. In 2011, the SEC brought new sophistication to core agency functions, began implementing complex and comprehensive Wall Street Reform Act mandates, advanced an investor-focused agenda, and improved the productivity of its 3,800 member staff. Over the past year, new specialized SEC Enforcement Division units continued to build expertise in complex, high-priority areas. Complementing this new organization was the increasing use of sophisticated analytic tools and data-based templates that identify suspicious trading patterns and activities, allowing Enforcement to more quickly identify and pursue unlawful conduct in the marketing, sale, and trading of securities products. In 2011, the SEC filed 735 enforcement actions—more than it ever filed in a single year. As a result of this aggressive enforcement agenda, the SEC obtained more than $2.8 billion in ill-gotten gains and penalties in 2011. As part of 33 its enforcement efforts, the SEC has continued to bring actions against those suspected of misconduct related to the financial crisis of 2008. To date, the SEC has filed 36 separate actions in financial crisis-related cases against 81 defendants—nearly half of whom were CEOs, CFOs, and senior corporate executives of public companies—resulting in approximately $1.97 billion in ill-gotten gains, penalties, and monetary relief obtained on behalf of the American people. The Wall Street Reform Act tasked the SEC with writing a large number of new rules. In addition to managing the complexity and interrelatedness of the mandated rules, the SEC has worked to provide certainty to financial markets and participants by finalizing rules as quickly as possible without compromising the agency’s ability to review, evaluate, and make changes to reflect the large number of public comments received on its proposed rulemakings. By December 31, 2011, the SEC had proposed or adopted more than three-fourths of the rules required by the Act. Among its accomplishments in reform rulemaking, the SEC has: proposed rules that will improve the integrity of the process that yielded so many flawed ratings of subprime mortgage products, by increasing transparency of the rating process and of the agencies that produce ratings, and by protecting against conflicts of interest when entities or individuals provide ratings for their clients; made available to regulators and the investing public information about the identities, size, and disciplinary history of hedge fund and other private fund advisers, enabling more efficient investing and more effective oversight of these previously unregulated entities; and worked with the CFTC to develop the regulatory blueprint and requirements for a transparent, efficient, and competitive marketplace for over-the-counter swaps and derivatives. The SEC has also initiated a review of its offering rules to evaluate their impact on small business capital formation and to consider appropriate changes to boost participation and reduce barriers to entry. As part of this effort, the SEC created an Advisory Committee on Small and Emerging Companies. In addition to its longstanding responsibility to ensure fair, open, and efficient future markets, the Wall Street Reform Act authorized the CFTC regulate the swaps marketplace through oversight of derivatives dealers and open trading and clearing of standardized derivatives on regulated platforms. To adapt its mission to include these new responsibilities, the CFTC is drafting numerous rules required to implement the Act. Through September 30, 2011, CFTC issued 52 proposed rules and 15 final rules; received, reviewed and analyzed approximately 28,000 comments; and held 14 technical conferences. The CFTC anticipates completion of the vast majority of the rules required by the Wall Street Reform Act by March 2012, and essentially all rules by July 2012—within 24 months of enactment of the Act. While devoting significant resources to timely and thorough implementation of new Wall Street Reform Act authorities, the CFTC has continued its market surveillance and enforcement activities. The Commission under- 34 took 99 enforcement actions in 2011, the highest in the agency’s history and a 74 percent increase over the prior fiscal year. The Commission also opened more than 450 investigations. More than 70 indictments and convictions were obtained in criminal cases related to CFTC enforcement actions. The most notable fraud case was CFTC vs. Walsh, et al., where the Court ordered an initial distribution and return of approximately $792 million to commodity pool investors. The CFTC has actively consulted with other Federal financial regulators, as well as international counterparts, to ensure harmonization of new proposed rules. Additionally, the CFTC has demonstrated a commitment to public transparency in its adoption of Wall Street Reform Act implementing regulations, requesting and incorporating input from the public during the earliest stages of rule development, publishing a wide variety of materials and disclosures on its website, and conducting all Commission reviews of proposed rules in open forums. The CFTC’s review of Designated Contract Markets has been extremely limited due to funding constraints over the last year, which presents an oversight risk of exchanges that are responsible for the vast majority of U.S. futures trading volume. Annual reviews of major exchanges are important to provide assurance to the public and other regulators of the exchanges’ ongoing core principle compliance. The Commission did review Self-Regulatory Organizations (SROs) to assess compliance with the CEA and Commission requirements and deficiencies noted were communicated to the SRO in draft form. The next two years will be critical for the SEC and the CFTC as the agencies continue to identify and pursue unlawful activities stemming from the 2008 financial crisis and to operationalize the mandates of the Wall Street Reform Act. On top of its traditional market oversight and investor protection responsibilities, the SEC will fully implement the following new authorities in 2012 and 2013: oversight and examination of new security-based swap clearing agencies, dealers, and data repositories; oversight and examination of private fund advisers managing thousands of pooled investment vehicles that will be newly registered with the SEC; reviewing disclosures of asset-backed securities issuers; registration of municipal advisers; and enhanced supervision of credit rating agencies. In addition, the SEC will continue the work of strengthening its core programs and operations, including detecting and pursuing securities fraudsters, reviewing public company disclosures and financial statements, inspecting the activities of investment advisers, investment companies, broker-dealers, and other registered entities, and maintaining fair and efficient markets. Building on a 2009 reorganization and recommendations from consultants and auditors, the SEC will focus its efforts on increasing coverage of registered investment advisory firms by adding new positions to the examination program; enhancing disclosure reviews of large or financially significant companies; and leveraging technology to streamline operations and bolster program effectiveness. All of these responsibilities are essential to restoring investor confi- ANALYTICAL PERSPECTIVES dence and trust in financial institutions and markets in the wake of the 2008 financial crisis. In support of the SEC’s mission, the President’s Budget provides $1,566 million in new resources, an increase of $242 million over the agency’s 2012 appropriation. The Budget also projects that the SEC will obligate $50 million from its mandatory Reserve Fund for investments in information technology systems and other necessary improvements. The President’s Budget provides significant increases for the CFTC in 2013 in support of base regulatory work as well as Wall Street Reform Act implementation. For CFTC, $308 million is provided, an increase of $103 million or 50 percent over 2012. Additionally, the Administration urges the Congress to enact legislation authorizing the CFTC to collect user fees to fund its activities. Such legislation would bring the CFTC into line with all other Federal financial regulators, which are funded in whole or in part through user fees. Upon enactment of legislation permitting the CFTC to collect user fees, the Administration will transmit a budget amendment to reflect the funding of CFTC’s 2013 appropriation through offsetting collections. Streamlined Insurance Sector Regulation: The Federal Insurance Office (FIO), housed within the Treasury, was established by the Wall Street Reform Act to “monitor all aspects of the insurance industry, including identifying issues or gaps in the regulation of insurers that could contribute to” systemic risk. The FIO was created, in part, to streamline what is currently a decentralized regulatory regime. On October 17, 2011, the FIO announced that it was seeking public comment for its first mandatory report under the Act on how to modernize and improve the country’s insurance regulatory system. The FIO will also play a role in support of FSOC; it will advise the Secretary on international issues related to insurance investment risk and regulation, and it will assume responsibility for the Treasury’s Terrorism Risk Insurance Program. In May 2011, Treasury announced the formation of a Federal Advisory Committee on Insurance to offer recommendations to the FIO on issues related to the FIO’s responsibilities. The vision for the FIO is that it will also provide the Federal Government with the ability to immediately estimate exposures related to catastrophic events, such as the September 11th terrorist attacks or Hurricane Katrina. The FIO is funded with discretionary resources through the Treasury’s Departmental Offices (DO) request, and the Budget includes funding for this office. International Financial Reform. The financial crisis was an international event not limited to U.S. markets, corporations, and consumers. In addition to its demonstrated commitment to achieving meaningful financial reform at home, the Administration continues to ensure coordination of financial reform principles across the globe. At the G–20 Summit in Pittsburgh in September 2009, President Obama and other G-20 leaders established the G-20 as the premier forum for international economic cooperation. Over the course of Summits held in London (April 2009), Pittsburgh (September 2009), Toronto (June 2010), Seoul (November 2010), and Cannes (November 2011), the Administration and G-20 leaders have committed to an ambitious agenda for financial regulatory re- 4. FINANCIAL STABILIZATION EFFORTS AND THEIR BUDGETARY EFFECTS form. Their reform commitments have extended the scope of regulation, will improve transparency and disclosure, and will strengthen banks through increased and higher quality capital and introduction of a leverage ratio that will limit the amount banks may lend relative to their capital reserves. Together, the U.S. and its global allies are building effective resolution regimes, including crossborder resolution frameworks, and are developing higher prudential standards for systemically important financial institutions to reflect the greater risk those institutions pose to financial system stability. Treasury Secretary Geithner and others in the Administration have ensured that these commitments are fully consistent with our domestic financial reform agenda. The Administration continues to work cooperatively with its G-20 partners to close regulatory gaps. These efforts reflect the parties’ recognition of the interconnectedness of financial markets and the need to preclude opportunities for regulatory arbitrage, in which firms seek jurisdictions and financial instruments that are less regulated and, in doing so, allow risk to build up covertly, posing a threat to financial stability. In developing regulatory reforms that strengthen the resilience of the financial system to withstand the level of stress seen in the crisis, the Administration and its G-20 partners have remained mindful of the need to undertake reform in ways consistent with cultivating vibrant, innovative, and healthy markets that can do what financial markets do best: allocate scarce resources efficiently. Federal Reserve Programs Beginning in August 2007, the Federal Reserve responded to the crisis by implementing a number of programs designed to support the liquidity positions of financial institutions and foster improved conditions in financial markets. The Federal Reserve actions can be divided into three groups. The first set of tools involved the provision of short-term liquidity to banks and other financial institutions through the traditional discount window to stem the precipitous decline in interbank lending. The Term Auction Facility (TAF), which was created in December 2007, allowed depository institutions to access Federal Reserve funds through an auction process, wherein depository institutions bid for TAF funds at an interest rate that was determined by the auction. The final TAF auction was held in March 2010 and, in total, the Federal Reserve disbursed over $3.8 trillion in TAF loans. All TAF loans were repaid in full, with interest. The Federal Reserve also initiated the Term Securities Lending Facility (TSLF) and the Primary Dealer Credit Facility (PDCF), both of which provided additional liquidity to the system and helped stabilize the broader financial markets. The PDCF and TSLF expired on February 1, 2010, consistent with the Federal Reserve’s June 2009 announcement. The second set of tools involved the provision of liquidity directly to borrowers and investors in key credit markets. The Commercial Paper Funding Facility (CPFF), Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), Money Market Investor 35 Funding Facility (MMIFF), and the Term Asset-Backed Securities Loan Facility (TALF) fall into this category. As a third set of instruments, the Federal Reserve expanded its traditional tool of open market operations to support the functioning of credit markets through the purchase of longer-term secondary market securities for the Federal Reserve’s System Open Market Account portfolio. In light of improved functioning of financial markets, many of the new programs have expired or been closed including the MMIFF (October 30, 2009), AMLF (February 1, 2010), and CPFF (February 1, 2010). To address the frozen consumer and commercial credit markets, the Federal Reserve announced on November 25, 2008, that in conjunction with the Treasury Department it would lend up to $200 billion to holders of newly issued AAA-rated asset-backed securities through the TALF. The program was expanded as part of the Administration’s Financial Stability Plan and launched in March 2009. The program supported the issuance of asset-backed securities collateralized by student loans, auto loans, credit card loans, Small Business Administration guaranteed loans, commercial mortgage loans, and certain other loans. As part of the program, Treasury provided through TARP authorities protection to the Federal Reserve by originally covering the first $20 billion in losses on all TALF loans. However, in July 2010, Treasury, in consultation with the Federal Reserve, reduced its loss-coverage to $4.3 billion, which represented approximately 10 percent of the total $43 billion outstanding in the facility when the program was closed to new lending on June 30, 2010. To support mortgage lending and housing markets, the Federal Reserve began purchasing up to $175 billion of Government-Sponsored Enterprise (GSE) debt and up to $1.25 trillion of GSE mortgage-backed securities (MBS) beginning in December 2008. The Federal Reserve completed its purchase of $1.25 trillion in GSE MBS in March 2010, and purchased $172.1 billion of GSE debt as of December 2011. Purchasing GSE debt and MBS has provided liquidity to the mortgage market, which facilitated the issuance of new mortgage loans to homebuyers at affordable interest rates. The Federal Reserve also purchased $300 billion in longer-term Treasury securities in 2009 to improve interest rate conditions in mortgage and other private credit markets. To support a stronger paced economic recovery, in November 2010 the Federal Reserve announced plans to purchase up to $600 billion of additional long-term Treasury securities as part of its “quantitative easing” program. The purchases were extended over an eight-month period; however, the Federal Open Market Committee stipulated that it would continually monitor economic conditions and alter the timing and amount of purchases of Treasury securities, as necessary, to maximize employment and maintain price stability, consistent with its statutory mandate. Earnings resulting from the expansion of the Federal Reserve’s balance sheet through the purchase of GSE debt, GSE MBS, and long-term Treasury securities have increased the profits the Federal Reserve remits to the Treasury, reducing the budget deficit. In 2011, Treasury 36 received $82.6 billion from the Federal Reserve, which represents a 9 percent increase over 2010 deposits. The Budget projects Treasury will receive $81.3 billion and $80.5 billion from the Federal Reserve in 2012 and 2013, respectively. Federal Deposit Insurance Corporation (FDIC) Programs Using its existing authority, the FDIC created the Temporary Liquidity Guarantee Program (TLGP) in October 2008, to help restore confidence in the banking sector and prevent large scale deposit flight. There are two components to the TLGP: the Debt Guarantee Program and the Transaction Account Guarantee (TAG). For the first time ever, the Debt Guarantee Program (DGP) allowed participating institutions (banks and their holding companies and affiliates) to issue FDIC-guaranteed senior secured debt. Therefore, if a participating institution defaulted on its debt, the FDIC would make required principal and interest payments to unsecured senior debt holders. The FDIC charged additional fees and surcharges for any participating institutions that voluntarily opted into this program. Originally, the guarantee was limited to unsecured debt issued between October 14, 2008, and June 30, 2009, and the FDIC debt guarantee coverage extended through June 30, 2012. On March 17, 2009, the FDIC extended coverage to debt issued through October 31, 2009, and extended the guarantee through December 31, 2012. The FDIC also levied a surcharge on debt issued between April 1, 2009, and October 31, 2009, which was transferred to the Deposit Insurance Fund. On October 20, 2009, the FDIC adopted a final rule reaffirming that the FDIC will not guarantee any debt issued after October 31, 2009. The rule also established a limited, six-month emergency guarantee facility upon expiration of the program; however, this facility was never utilized. As of September 30, 2011, there was $224.9 billion of debt outstanding in the senior unsecured debt guarantee program. TAG, the second component of the TLGP, extended an unlimited FDIC guarantee to participating insured depository intuitions on non-interest bearing transaction account deposits, which included low-interest negotiable order of withdrawal (NOW) accounts and Interest on Lawyers Trust Accounts (IOLTAs). The FDIC charged additional premiums for any banks that voluntarily opted into this program. This guarantee was designed to protect small business payrolls held at small and medium sized banks. The Wall Street Reform Act modified authorities for these programs and authorized the FDIC to provide two years of unlimited insurance coverage, through the Deposit Insurance Fund, for non-interest bearing transaction account deposits starting on December 31, 2010 (excluding NOW accounts and IOLTAs). However, the Permanent Federal Deposit Insurance Coverage for Interest on Lawyers Trust Accounts Act (P.L. 111-343) enacted on December 29, 2010, extended the two years of unlimited coverage to IOTLAs as well, though not the NOW accounts. The coverage extended through the Act is provided to all insured institutions and there are no ANALYTICAL PERSPECTIVES separate fees associated with this coverage. Due to the passage of the Act, the FDIC Board adopted a final rule in October 2010, stating that the TAG would not be extended beyond its December 31, 2010, expiration date. The Budget reflects TAG account transactions for the first quarter of 2011, after which losses on non-interest bearing transaction accounts are reflected in the FDIC’s Deposit Insurance Fund. The FDIC has further collaborated with the Treasury Department and the Federal Reserve to provide exceptional assistance to institutions such as Citigroup. Alongside the Treasury and the Federal Reserve, the FDIC guaranteed up to $10 billion of a $301 billion portfolio of residential and commercial mortgage-backed securities at Citigroup. The guarantee was terminated in December 2009 as part of a larger Citigroup initiative to repay Federal support. For a more detailed analysis of active FDIC programs, see the section titled, “Deposit Insurance” in the Credit and Insurance chapter in this volume. National Credit Union Administration (NCUA) Programs The NCUA has continued to take aggressive actions in response to dislocations in financial markets in order to maintain member and investor confidence, limit losses, and promote recovery in the credit union system. These actions have included raising the deposit insurance coverage to $250,000 in 2009, providing liquidity loans to member credit unions totaling $24 billion, and stabilizing five credit unions through conservatorship. NCUA has also executed multiple programs amidst the economic crises to ensure liquidity and ultimately the continued safety and soundness of the credit union system, including the Corporate System Resolution Program under the Temporary Corporate Credit Union Stabilization Fund. For a more detailed analysis of active NCUA programs, see the section titled, “Deposit Insurance” in the Credit and Insurance chapter in this volume. Housing Market Programs under the Housing and Economic Recovery Act To avoid a possible collapse of the housing finance market and further risks to the broader financial market, the Federal Housing Finance Agency (FHFA) placed the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) into conservatorship on September 6, 2008. On the following day, the U.S. Treasury launched three new programs to provide temporary financial support to these housing Government-Sponsored Entities (GSEs) and to stabilize the housing market under the broad authority provided in the Housing and Economic Recovery Act (HERA) of 2008 (P.L. 110–289). First, the Treasury Department provided capital to the GSEs through Senior Preferred Stock Purchase Agreements (PSPAs) to ensure that the GSEs maintain a positive net position (i.e., assets are greater than or equal to liabilities). On December 24, 2009, Treasury announced that the funding commitments in the purchase agreements would be modified to 4. FINANCIAL STABILIZATION EFFORTS AND THEIR BUDGETARY EFFECTS the greater of $200 billion or $200 billion plus cumulative net worth deficits experienced during calendar years 2010 through 2012, less any surplus remaining as of December 31, 2012. Second, the Treasury established a line of credit for Fannie Mae, Freddie Mac, and the Federal Home Loan Banks to ensure they have adequate funding on a shortterm, as-needed basis. This line of credit was never used. The Treasury also initiated purchases of GSE guaranteed mortgage-backed securities (MBS) in the open market (separate from the Federal Reserve’s MBS purchase program discussed above), with the goal of increasing liquidity in the secondary mortgage market. In December 2009, the Treasury initiated two additional purchase programs under HERA authority to support housing assistance provided through new and existing State and local Housing Financing Agencies (HFAs) revenue bonds. Treasury’s authority to enter new obligations under the GSE PSPA agreement, MBS purchase, and HFA support programs expired on December 31, 2009. However, Treasury’s existing commitments continue to support any needed capital infusions through PSPAs, and new and existing HFA housing bond issuances, and Treasury will continue to collect proceeds from the sale or repayment of the securities that it owns. The Budget assumes that Treasury will make cumulative investments in Fannie Mae and Freddie Mac of $221 billion from 2009 through 2013 and receive dividends of $73 billion over the same period. Starting in 2013, the Budget forecasts that Fannie Mae and Freddie Mac will have sufficient earnings to pay part but not all of the scheduled dividend payments. The Budget assumes additional net dividend receipts of $121 billion from 2014-2022. The cumulative cost of the PSPA agreements from the first PSPA purchase through 2022 is estimated to be $28 billion. The Budget also includes new fees resulting from a provision in the Temporary Payroll Tax Cut Continuation Act of 2011 requiring the GSEs to increase their fees by an average of at least 0.10 percentage points above the average guarantee fee imposed in 2011. Revenues generated by these fee increases will be remitted directly to the Treasury for deficit reduction, and the Budget estimates resulting deficit reductions of $37 billion from 2012 through 2022. In addition, significant assistance has been provided to the mortgage market through the Federal Housing Administration (as described in the Credit and Insurance chapter), through Federal Reserve Bank purchases of GSE MBS (as described above), and through the Department of the Treasury (as described below). A more detailed analysis of these housing assistance programs and the future of the GSEs is provided in the “Credit and Insurance” chapter of this volume. Treasury Programs Small Business Lending Programs. To increase the availability and affordability of credit to help small businesses drive economic recovery and create jobs, the Small Business Jobs Act of 2010 (P.L. 111-240) created two new programs proposed by the Administration that are being administered by the Department of the Treasury: 37 the State Small Business Credit Initiative (SSBCI), which provides capital through grants to State programs that support lending to small businesses, and the Small Business Lending Fund (SBLF), which was authorized to provide up to $30 billion in capital to qualified community banks and other targeted lenders with assets of less than $10 billion to encourage their lending to small businesses. The SSBCI authorizes Treasury to disburse $1.5 billion to new and existing State programs such as Capital Access Programs (CAPs) and Other Credit Support Programs (OCSPs) that will leverage private financing to spur up to $15 billion in new lending to small businesses and small manufacturers. For every dollar of Federal funding, SSBCI requires at least $10 in private lending. A total of 53 States and territories (out of a possible 56) applied to take part in the SSBCI. A total of 5 municipalities in the three States that did not apply (Wyoming, North Dakota, and Alaska) submitted their applications directly to SSBCI by the statutory deadline of September 27, 2011 for a total of 58 applications received by the program. As of January 1, 2012, SSBCI has approved funding for 47 States, 3 territories, and the District of Columbia for a total of $1.4 billion, and approximately $460 million has been disbursed. (Note: SSBCI funds States in three equal tranches. States, territories, and municipalities must prove that they have disbursed at least 80 percent of prior funds before receiving the remaining tranches.) Treasury expects to disburse nearly all of the $1.5 billion funds. While it is still too early to measure the success of the SSBCI program, initial reports are promising, with 12 states reporting using SSBCI funds to support loans and investments. SSBCI will start receiving data-driven reports from recipient States, territories, and municipalities this year, which it will use to assess performance and provide tailored technical assistance, including assessment and communication across states of “best practices” to maximize the effectiveness of funding. The SBLF authorized Treasury to lend up to $30 billion of capital to eligible financial institutions (those having less than $10 billion in assets) and participating institutions are required to pay dividends based on the volume growth of their small business lending portfolio. Providing this low-cost capital to lenders will increase their loans to small businesses many times over. The application period closed in June 2011 and all awards were made by September 27, 2011, the statutory end of the funding phase of the program. Treasury received 933 applications totaling $11.8 billion. Of these, 332 institutions were approved for a total of $4.03 billion, with some institutions screened out due in part to stringent credit requirements aimed at protecting taxpayer dollars and avoiding lending to institutions that were likely to default on their SBLF obligations. Banks ineligible for the program included: (1) institutions listed on the regulator’s problem bank list with expected CAMELS score greater than 4; and (2) TARP Capital Purchase Program (CPP) refinancings with more than one missed CPP dividend payment. SBLF is expected to create a positive return for taxpayers given the prudent lending standards established by the program. For more information on SSBCI and SBLF, 38 please see the “Credit and Insurance” chapter, in this volume. Troubled Asset Relief Program (TARP). EESA authorized the Treasury to purchase or guarantee troubled assets and other financial instruments to restore liquidity and stability to the financial system of the United States while protecting taxpayers. Treasury has used its authority under EESA to provide capital to and restore confidence in U.S. financial institutions, to restart markets critical to financing American households and businesses, and to address housing market problems and the foreclosure crisis. Under EESA, the Secretary’s authority was originally limited to $700 billion in obligations at any one time, as measured by the total purchase price paid for assets and guaranteed amounts outstanding. The Helping Families Save Their Homes Act of 2009 (P.L. 111-22) reduced total TARP purchase authority by $1.3 billion, and in July 2010, the Wall Street Reform Act further reduced total TARP purchase authority to a maximum of $475 billion in cumulative obligations. On December 9, 2009, and as authorized by EESA, the Secretary of the Treasury certified to Congress that an extension of TARP purchase authority until October 3, 2010, was necessary “to assist American families and stabilize financial markets because it will, among other things, enable us to continue to implement programs that address housing markets and needs of small businesses, and to maintain the capacity to respond to unforeseen threats.” On October 3, 2010, the Treasury’s authority to make new TARP commitments expired. The Treasury continues to manage existing investments and is authorized to expend previously committed TARP funds pursuant to obligations entered into prior to October 3, 2010. In extending TARP authority through October 3, 2010, the Secretary outlined the Government’s four elements of its strategy to wind down TARP and related programs: First, the Treasury would wind down those programs that are no longer necessary, such as the Capital Purchase Program (CPP); funding for the CPP ended on December 31, 2009. Second, new planned programs in 2010 under the extension of the purchase authority would be limited to three areas: (1) continued foreclosure mitigation for responsible American homeowners and stabilization of the housing market; (2) initiatives to provide capital to small and community banks; and (3) potentially increased commitment to the Term Asset-Backed Securities Loan Facility (TALF) to improve securitization markets that facilitate consumer and small business loans, as well as commercial mortgage loans. Third, the Government would maintain the capacity to respond to unforeseen threats. The Government would not use remaining TARP funds unless necessary to respond to an immediate and substantial threat to the economy stemming from financial instability. Fourth, the Government would manage equity investments acquired through TARP while protecting taxpayer interests. It would continue to manage those investments in a commercial manner and seek to dispose of them as soon as practicable. Section 202 of EESA requires the Office of Management and Budget (OMB) to semi-annually report the estimated ANALYTICAL PERSPECTIVES cost of TARP assets purchased and guarantees issued pursuant to EESA. The most recent report was issued November 8, 2011.2 Consistent with the requirement to analyze transactions occurring no less than thirty days before publication, the 2013 Budget data presented in this report reflect revised subsidy costs for the TARP programs using actual performance and updated market information through November 30, 2011. For information on subsequent TARP program developments, please consult the Treasury Department’s Troubled Asset Relief Program Monthly 105(a) Reports. Market Impact Although challenges in the economy remain, TARP’s support to the banking sector through the Capital Purchase Program (CPP), Targeted Investment Program (TIP), Asset Guarantee Program, and the Community Development Capital Initiative (CDCI) has helped strengthen the financial position of the Nation’s banking institutions. Net income of insured financial institutions for the quarter ending September 30, 2011, was $35.3 billion, which marked nine consecutive quarters of yearover-year net income gains.3 This growth in earnings has largely been fueled by financial institutions reducing the loan loss provisions on their balance sheets based on improved forecasts of their asset quality. Total provisions for loan losses for all insured depository institutions was reduced by nearly half to $18.6 billion as of September 30, 2011, on a year-over-year basis. This reduction in loan loss reserves points to improving credit and market conditions. The gradual healing of the banking sector, coupled with the TARP programs aimed at reviving the credit markets, have facilitated the improved flow of credit in both the commercial and consumer markets. Together, the Term Asset Backed Securities Loan Facility (TALF) and the Public Private Investment Program (PPIP) helped to improve the overall credit climate for businesses, as evidenced by the declining cost of long-term investment grade borrowing, which has fallen from a peak of roughly 570 basis points over benchmark Treasury securities at the height of the crisis to just 206 basis points over Treasuries as of December 31, 2011.4 However, additional progress is needed to increase businesses’ access to credit at reasonable rates, enabling the economy to achieve its full potential. Emergency loans to General Motors and Chrysler via the TARP Automotive Industry Financing Program (AIFP) spurred the resurgence of the U.S. auto manufacturing industry. The Administration’s assistance to both GM and Chrysler was conditioned on the requirement that stakeholders make difficult, but necessary restructuring and reorganization decisions in order for these companies to 2 See “OMB Report under the Economic Stabilization Act, Section 202,” November 8, 2011. http://www.whitehouse.gov/sites/default/files/ omb/reports/emergency-economic-stabilization-act-of-2008.pdf 3 Federal Deposit Insurance Corporation, Quarterly Banking Profile, September 2011. http://www2.fdic.gov/qbp/2011sep/qbp.pdf 4 Spreads for the cost of long-term investment grade borrowing are based upon 10-year Treasury yield and FINRA/Bloomberg Investment Grade U.S. Corporate Bond Index yield. 39 4. FINANCIAL STABILIZATION EFFORTS AND THEIR BUDGETARY EFFECTS emerge from bankruptcy and achieve long-term viability. Although AIFP is still estimated to result in a net cost to taxpayers, the Government has been able to recover much more from auto companies than originally estimated, and far sooner, while reinvigorating one of America’s critical industries. New Chrysler has posted seven consecutive quarters of operating profit and has announced more than $4.5 billion in investments in plants and technology since emerging from bankruptcy in 2009.5 The story has been similar for New GM — and the industry as a whole. For the first time since 2004, Ford, Chrysler, and GM all achieved positive quarterly net profits in the first quarter of 2011.6 In addition, the Big Three automakers increased their market share in 2010 for the first time since 1995.7 The auto industry is leading a resurgence in American manufacturing that translates to the creation of more American jobs, with nearly 160,000 jobs created in the American auto industry in 2010 and 2011. Although the housing market is still recovering, the Administration’s housing programs implemented through the TARP have helped stabilize the market and kept millions of borrowers in their homes. As of December 31, 2011, nearly 910,000 borrowers have received permanent modifications through the Home Affordable Modification Program (HAMP), which amounts to an estimated $10 billion in realized aggregate savings for these 5 Chrysler Corporation, Third Quarter 2011 Financial Results Webcast, October, 28, 2011 http://www.chryslergroupllc.com/en-us/investor/ presentations/QAWebcasts/ChryslerDocuments/Q3_2011_Presentation. pdf 6 Department of the Treasury, Secretary Timothy F. Geithner’s Written Testimony before the Congressional Oversight Panel, http://cybercemetery.unt.edu/archive/cop/20110402013407/http://cop.senate.gov/ documents/testimony-121610-geithner.pdf 7 White House Report, The Resurgence of the American Automotive Industry, June 2011. homeowners. In addition to helping these borrowers, the Administration’s TARP housing programs have been a catalyst to private sector modifications, as they have paved the way for private lenders and investors to acknowledge that a borrower’s debt-to-income ratio is a key determinant of mortgage affordability and therefore linked to credit performance. Since April 2009, HAMP, FHA, and the private sector HOPE Now alliance have initiated more than 5.5 million mortgage modifications, which is nearly double the number of foreclosure completions that were executed in the same period. The Administration has continued to respond to the evolving housing crisis by implementing programs that provide mortgage relief to unemployed homeowners and those with negative home equity. Furthermore, through the HFA Hardest Hit Fund, the Administration has allocated $7.6 billion to eligible States to implement innovative housing programs to bring stability to local housing markets and meet the unique needs of their communities. Deficit Impact Nearly three years after the first TARP dollars were disbursed, the TARP has not only helped to stabilize financial markets and set the foundation for economic recovery, but it has done so at a much lower cost than originally estimated. As of December 31, 2011, total repayments and income on TARP investments were approximately $318 billion, which is 77 percent of the $414 billion in total disbursements to date. The projected total lifetime deficit impact of TARP programmatic costs, reflecting recent activity and revised subsidy estimates based on market data as of November 30, 2011, is now estimated at $67.8 billion (see Table 4-1). Compared to the 2012 MSR estimate of $46.8 billion, the estimated deficit impact of TARP increased by $21 Chart 4-1. Estimate of TARP's Deficit Impact In billions of dollars 400 350 300 250 200 150 100 50 Source: OMB and Treasury. et 1 13 Bu dg 01 20 e2 Ju n rc h2 01 1 et Ma dg Bu 12 20 0 10 20 Oc t. 01 Ma y2 MS R 11 20 rc h2 01 0 et Ma dg Bu 11 20 20 10 MS R 0 40 billion. This increase was largely attributable to the lower valuation of the AIG and GM common stock held by Treasury. AIG’s share price fell by $6.01 (or 21 percent), while GM’s share price fell by $9.07 (or 30 percent), relative to the share prices used to formulate the June 30th Valuation.8 AIG and GM losses were partly offset by a higher valuation for the PPIP, as the value of commercial and mortgage-back securities held in the portfolios of Public-Private Investment Funds improved. There has been a notable reduction in TARP’s projected deficit impact from the $341 billion estimate published in the 2010 MSR (see graph below). The Budget reflects a total TARP deficit impact of $67.8 billion, a $273 billion reduction from the 2010 MSR and a $288 billion reduction from the Congressional Budget Office’s March 2009 estimate of $356 billion. A description of the TARP programs, followed by a detailed analysis of the programmatic changes to the TARP and the cost estimates since the publication of the 2012 MSR, is provided below. Description of Assets Purchased Through the TARP, by Program Capital Purchase Program (CPP). Pursuant to EESA, the Treasury created the CPP in October 2008 to restore confidence throughout the financial system by ensuring that the Nation’s banking institutions have a sufficient capital cushion against potential future losses and to support lending to creditworthy borrowers. All eligible CPP recipients completed funding by December 31, 2009, and Treasury purchased $204.9 billion in preferred stock in 707 financial institutions under the CPP program. As of December 31, 2011, Treasury had received approximately $185 billion in principal repayments (i.e., redemptions of common and preferred stock, CDCI conversions, and refinancings to SBLF) and nearly $26 billion in revenues from dividends, interest, warrants, gains/other interest and fees. Total redemptions and income now exceed Treasury’s initial investment. Community Development Capital Initiative (CDCI). The CDCI program invests lower-cost capital in Community Development Financial Institutions (CDFIs), which operate in markets underserved by traditional financial institutions. In February 2010, Treasury released program terms for the CDCI program, under which participating institutions received capital investments of up to 5 percent of risk-weighted assets and pay dividends to Treasury of as low as 2 percent per annum. The dividend rate increases to 9 percent after eight years. CDFI credit unions were able to apply to TARP for subordinated debt at rates equivalent to those offered to CDFI banks and thrifts. These institutions could apply for capital investments of up to 3.5 percent of total assets – an amount approximately equivalent to the 5 percent of riskweighted assets available under the CDCI program to banks and thrifts. TARP capital of $570 million has been committed to this program. 8 The 2013 Budget valuation used the November 30, 2011 share price of $23.31 for Treasury’s AIG common stock and $21.29 for Treasury’s GM common stock. ANALYTICAL PERSPECTIVES Capital Assistance Program and Other Programs (CAP). The Treasury launched the CAP in March 2009 as the next phase of its effort to ensure that institutions have enough capital to lend, even under more distressed economic scenarios. The CAP was announced in conjunction with the commencement of a supervisory capital assessment process, commonly referred to as the “stress tests”. The CAP was available to institutions that participated in the “stress tests” as well as others. Of the ten bank holding companies that were identified by the test as needing to raise more capital, nine have met or exceeded the capital raising requirements through private efforts. The Treasury provided an additional $3.8 billion in capital to GMAC, now Ally Financial, under the Auto Industry Financing Program (described above) to assist its fundraising efforts to meet the requirements of the stress test results. Due to the success of the stress tests, efforts to raise private capital, and CPP, as well as other Government efforts, the Treasury did not receive any applications for the CAP, which terminated on November 9, 2009. American International Group (AIG) Investments. The Federal Reserve Bank of New York (FRBNY) and the Treasury provided financial support to AIG in order to mitigate broader systemic risks that would have resulted from the disorderly failure of the company. To prevent the company from entering bankruptcy and to resolve the liquidity issues it faced, the FRBNY provided an $85 billion line of credit to AIG in September 2008 and received preferred shares that entitled it to 79.8 percent of the voting rights of AIG’s common stock. After TARP was enacted, the Treasury and FRBNY continued to work to facilitate AIG’s execution of its plan to sell certain of its businesses in an orderly manner, promote market stability, and protect the interests of the U.S. Government and taxpayers. As of December 31, 2008, when purchases ended, the Treasury had purchased $40 billion in preferred shares from AIG through TARP, which have subsequently been converted to common stock. In April 2009, Treasury also extended a $29.8 billion line of credit, of which AIG drew down $27.8 billion as of January 2011, in exchange for additional preferred stock. The remaining $2 billion obligation was subsequently canceled. AIG executed a recapitalization plan with FRBNY, Treasury, and the AIG Credit Facility Trust in mid-January 2011 that has allowed for the acceleration of the Government’s exit from AIG. As a result of the restructuring and AIG’s ensuing public offering, the Treasury now has a 77 percent ownership (or 1.45 billion shares) stake in AIG, which represents a 15 percentage point reduction from Treasury’s 92 percent ownership stake in January 2011. Moreover, AIG has fully repaid the FRBNY. A summary of the deal terms and recent transactions is provided below: • AIG fully repaid the remaining $20 billion line of credit held by the FRBNY (including accrued interest and fees) using $27.2 billion raised from the initial public offering of the AIA Group Limited (AIA) and the sale of its American Life Insurance Company (ALICO) to MetLife. The line of credit was subsequently canceled. 4. FINANCIAL STABILIZATION EFFORTS AND THEIR BUDGETARY EFFECTS • AIG drew $20.3 billion from the remaining $22.3 billion TARP line of credit to buy-out the FRBNY’s preferred interests in special purposes vehicles (SPV) holdings within AIA and ALICO. In exchange, Treasury received the preferred interests in the two SPV’s, which are supported by interests in a number of AIG subsidiaries that were valued at $24.5 billion as of September 30, 2011. In February 2011, AIG sold subsidiaries AIG Star Life and AIG Edison Life Insurance Companies and provided $2.1 billion in proceeds to Treasury. On March 2, 2011, AIG sold common stock and equity shares in MetLife for $9.6 billion in gross proceeds. AIG used $6 billion of these proceeds to repay U.S. taxpayers, which represented Treasury’s share of preferred interests in the ALICO SPV that was transferred from the FRBNY. As of November 30, 2011, Treasury held approximately $8.2 billion of preferred equity interest of designated AIG assets held in the AIA SPV. The 2013 Budget cost estimates assume full repayment of the Treasury’s preferred equity interest, as the estimated value of the underlying assets in the AIA SPV far exceed Treasury’s $8.2 billion holdings, based on November 30, 2011, market pricing. • The January 2011 recapitalization agreement allowed AIG to draw down $2.0 billion in previous obligations from the TARP credit line for general corporate purposes as necessary. However, these funds were not drawn down and in May 2011, AIG canceled the outstanding $2 billion credit line with Treasury in conjunction with AIG’s sale of 100 million primary shares of common stock. • When the recapitalization closed in January 2011, Treasury exchanged its Series E and F preferred interest holdings acquired through the TARP for 1.09 billion shares in AIG common stock, which facilitates Treasury’s ability to exit the program as common stock is more liquid than preferred interest holdings. • As part of the initial aid package extended to AIG in 2008, the FRBNY received AIG Series C convertible preferred shares worth 79.8 percent of AIG common stock in January 2009, and transferred ownership to an independent Trust that names the U.S. Treasury as beneficiary. As part of the January recapitalization plan, the Series C preferred shares held by the Trust were exchanged for 562.9 million shares of AIG common stock. Immediately after the exchange, the Trust distributed all of its AIG common stock to the Treasury, and was subsequently dissolved. (Note: the transfer of AIG common stock from the Trust to the Treasury was not a TARP purchase, and thus the value of this stock received from the Federal Reserve is not included in the TARP cost estimates.) • On May 24, 2011, Treasury sold 200 million shares of its common stock through a public offering at $29.00 per share, netting $5.8 billion in proceeds for taxpayers. Approximately two-thirds of the proceeds, or $3.8 billion, represented sales of stock acquired 41 from TARP assistance to AIG and is included in TARP AIG net cost estimates, while the remaining one-third, or $2 billion, represented the sale of AIG common stock that was transferred to the Treasury from the Federal Reserve. • On August 18, 2011, Treasury received an additional payment of $2.2 billion funded through proceeds from the sale of AIG’s Nan Shan life insurance subsidiary. This was followed by an additional repayment of $972 million on November 1, 2011, that was funded primarily through the scheduled release of escrowed proceeds from AIG’s sale of ALICO, a subsidiary, to MetLife, Inc. Proceeds from both of these repayments were used to pay back the U.S. taxpayers’ investments in AIG. After this repayment, Treasury’s remaining outstanding investment in AIG, including common shares and preferred interests, was $50 billion. Targeted Investment Program (TIP). The goal of the TIP was to stabilize the financial system by making investments in institutions that are critical to the functioning of the financial system. Investments made through the TIP sought to avoid significant market disruptions resulting from the deterioration of one financial institution that could threaten other financial institutions and impair broader financial markets, and thereby pose a threat to the overall economy. Under the TIP, the Treasury purchased $20 billion in preferred stock from Citigroup and $20 billion in preferred stock from Bank of America. The Treasury also received stock warrants from each company. Both Citigroup and Bank of America repaid their TIP investments in full in December 2009, along with dividend payments of approximately $3.0 billion. In March 2010, Treasury sold all of its Bank of America warrants for $1.2 billion, and in January 2011, the Treasury sold Citigroup warrants acquired through the TIP for $190.4 million. The TIP is closed and has no remaining assets; taxpayers received a positive return of 8.5 percent on these investments. Asset Guarantee Program (AGP). The TARP created the AGP to provide Government assurances for assets held by financial institutions that were critical to the functioning of the nation’s financial system. In January 2009, the Treasury, the Federal Reserve, and the FDIC negotiated a potential loss-sharing arrangement under the AGP on up to $118 billion of financial instruments owned by Bank of America. In May 2009, Bank of America announced its intention to terminate negotiations with respect to the loss-sharing arrangement. In September 2009, the Treasury, the Federal Reserve, the FDIC, and Bank of America entered into a termination agreement pursuant to which Bank of America agreed to pay a termination fee of $425 million to the Government parties. Of this amount, $276 million was paid to the TARP in 2009 for the value Bank of America received from the announcement of the government’s willingness to guarantee and share losses on the pool of assets. The Treasury, the Federal Reserve and the FDIC entered into a final agreement for a loss-sharing arrange- 42 ment with Citigroup on January 15, 2009. Under the agreement, the Treasury guaranteed up to $5 billion of potential losses incurred on a $301 billion portfolio of financial assets held by Citigroup. The agreement was terminated, effective December 23, 2009. The U.S. Government parties did not pay any losses under the agreement, and retained $5.2 billion of the $7 billion in trust preferred securities that were part of the initial agreement with Citigroup.9 TARP retained $2.2 billion of the trust preferred securities, as well as warrants for common stock shares that were issued by Citigroup as consideration for the guarantee. Treasury sold the trust preferred securities on September 30, 2010, and the warrants on January 25, 2011, liquidating its direct holdings in Citigroup. However, Treasury is entitled to receive up to $800 million in additional Citigroup trust preferred securities held by the FDIC (net of any losses suffered by the FDIC) under Citigroup’s use of the Temporary Liquidity Guarantee Program. The AGP program is now closed and will generate a positive return to the taxpayers from the preferred securities and other considerations. Automotive Industry Financing Program (AIFP). In December 2008, the Treasury established the AIFP to prevent a disruption of the domestic automotive industry, in order to mitigate a systemic threat to the Nation’s economy and a potential loss of thousands of jobs. Through TARP, the Treasury originally committed $84.8 billion through loans and equity investments to participating domestic automotive manufacturers, auto finance companies, and auto parts manufacturers and suppliers. As of December 31, 2011, Treasury had recouped nearly 50 percent of its investments in GM and had fully exited its Chrysler Group LLC investments. Below is a summary of the securities TARP received in exchange for the assistance provided to automotive manufacturers and recent transactions: • Treasury received 60.8 percent of the common equity and $2.1 billion in preferred stock in “New GM” when the sale of assets from the old GM to the new GM took place on July 10, 2009. In April 2010, GM fully repaid its $7 billion loan, ahead of its publicly stated goal to repay the entire loan by June 2010. As part of New GM’s initial public offering (IPO) in November 2010, Treasury sold nearly 359 million shares of New GM common stock at $33.00 per share, and subsequently sold an additional 53.7 million shares in December 2010 at the same price. In total, TARP raised $13.5 billion in net proceeds from the New GM IPO and reduced its ownership stake by nearly half, to approximately 32 percent. New GM also repurchased $2.1 billion in preferred stock from TARP in December 2010. As of December 31, 2011, TARP had recouped $24.1 billion of the $51.03 billion in aid extended to GM. • Treasury also received a $7.1 billion debt security and a 9.9 percent share of the equity in the newly 9 Trust Preferred Securities (TruPS) are financial instruments that have the following features: they are taxed like debt; counted as equity by regulators; are generally longer term; have early redemption features; make quarterly fixed interest payments; and mature at face value. ANALYTICAL PERSPECTIVES formed, post-bankruptcy Chrysler Group LLC (New Chrysler). As part of the bankruptcy proceedings, New Chrysler also assumed $500 million of debt from TARP’s original $4 billion loan to Chrysler Holding (Old Chrysler). Therefore, TARP held a $3.5 billion loan with Old Chrysler in addition to investments in New Chrysler. In April 2010, TARP received a $1.9 billion repayment of its investments in Old Chrysler. This repayment, while less than the amount Treasury invested, was significantly more than the Administration had previously estimated to recover. As part of the repayment agreement, Treasury agreed to write off the $1.6 billion balance remaining under the $3.5 billion TARP loan to Old Chrysler. On May 24, 2011, six years ahead of schedule, Chrysler Group LLC repaid the remaining $5.1 billion in TARP loans and terminated the remaining $2.1 billion TARP loan commitment. Finally, on June 2, 2011, Treasury reached an agreement to sell to Fiat Treasury’s 6 percent fully diluted equity interest in New Chrysler and Treasury’s interest in an agreement with the UAW retiree trust for $560 million. The closing of this transaction in July 2011 marked Treasury’s full exit from its TARP investments in Chrysler. In total, Chrysler repaid $11.1 billion10 of the $12.4 billion in aid provide by the U.S. Government, which far exceeded expectations when the program was first unveiled in December 2008. • The Treasury has also purchased investments totaling $16.3 billion in Ally Financial (formerly GMAC). On December 30, 2010, Treasury converted $5.5 billion of its $11.4 convertible preferred stock in Ally Financial into common stock. On March 2, 2011, Treasury sold all of its trust preferred securities for approximately $2.7 billion. Ally Financial filed a registration statement with the Securities and Exchange Commission for a proposed initial public offering on March 31, 2011, proceeds of which are expected to facilitate Ally paying back TARP and ending governmental ownership shares. As of December 31, 2011, Treasury had recouped $5.3 billion of its $16.3 billion in Ally-related investments, including $2.7 billion in dividends and interest. Both the Auto Supplier Support Program (ASSP) and the Auto Warranty Commitment Program (AWCP) have closed and, in aggregate, these investments did not result in losses. The Government originally committed $5 billion in loans to ASSP, ensuring the auto suppliers received compensation for products and services purchased by automakers. Through the AWCP, the Government extended support to protect consumer warranties on purchased GM and Chrysler vehicles while the companies worked through their restructuring plans. Treasury no longer holds warranties under the AWCP. TARP Housing Programs. To mitigate foreclosures and preserve homeownership, in February 2009 10 Chrysler repayments of $11.1 billion include $560 million in proceeds from the sale of Treasury’s 6 percent fully diluted equity interest in Chrysler to Fiat and Treasury’s interest in an agreement with the UAW retiree trust that were executed on July 21, 2011. 4. FINANCIAL STABILIZATION EFFORTS AND THEIR BUDGETARY EFFECTS the Administration announced a comprehensive housing program utilizing up to $50 billion in funding through the TARP. The Government-Sponsored Entities (GSEs) Fannie Mae and Freddie Mac participated in the Administration’s program both as the Treasury Department’s financial agents for Treasury’s contracts with servicers, and by implementing similar policies for their own mortgage portfolios.11 These housing programs are focused on creating sustainably affordable mortgages for responsible homeowners who are making a good faith effort to make their mortgage payments, while mitigating the spillover effects of foreclosures on neighborhoods, communities, the financial system and the economy. Following the enactment of the Wall Street Reform Act, Treasury reduced its commitments to the TARP Housing programs to $45.6 billion. These programs fall into three initiatives: 1. Making Home Affordable (MHA); 2. Housing Finance Agency (HFA) Hardest-Hit Fund (HHF); and 3. Federal Housing Administration (FHA) Refinance Program12. The MHA initiative includes among its components the Home Affordable Modification Program (HAMP), FHAHAMP, the Second Lien Modification Program (2MP), and the second lien extinguishment portion of the FHARefinance Program, and Rural Development-HAMP.13 Under MHA programs, the Treasury contracts with servicers to modify loans in accordance with the program’s guidelines, and to make incentive payments to the borrowers, servicers, and investors for those modification or other foreclosure alternatives. As of December 31, 2011, 143 non-GSE mortgage servicers had signed up to participate in the HAMP and over 1.75 million trial modification offers had been extended to borrowers. Nearly 910,000 permanent modifications were initiated as of the end of December 2011, which have saved homeowners nearly $10 billion in reduced mortgage payments. Program implementation has continually improved since its inception in February 2009. As of December 2011, 83 percent of homeowners who started a trial modification after June 1, 2010, had converted to permanent modifications within an average of 3.5 months – a higher conversion rate and shorter time to convert than earlier in the program. In addition to providing responsible homeowners with sustainable mortgages, the MHA initiative has also, for the 11 For additional information on MHA programs, visit: http://www. makinghomeaffordable.gov/. 12 This program has also been referred to as the FHA Short Refinance Program or Option in other reporting. The FHA Refinance Program is not a Treasury program, but is supported through the TARP with nearly $3.0 billion available to provide incentive payments to extinguish second lien mortgages to facilitate refinancing the first liens, and an additional $8.1 billion is committed to cover a share of any losses on FHA Refinance loans. 13 For additional information on MHA programs, visit: http://www. makinghomeaffordable.gov/. 43 first time, standardized the mortgage modification process across the servicing industry. In January 2012, the Administration extended MHA programs until December 31, 2013. Treasury also offers other forms of incentives to encourage mortgage loan modifications, or prevent foreclosure under the HAMP, as part of its MHA program. For example, Treasury provides payments to servicers and investors to protect against declining home prices as part of encouraging mortgage modifications in communities that have experienced continued home price depreciation. When a mortgage modification is not possible, Treasury contracts with servicers to provide incentives that encourage borrower short sales (sales for less than the value of the mortgage in satisfaction of the mortgage) or deedsin-lieu (when the homeowner voluntarily transfers ownership of the property to the servicer in full satisfaction of the total amount due on the mortgage) via the Home Affordable Foreclosure Alternatives Program (HAFA), in order to provide a means for borrowers to avoid foreclosure. Since the inception of the program, over 38,600 HAFA agreements have been initiated. As part of its ongoing effort to continuously refine the targeting of mortgage assistance to address the sector’s greatest needs, the Administration created several programs that will give a greater number of responsible borrowers an opportunity to remain in their homes and reduce costly foreclosures. Major programs announced since December 31, 2009, include: Home Affordable Unemployment Program (part of HAMP): Unemployed borrowers that meet eligibility criteria will receive temporary mortgage payment assistance while they look for a new job. In an effort to keep more unemployed borrowers in their homes and allow them an opportunity to find new employment, Treasury extended the minimum period for which unemployed borrowers receive temporary payment assistance from 3 months to 12 months in July 2011. In response to the Administration’s efforts, 12-month forbearance is becoming an industry standard, with Fannie Mae and Freddie Mac now applying it to mortgages they own and Wells Fargo and Bank of America now offering it as their default approach for unemployed borrowers. Principal Reduction Alternative (PRA, part of HAMP): Servicers who have signed up for this program are required to consider an alternative mortgage modification that emphasizes principal relief for borrowers who owe more than their home is worth. Under the alternative approach, if the servicer reduces borrower loan principal using this program, investors will receive incentive payments based on a percentage of each dollar of loan principal written off. Borrowers and investors will receive principal reduction and the incentives, respectively, through a pay-for-success structure. There have been over 36,400 PRA trial modifications initiated as of December 31, 2011, with the median principal amount reduced for active permanent modifications of over $66,300, representing a median reduction of over 31 percent from the original loan. HFA Hardest-Hit Fund (HHF): The $7.6 billion HHF provides the eligible entities of Housing Finance Agencies 44 from 18 states and the District of Columbia with funding to design and implement innovative programs to prevent foreclosures and bring stability to local housing markets. The Administration targeted areas hardest hit by unemployment and home price declines through the program. Approximately 70 percent of the HHF funds are dedicated to programs that help unemployed borrowers stay in their homes, while the remaining 30 percent of HHF funds facilitate principal write-downs for borrowers who owe more than their home is worth. The flexibility of the HHF funds has allowed States to design and tailor innovative programs to meet the unique needs of their community. For example, Oregon has recently implemented a program through which the state’s Housing Finance Agency will purchase mortgages of homeowners who have sustained a financial shock, rehabilitate the loan by reducing the borrowers’ principal balance, and subsequently sell the loan after the borrowers’ circumstances stabilize and a reliable payment history is established. The design of Oregon’s model allows the Housing Finance Agency to generate enough cash flow to create a revolving loan fund that provides on-going support to responsible, but vulnerable homeowners. FHA Refinance Program: This program, which is administered by the Federal Housing Administration and supported by TARP, was initiated in September 2010 and allows eligible borrowers who are current on their mortgage but owe more than their home is worth, to re-finance into an FHA-guaranteed loan if the lender writes off at least 10 percent of the existing loan. Nearly $3.0 billion in TARP funds allocated under the MHA are available to provide incentive payments to extinguish second lien mortgages to facilitate refinancing the first liens under the MHA, and an additional $8.1 billion is committed to cover a share of any losses on the loans and administrative expenses. In January 2012, the Administration extended the FHA Refinance Program until December 31, 2014. Credit Market Programs. The Credit Market programs are designed to facilitate lending that supports consumers and small businesses, through the Term Asset-Backed Securities Loan Facility (TALF), the CDCI discussed previously, and the Small Business Administration’s guaranteed loan program (SBA 7(a)). TALF: The TALF is a joint initiative with the Federal Reserve that provides financing (TALF loans) to private investors to help facilitate the restoration of efficient and robust secondary markets for various types of credit. The Treasury provides protection to the Federal Reserve through a loan to the TALF’s special purpose vehicle (SPV), which was originally available to purchase up to $20 billion in assets that would be acquired in the event of default on Federal Reserve financing. The Treasury has disbursed $0.1 billion of this amount to the TALF SPV to implement the program, representing a notional amount used to establish the SPV. The Treasury’s total TALF purchases will depend on actual TALF loan defaults. In July 2010, Treasury, in consultation with the Federal Reserve, reduced the maximum amount of assets Treasury will ac- ANALYTICAL PERSPECTIVES quire to $4.3 billion, or 10 percent of the total $43 billion outstanding in the facility when the program was closed to new lending on June 30, 2010. SBA 7(a): In March 2009, Treasury and the Small Business Administration announced a Treasury program to purchase SBA-guaranteed securities (“pooled certificates”) to re-start the secondary market in these loans. Treasury subsequently developed a pilot program to purchase SBA-guaranteed securities, and purchased 31 securities with an aggregate face value of approximately $368 million. Treasury reduced its commitment to the Small Business 7(a) program from $1 billion to $370 million, as demand for the program waned due to significantly improved secondary market conditions for these securities following the original announcement of the program. On June 2, 2011, Treasury began the disposition of its SBA 7(a) securities. As of December 31, 2011, 23 securities have been sold for approximately $272 million representing an estimated $4 million return relative to the initial purchase amount for these 23 securities. Public Private Investment Program (PPIP). The Treasury, in conjunction with the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, introduced the PPIP on March 23, 2009, to address the volatile market cycle affecting troubled legacy assets clogging the balance sheets of private-sector financial institutions. The PPIP is designed to improve the financial position of financial institutions by facilitating the removal of legacy assets from their balance sheets. Legacy assets include both real estate loans held on banks’ balance sheets (legacy loans) as well as securities backed by residential and commercial real estate loans (legacy securities). The Treasury implemented the legacy securities PPIP and initially announced that it would provide up to $100 billion. However, Treasury has subsequently reduced the PPIP commitment twice since the need for Government intervention in the legacy securities market has waned as market conditions have improved and investment of private capital have increased. PPIP closed for new funding on June 30, 2010. The Budget reflects $21.9 billion in PPIP commitments. Method for Estimating the Cost of TARP Transactions Exercising its authority under EESA, the Treasury has purchased financial instruments with varying terms and conditions. Consistent with the provisions of Section 123 of EESA, the costs of equity purchases, loans, guarantees, and loss sharing under the FHA Refinance program through the TARP are reflected on a net present value basis, as determined under the Federal Credit Reform Act (FCRA) of 1990 (2 U.S.C. 661 et seq.), with an EESArequired adjustment to the discount rate for market risks. The budgetary cost of these transactions is reflected as the net present value of estimated cash flows to and from the Government, excluding administrative costs. Costs for the incentive payments under TARP Housing programs, other than loss sharing under the FHA Refinance pro- 4. FINANCIAL STABILIZATION EFFORTS AND THEIR BUDGETARY EFFECTS gram, involve financial instruments without any provision for future returns, and are recorded on a cash basis.14 The costs of each transaction reflect the underlying structure of the instruments, which may include direct loans, structured loans, equity, loan guarantees, or direct incentive payments. For each of these instruments, cash flow models are used to estimate future cash flows to and from the Government over the life of a program or facility. Further, each cash flow model reflects the specific terms and conditions of the program, technical assumptions regarding the underlying assets, risk of default or other losses, actual transactions to date, and other factors as appropriate. Models generate cash flows for original subsidy rate estimates; calculate changes in cost due to changes in contract terms or other Government actions (modification cost estimates); and calculate changes in cost due to updated economic or performance assumptions, and actual cash flows to date. The risk adjustments to the discount rates for TARP equity, loan, and guarantee transactions were made using available data and methods to capture additional potential costs related to uncertainty around the expected cash flows to and from the public. The basic methods for each of these models are outlined below. Direct Loans. Direct loan model cash flows include the scheduled principal, interest, and other payments to the Government, including estimated income from warrants or additional notes. These models include estimates of delinquencies, default and recoveries, based on loan-specific factors including the value of any collateral provided by the contract. The probability and timing of default and recoveries are estimated using applicable historical data and econometric projections where available, or publicly available proxy data including aggregated credit rating agency historical performance data. Structured Loans. Structured loans such as the TALF are modeled according to the program structure, where an intermediary special purpose vehicle (SPV) is established to purchase or commit to purchase assets from beneficiaries. In general, TARP structured loans are a hybrid of guarantees and direct loans. The Treasury makes a direct loan to a SPV; the SPV in turn enters into a contract with a beneficiary that resembles a guaranteed loan. Estimated cash flow assumptions reflect the anticipated behavior of the beneficiaries and the cash flows to and from the SPV and the Treasury. The Treasury projects cash flows to and from the Government based on estimated SPV performance, the estimated mix of assets funded through the facility, the terms of the contracts, and other factors. In the case of the TALF, the New York Federal Reserve created an SPV to purchase and manage assets received in connection with any TALF loans. The Federal Reserve 14 Section 123 of the EESA provides the Administration the authority to record TARP equity purchases pursuant to the FCRA, with required adjustments to the discount rate for market risks. The Making Home Affordable programs and HFA Hardest Hit Fund involve the purchase of financial instruments which have no provision for repayment or other return on investment, and do not constitute direct loans or guarantees under FCRA. Therefore these purchases are recorded on a cash basis. Administrative expenses are recorded for all of TARP under the Office of Financial Stability and the Special Inspector General for TARP on a cash basis, consistent with other Federal administrative costs. 45 acquires assets either when a TALF participant defaults on the Federal Reserve financing or chooses to turn over the securing assets in lieu of the scheduled repayment at the end of the term. The SPV has committed, for a fee, to purchase all assets securing a TALF loan that are received by the New York Federal Reserve at a price equal to the TALF loan amount at the time of acquisition, plus accrued but unpaid interest. The Treasury made an initial allotment to the SPV of $0.1 billion to fund the SPV, and the Treasury will purchase subordinated debt issued by the SPV to finance up to $4.3 billion of asset purchases. The Treasury receives fees and interest income on the entire outstanding TALF facility, and amounts collected in the SPV. Guarantees. Cost estimates for guarantees reflect the net present value of estimated claim payments by the Government, net of income from fees, recoveries on defaults, or other sources. Under EESA, asset guarantees provided through TARP must be structured such that fees and other income must completely offset estimated losses at the time of commitment. In TARP’s Asset Guarantee Program, fees were paid in the form of preferred stock and termination fees. The value of preferred stock is modeled using the same methodology discussed for other equity purchase programs below. Claim payments were modeled consistent with the terms of the guarantee contract, and reflected historical performance data on similar assets and estimates of future economic conditions such as unemployment rates, gross domestic product, and home price appreciation. However, the AGP was terminated with no claim payments made by the Treasury. The budget reflects actual and estimated collections from preferred stock proceeds. Equity Purchases. Preferred stock cash flow projections reflect the risk of losses associated with adverse events, likely failure of an institution, or increases in market interest rates. Estimated cash flows vary depending on: 1) current interest rates, which affect the institution’s decision to repay the preferred stock; and 2) the strength of a financial institution’s assets. The model also estimates the values and projects the cash flows of warrants using an option-pricing approach based on the current stock price and its volatility. Common equity is valued at market prices as of a fixed date, such as November 30, 2011, for the 2013 Budget. For the purposes of this calculation, common equity is assumed to be sold to the public as soon as is practicable and advisable. FHA Refinance Program. Under this program, the cost estimates reflect the present value of estimated claim payments made from the letter of credit (LOC) provider to the lenders of FHA-guaranteed loans, adjusted for market risks. Treasury has signed a LOC with Citigroup, committing $8.1 billion of TARP funds to cover a portion of default claims of FHA Refinance mortgages, plus administrative expenses. Through the LOC agreement, Treasury effectively makes claim payments to private lenders for defaulted debt obligations of non-Federal borrowers. Therefore, the program costs are estimated according to the principles of FCRA, with a risk adjustment to the discount rate as prescribed by EESA. The model 46 ANALYTICAL PERSPECTIVES Table 4–1. CHANGE IN PROGRAMMATIC COSTS OF TROUBLED ASSET RELIEF ACTIONS (EXCLUDING DEBT SERVICE) (In billions of dollars) TARP Actions 2012 MSR TARP Obligations 1 Change from 2012 MSR to 2013 Budget 2013 Budget Estimated Cost (+) / Savings (–) TARP Obligations 1 Estimated Cost TARP Estimated Cost (+) / Savings (–) Obligations 1 (+) / Savings (–) Equity purchases ������������������������������������������������������������������������������������������������������� Structured & direct loans and asset-backed security purchases ������������������������������� Guarantees of troubled asset purchases 2 ���������������������������������������������������������������� TARP housing programs �������������������������������������������������������������������������������������������� 337.1 83.0 5.0 45.6 5.2 15.7 –3.6 45.6 337.1 83.0 5.0 45.6 17.2 19.1 –3.6 45.6 ......... ......... ......... ......... 11.9 3.3 0.0 0.0 Total programmatic costs 3 ������������������������������������������������������������������������������� 470.7 62.9 470.7 78.2 ......... 15.3 Memorandum: Deficit impact before administrative costs and interest effects �������������������� 46.8 1 TARP obligations are net of cancellations. 2 The face value of assets supported by the Asset Guarantee Program was $301 billion. 3 Total programmatic costs of the TARP exclude interest on reestimates of $16.2 billion in “2012 MSR” and $10.4 billion in “2013 Budget.” projects TARP claim payments based on projected FHA Refinance volumes and claim rates. The full $8 billion commitment was obligated at the point the LOC contract was signed, and outlays of subsidy are recorded as the underlying FHA Refinance loans are made. Other TARP Housing. Foreclosure mitigation incentive payments occur when the Government makes incentive payments to borrowers and servicers for certain actions such as: successful modifications of first and second liens, on-schedule borrower payments on those modified loans, protection against further declines in home prices, completing a short sale, or receiving a deed in lieu of foreclosure. The method for estimating these cash flows includes forecasting the total eligible loans, the timing of the loans entering into the program, loan characteristics, the overall participation rate in the program, the re-default rate, home price appreciation, and the size of the incentive payments. For the HFA Hardest-Hit Fund (HHF), the Government provides a cash infusion, similar to a grant, to the eligible entities of state Housing Financing Agencies (HFAs) to design and implement innovative programs to prevent foreclosures and bring stability to local housing markets. The estimated cash flows for the HHF are based on the plans submitted by the HFAs and approved by Treasury, which detail program design and anticipated activity. 67.8 21.0 This section provides the special analysis required under Sections 202 and 203 of EESA, including estimates of the cost to taxpayers and the budgetary effects of TARP transactions as reflected in the Budget.15 This section explains the changes in TARP costs, including whether such changes are due to actual performance, or changes in future expectations. The analysis also includes an estimate of what the budgetary effects would have been had all TARP transactions been reflected on a cash basis, and also shows the estimated cost for transactions using the standard methodology required under the FCRA, without the adjustment to the discount rate for market risks prescribed by EESA. It also includes a comparison of the cost estimates with previous estimates provided by OMB and the Congressional Budget Office (CBO). Table 4—1, below, summarizes the current and anticipated activity under TARP, and the estimated lifetime budgetary cost reflected in the Budget, compared to estimates from the 2012 MSR. The direct impact of TARP on the deficit, including interest on reestimates, and using the risk-adjustment to the discount rate required under EESA, is projected to be $67.8 billion, up $21.0 billion from $46.8 billion as projected in the 2012 MSR. The subsidy cost represents the lifetime net present value cost of TARP obligations from the date the obligations originated. The subsidy cost for TARP excluding interest on reestimates is now estimated to be $78.2 billion.16 The eventual subsidy cost of TARP is likely to be lower than the current subsidy cost because projected cashflows are discounted using a risk adjustment to the discount rate as required by EESA, which adds a premium to current estimates of TARP costs on top of market risks already reflected in cash flows with the public. If actual cash flows match projections, the risk premium added to TARP costs is essentially returned via downward subsidy reestimates over time. While TARP’s overall cost to taxpayers will likely be lower than current estimates, the final cost will not be fully known until all TARP investments are extinguished. Current Value of Assets. The current value of future cash flows related to TARP transactions can also be measured by the balances in the program’s non-budgetary credit financing accounts. Under the FCRA budgetary accounting structure, the net debt or cash balances in non-budgetary credit financing accounts at the end of each fiscal year reflect the present value of anticipated 15 The analysis does not assume the effects on net TARP costs of a recoupment proposal authorized under Section 134 of EESA. Please see Chapter 2 for discussion of the Financial Crisis Responsibility Fee. 16 With the exception of the Making Home Affordable and HFA Hardest-Hit Fund programs, all the other TARP investments are reflected on a present value basis pursuant to the FCRA. TARP Program Costs and Current Value of Assets 47 4. FINANCIAL STABILIZATION EFFORTS AND THEIR BUDGETARY EFFECTS Table 4–2. TROUBLED ASSET RELIEF PROGRAM CURRENT VALUE 1 (In billions of dollars) Actual 2009 2010 Estimate 2011 Financing account balances: Troubled Asset Relief Program Equity Purchase Financing Account �� 105.4 76.9 Troubled Asset Relief Program Direct Loan Financing Account ������� 23.9 42.7 Troubled Assets Insurance Financing Fund Guaranteed Loan Financing Account ����������������������������������������������������������������������� 0.6 2.4 Troubled Assets Relief Program FHA Refinance Letter of Credit Financing Account ����������������������������������������������������������������������� ......... ......... 2012 2013 2014 2015 2016 2017 2018 2019 2020 17 For example, to disburse a loan to a borrower, a direct loan financing account receives the subsidy cost from the program account. The financing account borrows the difference between the face value of the loan and the subsidy cost from the Treasury. As inflows from the public are received, the value is realized and these amounts are used to repay the financing account’s debt to Treasury. 18 As an extreme example, a direct loan program with 100 percent subsidy cost would require budget authority for the full amount of the loan. The financing account would receive the entire amount of a loan disbursement from the budgetary program account, and would not have to borrow from the Treasury. In this case, the loan would be estimated to have a zero asset value. 19 Reestimates for TARP are calculated using actual data through September 30, 2011, and updated projections of future activity. Thus, the full impacts of TARP reestimates are reflected in the 2012 financing account balances. 2022 74.9 28.5 48.2 20.2 33.2 12.0 18.2 9.7 13.6 6.7 12.5 3.8 8.9 0.9 7.1 0.6 5.8 0.5 2.4 0.1 2.1 0.1 1.9 0.1 0.8 0.8 0.4 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 –* –2.8 –5.1 –6.8 –6.3 –4.8 –3.3 –2.0 –0.9 ......... ......... ......... Total financing account balances ��������������������������������������������� 129.9 122.0 104.1 66.4 40.5 21.3 14.2 11.6 6.6 5.7 5.4 2.5 * $50 million or less. 1 Current value as reflected in the 2013 Budget. Amounts exclude the Making Home Affordable and HFA Hardest Hit Fund, activities that are reflected on a cash basis. cashflows to and from the public.17 So, the net debt or cash balances reflect the expected present value of the asset or liability. Future collections from the public – such as proceeds from stock sales, or payments of principal and interest – are financial assets, just as future payments to the public are financial liabilities. The current year reestimates effectively true-up the net debt or cash balance in the financing account, with updated estimates of the present value of these financial assets or liabilities. For example, if an asset is valued at $100 million and the net debt in the financing account is $90 million, there will be a downward reestimate, returning the $10 million in excess subsidy to the General Fund. Accordingly, the net debt balance in the financing account after the reestimate will be $100 million—equal to the reestimated value of the asset. The larger the subsidy cost for a given loan disbursed or equity purchased, the lower the estimated value of the cash flows from the public and asset value to the Government.18 Table 4–2 shows the actual balances of TARP financing accounts as of the end of 2011, and projected balances for each subsequent year through 2022.19 Actual net balances in financing accounts at the end of 2009 totaled $129.9 billion. By the end of 2011, total financing account balances decreased to $104.1 billion, as repayments, primarily from large banks, exceeded disbursements of TARP assistance committed in prior years. Estimates in 2012 and beyond reflect reestimated value for TARP investments outstanding as of September 30, 2011, and all other an- 2021 2.3 2.1 ticipated transactions. The value of TARP assets is expected to fall by the end of 2012 to $66.4 billion, based on risk adjusted discount rates. To view net TARP costs, the value of these outstanding assets could be compared against the costs TARP incurred to acquire the assets. The expected decrease during 2012 is primarily due to winding down TARP assets and an upward reestimate for outstanding investments to be executed in 2012. The upward reestimates are driven primarily by the lower value of AIG and AIFP investments, offset in part by downward reestimates associated with the Legacy Securities Public-Private Partnership Program. The overall balance of the financing accounts is estimated to continue to fall significantly as TARP investments wind down, to $40.5 billion in 2013, and $21.3 billion in 2014, and is expected to continue to decrease over time as the assets and loans acquired under the TARP program are repaid or sold, and liabilities funded. The value of TARP equity purchases reached $76.9 billion in 2010, and fell $2 billion in 2011 reflecting the 2011 downward reestimate, final AIG funding, and repayments from large financial institutions. The value of the TARP equity portfolio is anticipated to continue declining as participants repurchase stock and assets are sold. The value of direct loans is expected to decrease to $20.2 billion in 2012, gradually declining to $0.1 billion by 2020 as loans are repaid and warrants and other assets are sold. The $0.8 billion value under the Asset Guarantee Program (AGP) in 2012 reflects the estimated value of warrants held by the Treasury and the expected receipt of trust preferred shares from the FDIC following termination of the guarantee on Citigroup assets. The value of the AGP is expected to decline, as preferred stock and warrants are sold. The FHA Refinance program reflects net cash balances, showing the reserves set aside to cover TARP’s share of default claims for FHA Refinance mortgages over the 10-year letter of credit facility. These cash balances fall as claims are paid, and reach zero by 2020 as the TARP coverage expires. Where Table 4–2 displays the estimated value of TARP investments, guarantees, and loss share agreements over time, Table 4–3 shows the estimated face value of outstanding TARP investments at the end of each year 48 ANALYTICAL PERSPECTIVES Table 4–3. TROUBLED ASSET RELIEF PROGRAM FACE VALUE OF TARP OUTSTANDING 1 (In billions of dollars) Actual 2009 Troubled Asset Relief Program Equity Purchases �������������������������������������������������������������� Troubled Asset Relief Program Direct Loans ���������������������������������������������������������������������� Troubled Assets Insurance Financing Fund Guaranteed Assets ���������������������������������������� FHA Refinance Letter of Credit ����������������������������������������������������������������������������������������� 229.6 60.5 251.4 ......... 2010 119.0 15.7 ......... ......... Estimate 2011 88.2 11.5 ......... 0.1 2012 72.3 12.4 ......... 51.9 2013 54.4 11.5 ......... 100.5 Total face value of TARP outstanding ������������������������������������������������������������������������ 541.5 134.7 99.8 136.6 166.4 reflects face value of TARP outstanding direct loans, preferred stock equity purchases, guaranteed assets, and the face value of FHA Refinance mortgages supported by the TARP Letter of Credit. Financial instrument purchases under the Making Home Affordable Program and HFA Hardest Hit Fund are reflected in the budget on a cash basis, and are not included here. 1 Table through 2013. For equity investments, the par value of Treasury’s remaining investment is reflected. The outstanding amount of equity investments overall decreased in 2011, as repurchases of equity investments exceeded AIG disbursements. Direct loans increase with planned disbursements under the PPIP program, and fall in 2013 as loans are repaid. Under FCRA, the total outstanding reflects the full face value of loans supported by a Federal guarantee, any portion of which may be guaranteed. TARP’s liability under the Asset Guarantee Program was only a fraction of the face value of the underlying loans (see Table 4–6), and is currently zero, with the termination of the Citibank guarantee in 2009. Likewise, the full face value of FHA Refinance mortgages supported by the letter of credit facility far exceeds TARP’s liability, which is capped at $8.1 billion (including $100 million set aside for administrative fees). The TARP coverage ratio or share of default losses was 8.85 percent in 2011 and is estimated to be 15.57 percent in 2012. The face value of FHA refi loans supported by the TARP LOC was less than $0.1 billion in 2011, but is expected to increase to more than $51.9 billion in 2012 and $100.5 billion in 2013. The overall outstanding face value of TARP investments, loan guarantees, and mortgages supported by the FHA Refinance Letter of Credit is projected to reach $166.4 billion in 2013. Estimate of the Deficit, Debt Held by the Public, and Gross Federal Debt, Based on the EESA Methodology The estimates of the deficit and debt in the Budget reflect the impact of TARP as estimated under FCRA and Section 123 of EESA. The deficit estimates include the budgetary costs for each program under TARP, administrative expenses, certain indirect interest effects of credit programs, and the debt service cost to finance the program. Direct activity under the TARP is expected to increase the 2012 deficit by $34.7 billion, which is largely attributable to net upward reestimates of program costs totaling $21.1 billion (including interest on reestimates) and outlays for TARP housing programs estimated to be $13.6 billion. The total deficit effect including interest effects is estimated at $31.0 billion for 2012. The estimates of U.S. Treasury debt attributable to TARP include both borrowing to finance the deficit impacts of TARP activity and the cash flows to and from the Government, reflected as a means of financing in the TARP financing accounts. Estimated debt due to TARP at the end of 2012 is $101.8 billion, and this figure declines to $77.1 billion in 2014 as TARP loans are repaid and TARP equity purchases are sold or redeemed. Even as the TARP program is winding down, the debt due to TARP increases annually starting in 2015, with additional borrowing to finance the debt service on past TARP costs. Debt held by the public net of financial assets reflects the cumulative amount of money the Federal Government has borrowed from the public for the program and not repaid, minus the current value of financial assets acquired with the proceeds of this debt, such as loan assets, or equity held by the Government. While debt held by the public is one useful measure for examining the impact of TARP, it provides incomplete information on the program’s effect on the Government’s financial condition. Debt held by the public net of financial assets provides a more complete picture of the U.S. Government’s financial position because it reflects the net change in the government’s balance sheet due to the program. Debt net of financial assets due to the TARP program is estimated to be $35.4 billion as of the end of 2012. This is $21.1 billion higher than the projected 2012 debt held net of financial assets reflected in the 2012 MSR, primarily due to net increases in TARP subsidy costs reflected in the 2012 reestimates. Under the FCRA, the financing account earns and pays interest on its Treasury borrowings at the same rate used to discount cash flows for the credit subsidy cost. Section 123 of EESA requires an adjustment to the discount rate used to value TARP subsidy costs, to account for market risks. However, actual cash flows as of September 30, 2011, already reflect the effect of any incurred market risks to that point, and therefore actual financing account interest transactions reflect the FCRA Treasury interest rates present in these years, with no additional risk adjustment.20 Future cash flows reflect a risk adjusted discount rate and the corresponding financing account interest 20 As TARP transactions wind down, the final lifetime cost estimates under the requirements of Section 123 of EESA will reflect no adjustment to the discount rate for market risks, as these risks have already been realized in the actual cash flows. Therefore, the final subsidy cost for TARP transactions will equal the cost per FCRA, where the net present value costs are estimated by discounting cashflows using Treasury rates. 49 4. FINANCIAL STABILIZATION EFFORTS AND THEIR BUDGETARY EFFECTS Table 4–4. TROUBLED ASSET RELIEF PROGRAM EFFECTS ON THE DEFICIT AND DEBT 1 (Dollars in billions) Actual 2009 2010 Estimate 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Deficit effect: Programmatic and administrative expenses: Programmatic expenses: Equity purchases ������������������������������������������������������������� Direct loans and purchases of asset-backed securities ��� Guarantees of troubled asset purchases ������������������������� TARP housing programs �������������������������������������������������� Reestimates of credit subsidy costs �������������������������������� Subtotal, programmatic expenses ������������������������������ Administrative expenses ������������������������������������������������������� Special Inspector General for TARP ������������������������������������� Subtotal, programmatic & administrative expenses ��������� Interest effects: Interest transactions with credit financing accounts 2 ����������� Debt service 3 ����������������������������������������������������������������������� Subtotal, interest effects �������������������������������������������������� Total deficit impact �������������������������������������������������� 115.3 8.4 36.9 –0.9 –1.0 –1.4 * 0.5 ......... –116.5 151.2 –109.9 0.1 0.2 * * 151.3 –109.6 19.1 –0.3 ......... 1.9 –58.5 –37.7 0.4 * –37.3 0.2 –0.3 ......... 13.6 21.1 34.7 0.5 * 35.2 * –* ......... 12.1 ......... 12.1 0.3 * 12.5 ......... ......... ......... 8.1 ......... 8.1 0.2 * 8.4 ......... ......... ......... 5.4 ......... 5.4 0.2 * 5.6 ......... ......... ......... 2.4 ......... 2.4 0.2 * 2.6 ......... ......... ......... 1.2 ......... 1.2 0.1 * 1.4 ......... ......... ......... 0.2 ......... 0.2 0.1 * 0.4 ......... ......... ......... * ......... * * * 0.1 ......... ......... ......... * ......... * * * 0.1 ......... ......... ......... ......... ......... ......... * * 0.1 ......... ......... ......... ......... ......... ......... * * 0.1 –4.7 4.7 * –3.0 3.0 * –7.5 3.3 –4.2 –4.8 3.4 –1.4 –3.0 3.9 0.9 –2.2 4.7 2.5 –1.8 5.4 3.6 –1.7 5.6 3.9 –1.4 5.5 4.1 –1.2 5.2 4.0 –1.0 4.8 3.9 –0.3 4.6 4.4 –0.2 4.2 3.9 151.3 –109.6 –37.3 31.0 11.1 9.3 8.1 6.1 5.3 4.4 4.1 3.9 4.5 4.0 –26.7 –8.3 –14.9 –8.2 –15.0 –2.3 –4.5 –3.0 –1.2 –2.9 –3.6 –2.8 –1.8 –0.3 –1.2 –0.2 –3.4 –0.4 –0.2 ......... –0.2 ......... * –0.4 –0.2 –0.1 –* –* –* –* –* –* –* –2.8 –2.4 –1.7 0.5 1.5 1.5 1.3 1.1 0.9 ......... ......... –37.7 –25.9 –19.1 –7.1 –2.6 –5.0 –0.8 –0.3 –2.9 –0.3 –0.2 –2.8 2.8 * Other TARP transactions affecting borrowing from the public — net disbursements of credit financing accounts: Troubled Asset Relief Program Equity Purchase Financing Account �������������������������������������������������������������������������������� 105.4 –28.5 –2.0 Troubled Asset Relief Program Direct Loan Financing Account 23.9 18.8 –14.2 Troubled Assets Insurance Financing Fund Guaranteed Loan Financing Account ��������������������������������������������������������������� 0.6 1.8 –1.6 Troubled Assets Relief Program FHA Refinance Letter of Credit Financing Account ���������������������������������������������������� ......... ......... –* Total, other transactions affecting borrowing from the public �������������������������������������������������������������������������� 129.9 –7.9 –17.8 Change in debt held by the public ��������������������������������������������� 281.2 –117.5 –55.1 –6.7 –14.8 –9.8 1.0 3.5 0.3 3.6 3.8 1.0 4.2 3.8 Debt held by the public ��������������������������������������������������������������� As a percent of GDP ����������������������������������������������������������������� 281.2 2.0% 163.6 1.1% 108.5 0.7% 101.8 0.7% 87.0 0.5% 77.1 0.4% 78.2 0.4% 81.7 0.4% 81.9 0.4% 85.5 0.4% 89.3 0.4% 90.4 0.4% 93.6 0.4% 97.4 0.4% Debt held by the public net of financial assets: Debt held by the public ������������������������������������������������������������� 281.2 163.6 108.5 101.8 87.0 77.1 78.2 81.7 81.9 85.5 89.3 90.4 93.6 97.4 105.4 76.9 74.9 48.2 33.2 18.2 13.6 12.5 8.9 7.1 5.8 2.4 2.1 1.9 23.9 42.7 28.5 20.2 12.0 9.7 6.7 3.8 0.9 0.6 0.5 0.1 0.1 0.1 0.6 2.4 0.8 0.8 0.4 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 ......... ......... –* 129.9 122.0 104.1 –2.8 66.4 –5.1 40.5 –6.8 21.3 –6.3 14.2 –4.8 11.6 –3.3 6.6 –2.0 5.7 –0.9 5.4 ......... 2.5 ......... 2.3 ......... 2.1 Less financial assets net of liabilities — credit financing account balances: Troubled Assets Relief Program Equity Purchase Financing Account ���������������������������������������������������������������������������� Troubled Asset Relief Program Direct Loan Financing Account ���������������������������������������������������������������������������� Troubled Assets Insurance Financing Fund Guaranteed Loan Financing Account �������������������������������������������������� Troubled Assets Relief Program FHA Refinance Letter of Credit Financing Account ������������������������������������������������� Total, financial assets net of liabilities ������������������������� Debt held by the public net of financial assets �������������������� 151.3 41.6 4.4 35.4 46.5 55.8 63.9 70.1 75.3 79.8 83.9 87.8 91.3 95.3 As a percent of GDP �������������������������������������������������������� 1.1% 0.3% 0.0% 0.2% 0.3% 0.3% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% * $50 million or less. 1 Table reflects the deficit effects of the TARP program, including administrative costs and interest effects. 2 Projected Treasury interest transactions with credit financing accounts are based on the market-risk adjusted rates. Actual credit financing account interest transactions reflect the appropriate Treasury rates under the FCRA. 3 Includes estimated debt service effects of all TARP transactions that affect borrowing from the public. 50 ANALYTICAL PERSPECTIVES rate, consistent with the EESA requirement. For on-going TARP credit programs, the risk adjusted discount rates on future cash flows result in subsidy costs that are higher than subsidy costs estimated under FCRA. Estimates on a Cash Basis The value to the Federal Government of the assets acquired through TARP is the same whether the costs of acquiring the assets are recorded in the budget on a cash basis, or a credit basis. As noted above, the budget records the cost of equity purchases, direct loans, and guarantees as the net present value cost to the Government, discounted at the rate required under the FCRA and adjusted for market risks as required under Section 123 of EESA. Therefore, the net present value cost of the assets is reflected on-budget, and the gross value of these assets is reflected in the financing accounts.21 If these pur21 For the Making Home Affordable programs and the HFA Hardest Hit Fund, Treasury’s purchase of financial instruments does not result in the acquisition of an asset with potential for future cash flows, and therefore are recorded on a cash basis. chases were instead presented in the Budget on a cash basis, the Budget would reflect outlays for each disbursement (whether a purchase, a loan disbursement, or a default claim payment), and offsetting collections as cash is received from the public, with no obvious indication of whether the outflows and inflows leave the Government in a better or worse financial position, or what the net value of the transaction is. Revised Estimate of the Deficit, Debt Held by the Public, and Gross Federal Debt Based on the Cash-basis Valuation Estimates of the deficit and debt under TARP transactions calculated on a cash basis are reflected in Table 4–5, for comparison to those estimates in Table 4–4 reported above in which TARP transactions are calculated consistent with FCRA and Section 123 of EESA. If TARP transactions were reported on a cash basis, the annual budgetary effect would include the full amount of government disbursements for activities such as equity purchases and direct loans, offset by cash inflows from Table 4–5. TROUBLED ASSET RELIEF PROGRAM EFFECTS ON THE DEFICIT AND DEBT CALCULATED ON A CASH BASIS 1 (Dollars in billions) Actual 2009 2010 Estimate 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Deficit effect: Programmatic and administrative expenses: Programmatic expenses: Equity purchases ������������������������������������������������������������� Direct loans and purchases of asset-backed securities ��� Guarantees of troubled asset purchases ������������������������� TARP housing programs �������������������������������������������������� Subtotal, programmatic expenses ������������������������������ Administrative expenses ������������������������������������������������������� Special Inspector General for TARP ������������������������������������ Subtotal, programmatic & administrative expenses ��������� Debt service 2 ����������������������������������������������������������������������� 217.6 –121.9 61.1 –1.0 –0.5 –0.3 * 0.5 278.3 –122.6 0.1 0.2 * * 278.4 –122.3 2.8 4.7 –36.8 –21.3 –2.3 1.9 –58.5 0.4 * –58.1 3.0 –16.8 –4.6 * 10.9 –10.5 0.5 * –10.0 3.3 –18.6 –9.3 –0.5 9.8 –18.6 0.3 * –18.2 3.4 –17.4 –2.7 –0.2 6.3 –14.0 0.2 * –13.7 3.9 –6.0 –3.3 –0.1 5.6 –3.9 0.2 * –3.7 4.7 –2.2 –3.1 –* 3.3 –2.1 0.2 * –1.9 5.4 –4.5 –2.9 –* 2.0 –5.5 0.1 * –5.3 5.6 –2.5 –0.3 –* 0.8 –2.0 0.1 * –1.9 5.5 –1.7 –0.2 –* 0.4 –1.5 * * –1.4 5.2 –3.8 –0.4 –* 0.3 –3.9 * * –3.8 4.8 –0.5 ......... –* ......... –0.5 * * –0.4 4.6 –0.4 ......... –* ......... –0.4 * * –0.4 4.2 3.8 Total deficit impact ������������������������������������������������������� 281.2 –117.5 –55.1 –6.7 –14.8 –9.8 1.0 3.5 0.3 3.6 3.8 1.0 4.2 Change in debt held by the public ��������������������������������������������� 281.2 –117.5 –55.1 –6.7 –14.8 –9.8 1.0 3.5 0.3 3.6 3.8 1.0 4.2 3.8 Debt held by the public ��������������������������������������������������������������� As a percent of GDP ����������������������������������������������������������������� 281.2 2.0% 163.6 1.1% 108.5 0.7% 101.8 0.7% 87.0 0.5% 77.1 0.4% 78.2 0.4% 81.7 0.4% 81.9 0.4% 85.5 0.4% 89.3 0.4% 90.4 0.4% 93.6 0.4% 97.4 0.4% Debt held by the public net of financial assets: Debt held by the public ������������������������������������������������������������� 281.2 163.6 108.5 101.8 87.0 77.1 78.2 81.7 81.9 85.5 89.3 90.4 93.6 97.4 105.4 76.9 74.9 48.2 33.2 18.2 13.6 12.5 8.9 7.1 5.8 2.4 2.1 1.9 23.9 42.7 28.5 20.2 12.0 9.7 6.7 3.8 0.9 0.6 0.5 0.1 0.1 0.1 0.6 2.4 0.8 ......... ......... –* 129.9 122.0 104.1 0.8 –2.8 66.4 0.4 –5.1 40.5 0.2 –6.8 21.3 0.2 –6.3 14.2 0.1 –4.8 11.6 0.1 –3.3 6.6 0.1 –2.0 5.7 0.1 –0.9 5.4 0.1 ......... 2.5 0.1 ......... 2.3 0.1 ......... 2.1 Debt held by the public net of financial assets �������������������� 151.3 41.6 4.4 35.4 46.5 55.8 63.9 70.1 75.3 79.8 83.9 As a percent of GDP �������������������������������������������������������� 1.1% 0.3% 0.0% 0.2% 0.3% 0.3% 0.4% 0.4% 0.4% 0.4% 0.4% * $50 million or less. 1 Table reflects deficit effect of budgetary costs, substituting estimates calculated on a cash basis for estimates calculated under FCRA and Sec. 123 of EESA. 2 Includes estimated debt service effects of all TARP transactions affecting borrowing from the public. 87.8 0.4% 91.3 0.4% 95.3 0.4% Less financial assets net of liabilities — credit financing account balances: Troubled Asset Relief Program Equity Purchase Financing Account ���������������������������������������������������������������������������� Troubled Asset Relief Program Direct Loan Financing Account. ��������������������������������������������������������������������������� Troubled Assets Insurance Financing Fund Guaranteed Loan Financing Account. ������������������������������������������������� FHA Refinance Letter of Credit Financing Account.. ������������ Total, financial assets net of liabilities ������������������������������ 4. FINANCIAL STABILIZATION EFFORTS AND THEIR BUDGETARY EFFECTS dividend payments, redemptions, and loan repayments occurring in each year. For loan guarantees, the deficit would show fees, claim payouts, or other cash transactions associated with the guarantee as they occurred. Updates to estimates of future performance would impact the deficit in the year that they occur, and there would not be credit reestimates. Under cash reporting, TARP would reduce the deficit in 2012 by an estimated $6.7 billion, so the 2012 deficit would be $37.7 billion lower if TARP were reflected on a cash basis than the estimate in the Budget. The deficit would be lower because repayments and proceeds of sales that are now included in non-budgetary financing accounts for TARP would be reflected as offsetting receipts when they occur. Under FCRA, the marginal change in the present value attributable to better-than-expected future inflows from the public would be recognized up front in a downward reestimate, in contrast with a cash-based treatment that would show the annual marginal changes in cash flows. However, the impact of TARP on the Federal debt, and on debt held net of financial assets, is the same on a cash basis as under FCRA. Portion of the Deficit Attributable to TARP, and the Extent to Which the Deficit Impact is Due to a Reestimate Table 4–4 shows the portion of the deficit attributable to TARP transactions. The largest changes in the overall TARP effects on the deficit are the result of reestimates of TARP activity outstanding as of September 30, 2011, and November 30, 2011. The specific effects are as follows: • TARP reestimates and interest on reestimates will increase the deficit by $21.1 billion in 2012, including $15.2 billion in increased subsidy costs for TARP programs, and $5.9 billion in interest on reestimates. • Program costs for purchases of assets including costs associated with PPIP investments, MHA incentive payments, FHA Refinance program loss sharing, and modifications of existing TARP activity (excluding reestimates) are estimated to increase the deficit by $13.6 billion in 2012, $3.6 billion less than the estimated 2012 deficit effects reflected in the 2012 MSR. This decrease is primarily due to the extension of TARP housing programs. • TARP equity purchase outlays in 2012 are estimated to increase the deficit by $0.2 billion due to the drawing of additional capital by the PPIP fund managers. Subsidy costs associated with new disbursements of direct loans from previous TARP obligations are estimated to result in a $0.3 billion reduction in net outlays in 2012, largely due to expected returns from PPIP debt purchases. These amounts have not changed since the 2012 MSR. Outlays for the TARP Housing Programs are estimated at $13.6 billion in 2012, which includes payments under the MHA program, Hardest Hit Fund, and subsidy costs for the FHA Refinance program. Outlays for TARP Housing Program are estimated to increase through 2014, and then decline gradually through 2021. 51 • Administrative expenses for TARP are estimated at $0.3 billion in 2013, and expected to decrease annually as TARP winds down through 2022. Costs for the Special Inspector General for TARP are estimated at less than $0.1 billion in 2013, and are expected to remain relatively stable through 2022. • Interest transactions with credit financing accounts include interest paid to Treasury on borrowing by the financing accounts, offset by interest paid by Treasury on the financing accounts’ uninvested balances. Although the financing accounts are nonbudgetary, Treasury payments to these accounts and receipt of interest from them are budgetary transactions and therefore affect net outlays and the deficit. For TARP financing accounts, projected interest transactions are based on the market risk adjusted rates used to discount the cash flows. The projected net financing account interest paid to Treasury at market risk adjusted rates is $7.5 billion in 2012 and declines over time as the financing accounts repay borrowing from Treasury through investment sale proceeds and repayments on TARP equity purchases and direct loans. The full impact of TARP on the deficit includes the estimated cost of Treasury borrowing from the public – debt service – for the outlays listed above. Debt service is estimated at $3.3 billion for 2012 (as shown in Table 4–4), and then expected to increase to $5.6 billion by 2017 due to TARP housing. Total debt service will continue over time after the TARP winds down, due to the financing of past TARP costs. Analysis of TARP Reestimates. The costs of outstanding TARP assistance are reestimated annually by updating cash flows for actual experience and new assumptions, and adjusting for any changes by either recording additional subsidy costs (an upward technical and economic reestimate) or by reducing subsidy costs (a downward reestimate). The reestimated dollar amounts to be recorded in 2012 reflect TARP disbursements through September 30, 2011, while reestimated subsidy rates reflect the full lifetime costs, including anticipated future disbursements. As noted above, the total increase in the deficit attributable to TARP reestimates in 2012 is $21.1 billion, reflecting a $15.2 billion net upward reestimate of the subsidy cost, plus $5.9 billion in interest on the reestimates. Detailed information on upward and downward reestimates to program is reflected in Table 4–6. The current reestimate reflects an increase in estimated TARP costs from the 2012 Budget. Increased subsidy costs for AIG investments, AIFP, and the AGP program are due to weaker market conditions and performance expectations compared to 2012 Budget estimates, resulting in a lower estimated value of Treasury holdings. The subsidy cost for outstanding TARP equity is estimated to be substantially lower than originally estimated overall. The majority of reduced subsidy costs reflect significant repayments of CPP and TIP investments by financial institutions and higher-than-anticipated income from dividends and the sale of preferred, common stock or war- 52 ANALYTICAL PERSPECTIVES Table 4–6. TROUBLED ASSET RELIEF PROGRAM REESTIMATES (Dollars in billions) TARP Program and Cohort Year Original subsidy rate Net lifetime TARP Current reestimate Current reestimate reestimate amount, disbursements as rate amount excluding interest of 9/30/2011 Equity programs: Automotive Industry Financing Program (Equity) ����������������������������������������������� 2009 ����������������������������������������������������������������������������������������������������������������� 2010 ����������������������������������������������������������������������������������������������������������������� 54.52% 30.25% 42.64% 9.68% 3.6 0.2 –3.1 –0.7 12.5 3.8 Capital Purchase Program 2009 ����������������������������������������������������������������������������������������������������������������� 2010 ����������������������������������������������������������������������������������������������������������������� 26.99% 5.77% –5.63% 18.17% –1.1 –0.0 –63.1 0.0 204.6 0.3 82.78% 32.85% 14.6 –32.0 67.8 34.62% 22.97% –20.80% –45.90% –0.0 –2.4 –0.3 –4.0 0.7 6.5 Targeted Investment Program 2009 ����������������������������������������������������������������������������������������������������������������� 48.85% –8.47% 0.0 –23.2 40.0 Community Development Capital Initiative 2010 ����������������������������������������������������������������������������������������������������������������� 48.06% 27.19% –0.1 –0.1 0.6 14.9 –126.4 336.8 AIG Investments 2009 ����������������������������������������������������������������������������������������������������������������� Legacy Securities Public-Private Investment Program ���������������������������������������� 2009 ����������������������������������������������������������������������������������������������������������������� 2010 ����������������������������������������������������������������������������������������������������������������� Subtotal equity program reestimates ���������������������������������������������������������� Structured and direct loan programs: Automotive Industry Financing Program (AIFP) �������������������������������������������������� 2009 ����������������������������������������������������������������������������������������������������������������� 58.75% 28.34% 6.2 –17.70 63.4 Legacy Securities Public Private Investment Program 2009 ����������������������������������������������������������������������������������������������������������������� 2010 ����������������������������������������������������������������������������������������������������������������� –2.52% –10.85% 3.02% 2.18% –0.1 0.3 0.1 1.6 1.4 13.0 Small Business Lending Initiative 7(a) purchases 2010 ����������������������������������������������������������������������������������������������������������������� 0.48% –0.86% –0.0 –0.0 0.4 Term-Asset Backed Securities Loan Facility 1 2009 ����������������������������������������������������������������������������������������������������������������� –104.23% –407.95% –0.1 –0.3 0.1 6.2 –16.3 78.2 0.0 21.1 –1.18 –143.9 301.0 716.0 Subtotal direct loan program reestimates ��������������������������������������������������� Guarantee programs: Asset Guarantee Program 2 2009 ����������������������������������������������������������������������������������������������������������������� Total TARP reestimates ���������������������������������������������������������������������������� –0.25% –1.10% 1 The Term-Asset Backed Securities Loan Facility subsidy rate is calculated as a percent of estimated lifetime disbursements. amount reflects the face value of assets supported by the guarantee. The TARP obligation for this program was $5 billion, the maximum contingent liability while the guarantee was in force. 2 Disbursement rants in prior years. The $4.3 billion TALF facility reflects a downward reestimate and is estimated to generate a return of $0.4 billion to the Treasury, primarily due to fees. The subsidy rate for TALF is based on disbursements, and the Treasury only expects to purchase a small amount of the total $4.3 billion commitment but will collect fees on the full TALF facility. Differences Between Current and Previous OMB Estimates As shown in Table 4–7, the Budget reflects a total TARP deficit impact of $67.8 billion. This is an increase of $21.0 billion from the 2012 MSR projection of $46.8 billion and $14.6 billion from the June 30th valuation of $53.2 mil- lion. This increase is primarily due to increased estimates of the cost of TARP investments and guarantees. The reestimates performed for MSR do not include updates to estimated subsidy rates or market valuations, such as for common stock held by Treasury. Therefore, the June 30th valuation, being more comparable to the reestimates performed for the Budget because it includes adjustments to reflect recent market performance, is presented in Table 4–7 as a source of comparison. The estimated TARP deficit impact differs from the subsidy cost of $78.2 billion in the Budget because the deficit impact reflects a $10.4 billion cumulative downward adjustment for interest on reestimates. These adjustments account for the time between when the subsidy 53 4. FINANCIAL STABILIZATION EFFORTS AND THEIR BUDGETARY EFFECTS Table 4–7. DETAILED TARP PROGRAM LEVELS AND COSTS (In billions of dollars) June 30th Valuation Program TARP Obligations 2013 Budget Subsidy Costs TARP Obligations Subsidy Costs Equity programs: Capital Purchase Program ����������������������������������������������������������������������������� AIG Investments 1 ������������������������������������������������������������������������������������������� Targeted Investment Program ������������������������������������������������������������������������ Automotive Industry Financing Program (AIFP) ��������������������������������������������� Public-Private Investment Program - Equity ��������������������������������������������������� Community Development Capital Initiative. ���������������������������������������������������� Subtotal equity programs ��������������������������������������������������������������������������� 204.9 67.8 40.0 16.3 7.5 0.6 337.1 –7.2 19.8 –3.6 3.2 –1.9 0.2 10.4 204.9 67.8 40.0 16.3 7.5 0.6 337.1 –6.7 24.0 –3.6 5.5 –2.2 0.2 17.2 Direct loan programs: Automotive Industry Financing Program (AIFP) 2 ������������������������������������������� Term Asset-Backed Securities Loan Facility (TALF) ��������������������������������������� Public-Private Investment Program - Debt ������������������������������������������������������ Small Business 7(a) Program ������������������������������������������������������������������������� Subtotal direct loan programs ��������������������������������������������������������������������� 63.4 4.3 14.9 0.4 83.0 16.5 –0.3 * * 16.6 63.4 4.3 14.9 0.4 83.0 19.3 –0.4 0.2 * 19.1 Guarantee programs under Section 102: Asset Guarantee Program ����������������������������������������������������������������������������� Non-Add Asset Guarantee Program Face Value �������������������������������������������� Subtotal asset guarantees �������������������������������������������������������������������������� 5.0 301.0 5.0 –3.7 –3.6 –3.7 5.0 301.0 5.0 TARP housing programs: Making Home Affordable (MHA) Programs ���������������������������������������������������� HFA Hardest Hit Fund ������������������������������������������������������������������������������������ Subtotal non-credit programs ��������������������������������������������������������������������� FHA Refinance Letter of Credit ���������������������������������������������������������������������� Subtotal TARP housing programs ��������������������������������������������������������������� 29.9 7.6 37.5 8.1 45.6 29.9 7.6 37.5 8.1 45.6 29.9 7.6 37.5 8.1 45.6 29.9 7.6 37.5 8.1 45.6 Totals ���������������������������������������������������������������������������������������������������� 470.7 69.0 470.7 78.2 –3.6 Memorandum: Interest on reestimates 3 ����������������������������������������������������������������������������� –15.8 –10.4 Deficit impact before administrative costs and interest effects ������������� 53.2 67.8 * $50 million or less. 1 June 30th Valuation reflects the cancelation of AIG's outstanding $2 billion credit facility with Treasury. 2 June 30th Valuation reflects the Chrysler Group LLC termination of a remaining $2.1 billion TARP loan commitment. 3 Interest on reestimates is an adjustment for interest effects of changes in TARP subsidy costs from original subsidy estimates; such amounts are a component of the deficit impacts of TARP programs but are not direct programmatic costs. cost was originally estimated and the time when the reestimate is booked. Differences Between OMB and CBO Estimates Table 4–8 compares the subsidy cost for TARP reflected in MSR against the costs estimated by the Congressional Budget Office in its “Report on the Troubled Asset Relief Program – December 2011.” 22 CBO estimates the total cost of TARP at $34 billion, based on estimated lifetime TARP obligations of $429 billion. The Budget reflects current estimates of roughly $471 billion in program obligations, and $78.2 billion in programmatic costs. Differences in the estimated cost of the TARP Housing programs, which stem from divergent demand and participation rate assumptions, are the main 22 United States. Congressional Budget Office. Report on the Troubled Asset Relief Program – December 2011. Washington: CBO, 2011. http:// cbo.gov/ftpdocs/126xx/doc12611/12-16-TARP_report.pdf difference between OMB and CBO cost estimates. The CBO projects $13 billion in total TARP Housing expenditures, while the Budget reflects a $46 billion estimate. CBO and OMB cost estimates for the Capital Purchase Program are $10 billion apart because of different assumptions for the remaining institutions with investments in the program. Similarly, CBO and OMB cost estimates for the Automotive Industry Financing Program are $5 billion apart due to different assumptions for the future performance of equity investments in the program. Differences Between EESA and FCRA Cost Estimates EESA directs that for asset purchases and guarantees under TARP, the cost shall be determined pursuant to the FCRA, except that the discount rate shall be adjusted for market risks. EESA’s directive to adjust the FCRA discount rate for market risks effectively assumes higher losses on these transactions than those estimated under 54 ANALYTICAL PERSPECTIVES Table 4–8. COMPARISON OF OMB AND CBO TARP COSTS (In billions of dollars) Risk-Adjusted Subsidy Costs Program CBO Subsidy Cost 1 Capital Purchase Program ����������������������������������������������������������������������������� Targeted Investment Program ������������������������������������������������������������������������ AIG Assistance ����������������������������������������������������������������������������������������������� Automotive Industry Financing Program �������������������������������������������������������� Term Asset-Backed Securities Loan Facility ��������������������������������������������������� Other Programs 3 �������������������������������������������������������������������������������������������� TARP Housing Programs �������������������������������������������������������������������������������� –17 –8 25 20 * * 13 OMB Subsidy Cost 2 –7 –4 24 25 –* –5 46 Total ���������������������������������������������������������������������������������������������������������� 34 78 * $500 million or less. 1 CBO estimates from December 2011, available online at: http://www.cbo.gov/ftpdocs/126xx/doc12611/1216-TARP_report.pdf. 2 Lifetime subsidy costs as reflected in the 2013 Budget, excluding interest on reestimates. 3 "Other Programs" reflects an aggregate cost for PPIP (debt and equity purchases), CDCI, AGP, and small business programs. FCRA guidelines, which require that Treasury rates be used to discount expected cashflows. In implementing this requirement of EESA, the market risk adjustment is intended to capture the cost of the extra return on investment that a private investor would seek in compensation for uncertainty surrounding risks of default and other losses reflected in the cashflows.23 Table 4–9 compares the subsidy costs and subsidy rates of TARP programs discounted at the Treasury rate adjusted for market risk (EESA), and discounted at the unadjusted Treasury rate (FCRA) using November 30th subsidy cost valuations. The largest differences between these two reflect the most uncertainty regarding the probability of losses. For example, there is greater uncertainty regarding the value of Treasury’s mortgage-backed security investments in PPIP than there is compared to the valuation of Treasury’s investments in CPP and TALF, and so the difference between the market-risk adjusted cost versus the non-adjusted cost (as a percent change in dollar costs) is greater for PPIP than for CPP and TALF. Removing the market risk adjustment from the discount rate for Treasury’s investment in PPIP decreases its subsidy cost by 122 percent ($2.4 billion), whereas it only decreases the CPP and TALF program by 61 percent (or $3.0 billion) and 30 percent (or $0.1 billion), respectively. There is a relatively small difference in the FCRA and market risk cost of AGP because there is only a negligible market risk adjustment for the outstanding $800 million in additional Citigroup trust preferred securities that the Treasury is entitled to receive from the FDIC. For the TIP there is no difference because the TIP program has been fully repaid and its final value is known. Treasury holdings within the AIG and AIFP programs include sig23 For example, if there were a 100 percent default expectation on a loan, and losses given default were projected at 100 percent, the market risk adjustment to the discount rate would be zero. This reflects the fact that there are no unexpected losses if losses are expected to be 100 percent of the face value of the loan. nificant amounts of common stock, the value of which is based on the closing November 30, 2011, share price. The share price of common stock is inherently adjusted for market risk and, therefore, there is no additional market risk adjustment necessary for the EESA directive. As a result, there is no difference in the cost of AIG and AIFP between values calculated using the Treasury and risk adjusted rate. The FHA refinance program cost estimate is 53 percent (or $4.3 billion) lower under FCRA than under EESA due to a relatively large estimated risk premium associated with risk of mortgage defaults (and TARP losses). The non-credit TARP Housing programs are reflected on a cash basis and, therefore, costs are not discounted, which is why there is no difference in the subsidy cost estimate. Using November 30, 2011, valuations, TARP investments discounted at a risk adjusted rate will cost an estimated $78.2 billion, which suggests a net subsidy rate of 17 percent. TARP investments discounted under FCRA will cost an estimated $67.3 billion, or a net subsidy rate of 14 percent. TARP OVERSIGHT AND ACCOUNTABILITY Ensuring effective internal controls and monitoring of TARP programs and funds to protect taxpayer investments remains a top priority of TARP staff and those offices charged with TARP oversight and accountability. The Treasury has implemented a comprehensive set of assessments geared toward identifying risks, evaluating their potential impact, and prioritizing resource assignments to manage risks based on a combined top-down and bottom-up assessment of risk. The Internal Control Review organization within the Office of Financial Stability (OFS) utilizes the assessments to ensure appropriate coverage of high-impact areas. A Senior Assessment Team and the Internal Control Program Office guide OFS efforts to meet all applicable requirements for a sound system of internal controls, and to review and respond to all recom- 55 4. FINANCIAL STABILIZATION EFFORTS AND THEIR BUDGETARY EFFECTS Table 4–9. COMPARISON OF EESA AND FCRA TARP SUBSIDY COSTS USING 2013 BUDGET VALUATIONS (In billions of dollars) TARP Obligations 1 Program Equity, direct loan, and asset guarantee programs: Capital Purchase Program ����������������������������������������������������� Targeted Investment Program ������������������������������������������������ Asset Guarantee Program ������������������������������������������������������ Community Development Capital Initiative ����������������������������� Term Asset-Backed Securities Loan Facility ��������������������������� Small Business 7(a) Program ������������������������������������������������� Public Private Investment Program 2 �������������������������������������� AIG Investments ��������������������������������������������������������������������� Automotive Industry Financing Program 2 ������������������������������ Subtotal TARP equity, direct loans, and guarantee programs������������������������������������������������������������������������ TARP housing programs: Making Home Affordable Programs 3 ������������������������������������� HFA Hardest Hit Fund 3 ���������������������������������������������������������� Subtotal non-credit programs �������������������������������������������� FHA Refinance Letter of Credit ���������������������������������������������� Subtotal TARP Housing ����������������������������������������������������� Subsidy Cost EESA FCRA 204.9 40.0 5.0 0.6 4.3 0.4 22.4 67.8 79.7 –6.7 –3.6 –3.6 0.2 –0.4 * –2.0 24.0 24.8 –10.7 –3.6 –3.7 0.1 –0.5 * –4.4 24.0 24.8 425.1 32.6 26.0 29.9 7.6 37.5 8.1 45.6 29.9 7.6 37.5 8.1 45.6 29.9 7.6 37.5 3.8 41.3 Total 4 ��������������������������������������������������������������������������� 470.7 78.2 67.3 * $50 million or less. 1 TARP obligations reflect the cancellation of AIG's outstanding $2 billion credit facility with Treasury and the Chrysler Group LLC termination of a remaining $2.1 billion TARP loan commitment. 2 Rates for PPIP and AIFP reflect weighted average subsidy costs across various instruments. 3 TARP Making Home Affordable Programs and HFA Hardest Hit Fund involve financial instruments without any provision for income or other returns, and are recorded on a cash basis. The table reflects 100 percent subsidy cost for these programs. 4 Total subsidy costs do not include interest effects or administrative costs. mendations made by the four TARP oversight bodies— the Special Inspector General for TARP (SIGTARP), the Government Accountability Office (GAO), the Financial Stability Oversight Board, and the Congressional Oversight Panel (terminated April 3, 2011). The soundness of Treasury’s TARP compliance monitoring, internal control, and risk management policies and processes are reflected in the clean opinions issued by GAO after its audit of TARP financial statements for 2009, 2010 and 2011 and the associated internal control over financial reporting. The Treasury has issued regulations governing executive compensation and conflicts of interest related to TARP program administration and participation. Compliance with these rules is monitored on an ongoing basis, and reviews of participant conduct and program administration are conducted as appropriate. In executing its responsibility for monitoring compliance with executive com- pensation requirements, the Treasury has also created an Office of the Special Master for TARP to review TARP participant compliance with applicable legal and regulatory authority, and to recommend action to the Secretary when compensation is found to be awarded in a manner or amount deemed contrary to the public interest. Special Inspector General for TARP (SIGTARP) Section 121 of EESA created the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) to prevent fraud, waste, and abuse in the administration of TARP programs through audits and investigations of the purchase, management, and sales of TARP assets. SIGTARP is required to submit quarterly reports to Congress, and as of its latest report released on October 27, 2011, it has initiated 28 audits, 2 evaluations, and over 150 investigations since its inception. 5. LONG TERM BUDGET OUTLOOK The horizon for the detailed estimates of receipts and outlays in the President’s Budget is 10 years. Accordingly, the account-level estimates in the 2013 Budget extend to 2022. This 10-year horizon reflects a balance between the importance of considering both the current and future implications of budget decisions made today and a practical limit on the construction of detailed budget projections for years in the future. Decisions made today can have important repercussions beyond the 10-year horizon. It is important to anticipate future budgetary requirements beyond the 10year horizon, and the effects of changes in policy on those requirements, despite the uncertainty surrounding the assumptions needed for such estimates. Long-run budget projections can be useful in drawing attention to potential problems that could become unmanageable if allowed to grow. To this end, the budget projections in this chapter extend the 2013 Budget for 75 years through 2087. Because of the uncertainties involved in making long-run projections, results are presented for a base case and for several alternative scenarios. The passage of the Affordable Care Act (ACA) in 2010 had a profound effect on these projections. The cost-reduction mechanisms in the ACA significantly reduce projected budget deficits in the long run. In 2011, following weeks of negotiation with the Administration, Congress passed the Budget Control Act of 2011 (BCA). The BCA reduces long-run budget deficits by constraining spending over the next 10 years, and the 2013 Budget includes other initiatives that would help control future deficits if enacted. Nonetheless, the Administration recognizes that there is considerable uncertainty in its long-term projections and that future challenges will require policy responses that have yet to be formulated. The projections in this chapter reflect the fact that, until these reforms are enacted, simply extending current laws and policies leaves the country with a large and growing publicly held debt. Reforms are needed to make sure that overall budgetary resources are sufficient to support future spending and that programs like Medicare Part A and Social Security, which are expected to be financed from dedicated revenue sources, remain self-sustaining. The Administration intends to work with the Congress to develop additional policies that will assure fiscal sustainability in the future. When the current Administration took office, the budget deficit was rising sharply because of the declining economy and measures taken to revive it. Revenues had fallen, as a share of GDP, to their lowest level since 1950. Spending on programs like unemployment insurance had also risen sharply. The measures taken by the Administration to revive economic growth will also help to increase revenues, and, over the next ten years, the revenue shortfall is projected to be made up. By 2022, revenues as a share of GDP are projected to be above their historical average over the last 40 years. Meanwhile, measures like the ACA and the BCA along with the proposals in this Budget will constrain future spending and help narrow the deficit. By the end of the period, the primary budget is balanced and the debt-to-GDP ratio will have been stabilized. Beyond the 10-year horizon, however, demographic pressures and continued high costs for health care are likely to begin gradually pushing up the deficit and the ratio of debt to GDP. The key drivers of the long-range deficit are the Government’s major health and retirement programs: Medicare, Medicaid and Social Security. Revenues rise somewhat relative to GDP, but not enough to keep pace with the increase in health and retirement program spending. • Medicare finances health insurance for most of the Nation’s seniors and many individuals with disabilities. Medicare’s growth has generally exceeded that of other Federal spending for decades, tracking the rapid growth in overall health care costs. The ACA will curtail this cost growth, but Medicare spending is still projected to reach higher levels relative to the economy and the budget than those that prevail today. • Medicaid provides medical assistance, including acute and long-term care, to low-income children and families, seniors, and people with disabilities. Medicaid’s growth has also generally exceeded that of other Federal spending, and like Medicare it has generally tracked the growth in overall health costs. Medicaid assistance will expand further beginning in 2014 because of broadened coverage provided by the ACA. Medicaid’s finances are also expected to benefit from the ACA’s reforms. • Social Security provides retirement benefits, disability benefits, and survivors’ insurance for the Nation’s workers. Outlays for Social Security benefits will begin to exceed the program’s dedicated income in a little more than a decade putting pressure on the overall budget as trust fund balances are drawn down. Long-range projections for Social Security and Medicare have been prepared for decades, and the actuaries at the Centers for Medicare and Medicaid Services have indicated that they intend to begin producing such projections for Medicaid. This is useful information, but it does not indicate the Government’s overall budgetary po57 58 ANALYTICAL PERSPECTIVES sition, which is the reason the projections in this chapter offer a useful complement to the long-run projections for the individual programs. Future budget outcomes depend on a host of unknowns—changing economic conditions, unforeseen international developments, unexpected demographic shifts, the unpredictable forces of technological advance, and evolving political preferences to name a few. These uncertainties make even short-run budget forecasting quite difficult, and the uncertainties increase the further into the future projections are extended. While uncertainty makes forecast accuracy difficult to achieve, it does not detract from the importance of long-run budget projections, because future problems are often best addressed in the present. A full treatment of all the relevant risks is beyond the scope of this chapter, but the chapter does show how sensitive long-run budget projections are to changes in some of key economic and demographic assumptions. The Long-Run Fiscal Challenge The 2013 Budget includes $3 trillion in net deficit reduction over the next 10 years. Combined with the approximately $1 trillion in savings from the provisions in Title I of the BCA, this would generate more than $4 trillion in deficit reduction over the next decade. These savings would bring the Nation to the point where current spending is no longer adding to debt and where debt is no longer increasing as a share of the economy—an important milestone on the way to restoring fiscal discipline and moving the budget toward balance. By the end of the 10-year budget window, the policies in this Budget stabilize the deficit at less than 3 percent of GDP. Beyond 2022, however, the fiscal position gradually deteriorates mainly because of the aging of the population and the high continuing cost of the Government’s health programs. By 2030, the deficit is projected to be 4.5 percent of GDP, and by 2040 it is nearly 6 percent. The deficit continues to rise for the next 75 years, and the publicly-held debt is also projected to rise persistently relative to GDP (see Chart 5-1). Health care costs have risen faster than inflation for decades. This rising cost trend has contributed to steady increases in the amounts spent on Medicare and Medicaid, while also making it more difficult for people to afford private health insurance. The ACA tackles both problems by extending health insurance coverage to millions of Americans who currently lack insurance, while making reforms that will slow future growth in medical costs. When the law is fully implemented, Medicare spending per beneficiary would rise at rates substantially below those at which spending has grown for four decades. Even with these changes, however, health care costs are likely to continue to rise faster than inflation as the population ages, posing a danger to long-run budget stability. Population aging also poses a serious long-run budgetary challenge. Because of lower expected fertility and improved longevity, the Social Security actuaries project that under current law in which the normal retirement age rises to 67, the ratio of workers to Social Security beneficiaries will fall from around 2.9 currently to a little over 2 by the time most of the baby boomers have retired. From that point forward, the ratio of workers to beneficiaries is expected to continue to decline slowly. With fewer workers to pay the taxes needed to support the retired population, budgetary pressures will steadily mount and without reforms, trust fund exhaustion is projected by the Social Security Trustees to occur in 2036. The country also faces the challenge of reforming the tax code to make it fairer and simpler and to provide sufficient revenue to meet long-run commitments. Resolving the long-run fiscal challenge will require a comprehensive approach, one that restrains spending growth but also addresses the sufficiency of the tax code. The 2013 Budget includes several proposed changes to the tax code that would close loopholes and eliminate tax breaks for special interests. It also calls on Congress to undertake comprehensive tax reform to both lower tax rates and generate new revenues. Long-Run Budget Projections.—In 2011, the three major entitlement programs — Medicare, Medicaid, and Social Security — accounted for 44 percent of non-interest Chart 5-1. Publicly Held Debt Under 2013 Budget Policy Extended Percent of GDP 260 240 220 200 180 160 140 120 100 80 60 40 20 0 1940 1958 1976 1994 2012 2030 2048 2066 2084 59 5. LONG TERM BUDGET OUTLOOK Table 5–1. LONG-RUN BUDGET PROJECTIONS (Receipts, Outlays, Surplus or Deficit, and Debt as a Percent of GDP) 1980 Receipts ������������������������������������������������������������������� Outlays: Discretionary �������������������������������������������������������� Mandatory: Social Security ������������������������������������������������ Medicare ��������������������������������������������������������� Medicaid ��������������������������������������������������������� Other ���������������������������������������������������������� Subtotal, mandatory ���������������������������������� Net interest �������������������������������������������������������������� Total outlays ��������������������������������������������������������� Surplus or deficit (–) ������������������������������������������������ Primary surplus/deficit(–) ����������������������������������������� Federal debt held by the public, end of period ��������� 1990 2000 2010 2020 2030 2040 2050 2060 2070 2080 2085 19.0 18.0 20.6 15.1 19.7 20.0 20.2 20.3 20.5 20.7 20.8 20.9 10.1 8.7 6.3 9.1 5.3 5.0 5.0 5.0 5.0 5.0 5.0 5.0 4.3 1.1 0.5 3.7 9.6 1.9 21.7 –2.7 –0.8 26.1 4.3 1.7 0.7 3.2 9.9 3.2 21.9 –3.9 –0.6 42.1 4.1 2.0 1.2 2.4 9.7 2.3 18.2 2.4 4.7 34.7 4.9 3.1 1.9 3.7 13.6 1.4 24.1 –9.0 –7.6 62.8 5.2 3.3 2.2 3.4 14.0 3.2 22.5 –2.8 0.4 76.5 5.8 4.3 2.5 3.1 15.8 3.8 24.5 –4.5 –0.7 84.2 5.8 4.8 2.8 2.9 16.4 4.6 26.0 –5.8 –1.2 103.5 5.7 5.0 3.0 2.8 16.4 5.6 27.0 –6.6 –1.1 124.4 5.6 5.0 2.9 2.7 16.3 6.5 27.7 –7.2 –0.7 143.7 5.7 5.1 2.9 2.6 16.3 7.3 28.6 –7.9 –0.6 161.8 5.8 5.1 2.9 2.6 16.3 8.1 29.4 –8.6 –0.5 180.8 5.8 5.1 2.8 2.6 16.3 8.6 29.9 –9.0 –0.4 190.6 Note: The figures shown in this table beyond 2020 are the product of a long-range forecasting model maintained by the Office of Management and Budget. This model is separate from the models and capabilities that produce detailed programmatic estimates in the Budget. It was designed to produce long-range projections based on additional assumptions regarding growth in the economy, the long-range evolution of specific programs, and the demographic and economic forces affecting those programs. The model, its assumptions, and sensitivity testing of those assumptions are presented in this chapter. Federal spending, up from 30 percent in 1980. By 2035, when the surviving baby boomers will all be 70 or older, these three programs could account for more than 60 percent of non-interest Federal spending. Through the end of the projection period, in 2087, this figure would continue to rise gradually. In other words without further reforms, more than three-fifths of the budget, aside from interest, would go to these three programs alone. That would severely reduce the flexibility of the budget, and the Government’s ability to respond to new challenges. Because of these pressures, further cost-reducing measures or additional revenues are needed to stabilize the budget outlook in the long run. The budget projections shown in Table 5–1 illustrate that point. The policies in the 2013 Budget, would stabilize the budget outlook over the next 10 years by generating $3 trillion in additional deficit reduction. However, after stabilizing the debt-toGDP ratio over that time period, the deficit and the debtratio begin to rise again in the period after 2022, with the debt-to-GDP ratio eventually far exceeding its previous peak level reached at the end of World War II. The policies in the 2013 Budget will allow more time to develop longterm policies to address the persistently-rising debt. Medicare and Medicaid.— In the long-run projections in this chapter, different assumptions about the growth rate of health care costs are made. In the base case, a continuation of current policy assumes that the provisions of the ACA are fully implemented, limiting health care costs in the long run compared with prior law. The long-run Medicare assumptions for the years following the 10-year budget window are essentially the same as those in the latest Medicare Trustees’ report (May 2011), which is consistent with how these long-term budget projections have generally been made in the past. The Trustees’ projections imply that average long-range annual growth in Medicare spending per enrollee is 0.2 percentage points per year faster than the projected growth rate in GDP per capita. This growth rate for Medicare is significantly smaller than previous projections prior to the passage of the ACA—a reduction the Trustees largely attribute to the ACA. Along with the rules for Medicare, there are a number of reforms in the ACA that experts believe could produce significant savings relative to the historical trend and that would affect medical costs more broadly. One is an excise tax on the highest-cost insurance plans, which will encourage substitution of plans with lower costs, while raising take-home pay. There is also an array of delivery system reforms, including incentives for accountable care organizations and payment reform demonstrations that have the potential to re-orient the medical system toward providing higher quality care, not just more care, and thus reduce cost growth in the future.1 Finally, the ACA established an independent payment advisory board that will be empowered to propose changes in Medicare should Medicare costs exceed the growth rate specified in law. The proposed changes in Medicare would take effect automatically, unless overridden by the Congress. Because of these broader reforms, Medicaid spending per beneficiary and private health spending per capita are also projected to slow, though not as much as Medicare.2 An alternative discussed below assumes that medical costs rise more rapidly than in the base case. This could happen, for example, if future Congresses and Administrations weaken the budgetary discipline embodied in current law. The alternative assumes that costs per beneficiary rise at two percentage points per year above GDP per capita which would continue the historical experience of the last 50 years. 1 Groups of providers meeting certain criteria can be recognized as accountable care organizations (ACOs), which allow them to coordinate care and manage chronic disease more easily thereby improving the quality of care for patients. ACOs can then share in any cost savings they achieve for Medicare if they meet quality standards. 2 The projections assume that growth in Medicaid spending per enrollee and private health spending per capita exceeds growth in GDP per capita by 0.6 percentage points. 60 Revenues.—Projected revenues in these long-run budget projections start with the estimated receipts under the Administration’s proposals in the 2013 Budget. There is some built-in momentum in the tax code that tends to push up average tax rates over time when real incomes are rising, as assumed in these projections. For example, the tax code is indexed for inflation, but not for increases in real income, so there is a tendency for individual income taxes to increase relative to incomes when real taxable incomes are rising, everything else equal. Historically, Congress has acted to forestall this tendency by periodically lowering tax rates. Beyond the 10-year budget window, the projections in this chapter assume that individual income tax rates will not rise automatically with real wage growth. The projections also assume that the Alternative Minimum Tax (AMT) will not be allowed to expand as it would under current law. In recent years, Congress and the Administration have always acted to curtail the spread of the AMT preventing the increase in revenues from that source implied by current law. While these assumptions tend to limit tax revenue, other assumptions work in the opposite direction. For example, the projections assume that the new revenue provisions in the ACA go into effect including the excise tax on high-premium health plans. On balance, the assumptions produce a gradual increase in the overall share of revenues relative to GDP rising to nearly 21 percent by the end of the long-run projection period. Despite the increase, projected revenues are insufficient to meet the Federal Government’s projected future commitments as shown by the growing deficits in Table 5-1. Discretionary Outlays.—Because discretionary spending is determined annually through the legislative process, there is no straightforward assumption for projecting its future path. The budget displays a path for discretionary spending over the next 10 years; beyond that time frame, however, there are several different plausible assumptions for the future path. One is to assume that discretionary spending will be held constant in inflation-adjusted terms, which would allow discretionary programs to increase with prices, but would not allow the programs to expand with population or real growth in the economy. Extending this assumption over many decades is not realistic, when the population and economy are projected to grow, as assumed in these projections. Therefore, the base projection assumes that discretionary spending keeps pace with the growth in GDP in the long run. The chapter also uses alternative assumptions for discretionary spending to show other possible paths. It is important to note that these paths are merely illustrative; they are not intended to represent the policy preferences of this Administration or future Administrations. Table 5-1 shows how the budget would evolve without further changes in policy under the base assumptions described above. The key assumptions are the full implementation of the ACA with its various provisions to control costs and alter incentives for medical practice, the BCA which limits discretionary spending over the next ten years, and the adoption of the proposals in this Budget to control the deficit and reform taxes. Under these as- ANALYTICAL PERSPECTIVES sumptions, the future growth of Medicare and Medicaid is projected to slow sharply relative to GDP, and future discretionary spending is much lower relative to GDP than has been true in recent decades. Social Security benefits rise relative to the economy over the next 20 years, but increase more slowly after that as the age composition of the population begins to stabilize. Other mandatory programs generally decline relative to the size of the economy. These include Federal pension benefits for Government workers. The shift in the 1980s from the Civil Service Retirement System (CSRS) to the Federal Employees Retirement System (FERS) is having a marked effect on Federal civilian pensions, which is expected to continue as FERS comes to dominate future pension projections. The defined benefit pension plan in FERS is much smaller than the traditional Federal pension benefit under CSRS. On the revenue side, once tax revenues recover from the economic downturn, revenues gradually grow but by less than future spending. With total outlays increasing more rapidly than taxes, the deficit rises, and publicly held debt exceeds historical levels. The ACA addresses the single most important longrun challenge to the Nation’s fiscal future, which is rising health care costs. Even with this fundamental change, however, an aging population and a continued high level of health costs will pose serious long-term budget problems. Under current policies, Medicare, Medicaid, and Social Security are projected to absorb a much larger share of Federal resources than in the past, limiting what the Government can do in other areas. The ratio of debt to GDP, which is stabilized within the 10-year budget window, is projected to resume its growth in the long run without further policy changes. Alternative Policy, Economic, and Technical Assumptions The quantitative results discussed above are sensitive to changes in underlying policy, economic, and technical assumptions. Some of the most important of these assumptions and their effects on the budget outlook are discussed below. For most plausible alternative projections of long-run trends, the deficit and debt rise even more than in the base projections discussed above. Health Spending.—The base projections for Medicare and Medicaid over the next 75 years assume an extension of current law. Chart 5-2 shows budget outcomes under these base assumptions and an alternative scenario. The alternative assumes spending per beneficiary grows 2 percentage points faster than GDP per capita, similar to the historical growth rate of medical costs in the United States since 1960. Discretionary Spending.— The current base projection for discretionary spending assumes that after 2022, discretionary spending keeps pace with the growth in GDP (see Chart 5-3). An alternative assumption would be to allow discretionary spending to increase for inflation and population growth only. In this case, discretionary spending would remain constant in inflation-adjusted per capita terms. Yet another possible assumption is to al- 61 5. LONG TERM BUDGET OUTLOOK Chart 5-2. Alternative Health Care Costs Surplus(-)/Deficit(+) as a percent of GDP 5 0 2013 Budget Policy Extended -5 -10 -15 -20 -25 -30 Continuation of Historical Trends in Health Care Costs -35 -40 -45 2000 2017 2034 low nondefense discretionary spending to grow with GDP while defense spending is adjusted only for inflation plus one percent real growth per year. This latter combination is somewhat closer to historical experience over the last 60 years. Alternative Revenue Projections.—In the base projection, tax receipts rise gradually relative to GDP. Chart 5-4 shows alternative receipts assumptions. Allowing receipts to rise by an additional 2 percentage points of GDP relative to the base projections would stabilize the long-run budget deficit. Reducing taxes by 2 percentage points of GDP relative to the base projections would bring the projected rise in the deficit and the publicly-held debt forward in time. Productivity.—The rate of future productivity growth has a major effect on the long-run budget outlook (see 2051 2068 2085 Chart 5-5). It is also highly uncertain. Over the next few decades, an increase in productivity growth would reduce projected budget deficits. Higher productivity growth adds directly to the growth of the major tax bases, while it has a smaller immediate effect on outlay growth even assuming that discretionary spending rises with GDP. For much of the last century, output per hour in nonfarm business grew at an average rate of around 2.2 percent per year. Growth was not always steady. In the 25 years following 1948, labor productivity in the nonfarm business sector of the economy grew at an average rate of 2.7 percent per year, but this was followed by a period of much slower growth. From 1973 to 1995, output per hour in non-farm business grew at an average annual rate of just 1.5 percent per year. In the latter half of the 1990s, however, the rate of productivity growth increased again Chart 5-3. Alternative Discretionary Projections Surplus(-)/Deficit(+) as a percent of GDP 4 2 0 Discretionary Spending Grows with Population and Inflation -2 -4 Defense Grows with Inflation plus 1%, Nondefense Grows with GDP -6 -8 2013 Budget Policy Extended -10 -12 2000 2017 2034 2051 2068 2085 62 ANALYTICAL PERSPECTIVES Chart 5-4. Alternative Revenue Projections Surplus(-)/Deficit(+) as a percent of GDP 5 Revenues Higher by 2% of GDP 0 -5 2013 Budget Policy Extended -10 -15 Revenues Lower by 2% of GDP -20 2000 2017 2034 2051 and it has remained higher albeit with some fluctuations since then. Indeed, the average growth rate of productivity in nonfarm business has averaged 2.5 percent per year since the fourth quarter of 1995. The base projections assume that output per hour in nonfarm business will increase at an average annual rate of around 2.3 percent per year, close to its long-run average and slightly below its average growth rate since 1995. This implies that real GDP per hour worked will grow at an average annual rate of 1.9 percent per year. The difference is accounted for by the fact that the sectors of the economy that are counted in GDP outside of the nonfarm business sector tend to have lower productivity growth than nonfarm business does. The alternatives highlight the effect of raising and lowering the projected productivity growth rate by 1/4 percentage point. 2068 2085 Population.—The key assumptions for projecting long-run demographic developments are fertility, immigration, and mortality. • The demographic projections assume that fertility will average about 2.0 total lifetime births per woman in the future, just slightly below the replacement rate needed to maintain a constant population in the absence of immigration—2.1 births per woman (see Chart 5-6). The alternatives are those in the latest Social Security trustees’ report (1.7 and 2.3 births per woman). • The rate of immigration is assumed to average around 1 million immigrants per year in the long run (see Chart 5-7). Higher immigration relieves some of the downward pressure on population growth from low fertility and allows total population to expand throughout the projection period, although at Chart 5-5. Alternative Productivity Assumptions Surplus(-)/Deficit(+) as a percent of GDP 5 0 Higher Productivity Growth -5 2013 Budget Policy Extended -10 -15 Lower Productivity Growth -20 -25 2000 2017 2034 2051 2068 2085 63 5. LONG TERM BUDGET OUTLOOK Chart 5-6. Alternative Fertility Assumptions Surplus(-)/Deficit(+) as a percent of GDP 5 0 Higher Fertility 2013 Budget Policy Extended -5 -10 -15 Lower Fertility -20 -25 -30 2000 2017 2034 a much slower rate than has prevailed historically. The alternatives are taken from the Social Security Trustees’ Report (1.3 million total immigrants per year in the high alternative and 0.8 million in the low alternative). • Mortality is projected to decline as people live longer in the future (see Chart 5-8). These assumptions parallel those in the latest Social Security Trustees’ Report. The average life expectancy at birth for women is projected to rise from 80.5 years in 2010 to 86.7 years in 2085, and the average for men is expected to increase from 75.8 years in 2010 to 83.3 years in 2085. A technical panel advising the Social Security trustees has reported that the improvement in longevity might be even greater than assumed here. The variations show the high and low alternatives from the latest Trustees’ report (average female and 2051 2068 2085 male life expectancy reaching 83.2 and 79.4 in the low cost alternative and 90.3 and 87.6 in the high cost alternative). The long-run budget outlook is highly uncertain. With pessimistic assumptions, the fiscal picture deteriorates much more than in the base projection. More optimistic assumptions imply a smaller rise in the deficit and the debt. But despite the uncertainty, these projections show under a wide range of forecasting assumptions that overall budgetary resources will be strained in future decades. These projections highlight the need for policy action to address the main drivers of future budgetary costs. The Fiscal Gap The fiscal gap is one measure of the size of the adjustment needed to preserve fiscal sustainability in the long Chart 5-7. Alternative Immigration Assumptions Surplus(-)/Deficit(+) as a percent of GDP 5 0 Higher Net Immigration -5 2013 Budget Policy Extended -10 Lower Net Immigration -15 -20 2000 2017 2034 2051 2068 2085 64 ANALYTICAL PERSPECTIVES Chart 5-8. Alternative Mortality Assumptions Surplus(-)/Deficit(+) as a percent of GDP 4 2 0 -2 2013 Budget Policy Extended -4 Shorter Life Expectancy -6 -8 Longer Life Expectancy -10 -12 2000 2017 2034 run.3 It is defined as the increase in taxes or reduction in non-interest expenditures required to keep the long-run ratio of Government debt-to-GDP at its current level if implemented immediately. The gap is usually measured as a percentage of GDP. The fiscal gap is calculated over a finite time period, and therefore it may understate the adjustment needed to achieve permanent sustainability. Table 5-2 shows fiscal gap calculations for the base case calculated over a 75-year horizon and for the various 3 Alan J. Auerbach, “The U.S. Fiscal Problem: Where We Are, How We Got Here, and Where We’re Going,” NBER: Macroeconomics Annual 1994, pp 141 – 175. Table 5–2. 75-YEAR FISCAL GAP UNDER ALTERNATIVE BUDGET SCENARIOS (Percent of GDP) Base Case �������������������������������������������������������������������������������������������������������� 1.3 Health: Excess cost growth averages 2 percent. ����������������������������������������������������� 5.3 Discretionary Outlays: Grow with inflation plus population �������������������������������������������������������������� Defense grows with inflation 1%; nondefense grows with GDP ������������������� –0.1 0.8 Revenues: Revenues exceed base case by 2 percent of GDP ������������������������������������� Revenues fall short of base case by 2 percent of GDP ������������������������������� –0.3 2.9 Productivity: Productivity grows by 0.5 percent per year faster than the base case �������� Productivity grows by 0.5 percent per year slower than the base case ������� –0.2 3.0 Population: Fertility: 2.3 births per woman ������������������������������������������������������������������������������� 1.7 births per woman ������������������������������������������������������������������������������� –0.1 2.8 Immigration: 1.3 million immigrants per year ���������������������������������������������������������������� 0.8 million immigrants per year ���������������������������������������������������������������� 0.1 2.6 Mortality in 2085: Female life expectancy 83.2; male life expectancy 79.4 �������������������������� Female life expectancy 90.3; male life expectancy 87.6 �������������������������� 1.5 1.9 2051 2068 2085 alternative scenarios described above. The fiscal gap in the base case is 1.3 percent of GDP, and it ranges in the alternative scenarios from -0.3 percent of GDP to 5.3 percent of GDP. This suggests that additional reforms are needed to be sure the budget is on a permanently sustainable course in the long run. Actuarial Projections for Social Security and Medicare The Trustees for the Medicare Federal Hospital Insurance (HI) and Social Security trust funds issue annual reports that include projections of income and outgo for these funds over a 75-year period. These projections are based on different methods and assumptions than the long-run budget projections presented above. Even with these differences, the message is similar: the ACA is projected to curtail the projected growth in per capita health care costs but even with this reform, the retirement of the baby-boom generation and continuing high medical costs will eventually exhaust the trust funds unless further action is taken. The Trustees’ reports feature the actuarial balance of the trust funds as a summary measure of their financial status. For each trust fund, the balance is calculated as the change in receipts or program benefits (expressed as a percentage of taxable payroll) that would be needed to preserve a small positive balance in the trust fund at the end of a specified time period. The estimates cover periods ranging in length from 25 to 75 years. These balance calculations show what it would take to achieve a positive trust fund balance at the end of a specified period of time, not what it would take to maintain a positive balance indefinitely. To maintain a positive balance forever requires a larger adjustment than is needed to maintain a positive balance over 75 years when the annual balance in the program is negative at the end of the 75-year projection period, as it is expected to be for Social Security and Medicare without future reforms. 65 5. LONG TERM BUDGET OUTLOOK Table 5–3. INTERMEDIATE ACTUARIAL PROJECTIONS FOR OASDI AND HI 2010 2020 2030 2050 2080 Percent of Payroll Medicare Hospital Insurance (HI) Income Rate 2009 Trustees’ Report ������������������������������������������������������������������������������������� 2010 Trustees’ Report ������������������������������������������������������������������������������������� 2011 Trustees’ Report ������������������������������������������������������������������������������������� 3.2 3.2 3.2 3.3 3.4 3.5 3.4 3.6 3.6 3.4 3.9 3.9 3.5 4.3 4.3 Cost Rate 2009 Trustees’ Report ������������������������������������������������������������������������������������� 2010 Trustees’ Report ������������������������������������������������������������������������������������� 2011 Trustees’ Report ������������������������������������������������������������������������������������� 3.6 3.7 3.8 4.4 3.5 3.6 6.0 4.3 4.4 8.7 5.0 5.1 11.8 4.9 5.0 –0.4 –0.5 –0.6 –1.1 –0.0 –0.2 –2.6 –0.7 –0.8 25 years –1.4 –0.3 –0.5 –5.3 –1.1 –1.2 50 years –2.8 –0.6 –0.8 –8.3 –0.7 –0.7 75 years –3.9 –0.7 –0.8 Annual Balance 2009 Trustees’ Report ������������������������������������������������������������������������������������� 2010 Trustees’ Report ������������������������������������������������������������������������������������� 2011 Trustees’ Report ������������������������������������������������������������������������������������� Projection Interval: ����������������������������������������������������������������������������������������������� Actuarial Balance: 2009 Trustees’ Report. ������������������������������������������������������ Actuarial Balance: 2010 Trustees’ Report. ������������������������������������������������������ Actuarial Balance: 2011 Trustees’ Report. ������������������������������������������������������ Percent of Payroll Old Age Survivors and Disability Insurance (OASDI) Income Rate 2009 Trustees’ Report ������������������������������������������������������������������������������������� 2010 Trustees’ Report ������������������������������������������������������������������������������������� 2011 Trustees’ Report ������������������������������������������������������������������������������������� 12.9 12.3 12.5 13.0 13.1 13.1 13.2 13.2 13.2 13.3 13.2 13.2 13.3 13.3 13.3 Cost Rate 2009 Trustees’ Report ������������������������������������������������������������������������������������� 2010 Trustees’ Report ������������������������������������������������������������������������������������� 2011 Trustees’ Report ������������������������������������������������������������������������������������� 12.5 13.1 13.4 14.5 14.2 14.2 16.8 16.4 16.7 16.6 16.3 16.7 17.5 17.3 17.4 0.4 –0.8 –0.9 –1.5 –1.1 –1.1 –3.6 –3.2 –3.4 25 years –0.2 –0.3 –0.6 –3.4 –3.1 –3.4 50 years –1.5 –1.5 –1.8 –4.2 –4.0 –4.1 75 years –2.0 –1.9 –2.2 Annual Balance 2009 Trustees’ Report ������������������������������������������������������������������������������������� 2010 Trustees’ Report ������������������������������������������������������������������������������������� 2011 Trustees’ Report ������������������������������������������������������������������������������������� Projection Interval: ����������������������������������������������������������������������������������������������� Actuarial Balance: 2009 Trustees’ Report. ������������������������������������������������������ Actuarial Balance: 2010 Trustees’ Report. ������������������������������������������������������ Actuarial Balance: 2011 Trustees’ Report. ������������������������������������������������������ Table 5–3 shows the projected income rate, cost rate, and annual balance for the Medicare HI and combined OASDI Trust Funds at selected dates under the Trustees’ intermediate assumptions. Data from the 2009 and the 2010 reports are shown along with the latest data from the 2011 reports. The large improvement in the HI Trust Fund balance between 2009 and 2010 can be seen in Table 5-3. This is the result of the passage of the ACA. Even with the ACA there is still a long-run deficit in the HI program, albeit one that is much smaller than projected in 2009 and earlier. These projections assume full implementation of the cost reductions under current law, over the entire long-run projection period. In the 2009 Trustees’ report, Medicare HI trust fund costs as a percentage of Medicare covered payroll were projected to rise from 3.6 percent to 11.8 percent between 2010 and 2080 and the HI trust fund imbalance was projected to be -8.3 percent in 2080. In the 2010 report, costs rise from 3.7 percent of Medicare taxable payroll in 2010 to 4.9 percent in 2080 and the imbalance in the HI trust fund in 2080 is -0.7 percent. On average, the HI cost rate has increased slightly in the 2011 report compared with 2010, although the final value of the HI cost rate is slightly lower in the 2011 report than it was in 2010. The large improvement in the trust fund imbalance projected in 2010 is largely unchanged in 2011. Demographic trends and continued high per-person costs combine to explain the continued imbalance in the long-run projections. Medicare Funding Warning. Under the Medicare Modernization Act (MMA) of 2003, the Medicare Trustees must issue a “warning” when in two consecutive Trustees’ reports they project that the share of Medicare funded by 66 ANALYTICAL PERSPECTIVES general revenues will exceed 45 percent in the current year or any of the subsequent six years. Such a warning was included in the 2011 Trustees Report. The MMA requires that the President submit legislation, within 15 days of submitting the Budget, which will reduce general revenue funding to 45 percent of overall Medicare outlays or lower in the immediate seven-fiscal-year window. In accordance with the Recommendations Clause of the Constitution, and as the Executive Branch has noted in prior years, the Executive Branch considers this requirement to be advisory and not binding. However, the proposals in this Budget would further strengthen Medicare’s finances and extend its solvency. As a result of reforms legislated in 1983, Social Security had been running a cash surplus with taxes exceeding costs up until 2009. This surplus in the Social Security trust fund helped to hold down the unified budget deficit. The cash surplus ended in 2009. The 2011 Social Security trustees report projects that on a cash-flow basis the trust fund will not return to surplus without further reforms. Consequently, Social Security will no longer act to hold down the unified budget deficit. Even so, the program will continue to experience a surplus for some years because of the Trust Funds’ interest earnings. Eventually, however, Social Security will begin to draw on its trust fund balances to cover current expenditures. Over time, as the ratio of workers to retirees falls, costs are projected to rise further from 13.4 percent of Social Security covered payroll in 2010 to 14.2 percent of payroll in 2020, 16.7 percent of payroll in 2030 and 17.4 percent of payroll in 2080. Revenues excluding interest are projected to rise only slightly from 12.5 percent of payroll today to 13.3 percent in 2080. Thus the annual balance is projected to decline from -0.9 percent of payroll in 2010 to -1.1 percent of payroll in 2020, -3.4 percent of payroll in 2030, and -4.1 percent of payroll in 2080. On a 75-year basis, the actuarial deficit is projected to be -2.2 percent of payroll. In the process, the Social Security trust fund, which was built up since 1983, would be drawn down and eventually be exhausted in 2036. These projections assume that benefits would continue to be paid in full despite the projected exhaustion of the trust fund to show the long-run implications of current benefit formulas. Under current law, not all scheduled benefits would be paid after the trust funds are exhausted. Some benefits, however, could still be partially funded from current revenues. The 2011 Trustees’ report presents projections on this point. Beginning in 2036, 77 percent of projected Social Security scheduled benefits would be funded. This percentage would eventually decline to 74 percent by 2085. TECHNICAL NOTE: SOURCES OF DATA AND METHODS OF ESTIMATING The long-range budget projections are based on demographic and economic assumptions. A simplified model of the Federal budget, developed at OMB, is used to compute the budgetary implications of these assumptions. Demographic and Economic Assumptions.—For the years 2012-2022, the assumptions are drawn from the Administration’s economic projections used for the 2013 Budget. These budget assumptions reflect the President’s policy proposals. The economic assumptions are extended beyond this interval by holding inflation, interest rates, and the unemployment rate constant at the levels assumed in the final year of the budget forecast. Population growth and labor force growth are extended using the intermediate assumptions from the 2011 Social Security Trustees’ report. The projected rate of growth for real GDP is built up from the labor force assumptions and an assumed rate of productivity growth. Productivity growth, measured as real GDP per hour, is assumed to equal its average rate of growth in the Budget’s economic assumptions—1.9 percent per year. CPI inflation holds stable at 2.1 percent per year, the unemployment rate is constant at 5.4 percent, the yield on 10-year Treasury notes is steady at 5.3 percent, and the 91-day Treasury bill rate is 4.1 percent. Consistent with the demographic assumptions in the Trustees’ reports, U.S. population growth slows from around 1 percent per year to about two-thirds that rate by 2030, and slower rates of growth beyond that point. By the end of the projection period total population growth is as low as 0.4 percent per year. Real GDP growth is projected to be less than its historical average of around 3.2 percent per year because the slowdown in population growth and the increase in the population over age 65 reduce labor supply growth. In these projections, average real GDP growth averages between 2.3 percent and 2.4 percent per year for the period following the end of the 10-year budget window in 2022. The economic and demographic projections described above are set by assumption and do not automatically change in response to changes in the budget outlook. This is unrealistic, but it simplifies comparisons of alternative policies. Budget Projections.—For the period through 2022, receipts follow the 2013 Budget’s policy projections. After 2022, total tax receipts rise gradually relative to GDP. Discretionary spending follows the path in the Budget over the next 10 years and grows at the rate of growth in nominal GDP afterwards. Other spending also aligns with the Budget through the budget horizon. Long-run Social Security spending is projected by the Social Security actuaries using this chapter’s long-range economic and demographic assumptions. Medicare benefits are projected based on a projection of beneficiary growth and excess health care cost growth from the 2011 Medicare Trustees’ report, and the general inflation assumptions described above. Medicaid outlays are based on the economic and demographic projections in the model. Other entitlement programs are projected based on rules of thumb linking program spending to elements of the economic and demographic projections such as the poverty rate. 6. FEDERAL BORROWING AND DEBT Debt is the largest legally and contractually binding obligation of the Federal Government. At the end of 2011, the Government owed $10,128 billion of principal to the individuals and institutions who had loaned it the money to fund past deficits. During that year, the Government paid the public approximately $266 billion of interest on this debt. At the same time, the Government also held financial assets, net of other liabilities, of $958 billion. Therefore, debt net of financial assets was $9,170 billion, or 61.3 percent of GDP. The $10,128 billion debt held by the public at the end of 2011 represents an increase of $1,109 billion, or 4.9 percent of GDP, over the level at the end of 2010. In 2011, the $1,300 billion deficit, partially offset by $190 billion of other financing transactions, 1 caused the Government to increase its borrowing from the public by $1,109 billion. Debt held by the public increased from 62.8 percent of Gross Domestic Product (GDP) at the end of 2010 to 67.7 percent of GDP at the end of 2011. Meanwhile, assets net of liabilities fell by $167 billion in 2011, as activities undertaken in previous years to help stabilize credit markets (particularly temporary increases to the Treasury operating cash balance) began to wind down. Debt held by the public net of financial assets increased from 55.0 percent of GDP at the end of 2010 to 61.3 percent of GDP at the end of 2011. The deficit is estimated to increase to $1,327 billion in 2012, and then begin to fall. Declining deficits and continued GDP growth are estimated to significantly reduce growth in debt as a percentage of GDP; debt net of financial assets is projected to reach 67.1 percent of GDP at the end of 2012 and 69.5 percent at the end of 2013 and then to begin to decline very gradually after 2014. Trends in Debt Since World War II Table 6–1 depicts trends in Federal debt held by the public from World War II to the present and estimates from the present through 2017. (It is supplemented for earlier years by Tables 7.1–7.3 in Historical Tables, which is published as a separate volume of the Budget.) Federal debt peaked at 108.7 percent of GDP in 1946, just after the end of the war. From then until the 1970s, Federal debt as a percentage of GDP decreased almost every year because of relatively small deficits, an expanding economy, and inflation. With households borrowing large amounts to buy homes and consumer durables, and with businesses borrowing large amounts to buy plant and equipment, Federal debt also decreased almost every year as a percentage of total credit market debt outstanding. The cumulative effect was impressive. From 1950 to 1975, debt held by the public declined from 80.2 percent of GDP 1 For further discussion of these other financing transactions, see the discussion in the “Government Deficits or Surpluses and the Change in Debt” section of this chapter and the presentation in Table 6-2. to 25.3 percent, and from 53.3 percent of credit market debt to 18.4 percent. Despite rising interest rates, interest outlays became a smaller share of the budget and were roughly stable as a percentage of GDP. Federal debt relative to GDP is a function of the Nation’s fiscal policy as well as overall economic conditions. During the 1970s, large budget deficits emerged as spending grew faster than receipts and as the economy was disrupted by oil shocks and rising inflation. The nominal amount of Federal debt more than doubled, and Federal debt relative to GDP and credit market debt stopped declining after the middle of the decade. The growth of Federal debt accelerated at the beginning of the 1980s, due in large part to a deep recession, and the ratio of Federal debt to GDP grew sharply. It continued to grow throughout the 1980s as large tax cuts, enacted in 1981, and substantial increases in defense spending were only partially offset by reductions in domestic spending. The resulting deficits increased the debt to almost 50 percent of GDP by 1993. The ratio of Federal debt to credit market debt also rose, though to a lesser extent. Interest outlays on debt held by the public, calculated as a percentage of either total Federal outlays or GDP, increased as well. The growth of Federal debt held by the public was slowing by the mid-1990s. In addition to a growing economy, three major budget agreements were enacted in the 1990s, implementing spending cuts and revenue increases and significantly reducing deficits. The debt declined markedly relative to both GDP and total credit market debt, from 1997 to 2001, as surpluses emerged. Debt fell from 49.3 percent of GDP in 1993 to 32.5 percent of GDP in 2001. Over that same period, debt fell from 26.6 percent of total credit market debt to 17.5 percent. Interest as a share of outlays peaked at 16.5 percent in 1989 and then fell to 8.9 percent by 2002; interest as a percentage of GDP fell by a similar proportion. The impressive progress in reducing the debt burden stopped and then reversed course beginning in 2002. A decline in the stock market, a recession, and the initially slow recovery from that recession all reduced tax receipts. The tax cuts of 2001 and 2003 had a similarly large and longer-lasting effect, as did the growing costs of the wars in Iraq and Afghanistan. Deficits ensued and debt began to rise, both in nominal terms and as a percentage of GDP. There was a small temporary improvement in 2006 and 2007 as economic growth led to a short-lived revival of receipt growth. As a result of the most recent recession, which began in December 2007, and the massive financial and economic challenges it imposed on the Nation, the deficit began increasing rapidly in 2008. The deficit increased more substantially in 2009 as the Government continued to take aggressive steps to restore the health of the 67 68 ANALYTICAL PERSPECTIVES Table 6–1. TRENDS IN FEDERAL DEBT HELD BY THE PUBLIC (Dollar amounts in billions) Fiscal Year Debt held by the public: Current dollars FY 2011 dollars1 Interest on the debt Debt held by the public held by the public as a as a percent of: percent of:3 GDP Credit market debt2 Total outlays GDP 1946 ����������������������������������������������������������������������������������������������������� 241.9 2,324.7 108.7 N/A 7.4 1.8 1950 ����������������������������������������������������������������������������������������������������� 1955 ����������������������������������������������������������������������������������������������������� 219.0 226.6 1,712.9 1,557.3 80.2 57.2 53.3 43.2 11.4 7.6 1.8 1.3 1960 ����������������������������������������������������������������������������������������������������� 1965 ����������������������������������������������������������������������������������������������������� 236.8 260.8 1,444.9 1,487.7 45.6 37.9 33.7 26.9 8.5 8.1 1.5 1.4 1970 ����������������������������������������������������������������������������������������������������� 1975 ����������������������������������������������������������������������������������������������������� 283.2 394.7 1,343.4 1,377.8 28.0 25.3 20.8 18.4 7.9 7.5 1.5 1.6 1980 ����������������������������������������������������������������������������������������������������� 1985 ����������������������������������������������������������������������������������������������������� 711.9 1,507.3 1,718.7 2,773.7 26.1 36.4 18.5 22.3 10.6 16.2 2.3 3.7 1990 ����������������������������������������������������������������������������������������������������� 1995 ����������������������������������������������������������������������������������������������������� 2,411.6 3,604.4 3,800.7 5,004.6 42.1 49.1 22.6 26.7 16.2 15.8 3.5 3.3 2000 ����������������������������������������������������������������������������������������������������� 2001 ���������������������������������������������������������������������������������������������������� 2002 ���������������������������������������������������������������������������������������������������� 2003 ����������������������������������������������������������������������������������������������������� 2004 ����������������������������������������������������������������������������������������������������� 3,409.8 3,319.6 3,540.4 3,913.4 4,295.5 4,358.5 4,145.5 4,349.4 4,711.4 5,043.6 34.7 32.5 33.6 35.6 36.8 19.1 17.5 17.5 17.8 17.4 13.0 11.6 8.9 7.5 7.3 2.4 2.1 1.7 1.5 1.4 2005 ����������������������������������������������������������������������������������������������������� 2006 ����������������������������������������������������������������������������������������������������� 2007 ����������������������������������������������������������������������������������������������������� 2008 ����������������������������������������������������������������������������������������������������� 2009 ����������������������������������������������������������������������������������������������������� 4,592.2 4,829.0 5,035.1 5,803.1 7,544.7 5,222.2 5,311.0 5,378.6 6,058.4 7,764.6 36.9 36.6 36.3 40.5 54.1 17.1 16.5 15.8 17.1 21.3 7.7 8.9 9.2 8.7 5.7 1.5 1.8 1.8 1.8 1.4 2010 ����������������������������������������������������������������������������������������������������� 2011 ����������������������������������������������������������������������������������������������������� 2012 estimate ��������������������������������������������������������������������������������������� 2013 estimate ��������������������������������������������������������������������������������������� 2014 estimate ��������������������������������������������������������������������������������������� 9,018.9 10,128.2 11,578.1 12,636.7 13,445.3 9,196.4 10,128.2 11,367.7 12,204.7 12,779.9 62.8 67.7 74.2 77.4 78.4 24.7 26.8 N/A N/A N/A 6.6 7.4 7.1 7.9 9.2 1.6 1.8 1.7 1.8 2.1 2015 estimate ��������������������������������������������������������������������������������������� 2016 estimate ��������������������������������������������������������������������������������������� 2017 estimate ��������������������������������������������������������������������������������������� 14,197.6 14,980.2 15,713.5 13,257.5 13,741.0 14,158.8 78.1 77.8 77.1 N/A N/A N/A 10.9 12.5 13.8 2.4 2.8 3.1 N/A = Not available. 1 Debt in current dollars deflated by the GDP chain-type price index with fiscal year 2011 equal to 100. 2 Total credit market debt owed by domestic nonfinancial sectors. Financial sectors are omitted to avoid double counting, since financial intermediaries borrow in the credit market primarily in order to finance lending in the credit market. Source: Federal Reserve Board flow of funds accounts. Projections are not available. 3 Interest on debt held by the public is estimated as the interest on Treasury debt securities less the "interest received by trust funds" (subfunction 901 less subfunctions 902 and 903). The estimate of interest on debt held by the public does not include the comparatively small amount of interest paid on agency debt or the offsets for interest on Treasury debt received by other Government accounts (revolving funds and special funds). Nation’s economy and financial markets. The deficit fell somewhat in 2010 and increased only slightly in 2011. The deficit is projected to increase in 2012 but then to recede thereafter. Debt held by the public as a percent of GDP is estimated to grow to 74.2 percent at the end of 2012 and 77.4 percent at the end of 2013. Debt net of financial assets as a percent of GDP is estimated to grow to 67.1 percent at the end of 2012 and 69.5 percent at the end of 2013 and then to begin to decline slowly after 2014. To ensure continued reductions in the debt in relation to the economy, the Administration has proposed a budget enforcement mechanism that sets declining annual ceilings for debt net of financial assets as a percentage of GDP, beginning with 2014. Under the proposal, the ceilings would be enforced by automatic reductions in spending and tax expenditures. For further discussion of this “debt trigger” mechanism, see Chapter 14, “Budget Process,” in this volume. 6. FEDERAL BORROWING AND DEBT Debt Held by the Public and Gross Federal Debt The Federal Government issues debt securities for two principal purposes. First, it borrows from the public to finance the Federal deficit. 2 Second, it issues debt to Federal Government accounts, primarily trust funds, which accumulate surpluses. By law, trust fund surpluses must generally 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 sometimes called “public debt,’’ but a small portion has been issued by other Government agencies and is called “agency debt.’’ 3 Borrowing from the public, whether by the Treasury or by some other Federal agency, is important because it represents the Federal demand on credit markets. Regardless of whether the proceeds are used for tangible or intangible investments or to finance current consumption, 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. Federal borrowing thereby competes with the borrowing of other sectors of the economy for financial resources in the credit market. Borrowing from the public thus affects the size and composition of assets held by the private sector and the amount of saving imported from abroad. It also increases the amount of future resources required to pay interest to the public on Federal debt. Borrowing from the public is therefore an important concern of Federal fiscal policy. 4 Borrowing from the public, however, is an incomplete measure of the Federal impact on credit markets. Different types of Federal activities can affect the credit markets in different ways. For example, with the Federal Government’s recent extraordinary efforts to stabilize credit markets, the Government used the borrowed funds to acquire financial assets that would otherwise have required financing in the credit markets directly. (For more information on other ways in which Federal activities impact the credit market, see the discussion at the end of this chapter.) 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 2 For the purposes of the Budget, “debt held by the public” is defined as debt held by investors outside of the Federal Government, both domestic and foreign, including U.S. State and local governments and foreign governments. It also includes debt held by the Federal Reserve. 3 The term “agency debt’’ is defined more narrowly in the budget than customarily in the securities market, where it includes not only the debt of the Federal agencies listed in Table 6–4, but also the debt of the Government-Sponsored Enterprises listed in Table 23–9 at the end of Chapter 23, “Credit and Insurance,” and certain Governmentguaranteed securities. 4 The Federal subsector of the national income and product accounts provides a measure of “net government saving’’ (based on current expenditures and current receipts) that can be used to analyze the effect of Federal fiscal policy on national saving within the framework of an integrated set of measures of aggregate U.S. economic activity. The Federal subsector and its differences from the budget are discussed in Chapter 29, “National Income and Product Accounts.’’ 69 their tax receipts, interest receipts, and other collections over their spending. The interest on the debt that is credited to these funds accounts for the fact that some earmarked taxes and user charges will be spent at a later time than when the funds receive the monies. The debt securities are assets of those funds but are a liability of the general fund to the funds that hold the securities, and are a mechanism for crediting interest to those funds on their recorded balances. These balances generally provide the fund with authority to draw upon the U.S. Treasury in later years to make future payments on its behalf to the public. Public policy may result in the Government’s running surpluses and accumulating debt in trust funds and other Government accounts in anticipation of future spending. However, issuing debt to Government accounts does not have any of the credit market effects of borrowing from the public. It is an internal transaction of the Government, made between two accounts that are both within the Government itself. Issuing debt to a Government account is not a current transaction of the Government with the public; it is not financed by private saving and does not compete with the private sector for available funds in the credit market. While such issuance provides the account with assets—a binding claim against the Treasury— those assets are fully offset by the increased liability of the Treasury to pay the claims, which will ultimately be covered by the collection of revenues or by borrowing. Similarly, the current interest earned by the Government account on its Treasury securities does not need to be financed by other resources. Furthermore, the debt held by Government accounts does not represent the estimated amount of the account’s obligations or responsibilities to make future payments to the public. For example, if the account records the transactions of a social insurance program, the debt that it holds does not necessarily represent the actuarial present value of estimated future benefits (or future benefits less taxes) for the current participants in the program; nor does it necessarily represent the actuarial present value of estimated future benefits (or future benefits less taxes) for the current participants plus the estimated future participants over some stated time period. The future transactions of Federal social insurance and employee retirement programs, which own 93 percent of the debt held by Government accounts, are important in their own right and need to be analyzed separately. This can be done through information published in the actuarial and financial reports for these programs. 5 This Budget uses a variety of information sources to analyze the condition of Social Security and Medicare, the Government’s two largest social insurance programs. Chapter 5, “Long-Term Budget Outlook,’’ projects Social Security and Medicare outlays to the year 2085 relative 5 Extensive actuarial analyses of the Social Security and Medicare programs are published in the annual reports of the boards of trustees of these funds. The actuarial estimates for Social Security, Medicare, and the major Federal employee retirement programs are summarized in the Financial Report of the United States Government, prepared annually by the Treasury Department in coordination with the Office of Management and Budget. 70 ANALYTICAL PERSPECTIVES Table 6–2. FEDERAL GOVERNMENT FINANCING AND DEBT (In billions of dollars) Financing: Unified budget deficit ��������������������������������������������������������� Other transactions affecting borrowing from the public: Changes in financial assets and liabilities:1 Change in Treasury operating cash balance ����������� Net disbursements of credit financing accounts: Direct loan accounts ������������������������������������������� Guaranteed loan accounts ���������������������������������� Troubled Asset Relief Program equity purchase accounts �������������������������������������������������������� Subtotal, net disbursements ����������������������� Net purchases of non-Federal securities by the National Railroad Retirement Investment Trust �� Net change in other financial assets and liabilities2 � Subtotal, changes in financial assets and liabilities ��������������������������������������������������������� Seigniorage on coins ���������������������������������������������������� Total, other transactions affecting borrowing from the public ������������������������������������������������������� Total, requirement to borrow from the public (equals change in debt held by the public) ��� Changes in Debt Subject to Statutory Limitation: Change in debt held by the public ������������������������������������� Change in debt held by Government accounts ����������������� Less: change in debt not subject to limit and other adjustments ������������������������������������������������������������������ Total, change in debt subject to statutory limitation ������ Estimate Actual 2011 2012 1,299.6 1,326.9 901.4 667.8 609.7 648.8 612.4 575.5 625.7 657.9 680.7 704.3 –251.7 1.9 ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... 49.5 10.3 138.5 9.6 162.1 11.5 156.6 0.6 148.6 –0.3 135.5 1.3 125.7 –0.2 116.8 1.3 109.6 0.8 108.0 –1.6 106.5 –5.1 110.8 –5.4 –2.0 57.9 –26.7 121.4 –14.9 158.6 –15.0 142.2 –4.5 143.8 –1.2 135.6 –3.6 122.0 –1.8 116.3 –1.2 109.1 –3.4 103.0 –0.2 101.1 –0.2 105.1 –1.3 4.9 –0.3 ......... –1.4 ......... –1.4 ......... –1.2 ......... –1.7 ......... –1.1 ......... –1.2 ......... –1.3 ......... –1.2 ......... –1.2 ......... –1.0 ......... –190.3 ......... 123.0 –0.1 157.3 –* 140.8 –* 142.6 –0.1 133.9 –0.1 120.8 –0.1 115.1 –0.1 107.8 –0.1 101.8 –0.1 99.9 –0.1 104.1 –0.1 –190.3 122.9 157.2 140.8 142.6 133.9 120.8 115.0 107.8 101.8 99.8 104.1 1,109.3 1,449.9 1,058.6 808.6 752.3 782.6 733.2 690.5 733.5 759.6 780.5 808.4 1,109.3 126.1 1,449.9 136.8 1,058.6 138.4 808.6 143.4 752.3 174.4 782.6 182.3 733.2 201.4 690.5 228.4 733.5 173.5 759.6 164.8 780.5 150.9 808.4 123.8 0.3 1,235.7 0.7 1,587.3 1.1 1,198.2 0.8 952.8 0.8 927.5 1.8 966.7 1.1 935.7 1.0 919.9 1.2 908.2 1.2 925.7 1.9 933.3 1.8 934.0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Debt Subject to Statutory Limitation, End of Year: Debt issued by Treasury ���������������������������������������������������� 14,737.2 16,323.3 17,520.0 18,471.5 19,398.0 20,363.4 21,298.5 22,217.8 23,125.3 24,050.9 24,984.2 25,918.2 Less: Treasury debt not subject to limitation (–) 3 ��������������� –9.4 –8.1 –6.7 –5.3 –4.3 –3.0 –2.3 –1.8 –1.1 –1.1 –1.1 –1.2 Agency debt subject to limitation ��������������������������������������� * * * * * * * * * * * * Adjustment for discount and premium 4 ����������������������������� 18.7 18.7 18.7 18.7 18.7 18.7 18.7 18.7 18.7 18.7 18.7 18.7 Total, debt subject to statutory limitation 5 ��������������������� 14,746.6 16,333.9 17,532.1 18,484.9 19,412.5 20,379.2 21,314.9 22,234.8 23,142.9 24,068.6 25,001.8 25,935.8 Debt Outstanding, End of Year: Gross Federal debt:6 Debt issued by Treasury ����������������������������������������������� 14,737.2 16,323.3 17,520.0 18,471.5 19,398.0 20,363.4 21,298.5 22,217.8 23,125.3 24,050.9 24,984.2 25,918.2 Debt issued by other agencies ������������������������������������� 27.0 27.6 27.9 28.5 28.7 28.2 27.8 27.4 26.9 25.6 23.7 21.9 Total, gross Federal debt ����������������������������������������� 14,764.2 16,350.9 17,547.9 18,500.0 19,426.7 20,391.7 21,326.3 22,245.2 23,152.1 24,076.6 25,008.0 25,940.1 Held by: Debt held by Government accounts ����������������������������� 4,636.0 4,772.8 4,911.2 5,054.7 5,229.1 5,411.4 5,612.8 5,841.3 6,014.7 6,179.5 6,330.4 6,454.2 Debt held by the public 7 ����������������������������������������������� 10,128.2 11,578.1 12,636.7 13,445.3 14,197.6 14,980.2 15,713.5 16,403.9 17,137.4 17,897.1 18,677.6 19,485.9 *$50 million or less. 1 A decrease in the Treasury operating cash balance (which is an asset) is a means of financing a deficit and therefore has a negative sign. An increase in checks outstanding (which is a liability) is also a means of financing a deficit and therefore also has a negative sign. 2 Includes checks outstanding, accrued interest payable on Treasury debt, uninvested deposit fund balances, allocations of special drawing rights, and other liability accounts; and, as an offset, cash and monetary assets (other than the Treasury operating cash balance), other asset accounts, and profit on sale of gold. 3 Consists primarily of debt issued by or held by the Federal Financing Bank. 4 Consists mainly 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. 5 The statutory debt limit is $16,394 billion, as increased after January 27, 2012. 6 Treasury securities held by the public and zero-coupon bonds held by Government accounts are almost all measured at sales price plus amortized discount or less amortized premium. Agency debt securities are almost all measured at face value. Treasury securities in the Government account series are otherwise measured at face value less unrealized discount (if any). 7 At the end of 2011, the Federal Reserve Banks held $1,664.7 billion of Federal securities and the rest of the public held $8,463.5 billion. Debt held by the Federal Reserve Banks is not estimated for future years. 6. FEDERAL BORROWING AND DEBT to GDP. The excess of future Social Security and Medicare benefits relative to their dedicated income is very different in concept and much larger in size than the amount of Treasury securities that these programs hold. For all these reasons, debt held by the public and debt net of financial assets are both better gauges of the effect of the budget on the credit markets than gross Federal debt. Government Deficits or Surpluses and the Change in Debt Table 6–2 summarizes Federal borrowing and debt from 2011 through 2022. 6 In 2011 the Government borrowed $1,109 billion, increasing the debt held by the public from $9,019 billion at the end of 2010 to $10,128 billion at the end of 2011. The debt held by Government accounts increased $126 billion, and gross Federal debt increased by $1,235 billion to $14,764 billion. Debt held by the public.—The Federal Government primarily finances deficits by borrowing from the public, and it primarily uses surpluses to repay debt held by the public. 7 Table 6–2 shows the relationship between the Federal deficit or surplus and the change in debt held by the public. The borrowing or debt repayment depends on the Federal Government’s expenditure programs and tax laws, on the economic conditions that influence tax receipts and outlays, and on debt management policy. The sensitivity of the budget to economic conditions is analyzed in Chapter 3, “Interactions Between the Economy and the Budget,’’ in this volume. The total or unified budget surplus consists of two parts: the on-budget surplus or deficit; and the surplus 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 (OldAge and Survivors Insurance and Disability Insurance) and the Postal Service fund. 8 The on-budget and off-budget surpluses or deficits are added together to determine the Government’s financing needs. Over the long run, it is a good approximation to say that “the deficit is financed by borrowing from the public’’ or “the surplus is used to repay debt held by the public.’’ However, the Government’s need to borrow in any given year has always depended on several other factors besides the unified budget surplus or deficit, such as the change in the Treasury operating cash balance. These other factors—“other transactions affecting borrowing from the public’’—can either increase or decrease the 6 For projections of the debt beyond 2022, see Chapter 5, “Long-Term Budget Outlook.” 7 Treasury debt held by the public is measured as the sales price plus the amortized discount (or less the amortized premium). At the time of sale, the book value equals the sales price. Subsequently, it equals the sales price plus the amount of the discount that has been amortized up to that time. In equivalent terms, the book value of the debt equals the principal amount due at maturity (par or face value) less the unamortized discount. (For a security sold at a premium, the definition is symmetrical.) For inflation-indexed notes and bonds, the book value includes a periodic adjustment for inflation. Agency debt is generally recorded at par. 8 For further explanation of the off-budget Federal entities, see Chapter 13, “Coverage of the Budget.’’ 71 Government’s need to borrow and can vary considerably in size from year to year. As a result of the Government’s recent extraordinary efforts to stabilize the Nation’s credit markets, these other factors have had significantly increased effects on borrowing from the public. The other transactions affecting borrowing from the public are presented in Table 6–2 (an increase in the need to borrow is represented by a positive sign, like the deficit). In 2011 the deficit was $1,300 billion while these other factors—primarily the change in the Treasury operating cash balance, partly offset by the net activity of credit financing accounts—reduced the need to borrow by $190 billion. As a result, the Government borrowed $1,109 billion from the public. The other factors are estimated to increase borrowing by $123 billion in 2012 and $157 billion in 2013. In 2014–2022, these other factors are expected to increase borrowing by annual amounts ranging from $100 billion to $143 billion. Prior to 2008, the effect of these other transactions had been much smaller. In the 20 years between 1988 and 2007, the cumulative deficit was $2,956 billion, the increase in debt held by the public was $3,145 billion, and other factors added a total of $190 billion of borrowing, 6 percent of total borrowing over this period. By contrast, the other factors resulted in more than 40 percent of the total increase in borrowing from the public for 2008, nearly 20 percent of the increase for 2009, and over 12 percent of the increase for 2010. In 2011, the other factors reduced borrowing by about 15 percent. Three specific factors presented in Table 6–2 are especially important. Change in Treasury operating cash balance.—In 20082011, changes in the cash balance were largely driven by fluctuations in the temporary Supplementary Financing Program (SFP). Under the SFP, Treasury issued shortterm debt and deposited the cash proceeds with the Federal Reserve for use by the Federal Reserve in its actions to stabilize the financial markets. The cash balance increased by a record $296 billion in 2008, primarily as a result of the creation of the SFP. In 2009, the cash balance decreased by $96 billion, due to a $135 billion reduction in the SFP balance offset by a $38 billion increase in the non-SFP cash balance. In 2010, the cash balance increased by $35 billion, to $310 billion, due nearly entirely to an increase in the SFP balance. In 2011, the cash balance decreased by $252 billion to $58 billion, due largely to a $200 billion decrease in the SFP balance. As the Federal Government neared the debt ceiling, the SFP balance was reduced down to zero. In the 10 years preceding 2008, changes in the cash balance had been much smaller, ranging from a decrease of $26 billion in 2003 to an increase of $23 billion in 2007. The operating cash balance is projected to increase by $2 billion, to $60 billion at the end of 2012. Changes in the operating cash balance, while occasionally large, are inherently limited over time. Decreases in cash—a means of financing the Government—are limited by the amount of past accumulations, which themselves required financing when they were built up. Increases are limited because it is generally more efficient to repay debt. 72 Net financing disbursements of the direct loan and guaranteed loan financing accounts.—Under the Federal Credit Reform Act of 1990 (FCRA), 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 are disbursed or the guaranteed loans are made. The cash flows to and from the public resulting from these loans and guarantees—the disbursement and repayment of loans, the default payments on loan guarantees, the collections of interest and fees, and so forth—are not costs (or offsets to costs) to the Government except for their subsidy costs (the present value of the estimated net losses), which are already included in budget outlays. Therefore, although they affect Treasury’s net borrowing requirements, they are non-budgetary in nature and are recorded as transactions of the non-budgetary financing account for each credit program. 9 The financing accounts also include several types of intragovernmental transactions. In particular, they receive payment from the credit program accounts for the costs of new direct loans and loan guarantees; they also receive payment for any upward reestimate of the costs of direct loans and loan guarantees outstanding. These collections are offset against the gross disbursements of the financing accounts in determining the accounts’ total net cash flows. The gross disbursements include outflows to the public—such as of loan funds or default payments—as well as the payment of any downward reestimate of costs to budgetary receipt accounts. The total net cash flows of the financing accounts, consisting of transactions with both the public and the budgetary accounts, are called “net financing disbursements.’’ They occur in the same way as the “outlays’’ of a budgetary account, even though they do not represent budgetary costs, and therefore affect the requirement for borrowing from the public in the same way as the deficit. The intragovernmental transactions of the financing accounts do not affect Federal borrowing from the public. Although the deficit changes because of the budget’s outlay to, or receipt from, a financing account, the net financing disbursement changes in an equal amount with the opposite sign, so the effects are cancelled out. On the other hand, financing account disbursements to the public increase the requirement for borrowing from the public in the same way as an increase in budget outlays that are disbursed to the public in cash. Likewise, financing account receipts from the public can be used to finance the payment of the Government’s obligations, and therefore they reduce the requirement for Federal borrowing from the public in the same way as an increase in budget receipts. In some years, large net upward or downward reestimates in the cost of outstanding direct and guaranteed loans may cause large swings in the net financing disbursements. In 2011, due primarily to the Troubled Asset Relief Program (TARP) and student loan programs, down9 The Federal Credit Reform Act of 1990 (sec. 505(b)) requires that the financing accounts be non-budgetary. As explained in Chapter 13, “Coverage of the Budget,’’ they are non-budgetary in concept because they do not measure cost. For additional discussion of credit programs, see Chapter 23, “Credit and Insurance,” and Chapter 12, “Budget Concepts.’’ ANALYTICAL PERSPECTIVES ward reestimates were significantly larger than upward reestimates, resulting in a net downward reestimate of $71 billion. In 2012, there is a net upward reestimate of $14 billion, due largely to upward reestimates in the TARP and Federal Housing Administration Mutual Mortgage Insurance programs. The impact of the net financing disbursements on borrowing increased significantly in 2009, largely as a result of Government actions to address the Nation’s financial and economic challenges including through TARP, purchases of mortgage-backed securities issued or guaranteed by the Government-Sponsored Enterprises (GSEs), and the Temporary Student Loan Purchase Program. Net financing disbursements increased from $33 billion in 2008 to a record $406 billion in 2009. In 2010, borrowing due to financing accounts fell by more than half, to $153 billion, due in part to large repayments of TARP assistance. In 2011, borrowing due to financing accounts fell to $58 billion, due largely to sales of GSE mortgage-backed securities. In 2012 credit financing accounts are projected to increase borrowing by $121 billion. After 2012, the credit financing accounts are expected to increase borrowing by amounts ranging from $101 billion to $159 billion over the next 10 years. Net purchases of non-Federal securities by the National Railroad Retirement Investment Trust (NRRIT).—This trust fund was established by the Railroad Retirement and Survivors’ Improvement Act of 2001. In 2003, most of the assets in the Railroad Retirement Board trust funds were transferred to the NRRIT trust fund, which invests its assets primarily in private stocks and bonds. The Act required special treatment of the purchase or sale of nonFederal assets by this trust fund, treating such purchases as a means of financing rather than outlays. Therefore, the increased need to borrow from the public to finance NRRIT’s purchases of non-Federal assets is part of the “other transactions affecting borrowing from the public’’ rather than included as an increase in the deficit. While net purchases and redemptions affect borrowing from the public, unrealized gains and losses on NRRIT’s portfolio are included in both the other factors and, with the opposite sign, in NRRIT’s net outlays in the deficit, for no net impact on borrowing from the public. The increased borrowing associated with the initial transfer expanded publicly held debt by $20 billion in 2003. Net transactions in subsequent years have been much smaller. In 2011, net reductions, including redemptions and losses, were $1 billion. Net redemptions of $0.3 billion are projected for 2012 and net redemptions of roughly $1 billion annually are projected for subsequent years. 10 Debt held by Government accounts.—The amount of Federal debt issued to Government accounts depends largely on the surpluses of the trust funds, both on-budget and off-budget, which owned 92 percent of the total Federal debt held by Government accounts at the end of 2011. In 2011, the total trust fund surplus was $97 billion, and trust funds invested $99 billion in Federal securities. Investment may differ somewhat from the surplus due to 10 The budget treatment of this fund is further discussed in Chapter 12, “Budget Concepts.’’ 73 6. FEDERAL BORROWING AND DEBT changes in the amount of cash assets not currently invested. The remainder of debt issued to Government accounts is owned by a number of special funds and revolving funds. The debt held in major accounts and the annual investments are shown in Table 6–5. Debt Held by the Public Net of Financial Assets and Liabilities While debt held by the public is a key measure for examining the role and impact of the Federal Government in the U.S. and international credit markets and for other purposes, it provides incomplete information on the Government’s financial condition. The U.S. Government holds significant financial assets, which must be offset against debt held by the public and other financial liabilities to achieve a more complete understanding of the Government’s financial condition. The acquisition of those financial assets represents a transaction with the credit markets, broadening those markets in a way that is analogous to the demand on credit markets that borrowing entails. For this reason, debt held by the public is also an incomplete measure of the impact of the Federal Government in the U.S. and international credit markets. One transaction that can increase both borrowing and assets is an increase to the Treasury operating cash balance. When the Government borrows to increase the Treasury operating cash balance, that cash balance also represents an asset that is available to the Federal Government. Looking at both sides of this transaction— the borrowing to obtain the cash and the asset of the cash holdings—provides much more complete information about the Government’s financial condition than looking at only the borrowing from the public. Another example of a transaction that simultaneously increases borrowing from the public and Federal assets is Government borrowing to issue direct loans to the public. When the direct loan is made, the Government is also acquiring an asset in the form of future payments of principal and interest, net of the Government’s expected losses on the loans. Similarly, when the National Railroad Retirement Investment Trust increases its holdings of non-Federal securities, the borrowing to purchase those securities is offset by the value of the asset holdings. The acquisition or disposition of Federal financial assets very largely explains the difference between the deficit for a particular year and that year’s increase in debt held by the public. Debt net of financial assets is a measure that is conceptually closer to the measurement of Federal deficits or surpluses; cumulative deficits and surpluses over time more closely equal the debt net of financial assets than they do the debt held by the public. The magnitude and the significance of the Government’s financial assets increased greatly from the later part of 2008 through 2010, as a result of Government actions, such as implementation of TARP, to address the challenges facing the Nation’s financial markets and economy. 11 In 2011, as some of these activities continued to wind down, the Government’s net financial assets decreased from $1,125 billion to $958 billion. Table 6–3 presents debt held by the public net of the Government’s financial assets and liabilities, or “net debt.” Treasury debt is presented in the Budget at book value, with no adjustments for the change in economic 11 For more information on these activities, see Chapter 4, “Financial Stabilization Efforts and Their Budgetary Effects.” Table 6–3. DEBT HELD BY THE PUBLIC NET OF FINANCIAL ASSETS AND LIABILITIES (Dollar amounts in billions) Actual 2011 Estimate 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Debt Held by the Public: Debt held by the public ������������������������������������������������������ 10,128.2 11,578.1 12,636.7 13,445.3 14,197.6 14,980.2 15,713.5 16,403.9 17,137.4 17,897.1 18,677.6 19,485.9 As a percent of GDP ����������������������������������������������������� 67.7% 74.2% 77.4% 78.4% 78.1% 77.8% 77.1% 76.5% 76.4% 76.5% 76.5% 76.5% 58.1 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 Direct loan accounts ����������������������������������������������������� 717.5 856.0 1,018.1 1,174.7 1,323.3 1,458.8 1,584.5 1,701.3 1,810.9 1,918.9 2,025.4 2,136.2 Guaranteed loan accounts ������������������������������������������� –22.1 –12.5 –1.0 –0.3 –0.6 0.7 0.5 1.8 2.6 1.0 –4.1 –9.5 TARP equity purchase accounts ����������������������������������� 74.9 48.2 33.2 18.2 13.6 12.5 8.9 7.1 5.8 2.4 2.1 1.9 Financial Assets Net of Liabilities: Treasury operating cash balance ��������������������������������������� Credit financing account balances: Subtotal, credit financing account balances ������������ 770.3 891.7 1,050.3 1,192.5 1,336.3 1,472.0 1,593.9 1,710.2 1,819.3 1,922.3 2,023.5 2,128.6 Government-sponsored enterprise preferred stock ����������� 133.0 163.6 173.4 176.5 176.5 176.5 176.5 176.5 176.5 176.5 176.5 176.5 Non-Federal securities held by NRRIT ������������������������������ 21.4 21.1 19.8 18.4 17.2 15.5 14.4 13.2 11.9 10.7 9.5 8.5 Other assets net of liabilities ���������������������������������������������� –25.1 –25.1 –25.1 –25.1 –25.1 –25.1 –25.1 –25.1 –25.1 –25.1 –25.1 –25.1 Total, financial assets net of liabilities ��������������������������� 957.8 1,111.4 1,278.4 1,422.4 1,565.1 1,699.0 1,819.8 1,934.9 2,042.7 2,144.5 2,244.4 2,348.6 Debt Held by the Public Net of Financial Assets and Liabilities: Debt held by the public net of financial assets ������������������� As a percent of GDP ����������������������������������������������������� 9,170.4 10,466.7 11,358.3 12,022.9 12,632.5 13,281.2 13,893.6 14,469.0 15,094.7 15,752.5 16,433.1 17,137.3 61.3% 67.1% 69.5% 70.1% 69.5% 69.0% 68.2% 67.5% 67.3% 67.3% 67.3% 67.2% 74 ANALYTICAL PERSPECTIVES value that results from fluctuations in interest rates. The balances of credit financing accounts are based on projections of future cash flows. For direct loan financing accounts, the balance generally represents the net present value of anticipated future inflows such as principal and interest payments from borrowers. For guaranteed loan financing accounts, the balance generally represents the net present value of anticipated future outflows, such as default claim payments net of recoveries. NRRIT’s holdings of non-Federal securities are marked to market on a monthly basis. GSE preferred stock is measured at market value. At the end of 2011, debt held by the public was $10,128 billion, or 67.7 percent of GDP. The Government held $958 billion in net financial assets, including a cash balance of $58 billion, net credit financing account balances of $770 billion, 12 and other assets and liabilities that aggregated to a net asset of $129 billion. Therefore, debt net of financial assets was $9,170 billion, or 61.3 percent of GDP. As shown in Table 6–3, the value of the Government’s net financial assets is projected to increase to $1,111 billion in 2012, due largely to increases in the net balances of credit financing accounts. While debt held by the public is expected to increase from 67.7 percent to 74.2 percent of GDP during 2012, net debt is expected to increase from 61.3 percent to 67.1 percent of GDP. Debt securities and other financial assets and liabilities do not encompass all the assets and liabilities of the Federal Government. For example, accounts payable occur in the normal course of buying goods and services; Social Security benefits are due and payable as of the end of the month but, according to statute, are paid during the next month; and Federal employee salaries are paid after they have been earned. Like debt securities sold in the credit market, these liabilities have their own distinctive effects on the economy. The Federal Government also has significant holdings of non-financial assets, such as land, mineral deposits, buildings, and equipment. A unique and important asset is the Government’s sovereign power to tax. Federal assets and liabilities are analyzed within the broader conceptual framework of Federal resources and responsibilities in Chapter 31, “Budget and Financial Reporting,’’ in this volume. The different types of assets and liabilities are reported annually in the financial statements of Federal agencies and in the Financial Report of the United States Government, prepared by the Treasury Department in coordination with the Office of Management and Budget (OMB). Treasury Debt Nearly all Federal debt is issued by the Department of the Treasury. Treasury meets most of the Federal 12 Consistent with the presentation in the Monthly Treasury Statement of Receipts and Outlays of the United States Government (Monthly Treasury Statement), Table 6-3 presents the net financial assets associated with direct and guaranteed loans in the financing accounts created under the Federal Credit Reform Act of 1990. Therefore, the figures differ by relatively small amounts from the figures in Chapter 31, “Budget and Financial Reporting,” which reflect all loans made or guaranteed by the Federal Government, including loans originated prior to implementation of the FCRA. Government’s financing needs by issuing marketable securities to the public. These financing needs include both the change in debt held by the public and the refinancing—or rollover—of any outstanding debt that matures during the year. Treasury marketable debt is sold at public auctions on a regular schedule and can be bought and sold on the secondary market. Treasury also sells to the public a relatively small amount of nonmarketable securities, such as savings bonds and State and Local Government Series securities (SLUGs). 13 Treasury nonmarketable debt cannot be bought or sold on the secondary market. Treasury issues marketable securities in a wide range of maturities, and issues both nominal (non-inflation-indexed) and inflation-indexed securities. Treasury’s marketable securities include: Treasury Bills—Treasury bills have maturities of one year or less from their issue date. In addition to the regular auction calendar of bill issuance, Treasury issues cash management bills on an as-needed basis for various reasons such as to offset the seasonal patterns of the Government’s receipts and outlays. Treasury Notes—Treasury notes have maturities of more than one year and up to 10 years. Treasury Bonds—Treasury bonds have maturities of more than 10 years. The longest-maturity securities issued by Treasury are 30-year bonds. Treasury Inflation-Protected Securities (TIPS)— Treasury inflation-protected—or inflation-indexed—securities are coupon issues for which the par value of the security rises with inflation. The principal value is adjusted every six months to reflect inflation as measured by changes in the CPI-U (with a two-month lag). Although the principal value may be adjusted downward if inflation is negative, the principal value will not be reduced below the original par value. Historically, the average maturity of outstanding debt issued by Treasury has been about five years. The average maturity of outstanding debt was 63 months at the end of 2011. In addition to quarterly announcements about the overall auction calendar, Treasury publicly announces in advance the auction of each security. Individuals can participate directly in Treasury auctions or can purchase securities through brokers, dealers, and other financial institutions. Treasury accepts two types of auction bids—competitive and noncompetitive. In a competitive bid, the bidder specifies the yield. A significant portion of competitive bids are submitted by primary dealers, which are banks and securities brokerages that have been designated to trade in Treasury securities with the Federal Reserve System. In a noncompetitive bid, the bidder agrees to accept the yield determined by the auction. At the close of the auction, Treasury accepts all eligible noncompetitive bids and then accepts competitive bids in ascending order beginning with the lowest yield bid until 13 Under the State and Local Government Series program, the Treasury offers special low-yield securities to State and local governments and other entities for temporary investment of proceeds of tax-exempt bonds. 75 6. FEDERAL BORROWING AND DEBT the offering amount is reached. All winning bidders receive the highest accepted yield bid. Treasury marketable securities are highly liquid and actively traded on the secondary market. The liquidity of Treasury securities is reflected in the ratio of bids received to bids accepted in Treasury auctions; the demand for the securities is substantially greater than the level of issuance. Because they are backed by the full faith and credit of the United States Government, Treasury marketable securities are considered to be “risk-free.” Therefore, the Treasury yield curve is commonly used as a benchmark for a wide variety of purposes in the financial markets. Whereas Treasury issuance of marketable debt is based on the Government’s financing needs, Treasury’s issuance of nonmarketable debt is based on the public’s demand for the specific types of investments. Increases in outstanding balances of nonmarketable debt reduce the need for marketable borrowing. In 2011, there was net disinvestment in nonmarketables, necessitating additional marketable borrowing to finance the redemption of nonmarketable debt. 14 Agency Debt A few Federal agencies, shown in Table 6–4, sell or have sold debt securities to the public and, at times, to other Government accounts. Currently, new debt is issued only by the Tennessee Valley Authority (TVA) and the Federal Housing Administration (FHA); the remaining agencies are repaying existing borrowing. Agency debt increased from $26.1 billion at the end of 2010 to $27.0 billion at the end of 2011, due to increases in debt issued by TVA, 14 Detail on the marketable and nonmarketable securities issued by Treasury is found in the Monthly Statement of the Public Debt, published on a monthly basis by the Department of Treasury. slightly offset by decreases in debt issued by other agencies. Agency debt is less than one-third of one percent of Federal debt held by the public. As a result of new borrowing by TVA, agency debt is estimated to increase by $0.6 billion in 2012 and by $0.3 billion in 2013. The predominant agency borrower is the TVA, which had borrowed $26.7 billion from the public as of the end of 2011, or 99 percent of the total debt of all agencies. TVA sells debt primarily to finance capital expenditures. The TVA has traditionally financed its capital construction by selling bonds and notes to the public. Since 2000, it has also employed two types of alternative financing methods, lease/leaseback obligations and prepayment obligations. Under the lease/leaseback obligations method, TVA signs contracts to lease some facilities and equipment to private investors and simultaneously leases them back. It receives a lump sum for leasing out its assets, and then leases them back at fixed annual payments for a set number of years. TVA retains substantially all of the economic benefits and risks related to ownership of the assets. 15 Under the prepayment obligations method, TVA’s power distributors may prepay a portion of the price of the power they plan to purchase in the future. In return, they obtain a discount on a specific quantity of the future power they buy from TVA. The quantity varies, depending on TVA’s estimated cost of borrowing. The Office of Management and Budget determined that each of these alternative financing methods is a means of financing the acquisition of assets owned and used by the Government, or of refinancing debt previously incurred 15 This arrangement is at least as governmental as a “lease-purchase without substantial private risk.’’ For further detail on the current budgetary treatment of lease-purchase without substantial private risk, see OMB Circular No. A–11, Appendix B. Table 6–4. AGENCY DEBT (In millions of dollars) 2011 Actual Borrowing/ Repayment(–) 2012 Estimate Debt, End-ofYear Borrowing/ Repayment(–) 2013 Estimate Debt, End-ofYear Borrowing/ Repayment(–) Debt, End-ofYear Borrowing from the public: Housing and Urban Development: Federal Housing Administration ������������������������������������������������������� Architect of the Capitol ������������������������������������������������������������������������ National Archives ��������������������������������������������������������������������������������� ......... –5.4 –14.0 28.8 133.3 165.7 * –5.3 –15.2 29.0 128.0 150.5 ......... –7.0 –16.5 29.0 121.0 134.0 Tennessee Valley Authority: Bonds and notes ������������������������������������������������������������������������������� Lease/leaseback obligations ������������������������������������������������������������� Prepayment obligations �������������������������������������������������������������������� 1,031.7 –70.4 –105.3 24,654.0 1,282.0 716.8 –2,651.3 3,421.9 –105.3 22,002.6 4,703.9 611.5 513.4 –78.9 –101.2 22,516.0 4,625.0 510.3 Total, borrowing from the public ��������������������������������������������� 836.7 26,980.7 644.9 27,625.5 309.8 27,935.4 Borrowing from other funds: Tennessee Valley Authority1 ������������������������������������������������������������������ 1.6 5.9 ......... 5.9 ......... 5.9 Total, borrowing from other funds ������������������������������������������ 1.6 5.9 ......... 5.9 ......... 5.9 Total, agency borrowing ������������������������������������������������������ 838.4 26,986.6 644.9 27,631.5 309.8 27,941.3 24,659.9 –2,651.3 22,008.6 513.4 22,522.0 Memorandum: Tennessee Valley Authority bonds and notes, total ������������������������������ 1,033.3 * $500,000 or less. 1 Represents open market purchases by the National Railroad Retirement Investment Trust. 76 ANALYTICAL PERSPECTIVES Table 6–5. DEBT HELD BY GOVERNMENT ACCOUNTS 1 (In millions of dollars) Investment or Disinvestment (–) Description 2011 Actual 2012 Estimate 2013 Estimate Holdings, End of 2013 Estimate Investment in Treasury debt: Defense: Host nation support fund for relocation ��������������������������������������������������������������������������������������������������������� –3 266 ......... 1,106 Energy: Nuclear waste disposal fund1 ������������������������������������������������������������������������������������������������������������������������������������ Uranium enrichment decontamination fund �������������������������������������������������������������������������������������������������������������� 2,095 –389 1,755 –476 1,258 10 29,180 3,906 Health and Human Services: Federal hospital insurance trust fund ������������������������������������������������������������������������������������������������������������������������ Federal supplementary medical insurance trust fund ����������������������������������������������������������������������������������������������� Vaccine injury compensation fund ���������������������������������������������������������������������������������������������������������������������������� Child enrollment contingency fund ��������������������������������������������������������������������������������������������������������������������������� –33,535 –536 169 –25 –19,619 –3,946 344 –92 –24,346 1,135 357 –187 201,974 67,635 3,809 1,814 Homeland Security: Aquatic resources trust fund ������������������������������������������������������������������������������������������������������������������������������������� Oil spill liability trust fund ������������������������������������������������������������������������������������������������������������������������������������������ –54 724 –88 358 –49 339 1,745 2,922 Housing and Urban Development: Federal Housing Administration mutual mortgage fund �������������������������������������������������������������������������������������������� Guarantees of mortgage-backed securities �������������������������������������������������������������������������������������������������������������� –37 –1,428 –4,157 217 7,529 –197 7,529 2,154 Interior: Abandoned mine reclamation fund ��������������������������������������������������������������������������������������������������������������������������� Bureau of Land Management permanent operating funds ��������������������������������������������������������������������������������������� Environmental improvement and restoration fund ���������������������������������������������������������������������������������������������������� Justice: Assets forfeiture fund ��������������������������������������������������������������������������������������������������������������������������������������� 84 –255 30 220 29 –209 –19 1,299 –43 –172 1 –1,414 2,694 785 1,212 2,290 Labor: Unemployment trust fund ����������������������������������������������������������������������������������������������������������������������������������������� Pension Benefit Guaranty Corporation1 �������������������������������������������������������������������������������������������������������������������� State: Foreign service retirement and disability trust fund ������������������������������������������������������������������������������������������� –2,672 1,137 534 379 244 534 170 1,552 478 16,579 17,287 17,409 Transportation: Airport and airway trust fund ������������������������������������������������������������������������������������������������������������������������������������ Transportation trust fund ������������������������������������������������������������������������������������������������������������������������������������������� Aviation insurance revolving fund ����������������������������������������������������������������������������������������������������������������������������� 1,596 –8,153 179 –230 –7,633 224 –993 16,803 192 7,418 25,472 2,047 Treasury: Exchange stabilization fund �������������������������������������������������������������������������������������������������������������������������������������� Treasury forfeiture fund ��������������������������������������������������������������������������������������������������������������������������������������������� Comptroller of the Currency assessment fund ��������������������������������������������������������������������������������������������������������� 2,285 202 146 1,583 –478 –62 ......... –375 –115 24,304 732 994 Veterans Affairs: National service life insurance trust fund ������������������������������������������������������������������������������������������������������������������ Veterans special life insurance fund ������������������������������������������������������������������������������������������������������������������������� Corps of Engineers: Harbor maintenance trust fund ���������������������������������������������������������������������������������������������������� –620 –15 781 –688 –49 568 –695 –53 548 6,158 1,879 7,319 Other Defense-Civil: Military retirement trust fund ������������������������������������������������������������������������������������������������������������������������������������� Medicare-eligible retiree health care fund ����������������������������������������������������������������������������������������������������������������� Education benefits fund �������������������������������������������������������������������������������������������������������������������������������������������� 44,034 19,452 –18 97,465 12,486 –149 57,315 7,336 –128 480,820 181,563 1,731 Environmental Protection Agency: Leaking underground storage tank trust fund ����������������������������������������������������������������������������������������������������������� Hazardous substance trust fund ������������������������������������������������������������������������������������������������������������������������������� International Assistance Programs: Overseas Private Investment Corporation ���������������������������������������������������������� 22 –141 139 318 177 96 26 103 83 3,794 3,789 5,290 Office of Personnel Management: Civil service retirement and disability trust fund ������������������������������������������������������������������������������������������������������� Postal Service retiree health benefits fund ��������������������������������������������������������������������������������������������������������������� Employees life insurance fund ���������������������������������������������������������������������������������������������������������������������������������� Employees health benefits fund �������������������������������������������������������������������������������������������������������������������������������� 23,448 1,592 2,073 2,949 8,666 3,118 2,016 1,238 9,896 3,076 2,068 49 822,375 49,902 43,762 20,481 Social Security Administration: Federal old-age and survivors insurance trust fund2 ������������������������������������������������������������������������������������������������ 93,421 90,923 72,652 2,656,106 77 6. FEDERAL BORROWING AND DEBT Table 6–5. DEBT HELD BY GOVERNMENT ACCOUNTS 1—Continued (In millions of dollars) Investment or Disinvestment (–) Description 2011 Actual 2012 Estimate Holdings, End of 2013 Estimate 2013 Estimate Federal disability insurance trust fund2 ��������������������������������������������������������������������������������������������������������������������� District of Columbia: Federal pension fund ������������������������������������������������������������������������������������������������������������������� –25,256 –7 –29,374 21 –33,487 9 99,104 3,689 Farm Credit System Insurance Corporation: Farm Credit System Insurance fund ������������������������������������������������������������������������������������������������������������������������� 126 211 147 3,570 Federal Communications Commission: Universal service fund ���������������������������������������������������������������������������������������������������������������������������������������������� –266 92 43 5,950 Federal Deposit Insurance Corporation: Deposit insurance fund ��������������������������������������������������������������������������������������������������������������������������������������������� Senior unsecured debt guarantee fund �������������������������������������������������������������������������������������������������������������������� FSLIC resolution fund ����������������������������������������������������������������������������������������������������������������������������������������������� –2,516 1,143 –13 –19,008 –1,004 53 17,058 –1 73 32,976 6,296 3,500 National Credit Union Administration: Share insurance fund ����������������������������������������������������������������������������������������������������������������������������������������������� Central liquidity facility ���������������������������������������������������������������������������������������������������������������������������������������������� Temporary corporate credit union stabilization fund ������������������������������������������������������������������������������������������������� Postal Service funds2 ���������������������������������������������������������������������������������������������������������������������������������������������������� Railroad Retirement Board trust funds ������������������������������������������������������������������������������������������������������������������������� Securities Investor Protection Corporation3 ������������������������������������������������������������������������������������������������������������������ United States Enrichment Corporation fund ����������������������������������������������������������������������������������������������������������������� Other Federal funds ������������������������������������������������������������������������������������������������������������������������������������������������������ Other trust funds ����������������������������������������������������������������������������������������������������������������������������������������������������������� Unrealized discount1 ����������������������������������������������������������������������������������������������������������������������������������������������������� 1,454 125 1,822 424 –106 238 26 –626 2 90 –12 105 –635 * –265 59 5 26 105 ......... 139 110 55 ......... –133 141 4 –70 148 ......... 10,860 2,311 1,606 1,815 1,745 1,620 1,602 4,279 3,367 –1,015 Total, investment in Treasury debt1 ����������������������������������������������������������������������������������������������������������������� 126,089 136,786 138,445 4,911,241 6 Investment in agency debt: Railroad Retirement Board: National Railroad Retirement Investment Trust �������������������������������������������������������������������������������������������������������� 2 ......... ......... Total, investment in agency debt1 ������������������������������������������������������������������������������������������������������������������� 2 ......... ......... 6 Total, investment in Federal debt1 �������������������������������������������������������������������������������������������������������������� 126,090 136,786 138,445 4,911,247 Memorandum: Investment by Federal funds (on-budget) ��������������������������������������������������������������������������������������������������������������������� Investment by Federal funds (off-budget) ��������������������������������������������������������������������������������������������������������������������� Investment by trust funds (on-budget) �������������������������������������������������������������������������������������������������������������������������� Investment by trust funds (off-budget) �������������������������������������������������������������������������������������������������������������������������� Unrealized discount1 ����������������������������������������������������������������������������������������������������������������������������������������������������� 26,787 424 30,626 68,164 90 –4,467 * 79,704 61,548 ......... 36,357 ......... 62,923 39,165 ......... 410,948 1,815 1,744,289 2,755,210 –1,015 * $500 thousand or less. ¹ Debt held by Government accounts is measured at face value except for the Treasury zero-coupon bonds held by the Nuclear waste disposal fund and the Pension Benefit Guaranty Corporation (PBGC), which are recorded at market or redemption price; and the unrealized discount on Government account series, which is not distributed by account. Changes are not estimated in the unrealized discount. If recorded at face value, at the end of 2011 the debt figures would be $22.4 billion higher for the Nuclear waste disposal fund and $0.2 billion higher for PBGC than recorded in this table. 2 Off-budget Federal entity. 3 Amounts on calendar-year basis. to finance such assets. They are equivalent in concept to other forms of borrowing from the public, although under different terms and conditions. The budget therefore records the upfront cash proceeds from these methods as borrowing from the public, not offsetting collections. 16 16 This budgetary treatment differs from the treatment in the Monthly Treasury Statement Table 6 Schedule C, and the Combined Statement of Receipts, Outlays, and Balances of the United States Government Schedule 3, both published by the Department of the Treasury. These two schedules, which present debt issued by agencies other than Treasury, exclude the TVA alternative financing arrangements. This difference in treatment is one factor causing minor differences between debt figures reported in the Budget and debt figures reported by Treasury. The budget presentation is consistent with the reporting of these obligations as liabilities on TVA’s balance sheet under generally accepted accounting principles. Table 6–4 presents these alternative financing methods separately from TVA bonds and notes to distinguish between the types of borrowing. Obligations for lease/leasebacks were $1.3 billion at the end of 2011 and are estimated to increase to $4.7 billion at the end of 2012. Obligations for prepayments were $0.7 billion at the end of 2011 and The other factors are adjustments for the timing of the reporting of Federal debt held by the National Railroad Retirement Investment Trust and treatment of the Federal debt held by the Securities Investor Protection Corporation. 78 are estimated to be $0.6 billion at the end of 2012. After 2012, obligations for these two types of alternative financing are estimated to gradually decline as TVA fulfills the terms of the contracts. Although the FHA generally makes direct disbursements to the public for default claims on FHA-insured mortgages, it may also pay claims by issuing debentures. Issuing debentures to pay the Government’s bills is equivalent to selling securities to the public and then paying the bills by disbursing the cash borrowed, so the transaction is recorded as being simultaneously an outlay and borrowing. The debentures are therefore classified as agency debt. A number of years ago, the Federal Government guaranteed the debt used to finance the construction of buildings for the National Archives and the Architect of the Capitol, and subsequently exercised full control over the design, construction, and operation of the buildings. These arrangements are equivalent to direct Federal construction financed by Federal borrowing. The construction expenditures and interest were therefore classified as Federal outlays, and the borrowing was classified as Federal agency borrowing from the public. A number of Federal agencies borrow from the Bureau of the Public Debt (BPD) or the Federal Financing Bank (FFB), both within the Department of the Treasury. Agency borrowing from the FFB or the BPD is not included in gross Federal debt. It would be double counting to add together (a) the agency borrowing from the BPD or FFB and (b) the Treasury borrowing from the public that is needed to provide the BPD or FFB with the funds to lend to the agencies. Debt Held by Government Accounts Trust funds, and some special funds and public enterprise revolving funds, accumulate cash in excess of current needs in order to meet future obligations. These cash surpluses are generally invested in Treasury debt. New investment by trust funds and other Government accounts was $126 billion in 2011. Investment by Government accounts is estimated to be $137 billion in 2012 and $138 billion in 2013, as shown in Table 6–5. The holdings of Federal securities by Government accounts are estimated to increase to $4,911 billion by the end of 2013, or 28 percent of the gross Federal debt. The percentage is estimated to decrease gradually over the next 10 years. The Government account holdings of Federal securities are concentrated among a few funds: the Social Security Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds; the Medicare Hospital Insurance and Supplementary Medical Insurance trust funds; and four Federal employee retirement funds. These Federal employee retirement funds include the military retirement trust fund, the special fund for uniformed services Medicare-eligible retiree health care, the Civil Service Retirement and Disability Fund (CSRDF), and a separate special fund for Postal Service retiree health benefits. At the end of 2013, these Social Security, Medicare, and Federal employee retirement funds are estimated to own ANALYTICAL PERSPECTIVES 93 percent of the total debt held by Government accounts. During 2011–2013, the Social Security OASI fund has a large surplus and is estimated to invest a total of $257 billion, 64 percent of total net investment by Government accounts. Over this period, the military retirement trust fund is projected to invest $199 billion, 50 percent of the total. Some Government accounts reduce their investments in Federal securities during 2011–2013. During these years, the Social Security DI fund disinvests $88 billion, or 22 percent of the total net investment and the Medicare Hospital Insurance trust fund disinvests $78 billion, or 19 percent of the total. Technical note on measurement.—The Treasury securities held by Government accounts consist almost entirely of the Government account series. Most were issued at par value (face value), and the securities issued at a discount or premium were traditionally recorded at par in the OMB and Treasury reports on Federal debt. However, there are two kinds of exceptions. First, Treasury issues zero-coupon bonds to a very few Government accounts. Because the purchase price is a small fraction of par value and the amounts are large, the holdings are recorded in Table 6–5 at par value less unamortized discount. The only two Government accounts that held zero-coupon bonds during the period of this table are the Nuclear Waste Disposal Fund in the Department of Energy and the Pension Benefit Guaranty Corporation (PBGC). The total unamortized discount on zero-coupon bonds was $22.7 billion at the end of 2011. Second, Treasury subtracts the unrealized discount on other Government account series securities in calculating “net Federal securities held as investments of Government accounts.’’ Unlike the discount recorded for zero-coupon bonds and debt held by the public, the unrealized discount is the discount at the time of issue and is not amortized over the term of the security. In Table 6–5 it is shown as a separate item at the end of the table and not distributed by account. The amount was $1.0 billion at the end of 2011. Limitations on Federal Debt Definition of debt subject to limit.—Statutory limitations have usually been placed on Federal debt. Until World War I, the Congress ordinarily authorized a specific amount of debt for each separate issue. Beginning with the Second Liberty Bond Act of 1917, however, the nature of the limitation was modified in several steps until it developed into a ceiling on the total amount of most Federal debt outstanding. This last type of limitation has been in effect since 1941. The limit currently applies to most debt issued by the Treasury since September 1917, whether held by the public or by Government accounts; and other debt issued by Federal agencies that, according to explicit statute, is guaranteed as to principal and interest by the United States Government. The third part of Table 6–2 compares total Treasury debt with the amount of Federal debt that is subject to the limit. Nearly all Treasury debt is subject to the debt limit. A large portion of the Treasury debt not subject to the general statutory limit was issued by the Federal 6. FEDERAL BORROWING AND DEBT Financing Bank. The FFB is authorized to have outstanding up to $15 billion of publicly issued debt. It issued $14 billion of securities to the Civil Service Retirement and Disability Fund on November 15, 2004, in exchange for an equal amount of regular Treasury securities. The FFB securities have the same interest rates and maturities as the regular Treasury securities for which they were exchanged. The securities mature on dates from June 30, 2009, through June 30, 2019. At the end of 2011, $8 billion of these securities remained outstanding. The Housing and Economic Recovery Act of 2008 created a new type of debt not subject to limit. This debt, termed “Hope Bonds,” is issued by Treasury to the Federal Financing Bank for the HOPE for homeowners program. The outstanding balance of Hope Bonds was $0.5 billion at the end of 2011 and is projected to increase by small amounts annually in 2012 through 2022. The other Treasury debt not subject to the general limit consists almost entirely of silver certificates and other currencies no longer being issued. It was $487 million at the end of 2011 and is projected to gradually decline over time. The sole agency debt currently subject to the general limit, $10 million at the end of 2011, is certain debentures issued by the Federal Housing Administration. 17 Some of the other agency debt, however, is subject to its own statutory limit. For example, the Tennessee Valley Authority is limited to $30 billion of bonds and notes outstanding. The comparison between Treasury debt and debt subject to limit also includes an adjustment for measurement differences in the treatment of discounts and premiums. As explained earlier in this chapter, debt securities may be sold at a discount or premium, and the measurement of debt may take this into account rather than recording the face value of the securities. However, the measurement differs between gross Federal debt (and its components) and the statutory definition of debt subject to limit. An adjustment is needed to derive debt subject to limit (as defined by law) from Treasury debt. The amount of the adjustment was $18.7 billion at the end of 2011 compared with the total unamortized discount (less premium) of $53.1 billion on all Treasury securities. Changes in the debt limit.—The statutory debt limit has been changed many times. Since 1960, Congress has passed 79 separate acts to raise the limit, extend the duration of a temporary increase, or revise the definition. 18 The Budget Control Act of 2011, enacted on August 2, 2011, created a new framework for increasing the debt limit, based on the President’s submission of a series of written certifications that such increases are necessary because the debt subject to limit is within $100 billion of the current limit. The certification triggering the first two increases was submitted immediately following the Act’s enactment. Consequently, the debt limit was first in17 At the end of 2011, there were also $18 million of FHA debentures not subject to limit. 18 The Acts and the statutory limits since 1940 are listed in Historical Tables, Budget of the United States Government, Fiscal Year 2013, Table 7.3. 79 creased by $400 billion, from $14,294 billion to $14,694 billion, effective as of August 2, 2011, and then by an additional $500 billion, from $14,694 billion to $15,194 billion, effective after the close of business on September 21. The Act also provided for a third increase of $1,200 billion, to $16,394 billion. 19 Under the Act, the third part of the increase was scheduled to occur 15 calendar days after the President submitted certification to Congress that the debt subject to limit was within $100 billion of the $15,194 billion limit (unless Congress enacted a joint resolution of disapproval). The certification was submitted on January 12, 2012, and the increase took effect after the close of business on January 27. Between July 2008 and February 2010, the debt limit was increased five times. On February 12, 2010, the debt limit was increased by $1,900 billion to $14,294 billion and on December 28, 2009, by $290 billion to $12,394 billion. The December 2009 increase, enacted shortly before the anticipated reaching of the previous limit, had been intended to cover only a short period. In the three instances between July 2008 and February 2009, the increase was included in a larger piece of legislation aimed at stabilizing the financial markets and restoring economic growth and provided room under the statutory debt ceiling for the activities authorized by each piece of legislation. On July 30, 2008, the debt limit was increased by $800 billion, to $10,615 billion, as part of the Housing and Economic Recovery Act of 2008. On October 3, 2008, the Emergency Economic Stabilization Act of 2008 increased the debt limit by $700 billion, to $11,315 billion. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 increased the statutory limit by $789 billion, to $12,104 billion. At the dates of enactment, the debt subject to limit was at least a few hundred billion dollars below the previous ceiling. At many times in the past several decades, including 2011, the Government has reached the statutory debt limit before an increase has been enacted. When this has occurred, it has been necessary for the Treasury Department to take administrative actions to meet the Government’s obligation to pay its bills and invest its trust funds while remaining below the statutory limit. One such measure is the partial or full disinvestment of the Government Securities Investment Fund (G-fund). This fund is one component of the Thrift Savings Plan (TSP), a defined contribution pension plan for Federal employees. The Secretary has statutory authority to suspend investment of the G-fund in Treasury securities as needed to prevent the debt from exceeding the debt limit. Treasury determines each day the amount of investments that would allow the fund to be invested as fully as possible without exceeding the debt limit. At the end of 2011, the TSP G-fund had an outstanding balance of $139 billion. The Treasury Secretary is also authorized to declare 19 Under the Act, if the constitutional amendment voted on pursuant to Title II of the Act (balanced budget amendment) had been submitted to the States for ratification, the increase would have been $1,500 billion, or if a Joint Select Committee on Deficit Reduction bill had been enacted, pursuant to Title IV of the Act, that achieved an amount of deficit reduction greater than $1,200 billion, the increase would have been equal to that amount, but not greater than $1,500 billion. 80 ANALYTICAL PERSPECTIVES a debt issuance suspension period, which allows him or her to redeem a limited amount of securities held by the Civil Service Retirement and Disability Fund and stop investing its receipts. The law requires that when any such actions are taken with the TSP G-fund or the CSRDF, the Secretary is required to make the fund whole after the debt limit has been raised by restoring the forgone interest and investing the fund fully. In 2011, Treasury determined that, because the special fund for Postal Service retiree health benefits was governed by the same laws as the CSRDF, administrative actions could also be taken with that fund. 20 Therefore, reinvestment of the Postal Service Retiree Health Benefits Fund’s maturing balances and investment of new interest collections was briefly postponed. After the debt limit increase, the foregone interest was restored to the Postal Service Retiree Health Benefits Fund. Another measure for staying below the debt limit is disinvestment of the Exchange Stabilization Fund. The outstanding balance in the Exchange Stabilization Fund was $23 billion at the end of 2011. As the debt nears the limit, Treasury has also suspended acceptance of subscriptions to the State and Local Government Series to reduce unanticipated fluctuations in the level of the debt. In 2011, Treasury also allowed the cash balance in the temporary Supplementary Financing Program to decline from $200 billion to zero by not rolling over the bills as they matured. Because Treasury does not currently have any plans to resume the SFP, this action 20 Both the CSRDF and the Postal Service Retiree Health Benefits Fund are administered by the Office of Personnel Management. is not anticipated to be an available administrative action in the future. In addition to these steps, Treasury has previously replaced regular Treasury securities with borrowing by the FFB, which, as explained above, is not subject to the debt limit. This measure was most recently taken in November 2004, and the outstanding FFB securities began to mature in June 2009. At the time of submission of the January 12, 2012, certification, the debt was already at the then-current limit of $15,194 billion, which had been reached on January 4. Therefore, Treasury had begun to use some of its administrative actions, such as use of the Exchange Stabilization Fund and the TSP G-fund. The debt limit has always been increased prior to the exhaustion of Treasury’s limited available administrative actions to continue to finance Government operations when the statutory ceiling has been reached. Failure to enact a debt limit increase before these actions were exhausted would have significant and longterm negative consequences. Without an increase, Treasury would be unable to make timely interest payments or redeem maturing securities. Investors would cease to view U.S. Treasury securities as free of credit risk and Treasury’s interest costs would increase. Because interest rates throughout the economy are benchmarked to the Treasury rates, interest rates for State and local governments, businesses, and individuals would also rise. Foreign investors would likely shift out of dollar-denominated assets, driving down the val- Table 6–6. FEDERAL FUNDS FINANCING AND CHANGE IN DEBT SUBJECT TO STATUTORY LIMIT (In billions of dollars) Description Change in Gross Federal Debt: Federal funds deficit (+) ����������������������������������������������������� Other transactions affecting borrowing from the public— Federal funds1 ��������������������������������������������������������������� Increase (+) or decrease (–) in Federal debt held by Federal funds ���������������������������������������������������������������� Adjustments for trust fund surplus/deficit not invested/ disinvested in Federal securities2 ���������������������������������� Change in unrealized discount on Federal debt held by Government accounts �������������������������������������������������� Total financing requirements ������������������������������������� Change in Debt Subject to Limit: Change in gross Federal debt ������������������������������������������� Less: increase (+) or decrease (–) in Federal debt not subject to limit ��������������������������������������������������������������� Less: change in adjustment for discount and premium 3 ��� Total, change in debt subject to limit ������������������������ Estimate Actual 2011 2012 2013 1,396.6 1,426.2 1,010.1 777.2 745.3 783.9 762.9 745.3 734.9 764.8 791.9 788.6 –188.9 123.2 158.6 142.2 143.8 135.6 121.9 116.3 109.0 103.0 101.1 105.1 27.2 –4.5 36.4 34.1 38.9 47.1 50.9 58.6 64.3 57.9 39.6 39.5 0.4 41.8 –8.0 –1.4 –1.2 –1.7 –1.1 –1.2 –1.3 –1.2 –1.2 –1.0 2014 2015 2016 2017 2018 2019 2020 2021 2022 0.1 ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... 1,235.4 1,586.7 1,197.1 952.0 926.7 964.9 934.6 918.9 906.9 924.4 931.4 932.2 1,235.4 1,586.7 1,197.1 952.0 926.7 964.9 934.6 918.9 906.9 924.4 931.4 932.2 –1.0 0.7 –0.7 ......... –1.1 ......... –0.8 ......... –0.8 ......... –1.8 ......... –1.1 ......... –1.0 ......... –1.2 ......... –1.2 ......... –1.9 ......... –1.8 ......... 1,235.7 1,587.3 1,198.2 952.8 927.5 966.7 935.7 919.9 908.2 925.7 933.3 934.0 Memorandum: Debt subject to statutory limit 4 ������������������������������������������ 14,746.6 16,333.9 17,532.1 18,484.9 19,412.5 20,379.2 21,314.9 22,234.8 23,142.9 24,068.6 25,001.8 25,935.8 * $50 million or less. 1 Includes Federal fund transactions that correspond to those presented in Table 6–2, but that are for Federal funds alone with respect to the public and trust funds. 2 Includes trust fund holdings in other cash assets and changes in the investments of the National Railroad Retirement Investment Trust in non-Federal securities. 3 Consists of unamortized discount (less premium) on public issues of Treasury notes and bonds (other than zero-coupon bonds). 4 The statutory debt limit is $16,394 billion, as increased after January 27, 2012. 81 6. FEDERAL BORROWING AND DEBT ue of the dollar and further increasing interest rates on non-Federal, as well as Treasury, debt. In addition, the Federal Government would be forced to delay or discontinue payments on its broad range of obligations, including Social Security and other payments to individuals, Medicaid and other grant payments to States, individual and corporate tax refunds, Federal employee salaries, payments to vendors and contractors, and other obligations. The debt subject to limit is estimated to increase to $16,334 billion by the end of 2012 and to $17,532 billion by the end of 2013. Federal funds financing and the change in debt subject to limit.—The change in debt held by the public, as shown in Table 6–2, and the change in debt net of financial assets are determined primarily by the total Government deficit or surplus. The debt subject to limit, however, includes not only debt held by the public but also debt held by Government accounts. The change in debt subject to limit is therefore determined both by the factors that determine the total Government deficit or surplus and by the factors that determine the change in debt held by Government accounts. The effect of debt held by Government accounts on the total debt subject to limit can be seen in the second part of Table 6–2. The change in debt held by Government accounts results in 16 percent of the estimated total increase in debt subject to limit from 2012 through 2022. The budget is composed of two groups of funds, Federal funds and trust funds. The Federal funds, in the main, are derived from tax receipts and borrowing and are used for the general purposes of the Government. The trust funds, on the other hand, are financed by taxes or other receipts dedicated by law for specified purposes, such as for paying Social Security benefits or making grants to State governments for highway construction. 21 A Federal funds deficit must generally be financed by borrowing, which can be done either by selling securities to the public or by issuing securities to Government accounts that are not within the Federal funds group. Federal funds borrowing consists almost entirely of Treasury securities that are subject to the statutory debt limit. Very little debt subject to statutory limit has been issued for reasons except to finance the Federal funds deficit. The change in debt subject to limit is therefore determined primarily by the Federal funds deficit, which is equal to the difference between the total Government deficit or surplus and the trust fund surplus. Trust fund surpluses are almost entirely invested in securities subject to the debt limit, and trust funds hold most of the debt held by Government accounts. The trust fund surplus reduces the total budget deficit or increases the total budget surplus, decreasing the need to borrow from the public or increasing the ability to repay borrowing from the public. When the trust fund surplus is invested in Federal securities, the debt held by Government accounts increases, offsetting the decrease in debt held by the public by an equal amount. Thus, there is no net effect on gross Federal debt. 21 For further discussion of the trust funds and Federal funds groups, see Chapter 28, “Trust Funds and Federal Funds.’’ Table 6–6 derives the change in debt subject to limit. In 2011 the Federal funds deficit was $1,397 billion, and other factors decreased financing requirements by $189 billion. The change in the Treasury operating cash balance reduced financing requirements by $252 billion, while the net financing disbursements of credit financing accounts increased financing requirements by $58 billion. Other factors increased financing requirements by $5 billion. In addition, special funds and revolving funds, which are part of the Federal funds group, invested a net of $27 billion in Treasury securities. An adjustment is also made for the difference between the trust fund surplus or deficit and the trust funds’ investment or disinvestment in Federal securities (including the changes in the National Railroad Retirement Investment Trust’s investments in non-Federal securities). As a net result of all these factors, $1,235 billion in financing was required, increasing gross Federal debt by that amount. Since Federal debt not subject to limit decreased by $1 billion and the adjustment for discount and premium changed by $1 billion, the debt subject to limit increased by $1,236 billion, while debt held by the public increased by $1,109 billion. Debt subject to limit is estimated to increase by $1,587 billion in 2012 and by $1,198 billion in 2013. The projected increases in the debt subject to limit are caused by the continued Federal funds deficit, supplemented by the other factors shown in Table 6–6. While debt held by the public increases by $5,585 billion from the end of 2011 through 2017, debt subject to limit increases by $6,568 billion. Foreign Holdings of Federal Debt During most of American history, the Federal debt was held almost entirely by individuals and institutions within the United States. In the late 1960s, foreign holdings were just over $10 billion, less than 5 percent of the total Federal debt held by the public. Foreign holdings began to grow significantly starting in 1970 and now represent almost half of outstanding debt. This increase has been almost entirely due to decisions by foreign central banks, corporations, and individuals, rather than the direct marketing of these securities to foreign residents. Foreign holdings of Federal debt are presented in Table 6–7. At the end of 2011, foreign holdings of Treasury debt were $4,660 billion, which was 46 percent of the total debt held by the public. 22 Foreign central banks and foreign official institutions owned 75 percent of the foreign holdings of Federal debt; private investors owned nearly all the rest. At the end of 2011, the nations holding the largest shares of U.S. Federal debt were China, which held 25 percent of all foreign holdings, Japan, which held 21 percent, and the United Kingdom, which held 9 percent. All of the foreign holdings of Federal debt are denominated in dollars. Although the amount of foreign holdings of Federal debt has grown greatly over this period, the proportion that foreign entities and individuals own, after increasing abruptly in the very early 1970s, remained about 15–20 22 The debt calculated by the Bureau of Economic Analysis, Department of Commerce, is different, though similar in size, because of a different method of valuing securities. 82 ANALYTICAL PERSPECTIVES percent until the mid-1990s. During 1995–97, however, growth in foreign holdings accelerated, reaching 33 percent by the end of 1997. Foreign holdings of Federal debt resumed growth in the following decade, increasing from 34 percent at the end of 2002 to 42 percent at the end of 2004 and to 48 percent at the end of 2008. Foreign holdings were 48 percent at the end of 2010 and fell to 46 percent at the end of 2011. The increase in foreign holdings was about 30 percent of total Federal borrowing from the public in 2011 and 50 percent over the last five years. Foreign holdings of Federal debt are around 25 percent of the foreign-owned assets in the United States, depending on the method of measuring total assets. The foreign purchases of Federal debt securities do not measure the full impact of the capital inflow from abroad on the market for Federal debt securities. The capital inflow supplies additional funds to the credit market generally, and thus affects the market for Federal debt. For example, the capital inflow includes deposits in U.S. financial intermediaries that themselves buy Federal debt. Federal, Federally Guaranteed, and Other Federally Assisted Borrowing rect loans that it makes to the public and the provision of assistance to certain borrowing by the public. The Government guarantees various types of borrowing by individuals, businesses, and other non-Federal entities, thereby providing assistance to private credit markets. The Government is also assisting borrowing by States through the Build America Bonds program, which subsidizes the interest that States pay on such borrowing. In addition, the Government has established private corporations—Government-Sponsored Enterprises—to provide financial intermediation for specified public purposes; it exempts the interest on most State and local government debt from income tax; it permits mortgage interest to be deducted in calculating taxable income; and it insures the deposits of banks and thrift institutions, which themselves make loans. Federal credit programs and other forms of assistance, including the substantial Government efforts to support the credit markets during the recent financial turmoil, are discussed in Chapter 23, “Credit and Insurance,’’ in this volume. Detailed data are presented in tables at the end of that chapter. The Government’s effects on the credit markets arise not only from its own borrowing but also from the di- Table 6–7. FOREIGN HOLDINGS OF FEDERAL DEBT (Dollar amounts in billions) Debt held by the public Fiscal Year Percentage foreign Foreign 1 Total Change in debt held by the public Total 2 Foreign 1 1965 ���������������������������������������������������� 260.8 12.3 4.7 3.9 0.3 1970 ���������������������������������������������������� 1975 ���������������������������������������������������� 283.2 394.7 14.0 66.0 5.0 16.7 5.1 51.0 3.8 9.2 1980 ���������������������������������������������������� 1985 ���������������������������������������������������� 711.9 1,507.3 121.7 222.9 17.1 14.8 71.6 200.3 1.4 47.3 1990 ���������������������������������������������������� 1995 ���������������������������������������������������� 2,411.6 3,604.4 463.8 820.4 19.2 22.8 220.8 171.3 72.0 138.4 2000 ���������������������������������������������������� 3,409.8 1,038.8 30.5 –222.6 –242.6 2005 ���������������������������������������������������� 2006 ���������������������������������������������������� 2007 ���������������������������������������������������� 2008 ���������������������������������������������������� 2009 ���������������������������������������������������� 4,592.2 4,829.0 5,035.1 5,803.1 7,544.7 1,929.6 2,025.3 2,235.3 2,802.4 3,570.6 42.0 41.9 44.4 48.3 47.3 296.7 236.8 206.2 767.9 1,741.7 135.1 95.7 210.0 567.1 768.2 2010 ���������������������������������������������������� 2011 ���������������������������������������������������� 9,018.9 10,128.2 4,324.2 4,660.2 47.9 46.0 1,474.2 1,109.3 753.6 336.0 1 Estimated by Treasury Department. These estimates exclude agency debt, the holdings of which are believed to be small. The data on foreign holdings are recorded by methods that are not fully comparable with the data on debt held by the public. Projections of foreign holdings are not available. The estimates include the effects of benchmark revisions in 1984, 1989, 1994, and 2000, and annual June benchmark revisions for 2002-2010. 2 Change in debt held by the public is defined as equal to the change in debt held by the public from the beginning of the year to the end of the year. PERFORMANCE AND MANAGEMENT 83 7. DELIVERING A HIGH-PERFORMANCE GOVERNMENT The work of the Federal Government has a real effect on people’s lives – on small business-owners who need loans, on young people who want to go to college, on the men and women in our Armed Forces who need the best resources when in uniform and who, after they have served, deserve the benefits they earned. Whether protecting individuals and communities, modernizing infrastructure, investing in our children, or taking care of the most vulnerable, the American people deserve a highly effective government. The Nation’s current fiscal situation makes it more important than ever for government agencies to use taxpayer money wisely to achieve more mission for the money. Building a government that works smarter, better, and more efficiently to deliver results for the American people is a cornerstone of this Administration. This chapter discusses the Administration’s approach to improving the performance of the Federal Government, progress of this effort, challenges remaining, and the path forward. Driving Federal Performance We must use taxpayer dollars in the most effective and efficient ways we can, continually searching for smarter ways to serve the American people, businesses, and communities. A critical part of our effort is creating a culture of continual performance improvement where Federal agencies constantly strive to improve the quality of Americans’ lives and find lower-cost ways to achieve positive outcomes. The Administration’s approach to delivering more effective and efficient government is straightforward, and builds on a careful examination of best management practices in the Federal Government, State and local governments, other countries, and businesses (described in the President’s 2011 and 2012 Budgets). The Administration has built on these lessons learned, and the groundwork established by Congress and previous Administrations. This approach rests on three mutually reinforcing practices. 1. Choose Areas of Focus and Clear Goals. Leaders at all levels of the organization choose a limited number of areas of focus that have high potential to advance the well-being of the American people, cut the costs of delivery, or both. Where goals are likely to accelerate progress, leaders set clear, ambitious goals for outcome-focused and management priorities. For each area of focus, senior officials responsible for leading change are clearly identified and goals are clearly communicated to employees, delivery partners, and the public. 2. Measure and Analyze Performance. Agencies measure, analyze, and discuss performance infor- mation to reinforce priorities, motivate action, and illuminate a path to improvement. They analyze data to find problems to fix, successful practices to spread, and the root causes of both. Armed with this understanding, they take actions to achieve better outcomes and cut the costs of delivery. Agencies also communicate goals, measurements, progress, and strategies to enlist external ideas, expertise, and assistance to improve performance and boost accountability. 3. Deliver Better Results with Frequent, DataDriven Reviews. Leaders conduct frequent, indepth performance reviews to drive progress on priorities. They review progress with those involved in implementation and adjust agency action quickly, as needed, to improve outcomes and reduce costs. Progress on Agency Priorities The Administration’s performance management approach is fueling progress on performance and productivity. Federal agencies are widely adopting these performance improvement practices and beginning to see changes on the ground. Leadership engagement, not just in goal-setting but in running frequent progress reviews to identify actions an agency can take to improve results, is on the rise across the Federal government. At the same time, agencies are learning how outcome-focused goals can help them break down organizational barriers, leading to better results than one agency can achieve on its own. As described in “Reducing Crime on Indian Reservations” on the following page, efforts at the Department of Interior to reduce crime on Indian reservations exemplify how these practices can coalesce to produce breakthrough performance. Performance results like this are not limited to Interior; other agencies are also making great progress on their mission-focused priorities, some of which they identified as two-year Agency Priority Goals (introduced as High Priority Performance Goals) in the 2011 Budget. Streamlining Student Loans and Strengthening Teacher Evaluation Systems The Department of Education (Education) set a goal that all participating higher education institutions and loan servicers will be operationally ready to originate and service Federal Direct Student Loans through an efficient and effective student aid delivery system with simplified applications and minimal disruption to students. Within six months of the enactment of the Student Aid and Fiscal Responsibility Act (SAFRA), Education successfully moved to making students loans directly instead of hav- 85 86 ANALYTICAL PERSPECTIVES REDUCING CRIME ON INDIAN RESERVATIONS High crime rates on some Indian reservations have long been a public concern, especially to the Native American community at large. The Department of the Interior’s (Interior) pilot program to reduce crime on Indian reservations demonstrates how transformative it can be when an agency adopts a goal that matters to a community, takes actions to address the problem, regularly measures and reviews relevant data to see if change is happening, and engages the local community in every aspect of the effort. To seek solutions to this long-standing issue – but given tough constrains on its budget – Interior started a pilot program to test and identify effective crime reduction strategies on Indian lands. In the 2011 Budget, Interior set an agency High Priority Performance Goal to reduce crime by at least 5 percent on four reservations with some of the highest crime rates. When this goal was set, most considered it ambitious; Interior had never before adopted a crime reduction goal and does not control many of the factors that affect the crime rate. Nevertheless, by the end of 2011, the initiative far exceeded its goal, reducing violent crime, on average, by a remarkable 35 percent across all four reservations, with crime going down on three of the four. Chart 7-1. Safe Indian Communities Priority Goal Number of Violent Crimes 500 448 400 400 Incidents in Rocky Boy, Mescalero, Standing Rock, and Wind River Indian Reservations Down 11% 290 300 Down 35% 200 100 0 2010 2007-2009 Annual Average Beginning of 2010 Priority Goal Initiative -- October 2009 2011 The importance and resonance of the goal won the cooperation of law enforcement partners and the enthusiasm of the local communities. This enabled a comprehensive strategy that involved community policing, tactical deployment, and interagency and intergovernmental partnerships between the Federal Bureau of Investigations (FBI), Department of Justice (DOJ), and the tribal police departments. The number of Indian country and DOJ officers on the ground was doubled and the number of law enforcement officers who received basic training increased ten-fold. Interior also supported officer-initiated programs to help victims and their families along with programs to strengthen community relationships with law enforcement. Community-launched innovations also played a role, such as an initiative on Rocky Boy’s Reservation in Montana to reduce juvenile delinquency and criminal behavior. Recognizing the importance of fresh and actionable data, Interior has now established a computer-aided system to help analyze crime data, identify crime trends, and report criminal offenses. These data and trend analyses were used to allocate resources and to evaluate law enforcement and community policing strategies. The results strongly affirm the value of a data-based, goal-oriented approach that empowers local officials to drive change. In the next two years, Interior is seeking to spread this success, starting with a replication demonstration at two new reservations, while continuing efforts on the original four reservations. ing third party lenders make them. This lending approach serves students better and, according to Congressional Budget Office estimates, will save taxpayers more than $60 billion over ten years. Education is also supporting and encouraging states to strengthen teacher evaluation systems given the evidence that teacher effectiveness contributes more to improving student academic outcomes than any other school characteristic. Education has made considerable progress – forty-one states adopted such systems over the last two years. Improving Health and Well-Being To improve not just the education of students but other aspects of their well-being, the Department of Agriculture 87 7. DELIVERING HIGH-PERFORMANCE GOVERNMENT (USDA) set a goal to partner with local schools, propose national standards, and take other actions that will result in improved quality of food sold in schools throughout the school day. Since 2009, USDA has signed up over 1600 more schools for its Healthier US School Challenge, a program that certifies schools as meeting rigorous quality standards for the food they offer. In addition, toward its goal of improving the availability and accessibility of health insurance coverage by increasing enrollment of eligible children in Children’s Health Insurance Program (CHIP) by 9 percent over the 2008 baseline and increasing enrollment of eligible children in Medicaid by 11 percent over the 2008 baseline by the end of FY 2011, the Department of Health and Human Services (HHS) enrolled an additional 4.8 million children in the CHIP and Medicaid from 2008 to 2010, thus providing greater access to health care. Agencies are working to improve the well-being of adults, as well. To save lives and tens of billions of dollars in Medicare and Medicaid costs, HHS launched the Partnership for Patients and set a new Priority Goal to reduce the rate of hospital acquired conditions and hospital readmissions. More than 3,100 hospitals and nearly 3,500 other partners, such as physician, nurses groups, and employers, have already joined this initiative. HHS has adopted a 2012-2013 Priority Goal focusing on reducing hospital associated infections reflecting this effort. Working in conjunction with the Interagency Council on Homelessness, the Departments of Veterans Affairs (VA) and Housing and Urban Development (HUD) set a goal to reduce the population of homeless veterans to 59,000 by June 2012, and have reduced the population of homeless veterans from 75,609 in January 2009 to 67,495 in January 2011. Building upon this progress, VA and HUD set a Priority Goal to house another 24,400 Veterans by the end of 2013 on the way to eliminating veteran homelessness by 2015. Energy Savings for Low-Income Families and Clean Energy Production The Department of Energy (Energy) and the Department of Housing and Urban Development (HUD) set a joint goal to enable the cost-effective energy retrofits of 1.2 million housing units by the end of 2013. By supporting energy conservation in over 750,000 homes of lower income and middle class families, Energy has already helped reduce energy costs, on average, by over $400 per home each year. These changes have reduced the overall annual energy consumption by 20 percent for these homes, but also cut annual greenhouse gas emissions nearly 2.0 million metric tons. HUD similarly reduced energy consumption at 120,000 HUD-assisted housing units. Energy, in the same period, has invested in reducing the cost of batteries for electric drive vehicles to help increase the market for Plug-In Hybrids and All-Electric Vehicles. Not surprisingly, because agencies were asked to set stretch targets to reach higher levels of performance, agencies did not attain every Priority Goal. In fact, if every target had been met it would indicate that the goals were insufficiently ambitious - not bold enough to spur the sort of innovation and focus associated with challenging but realistic targets. The experience of Interior on its energy goal illustrates not just the performance-improving power of a stretch target but also of the Administration’s emphasis on performance progress, rather than goal attainment for its own sake, to create a healthy performance-improving dynamic across the Federal government. Interior set a goal to authorize 9000 megawatts of solar, wind, and geothermal energy projects by the end of 2011. It did not reach its target, but did approve more than 6,000 megawatts of new renewable energy capacity on Interior land – enough to power, when fully developed, more than 1 million homes. Prior to setting this goal in October 2009, Interior had approved only a small number of projects like this. It had a slower than expected startup because it had to move along a learning curve, yet by setting a stretch goal in this area Interior was highly successful - permitting more than 6,000 megawatts in 2 years. To continue progress in this area, Interior set a new Priority Goal to increase the approved capacity for production of renewable energy resources to 11,000 megawatts by the end of 2013. Strengthening Small and Medium-Sized Businesses The Small Business Administration (SBA) increased small business access to capital by growing the number of active lending partners and bringing 1,200 new or returning lenders into the 7(a) loan program. Loans approved by active lenders reached nearly $20 million in 2011, up from $12 million in 2010 and $9 million in 2009. The Department of Commerce (Commerce) increased the number of small and medium-sized enterprises that entered a 2nd or additional market, not quite reaching its 2011 target but nonetheless up 20% between 2009 to 2011 (over 3000 businesses in 2011) despite staffing decreases and modest global economic growth in that period. Commerce has adopted a new 2012-2013 Priority Goal to expand its export activity, one of many strategies outlined in the National Export Initiative (NEI) report that contribute to the President’s directive to double U.S. exports by 2014, a new Cross-Agency Priority Goal. Improving Water Quality and Aquatic Health Commerce has also worked closely with Regional Fishery Management Councils (RFMCs) to end and prevent overfishing. The agency set a goal to reduce the number of stocks subject to overfishing to zero by the end of 2011; improve the Fish Stock Sustainability Index (FSSI) to 586 by the end of 2011; and ensure that all 46 Federal fishery management plans have required catch limits to end overfishing in place by the end of 2011. By the end of December 2011, all stocks subject to overfishing had annual catch limits in place, and the Fish Stock Sustainability Index rose from 565.5 (in 2009) to 598.5. At the same time, the effort to ensure all Fishery Management Plans have annual catch limits is moving forward at a steady pace. Forty Fishery Management Plans have been completed as of December 31, 2011 and 88 six will be completed in time to be effective for the respective 2012 fishing years. In other agency efforts related to aquatic health, the Corps of Engineers completed 27 projects restoring over 12,000 acres of aquatic habitat, most of it to improve the Upper Mississippi River, surpassing its goal of 10,300 acres. In a separate effort to improve the health of the Nation’s waters, the Environmental Protection Agency (EPA) focused approximately 60% of its water quality enforcement actions on facilities discharging to waters that do not meet water quality standards, up from 32 percent in 2009 and well above the agency’s goal of at least 37 percent. This resulted in reductions in harmful discharges from 195 facilities into these waters. National Security One of the Department of State’s goals is to improve global controls to prevent the spread of nuclear weapons and enable the secure, peaceful use of nuclear energy. The 2010 Nuclear Security Summit moved the U.S. closer to this goal by strengthening international cooperation to control weapons-usable nuclear materials and prevent nuclear terrorism - actions critical to our own national security. Attending states pledged specific national actions to prevent terrorists, criminals, and proliferators from acquiring nuclear materials, ranging from ratification of a convention to extremely complicated steps converting reactors from the use of highly-enriched to lowenriched uranium. The number of countries ratifying the Amendment to the Convention on Physical Protection of Nuclear Materials (CPPNM) is now at 52, up from 20 at the end of 2008. Improving Customer Service and Saving Taxpayer Dollars Both the Department of the Treasury (Treasury) and the Social Security Administration (SSA) are making it easier for their customers, while saving taxpayer dollars. Treasury has saved over $63.9 million by encouraging taxpayers to file electronically - increasing the electronic filing rate for individual tax returns to 76.9 percent in the 2011 season, up from 66 percent in 2009. SSA increased online retirement benefit applications from single digits in most prior years to the highest usage ever - 41 percent in FY 2011. These online services reduce the time employees spend handling applications, which frees them to handle other work. SSA has achieved this success while maintaining high customer satisfaction. The online claim application is one of three SSA electronic services that consistently tops the American Customer Satisfaction Index survey, rating higher than popular private sector electronic services. Despite this progress, some agencies did not meet their goals because of fiscal pressures. While the Priority Goals were intended to be budget neutral, they were not budget independent. For example, in the President’s 2011 Budget the Social Security Administration had a target for completing 3.409 million initial disability claims. However, Congress appropriated $1 billion less than the President requested and the agency could not complete all of the ANALYTICAL PERSPECTIVES work related to their disability programs. To compensate for this, SSA decreased its target for the number of initial disability claims completed to 3.273 million. The agency was able to leverage technology to identify and fasttrack the most severe disability claims. From October 2010 through June 2011, the agency fast-tracked over 108,000 initial disability cases, or 4.6 percent of all disability claims filed through the two fast-track processes. Learning from this experience, SSA continues to refine the predictive model and selection software to maximize capacity and accurately identify these cases. More complete performance updates on the 2010-2011 Agency Priority Goals and other agency performance goals for the 15 Cabinet agencies and nine other large departments can be found at each agency’s Performance. gov home page (click on the annual performance plans and reports button or access all 24 agency plans and reports at http://my-goals.performance.gov/agency/plans). Updates on government-wide management priorities established under the Accountable Government Initiative can also be found at Performance.gov under the Area of Focus tabs. Building a Culture of Continual Performance Improvement Agency heads have charged their leadership teams with transforming the way their agencies use goals, measurement, analysis, and data-driven discussions to drive performance improvements. This transformation is increasingly evident. As discussed above, agencies are using goals not just as words on the pages of reports required by Congress or OMB, but instead as simple, powerful tools for communicating priorities and focusing agency action. Complementing progress on the Agency Priority Goals, this budget continues efforts to integrate performance more directly into the use of traditional government tools such as grants. Race to the Top grants, for example, are being used to enlist state and local education leaders willing to commit to rigorous standards and high-quality assessments, build better data systems to inform decisions and improve instruction, attract and retain great teachers, and adopt the most promising evidence-based practices to turn-around the lowest performing schools. Similarly, HHS has established stronger performance expectations for its early childhood grants, requiring Head Start grantees that fail to meet rigorous benchmarks to re-compete for continued Federal funding to help children from low-income families achieve their full potential. As discussed in AP Chapter 8: Program Evaluation and Data Analytics, a number of agencies have begun to use tiered grant-funding to encourage state, local, and notfor-profit delivery partners to improve performance in three complementary ways: scale, validate, and develop. Scale-up grants promote adoption of effective practices identified through objectives searches of the evidence and experience. Validation grants support replication demonstrations before scale-up to test if practices effective in one location or situation can be replicated in others. Smaller grants support development and testing of 89 7. DELIVERING HIGH-PERFORMANCE GOVERNMENT new high-potential practices. In addition, the President’s Budget proposes Pay for Success pilots. Looking Forward Over the next year, the Administration will continue to build upon these efforts to deliver more value for the taxpayer’s dollar. It will continue to strengthen its approach of using goals to communicate priorities, focus agency actions on innovative solutions, support cross-agency collaboration, and enlist external ideas and assistance. The Administration will continue to measure and analyze to find lower cost ways to deliver more mission for the money. It will set ambitious goals to stimulate innovation and motivate effort, and communicate progress and strategies to boost accountability to the public. Increasingly, it will reach out to field employees, other offices, other agencies, and delivery partners to engage them in regular datadriven reviews to find smarter ways to accomplish priority objectives. And, it will strengthen networks, within and beyond government, to tackle common problems and pursue shared areas of opportunity. Agency Priority Goals Major Federal agencies have set near-term Agency Priority Goals for 2012-2013, which are a subset of agencies’ broader goals and objectives. Over half of the agency goals, such as Interior’s goal to permit renewable energy on Interior land, continue Agency Priority Goals set with the 2011 Budget, but update the targets. Other goals address a problem tackled with a 2010-2011 goal, but frame the goals in ways more likely to accelerate progress. For example, an HHS goal expands from tracking the percentage of Recovery Act funded communities that adopt smoke-free policies to a goal to reduce nation-wide cigarette consumption per capita. Still other goals expand into areas previously untouched by previous Agency Priority Goals, such as the Commerce Department’s weather-forecasting goal. The full list of Agency Priority Goals can be found at www.Goals.Performance.gov and are sortable by agency and by theme. Agency Priority Goals are presented this year in the context of agency strategic goals and objectives to show how Agency Priority Goals fit within the context of agencies’ longer term strategic goals, and each agency’s full set of performance objectives. In addition, to make the goals more understandable to the public, each goal includes an “Impact Statement” that describes generally what the goal is trying to accomplish, paired with a time-specific target to guide agency action. Cross-Agency Priority Goals In addition, the Administration has adopted interim Cross-Agency Priority (CAP) Goals. This Administration, Congress, the U.S. Government Accountability Office (GAO), and others have long recognized that government often tackles problems in stove-piped or fragmented ways that can prevent problems from being effectively addressed. To enhance progress in areas needing more crossgovernment collaboration, the GPRA Modernization Act requires OMB to establish a limited number of CAP Goals for both crosscutting policy and government-wide management areas. The goals are to be revised or updated at least every four years, starting with the 2015 Budget. At the same time, the law instructs the Administration to set interim CAP goals concurrent with the 2013 Budget. To develop the interim CAP Goals, OMB and the Performance Improvement Council worked with senior policy officials and agencies, and consulted with Congress. GAO studies were also considered in selecting CAP Goals. Emphasis was placed on choosing goals that reflect Presidential priorities and where increased crossagency coordination and regular review are expected to speed progress. The limited number of interim CAP Goals therefore reflect a subset of Presidential priorities and opportunities for increased cross-agency collaboration. CAP Goals are complemented by other cross-agency coordination and goal-setting efforts, such as those of the Federal Food Safety Working Group and the Office of National Drug Control Policy (ONDCP). ONDCP has established government-wide goals and measurements to combat the public health and safety consequences of drug use, and coordinates inter-agency efforts to cut drug use among youth by 15 percent, drug-induced deaths and drug-related morbidity by 15 percent, and drugged driving by 10 percent in five years. The National Drug Control Strategy is available at http://www.whitehouse.gov/ondcp/2011national-drug-control-strategy. The Federal Food Safety Working Group issued an update on its progress since its March 2009 formation at http://www.whitehouse.gov/ sites/default/files/fswg_report_final.pdf. The Administration set interim CAP Goals in the following areas: • Science, Technology, Engineering, and Math (STEM) Education • Veterans Career Readiness • Broadband • Entrepreneurship and Small Businesses • Energy Efficiency • Exports • Job Training • Cybersecurity • Sustainability • Financial Management • Human Capital Management • Information Technology Management • Procurement and Acquisition Management • Real Property Management The interim CAP Goals can be found at www.Goals. Performance.gov. The website, which comprises the Federal performance plan, is the beginning of a broader transition to providing the public more dynamic, useful, and current performance information. Progress on each Priority Goal will be published through a central website starting in the fall of 2012. Frequent Data-Driven Reviews For each Agency Priority Goal, the agency head or Chief Operating Officer (COO), often the Deputy Secretary, will continue running data-driven performance reviews 90 on their Priority Goals at least once a quarter. Some COOs also run quarterly performance reviews with their Departmental components - agencies, bureaus, or programs. At the same time, leaders of individual components, such as the heads of the FBI, Customs and Border Patrol, Federal Emergency Management Agency, and the Food and Drug Administration, are running their own frequent data-driven reviews. OMB, with support from the Performance Improvement Council, will initiate progress reviews on CAP Goals later this year. Producing Results for the American People In the coming year, the Administration will continue to develop tools and offer services to strengthen agency performance improvement capacity and to foster interagency networks to facilitate expertise and data sharing, co-investment, and learning. It will strengthen a working group begun in 2011 to help agencies improve and benchmark their data-driven progress reviews. The Administration will continue to foster inter-agency networks, such as the Benefits Processing Working Group, ANALYTICAL PERSPECTIVES launched in 2010, and will also work to launch additional networks to develop measures for other common government functions, such as reducing the number of undesirable incidents and their associated costs. Additionally, the Administration will develop training opportunities and career pathways to strengthen performance improvement skills and capacity across the Federal government. The Administration is strongly committed to responding to the President’s charge to deliver a government that works, a government that is smarter, leaner, and more effective, one that produces tangible results all around us – in a small business opening its doors, more homes becoming energy-efficient, new wind turbines generating clean renewable energy, healthier children, better served veterans, and falling crime rates. Leadership engagement, clear goals, measurement, analysis of progress, and frequent progress reviews to find and promote what works and fix or eliminate what does not are keys to fulfilling that commitment to improve the lives of the American people. 8. PROGRAM EVALUATION AND DATA ANALYTICS The Administration is committed to using taxpayer dollars efficiently and effectively. Central to that commitment is a culture where agencies constantly ask, and try to answer, questions that help them find, implement, spread, and sustain effective programs and practices; find and fix or eliminate ineffective ones; test promising programs and practices to see if they are effective and can be replicated; and find lower-cost ways to achieve positive impacts. The Federal fiscal situation necessitates doing more with less, not only to reduce budget deficits, but also to build confidence that Americans are receiving maximum value for their hard-earned tax dollars. It is therefore critical to apply an evidence-based approach to government management that utilizes rigorous methods appropriate to the situation, learns from experience, and is open to experimentation. This application requires selecting and implementing promising policies, programs, and strategies, monitoring of their implementation, evaluating their effectiveness, and adapting them over time to meet emerging challenges informed by ongoing measures of the well-being of Americans and the Nation. One of the challenges to evidence-based policy-making is that it is sometimes hard to say whether a program is working well or not. Historically, evaluations have been an afterthought when programs are designed, and once a program has been in place for a while, building a constituency for rigorous evaluation is hard. Further, the use of data and evaluation on an ongoing basis to manage and improve programs is rare. The Administration is committed to addressing this problem. This Administration is strongly encouraging appropriately rigorous evaluations and data analytics to determine the impact of programs and practices on outcomes, complementing the performance measurement and management practices described in chapter 7, “Delivering a High-Performance Government”, in this volume. In many policy debates, stakeholders come to the table with deep disagreements about the effectiveness or ineffectiveness of particular interventions. Evaluations that are sufficiently rigorous, relatively straightforward, and free from political interference are especially valuable in such circumstances. Evaluations do what performance measurement, alone, cannot. Evaluations determine whether programs produce outcomes superior to alternative policy choices, or not putting into place a policy at all. This is in contrast with performance measurement, which tracks implementation and progress toward intended program outcomes, but typically does not compare outcomes to alternative programs or the status quo. If a particular job training approach has a high job placement rate, is it because it is effective or because it attracts those easiest to place in jobs? An evaluation would compare the employment of participants in the job training program to comparable individuals who did not participate in the program in order to isolate the effects of the training from other factors. Evaluations can answer a wide-range of germane questions such as whether workers are safer in facilities that are inspected more frequently, whether one option for turning around a low-performing school is more effective than another, whether outcomes for families are substantially improved in neighborhoods that receive intensive services, whether no-fee debit cards increase savings among the unbanked, and whether re-employment services are cost-effective. Evaluation is one component of the evidence infrastructure that plays a role in a wide range of decisionmaking. The best government programs embrace a culture where broad statistical data series, performance and other measurement, evaluation, and other data analytics are regularly used and complement one another. Agencies use broad statistical data series to understand social and economic conditions of the populations to be served, and to inform the design of new or revised policies. They use performance measurement to monitor the implementation of their policies, to detect promising practices for improving performance and to identify challenges. They use descriptive evidence about program recipients, program stakeholders, and community conditions to target their resources more precisely to areas of high need and opportunity. Regression analyses of administrative data can, for example, shed light on how to better match recipients with appropriate services. Rigorous evaluations using experimental or quasi-experimental methods identify the effects of programs in situations where doing so is difficult using other methods; and rigorous qualitative evidence complements what can be learned from quantitative evidence and provides greater insight into how programs and practices can be implemented more and less successfully. Developing and supporting the use of data and evaluation in decision-making requires a coordinated effort between those charged with managing the operations of a program and those responsible for using data and evaluation to understand a program’s effectiveness. It requires consistent messages from multiple leaders in an agency to ensure that evidence is valued, collected or built, analyzed, understood, and appropriately acted upon. No one individual in an agency has the knowledge and skills necessary to develop research designs that address actionable questions, understand different types of evidence, interpret evidence, and develop and implement effective, evidence-based practices. Rather, it takes a leadership team, at the agency level, to oversee these efforts and to build and sustain a culture of learning. Complementing this team with a team of “implementers” at the program 91 92 level encourages the use of evidence and data so that it will filter down into program management. Who is on these teams and how their work is divided depends upon the specific needs, personnel, and structure of a given agency. Success of these teams depends on including leadership at the agency and bureau level capable of supporting and requiring programs’ use of data and evaluation in program operations. This leadership team, working together with OMB and Congress, can make sure that the right questions are being asked about the program’s effectiveness and its operations. Program managers are responsible for creating a culture where all operational decisions and internal and external communications of progress are based on evidence and data. In order to do so, the program managers need a team of both data analysts and evaluators. These individuals can provide the data and analysis packaged in a way that helps inform the program’s operational and policy decisions, including understanding the different types of evidence available and its implications for decisions, as well as identifying the need for new descriptive data and evaluation studies. The Administration and Congress have made considerable progress in making Federal decision-making more based in data and evidence. Chapter 7, “Delivering a High-Performance Government”, in this volume discusses how Administration efforts are helping focus agencies on setting high-priority goals and measuring their progress on those goals. In the area of evaluation, the Administration has moved to adopt a multi-tiered approach to evidence-based funding for new grant-based initiatives targeted towards education interventions, teenage pregnancy prevention, social innovations, home visitations for new parents, workforce interventions, and science, technology, engineering, and math programs. The initiatives offer the most funding to programs and practices supported by the strongest evidence. Programs with some, but not as much, supportive evidence also receive significant funding, the condition that the programs will be rigorously evaluated going forward. Over time, the Administration anticipates that some second-tier programs will move to the first tier as they prove more promising and cost-effective than other programs. Finally, agencies are encouraged to innovate and test ideas with strong potential—ideas supported by preliminary research findings or reasonable hypotheses. At all levels, it is important to build implementation evidence into this multi-tiered approach so that we understand how best to scale successful programs and to create more and better program options. A good example of this approach—in which new or expanded programs have evaluation “baked into their DNA”—is the Department of Education’s Invest in Innovation Fund (i3). The i3 fund invests in high-impact, potentially transformative education interventions— ranging from new ideas with huge potential to those that have proven their effectiveness and are ready to be scaled up. Whether applicants to i3 are eligible for funding to develop, validate, or scale up their program, and therefore how much funding they are eligible to receive, depends ANALYTICAL PERSPECTIVES on the strength of the existing evidence of the program’s effectiveness, the magnitude of the impact the evidence demonstrates the program is likely to have, and the program’s readiness for scaling up. This multi-tiered structure provides objective criteria to inform decisions about programs and practices in which to invest and create the right incentives for the future. Organizations understand that to be considered for significant funding, they must provide credible evaluation results that show promise, and, before that evidence is available, be ready to subject their models to analysis. As more models move into the top tier, this approach creates pressure on all the top-tier models to compete to improve their effectiveness to continue to receive support. The Administration is also working with agencies to adopt common evidence standards (where such common standards are appropriate) and to develop more robust “what works” repositories across a wide range of programs. The Administration has also championed the Pay for Success model. In the Pay for Success model, philanthropic and other private investors provide up-front funding for services for a target population to achieve specific outcomes that are measured in terms of improved lives and reduced costs. The government pays only if agreed-upon goals are achieved. Pay for Success allows the government to better partner with and leverage the resources of philanthropic and other investors to help drive evidencebased innovation and invest in what works. The Pay for Success model is particularly well-suited to cost-effective interventions that produce government savings, since those savings can be used to pay for results. For example, effective prisoner re-entry interventions can reduce future prison costs, and a portion of those savings can be used to pay back the investors. More effective workforce systems could increase job placement and improve job retention and again, some savings may be used to repay the investments. The Administration is promoting the Pay for Success model in several Federal grant programs and is helping several states and localities that are seeking to implement the Pay for Success model. In addition, the Administration is exploring ways in which appropriations bills can better account for programs that generate savings for other programs. The Administration supports evaluations with rigorous research designs that address questions critical to program design, and supports strengthened agency capacity to support such evaluations, even in tight budget times. The Recovery Act launched a number of evaluations across the Federal Government on such topics as the effects of different rent formulas on housing assistance recipients, the effects of smart grid meters on residential electricity usage, and the effects of extended unemployment insurance benefit programs on employment outcomes. Even with scarce dollars, agencies continue to direct scarce dollars to evaluations to assure they are not funding programs without positive impacts, the biggest waste of all. Research and evaluation are part of any comprehensive effort to use data and evidence to serve the American people in more cost-effective ways. So ideally the fund- 8. PROGRAM EVALUATION ing for research and evaluation would not be viewed as optional but rather as an essential element of running effective government programs. New funding for research and evaluation is only part of the Administration’s efforts to re-invigorate evaluation activities across the Federal Government. The Administration is also working to build agency capacity for a robust evaluation and data analytics infrastructure, whether that is supporting an agency in standing up a central evaluation office, empowering existing evaluation offices, institutionalizing policies that lead to strong evaluations, helping spread effective procurement practices, or hiring evaluation and data analytics experts into key administrative positions. Part of that evaluation and data analytics infrastructure is helping agencies make better use of administrative data. Administrative data, especially when linked across programs or to survey data, can sometimes make rigorous program evaluations much more informative and much less costly. Data from an early childhood program linked to the data from juvenile justice systems or K-16 educational systems shed light on the long-term effects of interventions in ways that would be cost-prohibitive in a long-term survey follow-up. Linking records from across programs also enables policy makers to better understand how families access combinations of government assistance programs, such as food assistance and unemployment insurance, during times of economic challenges. This sort of analysis is not evaluation, but is an incredibly important aspect of agency management – looking at available information to find patterns, relationships, anomalies, and other features to inform priority-setting, program design, and hypothesis formulation. Moreover, when skilled data analysts have access to linked administrative data with appropriate privacy protections, the cost of additional policy-relevant research is extremely modest. The private sector is increasingly using such data analytics to drive decisions on how to allocate resources and better serve their customers. There is perhaps even greater potential in the public sector to make use of such analytics, although realizing this potential will also take a concerted effort to hire and retain skilled data analysts, increased attention to the multiple legal and policy contexts that make data access a continued challenge, and infrastructure investments that support this sort of analysis by more people across the organization. In addition, an inter-agency working group is beginning to share best practices across the Federal Government and to discuss issues, such as how to do a better job disseminating evidence of what works, integrating cost-effectiveness analysis into evaluations, and making better use of administrative data for evaluation and other data analytics purposes. OMB is also building tools that should make it easier for agencies to make information available online about their completed and underway evaluations. Rigorous evaluation will be a central component of several cross-agency initiatives designed to identify more cost-effective approaches to achieving positive outcomes for disadvantaged populations. These populations are often eligible for multiple services and benefits administered 93 by separate Federal and State agencies, which are poorly coordinated and governed by rules that stifle effective collaboration and innovation. In 2012, the Departments of Labor and Education will support joint pilots to test interventions and systemic reforms with the potential to improve education and employment outcomes at lower cost to taxpayers. The Departments of Education, Labor, and Health and Human Services and the Social Security Administration will launch a joint initiative to test interventions that improve outcomes for children with disabilities and their families, which may yield substantial savings through reduced long-term reliance on the Supplemental Security Income program and other public services. OMB’s Partnership Fund for Program Integrity Innovation is testing promising solutions developed collaboratively by Federal agencies, States, and other stakeholders to improve payment accuracy, improve administrative efficiency, and enhance service delivery in benefit programs that serve overlapping populations. Evaluation of these pilots will help determine which strategies lead to better results at lower cost, allowing Federal and State governments to identify the most promising strategies that warrant expansion. The Administration is committed to producing more and better empirical evidence. There is, however, perhaps an even greater need to promote greater demand for data and evidence in Federal decision-making processes. The process of setting high-priority goals and measuring progress towards meeting them is beginning to increase the demand for data, its analysis, and complementary evaluations, as leaders running frequent data-driven reviews to achieve progress on ambitious goals search for increasingly effective and cost-effective practices to speed progress toward the goals they have set. State, local, and tribal governments face a similar need to prioritize programs that achieve the best results. One particularly interesting model is the Washington State Institute for Public Policy. The Institute provides a good example of how a centralized evaluation and research agency can conduct reviews of existing evaluation research to identify policies, practices, and strategies that are most likely to give taxpayers a return on their investment. It was created by the Washington state legislature to carry out practical, non-partisan research – at legislative direction – of importance to Washington State. The Institute has its own set of policy analysts and economists, specialists from universities, and consultants whom it engages to conduct policy analysis. It does a systematic review of evidence and has a methodology for comparing the relative return-on-investment of alternative interventions and presents the results in a straightforward, userfriendly manner. The Institute provides a potential model for Federal, state, local, and tribal government as well as for not-for-profit and for-profit organizations. An example of an assessment of the evidence for options to improve statewide outcomes in a variety of areas, including child maltreatment, crime, and education can be found at the Institute’s website here: http://www.wsipp.wa.gov/rptfiles/11-07-1201.pdf. 94 The President has made it clear that policy decisions should be driven by evidence—evidence about what works and what does not and evidence that identifies the greatest needs and challenges. By instilling a culture of learning into Federal programs, the Administration will ANALYTICAL PERSPECTIVES build knowledge so that spending decisions are based not only on good intentions, but also on strong evidence that yield the highest social returns on carefully targeted investments. 9. BENEFIT-COST ANALYSIS I. INTRODUCTION Federal Government policies and programs make use of our Nation’s limited resources to achieve important social goals, including economic growth, job creation, education, national security, environmental protection, and public health. Many Federal programs require governmental expenditures, such as those funding early childhood education or job training. Moreover, many policies entail social expenditures that are not reflected in budget numbers. For example, environmental, energy efficiency, and workplace safety regulations impose compliance costs on the private sector. In all cases, the American people expect the Federal Government to design programs and policies to manage and allocate scarce fiscal resources prudently, and to ensure that programs achieve the maximum benefit to society and do not impose unjustified or excessive costs. A crucial tool used by the Federal Government to achieve these objectives is benefit-cost analysis, which provides a systematic accounting of the social benefits and costs of Government policies. Executive Order 13563, issued in January 2011, makes a firm commitment to cost-benefit analysis and to ensuring that the benefits of regulations justify the costs. It states, among other things, that each agency must “use the best available techniques to quantify anticipated present and future benefits and costs as accurately as possible.” It also states that agencies must “propose or adopt a regulation only upon a reasoned determination that its benefits justify its costs (recognizing that some benefits and costs are difficult to quantify.)” The goal of benefit-cost analysis is to promote social welfare -- to ensure that the consequences of regulations are desirable on balance. The use of monetary equivalents does of course create numerous challenges, both conceptual and empirical; philosophers and economists have grappled with those challenges. 1 The translation of regulatory 1 See Adler (2011). [Reference is to Matthew D. Adler, Well-Being and Fair Distribution: Beyond Cost-Benefit Analysis, Oxford University consequences into monetary figures is meant to promote sensible comparisons, and should be understood as an administrable method for promoting that assessment. Other considerations, not subject to that translation, may also matter. As Executive Order 13563 also states, “each agency may consider (and discuss qualitatively) values that are difficult or impossible to quantify, including equity, human dignity, fairness, and distributive impacts.” The assessment of benefits and costs of a government policy are meant to offer a concrete description of the anticipated consequences of the policy. Such an accounting helps policymakers to design programs to be both efficient and effective and to avoid unnecessary or unjustified costs and burdens. That accounting also allows the American people to see the expected consequences of programs and to hold policymakers accountable for their actions. As noted, quantification and monetization produce significant challenges, but serious efforts have been made to meet those challenges. Those efforts are continuing. Importantly, there is a close relationship between open government and benefit-cost analysis. Because analysis is often improved through transparency and public comments, transparency and consideration of benefits and costs are tightly connected in practice. Especially in a difficult economic period, it is important to analyze both benefits and costs and to take steps to eliminate unnecessary burdens, which may have adverse effects on job creation and growth. Executive Order 13563 calls for such steps with its efforts to discipline the flow of new regulations and its requirement of retrospective analysis of existing significant rules. Retrospective analysis has recently become a central part of the regulatory process as agencies identify outdated or redundant regulations and is helping to eliminate billions of dollars in regulatory burdens, in areas including environmental protection, transportation, labor, health care, and agriculture. Press, 2011)] II. BENEFIT-COST ANALYSIS OF FEDERAL REGULATIONS Overview of Benefit-Cost Analysis of Federal Regulation For over three decades, benefit-cost analysis has played a critical role in the evaluation and design of significant Federal regulatory actions. While there are precursors in earlier administrations, the Reagan Administration was the first to establish a broad commitment to benefitcost analysis in regulatory decision making through its Executive Order 12291. The Clinton Administration continued that commitment when it updated the principles and processes governing regulatory review in Executive Order 12866, which continues in effect today. Executive Order 12866 requires executive agencies to catalogue and assess the benefits and costs of planned significant regulatory actions. It also requires agencies (1) to undertake regulatory action only on the basis of a “reasoned determination” that the benefits justify the costs and (2) to choose the regulatory approach that maximizes net social benefits, that is, benefits minus costs (unless the law governing the agency’s action requires another approach). Executive Order 13563, issued in January 2011, reaffirms 95 96 ANALYTICAL PERSPECTIVES the requirements of Executive Order 12866 and imposes a set of important additional requirements designed to promote sound analysis, to increase flexibility, to promote public participation, to harmonize conflicting and redundant requirements, and to ensure scientific integrity. Operating under the broad framework established by Executive Orders 13563 and 12866, the Office of Management and Budget requires careful analysis of the costs and benefits of significant rules; identification of the approach that maximizes net benefits; detailed exploration of reasonable alternatives, alongside assessments of their costs and benefits; cost-effectiveness; and attention to unquantifiable benefits and costs as well as to distributive impacts. Central goals are to ensure that regulations will be effective in achieving their purposes and that they do not impose excessive costs. As noted, it is especially important to maximize net benefits, and to avoid unjustified burdens, in a period of economic difficulty. Notably, Executive Order 13563 specifically refers to “job creation,” and where feasible, agencies have recently devoted a great deal of attention to the anticipated job impacts (whether positive or negative) of regulations. Under Executive Order 13563, agencies are authorized to consider “values that are difficult or impossible to quantify, including equity, human dignity, fairness, and distributive impacts.” In analyzing the effects of rules issued under the Americans with Disabilities Act, for example, it is legitimate to consider the dignitary values 2 associated with protection against discrimination, and also the equitable goals of the statute. Also, in eliminating the ban on entry into the United States of those who are HIV-positive, it is legitimate to consider dignitary and equitable factors that properly bear on the decision to eliminate that ban. Reviewing agencies’ benefit-cost analyses and working with agencies to improve them, OMB provides a centralized repository of analytical expertise in its Office of Information and Regulatory Affairs (OIRA). OMB’s guidance to agencies on how to do benefitcost analysis for proposed regulations is contained in its Circular A-4. A-4 directs agencies to specify the goal of a planned regulatory intervention, to consider a range of regulatory approaches for achieving that goal, to select the least burdensome approach, and to estimate the benefits and costs of each alternative considered. To the extent feasible, agencies are re- quired to monetize benefits and costs, so that they are expressed in comparable units of value. This process enables the agency to identify (and generally to choose) the approach that maximizes the total net benefits to society generated by the rule. OIRA has recently issued a primer on Circular A-4 and also a response to Frequently Asked Questions. For example, consider a regulation that sets standards for how quickly a truck’s brakes must be able to bring it to a stop. 3 A shorter stopping distance generates greater safety benefits, but also will impose larger compliance costs (if more effective brakes are more expensive). The agency should attempt to quantify both the safety benefits of reduced stopping distance and the costs of regulatory requirements. It should consider a range of stopping distances to determine the optimal one that maximizes net benefits. At such an optimal standard, making the stopping distance even shorter would impose compliance costs greater than additional safety benefits. At the same time, making the stopping distance longer than optimal results in a loss in safety benefits that is greater than the cost savings. Careful benefit-cost analysis enables the agency to determine the optimal standard. It helps to show that some approaches would be insufficient and that others would be excessive. To be sure, quantification of the relevant variables, and monetization of those variables, can present serious challenges. OIRA and relevant agencies have developed a range of strategies for meeting those challenges; many of them are sketched in Circular A-4, and we take up one such approach below. Efforts continue to be made to improve current analyses and to disclose and test their underlying assumptions. In some cases, identification of costs and benefits will leave significant uncertainties. In some cases, the monetized figures will not be sufficient to settle the appropriate choice. But much of the time, an understanding of costs and benefits will rule out some possible courses of action, and will show where, and why, reasonable people might differ. Such an understanding will also help to identify the most effective courses of action and to eliminate unjustified costs and burdens—in the process potentially helping to promote competitiveness, innovation, job creation, and economic growth. (Recall that the purpose of cost-benefit analysis is to provide an administrable method for assessing the consequences of regulation.) 2 Dignitary value is defined as “a concern for values inherent in or intrinsic to our common humanity-values such as autonomy, self-respect, or equality that might be nurtured or suppressed depending on the form that governmental decision making takes.” The definition is available at http://digitalcommons.law.yale.edu/. 3 The National Highway Traffic Safety Administration issued a new safety standard for air brake systems to improve the stopping distance performance of trucks. See 49 CFR § 571. 97 9. BENEFIT-COST ANALYSIS Table 9–1. ESTIMATES OF THE TOTAL ANNUAL BENEFITS AND COSTS OF MAJOR RULES REVIEWED BY OMB IN 2010 (In billions of 2001 dollars) Rule Agency Benefits Costs Energy Conservation Standards for Small Electric Motors �������������������������������������������� DOE 0.7-0.8 0.2 Energy Efficiency Standards for Commercial Clothes Washers ������������������������������������ Energy Efficiency Standards for Pool Heaters and Direct Heating Equipment and Water Heaters ����������������������������������������������������������������������������������������������������������� Medical Examination of Aliens--Removal of Human Immunodeficiency Virus (HIV) Infection from Definition of Communicable Disease of Public Health Significance �� Regulations Restricting the Sale and Distribution of Cigarettes and Smokeless Tobacco to Protect Children and Adolescents ���������������������������������������������������������� Use of Ozone-Depleting Substances; Removal of Essential Use Designations [Flunisolide, Triamcinolone, Metaproterenol, Pirbuterol, Albuterol and Ipratropium in Combination, Cromolyn, and Nedocromil] ������������������������������������������������������������ Interim Final Rules under the Paul Wellstone and Pete Domenici Mental Health Parity and Addiction Equity Act of 2008 ������������������������������������������������������������������������������ Interim Final Rules for Group Health Plans and Health Insurance Issuers Relating to Dependent Coverage of Children to Age 26 under the Patient Protection and Affordable Care Act �������������������������������������������������������������������������������������������������� Interim Final Rules for Group Health Plans and Health Insurance Coverage Relating to Status as a Grandfathered Health Plan under the Patient Protection and Affordable Care Act �������������������������������������������������������������������������������������������������� Patient Protection and Affordable Care Act: Preexisting Condition Exclusions, Lifetime and Annual Limits, Rescissions, and Patient Protections ��������������������������� Interim Final Rules for Group Health Plans and Health Insurance Issuers Relating to Internal Claims and Appeals and External Review Processes under the Patient Protection and Affordable Care Act �������������������������������������������������������������������������� Interim Final Rules for Group Health Plans and Health Insurance Issuers Relating to Coverage of Preventive Services under the Patient Protection and Affordable Care Act ���������������������������������������������������������������������������������������������������������������������������� Migratory Bird Hunting; Final Frameworks for Early-Season Migratory Bird Hunting Regulations ��������������������������������������������������������������������������������������������������������������� Migratory Bird Hunting; Final Frameworks for Late Season Migratory Bird Hunting Regulations ��������������������������������������������������������������������������������������������������������������� Nondiscrimination on the Basis of Disability in Public Accommodations and Commercial Facilities ������������������������������������������������������������������������������������������������ DOE 0-0.1 <0.1 DOE 1.3-1.8 1.0-1.1 HHS Not Estimated <0.1 HHS Not Estimated Not Estimated HHS Not Estimated Not Estimated HHS/DOL/TREAS Not Estimated <0.1 HHS/DOL/TREAS Not Estimated <0.1 HHS/DOL/TREAS Not Estimated <0.1 HHS/DOL/TREAS Not Estimated <0.1 HHS/DOL/TREAS Not Estimated <0.1 HHS/DOL/TREAS Not Estimated Not Estimated DOI 0.2-0.3 Not estimated DOI 0.2-0.3 Not estimated DOJ 1.0-2.1 0.5-0.7 DOJ 0.2-0.3 0.1-0.2 Electronic Prescriptions for Controlled Substances ������������������������������������������������������� DOJ 0.3-1.3 <0.1 Cranes and Derricks in Construction ����������������������������������������������������������������������������� DOL 0.2 0.1 Improved Fee Disclosure for Pension Plans ������������������������������������������������������������������ Automatic Dependent Surveillance--Broadcast (ADS-B) Equipage Mandate to Support Air Traffic Control Service ��������������������������������������������������������������������������� DOL Not Estimated <0.1 DOT 0.1-0.2 0.2 Electronic On-Board Recorders for Hours-of-Service Compliance ������������������������������� DOT 0.2 0.1 Positive Train Control ����������������������������������������������������������������������������������������������������� DOT <0.1 0.5-1.3 Pipeline Safety: Distribution Integrity Management ������������������������������������������������������� Passenger Car and Light Truck Corporate Average Fuel Economy Standards MYs 2012 to 2016 ������������������������������������������������������������������������������������������������������������� DOT 0.1 0.1 Nondiscrimination on the Basis of Disability in State and Local Government Services DOT and EPA 3.9-18.2 1.7-4.7 S.A.F.E. Mortgage Licensing Act ����������������������������������������������������������������������������������� Control of Emissions from New Marine Compression-Ignition Engines at or above 30 Liters per Cylinder ���������������������������������������������������������������������������������������������������� National Emission Standards for Hazardous Air Pollutants for Reciprocating Internal Combustion Engines ������������������������������������������������������������������������������������������������ National Emission Standards for Hazardous Air Pollutants for Reciprocating Internal Combustion Engines--Existing Stationary Spark Ignition (Gas-Fired) ���������������������� TREAS Not Estimated 0.1-0.2 EPA Not Estimated Not Estimated EPA 0.7-1.9 0.3 EPA 0.4-1.0 0.2 NESHAP: Portland Cement Notice of Reconsideration ������������������������������������������������� EPA 6.1-16.3 0.8-0.9 Prevention of Significant Deterioration/Title V Greenhouse Gas Tailoring Rule ������������ EPA Not Estimated Not Estimated Renewable Fuels Standard Program ����������������������������������������������������������������������������� EPA Not Estimated Not Estimated Review of the National Ambient Air Quality Standards for Sulphur Dioxide ������������������ Lead; Amendment to the Opt-out and Recordkeeping Provisions in the Renovation, Repair, and Painting Program ����������������������������������������������������������������������������������� EPA 2.8-38.6 0.3-2.0 EPA 0.8-3.0 0.3 Revisions to the Spill Prevention, Control, and Countermeasure (SPCC) Rule ������������ EPA 0 -0.1 98 The Benefits and Costs of Federal Regulation in FY 2010 Each year, OMB reports to Congress agencies’ estimates of the benefits and costs of major regulations reviewed in the prior fiscal year. Table 9–1 presents the benefit and cost estimates for the 34 non-budgetary rules reviewed by OMB in FY 2010. 4 Of those, agencies monetized both the benefits and costs for 18. 5 Most of the benefits and costs reported in Table 9–1 are expressed as ranges, and sometimes as wide ranges, because of uncertainty about the likely consequences of rules. Quantification and monetization raise difficult conceptual and empirical questions. Prospective benefitcost analysis requires predictions about the future—both about what will happen if the regulatory action is taken and what will happen if it is not—and what the future holds is typically not known for certain. A standard goal of the agency’s analysis is to produce both a central “best estimate,” which reflects the expected value of the benefits and costs of the rule, as well as a description of the ranges of plausible values for benefits, costs, and net benefits. These estimates inform the decisionmakers and the public of the degree of uncertainty associated with the regulatory decision. The process of public scrutiny can sometimes reduce that uncertainty. To illustrate some of the underlying issues, consider the EPA’s recent National Ambient Air Quality Standard (NAAQS) for Sulfur Dioxide. The benefits of the rule are estimated to be somewhere between $2.8 to $38.6 billion—an expansive range. Almost all of these estimated benefits are due to co-benefits of reduced mortality resulting from the reduction in particulate matter emissions caused by the rule. However, there is substantial uncertainty with respect to (a) the relationship between exposure to particulate matter and premature death and (b) the proper monetary valuation of avoiding a premature death. Hence, the agency reported a wide range of plausible values for the benefits of the NAAQS for Sulfur Dioxide. Similar uncertainties in both the science used to predict the consequences of rules and the monetary values of those consequences, contribute to the uncertainty represented in the ranges of benefits and costs for other rules in Table 9–1. Despite these uncertainties, benefitcost analysis often reduces the range of reasonable approaches – and simultaneously helps to inform the decision about which approach is most reasonable. 4 FY 201020 is the most recent period for which such a summary is available. These estimates were reported in OMB, 2011 Report to Congress on the Benefits and Costs of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entities. A detailed description of the assumptions and calculations underlying these estimates is provided in that Report. 5 (1) The Department of Health and Human Services issued six rules to implement health insurance reforms. . (2) The Department of Interior adopted two Migratory Bird Hunting regulations where the agency assessed benefits associated with increased consumer welfare of hunting allowances. (3) The Environmental Protection Agency assessed the benefits and costs for both national and international coordinated strategy to control emissions from ocean-going vessels, adopted a case-study approach to examine the effects of the Renewable Fuels Program, and provided illustrative estimates for the Greenhouse Gas Tailoring Rule. ANALYTICAL PERSPECTIVES Quantification and Breakeven Analysis In some cases, the effort to monetize certain benefits (such as protection of streams and wildlife) will run into serious obstacles; quantification may be possible but not monetization. In other cases, analysts will know the direction of an effect, and perhaps be able to specify a range, but precise quantification itself will not be possible. Recognizing these points, OMB has recommended that consistent with Executive Orders 13563 and 12866, the best practice is to accompany all significant regulations with (1) a tabular presentation, placed prominently and offering a clear statement of qualitative and quantitative benefits and costs of the proposed or planned action, together with (2) a presentation of uncertainties and (3) similar information for reasonable alternatives to the proposed or planned action. An advantage of this approach is transparency. If, for example, it is possible to quantify certain benefits (such as protection of water quality) but not to monetize them, then the public should be made aware of that fact. At the same time, qualitative discussion of nonquantifiable benefits should help the public, and relevant decisionmakers, to understand the goal of the regulation and how it might achieve that goal. When quantification is not possible, many agencies have found it both useful and informative to engage in “breakeven analysis.” Under this approach, agencies specify how high the unquantified or unmonetized benefits would have to be in order for the benefits to justify the costs. Suppose, for example, that regulation that protects water quality costs $105 million annually, and that it also has significant effects in reducing pollution in rivers and streams. It is clear that the regulation would be justified if and only if those effects could reasonably be valued at $105 million or more. Once the nature and extent of the water quality benefits are understood, it might well be easy to see whether or not the benefits plausibly justify the costs -- and if the question is difficult, at least it would be clear why it is difficult. Breakeven analysis is an important tool, and it has analytical value when quantification is speculative or impossible. Current Agency Practice for Values of Mortality Reduction Since agencies often design health and safety regulation to reduce risks to life, evaluation of these benefits can be the key part of the analysis. When monetizing reduced mortality risks, agencies often use what is commonly described as a “Value of a Statistical Life,” or VSL. The term is misleading because it suggests, erroneously, that the goal of monetization is to place a “value” on individual lives. The goal is instead to value reductions in small risks of premature death (such as 1 in 100,000); it follows that “VSL” actually refers to the value of gaining small risk reductions. There is no effort to suggest that any individual’s life can be expressed in monetary terms. Circular A-4 provides background on the theory and practice of calculating VSL. It states that a substantial majority of the studies of VSL indicate a value that varies “from roughly $1 million to $10 million per statisti- 99 9. BENEFIT-COST ANALYSIS cal life.” In practice, agencies have tended to use a value in the middle or upper range of this distribution. (Note that Circular A-4 was issued in 2003 and that because of income growth, the figure increases over time.) OMB believes that it is important to consult the relevant literature, which contains a range of significant empirical findings and conceptual claims, in order to base analysis on the best available research. Below we provide a brief summary of the VSL values agencies have adopted in recent Regulatory Impact Analyses (RIAs). Two agencies, EPA and DOT, have developed official guidance on VSL. In its 2011 update to its guidelines, DOT uses a value of $6.2 million ($2011), and requires all the components of the Department to use this value in their RIAs. EPA recently changed its VSL to $6.3 million ($2000) and adjusts this value for real income growth to later years. For example, in its final rule setting a new primary standard for Sulfur Dioxide, EPA adjusted VSL to account for a different currency year ($2006) and to account for income growth to 2020, which yields a VSL of $8.9 million. EPA stated in this RIA, however, that it is continuing their efforts to update this guidance. OMB believes in the importance of consulting the growing empirical and conceptual work in this domain. Cost-per-life-saved of Health and Safety Regulation For regulations intended to reduce mortality risks, another analytic tool that can be used to assess regulations, and to help avoid unjustified burdens, is cost-effectiveness analysis. Some agencies develop estimates of the “net cost per life saved” for regulations intended to improve public health and safety. To calculate this figure, the costs of the rule minus any monetized benefits other than mortality reduction are placed in the numerator, and the expected reduction in mortality in terms of total number of lives saved is placed in the denominator. This measure avoids any assignment of monetary values to reductions in mortality risk. It still reflects, however, a concern for economic efficiency, insofar as choosing a regulatory option that reduces a given amount of mortality risk at a lower net cost to society would conserve scarce resources compared to choosing another regulatory option that would reduce the same amount of risk at greater net costs. Table 9–2. ESTIMATES OF THE NET COSTS PER LIFE SAVED OF SELECTED HEALTH AND SAFETY RULES RECENTLY REVIEWED BY OMB (In millions of 2001 dollars) Rule Agency Net Cost per Life Saved Prevention of Salmonella Enteritidis in Shell Eggs ���������������������� New Entrant Safety Assurance Process �������������������������������������� Reduced Stopping Distance Requirements for Truck Tractors ���� HHS/FDA DOT/FMCSA DOT/NHTSA Negative Negative Negative Roof Crush Resistance ��������������������������������������������������������������� DOT/NHTSA $6.4-11.0 Although the Department of Homeland Security has no official policy on VSL, it recently sponsored a report through its U.S. Customs and Border Protection, and has used the recommendations of this report to inform VSL values for several recent rulemakings. This report recommends $6.3 million ($2008) and also recommends that DHS adjust this value upward over time for real income growth (in a manner similar to EPA’s adjustment approach). Other regulatory agencies that have used a VSL in individual rulemakings include DOL’s Occupational Safety and Health Administration (OSHA) and HHS’ Food and Drug Administration (FDA). In a rulemaking revising worker safety standards when using cranes and derricks in construction, OSHA updated the previously used VSL of $7.0 million ($2003) to $8.7 million ($2010). The FDA is using a value of $7.9 million ($2010), but also often uses a monetary value of the remaining life years saved by alternative policies. This is sometimes referred to as a “Value of a Statistical Life Year” or VSLY. As noted, Notes Morbidity benefits exceed costs. Property damage and morbidity benefits exceed costs. Property damage benefits exceed costs. The agency estimates that the rule will prevent 135 fatalities and 1,065 nonfatal injuries annually. These figures translate into 156 equivalent fatalities. The main estimates value equivalent fatalities prevented at $6.1 million. It follows that the value of nonfatal injuries prevented is $6.1 million*(156-135)=$128.1 million annually. Total costs associated with the rule range from $875 million to $1,400 million annually. If we subtract the injury benefits from costs, the range of net cost per life saved is thus $5.5 million to $9.4 million (2007 dollar). Adjusting to $2001 yields $6.4 million to $11.0 million. Table 9–2 presents the net cost per life saved for four recent health and safety rules for which calculation is possible. The net cost per life saved is calculated using 3 percent discount rate and using agencies’ best estimates for costs and expected mortality reduction where those were provided by the agency. There is substantial variation in the net cost per life saved by these rules, ranging from negative (that is, the non-mortality-related benefits outweigh the costs), to potentially as high as $11.0 million. This table is designed to be illustrative rather than definitive, and continuing work must be done to ensure that estimates of this kind are complete and not misleading. For example, some mortality-reducing rules have a range of other benefits, including reductions in morbidity, and it is important to include these benefits in cost-effectiveness analysis. Other rules have benefits that are exceedingly difficult to quantify but nonetheless essential to consider; consider rules that improve water quality or have aes- 100 ANALYTICAL PERSPECTIVES thetic benefits. Nonetheless, it is clear that some rules are far more cost-effective than others, and it is valuable to take steps to catalogue variations and to increase the likelihood that scarce resources will be used as effectively as possible. III. BENEFIT-COST ANALYSIS OF BUDGETARY PROGRAMS As noted, Executive Orders 13563 and 12866 require agencies, to the extent permitted by law, to “propose or adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its costs.” OIRA works actively with agencies to promote compliance with this requirement. Historically, benefit-cost analysis of Federal budgetary programs has been more limited than that of regulatory policy. Increasingly, though, the Federal Government explicitly employs benefit-cost analysis to ensure that projects and spending programs have benefits in excess of costs, maximize net benefits, and allocate federal dollars most efficiently across potential projects. In the 1936 Flood Control Act, for example, Congress stated as a matter of policy that the Federal government should undertake or participate in flood control projects if the benefits exceeded the costs, where the lives and social security of people are at stake. By the late 1970s, the Army Corps of Engineers had begun to use benefitcost analysis to improve the return on investment at a given project site. The Corps did this by designing projects based on increments of work whose benefits exceeded their costs. More recently, the Budget has used benefits and costs, along with other criteria, to develop an overall program for the Corps that yields the greatest net benefits or cost effectiveness. Benefit-cost analysis can also be used to evaluate programs retrospectively to determine whether they should be either expanded or discontinued and how they can be improved. Chapter 8, “Program Evaluation”, in this volume discusses current efforts to improve program evaluation. Evidence that an activity can yield substantial net benefits has motivated the creation and expansion of a substantial number of programs. For example, longitudinal studies have shown that each dollar spent on high quality pre-school programs serving disadvantaged children yields substantially more than a dollar (in present value) in higher wages, less crime, and less use of public services, motivating an expansion of funding for quality pre-K programs. Similar evidence has spurred the decision to expand funding for nurse-family partnerships, finding that each dollar spent in the program leads to more than a dollar of benefits mostly in reduced government expenditures on health care, educational and social services, and criminal justice, and that the highest returns were present in serving the most disadvantaged families. Similarly, GAO has concluded that the Women, Infants, and Children (WIC) program produces monetary benefits that exceed its costs by reducing the incidence of low birth weight and iron deficiency, which are linked to children’s behavior and development. OMB continually works with executive agencies to improve their benefit-cost analyses, and to increase transparency. In its 2011 annual report to Congress on the benefits and costs of Federal regulations, 6 OMB continues to support the recommendations for improvement in agencies’ benefit-cost analysis by promoting (1) clarity with respect to underlying assumptions and anticipated consequences, (2) prominent tabular presentations of costs and benefits, and (3) careful consideration of the comments offered by members of the public on proposed rules. Furthermore, OMB recommends that benefit-cost analysis should be seen and used as a central part of open government. By providing the public with information about proposed and final regulations, by revealing assumptions and subjecting them to public assessment, and by drawing attention to the consequences of alternative approaches, such analysis can promote publ7ic understanding, scrutiny, and improvement of rules. OMB continues to explore ways to ensure that benefit-cost analysis helps promote the commitment to open government. 6 OMB, 2011 Report to Congress on the Benefits and Costs of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entities. 7 See Transparency and Open Government, Memorandum for the Heads of Executive Departments and Agencies, President Obama, Jan. 21, 2009. For discussion of this point and its relationship to retrospective analysis of the effects of regulations, see Greenstone (2009). IV. IMPROVING BENEFIT-COST ANALYSIS In the Memorandum on Transparency and Open Government, issued on January 21, 2009, the President called for the establishment of “a system of transparency, public participation, and collaboration.”8 The memorandum elaborated the principles of such a system, designed to promote accountability and disclosure of information that “the public can readily find and use.” The memorandum noted that “[k]nowledge is widely dispersed in society, and public officials benefit from having access to that dispersed knowledge.” Implementing the President’s memorandum, agencies have begun to take a series of 8 Available at: DCPD200900010.pdf http://www.gpoaccess.gov/presdocs/2009/ concrete measures described in the Open Government Directive to put into practice the commitments to transparency, participation, and collaboration. 9 The goals of this effort are to promote accountability, and to ensure that regulations are informed, to the extent possible, by a careful analysis of the likely consequences, and to reduce the dual risks of excessive and insufficient regulation. A particular goal, in the current period, is to avoid unjustified or excessive burdens on business, state and local government, and individuals. The recent agency checklist for Regulatory Impact Analysis is designed to promote these various goals (see Appendix). 9 Available at: http://www.openthegovernment.org/otg/OGD.pdf 101 9. BENEFIT-COST ANALYSIS Participation and Collaboration in the Regulatory Process Executive Order 13563 states that “regulations shall be based, to the extent feasible and consistent with law, on the open exchange of information and perspectives . . . . “ To promote that open exchange, Executive Order 13563 directs agencies to provide the public with timely access to regulatory analyses and supporting documents on regulations.gov to ensure a meaningful opportunity for public comment. The Internet provides an ideal vehicle for making information public and, under Executive Order 13563, the Administration has committed to publish as much as possible online in a format that can be retrieved, downloaded, indexed, and searched by commonly-used web search applications. Importantly, this commitment promotes public accessibility of the analysis of benefits and costs, together with the supporting materials, in order to ensure that the analysis is subject to public scrutiny. That process of scrutiny can help to increase benefits, decrease costs, or both. Agencies now publish a great deal of information relevant to rulemaking and benefit-cost analysis, including underlying data, online and in downloadable, as well as traditional, formats. Executive Order 13563 directs agencies to use regulations.gov to make the online record as complete as possible 10 and to take all necessary steps to make relevant material available to the public for comment. Executive Order 13563 requires that the public should generally receive a comment period of at least 60 days for proposed regulatory actions. Even where statutes necessitate shorter comment periods, agencies can seek public comment and respond in a timely fashion to suggestions about potential improvements in rules and underlying analyses. Publicly Accessible Summaries and Tables with Key Information In order to improve analysis of the effects of regulations, and simultaneously to improve accountability, OMB has called for a clear, salient, publicly accessible executive summary of both benefits and costs— written in a “plain language” manner designed to be understandable to the public. For all economically significant regulations, Executive Orders 13563 and 12866 require agencies to provide a description of the need for the regulatory action and a clear summary of the analysis of costs and benefits, both qualitative and quantitative. The summary often includes an accounting of benefits and costs of alternative approaches, and where relevant, an analysis of distributional impacts on subpopulations (such as disabled people or those with low income). 10 Available at: http://www.whitehouse.gov/omb/assets/inforeg/edocket_final_5-28-2010.pdf As noted, some benefits and costs can be quantified and monetized, while some can be described only in qualitative terms. A useful way to communicate effects that cannot be easily quantified or monetized is to present ranges of values (as agencies frequently now do). Simple, Straightforward Justification of Preferred Option Executive Orders 13563 and 12866 require the executive summary to include “an explanation of why the planned regulatory action is preferable to the identified potential alternative,” and demonstrate that the agency has selected the approach “that maximizes net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity) unless a statute requires another regulatory approach.” Under the Executive Orders, agencies are required to provide a “reasoned determination that the benefits of the intended regulation justify its costs,” to the extent permitted by law. In making those determinations, agencies should pay close attention to quantifiable and monetizable benefits and costs, but are permitted to consider values that are hard or impossible to quantify in light of existing knowledge, as well as distributional effects, human dignity, fairness, and considerations of equity (including, where relevant, considerations of environmental justice). We have noted that where nonquantified or nonmonetized variables are important to the agency’s determination, agencies often use “breakeven analysis,” explaining how high the nonquantified or nonmonetized benefits would have to be in order for the benefits to justify the costs. In those situations, agencies make underlying assumptions transparent to the public and available through the rulemaking process. Where the agency has proceeded even though the benefits do not justify the costs, and where the agency has not selected the approach that maximizes net benefits, it should carefully explain its reasoning (as, for example, where a statute so requires). Benefit-cost analysis is a useful and often indispensable method for evaluating programs and options. In some cases, it reveals that apparently attractive proposals are too expensive to be worthwhile. In other cases, it shows that costly proposals are well-justified, because the benefits are significantly higher than the costs. Often benefit-cost analysis helps to identify the range of reasonable options. It is true that conceptual and empirical challenges remain and that it is important to assess the evolving literature in order to meet those challenges. Especially in a period of serious economic difficulties, greater use and improvement of benefit-cost analysis are high priorities. 102 ANALYTICAL PERSPECTIVES APPENDIX AGENCY CHECKLIST: REGULATORY IMPACT ANALYSIS With this document, the Office of Information and Regulatory Affairs is providing a checklist to assist agencies in producing regulatory impact analyses (RIAs), as required for economically significant rules by Executive Order 12866 and OMB Circular A-4. Nothing herein alters, adds to, or reformulates existing requirements in any way. Moreover, this checklist is limited to the requirements of Executive Order 12866 (available at: http://www.reginfo.gov/public/jsp/Utilities/ EO_12866.pdf) and Circular A-4 (available at: http://www. whitehouse.gov/OMB/circulars/a004/a-4.pdf); it does not address requirements imposed by other authorities, such as the National Environmental Policy Act, the Regulatory Flexibility Act, the Unfunded Mandates Reform Act, the Paperwork Reduction Act, and various Executive Orders that require analysis. Executive Order 12866 and Circular A-4, as well as those other authorities, should be consulted for further information. Checklist for Regulatory Impact Analysis: Does the RIA include a reasonably detailed description of the need for the regulatory action? 11 12 Does the RIA include an explanation of how the regulatory action will meet that need? 13 Does the RIA use an appropriate baseline (i.e., best assessment of how the world would look in the absence of the proposed action)? 14 Is the information in the RIA based on the best reasonably obtainable scientific, technical, and economic information and is it presented in an accurate, clear, complete, and unbiased manner? 15 11 Required under Executive Order 12866, Section 6(a)(3)(B)(i): “The text of the draft regulatory action, together with a reasonably detailed description of the need for the regulatory action and an explanation of how the regulatory action will meet 12 Circular A-4 states: “If the regulation is designed to correct a significant market failure, you should describe the failure both qualitatively and (where feasible) quantitatively.” (P. 4) 13 See note 1 above. 14 Circular A-4 states: “You need to measure the benefits and costs of a rule against a baseline. This baseline should be the best assessment of the way the world would look absent the proposed action… In some cases, substantial portions of a rule may simply restate statutory requirements that would be self-implementing, even in the absence of the regulatory action. In these cases, you should use a pre-statute baseline.” (P. 15-16) 15 Circular A-4 states: “Because of its influential nature and its special role in the rulemaking process, it is appropriate to set minimum quality standards for regulatory analysis. You should provide documentation that the analysis is based on the best reasonably obtainable scientific, technical, and economic information available… you should assure compliance with the Information Quality Guidelines for your agency and OMB’s Guidelines for Ensuring and Maximizing the Quality, Objectivity, Utility, and Integrity of Information Disseminated by Federal Agencies...” (P. 17). The IQ Guidelines (paragraph V.3.a) define objectivity to Are the data, sources, and methods used in the RIA provided to the public on the Internet so that a qualified person can reproduce the analysis? 16 To the extent feasible, does the RIA quantify and monetize the anticipated benefits from the regulatory action? 17 18 To the extent feasible, does the RIA quantify and monetize the anticipated costs? 19 Does the RIA explain and support a reasoned determination that the benefits of the intended regulation justify its costs (recognizing that some benefits and costs are difficult to quantify)? 20 include “whether disseminated information is being presented in an accurate, clear, complete, and unbiased manner.” http://www.whitehouse. gov/omb/assets/omb/fedreg/reproducible2.pdf 16 Circular A-4 states: “A good analysis should be transparent and your results must be reproducible. You should clearly set out the basic assumptions, methods, and data underlying the analysis and discuss the uncertainties associated with the estimates. A qualified third party reading the analysis should be able to understand the basic elements of your analysis and the way in which you developed your estimates. To provide greater access to your analysis, you should generally post it, with all the supporting documents, on the internet so the public can review the findings.” (P. 17). OMB IQ Guidelines (paragraph V.3.b.ii) further states: “If an agency is responsible for disseminating influential scientific, financial, or statistical information, agency guidelines shall include a high degree of transparency about data and methods to facilitate the reproducibility of such information by qualified third parties.” 17 Required under Executive Order 12866, Section 6(a)(3)(C)(i): “An assessment, including the underlying analysis, of benefits anticipated from the regulatory action (such as, but not limited to, the promotion of the efficient functioning of the economy and private markets, the enhancement of health and safety, the protection of the natural environment, and the elimination or reduction of discrimination or bias) together with, to the extent feasible, a quantification of those benefits.” 18 Circular A-4 states: “You should monetize quantitative estimates whenever possible. Use sound and defensible values or procedures to monetize benefits and costs, and ensure that key analytical assumptions are defensible. If monetization is impossible, explain why and present all available quantitative information.” (P. 19). Circular A-4 also offers a discussion of appropriate methods for monetizing benefits that might not easily be turned into monetary equivalents. 19 Required under Executive Order 12866, Section 6(a)(3)(C)(ii): “An assessment, including the underlying analysis, of costs anticipated from the regulatory action (such as, but not limited to, the direct cost both to the government in administering the regulation and to businesses and others in complying with the regulation, and any adverse effects on the efficient functioning of the economy, private markets (including productivity, employment, and competitiveness), health, safety, and the natural environment), together with, to the extent feasible, a quantification of those costs;” See also note 6 above. 20 Executive Order 12866, Section 1(b)(6) states that to the extent permitted by law, “[e]ach agency shall assess both the costs and the benefits of the intended regulation and, recognizing that some costs and benefits are difficult to quantify, propose or adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its costs.” As Executive Order 12866 recognizes, a statute may require an agency to proceed with a regulation even if the benefits do not justify the costs; in such a case, the agency’s analysis may not show any such justification. 9. BENEFIT-COST ANALYSIS 103 Does the RIA assess the potentially effective and reasonably feasible alternatives? 21 Does the RIA use appropriate discount rates for benefits and costs that are expected to occur in the future? 27 Does the RIA assess the benefits and costs of different regulatory provisions separately if the rule includes a number of distinct provisions? 22 Does the RIA include, if and where relevant, an appropriate uncertainty analysis? 28 Does the RIA assess at least one alternative that is less stringent and at least one alternative that is more stringent? 23 Does the RIA consider setting different requirements for large and small firms? 24 Does the preferred option have the highest net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity), unless a statute requires a different approach? 25 Does the RIA include an explanation of why the planned regulatory action is preferable to the identified potential alternatives? 26 21 Required under Executive Order 12866, Section 6(a)(3)(C)(iii): “An assessment, including the underlying analysis, of costs and benefits of potentially effective and reasonably feasible alternatives to the planned regulation, identified by the agencies or the public (including improving the current regulation and reasonably viable nonregulatory actions)...” 22 Circular A-4 states: “You should analyze the benefits and costs of different regulatory provisions separately when a rule includes a number of distinct provisions.” (P. 17) 23 Circular A-4 states: “you generally should analyze at least three options: the preferred option; a more stringent option that achieves additional benefits (and presumably costs more) beyond those realized by the preferred option; and a less stringent option that costs less (and presumably generates fewer benefits) than the preferred option.” (P. 16) 24 Circular A-4 states: “You should consider setting different requirements for large and small firms, basing the requirements on estimated differences in the expected costs of compliance or in the expected benefits. The balance of benefits and costs can shift depending on the size of the firms being regulated. Small firms may find it more costly to comply with regulation, especially if there are large fixed costs required for regulatory compliance. On the other hand, it is not efficient to place a heavier burden on one segment of a regulated industry solely because it can better afford the higher cost. This has the potential to load costs on the most productive firms, costs that are disproportionate to the damages they create. You should also remember that a rule with a significant impact on a substantial number of small entities will trigger the requirements set forth in the Regulatory Flexibility Act. (5 U.S.C. 603(c), 604).” (P. 8) 25 Executive Order 12866, Section 1(a) states: “agencies should select those approaches that maximize net benefits (including potential economic, environmental, public health and safety, and other advantages; distributive impacts; and equity) unless a statute requires another regulatory approach.” 26 Required under Executive Order 12866, Section 6(a)(3)(C)(iii): “An assessment, including the underlying analysis, of costs and benefits of potentially effective and reasonably feasible alternatives to the planned regulation, identified by the agencies or the public (including improving the current regulation and reasonably viable nonregulatory actions), and an explanation why the planned regulatory action is preferable to the identified potential alternatives.” Does the RIA include, if and where relevant, a separate description of distributive impacts and equity? 29 Does the RIA provide a description/accounting of transfer payments? 30 27 Circular A-4 contains a detailed discussion, generally calling for discount rates of 7 percent and 3 percent for both benefits and costs. It states: “Benefits and costs do not always take place in the same time period. When they do not, it is incorrect simply to add all of the expected net benefits or costs without taking account of when they actually occur. If benefits or costs are delayed or otherwise separated in time from each other, the difference in timing should be reflected in your analysis.... For regulatory analysis, you should provide estimates of net benefits using both 3 percent and 7 percent.... If your rule will have important intergenerational benefits or costs you might consider a further sensitivity analysis using a lower but positive discount rate in addition to calculating net benefits using discount rates of 3 and 7 percent.” (PP. 31, 34, 36) 28 Circular A-4 provides a detailed discussion. Among other things, it states: “Examples of quantitative analysis, broadly defined, would include formal estimates of the probabilities of environmental damage to soil or water, the possible loss of habitat, or risks to endangered species as well as probabilities of harm to human health and safety. There are also uncertainties associated with estimates of economic benefits and costs, such as the cost savings associated with increased energy efficiency. Thus, your analysis should include two fundamental components: a quantitative analysis characterizing the probabilities of the relevant outcomes and an assignment of economic value to the projected outcomes.” (P. 40). Circular A-4 also states: “You should clearly set out the basic assumptions, methods, and data underlying the analysis and discuss the uncertainties associated with the estimates.” (P. 17) 29 Executive Order 12866, Section 1(b)(5) states; “When an agency determines that a regulation is the best available method of achieving the regulatory objective, it shall design its regulations in the most cost-effective manner to achieve the regulatory objective. In doing so, each agency shall consider incentives for innovation, consistency, predictability, the costs of enforcement and compliance (to the government, regulated entities, and the public), flexibility, distributive impacts, and equity” (emphasis added). Circular A-4 states: “The term ‘distributional effect’ refers to the impact of a regulatory action across the population and economy, divided up in various ways (e.g., income groups, race, sex, industrial sector, geography)… Your regulatory analysis should provide a separate description of distributional effects (i.e., how both benefits and costs are distributed among sub-populations of particular concern) so that decision makers can properly consider them along with the effects on economic efficiency… Where distributive effects are thought to be important, the effects of various regulatory alternatives should be described quantitatively to the extent possible, including the magnitude, likelihood, and severity of impacts on particular groups.” (P. 14) 30 Circular A-4 states: “Distinguishing between real costs and transfer payments is an important, but sometimes difficult, problem in cost estimation. . . . Transfer payments are monetary payments from one group to another that do not affect total resources available to society. . . . You should not include transfers in the estimates of the benefits and costs of a regulation. Instead, address them in a separate discussion of the regulation’s distributional effects.” (P. 14) 104 Does the RIA analyze relevant effects on disadvantaged or vulnerable populations (e.g., disabled or poor)? 31 Does the analysis include a clear, plain-language executive summary, including an accounting statement that summarizes the benefit and cost estimates for the regulatory action under consideration, including the qualitative and non-monetized benefits and costs? 32 31 Circular A-4 states: “Your regulatory analysis should provide a separate description of distributional effects (i.e., how both benefits and costs are distributed among sub-populations of particular concern) so that decision makers can properly consider them along with the effects on economic efficiency. Executive Order 12866 authorizes this approach. Where distributive effects are thought to be important, the effects of various regulatory alternatives should be described quantitatively to the extent possible, including the magnitude, likelihood, and severity of impacts on particular groups.” (P. 14) 32 Circular A-4 states: “Your analysis should also have an executive summary, including a standardized accounting statement.” (P. 3). OMB recommends that: “Regulatory analysis should be made as transparent as possible by a prominent and accessible executive summary—written in a “plain language” manner designed to be understandable to the public—that outlines the central judgments that support regulations, including the key findings of the analysis (such as central assumptions and uncertainties)…If an agency has analyzed the costs and benefits of regulatory alternatives to the planned action (as is required for economically significant regulatory actions), the summary should include such information.” See 2010 Report to Congress on the Benefits and Costs of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entities, page 51. Available at: http://www.whitehouse.gov/sites/ ANALYTICAL PERSPECTIVES Does the analysis include a clear and transparent table presenting (to the extent feasible) anticipated benefits and costs (quantitative and qualitative)? 33 default/files/omb/legislative/reports/2010_Benefit_Cost_Report.pdf 33 Circular A-4 states: “You need to provide an accounting statement with tables reporting benefit and cost estimates for each major final rule for your agency.” (P. 44). Circular A-4 includes an example of a format for agency consideration. OMB recommends “that agencies should clearly and prominently present, in the preamble and in the executive summary of the regulatory impact analysis, one or more tables summarizing the assessment of costs and benefits required under Executive Order 12866 Section 6(a)(3)(C)(i)-(iii). The tables should provide a transparent statement of both quantitative and qualitative benefits and costs of the proposed or planned action as well as of reasonable alternatives. The tables should include all relevant information that can be quantified and monetized, along with relevant information that can be described only in qualitative terms. It will often be useful to accompany a simple, clear table of aggregated costs and benefits with a separate table offering disaggregated figures, showing the components of the aggregate figures. To the extent feasible in light of the nature of the issue and the relevant data, all benefits and costs should be quantified and monetized. To communicate any uncertainties, we recommend that the table should offer a range of values, in addition to best estimates, and it should clearly indicate impacts that cannot be quantified or monetized. If nonquantifiable variables are involved, they should be clearly identified. Agencies should attempt, to the extent feasible, not merely to identify such variables but also to signify their importance.” See 2010 Report to Congress on the Benefits and Costs of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entities, page 51. Available at: http://www.whitehouse.gov/sites/default/files/omb/legislative/reports/2010_Benefit_Cost_Report.pdf 10. SOCIAL INDICATORS The social indicators presented in this chapter illustrate in broad terms how the Nation is faring in selected areas, including the economy, energy, the environment, health, and education, among others. The indicators shown in the tables in this chapter are only a subset drawn from the vast array of available data on conditions in the United States. In choosing indicators for these tables, priority was given to measures that were consistently available over an extended period. Such indicators make it easier to draw comparisons and establish trends. The individual measures in these tables are influenced to varying degrees by many Government policies and programs, as well as by external factors beyond the Government’s control. They do not measure the outcomes of Government policies, because they do not show the direct results of Government activities, but they do provide a quantitative measure of the progress or lack of progress toward some of the ultimate ends that Government policy is intended to promote. The “Program Evaluation “and “Benefit-Cost Analysis” chapters of this volume discuss approaches toward assessing directly the impacts of particular Government programs. The President has made it clear that policy decisions should be based upon evidence—evidence about what the Nation’s greatest needs and challenges are and evidence about what strategies are working. The social indicators in this chapter provide useful information both for prioritizing budgetary and policymaking resources and for evaluating how well existing approaches are working. Economic Conditions: The 2008-2009 economic downturn produced the worst labor market in more than a generation. Unemployment is higher than at any time in the past quarter century, and the employment-to-population ratio has fallen below 60 percent for the first time since 1984. Real GDP per capita has declined over the past five years. Income and Wealth: Over the entire period from 1960 to 2011 shown in the tables the primary pattern has been one of rising living standards. Real disposable income per capita has more than tripled as technological progress and the accumulation of human and physical capital have increased the Nation’s productive capacity. Average household net worth has more than doubled. But these gains have not been evenly distributed. Median household income is up only 23 percent (since 1967) and was lower in 2010 than in 1997. The largest income gains have been concentrated among higher-income families and individuals. Similarly, the median wealth of households in the decade before retirement has risen, but not nearly as rapidly as mean wealth. Changing household composition is partly responsible for these trends. The numbers of two-earner households and single-parent households have both increased. Stagnating wages for low-skill workers are another reason why rising average incomes have not had more impact on the most economically vulnerable Americans. Economic Inequality: The rise in the share of national income received by those at the top of the income distribution can be seen in the two inequality measures in Table 10-1. The share of income accruing to the lower 60 percent of households has fallen from 32.3 percent in 1970 to 26.4 percent in 2010. The income share of the top one percent of taxpayers has risen from around eight percent in the two decades between 1960 and 1980 to 18 percent in 2008. The poverty rate, which fell dramatically between 1960 and 1970, as the economy prospered and as Social Security and other safety-net programs expanded, is at about the same level as it was in 1966—despite the large increase in per capita income—and 15 percent of American households are food-insecure. Setting the Stage for Future Prosperity: The Nation’s future economic prosperity depends on having a highly skilled workforce, an expanding stock of physical capital, including advanced infrastructure, and a business environment that encourages innovation. Environmental quality is also important for future well-being. Saving: National saving is a key determinant of future prosperity because it supports capital accumulation. Table 10-1 shows that net national saving, which was already low by international standards when it averaged around 10 percent in the 1960s and 1970s, fell from 6.2 percent in 2000 to 2.0 percent in 2007 as Federal budget surpluses turned to deficits, and fell even further in the recession that followed. During the recent economic downturn, personal saving has rebounded to around 5 percent, but net national saving, which includes the Government’s dissaving, has turned slightly negative. Despite the current low saving rate, previous saving has resulted in a large accumulation of physical capital. The stock of physical capital including consumer durable goods like cars and appliances amounted to $49 trillion in 2010, more than four times the size of the capital stock in 1960, after accounting for inflation. Innovation: National Research and Development (R&D) spending has hovered between 2.5 percent and 2.8 percent of GDP for most of the past 50 years. Successful R&D can result in new innovations, which can also be encouraged by patent protection. Patents encourage innovation by awarding an inventor the right to exclude others from the use of an invention unless compensated. The patent system also assures publication of patented ideas distributing knowledge that might otherwise be kept confidential. Patents by U.S. inventors have increased threefold since 1960. Environmental Quality: The Nation’s future well-being and prosperity depends also on stewardship of our 105 106 natural resources, the environment, and on our ability to bring about a clean energy economy. The country has made major strides in improving air quality since the passage of the Clean Air Act in 1970. Concentrations of the main criteria pollutants tracked by the Environmental Protection Agency have declined significantly since 1970. The largest decline was for lead, which was removed from gasoline, but there have also been large declines in the emissions of carbon monoxide, nitrogen oxides, and sulfur dioxide. The air has become markedly cleaner in the United States as a result of this progress. Progress on improving water quality has also been noticeable as an increasing proportion of the population is served by improved water treatment facilities. Moving forward, the greatest environmental challenge is reducing greenhouse gas emissions. In 2009, emissions were 5,618 teragrams. The President announced a target reduction of 17 percent in greenhouse gas emissions between 2005 and 2020, with an ultimate reduction of 83 percent between 2005 and 2050. While technological advances and a shift in production patterns mean that Americans now use about half as much energy per real dollar of GDP as they did 50 years ago, rising income levels mean that per capita consumption has remained roughly constant. Only seven percent of U.S. energy production is from renewable sources. Health, Education, and Civic Engagement: Table 10-2 focuses on additional national priorities: health, education, community involvement and civic engagement. Health: The first three groups of indicators in this table show measures related to the Nation’s health. The United States devotes a large fraction of its income to health care, and that share has increased more than threefold since 1960. In the latest data, the share of GDP accounted for by health expenditures was 17.8 percent of GDP in 2009, and the share is projected to have remained near that level in 2010-2011. This is the largest it has ever been and well above what other nations spend on health. Despite the large expenditures on health care, many Americans were unable to obtain health insurance. In 2010, about 50 million people, 16 percent of the U.S. population, lacked health insurance. In 2010, the President signed into law the Affordable Care Act, which is projected to reduce the number of uninsured by 32 million Americans. The United States has seen progress over the last 50 years in some important indicators of health status. Infant mortality has fallen from 26 deaths per 1,000 live births in 1960 to less than 7 deaths since 2000. In 2009, infant mortality fell to all-time low of 6.4 per 1,000 live births. Life expectancy at birth has increased substantially, rising by more than eight years since 1960, although it lags behind that in many other developed countries. Running counter to these positive trends, 21 percent of the adult population still smokes (a level below historic highs, but still troubling), and about 33 percent of the population is classified as obese according to criteria established by the Centers for Disease Control and Prevention, up from 15 percent twenty years ago. Education: The Administration is committed to returning America to being number one in the world in ANALYTICAL PERSPECTIVES high school and college graduation rates and academic achievement, which is critical to long-term prosperity and growth. Between 1960 and 1980, the percentage of 1824 year olds with a high school diploma increased from 60 percent to 81 percent, a gain of about 10 percentage points per decade. Progress has slowed since then with only a four percentage point gain over the past 30 years. College enrollment rates have continued to rise. In 1980 only a quarter of 18-24 year olds were enrolled in college. In the latest data that number was 41 percent. The most thorough measurement of education achievement is the National Assessment of Educational Progress (NAEP). These measures have been taken since the 1980s. They show only very gradual improvement in mathematics and no discernible progress in reading for American 17-year olds. Housing: Americans are generally well housed, but some of the population faces housing problems. In 2009, about 5 percent of households with children lived in inadequate housing as defined by the Census Bureau. These problems usually consisted of poor plumbing, inadequate heating, or other physical maintenance problems. About six percent of these households were experiencing overcrowding. Both measures were down from levels reported in the 1980s. However, many families have experienced increased housing costs relative to income. In 2009, 39 percent of families with children were spending more than 30 percent of reported income on housing and utilities, up from 17 percent in 1980. Crime: Since 1980, there has been a remarkable decline in violent crime. The two crime measures shown in Table 10-2 are based on different types of record keeping. The murder rate is based on reported homicides compiled by the Federal Bureau of Investigation from local law enforcement agencies, while the violent crime statistic is based on surveys of victims. The violent crime rate has declined to about 30 percent of its peak level in 1979. Meanwhile, the murder rate has been cut in half. Families: Measures of family instability increased significantly up until around 1995. Since 1995, births to unmarried adolescents age 15 to 17 have dropped from around 30 per 1,000 women to about 19 per 1,000. After rising for more than three decades, the percentage of children living only with their mother stabilized at around 24 percent of all children from 1995 through 2009. Charitable Giving: Americans increased their charitable contributions at an average real rate of slightly less than two percent per year between 1960 and 2008; real GDP per capita grew by slightly more than two percent per year over that interval. Charitable giving measured in real terms dropped slightly in 2008 and again in 2009, as the recession and capital losses cut into family resources, but the level of giving appears to have rebounded in 2010, and it remains above its level in 2006. Voting: Another measure of American’s willingness to participate in civic activity, the voting rate for President, was at 64 percent in 1960, but averaged about 55 percent from 1972 through 2000 before rising to 60 percent in 2004 and 62 percent in 2008. 10. SOCIAL INDICATORS Other Compilations of Economic and Social Indicators: There are many other sources of data on trends in American social and economic conditions, including the Statistical Abstract published annually by the Census Bureau (the Census Bureau has announced plans to cease publication of the Statistical Abstract following the 2012 volume). Some examples are described below. Cutting across a range of social and economic domains, the Interagency Forum on Child and Family Statistics annually assembles American’s Children: Key National Indicators of Well-Being (http://www.childstats.gov). The Interagency Forum on Aging-Related Statistics publishes Older Americans: Key Indicators of Well-Being every other year (http://www.agingstats.gov/agingstatsdotnet/ main_site/default.aspx). There are also topic-specific indicators, which highlight performance in specific areas. Science and Engineering Indicators, published by the National Science Board, provides a broad base of quantitative information on the U.S. 107 and international science and engineering enterprise: (http://www.nsf.gov/statistics/indicators). The Science Resources Statistics Division at the National Science Foundation is doing developmental work on measuring innovation, an important component of the scientific enterprise not currently included in our measures. Healthy People 2020 within the Department of Health and Human Services offers a statement of national health objectives that identifies the most significant preventable threats to health and establishes national goals to reduce these threats. The National Center for Health Statistics annually publishes Health, United States (http://www. cdc.gov/nchs/hus.htm), a comprehensive compilation of health indicators. The National Center for Education Statistics within the Department of Education publishes the Condition of Education (http://nces.ed.gov/programs/coe). The website includes a set of indicators and also special analyses and a user’s guide. 108 ANALYTICAL PERSPECTIVES Table 10–1. ECONOMIC AND SOCIAL INDICATORS Calendar Years 1960 1970 1980 1990 1995 2000 2005 2009 2010 2011 Economic Conditions Living Standards: 1 Real GDP per person (2005 dollars) 1 ������������������������������������������������������������ 15,716 20,915 25,675 32,157 34,122 39,752 42,715 41,409 42,308 42,631 average annual percent change (5-year trend) ������������������������������������������� 0.8 2.3 2.6 2.3 1.2 3.1 1.4 –0.2 –0.2 –0.4 2 Real disposable income per capita average (2005 dollars) 2 ������������������������������ 10,860 15,151 18,855 23,557 24,939 28,886 31,318 32,141 32,446 32,495 average annual percent change (5-year trend) ������������������������������������������� 1.2 3.2 2.0 1.8 1.1 3.0 1.6 0.6 0.7 0.1 3 Real median income: all households (2010 dollars) ��������������������������������������� N/A 43,055 44,616 48,423 48,408 53,164 51,739 50,599 49,445 N/A average annual percent change (5-year trend) ������������������������������������������� N/A N/A 0.5 1.2 –0.0 1.9 –0.5 –0.2 –0.9 N/A 4 Poverty rate (%) 2 �������������������������������������������������������������������������������������������� 22.2 12.6 13.0 13.5 13.8 11.3 12.6 14.3 15.1 N/A 5 Food-insecure households (percent of all households) 3 �������������������������������� N/A N/A N/A N/A 11.9 10.5 11.0 14.7 14.5 N/A Jobs and Unemployment: 6 Civilian unemployment rate (%) ���������������������������������������������������������������������� 5.5 4.9 7.1 5.5 5.6 4.0 5.1 9.3 9.6 9.0 7 Unemployment plus marginally attached and underemployed (%) ��������������������������� N/A N/A N/A N/A 10.0 7.0 8.9 16.3 16.8 15.9 8 Employment-population ratio % 4 �������������������������������������������������������������������� 56.1 57.4 59.2 62.8 62.9 64.4 62.7 59.3 58.5 58.4 9 Payroll employment change - December to December (millions) ������������������� –0.4 –0.5 0.3 0.3 2.2 2.0 2.5 –5.1 0.9 1.6 10 Payroll employment change - 5-year annual average (millions) ��������������������� 0.2 1.7 2.6 2.1 1.8 2.9 0.5 –0.6 –0.9 –1.0 Economic Inequality: 11 Income share of lower 60% of all households ������������������������������������������������ N/A 32.3 31.2 29.3 28.0 27.3 26.6 26.6 26.4 N/A 12 Income share of top 1% of all taxpayers ��������������������������������������������������������� 8.4 7.8 8.2 13.0 13.5 16.5 17.4 N/A N/A N/A Wealth Creation: 13 Net national saving rate (% of GDP) 5 ������������������������������������������������������������ 10.4 8.1 7.1 3.9 4.7 6.2 3.0 –1.9 –0.4 –0.3 14 Personal Saving Rate (% of Disposable Personal Income) 5 ������������������������������ 7.2 9.4 9.8 6.5 5.2 2.9 1.5 5.1 5.3 4.5 15 Average household net worth (2011 dollars) 5 ������������������������������������������������ 233,621 280,457 307,200 366,831 412,725 523,483 608,807 493,011 515,875 483,249 16 Median wealth of households aged 55–64 (2009 dollars) 6 ���������������������������� N/A N/A N/A 166,668 163,752 210,052 281,741 222,300 N/A N/A Innovation: 17 R&D spending (% of GDP) ����������������������������������������������������������������������������� 2.6 2.5 2.3 2.6 2.5 2.7 2.6 2.8 2.7 2.7 18 Patents issued to U.S. residents (thousands) ������������������������������������������������� 42.3 50.6 41.7 56.1 68.2 103.6 88.5 107.0 132.5 N/A 19 Multifactor productivity (average 5 year percent change) ������������������������������� 1.0 0.9 0.8 0.7 0.5 1.3 1.8 0.2 0.6 N/A 20 Nonfarm output per hour (average 5 year percent change) 1 ����������������������������� 1.8 2.1 1.1 1.5 1.5 2.7 3.1 1.4 1.9 1.9 Capital and Infrastructure: 21 Bridges that are structurally deficient or functionally obsolete (%) 7 ��������������� N/A N/A N/A N/A 31.8 28.6 26.3 24.8 24.3 N/A 22 Real net stock of fixed assets and consumer durable goods ($2010 bils) ������ 11,257 16,430 22,639 29,946 33,316 39,209 45,155 48,872 49,324 N/A Energy and Environment: Air Quality - Mean Pollution Concentration levels 8: 23 Carbon Monoxide (ppm) based on 104 monitoring sites ���������������������������� N/A N/A 8.951 6.130 4.797 3.461 2.296 N/A N/A N/A 24 Ground Level Ozone (ppm) based on 247 monitoring sites ���������������������������� N/A N/A 0.101 0.089 0.090 0.082 0.080 0.070 0.073 N/A 25 Lead (ug/m3) based on 31 monitoring sites ����������������������������������������������� N/A N/A 1.338 0.525 0.357 0.270 0.194 0.226 0.144 N/A 26 Nitrogen Dioxide (ppb) based on 81 monitoring sites ��������������������������������� N/A N/A 27.341 23.935 22.438 20.034 16.871 13.564 13.076 N/A Particulate Matter (ug/m3): 27 PM10 based on 279 monitoring sites ���������������������������������������������������� N/A N/A N/A 82.663 68.551 64.344 59.093 50.624 51.022 N/A 28 PM 2.5 based on 646 monitoring sites �������������������������������������������������� N/A N/A N/A N/A N/A 13.620 12.958 9.816 9.992 N/A 29 Sulfur Dioxide (ppm) based on 141 monitoring sites ���������������������������������� N/A N/A 11.830 8.306 5.926 5.102 4.299 2.528 2.443 N/A Water Quality: 30 Population served by secondary treatment or better (millions) 6 ��������������� 53.4 85.9 117.9 154.4 163.3 189.1 205.2 208.0 210.2 212.5 Climate Change: 31 Net greenhouse gas emissions (teragrams CO2 equivalent) 9 ������������������� N/A N/A N/A 5,320 5,928 6,536 6,157 5,618 N/A N/A 32 Per capita greenhouse gas emissions (megagrams CO2 equivalent) �������� N/A N/A N/A 21.3 22.3 23.2 20.8 18.3 N/A N/A 33 Per 2005$ of GDP greenhouse emissions (kilograms CO2 equivalent) ����� N/A N/A N/A 0.663 0.652 0.583 0.488 0.442 N/A N/A Energy: 34 Energy consumption per capita (millions of BTUs) ������������������������������������ 250 331 344 338 342 350 339 308 317 N/A 35 Energy consumption per real dollar of GDP (thousands of BTUs) ������������� 15.9 15.9 13.4 10.5 10.0 8.8 7.9 7.3 7.4 N/A 36 Energy production from renewable sources (% of total) ����������������������������� N/A N/A N/A N/A N/A N/A 6.4 8.2 7.5 N/A 1 Values for 2011 based on Administration projection for 2011.Q4 growth. 2 The poverty rate does not reflect noncash government transfers. 3 These households were unable to acquire adequate food to meet the needs of all their members at some time during the year because they had insufficient money or other resources for food. 4 Civilian employment as a percent of the civilian noninstitutional population age 16 and above. 5 2011 through 2011.Q3 only. 6 Data interpolated for some years. 7 Bridges are structurally deficient if they have been restricted to light vehicles, require immediate rehabilitation, or are closed. They are functionally obsolete if they no longer meet the criteria for the system of which the bridge is carrying a part. 8 ppm -- parts per million; ug/m3 -- micrograms per cubic meter 9 This is a net measure reflecting both sources and sinks of greenhouse gas. 109 10. SOCIAL INDICATORS Table 10–2. ECONOMIC AND SOCIAL INDICATORS Calendar Years 1960 1970 1980 1990 1995 2000 2005 2009 2010 2011 37 38 39 Access to Health Care: Total national health expenditures (percent of GDP) 1 ������������������������������������ Percentage of population without health insurance ���������������������������������������� % of children age 19–35 months with recommended immunizations 2 ���������� 5.2 N/A N/A 7.2 N/A N/A 9.2 N/A N/A 12.5 12.9 N/A 13.9 14.4 N/A 13.8 13.1 72.8 16.0 14.6 80.8 17.8 16.1 71.9 17.8 16.3 N/A 17.9 N/A N/A 40 41 42 Health Status: Infant mortality (per 1000 live births) 3 ������������������������������������������������������������ Low birthweight [<2,500 gms] percentage of babies �������������������������������������� Life expectancy at birth (years) 3 �������������������������������������������������������������������� 26.0 7.7 69.7 20.0 7.9 70.8 12.6 6.8 73.7 9.2 7.0 75.4 7.6 7.3 75.8 6.9 7.6 76.8 6.9 8.2 77.4 6.4 8.2 78.2 N/A 8.1 N/A N/A N/A N/A 43 44 45 46 Health Risks: Cigarette smokers (% population 18 and older) ��������������������������������������������� Obesity (% of population with BMI over 30) 4 ������������������������������������������������� Alcohol (% high school seniors engaged in heavy drinking) 5 ������������������������ Physical activity: % of adults engaged in regular physical activity 6 ���������������� N/A 13.3 N/A N/A 39.2 N/A N/A N/A 32.7 15.1 41.2 N/A 25.3 22.9 32.2 N/A 24.6 N/A 29.8 N/A 23.1 30.1 30.0 15.0 20.8 33.9 26.2 17.1 20.6 N/A 25.2 19.1 N/A N/A N/A N/A N/A N/A N/A N/A 47 48 49 50 Education: High school graduates (% of population 25 and older) ����������������������������������� Percentage of 18–24 year olds with a high school diploma ���������������������������� Percentage of 18–24 year olds enrolled in college ����������������������������������������� College graduates (% of population 25 and older) ����������������������������������������� 44.6 59.9 N/A 8.4 55.2 78.8 25.7 11.0 68.6 80.9 25.6 17.0 77.6 81.7 32.0 21.3 81.7 80.8 34.3 23.0 84.1 81.9 35.5 25.6 85.2 82.9 38.9 27.6 86.7 84.3 41.3 29.5 87.1 N/A N/A 29.9 N/A N/A N/A N/A 51 52 National Assessment of Educational Progress 7 Reading 17-year olds ���������������������������������������������������������������������������������� Mathematics 17-year olds ��������������������������������������������������������������������������� N/A N/A N/A N/A 283 297 288 303 286 305 285 306 284 305 N/A N/A N/A N/A N/A N/A 53 54 55 Housing: Percentage of families with children with inadequate housing 8 ��������������������� Percentage of families with children with crowded housing ���������������������������� Percentage of families with children with costly housing 9 ������������������������������ N/A N/A N/A N/A N/A N/A 9 9 17 9 7 25 7 7 28 7 7 28 5 6 34 5 6 39 N/A N/A N/A N/A N/A N/A 56 57 Crime: Violent crime rate (per 100,000 population 12 and older) 10 ��������������������������� Murder rate (per 100,000 population) 11 ��������������������������������������������������������� N/A 5.1 N/A 7.8 4,940 10.2 4,410 9.4 4,610 8.2 2,740 5.5 2,100 5.6 1,690 5.0 1,490 4.8 N/A N/A 58 59 Families: Births to unmarried women age 15–17 (per 1,000) ���������������������������������������� Children living with mother only (% of all children) ����������������������������������������� N/A 9.2 N/A 11.6 20.6 18.6 29.6 21.6 30.1 24.0 23.9 22.3 19.7 23.4 19.3 24.4 N/A 25.2 N/A N/A 60 61 Civic Engagement: Individual charitable giving per capita (2011 dollars) ������������������������������������� Percentage of Americans volunteering 12 ������������������������������������������������������� 321 N/A 460 N/A 489 N/A 559 20.4 529 N/A 808 N/A 863 27.0 778 26.8 782 26.3 N/A N/A (1960) (1968) (1972) (1976) (1980) (1984) (1988) (2004) (2008) (2012) Voting for President by election year (% eligible population) 13 ��������������������� 63.8 61.5 56.2 54.8 54.2 55.2 52.8 60.1 61.7 N/A 1 The 2010 and 2011 values are projected, the last actual data are for 2009. 2 The 4:3:1:3:3 series consisting of 4 doses (or more) of diphtheria, tetanus toxoids, and pertussis (DTP) vaccines, diphtheria and tetanus toxoids (DT), or diphtheria, tetanus toxoids, and any acellular pertussis (DTaP) vaccines; 3 doses (or more) of poliovirus vaccines; 1 dose (or more) of any measles-containing vaccine; 3 doses (or more) of Haemophilus influenzae type b (Hib) vaccines; and 3 doses (or more) of hepatitis B vaccines. 3 Data for 2009 are preliminary. 4 BMI refers to body mass index. A BMI over 30 is the criterion for obesity used by the Centers for Disease Control and Prevention. 5 Data are interpolated. Percentage of high school students who had five or more drinks in a row at least once within the two weeks prior to the survey. 6 Participation in leisure-time aerobic and muscle-strengthening activities that meet the 2008 Federal phyiscal activity guidelines for adults 18 years of age and over. 7 Data are interpolated. Actual survey years were 1973, 1978, 1982, 1986, 1990, 1992, 1994, 1996, 1999, 2004, and 2008. 8 Inadequate housing has moderate to severe physical problems, usually poor plumbing or heating or upkeep problems. Some data are interpolated. 9 Expenditures for housing and utilities exceed 30 percent of reported income. Some data are interpolated. 10 Includes crimes both reported and not reported to law enforcement. Offenses include homicide, rape, robbery, aggravated assault and simple assault. 11 Based on reported crimes. Not all crimes are reported, and the fraction that go unreported may have varied over time, preliminary data for 2008. 12 Data from 1974, 1989, and since 2005 are drawn from the Current Population Survey. 13 As computed by Professor Michael McDonald, George Mason University, after adjusting the population for those not eligible to vote in Presidential elections. 62 110 ANALYTICAL PERSPECTIVES Table 10–3. SOURCES FOR ECONOMIC AND SOCIAL INDICATORS Indicator: Source: Economic, Environmental, and Energy Indicators (Table 10–1): Real GDP per person ����������������������������������������������������������������������� Real disposable income per capita ��������������������������������������������������� Real median income: all households ������������������������������������������������ Poverty rate �������������������������������������������������������������������������������������� Food-insecure households ��������������������������������������������������������������� Civilian unemployment rate �������������������������������������������������������������� Unemployment plus marginally attached and underemployed ��������� Employment-population ratio ������������������������������������������������������������ Payroll employment �������������������������������������������������������������������������� Income share of lower 60% of all households ���������������������������������� Income share of top 1% of all taxpayers ������������������������������������������ Net national saving rate �������������������������������������������������������������������� Personal Saving Rate ����������������������������������������������������������������������� Average household net worth ����������������������������������������������������������� Median wealth of households aged 55-64 ���������������������������������������� R&D spending ���������������������������������������������������������������������������������� Patents issued to U.S. residents ������������������������������������������������������� Multifactor productivity ���������������������������������������������������������������������� Nonfarm output per hour ������������������������������������������������������������������ Bridges that are structurally deficient or functionally obsolete ��������� Real net stock of fixed assets and consumer durable goods ����������� Carbon Monoxide ����������������������������������������������������������������������������� Ground Level Ozone ������������������������������������������������������������������������� Lead ������������������������������������������������������������������������������������������������� Nitrogen Dioxide ������������������������������������������������������������������������������� PM10 ������������������������������������������������������������������������������������������������ PM 2.5 ���������������������������������������������������������������������������������������������� Sulfur Dioxide ����������������������������������������������������������������������������������� Population served by secondary treatment or better ������������������������ Net greenhouse gas emissions �������������������������������������������������������� Energy consumption per capita �������������������������������������������������������� Energy consumption from renewable sources ���������������������������������� U.S. Department of Commerce, Bureau of Economic Analysis, National Economic Accounts Data. U.S. Department of Commerce, Bureau of Economic Analysis, National Economic Accounts Data. U.S. Census Bureau, Housing and Household Economic Statistics Division U.S. Census Bureau, Housing and Household Economic Statistics Division U.S. Census Bureau, Current Population Survey Food Security Supplement; tabulated by U.S. Department of Agriculture, Economic Research Service U.S. Department of Labor, Bureau of Labor Statistics, Current Population Survey. U.S. Department of Labor, Bureau of Labor Statistics, Current Population Survey. U.S. Department of Labor, Bureau of Labor Statistics, Current Population Survey. U.S. Department of Labor, Bureau of Labor Statistics, Current Employment Statistics program. U.S. Census Bureau, Housing and Household Economic Statistics Division Thomas Piketty and Emanuel Saez, "Income Inequality in the United States, 1913-1998" Quarterly Journal of Economics, 118(1), 2003, 1-39 (tables and figures updated to 2008, July 2010) U.S. Department of Commerce, Bureau of Economic Analysis, National Economic Accounts Data. U.S. Department of Commerce, Bureau of Economic Analysis, National Economic Accounts Data. Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the United States, and U.S. Census Bureau, Housing and Economic Statistics Division. Board of Governors of the Federal Reserve System, 2009 Survey of Consumer Finances Chartbook. National Science Foundation, Division of Science Resources Statistics, National Patterns of R&D Resources U.S. Patent and Trademark Office, Electronic Information Products Division, Patent Technology Monitoring Team, submissions to the World Intellectual Property Organization. U.S. Department of Labor, Bureau of Labor Statistics, Major Sector Productivity Program. U.S. Department of Labor, Bureau of Labor Statistics, Major Sector Productivity Program. U.S. Federal Highway Administration, Office of Bridge Technology, "National Bridge Inventory." U.S. Department of Commerce, Bureau of Economic Analysis, National Economic Accounts Data. U.S. Environmental Protection Agency, Office of Air and Radiation, Air Trends U.S. Environmental Protection Agency, Office of Air and Radiation, Air Trends U.S. Environmental Protection Agency, Office of Air and Radiation, Air Trends U.S. Environmental Protection Agency, Office of Air and Radiation, Air Trends U.S. Environmental Protection Agency, Office of Air and Radiation, Air Trends U.S. Environmental Protection Agency, Office of Air and Radiation, Air Trends U.S. Environmental Protection Agency, Office of Air and Radiation, Air Trends U.S. Environmental Protection Agency, Clean Watersheds Needs Survey 2008 Report to Congress, June 10, 2010 (includes a projection for 2028) EPA-832-R-10-002. U.S. Environmental Protection Agency, 2010 Inventory of Greenhouse Gases Emissions and Sinks: 1990-2008. U.S. Energy Information Administration, Annual Energy Review 2009, August 19, 2010 energy overview table 1.5. U.S. Energy Information Administration, Independent Statistics and Analysis Health, Education, and Other Social Indicators (Table 10–2): Total national health expenditures ���������������������������������������������������� Percentage of population without health insurance �������������������������� % of children age 19-35 months with recommended immunizations ����� Infant mortality ���������������������������������������������������������������������������������� Low birthweight percentage of babies ���������������������������������������������� Life expectancy at birth ��������������������������������������������������������������������� Cigarette smokers (% population 18 and older) ������������������������������� Obesity (% of population with BMI over 30) (d) �������������������������������� % high school students engaged in heavy drinking �������������������������� % of adults engaged in regular physical activity ������������������������������� High school graduates (% of population 25 and older) ��������������������� Percentage of 18-24 year olds with a high school diploma �������������� Percentage of 18-24 year olds enrolled in college ���������������������������� College graduates (% of population 25 and older) ��������������������������� NAEP: Reading 17-year olds ������������������������������������������������������������ Centers for Medicare and Medicaid Services, National Health Expenditures Data, January 2011. U.S. Census Bureau, Housing and Household Economic Statistics Division Childstats.gov, Forum on Child and Family Statistics Centers for Disease Control and Prevention, National Vital Statistics Report Centers for Disease Control and Prevention, National Vital Statistics Report Centers for Disease Control and Prevention, National Vital Statistics Report Health United States 2010, U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, National Center for Health Statistics Health United States 2010, U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, National Center for Health Statistics Health United States 2010, U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, National Center for Health Statistics Health United States 2010, U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, National Center for Health Statistics U.S. Census Bureau, Current Population Survey U.S. Census Bureau, Current Population Survey U.S. Census Bureau, Current Population Survey U.S. Census Bureau, Current Population Survey National Assessment of Educational Progress, National Center for Education Statistics 111 10. SOCIAL INDICATORS Table 10–3. SOURCES FOR ECONOMIC AND SOCIAL INDICATORS—Continued Indicator: NAEP: Mathematics 17-year olds ����������������������������������������������������� Percentage of families with children with inadequate housing ��������� Percentage of families with children with crowded housing �������������� Percentage of families with children with costly housing ������������������ Violent crime rate (per 100,000 population 12 and older) ���������������� Murder rate (per 100,000 population) ����������������������������������������������� Births to unmarried women age 15-17 (per 1,000) ��������������������������� Children living with mother only �������������������������������������������������������� Source: National Assessment of Educational Progress, National Center for Education Statistics U.S. Census Bureau, American Housing Survey. Tabulated by U.S. Department of Housing and Urban Development U.S. Census Bureau, American Housing Survey. Tabulated by U.S. Department of Housing and Urban Development U.S. Census Bureau, American Housing Survey. Tabulated by U.S. Department of Housing and Urban Development U.S. Department of Justice, Bureau of Justice Statistics, Violent Crime Trends U.S. Department of Justice, Federal Bureau of Investigation, Criminal Justice Information Services Division Centers for Disease Control and Prevention, National Vital Statistics Report Annual Social and Economic Supplement to the Current Population Survey, Detailed Poverty Tabulations various years Individual Charitable Giving �������������������������������������������������������������� Statistical Abstract 2012, Center on Philanthropy at Indiana University, Giving USA. Percentage of Americans volunteering ��������������������������������������������� Corporation for National and Community Service, "Volunteer Growth in America: A Review of Trends since 1974" based on the Current Population Survey. Voting for President by election year (% eligible population) ����������� The United States Elections Project, Dr. Michael McDonald, George Mason University, Fairfax, Virginia. 11. IMPROVING THE FEDERAL WORKFORCE The United States has overcome great challenges throughout our history because Americans of every generation have stepped forward to aid their Nation through service, both in civilian government and in the Uniformed Services. Today’s Federal public servant carries forward that proud American tradition. Whether it is defending our homeland, restoring confidence in our financial system and supporting an historic economic recovery effort, providing health care to our veterans, or searching for cures to the most vexing diseases, we are fortunate to be able to rely upon a skilled workforce committed to public service. A high-performing government depends on an engaged, well-prepared, and well-trained workforce with the right set of skills for the missions the government needs to achieve. However, tight fiscal resources, rapidly changing problems, and new technologies that change the way a program can be delivered are all challenges the Federal workforce must address. This chapter discusses trends in Federal employment, composition, and compensation, and presents the Administration’s plans for achieving the talented Federal workforce needed to serve the American people effectively and efficiently. Trends in Federal Employment The size of the Federal civilian workforce relative to the country’s population has declined dramatically over Percent 1.4% the last several decades, notwithstanding occasional upticks due, for example, to military conflicts and the enumeration of the Census. In the 1950s and 1960s, there were on average 92 residents for every Federal worker. In the 1980s and 1990s, there were on average 106 residents for every Federal worker. By 2011, the ratio had increased to 145 residents for every Federal worker. Since the 1950s and 1960s, the U.S. population increased by 76 percent, the private sector workforce surged 133 percent, while the size of the Federal workforce rose just 11 percent. Relative to the private sector, the Federal workforce is less than half the size it was back in the 1950s and 1960s. The picture that emerges is one of a Federal civilian workforce whose size has significantly shrunk compared to the size of the overall U.S. population, the private sector workforce, and the size of Federal expenditures. Chart 11-1 shows Federal civilian employment (excluding the U.S. Postal Service) as a share of the U.S. resident population from 1958 to 2011. The chart shows the overall decline noted above in both security and non-security agencies. Except for employment peaks associated with the decennial census, Federal employment, in absolute terms, increased slightly in the 1980s and then dropped in the 1990s. This overall downward trend began to reverse itself in 2001, following the September 11 attack. Following that tragic event, the Federal workforce expanded to deal with national security and homeland safety issues Chart 11-1. Federal Civilian Workforce as Share of U.S. Population Overall 1.2% Security Agencies Non-Security Agencies 1.0% 0.8% 0.6% 0.4% 0.2% 0.0% 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 2002 2006 2010 Source: Office of Personnel Management. Notes: Security agencies include the Department of Defense, the Department of Homeland Security, the Department of State, and the Department of Veterans Affairs. Nonsecurity agencies include the remainder of the Executive Branch. 113 114 and to serve our veterans. Between 2001 and 2011, security agency employment grew, while non-security employment declined. For example, civilians working for the Department of the Army grew by more than 60,000, with a similar level of increase in people working for the Veterans Health Administration. Customs and Border Protection also grew more than 30,000 to keep our citizens safe at home. Following this decade of growth, total Federal employment levels flattened out with minimal year-to-year shifts in 2012 and 2013. Table 11-2 shows actual Federal civilian full-time equivalent (FTE) employment levels in the Executive Branch by agency for 2010 and 2011, with estimates for 2012 and 2013. Estimated employment levels for 2013 result in nearly flat levels – a 0.1 percent increase when compared to the prior year. Capped levels of budget authority enacted through the Budget Control Act (BCA) and in the 2013 Budget are having a direct impact on FTE levels in all agencies. Among the 34 departments and agencies presented in Table 11-2, increases exist in less than one-third. Among the 15 Cabinet agencies, increases of more than 1 percent exist at only four – the Departments of Veterans Affairs (VA), Commerce (DOC), Health and Human Services (HHS), and the Treasury. In security agencies, limited increases in VA and the Department of Homeland Security correlate with increased demand for services in veterans’ medical care and continued emphasis on strengthening air travel safety and border protection. Even prior to the enactment of the BCA, in January 2011, the Department of Defense (DOD) initiated a policy to reduce staffing with the goal of holding to 2010 levels for most of the Department. The graduated reductions estimated by DOD in both 2012 and 2013 seek to achieve this goal while minimizing the impact on the workforce and the communities in which those workers live. Beyond the security agencies, 2013 increases in nonsecurity agencies are narrowly focused and are frequently supported by congressionally-authorized fees, not taxpayer dollars. Increased receipts from fees support timely commercialization of innovative technologies through faster and higher-quality patent reviews at the Patent and Trade Office of DOC, stronger food safety measures at the Food and Drug Administration of HHS, and enhancements to create stronger, more stable financial markets consistent with the Wall Street Reform Act. Increases in the category listed as “All other small agencies” in Table 11-2 are similarly driven by efforts to reform Wall Street and protect its customers. Commitments to activate new Federal prisons already constructed with funding appropriated as early as 2001 and as recently as 2010, result in limited necessary personnel increases at the Department of Justice in 2012 and 2013. And stepping up Internal Revenue Service (Treasury) program integrity efforts to ensure companies and individuals are paying their fair share is an investment that more than pays for itself and will result in a five-to-one increase in tax revenues. Beneath many of the staffing toplines are programs that pursue aggressive actions to reduce and reallocate staff from lower to higher priority programs. Some agen- ANALYTICAL PERSPECTIVES cies have imposed hiring freezes, others are using replacement ratios to allow fewer hires than separations, and many are offering early retirement and separation incentives. Across the Government, agencies are embracing a variety of workforce reduction tools to bring their personnel levels down. These complement other aggressive costsaving measures across all agencies such as real estate closures, consolidation of back-office functions, and strategic sourcing, as well as agency-specific initiatives, such as the Department of Agriculture’s Blueprint for Stronger Service to streamline operations, launched in January 2012, which involves consolidating more than 200 offices across the country while ensuring that the most vital services the offices provide continue. Federal Pay Trends After more than a decade when the percentage increase in annual Federal pay raises did not keep pace with the percentage increase in private sector pay raises, Congress passed the Federal Employees Pay Comparability Act of 1990 (FEPCA) pegging Federal pay raises, as a default, to changes in the 15-month-lagged Employment Cost Index (ECI) series of wage and salaries for private industry workers, and to locality pay adjustments. The ECI measures private sector pay, holding constant industry and occupation composition. The law gives the President the authority to propose alternative pay adjustments for both base and locality pay. Presidents have regularly proposed alternative pay plans. Chart 11-2 shows how the Federal pay scale has compared to the ECI since 1990. In late 2010, as one of several steps the Administration took to put the Nation on a sustainable fiscal path, the President proposed and Congress enacted a two-year freeze on across-the-board pay adjustments for civilian Federal employees. This has created structural savings in the Budget of $60 billion over 10 years. The President also issued a memorandum directing agencies to freeze pay schedules and forgo general pay increases for civilian Federal employees in administratively determined pay systems. For 2013, the President is proposing a 0.5 percent pay increase. While modest, the Administration’s decision to propose an increase in pay for civilian Federal employees reflects the understanding that while the continuation of a pay freeze was unsustainable, the tight fiscal environment required a responsible approach that enables the investment needed to spur jobs and economic growth for decades to come. This pay increase proposal permits savings of approximately $28 billion over 10 years and $2 billion in 2013 within the BCA caps, reallocated to priorities and services the American people depend on and that would not otherwise have been available under the spending caps. Proposing a pay increase below the level of the private sector (or ECI) was not taken lightly, given the two-year pay freeze in 2011 and 2012 -- but recognizes the real constraints of the current budget situation. The 2013 Budget also includes a deficit reduction proposal that would dedicate an additional 1.2 percent of employee salary (phased-in at 0.4 percent over three years) for contri- 115 11. IMPROVING THE FEDERAL WORKFORCE butions toward retirement benefits. This change in employee contribution levels would not change the amount of each Federal employee’s pension benefit, but would result in $21 billion over 10 years in mandatory savings. Composition of the Federal Workforce and Factors Affecting Federal Pay Federal worker compensation receives a great deal of attention, in particular, in comparison to that of private sector workers. Comparisons of the pay of Federal employees and private sector employees, for example, should account for factors affecting pay, such as differences in skill levels, complexity of work, scope of responsibility, size of organization, location, experience level, and exposure to personal danger. Some of the factors affecting pay are discussed below. Type of occupation. The last half century has seen significant shifts in the composition of the Federal workforce, with related effects on pay. Fifty years ago, most white-collar Federal employees performed clerical tasks, such as posting Census figures in ledgers and retrieving taxpayer records from file rooms. Today their jobs are vastly different, requiring advanced skills to serve a knowledge-based economy. Professionals such as doctors, engineers, scientists, statisticians, and lawyers now make up a large portion of the Federal workforce. Between 1981 and 2011, the proportion of the Federal workforce in clerical occupations fell from 19.4 percent to 5.1 percent of the workforce, and the proportion of blue-collar workers fell from 22.0 percent to 9.7 percent. Today, a large number of Federal employees must manage highly sensitive tasks that require great skill, experience, and judgment. Federal employees increasingly need sophisticated management and negotiation skills to affect change, not just across the Federal Government, but also with other levels of government, not-for-profit providers, and for-profit contractors. Using data from the Current Population Survey 2007-2011 of full-time, full-year workers, Table 11-1 breaks all Federal and private sector jobs into 22 occupation groups. That breakdown shows that Federal and private sector workers do very different types of work. More than half (55 percent) of Federal workers work in the nine highest-paying occupation groups as judges, engineers, scientists, nuclear plant inspectors, etc., compared to about a third (33 percent) of private sector workers in those same nine highest paying occupation groups. In contrast, 46 percent of private sector workers work in the seven lowest-paying occupation groups as cooks, janitors, service workers, clerks, laborers, manufacturing workers, etc. About 27 percent of Federal workers work in those seven lowest-paying occupation groups. Education level. The size and complexity of much Federal work necessitates a highly educated workforce whether that work is analyzing security and financial risks, forecasting weather, planning bridges to withstand extreme weather events, conducting research to advance human health and energy efficiency, or advancing science to fuel future economic growth. Chart 11-3 presents the comparative differences in the education level of the Federal civilian and private sector workforce. About 21 percent of Federal workers have a master’s degree, professional degree, or doctorate versus only 9 percent in the private sector. Only one-in-five Federal employees has not attended college, whereas 41 percent of workers in the private sector have not attended college. Size of organization and responsibilities. Another important difference between Federal workers and pri- Chart 11-2. Pay Raises for Federal vs. Private Workforce Year-over-year percent change 6.0% 5.0% 4.0% 3.0% 2.0% Federal Pay 1.0% 0.0% 1990 1993 1996 Employment Cost Index (15-month lag) 1999 2002 2005 2008 2011 Source: Public Laws, Executive Orders, and the Bureau of Labor Statistics. Notes: Federal pay is for civilians and includes base and locality pay. Employment Cost Index is the wages and salaries, private industry workers series. 116 ANALYTICAL PERSPECTIVES Table 11–1. OCCUPATIONS OF FEDERAL AND PRIVATE SECTOR WORKFORCES (Grouped by Average Private Sector Salary) Percent Occupational Groups Federal Workers Private Sector Workers Highest Paid Occupations Ranked by Private Sector Salary Lawyers and judges ��������������������������������������������������������������������������������������������������������������������������� Engineers ������������������������������������������������������������������������������������������������������������������������������������������ Scientists and social scientists ���������������������������������������������������������������������������������������������������������� Managers ������������������������������������������������������������������������������������������������������������������������������������������� Doctors, nurses, psychologists, etc. �������������������������������������������������������������������������������������������������� Miscellaneous professionals ������������������������������������������������������������������������������������������������������������� Administrators, accountants, HR personnel �������������������������������������������������������������������������������������� Pilots, conductors, and related mechanics ���������������������������������������������������������������������������������������� Inspectors ������������������������������������������������������������������������������������������������������������������������������������������ 1.7% 4.1% 4.8% 11.2% 7.4% 15.1% 7.0% 2.0% 1.2% 0.6% 1.9% 0.6% 13.2% 5.1% 8.0% 2.6% 0.8% 0.3% Total Percentage ����������������������������������������������������������������������������������������������������������������������������������� 54.5% 33.1% Medium Paid Occupations Ranked by Private Sector Salary Sales including real estate, insurance agents ����������������������������������������������������������������������������������� Other miscellaneous occupations ������������������������������������������������������������������������������������������������������ Automobile and other mechanics ������������������������������������������������������������������������������������������������������ Law enforcement and related occupations ���������������������������������������������������������������������������������������� Office workers ������������������������������������������������������������������������������������������������������������������������������������ Social workers ����������������������������������������������������������������������������������������������������������������������������������� 1.0% 3.2% 1.8% 8.5% 2.5% 1.5% 6.6% 4.4% 3.0% 0.8% 6.3% 0.5% Total Percentage ����������������������������������������������������������������������������������������������������������������������������������� 18.5% 21.5% Lowest Paid Occupations Ranked by Private Sector Salary Drivers of trucks and taxis ����������������������������������������������������������������������������������������������������������������� Laborers and construction workers ��������������������������������������������������������������������������������������������������� Clerks ������������������������������������������������������������������������������������������������������������������������������������������������ Manufacturing ������������������������������������������������������������������������������������������������������������������������������������ Other miscellaneous service workers ������������������������������������������������������������������������������������������������ Janitors and housekeepers ���������������������������������������������������������������������������������������������������������������� Cooks, bartenders, bakers, and wait staff ����������������������������������������������������������������������������������������� 0.7% 4.4% 14.2% 2.5% 2.5% 1.6% 0.9% 3.4% 10.4% 11.4% 7.8% 6.3% 2.4% 4.0% Total Percentage ����������������������������������������������������������������������������������������������������������������������������������� 26.8% 45.7% Source: 2007–2011 Current Population Survey. Notes: Federal workers exclude the military and Postal Service, but include all other Federal workers in the Executive, Legislative, and Judicial Branches. However, the vast majority of these employees are civil servants in the Executive Branch. Private sector workers exclude the self-employed. Neither category includes state and local government workers. This analysis is limited to fulltime, full-year workers, i.e. those with at least 1,500 annual hours of work. vate sector workers is the average size of the organizations in which they work. Federal agencies are large and often face challenges of enormous scale, such as distributing benefit payments to over 60 million Social Security and Supplemental Security Income beneficiaries each year, providing medical care to 8.8 million of the Nation’s veterans, and managing defense contracts costing billions of dollars. Workers from large firms (those with 1,000 or more employees) are paid about 14 percent more than workers from small firms (those with fewer than 100 employees), even after accounting for occupational type, level of education, and other characteristics. Demographic characteristics. Federal workers tend to have demographic characteristics associated with higher pay in the private sector. They are more experienced, older and live in higher cost metropolitan areas. For example, 22 percent of Federal workers are 55 or older – up from 15 percent 10 years ago and significantly more than the 18 percent in the private sector. Chart 11-4 shows the difference in age distribution between Federal and private sector workers. Challenges With the backdrop of tightening fiscal constraints, the Federal Government faces specific human capital challenges, including an aging and retiring workforce and a personnel system that requires further modernization. If the Government loses top talent, experience, and institutional memory through retirements, but cannot recruit, retain, and train highly qualified workers, Government performance suffers. While the age distribution and potential for a large number of retiring workers poses a challenge, it also creates an opportunity to streamline the workforce and to infuse it with new – and in some cases lower-cost – workers excited about Government service 117 11. IMPROVING THE FEDERAL WORKFORCE Chart 11-3. Education Level Distribution in Federal vs. Private Workforce Doctorate/ Professional Federal Private Masters Bachelors Some College/ Associates High School Less than High School 0% 5% 10% 15% 20% 25% 30% 35% Source: 2007-2011 Current Population Survey. Notes: Federal workers exclude the military and Postal Service, but include all other Federal workers in the Executive, Legislative, and Judicial Branches. However, the vast majority of these employees are civil servants in the Executive Branch. Private sector workers exclude the self-employed. Neither category includes state and local government workers. This analysis is limited to full-time, full-year workers, i.e. those with at least 1,500 hours of work. and equipped with strong technology skills, problem-solving ability, and fresh perspectives to tackle problems that Government must address. To address issues in the long-term, Federal managers and employees need to rely on a modernized personnel system. To that end, the Administration proposed to the Joint Select Committee on Deficit Reduction that the Congress establish a Commission on Federal Public Service Reform comprised of Members of Congress, representatives from the President’s National Council on Federal Labor-Management Relations, members of the private sector, and academic experts. The Commission would develop recommendations on reforms to modernize Federal personnel policies and practices within fiscal constraints, including, but not limited to compensation, staff development and mobility, and personnel performance and motivation. This section discusses two major Federal workforce challenges, and the following section describes actions this Administration is taking to address those challenges. Aging Workforce As discussed above, the Federal workforce of 2011 is older than Federal workforces of past decades and older than the private sector workforce. The number of Federal retirements is on a slow and steady increase, rising from 95,425 in 2009 to 96,133 in 2010 and 98,731 in 2011. Given these demographics, the Federal Government faces two immediate challenges: preparing for retirements to maximize knowledge transfer from one generation to the next, and hiring and developing the next gen- eration of the Government workforce to accomplish the varied and challenging missions the Federal Government must deliver. Developing and Engaging Personnel to Improve Performance One well-documented challenge in any organization is managing a workforce so it is engaged, innovative, and committed to continuous improvement, while at the same time dealing with poor performers who fail to improve as needed. Federal employees are generally positive about the importance of their work and express a high readiness to put in extra effort to accomplish the goals of their agencies. Results from the Federal Employee Viewpoint Survey (EVS) indicate 92 percent of respondents answer positively to the statement “The work I do is important.” and nearly 97 percent of respondents answer positively to the statement “When needed I am willing to put in the extra effort to get a job done.” However in contrast, Federal employees have repeatedly identified the inability to deal with poor performers as an area of weakness over the past 10 years. In 2011, only 31 percent of employees sampled in the EVS answered positively that “In my work unit, steps are taken to deal with a poor performer who cannot or will not improve.” In addition, only 41 percent agreed that “creativity and innovation are rewarded”. Over the past year, the Office of Personnel Management (OPM) and the Office of Management and Budget (OMB) have jointly met with agencies to review agency progress on their action plans to address weaknesses identified through the EVS. 118 ANALYTICAL PERSPECTIVES Chart 11-4. Federal vs. Private Age Distribution Percent 70% Private Sector Federal Workers 60% 50% 40% 30% 20% 10% 0% Less than 35 35-54 55 or more Source: 2011 Current Population Survey (covering calendar year 2010). Notes: Federal workers exclude the military and Postal Service, but include all other Federal workers in the Executive Branch. Private sector workers exclude the self-employed. Neither category includes state and local government workers. This analysis is limited to full-time, full-year workers, i.e. those with at least 1,500 annual hours of work. Progress Improving Employee Performance and Human Capital Management The Administration has made considerable progress improving employee performance and human capital management through multiple efforts, including: strengthened labor-management partnerships, better alignment between employee performance and organizational performance objectives, increased agency use of personnel data for decision-making, better hiring practices, heightened attention to a diverse and inclusive workforce, and a new Senior Executive Service (SES) performance appraisal system. Strengthening Labor-Management Relations On December 9, 2009, the President issued Executive Order 13522 “Creating Labor-Management Forums to Improve the Delivery of Government Services”. Cooperative labor-management forums have been formed across the Federal Government to resolve workplace issues and improve mission performance and service delivery to the American public. The Administration developed guidelines to help each forum define its objectives and measure results along three dimensions: mission accomplishment, employee perceptions, and labor-management relations. Training opportunities have been provided to support these efforts. For example, VA and the Federal Labor Relations Authority made web-based training available at no cost across the Executive Branch. In addition, a working group of the National Council on Federal Labor-Management Relations partnered with members of the Chief Human Capital Officers Council to recommend a new employee performance manage- ment framework, referred to as the Goals-EngagementAccountability-Results framework. Elements of this framework are now being tested by several pilot agencies, including VA, OPM, the Coast Guard, the Department of Housing and Urban Development, and the Department of Energy. Developing and Using Personnel Analytics The Administration is committed to strengthening Federal agencies’ capacity to analyze human resources data to address workplace problems, improve productivity, and cut costs. The Federal Government began annual administration of the EVS in 2010 to make it more useful as a managerial tool to help agencies identify areas of personnel management strength and weakness. In 2011, to enhance its value, the survey was administered in a way that provided more managers with EVS information specific to their organizational unit. In 2012, OPM will survey all permanent civilian employees, rather than sampling as it did in 2011, to increase further agencies’ ability to pinpoint areas of strength and weakness. In addition, Performance.gov provides agencies and the public a window on key human resources data – including Government-wide and agency-specific hiring times, applicant and manager satisfaction, employee engagement and retention, diversity and disability, and veterans hiring and employment. Building a Workforce with the Skills Necessary to Meet Agency Missions The demands of the workplace necessitate new and evolving skill sets in the workforce of the Federal Government. The Government Accountability Office has 119 11. IMPROVING THE FEDERAL WORKFORCE identified critical employee skills gaps as an area of high risk. As a result, the Administration has established a Cross-Agency Priority Goal in this area and OPM will lead the multiagency effort to close critical skills gaps across the Federal Government. OPM and the Chief Human Capital Officers Council will develop and implement a Government-wide plan to achieve this goal. This effort will build on progress already being made closing critical skills gaps in acquisition and information technology (IT). Spending on Federal contracts nearly doubled between 2001 and 2008, while the acquisition workforce responsible for negotiating, awarding, and managing these contracts remained essentially flat. While private sector contractors provide a wide range of services to help Federal employees carry out agency missions and operations, such as scientific research, IT support, and construction services, the lag in building a skilled acquisition workforce that kept pace with contracting requirements contributed to ineffective and wasteful contracting practices and imbalances in our relationship with contractors. Over the past three years, this Administration has worked to reverse this trend and restore accountability and fiscal responsibility. Through a focus on building the capacity and capability of the acquisition workforce and other key initiatives, the Federal Government reduced spending in Government contracting in 2010 for the first time in 13 years, reduced the use of many high-risk contracting practices, and made other significant improvements to the Federal contracting process. Continuing these and other efforts to increase efficiencies in Federal contracting -- while achieving further savings through the Campaign to Cut Waste -- depends on a strong, well-trained acquisition workforce, and the Administration continues to undertake the human capital planning and actions needed to improve Federal contracting. The Administration is also committed to building a more efficient and effective 21st Century Government for the American people through the strategic use of IT, and strengthening the IT workforce is a key element in its plan to reform Federal IT management. To ensure we have experienced and talented managers to oversee large, complex IT investments and maximize the return on taxpayer dollars at every step in the process, the Administration created a new role for IT program managers with rigorous requirements. In addition, the Presidential Technology Fellows Program was launched to reduce the barriers to entering public service and to provide highly talented technology professionals access to unique career opportunities in a variety of Federal agencies. The Entrepreneurin-Residence program was also initiated, which enables the Government to capitalize on subject matter experts across various communities to bring innovative practices and technologies into the Government. A Diverse and Inclusive Workforce The American people are best served by a Federal workforce that reflects the rich diversity of the populace and encourages collaboration, fairness, and innovation. Pursuant to the President’s Executive Order 13583, signed in August 2011, the first Government-wide Diversity and Inclusion Strategic Plan was issued and provides agencies with the shared goals of workforce diversity, workplace inclusion, and sustainability. The Strategic Plan efforts will focus on outreach, recruitment, and career development to draw from all segments of society, including those who are underrepresented, as well as on the retention, inclusion, and leadership development of all Federal employees. New Senior Executive Service Performance Appraisal System In January 2012, OPM and OMB issued a standard Government-wide SES performance appraisal system to meet the SES performance management needs of all agencies and their SES employees. An interagency work group developed this system after examining a number of current SES performance management systems at several agencies and benchmarking with the private sector through the President’s Management Advisory Board, a group of private sector leaders that advise the Government on management best practices. The new system will provide a consistent and uniform framework for agencies to communicate expectations and evaluate the performance of SES members, particularly centering on the role and responsibility of SES employees to provide executive leadership. The new system will also provide the necessary flexibility and enable appropriate customization. Agencies will have the opportunity to transition to this new system over the next year or two as their current system certifications expire, or earlier if desired. 120 ANALYTICAL PERSPECTIVES Table 11–2. FEDERAL CIVILIAN EMPLOYMENT IN THE EXECUTIVE BRANCH (Civilian employment as measured by FTEs in thousands, excluding the Postal Service) Actual Agency 2010 Cabinet agencies: Agriculture ����������������������������������������������������� Commerce ����������������������������������������������������� Defense ��������������������������������������������������������� Education ������������������������������������������������������� Energy ����������������������������������������������������������� Health and Human Services �������������������������� Homeland Security ��������������������������������������� Housing and Urban Development ������������������ Interior ����������������������������������������������������������� Justice ����������������������������������������������������������� Labor ������������������������������������������������������������� State �������������������������������������������������������������� Transportation ������������������������������������������������ Treasury ��������������������������������������������������������� Veterans Affairs ��������������������������������������������� Change: 2012 to 2013 Estimate 2011 2012 2013 FTE Percent 96.3 123.3 741.4 4.1 16.1 66.1 173.0 9.5 70.9 113.4 16.9 31.6 57.2 111.9 284.8 95.9 41.3 771.3 4.4 16.1 68.8 179.5 9.5 70.5 116.3 16.9 32.4 57.4 110.7 295.7 93.3 40.5 764.3 4.3 16.5 70.1 187.5 9.4 70.4 117.9 17.4 32.4 57.7 108.2 302.3 92.3 42.0 756.8 4.3 16.4 71.5 188.9 9.4 69.8 118.6 17.4 32.5 57.9 111.8 306.6 –1.0 1.5 –7.5 0.0 –0.1 1.4 1.4 0.0 –0.6 0.7 0.0 0.1 0.2 3.6 4.3 –1.1% 3.7% –1.0% 0.0% –0.6% 2.0% 0.7% 0.0% –0.9% 0.6% 0.0% 0.3% 0.3% 3.3% 1.4% Broadcasting Board of Governors ����������������� Corps of Engineers—Civil Works ������������������ Environmental Protection Agency ����������������� Equal Employment Opportunity Comm ��������� Federal Deposit Insurance Corporation ��������� General Services Administration ������������������� International Assistance Programs ���������������� National Aeronautics and Space Admin �������� National Archives and Records Admin ���������� National Labor Relations Board ��������������������� National Science Foundation ������������������������� Nuclear Regulatory Commission ������������������� Office of Personnel Management ������������������ Railroad Retirement Board ���������������������������� Securities and Exchange Commission ���������� Small Business Administration ���������������������� Smithsonian Institution ���������������������������������� Social Security Administration ����������������������� Tennessee Valley Authority ���������������������������� All other small agencies 1������������������������������� 1.9 23.6 17.2 2.4 7.1 12.5 4.9 18.4 3.2 1.6 1.4 4.0 4.8 1.0 3.7 3.4 5.1 67.3 12.0 15.9 1.9 23.7 17.3 2.5 8.3 12.7 5.2 18.6 3.3 1.7 1.4 4.0 5.4 1.0 3.8 3.4 5.2 67.6 12.4 16.3 2.0 23.0 17.1 2.4 8.7 13.2 5.4 18.4 3.3 1.7 1.4 4.0 5.7 1.0 3.9 3.4 5.2 65.4 12.8 17.7 1.9 22.7 17.1 2.4 8.4 13.0 5.4 18.2 3.3 1.7 1.5 3.9 5.3 0.9 4.5 3.4 5.2 63.4 12.9 18.7 –0.1 –0.3 0.0 0.0 –0.3 –0.2 0.0 –0.2 0.0 0.0 0.1 –0.1 –0.4 –0.1 0.6 0.0 0.0 –2.0 0.1 1.0 –5.0% –1.3% 0.0% 0.0% –3.4% –1.5% 0.0% –1.1% 0.0% 0.0% 7.1% –2.5% –7.0% –10.0% 15.4% 0.0% 0.0% –3.1% 0.8% 5.6% Total, Executive Branch civilian employment 2 ��� Security FTE per P.L. 112–25 ���������������������������� Nonsecurity FTE ������������������������������������������������� 2,127.9 1,241.7 886.2 2,102.4 1,290.1 812.3 2,107.6 1,297.9 809.7 2,110.0 1,296.3 813.7 2.4 –1.6 4.0 0.1% –0.1% 0.5% Other agencies—excluding Postal Service: 1 FTE increases in the Consumer Financial Protection Bureau and the Commodity Futures Trading Commission comprise 70% of the increase between 2012 and 2013. 2 Totals may not add due to rounding. 121 11. IMPROVING THE FEDERAL WORKFORCE Table 11–3. TOTAL FEDERAL EMPLOYMENT (As measured by FTEs) Description Estimate 2011 Actual 2012 Change: 2012 to 2013 2013 FTE Percent Executive branch civilian personnel: Subtotal, excluding Postal Service ���������������������������������������������������������������� 2,102,369 2,107,586 2,110,012 2,426 0.1% Postal Service 1 ������������������������������������������������������������������������������������������������� 603,070 579,069 574,142 –4,927 –0.9% Subtotal, Executive Branch civilian personnel ����������������������������������������������� 2,705,439 2,686,655 2,684,154 –2,501 –0.1% Department of Defense 2 ����������������������������������������������������������������������������������� 1,534,424 1,499,930 1,466,664 –33,266 –2.2% Department of Homeland Security (USCG) ������������������������������������������������������ 42,429 43,088 42,540 –548 –1.3% Commissioned Corps (DOC, EPA, HHS) ���������������������������������������������������������� 6,821 6,845 6,845 0 0.0% Subtotal, uniformed military personnel ���������������������������������������������������������� 1,583,674 1,549,863 1,516,049 –33,814 –2.2% Executive branch uniformed military personnel: Subtotal, Executive Branch ���������������������������������������������������������������������������� 4,289,113 4,236,518 4,200,203 –36,315 –0.9% Legislative Branch3 ������������������������������������������������������������������������������������������������� 31,684 34,685 34,515 –170 –0.5% Judicial Branch ������������������������������������������������������������������������������������������������������� 35,381 34,914 35,164 250 0.7% Grand total �������������������������������������������������������������������������������������������������� 4,356,178 4,306,117 4,269,882 –36,235 –0.8% Postal Rate Commission. 2 Includes activated Guard and Reserve members on active duty. Does not include Full-Time Support (Active Guard & Reserve (AGRs)) paid from Reserve Component appropriations. 3 FTE data not available for the Senate (positions filled were used). 1 Includes 122 ANALYTICAL PERSPECTIVES Table 11–4. PERSONNEL COMPENSATION AND BENEFITS (In millions of dollars) Description Change: 2012 to 2013 2011 Actual 2012 Estimate 2013 Request Dollars Percent Civilian personnel costs: Executive Branch (excluding Postal Service): Direct compensation ��������������������������������������������������������������� Personnel benefits ������������������������������������������������������������������ Subtotal, Executive Branch �������������������������������������� 175,931 63,919 239,850 177,035 64,495 241,530 179,942 65,816 245,758 2,907 1,321 4,228 1.6% 2.0% 1.8% Postal Service: Direct compensation ��������������������������������������������������������������� Personnel benefits ������������������������������������������������������������������ Subtotal ����������������������������������������������������������������������������� 37,495 15,126 52,621 35,691 8,697 44,388 30,003 11,711 41,714 –5,688 3,014 –2,674 –15.9% 34.7% –6.0% Legislative Branch: 1 Direct compensation ��������������������������������������������������������������� Personnel benefits ������������������������������������������������������������������ Subtotal ����������������������������������������������������������������������������� 2,154 653 2,807 2,110 647 2,757 2,132 663 2,795 22 16 38 1.0% 2.5% 1.4% Judicial Branch: Direct compensation ��������������������������������������������������������������� Personnel benefits ������������������������������������������������������������������ Subtotal ����������������������������������������������������������������������������� Total, civilian personnel costs �������������������������������������������� 3,226 1,067 4,293 299,571 3,206 1,081 4,287 292,962 3,249 1,105 4,354 294,621 43 24 67 1,659 1.3% 2.2% 1.6% 0.6% Department of Defense Direct compensation ��������������������������������������������������������������� Personnel benefits ������������������������������������������������������������������ Subtotal ����������������������������������������������������������������������������� 78,828 50,940 129,768 78,023 51,346 129,369 78,270 48,163 126,433 247 –3,183 –2,936 0.3% –6.2% –2.3% All other executive branch, uniformed personnel: Direct compensation �������������������������������������������������������������������� Personnel benefits ����������������������������������������������������������������������� Subtotal ���������������������������������������������������������������������������������� Total, military personnel costs 2 ��������������������������������������������������� 2,455 792 3,247 133,015 2,506 822 3,328 132,697 2,721 763 3,484 129,917 215 –59 156 –2,780 8.6% –7.2% 4.7% –2.1% Grand total, personnel costs �������������������������������������������������������� 432,586 425,659 424,538 –1,121 –0.3% Retired pay for former personnel Government payment for Annuitants: ������������������������������������� Employee health benefits �������������������������������������������������� Employee life insurance ����������������������������������������������������� 71,983 10,260 45 81,820 10,475 45 85,231 11,027 45 3,411 552 0 4.2% 5.3% 0.0% Former military personnel: Retired pay for former personnel ������������������������������������������������� Military annuitants health benefits ����������������������������������������������� 50,997 8,756 52,685 9,471 54,759 9,727 2,074 256 3.9% 2.7% Military personnel costs: ADDENDUM Former Civilian Personnel: 1 Excludes 2 Amounts members and officers of the Senate. in this table for military compensation reflect direct pay and benefits for all servicemembers, including active duty, guard, and reserve members. BUDGET CONCEPTS AND BUDGET PROCESS 123 12. BUDGET CONCEPTS The budget system of the United States Government provides the means for the President and the Congress to decide how much money to spend, what to spend it on, and how to raise the money they have decided to spend. Through the budget system, they determine the allocation of resources among the agencies of the Federal Government and between the Federal Government and the private sector. The budget system focuses primarily on dollars, but it also allocates other resources, such as Federal employment. The decisions made in the budget process affect the Nation as a whole, State and local governments, and individual Americans. Many budget decisions have worldwide significance. The Congress and the President enact budget decisions into law. The budget system ensures that these laws are carried out. This chapter provides an overview of the budget system and explains some of the more important budget concepts. It includes summary dollar amounts to illustrate major concepts. Other chapters of the budget documents discuss these amounts and more detailed amounts in greater depth. The following section discusses the budget process, covering formulation of the President’s Budget, action by the Congress, and execution of enacted budget laws. The next section provides information on budget coverage, including a discussion of on-budget and off-budget amounts, functional classification, presentation of budget data, types of funds, and full-cost budgeting. Subsequent sections discuss the concepts of receipts and collections, budget authority, and outlays. These sections are followed by discussions of Federal credit; surpluses, deficits, and means of financing; Federal employment; and the basis for the budget figures. A glossary of budget terms appears at the end of the chapter. Various laws, enacted to carry out requirements of the Constitution, govern the budget system. The chapter refers to the principal ones by title throughout the text and gives complete citations in the section just preceding the glossary. THE BUDGET PROCESS The budget process has three main phases, each of which is related to the others: 1. Formulation of the President’s Budget; 2. Action by the Congress; and 3. Execution of enacted budget laws. Formulation of the President’s Budget The Budget of the United States Government consists of several volumes that set forth the President’s fiscal policy goals and priorities for the allocation of resources by the Government. The primary focus of the Budget is on the budget year—the next fiscal year for which the Congress needs to make appropriations, in this case 2013. (Fiscal year 2013 will begin on October 1, 2012, and end on September 30, 2013.) The Budget also covers the nine years following the budget year in order to reflect the effect of budget decisions over the longer term. It includes the funding levels provided for the current year, in this case 2012, which allows the reader to compare the President’s Budget proposals with the most recently enacted levels. The Budget also includes data on the most recently completed fiscal year, in this case 2011, so that the reader can compare budget estimates to actual accounting data. In a normal year, the President begins the process of formulating the budget by establishing general budget and fiscal policy guidelines, usually by the spring of each year, at least nine months before the President transmits the budget to the Congress and at least 18 months before the fiscal year begins. (See the “Budget Calendar” later in this chapter.) Based on these guidelines, the Office of Management and Budget (OMB) works with the Federal agencies to establish specific policy directions and planning levels, both for the budget year and for at least the following four years, and in this case, the following nine years, to guide the preparation of their budget requests. Since the Budget Control Act of 2011 (BCA) has set statutory limits on discretionary budget authority, as discussed below, the President’s budget proposes funding levels for discretionary programs consistent with those limits. During the formulation of the budget, the President, the Director of OMB, and other officials in the Executive Office of the President continually exchange information, proposals, and evaluations bearing on policy decisions with the Secretaries of the departments and the heads of the other Government agencies. Decisions reflected in previously enacted budgets, including the one for the fiscal year in progress, reactions to the last proposed budget (which the Congress is considering at the same time the process of preparing the forthcoming budget begins), and evaluations of program performance all influence decisions concerning the forthcoming budget, as do projections of the economic outlook, prepared jointly by the Council of Economic Advisers, OMB, and the Treasury Department. In early fall, agencies submit their budget requests to OMB, where analysts review them and identify issues that OMB officials need to discuss with the agencies. OMB and the agencies resolve many issues themselves. 125 126 ANALYTICAL PERSPECTIVES Others require the involvement of White House policy officials and the President. This decision-making process is usually completed by late December. At that time, the final stage of developing detailed budget data and the preparation of the budget documents begins. The decision-makers must consider the effects of economic and technical assumptions on the budget estimates. Interest rates, economic growth, the rate of inflation, the unemployment rate, and the number of people eligible for various benefit programs, among other factors, affect Government spending and receipts. Small changes in these assumptions can alter budget estimates by many billions of dollars. (Chapter 2, “Economic Assumptions,’’ provides more information on this subject.) Thus, the budget formulation process involves the simultaneous consideration of the resource needs of individual programs, the allocation of resources among the agencies and functions of the Federal Government, and the total outlays and receipts that are appropriate in light of current and prospective economic conditions. The law governing the President’s budget requires its transmittal to the Congress on or after the first Monday in January but not later than the first Monday in February of each year for the following fiscal year, which begins on October 1. The budget is routinely sent to the Congress on the first Monday in February, giving the Congress eight months to act on the budget before the fiscal year begins. Congressional Action1 The Congress considers the President’s budget proposals and approves, modifies, or disapproves them. It can change funding levels, eliminate programs, or add programs not requested by the President. It can add or elimi1 For a fuller discussion of the congressional budget process, see Bill Heniff Jr., Introduction to the Federal Budget Process (Congressional Research Service Report 98–721), and Robert Keith and Allen Schick, Manual on the Federal Budget Process (Congressional Research Service Report 98–720, archived). nate taxes and other sources of receipts or make other changes that affect the amount of receipts collected. The Congress does not enact a budget as such. Through the process of adopting a planning document called a budget resolution (described below), the Congress agrees on targets for total spending and receipts, the size of the deficit or surplus, and the debt limit. The budget resolution provides the framework within which individual congressional committees prepare appropriations bills and other spending and receipts legislation. The Congress provides spending authority—funding—for specified purposes in appropriations acts each year. It also enacts changes each year in other laws that affect spending and receipts. Both appropriations acts and these other laws are discussed in the following paragraphs. In making appropriations, the Congress does not vote on the level of outlays (spending) directly, but rather on budget authority, or funding, which is the authority provided by law to incur financial obligations that will result in outlays. In a separate process, prior to making appropriations, the Congress usually enacts legislation that authorizes an agency to carry out particular programs, authorizes the appropriations of funds to carry out those programs, and, in some cases, limits the amount that can be appropriated for the programs. Some authorizing legislation expires after one year, some expires after a specified number of years, and some is permanent. The Congress may enact appropriations for a program even though there is no specific authorization for it or its authorization has expired. The Congress begins its work on its budget resolution shortly after it receives the President’s budget. Under the procedures established by the Congressional Budget Act of 1974, the Congress decides on budget targets before commencing action on individual appropriations. The Act requires each standing committee of the House and Senate to recommend budget levels and report legislative plans concerning matters within the committee’s jurisdiction to the Budget Committee in each body. The BUDGET CALENDAR The following timetable highlights the scheduled dates for significant budget events during a normal budget year: Between the 1st Monday in January and the 1st Monday in February ������������������������������ President transmits the budget Six weeks later ������������������������������������������������ Congressional committees report budget estimates to Budget Committees April 15 ������������������������������������������������������������� Action to be completed on congressional budget resolution May 15 �������������������������������������������������������������� House consideration of annual appropriations bills may begin even if the budget resolution has not been agreed to. June 10 ������������������������������������������������������������� House Appropriations Committee to report the last of its annual appropriations bills. June 15 ������������������������������������������������������������� Action to be completed on “reconciliation bill” by the Congress. June 30 ������������������������������������������������������������� Action on appropriations to be completed by House July 15 �������������������������������������������������������������� President transmits Mid-Session Review of the Budget October 1 ����������������������������������������������������������� Fiscal year begins 12. BUDGET CONCEPTS House and Senate Budget Committees then each design and report, and each body then considers, a concurrent resolution on the budget—a congressional budget plan, or budget resolution. The budget resolution sets targets for total receipts and for budget authority and outlays, both in total and by functional category (see “Functional Classification’’ later in this chapter). It also sets targets for the budget deficit or surplus and for Federal debt subject to statutory limit. The congressional timetable calls for the House and Senate to resolve differences between their respective versions of the congressional budget resolution and adopt a single budget resolution by April 15 of each year. In the report on the budget resolution, the Budget Committees allocate the total on-budget budget authority and outlays set forth in the resolution to the Appropriations Committees and the other committees that have jurisdiction over spending. (See “Coverage of the Budget,” later in this chapter, for more information on on-budget and off-budget amounts.) Now that the BCA has set statutory limits on discretionary budget authority, as discussed below, the budget resolution allocation to the Appropriations Committees will equal those limits. Once the Congress resolves differences between the House and Senate and agrees on a budget resolution, the Appropriations Committees are required to divide their allocations of budget authority and outlays among their subcommittees. The Congress is not allowed to consider appropriations bills (so-called “discretionary” spending) that would breach or further breach an Appropriations subcommittee’s target. The Congress is not allowed to consider legislation that would cause the overall spending target for any such committee to be breached or further breached. The Budget Committees’ reports may discuss assumptions about the level of funding for major programs. While these assumptions do not bind the other committees and subcommittees, they may influence their decisions. The budget resolution may also contain “reconciliation directives’’ (discussed below) to the committees responsible for tax laws and for mandatory spending—programs not controlled by annual appropriation acts—in order to conform the level of receipts and this type of spending to the targets in the budget resolution. Since the concurrent resolution on the budget is not a law, it does not require the President’s approval. However, the Congress considers the President’s views in preparing budget resolutions, because legislation developed to meet congressional budget allocations does require the President’s approval. In some years, the President and the joint leadership of Congress have formally agreed on plans to reduce the deficit or balance the budget. These agreements were then reflected in the budget resolution and legislation passed for those years. Once the Congress approves the budget resolution, it turns its attention to enacting appropriations bills and authorizing legislation. Appropriations bills are initiated in the House. They provide the budgetary resources for the majority of Federal programs, but only a minority of Federal spending. The Appropriations Committee in each 127 body has jurisdiction over annual appropriations. These committees are divided into subcommittees that hold hearings and review detailed budget justification materials prepared by the Executive Branch agencies within the subcommittee’s jurisdiction. After a bill has been drafted by a subcommittee, the full committee and the whole House, in turn, must approve the bill, sometimes with amendments to the original version. The House then forwards the bill to the Senate, where a similar review follows. If the Senate disagrees with the House on particular matters in the bill, which is often the case, the two bodies form a conference committee (consisting of some Members of each body) to resolve the differences. The conference committee revises the bill and returns it to both bodies for approval. When the revised bill is agreed to, first in the House and then in the Senate, the Congress sends it to the President for approval or veto. Since 1977, when the start of the fiscal year was established as October 1, there have been only three fiscal years (1989, 1995, and 1997) for which the Congress agreed to and enacted every regular appropriations bill by that date. When one or more appropriations bills has not been agreed to by this date, Congress usually enacts a joint resolution called a “continuing resolution,’’ (CR) which is an interim or stop-gap appropriations bill that provides authority for the affected agencies to continue operations at some specified level until a specific date or until the regular appropriations are enacted. Occasionally, a CR has funded a portion or all of the Government for the entire year. The Congress must present these CRs to the President for approval or veto. In some cases, Presidents have rejected CRs because they contained unacceptable provisions. Left without funds, Government agencies were required by law to shut down operations—with exceptions for some limited activities—until the Congress passed a CR the President would approve. Shutdowns have lasted for periods of a day to several weeks. The Congress also provides budget authority in laws other than appropriations acts. In fact, while annual appropriations acts fund the majority of Federal programs, they account for only about a third of the total spending in a typical year. Authorizing legislation controls the rest of the spending, which is commonly called “mandatory spending.” A distinctive feature of these authorizing laws is that they provide agencies with the authority or requirement to spend money without first requiring the Appropriations Committees to enact funding. This category of spending includes interest the Government pays on the public debt and the spending of several major programs, such as Social Security, Medicare, Medicaid, unemployment insurance, and Federal employee retirement. This chapter discusses the control of budget authority and outlays in greater detail under “Budget Authority and Other Budgetary Resources, Obligations, and Outlays.” Almost all taxes and most other receipts also result from authorizing laws. Article I, Section 7, of the Constitution provides that all bills for raising revenue shall originate in the House of Representatives. In the House, the Ways 128 and Means Committee initiates tax bills; in the Senate, the Finance Committee has jurisdiction over tax laws. The budget resolution often includes reconciliation directives, which require authorizing committees to change laws that affect receipts or mandatory spending. It directs each designated committee to report amendments to the laws under the committee’s jurisdiction that would achieve changes in the levels of receipts or reductions in mandatory spending controlled by those laws. These directives specify the dollar amount of changes that each designated committee is expected to achieve, but do not specify which laws are to be changed or the changes to be made. However, the Budget Committees’ reports on the budget resolution frequently discuss assumptions about how the laws would be changed. Like other assumptions in the report, they do not bind the committees of jurisdiction but may influence their decisions. A reconciliation instruction may also specify the total amount by which the statutory limit on the public debt is to be changed. The committees subject to reconciliation directives draft the implementing legislation. Such legislation may, for example, change the tax code, revise benefit formulas or eligibility requirements for benefit programs, or authorize Government agencies to charge fees to cover some of their costs. Reconciliation bills are typically omnibus legislation, combining the legislation submitted by each reconciled committee in a single act. Such a large and complicated bill would be difficult to enact under normal legislative procedures because it usually involves changes to tax rates or to popular social programs, generally to reduce projected deficits. The Senate considers such omnibus reconciliation acts under expedited procedures that limit total debate on the bill. To offset the procedural advantage gained by expedited procedures, the Senate places significant restrictions on the substantive content of the reconciliation measure itself, as well as on amendments to the measure. Any material in the bill that is extraneous or that contains changes to the Federal Old-Age and Survivors Insurance and the Federal Disability Insurance programs is not in order under the Senate’s expedited reconciliation procedures. Non-germane amendments are also prohibited. In addition, the Senate does not allow reconciliation bills as a whole to increase projected deficits or reduce projected surpluses. This Senate prohibition complements the Statutory Pay-As-You-Go Act of 2010, discussed below. The House does not allow reconciliation bills to increase mandatory spending in net, but does allow such bills to increase deficits by reducing revenues. See “Budget Enforcement” later in this chapter for a description of the House special order that permits the Budget Committee Chairman to certify that the costs of certain types of legislation are zero. Reconciliation acts, together with appropriations acts for the year, are usually used to implement broad agreements between the President and the Congress on those occasions where the two branches have negotiated a comprehensive budget plan. Reconciliation acts have sometimes included other matters, such as laws providing the ANALYTICAL PERSPECTIVES means for enforcing these agreements, as described under “Budget Enforcement.” Budget Enforcement The Statutory Pay-As-You-Go Act of 2010 and the BCA significantly amended laws pertaining to the budget process, including the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA). The Statutory Pay-As-You-Go Act of 2010, enacted on February 12, 2010, reestablished a statutory procedure to enforce a rule of deficit neutrality on new revenue and mandatory spending legislation. The BCA, enacted on August 2, 2011, reinstated limits (“caps”) on the amount of discretionary budget authority that can be provided through the annual appropriations process. Similar enforcement mechanisms were established by the Budget Enforcement Act of 1990, which also amended the BBEDCA, and were extended in 1993 and 1997, but expired at the end of FY 2002. The BCA also created a Joint Select Committee on Deficit Reduction that was instructed to develop a bill to reduce the Federal deficit by at least $1.5 trillion over a 10-year period. The BBEDCA divides spending into two types—discretionary spending and direct or mandatory spending. Discretionary spending is controlled through annual appropriations acts. Funding for salaries and other operating expenses of government agencies, for example, is generally discretionary because it is usually provided by appropriations acts. Direct spending is more commonly called mandatory spending. Mandatory spending is controlled by permanent laws. Medicare and Medicaid payments, unemployment insurance benefits, and farm price supports are examples of mandatory spending, because permanent laws authorize payments for those purposes. Receipts are included under the same statutory rules that apply to mandatory spending because permanent laws generally control receipts. The BBEDCA, as amended by the BCA, specifies spending limits (“caps”) on discretionary budget authority for 2012 through 2021. Title I of the BCA establishes a framework that places different limits on specific categories of spending in the first two years (2012 and 2013) as compared to a single spending limit in the remaining years (2014 through 2021). For 2012 and 2013, the discretionary spending limits in Title I are divided into two separate categories: the security category and the nonsecurity category. The security category includes discretionary budget authority for the Departments of Defense, Homeland Security, and Veterans Affairs, the National Nuclear Security Administration, the Intelligence Community Management account, and all budget accounts in the international affairs budget function (budget function 150). The nonsecurity category includes all discretionary budget authority not included in the security category. For 2014 through 2021, Title I has a single spending category that covers all discretionary budget authority, with a specified spending limit for each of those years. The law also requires that the categories be revised if the Joint Select Committee process under Title IV 12. BUDGET CONCEPTS of the BCA did not result in enactment of legislation that reduces the deficit by at least $1.2 trillion. A discussion of these revised categories can be found below. The BBEDCA, as amended, includes general requirements for OMB to adjust the caps for changes in concepts and definitions; appropriations designated by Congress and the President as emergency requirements; and appropriations designated by Congress and the President for Overseas Contingency Operations/Global War on Terrorism. The BBEDCA, as amended by the BCA also specifies adjustments, which are capped at certain amounts, for appropriations for continuing disability reviews and redeterminations by the Social Security Administration; the health care fraud and abuse control program at the Department of Health and Human Services; and appropriations designated by Congress as being for disaster relief. The BBEDCA requires OMB to provide cost estimates of each appropriations act in a report to Congress that is required to be transmitted within 7 days after enactment of such act and to publish three sequestration reports—a “preview” report when the President submits the budget; an “update” report in August, and a “final” report within 15 days after the end of a session of Congress. The preview report discusses the status of discretionary sequestration, based on current law. This report also explains the adjustments that are required by law to the discretionary caps and publishes the revised caps. (Chapter 14 of this volume, “Budget Process” includes the Preview Report.) The update and final reports revise the preview report estimates to reflect the effects of newly enacted discretionary laws. In addition, the update report must contain a preview estimate of the adjustment for disaster funding for the upcoming fiscal year. If OMB’s final sequester report indicates that the amount of discretionary budget authority provided in appropriations acts for a given year exceeds the statutory limit on budget authority for that category in that year, the President must issue a sequestration order canceling budgetary resources in nonexempt accounts within that category by the amount necessary to eliminate the breach. If a continuing resolution is in effect when OMB issues its final sequester report, calculations will be based on the annualized amount provided by that continuing resolution. Under sequestration, each nonexempt account within a category is reduced by a dollar amount calculated by multiplying the enacted level of sequestrable budgetary resources in that account by the uniform percentage necessary to eliminate a breach within that category. The BBEDCA, as amended, specifies special rules for reducing some programs and exempts some programs from sequestration entirely. For example the BBEDCA, as amended, limits the reduction for certain health and medical care accounts to 2 percent. During the 1990s, the threat of sequestration proved sufficient to ensure compliance with the discretionary spending limits. In that respect, discretionary sequestration can be viewed first as an incentive for compliance and second as a remedy for noncompliance. This is also true for mandatory sequestration under PAYGO, discussed below. 129 From the end of a session of Congress through the following June 30th, a within-session discretionary sequestration is imposed if appropriations for the current year cause a cap to be breached. If a breach occurs in the last quarter of a fiscal year (i.e., July 1 through September 30), instead of causing a sequestration, the breach would cause the applicable spending limit for the following fiscal year to be reduced by the amount of the breach. These requirements ensure that supplemental appropriations enacted during the fiscal year are subject to the budget enforcement provisions. The Statutory Pay-As-You-Go Act of 2010 requires that new legislation changing governmental receipts or mandatory spending or collections must be enacted on a “payas-you-go” (PAYGO) basis; that is, that the cumulative effects of such legislation not increase projected on-budget deficits. Unlike the budget enforcement mechanism for discretionary programs, PAYGO is a permanent requirement, and it does not impose a cap on spending or a floor on revenues. Instead, PAYGO requires that legislation reducing revenues must be fully offset by cuts in mandatory programs or by revenue increases, and that any bills increasing mandatory expenditures must be fully offset by revenue increases or cuts in mandatory programs. This requirement also is enforced by a sequestration process, separate from that described above in reference to the BCA, which requires automatic across-the-board cuts in selected mandatory programs in the event that legislation taken as a whole does not meet the PAYGO standard established by the law. The PAYGO law establishes special scorecards and scorekeeping rules. The budgetary effects of revenue and direct spending provisions, including both costs and savings, are recorded by OMB on two PAYGO scorecards in which costs or savings are averaged over rolling five-year and 10-year periods. The budgetary effects of PAYGO measures may be directed in legislation by reference to statements inserted into the Congressional Record by the chairmen of the House and Senate Budget Committees. These statements reflect the estimates of the Budget Committees, which are usually informed by cost estimates prepared by the Congressional Budget Office. If this procedure is not followed, then the budgetary effects of the legislation are determined by OMB. After a congressional session ends, OMB issues an annual PAYGO report and determines whether a violation of the PAYGO requirement has occurred. If there are more costs than savings in the budget year column of either scorecard, the President is required to issue a sequestration order implementing across-the-board cuts to nonexempt mandatory programs by an amount sufficient to offset the net costs on the PAYGO scorecard. The Statutory Pay-As-You-Go Act of 2010 exempted the costs of certain legislation from the PAYGO scorecard, as long as that legislation was enacted by December 31, 2011. Extension of the middle-class provisions of the 2001 and 2003 tax cuts, as amended in 2009, did not have to be offset. In addition, extension through 2014 of relief from the scheduled deep reduction in Medicare physician reimbursement rates was also exempt from PAYGO, but 130 only up to the reimbursement rates in effect in 2009. In four bills between June 2010 and December of 2011, the Congress enacted temporary relief to the Sustainable Growth Rate (SGR) provision of Medicare at payment rates 2.2 percent above those defined in the Statutory Pay-As-You-Go Act of 2010, so those incremental costs appear on the PAYGO scorecards. Congress chose to offset the entire costs of the relief, even though such offsets were not required. Because the December 31, 2011 deadline for enacting legislation extending these policies has now passed, current law provides for any further extensions to be subject to the PAYGO rules. In addition, if Congress designates a provision of mandatory spending or receipts legislation as an emergency requirement, the effect of the provision is not scored as PAYGO. The PAYGO rules also apply to the outlays resulting from outyear changes in mandatory programs made in appropriations acts and to all revenue changes made in appropriations acts. However, outyear changes to mandatory programs that have zero net outlay effects over the sum of the current year and the next five fiscal years are not considered PAYGO. The PAYGO rules do not apply to increases in mandatory spending or decreases in receipts that result automatically under existing law. For example, mandatory spending for benefit programs, such as unemployment insurance, rises when the population of eligible beneficiaries rises, and many benefit payments are automatically increased for inflation under existing laws. Additional information on the Statutory Pay-As-You-Go Act of 2010 can be found on OMB’s website at:www.whitehouse.gov/ omb/paygo_description The Senate imposes points of order against consideration of tax or mandatory spending legislation that would violate the PAYGO principle, although the time periods covered by the Senate’s rule and the treatment of previously enacted costs or savings may differ in some respects from the requirements of the Statutory Pay-As-You-Go Act of 2010. The House, in contrast, imposes points of order on legislation increasing mandatory spending in net, whether or not those costs are offset by revenue increases, but the House rule does not constrain the size of tax cuts or require them to be offset. On January 5, 2011, the House agreed to a special order that permits the Budget Committee Chairman to certify that the costs of certain types of legislation are zero when introducing pay-as-yougo estimates into the Congressional Record: • Repeal of the Affordable Care Act. • Extension of EGTRRA and JGTRRA. • Extension of AMT relief and estate tax repeal. • Creation of a 20 percent deduction in income to small businesses. • Enactment of legislation implementing trade agreements. ANALYTICAL PERSPECTIVES The BCA established a Joint Select Committee on Deficit Reduction and instructed it to recommend legislative changes that would reduce the deficit by at least $1.5 trillion over 2012 to 2021. The BCA further provided that if a joint committee bill reducing the deficit by at least $1.2 trillion was not signed into law by January 15, 2012, certain automatic spending reductions would take effect. Since the Joint Select Committee process under Title IV of the BCA did not result in enactment of legislation that reduces the deficit, the law put into place a different framework for the discretionary spending limits for 2013 through 2021 and requires automatic reductions to discretionary budget authority and direct spending to occur beginning in January 2013, absent further legislative action. Under this new framework, pursuant to Title III, limits are imposed on defense and nondefense categories of discretionary spending for 2013 through 2021. (The BCA refers to spending within the defense function as the “revised security category” and spending in the nondefense functions as the “the revised nonsecurity category.”) Because the 2013 President’s Budget proposes savings that would exceed the target set for the Joint Committee, it proposes to replace the automatic reductions with these alternative savings and restore the original framework for discretionary spending limits established in Title I. OMB is required to calculate the amount of the deficit reduction required for each of fiscal years 2013 through 2021. Absent intervening legislation, the automatic spending reduction process entails the following steps: • The statutory discretionary spending limits for 2013 through 2021 are revised by redefining the security and nonsecurity categories. The total budget authority cap for each year remains unchanged. The revised security category includes only discretionary budget authority in the defense budget function; the revised nonsecurity category includes discretionary budget authority other than in the defense budget function. The revised security and nonsecurity categories are extended through 2021. • The $1.2 trillion savings target is to be reduced by 18 percent to account for debt service. The remainder is spread in equal amounts across the nine years, 2013 through 2021. • The total amount of spending reduction required for each year is divided equally between the defense and nondefense functions. • The annual amounts of spending reductions required each year for each type of spending is to be divided proportionally between discretionary and direct spending programs, using the discretionary BA limit and the most recent baseline estimate of nonexempt mandatory outlays as the base. • The reduction each year for mandatory programs is to be achieved by a sequestration of non-exempt mandatory spending. Sequestration for 2013 is to begin on January 2, 2013, while the sequestration for subsequent years is to begin on the first day (Oc- 131 12. BUDGET CONCEPTS tober 1) of those fiscal years. • The reduction for discretionary programs for 2013 is to be achieved by a sequestration of non-exempt discretionary spending, effective January 2, 2013. For subsequent fiscal years, the reduction is to be taken by reducing the discretionary cap each year. Budget Execution Government agencies may not spend or obligate more than the Congress has appropriated, and they may use funds only for purposes specified in law. The Antideficiency Act prohibits them from spending or obligating the Government to spend in advance of an appropriation, unless specific authority to do so has been provided in law. Additionally, the Act requires the President to apportion the budgetary resources available for most executive branch agencies. The President has delegated this authority to OMB. Some apportionments are by time periods (usually by quarter of the fiscal year), some are by projects or activities, and others are by a combination of both. Agencies may request OMB to reapportion funds during the year to accommodate changing circumstances. This system helps to ensure that funds do not run out before the end of the fiscal year. During the budget execution phase, the Government sometimes finds that it needs more funding than the Congress has appropriated for the fiscal year because of unanticipated circumstances. For example, more might be needed to respond to a severe natural disaster. Under such circumstances, the Congress may enact a supplemental appropriation. On the other hand, the President may propose to reduce a previously enacted appropriation. The President may propose to either “cancel” or “rescind” the amount. If the President initiates the withholding of funds while the Congress considers his request, the amounts are apportioned as “deferred” or “withheld pending rescission” on the OMB-approved apportionment form. Agencies are instructed not to withhold funds without the prior approval of OMB. When OMB approves a withholding, the Impoundment Control Act requires that the President transmit a “special message” to the Congress. The historical reason for the special message is to inform the Congress that the President has unilaterally withheld funds that were enacted in regular appropriations acts. The notification allows the Congress to consider the proposed rescission in a timely way. The last time the President initiated the withholding of funds was in fiscal year 2000. COVERAGE OF THE BUDGET Federal Government and Budget Totals The budget documents provide information on all Federal agencies and programs. However, because the laws governing Social Security (the Federal Old-Age and Survivors Insurance and the Federal Disability Insurance trust funds) and the Postal Service Fund require that the receipts and outlays for those activities be excluded from the budget totals and from the calculation of the deficit or surplus, the budget presents on-budget and off-budget totals. The off-budget totals include the Federal transactions excluded by law from the budget totals. The on-budget and off-budget amounts are added together to derive the totals for the Federal Government. These are sometimes referred to as the unified or consolidated budget totals. It is not always obvious whether a transaction or activity should be included in the budget; the dividing line between the Government and the private sector is sometimes murky. Where there is a question, OMB normally follows the recommendation of the 1967 President’s Commission on Budget Concepts to be comprehensive of the full range of Federal agencies, programs, and activities. In recent years, for example, the budget has included the transactions of the Universal Service Fund, the Public Company Accounting Oversight Board, the Securities Investor Protection Corporation, Guaranty Agencies Reserves, the National Railroad Retirement Investment Trust, the United Mine Workers Combined Benefits Fund, the Telecommunications Development Fund, the Federal Financial Institutions Examination Council, Electric Reliability Organizations (EROs) established pursuant to the Energy Policy Act of 2005, and the Corporation for Travel Promotion The budget also classifies as governmental the collections and spending by the Affordable Housing Program Table 12–1. TOTALS FOR THE BUDGET AND THE FEDERAL GOVERNMENT (In billions of dollars) 2011 Actual Estimate 2012 2013 Budget authority Unified �������������������������������������������������������������������������� On-budget ����������������������������������������������������������������� Off-budget ����������������������������������������������������������������� 3,510 3,010 500 3,746 3,232 515 3,667 3,024 643 Receipts: Unified �������������������������������������������������������������������������� On-budget ����������������������������������������������������������������� Off-budget ����������������������������������������������������������������� 2,303 1,738 566 2,469 1,896 572 2,902 2,225 677 Outlays: Unified �������������������������������������������������������������������������� On-budget ����������������������������������������������������������������� Off-budget ����������������������������������������������������������������� 3,603 3,104 499 3,796 3,290 505 3,803 3,169 634 Surplus: Unified �������������������������������������������������������������������������� On-budget ����������������������������������������������������������������� Off-budget ����������������������������������������������������������������� –1,300 –1,367 67 –1,327 –1,394 67 –901 –945 43 132 ANALYTICAL PERSPECTIVES (AHP) funds created by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and includes them in the budget totals. FIRREA requires each of the 12 Federal Home Loan Banks (FHLBs) to contribute at least 10 percent of its previous year’s net earnings to an AHP fund to be used to subsidize owner-occupied and rental housing for low-income families and individuals. Since 1990, the FHLBs have contributed $3.9 billion to the AHP funds, of which $3.2 billion has been spent. The unspent funds represent 2011 contributions that will be committed in 2012 and the undisbursed portion of funds already committed to specific projects. Although the funds remain in the possession of the FHLBs, the deposit of specific amounts into the AHP funds is compulsory, and the expenditures are to meet specific governmental purposes. In contrast, the budget excludes tribal trust funds that are owned by Indian tribes and held and managed by the Government in a fiduciary capacity on the tribes’ behalf. These funds are not owned by the Government, the Government is not the source of their capital, and the Government’s control is limited to the exercise of fiduciary duties. Similarly, the transactions of Governmentsponsored enterprises, such as the FHLBs, are not included in the on-budget or off-budget totals. Federal laws established these enterprises for public policy purposes, but they are privately owned and operated corporations. Nevertheless, because of their public charters, the budget discusses them and reports summary financial data in the budget Appendix and in some detailed tables. The budget also excludes the revenues from copyright royalties and spending for subsequent payments to copyright holders where (1) the law allows copyright owners and users to voluntarily set the rate paid for the use of protected material, and (2) the amount paid by users of copyrighted material to copyright owners is related to the frequency or quantity of the material used. The budget excludes license royalties collected and paid out by the Copyright Office for the retransmission of network broadcasts via cable collected under 17 U.S.C. 111 because these revenues meet both of these conditions. The budget will continue to include the royalties collected and paid out for license fees for digital audio recording technology under 17 U.S.C. 1004, since the amount of license fees paid is unrelated to usage of the material. The Appendix includes a presentation for the Board of Governors of the Federal Reserve System for information only. The amounts are not included in either the on-budget or off-budget totals because of the independent status of the System within the Government. However, the Federal Reserve System transfers its net earnings to the Treasury, and the budget records them as receipts. Chapter 13 of this volume, “Coverage of the Budget,” provides more information on this subject. Functional Classification The functional classification is used to array budget authority, outlays, and other budget data according to the major purpose served—such as agriculture, transportation, income security, and national defense. There are 20 major functions, 17 of which are concerned with broad areas of national need and are further divided into subfunctions. For example, the Agriculture function comprises the subfunctions Farm Income Stabilization and Agricultural Research and Services. The functional array meets the Congressional Budget Act requirement for a presentation in the budget by national needs and agency missions and programs. The remaining three functions—Net Interest, Undistributed Offsetting Receipts, and Allowances—ensure full coverage of the Federal budget. The following criteria are used in establishing functional categories and assigning activities to them: • A function encompasses activities with similar purposes, emphasizing what the Federal Government seeks to accomplish rather than the means of accomplishment, the objects purchased, the clientele or geographic area served (except in the cases of functions 570 for Medicare, 650 for Social Security, and 700 for Veterans Benefits and Services), or the Federal agency conducting the activity (except in the case of subfunction 051 in the National Defense function, which is used only for defense activities under the Department of Defense—Military). • A function must be of continuing national importance, and the amounts attributable to it must be significant. • Each basic unit being classified (generally the appropriation or fund account) usually is classified according to its primary purpose and assigned to only one subfunction. However, some large accounts that serve more than one major purpose are subdivided into two or more functions or subfunctions. Detailed functional tables, which provide information on Government activities by function and subfunction, are available on the Internet and as a CD-ROM included with the printed version of this document. Agencies, Accounts, Programs, Projects, and Activities Various summary tables in the Analytical Perspectives volume of the Budget provide information on budget authority, outlays, and offsetting collections and receipts arrayed by Federal agency. A table that lists budget authority and outlays by budget account within each agency and the totals for each agency of budget authority, outlays, and receipts that offset the agency spending totals is available on the Internet and as a CD-ROM included with the printed version of this document. The Appendix provides budgetary, financial, and descriptive information about programs, projects, and activities by account within each agency. Types of Funds Agency activities are financed through Federal funds and trust funds. 133 12. BUDGET CONCEPTS Federal funds comprise several types of funds. Receipt accounts of the general fund, which is the greater part of the budget, record receipts not earmarked by law for a specific purpose, such as income tax receipts. The general fund also includes the proceeds of general borrowing. General fund appropriations accounts record general fund expenditures. General fund appropriations draw from general fund receipts and borrowing collectively and, therefore, are not specifically linked to receipt accounts. Special funds consist of receipt accounts for Federal fund receipts that laws have designated for specific purposes and the associated appropriation accounts for the expenditure of those receipts. Public enterprise funds are revolving funds used for programs authorized by law to conduct a cycle of business-type operations, primarily with the public, in which outlays generate collections. Intragovernmental funds are revolving funds that conduct business-type operations primarily within and between Government agencies. The collections and the outlays of revolving funds are recorded in the same budget account. Trust funds account for the receipt and expenditure of monies by the Government for carrying out specific purposes and programs in accordance with the terms of a statute that designates the fund as a trust fund (such as the Highway Trust Fund) or for carrying out the stipulations of a trust where the Government itself is the beneficiary (such as any of several trust funds for gifts and donations for specific purposes). Trust revolving funds are trust funds credited with collections earmarked by law to carry out a cycle of business-type operations. The Federal budget meaning of the term “trust,” as applied to trust fund accounts, differs significantly from its private-sector usage. In the private sector, the beneficiary of a trust usually owns the trust’s assets, which are managed by a trustee who must follow the stipulations of the trust. In contrast, the Federal Government owns the assets of most Federal trust funds, and it can raise or lower future trust fund collections and payments, or change the purposes for which the collections are used, by changing existing laws. There is no substantive difference between a trust fund and a special fund or between a trust revolving fund and a public enterprise revolving fund. However, in some instances, the Government does act as a true trustee of assets that are owned or held for the benefit of others. For example, it maintains accounts on behalf of individual Federal employees in the Thrift Savings Fund, investing them as directed by the individual employee. The Government accounts for such funds in deposit funds, which are not included in the budget. (Chapter 28 of this volume, “Trust Funds and Federal Funds,” provides more information on this subject.) Budgeting for Full Costs 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 and deciding how to finance the spending. 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 benefits, the cost of one program with another, and the cost of one method of reaching a specified goal with another. 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 when setting priorities. The budget includes all types of spending, including both current operating expenditures and capital investment, and to the extent possible, both are measured on the basis of full cost. Questions are often raised about the measure of capital investment. The present budget provides policymakers the necessary information regarding investment spending. It records investment on a cash basis, and it requires the Congress to provide budget authority before an agency can obligate the Government to make a cash outlay. By these means, it causes the total cost of capital investment 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 costs with benefits is consistent with the formal method of cost-benefit analysis of capital projects in government, in which the full cost of a capital asset as the cash is paid out is compared with the full stream of future benefits (all in terms of present values). (Chapter 21 of this volume, “Federal Investment,’’ provides more information on capital investment.) RECEIPTS, OFFSETTING COLLECTIONS, AND OFFSETTING RECEIPTS In General The budget records amounts collected by Government agencies two different ways. Depending on the nature of the activity generating the collection and the law that established the collection, they are recorded as either: • Governmental receipts, which are compared in total to outlays (net of offsetting collections and offsetting receipts) in calculating the surplus or deficit; or • Offsetting collections or offsetting receipts, which are deducted from gross outlays to calculate net outlay figures. Governmental Receipts Governmental receipts are collections that result from the Government’s exercise of its sovereign power to tax or otherwise compel payment. Sometimes they are called 134 receipts, Federal receipts, or Federal revenues. They consist mostly of individual and corporation income taxes and social insurance taxes, but also include excise taxes, compulsory user charges, regulatory fees, customs duties, court fines, certain license fees, and deposits of earnings by the Federal Reserve System. Total receipts for the Federal Government include both on-budget and off-budget receipts (see Table 12–1, “Totals for the Budget and the Federal Government,” which appears earlier in this chapter.) Chapter 15 of this volume, “Governmental Receipts,’’ provides more information on receipts. Offsetting Collections and Offsetting Receipts Offsetting collections and offsetting receipts are recorded as offsets to (deductions from) spending, not as additions on the receipt side of the budget. As explained below, they are recorded as offsets to outlays so that the budget totals represent governmental rather than market activity and reflect the Government’s net transactions with the public. They are recorded in one of two ways, based on interpretation of laws and longstanding budget concepts and practice. They are offsetting collections when the collections are authorized by law to be credited to expenditure accounts and are generally available for expenditure without further legislation. Otherwise, they are deposited in receipt accounts and called offsetting receipts. Offsetting collections and offsetting receipts result from any of the following types of transactions: • Business-like transactions or market-oriented activities with the public—these include voluntary collections from the public in exchange for goods or services, such as the proceeds from the sale of postage stamps, the fees charged for admittance to recreation areas, and the proceeds from the sale of Government-owned land; and reimbursements for damages, such as recoveries by the Hazardous Substance Superfund. The budget records these amounts as offsetting collections from non-Federal sources (for offsetting collections) or as proprietary receipts (for offsetting receipts). The amounts are deducted from gross budget authority and outlays, rather than added to governmental receipts. This treatment produces budget totals for budget authority, outlays, and governmental receipts that represent governmental rather than market activity. • Intragovernmental transactions—collections from other Federal Government accounts. The budget records collections by one Government account from another as offsetting collections from Federal sources (for offsetting collections) or as intragovernmental receipts (for offsetting receipts). For example, the General Services Administration rents office space to other Government agencies and records their rental payments as offsetting collections from Federal sources in the Federal Buildings Fund. These transactions are exactly offsetting and do not affect the surplus or deficit. However, they are ANALYTICAL PERSPECTIVES an important accounting mechanism for allocating costs to the programs and activities that cause the Government to incur the costs. Intragovernmental offsetting collections and receipts are deducted from gross budget authority and outlays so that the budget totals measure the transactions of the Government with the public. • Voluntary gifts and donations—gifts and donations of money to the Government, which are treated as offsets to budget authority and outlays. • Offsetting governmental transactions—collections from the public that are governmental in nature (e.g., tax receipts, regulatory fees, compulsory user charges, custom duties, license fees) but required by law to be misclassified as offsetting. The budget records amounts from non-Federal sources that are governmental in nature as offsetting governmental collections (for offsetting collections) or as offsetting governmental receipts (for offsetting receipts). Offsetting Collections Some laws authorize agencies to credit collections directly to the account from which they will be spent and, usually, to spend the collections for the purpose of the account without further action by the Congress. Most revolving funds operate with such authority. For example, a permanent law authorizes the Postal Service to use collections from the sale of stamps to finance its operations without a requirement for annual appropriations. The budget records these collections in the Postal Service Fund (a revolving fund) and records budget authority in an amount equal to the collections. In addition to revolving funds, some agencies are authorized to charge fees to defray a portion of costs for a program that are otherwise financed by appropriations from the general fund and usually to spend the collections without further action by the Congress. In such cases, the budget records the offsetting collections and resulting budget authority in the program’s general fund expenditure account. Similarly, intragovernmental collections authorized by some laws may be recorded as offsetting collections and budget authority in revolving funds or in general fund expenditure accounts. Sometimes appropriations acts or provisions in other laws limit the obligations that can be financed by offsetting collections. In those cases, the budget records budget authority in the amount available to incur obligations, not in the amount of the collections. Offsetting collections credited to expenditure accounts automatically offset the outlays at the expenditure account level. Where accounts have offsetting collections, the budget shows the budget authority and outlays of the account both gross (before deducting offsetting collections) and net (after deducting offsetting collections). Totals for the agency, subfunction, and overall budget are net of offsetting collections. 135 12. BUDGET CONCEPTS Offsetting Receipts Collections that are offset against gross outlays but are not authorized to be credited to expenditure accounts are credited to receipt accounts and are called offsetting receipts. Offsetting receipts are deducted from budget authority and outlays in arriving at total budget authority and outlays. However, unlike offsetting collections credited to expenditure accounts, offsetting receipts do not offset budget authority and outlays at the account level. In most cases, they offset budget authority and outlays at the agency and subfunction levels. Proprietary receipts from a few sources, however, are not offset against any specific agency or function and are classified as undistributed offsetting receipts. They are deducted from the Government-wide totals for budget authority and outlays. For example, the collections of rents and royalties from outer continental shelf lands are undistributed because the amounts are large and for the most part are not related to the spending of the agency that administers the transactions and the subfunction that records the administrative expenses. Similarly, two kinds of intragovernmental transactions—agencies’ payments as employers into Federal employee retirement trust funds and interest received by trust funds—are classified as undistributed offsetting receipts. They appear instead as special deductions in computing total budget authority and outlays for the Government rather than as offsets at the agency level. This special treatment is necessary because the amounts are so large they would distort measures of the agency’s activities if they were attributed to the agency. User Charges User charges are fees assessed on individuals or organizations for the provision of Government services and for the sale or use of Government goods or resources. The payers of the user charge must be limited in the authorizing legislation to those receiving special benefits from, or subject to regulation by, the program or activity beyond the benefits received by the general public or broad segments of the public (such as those who pay income taxes or customs duties). Policy regarding user charges is established in OMB Circular A–25, “User Charges” (July 8, 1993). The term encompasses proceeds from the sale or use of Government goods and services, including the sale of natural resources (such as timber, oil, and minerals) and proceeds from asset sales (such as property, plant, and equipment). User charges are not necessarily dedicated to the activity they finance and may be credited to the general fund of the Treasury. The term “user charge” does not refer to a separate budget category for collections. User charges are classified in the budget as receipts, offsetting receipts, or offsetting collections according to the principles explained previously. See Chapter 16, “Offsetting Collections and Offsetting Receipts,” for more information on the classification of user charges. BUDGET AUTHORITY, OBLIGATIONS, AND OUTLAYS Budget authority, obligations, and outlays are the primary benchmarks and measures of the budget control system. The Congress enacts laws that provide agencies with spending authority in the form of budget authority. Before agencies can use these resources—obligate this budget authority—OMB must approve their spending plans. After the plans are approved, agencies can enter into binding agreements to purchase items or services or to make grants or other payments. These agreements are recorded as obligations of the United States and deducted from the amount of budgetary resources available to the agency. When payments are made, the obligations are liquidated and outlays recorded. These concepts are discussed more fully below. Budget Authority and Other Budgetary Resources Budget authority is the authority provided in law to enter into legal obligations that will result in immediate or future outlays of the Government. In other words, it is the amount of money that agencies are allowed to commit to be spent in current or future years. Government officials may obligate the Government to make outlays only to the extent they have been granted budget authority. The budget records new budget authority as a dollar amount in the year when it first becomes available for obligation. When permitted by law, unobligated balances of budget authority may be carried over and used in the next year. The budget does not record these balances as budget authority again. They do, however, constitute a budgetary resource that is available for obligation. In some cases, a provision of law (such as a limitation on obligations or a benefit formula) precludes the obligation of funds that would otherwise be available for obligation. In such cases, the budget records budget authority equal to the amount of obligations that can be incurred. A major exception to this rule is for the highway and mass transit programs financed by the Highway Trust Fund, where budget authority is measured as the amount of contract authority (described later in this chapter) provided in authorizing statutes, even though the obligation limitations enacted in annual appropriations acts restrict the amount of contract authority that can be obligated. In deciding the amount of budget authority to request for a program, project, or activity, agency officials estimate the total amount of obligations they will need to incur to achieve desired goals and subtract the unobligated balances available for these purposes. The amount of budget authority requested is influenced by the nature of the programs, projects, or activities being financed. For current operating expenditures, the amount requested usually covers the needs for the fiscal year. For major procurement programs and construction projects, agencies generally must request sufficient budget authority in the 136 first year to fully fund an economically useful segment of a procurement or project, even though it may be obligated over several years. This full funding policy is intended to ensure that the decision-makers take into account all costs and benefits fully at the time decisions are made to provide resources. It also avoids sinking money into a procurement or project without being certain if or when future funding will be available to complete the procurement or project. Budget authority takes several forms: • Appropriations, provided in annual appropriations acts or authorizing laws, permit agencies to incur obligations and make payment; • Borrowing authority, usually provided in permanent laws, permits agencies to incur obligations but requires them to borrow funds, usually from the general fund of the Treasury, to make payment; • Contract authority, usually provided in permanent law, permits agencies to incur obligations in advance of a separate appropriation of the cash for payment or in anticipation of the collection of receipts that can be used for payment; and • Spending authority from offsetting collections, usually provided in permanent law, permits agencies to credit offsetting collections to an expenditure account, incur obligations, and make payment using the offsetting collections. Because offsetting collections and offsetting receipts are deducted from gross budget authority, they are referred to as negative budget authority for some purposes, such as Congressional Budget Act provisions that pertain to budget authority. Authorizing statutes usually determine the form of budget authority for a program. The authorizing statute may authorize a particular type of budget authority to be provided in annual appropriations acts, or it may provide one of the forms of budget authority directly, without the need for further appropriations. An appropriation may make funds available from the general fund, special funds, or trust funds, or authorize the spending of offsetting collections credited to expenditure accounts, including revolving funds. Borrowing authority is usually authorized for business-like activities where the activity being financed is expected to produce income over time with which to repay the borrowing with interest. The use of contract authority is traditionally limited to transportation programs. New budget authority for most Federal programs is normally provided in annual appropriations acts. However, new budget authority for more than half of all outlays is made available through permanent appropriations under existing laws and does not require current action by the Congress. Much of the permanent budget authority is for trust funds, interest on the public debt, and the authority to spend offsetting collections credited to appropriation or fund accounts. For most trust funds, the budget authority is appropriated automatically under ANALYTICAL PERSPECTIVES existing law from the available balance of the fund and equals the estimated annual obligations of the funds. For interest on the public debt, budget authority is provided automatically under a permanent appropriation enacted in 1847 and equals interest outlays. Annual appropriations acts generally make budget authority available for obligation only during the fiscal year to which the act applies. However, they frequently allow budget authority for a particular purpose to remain available for obligation for a longer period or indefinitely (that is, until expended or until the program objectives have been attained). Typically, budget authority for current operations is made available for only one year, and budget authority for construction and some research projects is available for a specified number of years or indefinitely. Most budget authority provided in authorizing statutes, such as for most trust funds, is available indefinitely. If budget authority is initially provided for a limited period of availability, an extension of availability would require enactment of another law (see “Reappropriation” later in this chapter). Budget authority that is available for more than one year and not obligated in the year it becomes available is carried forward for obligation in a following year. In some cases, an account may carry forward unobligated budget authority from more than one prior year. The sum of such amounts constitutes the account’s unobligated balance. Most of these balances had been provided for specific uses such as the multi-year construction of a major project and so are not available for new programs. A small part may never be obligated or spent, primarily amounts provided for contingencies that do not occur or reserves that never have to be used. Amounts of budget authority that have been obligated but not yet paid constitute the account’s unpaid obligations. For example, in the case of salaries and wages, one to three weeks elapse between the time of obligation and the time of payment. In the case of major procurement and construction, payments may occur over a period of several years after the obligation is made. Unpaid obligations (which are made up of accounts payable and undelivered orders) net of the accounts receivable and unfilled customers’ orders are defined by law as the obligated balances. Obligated balances of budget authority at the end of the year are carried forward until the obligations are paid or the balances are canceled. (A general law provides that the obligated balances of budget authority that was made available for a definite period is automatically cancelled five years after the end of the period.) Due to such flows, a change in the amount of budget authority available in any one year may change the level of obligations and outlays for several years to come. Conversely, a change in the amount of obligations incurred from one year to the next does not necessarily result from an equal change in the amount of budget authority available for that year and will not necessarily result in an equal change in the level of outlays in that year. The Congress usually makes budget authority available on the first day of the fiscal year for which the appropriations act is passed. Occasionally, the appropriations 137 12. BUDGET CONCEPTS language specifies a different timing. The language may provide an advance appropriation—budget authority that does not become available until one year or more beyond the fiscal year for which the appropriations act is passed. Forward funding is budget authority that is made available for obligation beginning in the last quarter of the fiscal year (beginning on July 1) for the financing of ongoing grant programs during the next fiscal year. This kind of funding is used mostly for education programs, so that obligations for education grants can be made prior to the beginning of the next school year. For certain benefit programs funded by annual appropriations, the appropriation provides for advance funding—budget authority that is to be charged to the appropriation in the succeeding year, but which authorizes obligations to be incurred in the last quarter of the current fiscal year if necessary to meet benefit payments in excess of the specific amount appropriated for the year. When such authority is used, an adjustment is made to increase the budget authority for the fiscal year in which it is used and to reduce the budget authority of the succeeding fiscal year. Provisions of law that extend into a new fiscal year the availability of unobligated amounts that have expired or would otherwise expire are called reappropriations. Reappropriations of expired balances that are newly available for obligation in the current or budget year count as new budget authority in the fiscal year in which the balances become newly available. For example, if a 2012 appropriations act extends the availability of unobligated budget authority that expired at the end of 2011, new budget authority would be recorded for 2012. This scorekeeping is used because a reappropriation has exactly the same effect as allowing the earlier appropriation to expire at the end of 2011 and enacting a new appropriation for 2012. For purposes of the BBEDCA and the Statutory PayAs-You-Go Act of 2010 (discussed earlier under “Budget Enforcement’’), the budget classifies budget authority as discretionary or mandatory. This classification indicates whether an appropriations act or authorizing legislation controls the amount of budget authority that is available. Generally, budget authority is discretionary if provided in an annual appropriations act and mandatory if provided in authorizing legislation. However, the budget authority provided in annual appropriations acts for certain specifically identified programs is also classified as mandatory by OMB and the congressional scorekeepers. This is because the authorizing legislation for these programs entitles beneficiaries—persons, households, or other levels of government—to receive payment, or otherwise legally obligates the Government to make payment and thereby effectively determines the amount of budget authority required, even though the payments are funded by a subsequent appropriation. Sometimes, budget authority is characterized as current or permanent. Current authority requires the Congress to act on the request for new budget authority for the year involved. Permanent authority becomes available pursuant to standing provisions of law without appropriations action by the Congress for the year involved. Generally, budget authority is current if an annual appropriations act provides it and permanent if authorizing legislation provides it. By and large, the current/permanent distinction has been replaced by the discretionary/mandatory distinction, which is similar but not identical. Outlays are also classified as discretionary or mandatory according to the classification of the budget authority from which they flow (see “Outlays’’ later in this chapter). The amount of budget authority recorded in the budget depends on whether the law provides a specific amount or employs a variable factor that determines the amount. It is considered definite if the law specifies a dollar amount (which may be stated as an upper limit, for example, “shall not exceed …”). It is considered indefinite if, instead of specifying an amount, the law permits the amount to be determined by subsequent circumstances. For example, indefinite budget authority is provided for interest on the public debt, payment of claims and judgments awarded by the courts against the United States, and many entitlement programs. Many of the laws that authorize collections to be credited to revolving, special, and trust funds make all of the collections available for expenditure for the authorized purposes of the fund, and such authority is considered to be indefinite budget authority because the amount of collections is not known in advance of their collection. Obligations Following the enactment of budget authority and the completion of required apportionment action, Government agencies incur obligations to make payments (see earlier discussion under “Budget Execution”). Agencies must record obligations when they enter into binding agreements that will result in immediate or future outlays. Such obligations include the current liabilities for salaries, wages, and interest; and contracts for the purchase of supplies and equipment, construction, and the acquisition of office space, buildings, and land. For Federal credit programs, obligations are recorded in an amount equal to the estimated subsidy cost of direct loans and loan guarantees (see “Federal Credit” later in this chapter). Outlays Outlays are the measure of Government spending. They are payments that liquidate obligations (other than most exchanges of financial instruments, of which the repayment of debt is the prime example). The budget records outlays when obligations are paid, in the amount that is paid. Agency, function and subfunction, and Governmentwide outlay totals are stated net of offsetting collections and offsetting receipts for most budget presentations. (Offsetting receipts from a few sources do not offset any specific function, subfunction, or agency, as explained previously, but only offset Government-wide totals.) Outlay totals for accounts with offsetting collections are stated both gross and net of the offsetting collections credited to the account. However, the outlay totals for special and 138 ANALYTICAL PERSPECTIVES trust funds with offsetting receipts are not stated net of the offsetting receipts; like other offsetting receipts, these offset the agency, function, and subfunction totals but do not offset account-level outlays. The Government usually makes outlays in the form of cash (currency, checks, or electronic fund transfers). However, in some cases agencies pay obligations without disbursing cash, and the budget nevertheless records outlays for the equivalent method. For example, the budget records outlays for the full amount of Federal employees’ salaries, even though the cash disbursed to employees is net of Federal and State income taxes withheld, retirement contributions, life and health insurance premiums, and other deductions. (The budget also records receipts for the amounts withheld from Federal employee paychecks for Federal income taxes and other payments to the Government.) When debt instruments (bonds, debentures, notes, or monetary credits) are used in place of cash to pay obligations, the budget records outlays financed by an increase in agency debt. For example, the budget records the acquisition of physical assets through certain types of lease-purchase arrangements as though a cash disbursement were made for an outright purchase. The transaction creates a Government debt, and the cash lease payments are treated as repayments of principal and interest. The budget records outlays for the interest on the public issues of Treasury debt securities as the interest accrues, not when the cash is paid. A small portion of Treasury debt consists of inflation-indexed securities, which feature monthly adjustments to principal for inflation and semiannual payments of interest on the inflation-adjusted principal. As with fixed-rate securities, the budget records interest outlays as the interest accrues. The monthly adjustment to principal is recorded, simultaneously, as an increase in debt outstanding and an outlay of interest. Most Treasury debt securities held by trust funds and other Government accounts are in the Government account series. The budget normally states the interest on these securities on a cash basis. When a Government account is invested in Federal debt securities, the purchase price is usually close or identical to the par (face) value of the security. The budget generally records the investment at par value and adjusts the interest paid by Treasury and collected by the account by the difference between purchase price and par, if any. For Federal credit programs, outlays are equal to the subsidy cost of direct loans and loan guarantees and are recorded as the underlying loans are disbursed (see “Federal Credit” later in this chapter). The budget records refunds of receipts that result from overpayments by the public (such as income taxes withheld in excess of tax liabilities) as reductions of receipts, rather than as outlays. However, the budget records payments to taxpayers for refundable tax credits (such as earned income tax credits) that exceed the taxpayer’s tax liability as outlays. Similarly, when the Government makes overpayments that are later returned to the Government, those refunds to the Government are recorded as offsetting collections or offsetting receipts, not as governmental receipts. Not all of the new budget authority for 2013 will be obligated or spent in 2013. Outlays during a fiscal year may liquidate obligations incurred in the same year or in prior years. Obligations, in turn, may be incurred against budget authority provided in the same year or against unobligated balances of budget authority provided in prior years. Outlays, therefore, flow in part from budget authority provided for the year in which the money is spent and in part from budget authority provided for prior years. The ratio of a given year’s outlays resulting from budget authority enacted in that or a prior year to the original amount of that budget authority is referred to as the spendout rate for that year. As shown in the accompanying chart, $2,833 billion of outlays in 2013 (74 percent of the outlay total) will be made from that year’s $3,667 billion total of proposed new budget authority (a first-year spendout rate of 77 percent). Thus, the remaining $970 billion of outlays in Chart 12-1. Relationship of Budget Authority to Outlays for 2013 (Billions of dollars) New Authority Recommended for 2013 3,667 Unspent Authority Enacted in Prior Years 2,182 To be spent in 2013 Outlays in 2013 2,833 3,803 To b e in fu spent ture year s nt pe e s 13 b To in 20 3 970 83 4 Authority written off, expired, and adjusted (net) To be spent in Future Years 1,209 Unspent Authority for Outlays in Future Years 2,043 139 12. BUDGET CONCEPTS 2013 (26 percent of the outlay total) will be made from budget authority enacted in previous years. At the same time, $834 billion of the new budget authority proposed for 2013 (23 percent of the total amount proposed) will not lead to outlays until future years. As described earlier, the budget classifies budget authority and outlays as discretionary or mandatory. This classification of outlays measures the extent to which actual spending is controlled through the annual appropriations process. About 36 percent of total outlays in 2011 ($1,300 billion) are discretionary and the remaining 64 percent ($2,303 billion in 2011) are mandatory spending and net interest. Such a large portion of total spending is mandatory because authorizing rather than appropriations legislation determines net interest ($230 billion in 2011) and the spending for a few programs with large amounts of spending each year, such as Social Security ($725 billion in 2011) and Medicare ($480 billion in 2011). The bulk of mandatory outlays flow from budget authority recorded in the same fiscal year. This is not necessarily the case for discretionary budget authority and outlays. For most major construction and procurement projects and long-term contracts, for example, the budget authority covers the entire cost estimated when the projects are initiated even though the work will take place and outlays will be made over a period extending beyond the year for which the budget authority is enacted. Similarly, discretionary budget authority for most education and job training activities is appropriated for school or program years that begin in the fourth quarter of the fiscal year. Most of these funds result in outlays in the year after the appropriation. FEDERAL CREDIT Some Government programs make direct loans or loan guarantees. A direct loan is a disbursement of funds by the Government to a non-Federal borrower under a contract that requires repayment of such funds with or without interest. The term includes economically equivalent transactions such as selling an asset on credit terms in lieu of receiving cash up front. A loan guarantee is any guarantee, insurance, or other pledge with respect to the payment of all or a part of the principal or interest on any debt obligation of a non-Federal borrower to a nonFederal lender. The Federal Credit Reform Act of 1990, as amended (FCRA), prescribes the budgetary treatment for Federal credit programs. Under this treatment, the budget records obligations and outlays up front, for the net cost to the Government (subsidy cost), rather than recording the cash flows year by year over the term of the loan. Under FCRA treatment, the costs and benefits of direct loans and loan guarantees can be compared on an equivalent basis to each other, and to other methods of delivering benefits, such as grants. The cost of direct loans and loan guarantees, sometimes called the “subsidy cost,’’ is estimated as the present value of expected payments to the public over the term of the loan, less the present value of expected collections, discounted using appropriate Treasury interest rates.2 (Some advocate for fair value treatment of loans and guarantees, which would discount cash flows using market rates. See Chapter 23 of this volume, “Credit and Insurance,” for a fuller discussion of this topic.) Similar to most other kinds of programs, agencies can make loans or guarantee loans only if the Congress has appropriated funds sufficient to cover the subsidy costs, or provided a limitation in an appropriations act on the amount of direct loans or loan guarantees that can be made. The budget records the subsidy cost to the Government arising from direct loans and loan guarantees—the budget authority and outlays—in credit program accounts. When a Federal agency disburses a direct loan or when 2 Present value is a standard financial concept that allows for the time-value of money. That is, it accounts for the fact that a given sum of money is worth more today than the same sum would be worth in the future because interest can be earned on money held today. a non-Federal lender disburses a loan guaranteed by a Federal agency, the program account disburses or outlays an amount equal to the estimated present value cost, or subsidy, to a non-budgetary credit financing account. The financing accounts record the actual transactions with the public. For a few programs, the estimated subsidy cost is negative because the present value of expected Government collections exceeds the present value of expected payments to the public over the term of the loan. In such cases, the financing account pays the estimated subsidy cost to the program’s negative subsidy receipt account, where it is recorded as an offsetting receipt. In a few cases, the offsetting receipts of credit accounts are dedicated to a special fund established for the program and are available for appropriation for the program. The agencies responsible for credit programs must reestimate the subsidy cost of the outstanding portfolio of direct loans and loan guarantees each year. If the estimated cost increases, the program account makes an additional payment to the financing account equal to the change in cost. If the estimated cost decreases, the financing account pays the difference to the program’s downward reestimate receipt account, where it is recorded as an offsetting receipt. The FCRA provides permanent indefinite appropriations to pay for upward reestimates. If the Government modifies the terms of an outstanding direct loan or loan guarantee in a way that increases the cost as the result of a law or the exercise of administrative discretion under existing law, the program account records obligations for the increased cost and outlays the amount to the financing account. As with the original cost, agencies may incur modification costs only if the Congress has appropriated funds to cover them. A modification may also reduce costs, in which case the amounts are generally returned to the general fund, as the financing account makes a payment to the program’s receipt account. Credit financing accounts record all cash flows arising from direct loan obligations and loan guarantee commitments. Such cashflows include all cashflows to and from the public, including direct loan disbursements and repayments, loan guarantee default payments, fees, and 140 ANALYTICAL PERSPECTIVES recoveries on defaults. Financing accounts also record intragovernmental transactions, such as the receipt of subsidy cost payments from program accounts, borrowing and repayments of Treasury debt to finance program activities, and interest paid to or received from the Treasury. The cash flows of direct loans and of loan guarantees are recorded in separate financing accounts for programs that provide both types of credit. The budget totals exclude the transactions of the financing accounts because they are not a cost to the Government. However, since financing accounts record all credit cash flows to and from the public, they affect the means of financing a budget surplus or deficit (see “Credit Financing Accounts” in the next section). The budget documents display the transactions of the financing accounts, together with the related program accounts, for information and analytical purposes. The FCRA grandfathered the budgetary treatment of direct loan obligations and loan guarantee commitments made prior to 1992. The budget records these on a cash basis in credit liquidating accounts, the same as they were recorded before FCRA was enacted. However, this exception ceases to apply if the direct loans or loan guarantees are modified as described above. In that case, the budget records the subsidy cost or savings of the modification, as appropriate, and begins to account for the associated transactions as the FCRA prescribes for direct loan obligations and loan guarantee commitments made in 1992 or later. Under the authority provided in various acts, certain activities are reflected pursuant to FCRA. For example, the Emergency Economic Stabilization Act of 2008 (EESA) created the Troubled Asset Relief Program (TARP) under the Department of the Treasury, and authorized Treasury to purchase or guarantee troubled assets until October 3, 2010. Under the TARP, Treasury has purchased equity interests in financial institutions. Section 123 of the EESA provides the Administration the authority to treat these equity investments on a FCRA-basis, recording outlays for the subsidy as is done for direct loans and loan guarantees. The budget reflects the cost to the Government of TARP direct loans, loan guarantees, and equity investments consistent with the FCRA and Section 123 of EESA, which requires an adjustment to the discount rate otherwise prescribed by FCRA to account for market risk for these transactions. Increases to the International Monetary Fund Quota and New Arrangement to Borrow enacted in the Supplemental Appropriations Act of 2009 are treated on a FCRA basis with a risk adjustment to the discount rate, under the authority provided in that Act. In addition, Treasury equity purchases under the Small Business Lending Fund are treated pursuant to the FCRA, as provided by the Small Business Jobs Act of 2010. BUDGET DEFICIT OR SURPLUS AND MEANS OF FINANCING When outlays exceed receipts, the difference is a deficit, which the Government finances primarily by borrowing. When receipts exceed outlays, the difference is a surplus, and the Government automatically uses the surplus primarily to reduce debt. The Government’s debt (debt held by the public) is approximately the cumulative amount of borrowing to finance deficits, less repayments from surpluses, over the Nation’s history. Borrowing is not exactly equal to the deficit, and debt repayment is not exactly equal to the surplus, because of the other means of financing such as those discussed in this section. The factors included in the other means of financing can either increase or decrease the Government’s borrowing needs (or decrease or increase its ability to repay debt). For example, the change in the Treasury operating cash balance is a factor included in other means of financing. Holding receipts and outlays constant, increases in the cash balance increase the Government’s need to borrow or reduce the Government’s ability to repay debt, and decreases in the cash balance decrease the need to borrow or increase the ability to repay debt. In some years, the net effect of the other means of financing is minor relative to the borrowing or debt repayment; in other years, such as 2009, the net effect may be significant, as explained later in this chapter. Borrowing and Debt Repayment The budget treats borrowing and debt repayment as a means of financing, not as receipts and outlays. If borrowing were defined as receipts and debt repayment as outlays, the budget would always be virtually balanced by definition. This rule applies both to borrowing in the form of Treasury securities and to specialized borrowing in the form of agency securities. The rule reflects the commonsense understanding that lending or borrowing is just an exchange of financial assets of equal value—cash for Treasury securities—and so is fundamentally different from, say, paying taxes. In 2011, the Government borrowed $1,109 billion from the public, bringing debt held by the public to $10,128 billion. This borrowing financed the $1,299 billion deficit in that year as well as the net effect of the other means of financing, such as changes in cash balances and other accounts discussed below. In addition to selling debt to the public, the Treasury Department issues debt to Government accounts, primarily trust funds that are required by law to invest in Treasury securities. Issuing and redeeming this debt does not affect the means of financing, because these transactions occur between one Government account and another and thus do not raise or use any cash for the Government as a whole. (See Chapter 6 of this volume, “Federal Borrowing and Debt,” for a fuller discussion of this topic.) Exercise of Monetary Power Seigniorage is the profit from coining money. It is the difference between the value of coins as money and their cost of production. Seigniorage reduces the Government’s need to borrow. Unlike the payment of taxes or other re- 141 12. BUDGET CONCEPTS ceipts, it does not involve a transfer of financial assets from the public. Instead, it arises from the exercise of the Government’s power to create money and the public’s desire to hold financial assets in the form of coins. Therefore, the budget excludes seigniorage from receipts and treats it as a means of financing other than borrowing from the public. The budget also treats proceeds from the sale of gold as a means of financing, since the value of gold is determined by its value as a monetary asset rather than as a commodity. Credit Financing Accounts The budget records the net cash flows of credit programs in credit financing accounts. These accounts include the transactions for direct loan and loan guarantee programs, as well as the equity purchase programs under TARP that are recorded on a credit basis consistent with Section 123 of EESA. Financing accounts also record the 2009 increase in the U.S. quota in the International Monetary Fund that are recorded on a credit basis consistent with the Supplemental Appropriations Act of 2009, and equity purchases under the Small Business Lending Fund consistent with the Small Business Jobs Act of 2010. Credit financing accounts are excluded from the budget because they are not allocations of resources by the Government (see “Federal Credit” earlier in this chapter). However, even though they do not affect the surplus or deficit, they can either increase or decrease the Government’s need to borrow. Therefore, they are recorded as a means of financing. Financing account disbursements to the public increase the requirement for Treasury borrowing in the same way as an increase in budget outlays. Financing account receipts from the public can be used to finance the payment of the Government’s obligations and therefore reduce the requirement for Treasury borrowing from the public in the same way as an increase in budget receipts. Deposit Fund Account Balances The Treasury uses non-budgetary accounts, called deposit funds, to record cash held temporarily until ownership is determined (for example, earnest money paid by bidders for mineral leases) or cash held by the Government as agent for others (for example, State and local income taxes withheld from Federal employees’ salaries and not yet paid to the State or local government or the Thrift Savings Fund, a defined contribution pension fund held and managed in a fiduciary capacity by the Government). Deposit fund balances may be held in the form of either invested or uninvested balances. To the extent that they are not invested, changes in the balances are available to finance expenditures and are recorded as a means of financing other than borrowing from the public. To the extent that they are invested in Federal debt, changes in the balances are reflected as borrowing from the public (in lieu of borrowing from other parts of the public) and are not reflected as a separate means of financing. United States Quota Subscriptions to the International Monetary Fund (IMF) The United States participates in the IMF through a quota subscription. Financial transactions with the IMF are exchanges of monetary assets. When the IMF draws dollars from the U.S. quota, the United States simultaneously receives an equal, offsetting, Special Drawing Right (SDR)-denominated claim in the form of an increase in the U.S. reserve position in the IMF. The U.S. reserve position in the IMF increases when the United States transfers dollars to the IMF and decreases when the United States is repaid and the cash flows return to the Treasury. The budgetary treatment of appropriations for IMF quotas has changed over time. Prior to 1981, the transactions were not included in the budget because they were viewed as exchanges of cash for a monetary asset (SDRs) of the same value. This was consistent with the scoring of other exchanges of monetary assets, such as deposits of cash in Treasury accounts at commercial banks. As a result of an agreement reached with the Congress in 1980, the budget began to record budget authority for the quotas, but did not record outlays because of the continuing view that the transactions were exchanges of monetary assets of equal value. This scoring convention continued to be applied through 2008. The 2010 Budget proposed to change the scoring back to the pre-1981 practice of showing zero budget authority and outlays for proposed increases in the U.S. quota subscriptions to the IMF. In 2009, Congress enacted an increase in the Supplemental Appropriations Act of 2009 (Public Law 111–2, Title XIV, International Monetary Programs) and directed that the increase be scored under the requirements of the Federal Credit Reform Act of 1990, with an adjustment to the discount rate for market risk. The 2013 Budget reflects obligations and outlays for the quota increase provided by the Supplemental Appropriations Act of 2009 under the terms of that Act. The cash transactions between the U.S. Treasury and the IMF are treated as a means of financing (see “Credit Financing Accounts” earlier in this chapter), which do not affect the deficit. In contrast, for increases to the U.S. quota subscriptions made prior to the Supplemental Appropriations Act of 2009, the 2013 Budget records interest received from the IMF on U.S. deposits as an offsetting receipt in the general fund of the Treasury. Treasury records outlays in the prior year for financial transactions with the IMF to the extent there is an unrealized loss in dollar terms and offsetting receipts to the extent there is an unrealized gain in dollar terms on the value of the interest-bearing portion of the U.S. quota actually held at the IMF in SDRs. Changes in the value of the portion of the U.S. quota held at Treasury rather than in the U.S. reserve position held at the IMF are recorded as a change in obligations. Investments of the National Railroad Retirement Investment Trust Under longstanding rules, the budget has generally treated investments in non-Federal equities and debt se- 142 ANALYTICAL PERSPECTIVES curities as a purchase of an asset, recording an obligation and an outlay in an amount equal to the purchase price in the year of the purchase. Since investments in non-Federal equities or debt securities consume cash, fund balances (of funds available for obligation) are normally reduced by the amounts paid for these purchases. However, as previously noted, the purchase of equity securities through TARP is recorded on a credit basis, with an outlay recorded in the amount of the estimated subsidy cost. In addition, the Railroad Retirement and Survivors’ Improvement Act of 2001 (Public Law 107–90) requires purchases or sales of non-Federal assets by the National Railroad Retirement Investment Trust to be treated as a means of financing in the budget, rather than as an outlay. Earnings on investments by the National Railroad Retirement Investment Trust (NRRIT) in private assets pose special challenges for budget projections. Over long periods, equities and private bonds are expected to earn a higher return on average than the Treasury rate, but that return is subject to greater uncertainty. Sound budgeting principles require that estimates of future trust fund balances reflect both the average return on investments, and the cost of risk associated with the uncertainty of that return. (The latter is particularly true in cases where individual beneficiaries have not made a voluntary choice to assume additional risk.) Estimating both of these separately is quite difficult. While the gains and losses that these assets have experienced in the past are known, it is quite possible that such premiums will differ in the future. Furthermore, there is no existing procedure for the budget to record separately the cost of risk from such an investment, even if it could be estimated accurately. Economic theory suggests, however, that the difference between the expected return of a risky liquid asset and the Treasury rate is equal to the cost of the asset’s additional risk as priced by the market net of administrative and transaction costs. Following through on this insight, the best way to project the rate of return on the Fund’s balances is probably to use a Treasury rate. As a result, the Budget treats equivalently NRRIT investments with equal economic value as measured by market prices, avoiding the appearance that the budget would be expected to benefit if the Government bought private sector assets. The actual and estimated returns to private (debt and equity) securities are recorded in subfunction 909, other investment income. The actual-year returns include interest, dividends, and capital gains and losses on private equities and other securities. The Fund’s portfolio of these assets is revalued at market prices at the end of each month to determine capital gains or losses. As a result, the Fund’s balance at any given point reflects the current market value of resources available to the Government to finance benefits. Earnings for the remainder of the current year and for future years are estimated using the 10year Treasury rate and the value of the Fund’s portfolio at the end of the actual year. No estimates are made of gains and losses for the remainder of the current year or for subsequent years. FEDERAL EMPLOYMENT The budget includes information on civilian and military employment. It also includes information on related personnel compensation and benefits and on staffing requirements at overseas missions. Chapter 11 of this volume, “Improving the Federal Workforce,’’ provides em- ployment levels measured in full-time equivalents (FTE). Agency FTEs are the measure of total hours worked by an agency’s Federal employees divided by the total number of one person’s compensable work hours in a fiscal year. BASIS FOR BUDGET FIGURES Data for the Past Year Data for the Current Year The past year column (2011) generally presents the actual transactions and balances as recorded in agency accounts and as summarized in the central financial reports prepared by the Treasury Department for the most recently completed fiscal year. Occasionally, the budget reports corrections to data reported erroneously to Treasury but not discovered in time to be reflected in Treasury’s published data. In addition, in certain cases the Budget has a broader scope and includes financial transactions that are not reported to Treasury (see Chapter 30 of this volume, “Comparison of Actual to Estimated Totals,” for a summary of these differences). The current year column (2012) includes estimates of transactions and balances based on the amounts of budgetary resources that were available when the budget was transmitted. In cases where the budget proposes policy changes effective in the current year, the data will also reflect the budgetary effect of those proposed changes. Data for the Budget Year The budget year column (2013) includes estimates of transactions and balances based on the amounts of budgetary resources that are estimated to be available, including new budget authority requested under current authorizing legislation, and amounts estimated to result from changes in authorizing legislation and tax laws. 143 12. BUDGET CONCEPTS The budget Appendix generally includes the appropriations language for the amounts proposed to be appropriated under current authorizing legislation. In a few cases, this language is transmitted later because the exact requirements are unknown when the budget is transmitted. The Appendix generally does not include appropriations language for the amounts that will be requested under proposed legislation; that language is usually transmitted later, after the legislation is enacted. Some tables in the budget identify the items for later transmittal and the related outlays separately. Estimates of the total requirements for the budget year include both the amounts requested with the transmittal of the budget and the amounts planned for later transmittal. Data for the Outyears The budget presents estimates for each of the nine years beyond the budget year (2014 through 2022) in order to reflect the effect of budget decisions on objectives and plans over a longer period. Allowances The budget may include lump-sum allowances to cover certain transactions that are expected to increase or decrease budget authority, outlays, or receipts but are not, for various reasons, reflected in the program details. For example, the budget might include an allowance to show the effect on the budget totals of a proposal that would actually affect many accounts by relatively small amounts, in order to avoid unnecessary detail in the presentations for the individual accounts. This year’s Budget, like last year’s, includes an allowance for the costs of possible future natural disasters. Baseline The budget baseline is an estimate of the receipts, outlays, and deficits or surpluses that would occur if no changes were made to current laws and policies during the period covered by the budget. The baseline assumes that receipts and mandatory spending, which generally are authorized on a permanent basis, will continue in the future as required by current law and policy. The baseline assumes that the future funding for most discretionary programs, which generally are funded annually, will equal the most recently enacted appropriation, adjusted for inflation. Baseline outlays represent the amount of resources that would be used by the Government over the period covered by the budget on the basis of laws currently enacted. The baseline serves several useful purposes: • It may warn of future problems, either for Government fiscal policy as a whole or for individual tax and spending programs. • It may provide a starting point for formulating the President’s Budget. • It may provide a “policy-neutral’’ benchmark against which the President’s Budget and alternative proposals can be compared to assess the magnitude of proposed changes. As it happens, a number of significant changes in policies are embedded in the baseline rules specified in the Balanced Budget and Emergency Deficit Control Act, as amended (BBEDCA). For example, the tax cuts enacted in 2001 and 2003 and extended in 2010 are scheduled under current law to expire at the end of 2012. As another example, the BBEDCA discretionary caps would reduce discretionary spending below the levels produced by the baseline rule to inflate enacted appropriations. Because the expiration of the 2001 and 2003 tax cuts and the operation of the discretionary caps would create significant differences between the BBEDCA baseline and policies in effect this year, the Administration also issues an adjusted baseline that, unlike the BBEDCA baseline, assumes such changes in policy will not occur. (Chapter 27 of this volume, “Current Services Estimates,” provides more information on the baseline, including the differences between the baseline as calculated under the rules of the BBEDCA and the adjusted baseline used in this Budget.) PRINCIPAL BUDGET LAWS The following basic laws govern the Federal budget process: Article 1, section 8, clause 1 of the Constitution, which empowers the Congress to collect taxes. Article 1, section 9, clause 7 of the Constitution, which requires appropriations in law before money may be spent from the Treasury and the publication of a regular statement of the receipts and expenditures of all public money. Antideficiency Act (codified in Chapters 13 and 15 of Title 31, United States Code), which prescribes rules and procedures for budget execution. Balanced Budget and Emergency Deficit Control Act of 1985, as amended, which establishes limits on discretionary spending and provides mechanisms for enforcing discretionary spending limits. Chapter 11 of Title 31, United States Code, which prescribes procedures for submission of the President’s budget and information to be contained in it. 144 ANALYTICAL PERSPECTIVES Congressional Budget and Impoundment Control Act of 1974 (Public Law 93–344), as amended. This Act comprises the: Congressional Budget Act of 1974, as amended, which prescribes the congressional budget process; and Impoundment Control Act of 1974, which controls certain aspects of budget execution. Federal Credit Reform Act of 1990, as amended (2 USC 661–661f), which the Budget Enforcement Act of 1990 included as an amendment to the Congressional Budget Act to prescribe the budget treatment for Federal credit programs. Government Performance and Results Act of 1993 (Public Law 103–62, as amended) which emphasizes managing for results. It requires agencies to prepare strategic plans, annual performance plans, and annual performance reports. Statutory Pay-As-You-Go Act of 2010, which establishes a budget enforcement mechanism generally requiring that direct spending and revenue legislation enacted into law not increase the deficit. GLOSSARY OF BUDGET TERMS Account refers to a separate financial reporting unit used by the Federal government to record budget authority, outlays and income for budgeting or management information purposes as well as for accounting purposes. All budget (and off-budget) accounts are classified as being either expenditure or receipt accounts and by fund group. Budget (and off-budget) transactions fall within either of two fund group: (1) Federal funds and (2) trust funds. (Cf. Federal funds group and trust funds group.) Accrual method of measuring cost means an accounting method that records cost when the liability is incurred. As applied to Federal employee retirement benefits, accrual costs are recorded when the benefits are earned rather than when they are paid at some time in the future. The accrual method is used in part to provide data that assists in agency policymaking, but not used in presenting the overall budget of the United States Government. Advance appropriation means appropriations of new budget authority that become available one or more fiscal years beyond the fiscal year for which the appropriation act was passed. Advance funding means appropriations of budget authority provided in an appropriations act to be used, if necessary, to cover obligations incurred late in the fiscal year for benefit payments in excess of the amount specifically appropriated in the act for that year, where the budget authority is charged to the appropriation for the program for the fiscal year following the fiscal year for which the appropriations act is passed. Agency means a department or other establishment of the Government. Allowance means a lump-sum included in the budget to represent certain transactions that are expected to increase or decrease budget authority, outlays, or receipts but that are not, for various reasons, reflected in the program details. Balances of budget authority means the amounts of budget authority provided in previous years that have not been outlayed. Baseline means a projection of the estimated receipts, outlays, and deficit or surplus that would result from continuing current law or current policies through the period covered by the budget. Budget means the Budget of the United States Government, which sets forth the President’s comprehensive financial plan for allocating resources and indicates the President’s priorities for the Federal Government. Budget authority (BA) means the authority provided by law to incur financial obligations that will result in outlays. (For a description of the several forms of budget authority, see “Budget Authority and Other Budgetary Resources’’ earlier in this chapter.) Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA) refers to legislation that altered the budget process, primarily by replacing the earlier fixed targets for annual deficits with a Pay-As-You-Go requirement for new tax or mandatory spending legislation and with caps on annual discretionary funding. While most aspects of these requirements expired in 2002, the Statutory Pay-As-You-Go Act of 2010, which is a standalone piece of legislation that did not directly amend the BBEDCA, reinstated a statutory pay-as-you-go rule for revenues and mandatory spending legislation, and the Budget Control Act of 2011, which did amend BBEDCA, reinstated discretionary caps on budget authority. Budget Control Act of 2011 refers to legislation that reinstated discretionary spending limits on budget authority through 2021. The law amended the BBEDCA. The legislation also increased the statutory debt ceiling, required a congressional vote on a Balanced Budget Amendment, created a congressional debt ceiling disapproval process, created a Joint Select Committee on Deficit Reduction and statutory and congressional procedures for enforcement of the budget goal, and made changes to the Pell Grant and Student Loan programs. 145 12. BUDGET CONCEPTS Budget resolution—see concurrent resolution on the budget. Budget totals mean the totals included in the budget for budget authority, outlays, receipts, and the surplus or deficit. Some presentations in the budget distinguish onbudget totals from off-budget totals. On-budget totals reflect the transactions of all Federal Government entities except those excluded from the budget totals by law. The off-budget totals reflect the transactions of Government entities that are excluded from the on-budget totals by law. Under current law, the off-budget totals include the Social Security trust funds (Federal Old-Age and Survivors Insurance and Federal Disability Insurance Trust Funds) and the Postal Service Fund. The budget combines the on- and off-budget totals to derive unified or consolidated totals for Federal activity. Budgetary resources mean amounts available to incur obligations in a given year. The term comprises new budget authority and unobligated balances of budget authority provided in previous years. Cap means the legal limits for each fiscal year under the BBEDCA, as amended, on the budget authority and outlays (only if applicable) provided by discretionary appropriations. Cap adjustment means either an increase or a decrease that is permitted to the statutory cap limits for each fiscal year under the BBEDCA, as amended, on the budget authority and outlays (only if applicable) provided by discretionary appropriations only if certain conditions are met. These conditions may include providing for a base level of funding or a designation of the increase or decrease by the Congress, and possibly a subsequent designation by the President, pursuant to a section of the BBEDCA or a change in concepts and definitions of funding under the cap. Changes in concepts and definitions require concurrent approval by the Congressional Budget Office and the Congressional Budget Committees. Cash equivalent transaction means a transaction in which the Government makes outlays or receives collections in a form other than cash or the cash does not accurately measure the cost of the transaction. (For examples, see the section on “Outlays’’ earlier in this chapter.) Collections mean money collected by the Government that the budget records as a governmental receipt, an offsetting collection, or an offsetting receipt. Concurrent resolution on the budget refers to the concurrent resolution adopted by the Congress to set budgetary targets for appropriations, mandatory spending legislation, and tax legislation. These concurrent resolutions are required by the Congressional Budget Act of 1974, and are generally adopted annually. Continuing resolution means an appropriations act that provides for the ongoing operation of the Government in the absence of enacted appropriations. Cost refers to legislation or administrative actions that increase outlays or decrease receipts. (Cf savings.) Credit program account means a budget account that receives and obligates appropriations to cover the subsidy cost of a direct loan or loan guarantee and disburses the subsidy cost to a financing account. Current services estimate—see Baseline. Debt held by the public means the cumulative amount of money the Federal Government has borrowed from the public and not repaid. Debt held by the public net of financial assets means the cumulative amount of money the Federal Government has borrowed from the public and not repaid, minus the current value of financial assets such as loan assets, bank deposits, or private-sector securities or equities held by the Government and plus the current value of financial liabilities other than debt. Debt held by Government accounts means the debt the Treasury Department owes to accounts within the Federal Government. Most of it results from the surpluses of the Social Security and other trust funds, which are required by law to be invested in Federal securities. Debt limit means the maximum amount of Federal debt that may legally be outstanding at any time. It includes both the debt held by the public and the debt held by Government accounts, but without accounting for offsetting financial assets. When the debt limit is reached, the Government cannot borrow more money until the Congress has enacted a law to increase the limit. Deficit means the amount by which outlays exceed receipts in a fiscal year. It may refer to the on-budget, offbudget, or unified budget deficit. Direct loan means a disbursement of funds by the Government to a non-Federal borrower under a contract that requires the repayment of such funds with or without interest. The term includes the purchase of, or participation in, a loan made by another lender. The term also includes the sale of a Government asset on credit terms of more than 90 days duration as well as financing arrangements for other transactions that defer payment for more than 90 days. It also includes loans financed by the Federal Financing Bank (FFB) pursuant to agency loan guarantee authority. The term does not include the acquisition of a federally guaranteed loan in satisfaction of default or other guarantee claims or the price support “loans” of the Commodity Credit Corporation. (Cf. loan guarantee.) 146 Direct spending—see mandatory spending. Disaster funding means an appropriation for a discretionary account that is enacted that the Congress designates as being for disaster relief. Such amounts are a cap adjustment to the limits on discretionary spending under the BBEDCA, as amended. The total adjustment for this purpose cannot exceed a ceiling for a particular year that is defined as the total of the average funding provided for disaster relief over the previous 10 years (excluding the highest and lowest years) and the unused amount of the prior year’s ceiling (excluding the portion of the prior year’s ceiling that was itself due to any unused amount from the year before). Disaster relief is defined as activities carried out pursuant to a determination under section 102(2) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Discretionary spending means budgetary resources (except those provided to fund mandatory spending programs) provided in appropriations acts. (Cf. mandatory spending.) Emergency requirement means an amount that the Congress has designated as an emergency requirement. Such amounts are not included in the estimated budgetary effects of PAYGO legislation under the requirements of the Statutory Pay-As-You-Go Act of 2010, if they are mandatory or receipts, and are a cap adjustment to the limits on discretionary spending under the BBEDCA, as amended, if they are discretionary and the President subsequently so designates on an account by account basis. Entitlement refers to a program in which the Federal Government is legally obligated to make payments or provide aid to any person who, or State or local government that, meets the legal criteria for eligibility. Examples include Social Security, Medicare, Medicaid, and Food Stamps. Federal funds group refers to the moneys collected and spent by the Government through accounts other than those designated as trust funds. Federal funds include general, special, public enterprise, and intragovernmental funds. (Cf. trust funds group.) Financing account means a non-budgetary account (an account whose transactions are excluded from the budget totals) that records all of the cash flows resulting from post-1991 direct loan obligations or loan guarantee commitments. At least one financing account is associated with each credit program account. For programs that make both direct loans and loan guarantees, there are separate financing accounts for the direct loans and the loan guarantees. (Cf. liquidating account.) Fiscal year means the Government’s accounting period. It begins on October 1st and ends on September 30th, and is designated by the calendar year in which it ends. ANALYTICAL PERSPECTIVES Forward funding means appropriations of budget authority that are made for obligation starting in the last quarter of the fiscal year for the financing of ongoing grant programs during the next fiscal year. General fund means the accounts in which are recorded governmental receipts not earmarked by law for a specific purpose, the proceeds of general borrowing, and the expenditure of these moneys. Government sponsored enterprises mean private enterprises that were established and sponsored by the Federal Government for public policy purposes. They are not included in the budget totals because they are private companies, and their securities are not backed by the full faith and credit of the Federal Government. However, the budget presents statements of financial condition for certain Government sponsored enterprises such as the Federal National Mortgage Association. (Cf. off-budget.) Intragovernmental fund —see Revolving fund. Liquidating account means a budget account that records all cash flows to and from the Government resulting from pre-1992 direct loan obligations or loan guarantee commitments. (Cf. financing account.) Loan guarantee means any guarantee, insurance, or other pledge with respect to the payment of all or a part of the principal or interest on any debt obligation of a non-Federal borrower to a non-Federal lender. The term does not include the insurance of deposits, shares, or other withdrawable accounts in financial institutions. (Cf. direct loan.) Mandatory spending means spending controlled by laws other than appropriations acts (including spending for entitlement programs) and spending for the food stamp program. Although the Statutory Pay-As-You-Go Act of 2010 uses the term direct spending to mean this, mandatory spending is commonly used instead. (Cf. discretionary spending.) Means of financing refers to borrowing, the change in cash balances, and certain other transactions involved in financing a deficit. The term is also used to refer to the debt repayment, the change in cash balances, and certain other transactions involved in using a surplus. By definition, the means of financing are not treated as receipts or outlays and so are non-budgetary. Obligated balance means the cumulative amount of budget authority that has been obligated but not yet outlayed. (Cf. unobligated balance.) Obligation means a binding agreement that will result in outlays, immediately or in the future. Budgetary resources must be available before obligations can be incurred legally. 147 12. BUDGET CONCEPTS Off-budget refers to transactions of the Federal Government that would be treated as budgetary had the Congress not designated them by statute as “off-budget.” Currently, transactions of the Social Security trust fund and the Postal Service fund are the only sets of transactions that are so designated. The term is sometimes used more broadly to refer to the transactions of private enterprises that were established and sponsored by the Government, most especially “Government sponsored enterprises” such as the Federal Home Loan Banks. (Cf. budget totals.) Offsetting collections mean collections that, by law, are credited directly to expenditure accounts and deducted from gross budget authority and outlays of the expenditure account, rather than added to receipts. Usually, they are authorized to be spent for the purposes of the account without further action by the Congress. They result from business-like transactions with the public, including payments from the public in exchange for goods and services, reimbursements for damages, and gifts or donations of money to the Government and from intragovernmental transactions with other Government accounts. The authority to spend offsetting collections is a form of budget authority. (Cf. receipts and offsetting receipts.) Offsetting receipts mean collections that are credited to offsetting receipt accounts and deducted from gross budget authority and outlays, rather than added to receipts. They are not authorized to be credited to expenditure accounts. The legislation that authorizes the offsetting receipts may earmark them for a specific purpose and either appropriate them for expenditure for that purpose or require them to be appropriated in annual appropriation acts before they can be spent. Like offsetting collections, they result from business-like transactions or market-oriented activities with the public, including payments from the public in exchange for goods and services, reimbursements for damages, and gifts or donations of money to the Government and from intragovernmental transactions with other Government accounts. (Cf. receipts, undistributed offsetting receipts, and offsetting collections.) On-budget refers to all budgetary transactions other than those designated by statute as off-budget (Cf. budget totals.) Outlay means a payment to liquidate an obligation (other than the repayment of debt principal or other disbursements that are “means of financing” transactions). Outlays generally are equal to cash disbursements, but also are recorded for cash-equivalent transactions, such as the issuance of debentures to pay insurance claims, and in a few cases are recorded on an accrual basis such as interest on public issues of the public debt. Outlays are the measure of Government spending. Outyear estimates mean estimates presented in the budget for the years beyond the budget year of budget authority, outlays, receipts, and other items (such as debt). Overseas Contingency Operations/Global War on Terrorism means an appropriation for a discretionary account that is enacted that the Congress and the President have so designated on an account by account basis. Such amounts are a cap adjustment to the limits on discretionary spending under the BBEDCA, as amended. Funding for these purposes have most recently been associated with the wars in Iraq and Afghanistan. Pay-as-you-go (PAYGO) refers to requirements of the Statutory Pay-As-You-Go Act of 2010 that result in a sequestration if the estimated combined result of new legislation affecting direct spending or revenue increases the on-budget deficit relative to the baseline, as of the end of a congressional session. Public enterprise fund —see Revolving fund. Reappropriation means a provision of law that extends into a new fiscal year the availability of unobligated amounts that have expired or would otherwise expire. Receipts mean collections that result from the Government’s exercise of its sovereign power to tax or otherwise compel payment. They are compared to outlays in calculating a surplus or deficit. (Cf. offsetting collections and offsetting receipts.) Revolving fund means a fund that conducts continuing cycles of business-like activity, in which the fund charges for the sale of products or services and uses the proceeds to finance its spending, usually without requirement for annual appropriations. There are two types of revolving funds: Public enterprise funds, which conduct business-like operations mainly with the public, and intragovernmental revolving funds, which conduct businesslike operations mainly within and between Government agencies. (Cf. special fund and trust fund.) Savings refers to legislation or administrative actions that decrease outlays or increase receipts. (Cf. cost.) Scorekeeping means measuring the budget effects of legislation, generally in terms of budget authority, receipts, and outlays, for purposes of measuring adherence to the Budget or to budget targets established by the Congress, as through agreement to a Budget Resolution. Sequestration means the cancellation of budgetary resources. The Statutory Pay-As-You-Go Act of 2010 requires such cancellations if revenue or direct spending legislation is enacted that, in total, increases projected deficits or reduces projected surpluses relative to the baseline. The Balanced Budget and Emergency Deficit Control Act of 1985, as amended, requires such cancella- 148 tions if discretionary appropriations exceed the statutory limits on discretionary spending. Special fund means a Federal fund account for receipts or offsetting receipts earmarked for specific purposes and the expenditure of these receipts. (Cf. revolving fund and trust fund.) Statutory Pay-As-You-Go Act of 2010 refers to legislation that reinstated a statutory pay-as-you-go requirement for new tax or mandatory spending legislation. The law is a standalone piece of legislation that cross-references the BBEDCA, as amended, but does not directly amend that legislation. This is a permanent law and does not expire. Subsidy means the estimated long-term cost to the Government of a direct loan or loan guarantee, calculated on a net present value basis, excluding administrative costs and any incidental effects on governmental receipts or outlays. Surplus means the amount by which receipts exceed outlays in a fiscal year. It may refer to the on-budget, offbudget, or unified budget surplus. Supplemental appropriation means an appropriation enacted subsequent to a regular annual appropriations act, when the need for additional funds is too urgent to be postponed until the next regular annual appropriations act. Trust fund refers to a type of account, designated by law as a trust fund, for receipts or offsetting receipts dedi- ANALYTICAL PERSPECTIVES cated to specific purposes and the expenditure of these receipts. Some revolving funds are designated as trust funds, and these are called trust revolving funds. (Cf. special fund and revolving fund.) Trust funds group refers to the moneys collected and spent by the Government through trust fund accounts. (Cf. Federal funds group.) Undistributed offsetting receipts mean offsetting receipts that are deducted from the Government-wide totals for budget authority and outlays instead of being offset against a specific agency and function. (Cf. offsetting receipts.) Unified budget includes receipts from all sources and outlays for all programs of the Federal Government, including both on- and off-budget programs. It is the most comprehensive measure of the Government’s annual finances. Unobligated balance means the cumulative amount of budget authority within a budget account that is not obligated and that remains available for obligation under law. User charges are charges assessed for the provision of Government services and for the sale or use of Government goods or resources. The payers of the user charge must be limited in the authorizing legislation to those receiving special benefits from, or subject to regulation by, the program or activity beyond the benefits received by the general public or broad segments of the public (such as those who pay income taxes or custom duties). 13. COVERAGE OF THE BUDGET The Federal Government’s activities have farreaching impacts, affecting the economy and society of the Nation and the world. One of the primary activities of the Government is to allocate resources in order to provide public goods and achieve public policy objectives. The budget is the Government’s financial plan for proposing and deciding the allocation of resources and the Government’s method for controlling the allocation of resources. Those financial activities that constitute the direct allocation of resources are included in the budget’s measures of receipts and expenditures, and characterized as “budgetary.” Federal Government activities that do not involve the direct allocation of resources in a measurable way are characterized as “non-budgetary” and classified outside of the budget. For example, the budget does not include funds that are privately owned but held and managed by the Government in a fiduciary capacity, such as the deposit funds owned by Native American Indians. In addition, the budget does not include costs that are borne by the private sector even when those costs result from Federal regulatory activity. Also, although the budget includes the subsidy costs1 of Federal credit programs, it does not include the cash flows of these programs that do not involve a direct allocation of resources by the Government and that are a means of financing these programs. Non-budgetary activities can be important instruments of Federal policy and are discussed briefly in this chapter and in more detail in other parts of the Budget documents. The term “off-budget” may appear to be synonymous with non-budgetary. However, it has a meaning distinct from non-budgetary and, as discussed below, refers to Federal Government activities that are required by law to be excluded from the budget totals. The term is also used colloquially to refer to emergency funding or supplemental appropriations for war costs because these items have often been passed by the Congress outside of the normal budget enforcement procedures. Despite the colloquial usage of the term off-budget, emergency aid and funding for war costs are budgetary and specifically “on-budget,” as that term is defined below; budgetary outlays and receipts reflect the costs of both emergencies and wars. Budgetary Activities The Federal Government has used the unified budget concept as the foundation for its budgetary analysis and presentation since the 1969 Budget, implementing a recommendation made by the President’s Commission on 1 Subsidy costs are explained in the section below on “Federal credit programs.” Budget Concepts in 1967. The Commission called for the budget to include the financial transactions of all of the Federal Government’s programs and agencies. For this reason, the budget includes the financial transactions of all 15 Executive departments, all independent agencies (from all three branches of Government), and all Government corporations. 2 Government corporations are distinct from Government-sponsored enterprises, which, as discussed below, are private entities and classified as non-budgetary. All accounts in Table 33-1, “Federal Programs by Agency and Account,” in the Supplemental Materials to this volume are budgetary. 3 The vast majority of budgetary accounts are associated with the departments or other entities that are clearly Federal agencies. Some budgetary accounts reflect Government payments to entities that were created by the Government as private or non-Federal entities and some of these entities receive all or a majority of their funding from the Government. These include the Corporation for Public Broadcasting, Gallaudet University, Howard University, the Legal Services Corporation, the National Railroad Passenger Corporation (Amtrak), the Smithsonian Institution, the State Justice Institute, and the United States Institute for Peace. Although the Federal payments to these entities are budgetary, the entities themselves are non-budgetary, as discussed below. Whether an entity was created or chartered by the Government does not alone determine its budgetary status. As noted below, some Government created or chartered entities are classified as non-budgetary because they recieve or were designed to receive the majority of their funding from non-Federal sources or because they are not controlled entirely by the Government. The President’s 1967 Commission on Budget Concepts recommended that the budget be comprehensive, but it also recognized that proper budgetary classification would require weighing all relevant factors regarding ownership and control of an 2 Government corporations are Government entities that are defined as corporations under 31 U.S.C. 9101, the Government Corporation Control Act, and four other entities. The four other entities are the African Development Foundation (which is subject to the Act by 22 U.S.C. 290h-6), the Inter-American Foundation (which is subject to the Act by 22 U.S.C. 290f), the Presidio Trust (which was established as a Government corporation by 16 U.S.C. 460bb note), and the Valles Caldera Trust (which is classified as a Government corporation by 16 U.S.C. 698v-4). Many Government corporations engage in a cycle of business activity with the public, selling services to the public at prices that enable the entities to be self-sustaining. Examples of Government corporations include the Commodity Credit Corporation, the Export-Import Bank of the United States, the Federal Crop Insurance Corporation, the Federal Deposit Insurance Corporation, the Millennium Challenge Corporation, the Overseas Private Investment Corporation, the Pension Benefit Guaranty Corporation, and the Tennessee Valley Authority. 3 Table 33-1 can be found at www.whitehouse.gov/sites/default/files/ omb/budget/fy2013/assets/33_1.pdf. 149 150 ANALYTICAL PERSPECTIVES Table 13–1. COMPARISON OF TOTAL, ON-BUDGET, AND OFF-BUDGET TRANSACTIONS 1 (In billions of dollars) Fiscal Year Receipts Total On-budget Outlays Off-budget Total On-budget Surplus or deficit (–) Off-budget Total On-budget Off-budget 1980 ��������������������������������������������������������������������������������������� 1981 ��������������������������������������������������������������������������������������� 1982 ��������������������������������������������������������������������������������������� 1983 ��������������������������������������������������������������������������������������� 1984 ��������������������������������������������������������������������������������������� 517.1 599.3 617.8 600.6 666.4 403.9 469.1 474.3 453.2 500.4 113.2 130.2 143.5 147.3 166.1 590.9 678.2 745.7 808.4 851.8 477.0 543.0 594.9 660.9 685.6 113.9 135.3 150.9 147.4 166.2 –73.8 –79.0 –128.0 –207.8 –185.4 –73.1 –73.9 –120.6 –207.7 –185.3 –0.7 –5.1 –7.4 –0.1 –0.1 1985 ��������������������������������������������������������������������������������������� 1986 ��������������������������������������������������������������������������������������� 1987 ��������������������������������������������������������������������������������������� 1988 ��������������������������������������������������������������������������������������� 1989 ��������������������������������������������������������������������������������������� 734.0 769.2 854.3 909.2 991.1 547.9 568.9 640.9 667.7 727.4 186.2 200.2 213.4 241.5 263.7 946.3 990.4 1,004.0 1,064.4 1,143.7 769.4 806.8 809.2 860.0 932.8 176.9 183.5 194.8 204.4 210.9 –212.3 –221.2 –149.7 –155.2 –152.6 –221.5 –237.9 –168.4 –192.3 –205.4 9.2 16.7 18.6 37.1 52.8 1990 ��������������������������������������������������������������������������������������� 1991 ��������������������������������������������������������������������������������������� 1992 ��������������������������������������������������������������������������������������� 1993 ��������������������������������������������������������������������������������������� 1994 ��������������������������������������������������������������������������������������� 1,032.0 1,055.0 1,091.2 1,154.3 1,258.6 750.3 761.1 788.8 842.4 923.5 281.7 293.9 302.4 311.9 335.0 1,253.0 1,324.2 1,381.5 1,409.4 1,461.8 1,027.9 1,082.5 1,129.2 1,142.8 1,182.4 225.1 241.7 252.3 266.6 279.4 –221.0 –269.2 –290.3 –255.1 –203.2 –277.6 –321.4 –340.4 –300.4 –258.8 56.6 52.2 50.1 45.3 55.7 1995 ��������������������������������������������������������������������������������������� 1996 ��������������������������������������������������������������������������������������� 1997 ��������������������������������������������������������������������������������������� 1998 ��������������������������������������������������������������������������������������� 1999 ��������������������������������������������������������������������������������������� 1,351.8 1,453.1 1,579.2 1,721.7 1,827.5 1,000.7 1,085.6 1,187.2 1,305.9 1,383.0 351.1 367.5 392.0 415.8 444.5 1,515.7 1,560.5 1,601.1 1,652.5 1,701.8 1,227.1 1,259.6 1,290.5 1,335.9 1,381.1 288.7 300.9 310.6 316.6 320.8 –164.0 –107.4 –21.9 69.3 125.6 –226.4 –174.0 –103.2 –29.9 1.9 62.4 66.6 81.4 99.2 123.7 2000 ��������������������������������������������������������������������������������������� 2001 ��������������������������������������������������������������������������������������� 2002 ��������������������������������������������������������������������������������������� 2003 ��������������������������������������������������������������������������������������� 2004 ��������������������������������������������������������������������������������������� 2,025.2 1,991.1 1,853.1 1,782.3 1,880.1 1,544.6 1,483.6 1,337.8 1,258.5 1,345.4 480.6 507.5 515.3 523.8 534.7 1,789.0 1,862.8 2,010.9 2,159.9 2,292.8 1,458.2 1,516.0 1,655.2 1,796.9 1,913.3 330.8 346.8 355.7 363.0 379.5 236.2 128.2 –157.8 –377.6 –412.7 86.4 –32.4 –317.4 –538.4 –568.0 149.8 160.7 159.7 160.8 155.2 2005 ��������������������������������������������������������������������������������������� 2006 ��������������������������������������������������������������������������������������� 2007 ��������������������������������������������������������������������������������������� 2008 ��������������������������������������������������������������������������������������� 2009 ��������������������������������������������������������������������������������������� 2,153.6 2,406.9 2,568.0 2,524.0 2,105.0 1,576.1 1,798.5 1,932.9 1,865.9 1,451.0 577.5 608.4 635.1 658.0 654.0 2,472.0 2,655.0 2,728.7 2,982.5 3,517.7 2,069.7 2,233.0 2,275.0 2,507.8 3,000.7 402.2 422.1 453.6 474.8 517.0 –318.3 –248.2 –160.7 –458.6 –1,412.7 –493.6 –434.5 –342.2 –641.8 –1,549.7 175.3 186.3 181.5 183.3 137.0 2010 ��������������������������������������������������������������������������������������� 2011 ��������������������������������������������������������������������������������������� 2012 estimate ������������������������������������������������������������������������� 2013 estimate ������������������������������������������������������������������������� 2014 estimate ������������������������������������������������������������������������� 2015 estimate ������������������������������������������������������������������������� 2016 estimate ������������������������������������������������������������������������� 2017 estimate ������������������������������������������������������������������������� 2,162.7 2,303.5 2,468.6 2,902.0 3,215.3 3,450.2 3,680.1 3,919.3 1,531.0 1,737.7 1,896.5 2,224.5 2,472.9 2,669.3 2,847.3 3,038.1 631.7 565.8 572.1 677.4 742.4 780.9 832.8 881.1 3,456.2 3,603.1 3,795.5 3,803.4 3,883.1 4,059.9 4,328.8 4,531.7 2,901.5 3,104.5 3,290.4 3,169.3 3,167.9 3,298.2 3,519.9 3,672.5 554.7 498.6 505.2 634.1 715.2 761.6 808.9 859.2 –1,293.5 –1,299.6 –1,326.9 –901.4 –667.8 –609.7 –648.8 –612.4 –1,370.5 –1,366.8 –1,393.9 –944.7 –695.0 –629.0 –672.6 –634.4 77.0 67.2 67.0 43.3 27.2 19.2 23.9 22.0 1 Off-budget transactions consist of the Social Security trust funds and the Postal Service. entity. Generally, entities that are primarily owned and controlled by the Government are classified as budgetary. The budgetary classification of entities is made jointly by the Office of Management and Budget (OMB), the Congressional Budget Office (CBO), and the Budget Committees of the Congress. 4 4 Until the 2011 Budget, the Securities Investor Protection Corporation (SIPC) was classified as non-budgetary. In the fall of 2009, OMB, CBO, and the Budget Committees of the Congress reviewed the nonbudgetary status of SIPC and decided to reclassify it as budgetary. The Corporation for Travel Promotion created by the Travel Promotion Act of 2009, Public Law 111-145, has been classified as budgetary since the Off-budget Federal activities.—Despite the 1967 Commission’s recommendation that the budget be comprehensive, every year since 1971, at least one Federal program or agency that would otherwise be included in the budget has been presented as off-budget because of a requirement in the law. Such off-budget Federal activities are funded by the Government and administered release of the 2012 Budget. The State programs of reinsurance and risk adjustments mandated by the Patient Protection and Affordable Care Act, Public Law 111-148, have also been classified as budgetary since the 2012 Budget release. 151 13. COVERAGE OF THE BUDGET according to Federal legal requirements, but their costs are excluded, by law, from the rest of the budget totals, which are also known as “on-budget” totals. The budget reflects the legal distinction between on-budget activities and off-budget activities by showing outlays and receipts for both types of activities separately. Although there is a legal distinction between on-budget and off-budget activities, there is no conceptual difference between the two. The off-budget Federal activities reflect the same kinds of governmental roles as the on-budget activities, and off-budget activities result in the same kind of outlays and receipts as on-budget activities. Like on-budget activities, off-budget activities are funded and controlled by the Government. The “unified budget” reflects the conceptual similarity between on-budget and off-budget activities by showing combined totals of outlays and receipts for both. The off-budget Federal activities currently consist of the U.S. Postal Service and the two Social Security Trust Funds: Old-Age and Survivors Insurance and Disability Insurance. Social Security has been classified as off-budget since 1986 and the Postal Service has been classified as off-budget since 1990. 5 Other activities that had been declared off-budget by law at different times before 1986 have been classified as on-budget by law since at least 1985. Table 13–1 divides total Federal Government receipts, outlays, and the surplus or deficit between on-budget and off-budget amounts. Within this table, the Social Security and Postal Service transactions are classified as off-budget for all years in order to provide a consistent comparison over time. Activities that were off-budget at one time but are now on-budget are classified as onbudget for all years. Because Social Security is the largest single program in the unified budget and is classified by law as off-budget, the off-budget accounts constitute a significant part of total Federal spending and receipts. In 2013, off-budget receipts are an estimated 23.3 percent of total receipts and off-budget outlays are a smaller, but still significant, percentage of total outlays at 16.7 percent. The estimated unified budget deficit in 2013 is $901 billion—a $945 billion on-budget deficit partly offset by a $43 billion offbudget surplus. The off-budget surplus for 2011, 2012, and 2013 consists entirely of the Social Security surplus. 6 Social Security had small deficits or surpluses from its inception through the early 1980s and large and growing 5 See 42 U.S.C. 911 and 39 U.S.C. 2009a. The off-budget Postal Service accounts consist of the Postal Service Fund, which is classified as a mandatory account, and the Office of the Inspector General and the Postal Regulatory Commission, both of which are classified as discretionary accounts. The Postal Service Retiree Health Benefits Fund is an onbudget mandatory account with the Office of Personnel Management. The off-budget Social Security accounts consist of the Federal Old-Age and Survivors Trust Fund and the Federal Disability Insurance Trust Fund, both of which have mandatory and discretionary amounts. 6 The 2011 off-budget surplus reflects a $68.0 billion surplus for Social Security and a $0.8 billion deficit for the Postal Service. The estimated 2012 off-budget surplus reflects a $61.9 billion surplus for Social Security and a $5.1 billion surplus for the Postal Service, and the projected 2013 off-budget surplus reflects a $38.7 billion surplus for Social Security and a $4.6 billion surplus for the Postal Service. surpluses from the mid-1980s until 2008. Because of the economic downturn, the Social Security surplus has been declining for several years, but it is expected to begin growing again during the budget horizon. Over the long term, however, the Social Security trust funds will begin to be drawn down under current law and, without further legislative action, will be depleted in 2036. Non-Budgetary Activities Some important Government activities are characterized as non-budgetary because they do not involve the direct allocation of resources by the Government. 7 Some of the Government’s major non-budgetary activities are discussed below and, as noted below, some of these activities affect budget outlays or receipts even though they have components that are non-budgetary. Federal credit programs: budgetary and nonbudgetary transactions.—Federal credit programs make direct loans or guarantee private loans to nonFederal borrowers. The Federal Credit Reform Act of 1990 (FCRA) established the current budgetary treatment for credit programs. Under FCRA, the budgetary cost of a credit program is known as the “subsidy cost” and outlays equal to the subsidy cost are recorded in the budget when a loan is made or guaranteed. The subsidy cost is the estimated cost to the Government of a loan or a loan guarantee on a net present value basis, not including the Government’s administrative costs of providing or guaranteeing the loan. All other credit program cash flows to and from the public are treated as non-budgetary. To illustrate the budgetary and non-budgetary components of a credit program, consider a portfolio of new direct loans made to a cohort of college students. To encourage higher education, the Government offers loans at more favorable terms than private lenders, for example, lower interest rates or longer repayment periods. Students agree to repay the loans according to the terms of their promissory notes, but some students are likely to become delinquent or default on their loans, leading to Government losses. Under credit reform, the subsidy cost equals the net estimated lifetime cash flows to and from the Government (excluding administrative costs) discounted to the point of the loan disbursement. If the repayments of principal and interest are not sufficient to offset the expected losses from delinquencies, defaults, or costs associated with favorable loan terms, the present value of the expected future cash flows will be less than the Government disburses in loans and the Government will incur a cost (known as the subsidy cost). The subsidy cost is the difference in present value between the 7 Tax expenditures, which are discussed in Chapter 17 of this volume, are an example of Government activities that could be characterized as either budgetary or non-budgetary. Tax expenditures refer to the reduction in tax receipts resulting from the special tax treatment accorded certain private activities. Because tax expenditures reduce tax receipts and receipts are budgetary, tax expenditures clearly have budgetary effects. However, the size and composition of tax expenditures are not explicitly recorded in the budget as outlays or as negative receipts and, for this reason, tax expenditures might be considered a special case of non-budgetary transactions. 152 amount disbursed by the Government and the estimated value of the future repayments the Government expects to receive. The remainder of the transaction (beyond the amount recorded as a subsidy cost) is simply an exchange of financial assets of equal value and does not result in a cost to the Government. Since credit reform first took effect in 1992, the budget outlays for credit programs have reflected only the subsidy costs of Government credit and have shown the cost when the credit assistance was or is expected to be provided. Credit reform allows the budget to reflect more accurately the cost of credit decisions. 8 This enables the budget to fulfill its purpose of serving as a financial plan for allocating resources among alternative uses by allowing comparisons of the expected cost of credit programs along with the cost of other spending programs, and allowing comparisons of the cost of one type of credit assistance with the cost of another type. 9 Credit programs are discussed in more detail in Chapter 23 of this volume, “Credit and Insurance.” Deposit funds.—Deposit funds are non-budgetary accounts that record amounts held by the Government temporarily until ownership is determined (such as earnest money paid by bidders for mineral leases) or held by the Government as an agent for others (such as State income taxes withheld from Federal employees’ salaries and not yet paid to the States). The largest deposit fund is the Government Securities Investment Fund, which is also known as the G Fund. It is one of several investment funds managed by the Federal Retirement Thrift Investment Board, as an agent, for Federal employees who participate in the Government’s defined contribution retirement plan, the Thrift Savings Plan (which is similar to private-sector 401(k) plans). Because the G Fund assets, which are held by the Department of the Treasury, are the property of Federal employees and are held by the Government only in a fiduciary capacity, the 8 Both credit reform accounting and the earlier cash accounting of Federal credit programs would ultimately show the same costs for credit transactions. For example, cash accounting for direct loans would show the full disbursement of the loan as an outlay when it was made and then later show the repayments of principal and interest as an offset to outlays. Over the life of the loan, only the net cost of the loan would ultimately be reflected in the budget. Credit accounting shows that same net cost, but shows that cost at the time the loan is made (adjusting the cash flows for the time-value of money). Under cash accounting, the outlays recorded when a loan was made overstated the lifetime costs of the loan and the outlays recorded when a guarantee was made understated the lifetime cost of the guarantee. Credit reform makes it possible to consider the full cost of a credit program at the time the program decisions are made and in a way that enables the cost of credit programs to be compared to other forms of Government assistance, such as grants. 9 For more explanation of the budget concepts for direct loans and loan guarantees, see the sections on Federal credit and credit financing accounts in Chapter 12 of this volume, “Budget Concepts.” The structure of credit reform is further explained in Chapter VIII.A of the Budget of the United States Government, Fiscal Year 1992, Part Two, pp. 223–226. The implementation of credit reform through 1995 is reviewed in Chapter 8, “Underwriting Federal Credit and Insurance,” Analytical Perspectives, Budget of the United States Government, Fiscal Year 1997, pp. 142–144. Refinements and simplifications enacted by the Balanced Budget Act of 1997 or provided by later OMB guidance are explained in Chapter 8, “Underwriting Federal Credit and Insurance,” Analytical Perspectives, Budget of the United States Government, Fiscal Year 1999, p. 170. ANALYTICAL PERSPECTIVES transactions of the Fund are not resource allocations by the Government and are therefore non-budgetary. 10 For similar reasons, the budget excludes funds that are owned by Native American Indians but held and managed by the Government in a fiduciary capacity. Government-sponsored enterprises.—The Federal Government has chartered Government-sponsored enterprises (GSEs) such as the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal Home Loan Banks, the Farm Credit System, and the Federal Agricultural Mortgage Corporation to provide financial intermediation for specified public purposes. Although federally chartered to serve public-policy purposes, the GSEs are classified as non-budgetary and excluded from the Budget. This is because they are intended to be privately owned and controlled, with any public benefits accruing indirectly from the GSEs’ business transactions. Estimates of the GSEs’ activities are reported in a separate chapter of the Budget Appendix, and their activities are discussed in Chapter 23 of this volume, “Credit and Insurance.” In September 2008, in response to the financial market crisis, the director of the Federal Housing Finance Agency (FHFA) 11 placed Fannie Mae and Freddie Mac into conservatorship for the purpose of preserving the assets and restoring the solvency of these two GSEs. As conservator, FHFA has broad authority to direct the operations of these GSEs. However, these GSEs remain private companies with Boards of Directors and management responsible for their day-to-day operations. This Budget continues to treat these two GSEs as nonbudgetary private entities in conservatorship rather than as Government agencies. By contrast, the CBO treats these GSEs as budgetary Federal agencies. Both treatments include budgetary and non-budgetary amounts. Under the approach in the Budget, all of the GSEs’ transactions with the public are non-budgetary because the GSEs are not considered to be Government agencies. However, the payments from the U.S. Treasury to the GSEs are recorded as budgetary outlays. Under CBO’s approach, the subsidy costs, or expected losses over time, of the GSEs’ past credit activities have already been recorded in the budget estimates and the subsidy costs of future credit activities will be recorded when the activities occur. Lending and borrowing activities between the GSEs and the public apart from the subsidy costs are treated as non-budgetary by CBO, and Treasury payments to the GSEs are intragovernmental transfers (from Treasury to the GSEs) that net to zero in CBO’s budget estimates. Overall, both the Budget’s accounting and CBO’s accounting present the GSEs’ losses as Government outlays, which increase Government deficits. The two 10 The administrative functions of the Federal Retirement Thrift Investment Board are carried out by Government employees and included in the budget. 11 The Housing and Economic Recovery Act of 2008, enacted on July 30, 2008, created the FHFA as the new regulator for Fannie Mae, Freddie Mac, and the Federal Home Loan Banks. FHFA reflects the merger of the Office of Federal Housing Enterprise Oversight, the Federal Housing Finance Board, and the Department of Housing and Urban Development’s Government-sponsored enterprise mission team. 13. COVERAGE OF THE BUDGET approaches, however, reflect the losses as budgetary costs at different times. Other federally created non-budgetary entities.— In addition to chartering the GSEs, the Federal Government has created a number of other entities that are classified as non-budgetary. These include federally funded research and development centers (FFRDCs), non-appropriated fund instrumentalities (NAFIs), and other entities, some of which are incorporated as nonprofit entities and some of which are incorporated as forprofit entities. 12 FFRDCs are entities that conduct agency-specific research under contract or cooperative agreement. Most FFRDCs were created by and conduct research for the Departments of Defense and Energy, and most are administered by colleges, universities, or other nonprofit entities. Examples of federally funded research and development centers are the Center for Naval Analysis, Los Alamos National Laboratory, and the Jet Propulsion Laboratory. 13 FFRDCs are non-budgetary, but the Federal agency’s payments to the FFRDC are recorded as budget outlays. In addition to Federal funding, FFRDCs may receive funding from non-Federal sources. Non-appropriated fund instrumentalities (NAFIs) are entities that support an agency’s personnel. Virtually all NAFIs are associated with the Departments of Defense, Homeland Security (Coast Guard), and Veterans Affairs. Most NAFIs are located on military bases and include the armed forces exchanges (which sell goods to military personnel and their families), recreational facilities, and child care centers. NAFIs do not receive direct appropriations; they are financed by the proceeds from the sale of goods or services. Because NAFIs are non-budgetary, any agency payments to the NAFIs are recorded as budget outlays. 12 Although most entities created by the Federal Government are budgetary, as discussed in this section, the GSEs and the Federal Reserve System were created by the Federal Government, but are classified as non-budgetary. In addition, Congress and the President have chartered, but not necessarily created, approximately 100 nonprofit entities that are non-budgetary. These include patriotic, charitable, and educational organizations under Title 36 of the United States Code and foundations and trusts chartered under other titles of the Code. Title 36 corporations include the American Legion, the American National Red Cross, Big Brothers-Big Sisters of America, Boy Scouts of America, Future Farmers of America, Girl Scouts of the United States of America, the National Academy of Public Administration, the National Academy of Sciences, and Veterans of Foreign Wars of the United States. Virtually all of the nonprofit entities chartered by the Government existed under State law prior to the granting of a Government charter, making the Government charter an honorary rather than governing charter; a major exception to this is the American National Red Cross. Its Government charter requires it to provide disaster relief and to ensure compliance with treaty obligations under the Geneva Convention. Although any Government payments (whether made as direct appropriations or through agency appropriations) to these chartered nonprofits, including the Red Cross, would be budgetary, the nonprofits themselves are classified as non-budgetary. On March 10, 2011, the Subcommittee on Immigration Policy and Enforcement of the Committee on the Judiciary in the U.S. House of Representatives adopted a policy prohibiting Congress from granting new Federal charters to private, non-profit organizations. This policy has been adopted by every subcommittee with jurisdiction over charters since the 101st Congress. 13 The National Science Foundation maintains a list of FFRDCs at www.nsf.gov/statistics/ffrdc. 153 As noted above in the section on “Budgetary Activities,” a number of entities created by the Government receive a significant amount of non-Federal funding. In addition, some such entities are significantly controlled by non-Federal individuals or organizations. Although not exhaustive, this list of entities includes Gallaudet University, Howard University, the United States Enrichment Corporation, and the Universal Services Administrative Company. 14 Most of these entities receive direct appropriations or other recurring payments from the Government, and the appropriations or other payments are budgetary and included in Table 33-1, mentioned above. However, many of these entities are themselves non-budgetary. Generally, entities that receive a significant portion of funding from nonFederal sources and that are not controlled by the Government are treated as non-budgetary. As noted above, classifications for budgetary and non-budgetary status are made jointly by OMB, CBO, and the Budget Committees of the Congress. 15 Regulation.—Federal Government regulation often requires the private sector or other levels of government to make expenditures for specified purposes that are intended to have public benefits, such as safety and pollution control. Although the budget reflects the Government’s cost of conducting regulatory activities, the costs imposed on the private sector as a result of regulation are treated as non-budgetary and not included in the budget. The Government’s regulatory priorities and plans are described in the annual Regulatory Plan and the semi-annual Unified Agenda of Federal Regulatory and Deregulatory Actions. 16 The estimated costs and benefits of Federal regulation have been published annually by OMB since 1997. The latest report was released in June 2011. 17 In this report, OMB indicates that the estimated annual benefits of Federal regulations it reviewed from October 1, 2000, to September 30, 2010, range from $132 billion to $655 billion, while the estimated annual costs range from $44 14 Under section 415(b) of the Amtrak Reform Act of 1997, Public Law 105-134, Amtrak is required to redeem all of its outstanding common stock. Once all outstanding common stock is redeemed, Amtrak will be wholly owned by the Government and, at that point, its non-budgetary status may need to be reassessed. 15 In the spring of 2010, OMB, CBO, and the Budget Committees of Congress agreed to reclassify as non-budgetary those copyright royalties received and subsequently paid out by the Copyright Office where (1) the amount paid by users of copyrighted material to copyright owners is directly related to the frequency or quantity of the material used, and (2) the law allows copyright owners and users to voluntarily set the rate paid for the use of protected material. Because they do not satisfy these two conditions, the copyright fees collected and paid out by the Copyright Office under 17 U.S.C. 1004 remain classified as budgetary. 16 The most recent Regulatory Plan and introduction to the Unified Agenda were issued by the General Services Administration’s Regulatory Information Service Center and were printed in the Federal Register of July 7, 2011. Both the Regulatory Plan and Unified Agenda are available on-line at www.reginfo.gov and at www.gpoaccess.gov. 17 Office of Information and Regulatory Affairs, OMB, 2011 Report to Congress on the Benefits and Costs of Federal Regulations and Unfunded Mandates on State, Local, and Tribal Entities (June 2011). The Report is available at www.whitehouse.gov/omb/inforeg_regpol_reports_ congress/. 154 to $62 billion. In its report, OMB discusses the impact of Federal regulation on State, local, and tribal governments, and agency compliance with the Unfunded Mandates Reform Act of 1995. The costs and benefits of Federal regulation are also discussed in Chapter 9 of this volume, “Benefit-Cost Analysis.” Monetary policy.—As noted above, the budget is a financial plan for allocating resources by raising revenues and spending those revenues. As a fiscal policy tool, the budget is used by elected Government officials to promote economic growth and achieve other public policy objectives. Monetary policy is another tool that governments use to promote public policy objectives. In the United States, monetary policy is conducted by the Federal Reserve System, which is composed of a Board of Governors and 12 regional Federal Reserve Banks. The Federal Reserve Act provides that the goal of monetary policy is to “maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.” 18 The dual goals of full employment and price stability were reaffirmed by the Full Employment and Balanced Growth Act of 1978, also known as the Humphrey-Hawkins Act. 19 By law, the Federal Reserve System is a self-financing entity that is independent of the Executive Branch and subject to only broad oversight by the Congress. Consistent with the recommendations of the 1967 President’s Commission on Budget Concepts, the effects of monetary policy and the actions of the Federal Reserve System are, with two exceptions, non-budgetary. Although the relatively recent increase in the Federal Reserve’s balance sheet in response to the financial crisis has had important macroeconomic consequences, it does not directly affect the Federal deficit. The exceptions to the treatment of Federal Reserve transactions as non-budgetary involve excess earnings of the Federal Reserve System. The Federal Reserve System earns income from a variety of sources including interest on U.S. Government securities, foreign currency investments and loans to depository institutions, and fees for services (e.g., check clearing services) provided to depository institutions. After paying its expenses, the Federal Reserve System remits to the U.S. Treasury any excess income. This income, which is classified in the budget as a governmental receipt, was equal to $82.5 billion in 2011. The recent expansion of the Federal Reserve’s balance sheet has increased its sources of income (and potential loss), which in turn has affected the Federal Reserve’s excess income payment to the Treasury. In addition to remitting excess income to the Treasury, the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the Federal Reserve to transfer a portion of its excess earnings to the Consumer Financial Protection Bureau, an independent bureau of the Federal Reserve, which was created by the Act. 20 18 See 12 U.S.C. 225a. 15 U.S.C. 3101 et seq. 20 See section 1011 of Public Law 111-203, enacted on July 21, 2010. 19 See ANALYTICAL PERSPECTIVES The Board of Governors is a Federal Government agency, but because of its independent status, its budget is not subject to Executive Branch review and is included in the Budget Appendix for informational purposes only. The Federal Reserve Banks are subject to Board oversight and managed by boards of directors chosen by the Board of Governors and member banks, which include all national banks and state banks that choose to become members. The budgets of the regional Banks are subject to approval by the Board of Governors and are not included in the Budget Appendix. Indirect macroeconomic effects of Federal activity.—Government activity has many effects on the Nation’s economy that extend beyond the amounts recorded in the budget. Government expenditures, taxation, tax expenditures, regulation, and trade policy can all affect the allocation of resources among private uses and income distribution among individuals. These effects, resulting indirectly from Federal activity, are generally not part of the budget, but the most important of these are discussed in this volume. For example, the effects of the American Recovery and Reinvestment Act of 2009 (ARRA), among other things, are discussed in Chapter 2 of this volume, “Economic Assumptions.” Financial Stabilization Activity Since late 2007, the Federal Reserve System, Executive Branch agencies, and the GSEs Fannie Mae and Freddie Mac have been engaged in a variety of activities designed to stabilize the financial markets and restore economic growth. The actions taken by the Federal Reserve System 21 are non-budgetary for reasons discussed above in the section on “Monetary policy.” However, as also noted above, Federal Reserve actions may affect the System’s earnings, which ultimately affect governmental receipts. The placement of Fannie Mae and Freddie Mac into conservatorship, discussed above in the section on “Government-sponsored enterprises,” is not treated as affecting their non-budgetary status, so the GSEs’ transactions with the public are not included in the 2013 Budget. However, as with other transactions between nonbudgetary entities and the Government, the transactions of the GSEs with the Government, including all cash payments from the Treasury to the GSEs, are included in the 2013 Budget. Executive Branch activities in support of financial market stabilization include actions taken by the Department of the Treasury, the Federal Deposit Insurance Corporation (FDIC), the National Credit Union OMB determined that the Consumer Financial Protection Bureau is a budgetary entity. 21 The following Federal Reserve liquidity facilities that were created during the financial market crisis have been allowed to expire: the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Money Market Investor Funding Facility, the Primary Dealer Credit Facility, the Term Auction Facility, and the Term Securities Lending Facility. The Federal Reserve Bank of New York continues to lend under the Term AssetBacked Securities Loan Facility, a program administered jointly with the Department of the Treasury. 13. COVERAGE OF THE BUDGET Administration (NCUA), and the Federal Housing Finance Agency (FHFA). The Treasury activities include three credit market programs—the Public-Private Investment Partnership program, the Term Asset-Backed Securities Loan Facility (administered jointly with the Federal Reserve), and the Small Business Administration (SBA) 7(a) Securities Purchase Program. In addition, Treasury activities include two housing programs—the Making Home Affordable Program and the Hardest Hit Fund. Treasury activities also include the Capital Purchase Program (which includes the Small Business Lending Fund), the Asset Guarantee Program (administered jointly with the Federal Reserve and the FDIC), the Automotive Industry Financing Program, and an investment in American International Group. 22 Actions by the FDIC include the Temporary Liquidity Guarantee Program and 22 Treasury has completed its work on two programs—the Targeted Investment Program and the Community Development Capital Initiative. In addition, Treasury is in the process of selling off the mortgagebacked securities it purchased from the GSEs. 155 actions by the NCUA include the Temporary Corporate Credit Union Liquidity Guarantee Program. Actions by the FHFA include the placement of the GSEs into conservatorship in 2008 and the subsequent and ongoing management of the GSEs. Chapter 4 of this volume, “Financial Stabilization Efforts and Their Budgetary Effects,” discusses all Government efforts to stabilize the financial markets and restore economic growth. As distinct from the activities of the Federal Reserve and the GSEs, the activities of the Department of the Treasury, the FDIC, and the NCUA are budgetary. The total budget impact of all of the credit market stabilization efforts undertaken by the Treasury, other Executive Branch agencies, the GSEs, and the Federal Reserve may not be known with certainty for several years. Nevertheless, actual and estimated outlays and receipts are included in the 2013 Budget. In addition, the actual and estimated impacts of credit market stabilization efforts on the Federal debt held by the public are included in the 2013 Budget. 14. BUDGET PROCESS Since taking office, the Administration has strived to present budget figures that accurately reflect the present and future course of the Nation’s finances, and to make improvements in budget process and enforcement. An honest and transparent accounting of our Nation’s finances is critical to making decisions about key fiscal policies, and effective budget enforcement mechanisms are necessary to promote budget discipline. This chapter begins with a report on the status of the discretionary caps that were reinstated by the Budget Control Act of 2011 (BCA). The report fulfills the requirement under section 254 of the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA) for the Office of Management and Budget (OMB) to issue a sequestration preview report for fiscal year 2013. The chapter then describes three broad categories of budget reform. First, the chapter discusses proposals to strengthen budgeting and fiscal sustainability of individual programs as well as across Government. These proposals include: legislation that is more than sufficient to meet the $1.2 trillion savings target established for the Joint Select Committee on Deficit Reduction and restore the security and nonsecurity caps to their original levels; various initiatives to reduce improper payments; funding requested for disaster relief; limiting advance appropriations; structural reforms for surface transportation programs; funding the maximum Pell Grant award; Postal Service reforms; provid- ing a fast-track procedure for Congress to consider certain rescission requests; and a debt trigger procedure that would require enactment of debt reduction legislation if debt net of financial assets exceeds specified ceilings. Second, the chapter provides a status update of scoring under the Statutory Pay-As-You-Go Act of legislation affecting receipts and mandatory spending, and it summarizes the Administration’s commitment to applying a PAYGO requirement to administrative actions affecting mandatory spending. Finally, the chapter presents proposals to revise the budget baseline and to improve budget presentation, for example, by including an allowance for the costs of potential future natural disasters and by projecting the costs of certain major tax and spending policies currently in effect, such as relief from the growing scope of the Alternative Minimum Tax, even though those policies are scheduled to expire within the budget window. This revised baseline better captures the likely future costs of operating the Federal Government. This section also discusses the use of debt net of financial assets, instead of debt held by the public, as a better measure of the Government’s demand on private credit markets. Taken together, these reforms generate a Budget that is more transparent, comprehensive, accurate, and realistic, and is thus a better guidepost for citizens and their representatives in making decisions about the key fiscal policy issues that face the Nation. I. PREVIEW REPORT The BCA amended the BBEDCA by reinstating limits on discretionary budget authority, which expired after 2002. Section 254 of the BBEDCA requires OMB to issue a sequestration preview report with the President’s budget submission. This Preview Report, the first of the three required sequestration reports for 2013, provides the status of the discretionary limits for the current year and each year thereafter through 2021 as of the end of the first session of the 112th Congress based on current law. As the BBEDCA requires, the estimates in this report rely on the same economic and technical assumptions that are used in the President’s 2013 Budget. Throughout each session of Congress, OMB is required to monitor compliance with the discretionary spending limits. Within seven working days of enactment of an appropriations bill, OMB reports its estimates of the total discretionary budget authority and outlays provided by the legislation. If the bill provides additional appropriations for the current year, OMB also determines at that time whether the additional budget authority would cause total discretionary appropriations to exceed the budget authority cap. OMB makes the same determination for the budget year at the end of each session of Congress. Appropriations that OMB estimates exceed the budget authority limits trigger an across-the-board reduction (or sequestration) to eliminate the excess spending. The law, however, does not require that Congress appropriate the full amount available under the discretionary limits. OMB will issue a sequestration update report in August, which will provide a mid-year status update on the limits and enacted appropriations, as well as a preview estimate of the 2013 adjustment for disaster funding. A final sequestration report will be issued after the end of this congressional session and will contain final estimates of enacted appropriations and any adjustments to the discretionary limits. If it is determined that a breach has occurred, the Final Report will also include a Presidential Order for implementing a sequestration of non-exempt discretionary accounts to eliminate the breach as calculated by OMB. As required by the BBEDCA, OMB’s estimates in each seven-day-after report and each sequestration report will be made using the same economic and technical assumptions underlying the President’s Budget. In addition, each of these reports will contain comparisons between OMB’s estimates and estimates from the Congressional Budget Office and explain any differences between those estimates. 157 158 ANALYTICAL PERSPECTIVES DISCRETIONARY SEQUESTRATION REPORT Discretionary programs are funded annually through the appropriations process. The BBEDCA, as amended by the BCA, limits—or caps—budget authority available for discretionary programs each year through 2021. Section 251 of BBEDCA specified for 2012 and 2013 separate “security” and “nonsecurity” categories for discretionary programs. The security category includes discretionary appropriations associated with agency budgets for the Department of Defense, the Department of Homeland Security, the Department of Veterans Affairs, the National Nuclear Security Administration, the intelligence community management account, and all discretionary budget accounts in budget function 150 (international affairs). The nonsecurity category includes all budget accounts that do not fall into the security category. After 2013, section 251 specified a single category for all discretionary spending referred to as the “discretionary” category. Section 302 of the BCA provided for phased revisions to the caps if legislation proposed by the Joint Select Committee on Deficit Reduction to reduce the deficit by more than $1.2 trillion was not enacted by January 15, 2012. Because such legislation was not enacted by this date, the section 302 phased revisions to the caps have been triggered. OMB’s Final Sequestration Report for FY 2012, issued on January 18, 2012, made the first and only revision required at this time, which is a redefinition of the discretionary caps. The limits resulting from that report serve as the starting point for this Preview Report. The security category was redefined to include only the discretionary programs in the defense budget function (050), which mainly consists of the Department of Defense. The nonsecurity category was redefined to consist of all discretionary programs not in the security category – essentially all non-defense (non-050) budget functions. The revised categories are in place starting in 2013 and continue through 2021, while the overall discretionary category is eliminated. The cap amounts were adjusted to reflect the redefinitions, as specified by section 302 of the BCA, but, at this time, the total amount of discretionary spending equals the total amounts provided under section 251 of the BBEDCA. Absent the enactment of subsequent legislation, OMB is required to implement future reductions in the revised discretionary caps, as well as a reduction via a sequestration of non-exempt discretionary spending on January 2, 2013. Because those reductions are not required at this time, the revised limits Table 14–1. OVERVIEW OF CHANGES TO DISCRETIONARY SPENDING LIMITS AND THE PRESIDENT’S PROPOSED LIMITS IN THE 2013 BUDGET (Discretionary budget authority in billions of dollars) 2012 Original limits set in Title I of Budget Control Act of 2011: Security Category ����������������������������������������������������������������������������� Nonsecurity Category ����������������������������������������������������������������������� Discretionary Category ��������������������������������������������������������������������� Enacted adjustments pursuant to section 251(b)(2) of BBEDCA: OCO/GWOT: Security Category �������������������������������������������������������������������� Program Integrity: Nonsecurity Category �������������������������������������������������������������� Disaster Relief : Security Category �������������������������������������������������������������������� Nonsecurity Category �������������������������������������������������������������� 2015 2016 2017 2018 2019 2020 2021 686.0 361.0 N/A N/A N/A 1,066.0 N/A N/A 1,086.0 N/A N/A 1,107.0 N/A N/A 1,131.0 N/A N/A 1,156.0 N/A N/A 1,182.0 N/A N/A 1,208.0 N/A N/A 1,234.0 +126.5 ......... ......... ......... ......... ......... ......... ......... ......... ......... +0.5 ......... ......... ......... ......... ......... ......... ......... ......... ......... +6.4 +4.1 ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... N/A N/A N/A N/A N/A Revised limits included in the OMB Final Sequestration and Preview Reports: Security Category �������������������������������������������������������������������� Nonsecurity Category �������������������������������������������������������������� Discretionary Category ������������������������������������������������������������ Revised Security Category ������������������������������������������������������ Revised Nonsecurity Category ������������������������������������������������ 816.9 363.5 N/A N/A N/A Restore limits to the bipartisan agreement in Title I of the Budget Control Act of 2011: 2014 684.0 359.0 N/A Redefinition of limits pursuant to section 251A of BBEDCA: Security Category �������������������������������������������������������������������� Nonsecurity Category �������������������������������������������������������������� Discretionary Category ������������������������������������������������������������ Revised Security Category ������������������������������������������������������ Revised Nonsecurity Category ������������������������������������������������ President's proposed changes to discretionary limits in the 2013 Budget: 2013 –686.0 N/A N/A N/A N/A N/A N/A N/A N/A –361.0 N/A N/A N/A N/A N/A N/A N/A N/A N/A –1,066.0 –1,086.0 –1,107.0 –1,131.0 –1,156.0 –1,182.0 –1,208.0 –1,234.0 +546.0 +556.0 +566.0 +577.0 +590.0 +603.0 +616.0 +630.0 +644.0 +501.0 +510.0 +520.0 +530.0 +541.0 +553.0 +566.0 +578.0 +590.0 ......... ......... N/A 546.0 501.0 N/A N/A ......... 556.0 510.0 N/A N/A ......... 566.0 520.0 N/A N/A ......... 577.0 530.0 N/A N/A ......... 590.0 541.0 N/A N/A ......... 603.0 553.0 N/A N/A ......... 616.0 566.0 N/A N/A ......... 630.0 578.0 N/A N/A ......... 644.0 590.0 159 14. BUDGET PROCESS Table 14–1. OVERVIEW OF CHANGES TO DISCRETIONARY SPENDING LIMITS AND THE PRESIDENT'S PROPOSED LIMITS IN THE 2013 BUDGET—Continued (Discretionary budget authority in billions of dollars) 2012 Security Category �������������������������������������������������������������������� Nonsecurity Category �������������������������������������������������������������� Discretionary Category ������������������������������������������������������������ Revised Security Category ������������������������������������������������������ Revised Nonsecurity Category ������������������������������������������������ Anticipated adjustments pursuant to section 251(b)(2) of BBEDCA: OCO/GWOT: Security Category �������������������������������������������������������������������� Discretionary Category ������������������������������������������������������������ Program Integrity: Nonsecurity Category �������������������������������������������������������������� Discretionary Category ������������������������������������������������������������ Disaster Relief : Security Category �������������������������������������������������������������������� Nonsecurity Category �������������������������������������������������������������� Discretionary Category ������������������������������������������������������������ New budget proposals: Reclassification of General Fund Surface Transportation Programs: Nonsecurity Category �������������������������������������������������������������� Discretionary Category ������������������������������������������������������������ New Program Integrity adjustments for IRS and UI: Nonsecurity Category �������������������������������������������������������������� Discretionary Category ������������������������������������������������������������ President's proposed limits in the 2013 Budget: Security Category �������������������������������������������������������������������� Nonsecurity Category �������������������������������������������������������������� Discretionary Category ������������������������������������������������������������ Revised Security Category ������������������������������������������������������ Revised Nonsecurity Category ������������������������������������������������ N/A = Not Applicable ......... ......... N/A N/A N/A 2013 2014 2015 2016 2017 2018 2019 2020 2021 +686.0 N/A N/A N/A N/A N/A N/A N/A N/A +361.0 N/A N/A N/A N/A N/A N/A N/A N/A N/A +1,066.0 +1,086.0 +1,107.0 +1,131.0 +1,156.0 +1,182.0 +1,208.0 +1,234.0 –546.0 –556.0 –566.0 –577.0 –590.0 –603.0 –616.0 –630.0 –644.0 –501.0 –510.0 –520.0 –530.0 –541.0 –553.0 –566.0 –578.0 –590.0 N/A N/A +96.7 N/A N/A +44.2 N/A +44.2 N/A +44.2 N/A +44.2 N/A +44.2 N/A +44.2 N/A +44.2 N/A +44.2 +0.4 N/A +1.1 N/A N/A +1.3 N/A +1.5 N/A +1.6 N/A +1.7 N/A +1.7 N/A +1.8 N/A +1.8 N/A +1.8 ......... ......... N/A +5.5 +0.2 N/A N/A N/A ......... N/A N/A ......... N/A N/A ......... N/A N/A ......... N/A N/A ......... N/A N/A ......... N/A N/A ......... N/A N/A ......... –4.1 N/A –4.2 N/A N/A –4.2 N/A –4.3 N/A –4.4 N/A –4.5 N/A –4.6 N/A –4.7 N/A –4.7 N/A –4.8 ......... N/A +0.7 N/A N/A +1.0 N/A +1.4 N/A +1.7 N/A +2.0 N/A +2.0 N/A +2.0 N/A +2.1 N/A +2.2 816.9 359.9 N/A N/A N/A 788.2 358.8 N/A N/A N/A N/A N/A 1,108.2 N/A N/A N/A N/A 1,128.7 N/A N/A N/A N/A 1,150.0 N/A N/A N/A N/A 1,174.4 N/A N/A N/A N/A 1,199.3 N/A N/A N/A N/A 1,225.3 N/A N/A N/A N/A 1,251.3 N/A N/A N/A N/A 1,277.3 N/A N/A used in this report remain at the levels specified in the January 18, 2012 Final Sequestration Report. Table 14–1 summarizes the changes that have occurred to the discretionary caps since their reinstatement and subsequent redefinition in the BCA, including adjustments as a result of enacted 2012 appropriations. Table 14–1 also summarizes the changes to these limits proposed in the 2013 Budget, which are discussed in more detail in the adjustments section below. Adjustments to discretionary limits.—The BBEDCA permits certain adjustments to the discretionary limits. After consultation with the Congressional Budget Office and the Congressional Budget Committees, section 251(b)(1) allows for adjustments due to changes in concepts and definitions in this Preview Report. Section 251(b)(2) authorizes certain adjustments after the enactment of appropriations. At this time, OMB includes no change in concepts and definitions or further adjustments under current law; therefore, as shown in Table 14–2, the caps in this Preview Report remain unchanged from those included in the Final Sequestration Report for FY 2012. Proposed and anticipated adjustments to discretionary limits.—The President’s Budget includes several proposals to revise the discretionary caps. The effects of these changes are reflected in Table 14–3. To accompany these proposals, the 2013 Budget proposes savings across the discretionary, mandatory and revenue categories in an amount that would exceed the Joint Committee’s minimum deficit reduction target and advocates enactment of those savings to replace the automatic reductions and restore the caps to the original definitions in Title I of the BCA. The President’s Budget also includes a proposed change in concepts and definitions that would reclassify as mandatory certain surface transportation programs that are currently funded from the General Fund. This change is also included on Table 14–3. Please see “Budgetary Treatment of Surface Transportation Infrastructure Funding” later in this chapter for a full discussion of the policy. Several proposals included in the Budget, if enacted, would trigger adjustments to the discretionary caps. These anticipated adjustments, shown in Table 14–3, include the following: 160 ANALYTICAL PERSPECTIVES Table 14–2. PREVIEW REPORT DISCRETIONARY SPENDING LIMITS (Discretionary budget authority in millions of dollars) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 SECURITY CATEGORY Final Sequestration Report Spending Limit ����������������������������������� 816,943 N/A N/A N/A N/A N/A N/A N/A N/A N/A No changes Preview Report Spending Limit ����������������������������������������������������� 816,943 N/A N/A N/A N/A N/A N/A N/A N/A N/A NONSECURITY CATEGORY Final Sequestration Report Spending Limit ����������������������������������� 363,536 N/A N/A N/A N/A N/A N/A N/A N/A N/A No changes Preview Report Spending Limit ����������������������������������������������������� 363,536 N/A N/A N/A N/A N/A N/A N/A N/A N/A DISCRETIONARY CATEGORY Final Sequestration Report Spending Limit ����������������������������������� N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A No changes Preview Report Spending Limit ����������������������������������������������������� N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A REVISED SECURITY CATEGORY Final Sequestration Report Spending Limit ����������������������������������� N/A 546,000 556,000 566,000 577,000 590,000 603,000 616,000 630,000 644,000 No changes Preview Report Spending Limit ����������������������������������������������������� N/A 546,000 556,000 566,000 577,000 590,000 603,000 616,000 630,000 644,000 REVISED NONSECURITY CATEGORY Final Sequestration Report Spending Limit ����������������������������������� N/A 501,000 510,000 520,000 530,000 541,000 553,000 566,000 578,000 590,000 No changes Preview Report Spending Limit ����������������������������������������������������� N/A 501,000 510,000 520,000 530,000 541,000 553,000 566,000 578,000 590,000 TOTAL DISCRETIONARY SPENDING Enacted Budget Control Act and Update Report, Total Discretionary Spending ������������������������������������������������������������ 1,043,000 1,047,000 1,066,000 1,086,000 1,107,000 1,131,000 1,156,000 1,182,000 1,208,000 1,234,000 Final Sequestration Report, Total Discretionary Spending ������������ 1,180,479 1,047,000 1,066,000 1,086,000 1,107,000 1,131,000 1,156,000 1,182,000 1,208,000 1,234,000 Preview Report, Total Discretionary Spending ������������������������������ 1,180,479 1,047,000 1,066,000 1,086,000 1,107,000 1,131,000 1,156,000 1,182,000 1,208,000 1,234,000 N/A = Not Applicable Table 14–3. PROPOSED CHANGES TO THE DISCRETIONARY SPENDING LIMITS (Discretionary budget authority in millions of dollars) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 SECURITY CATEGORY Preview Report Spending Limit ������������������������������������������������ Restore limits to the bipartisan agreement in Title I of the Budget Control Act of 2011 �������������������������������������������� Anticipated Security adjustments for the Final Sequestration Report: Anticipated adjustments pursuant to Section 251(b)(2) (A) of BBEDCA for OCO/GWOT �������������������������������� Anticipated adjustments pursuant to Section 251(b)(2) (D) of BBEDCA for Disaster Relief ����������������������������� Subtotal, Anticipated Security adjustments ������������������������� Proposed Spending Limit ��������������������������������������������������������� 816,943 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A +686,000 N/A N/A N/A N/A N/A N/A N/A N/A +96,727 N/A N/A N/A N/A N/A N/A N/A N/A ......... +5,481 ......... +102,208 816,943 788,208 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A ......... 161 14. BUDGET PROCESS Table 14–3. PROPOSED CHANGES TO THE DISCRETIONARY SPENDING LIMITS—Continued (Discretionary budget authority in millions of dollars) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 NONSECURITY CATEGORY Preview Report Spending Limit ������������������������������������������������ Restore limits to the bipartisan agreement in Title I of the Budget Control Act of 2011 �������������������������������������������� Proposed change in concepts and definitions for reclassification of General Fund Surface Transportation Program �������������������������������������������������������������������������� Anticipated and proposed Nonsecurity adjustments for the Final Sequestration Report: Anticipated adjustments pursuant to Section 251(b) (2)(B) of BBEDCA for CDRs & Redeterminations � Anticipated adjustments pursuant to Section 251(b) (2)(C) of BBEDCA for HCFAC ������������������������������� Anticipated adjustments pursuant to Section 251(b) (2)(D) of BBEDCA for Disaster Relief �������������������� Proposed adjustments for Internal Revenue Service Program Integrity ��������������������������������������������������� Proposed adjustments Unemployment Insurance Program Integrity ��������������������������������������������������� Subtotal, Anticipated Nonsecurity adjustments ������������������� Proposed Spending Limit ��������������������������������������������������������� 363,536 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A +361,000 N/A N/A N/A N/A N/A N/A N/A N/A –4,093 –4,166 N/A N/A N/A N/A N/A N/A N/A N/A +140 +751 N/A N/A N/A N/A N/A N/A N/A N/A +270 +299 N/A N/A N/A N/A N/A N/A N/A N/A ......... +167 N/A N/A N/A N/A N/A N/A N/A N/A ......... +691 N/A N/A N/A N/A N/A N/A N/A N/A ......... +410 359,853 +15 +1,923 358,757 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A DISCRETIONARY CATEGORY Preview Report Spending Limit ������������������������������������������������ Restore limits to the bipartisan agreement in Title I of the Budget Control Act of 2011 �������������������������������������������� Proposed change in concepts and definitions for reclassification of General Fund Surface Transportation Programs ������������������������������������������������������������������������ Anticipated and Proposed Nonsecurity adjustments for the Final Sequestration Report: Anticipated adjustments pursuant to Section 251(b) (2)(A) of BBEDCA for OCO/GWOT ������������������������ Anticipated adjustments pursuant to Section 251(b)(2) (B) of BBEDCA for CDRs & Redeterminations �������� Anticipated adjustments pursuant to Section 251(b) (2)(C) of BBEDCA for HCFAC ������������������������������� Proposed adjustments for Internal Revenue Service Program Integrity ��������������������������������������������������� Proposed adjustments Unemployment Insurance Program Integrity ��������������������������������������������������� Subtotal, Anticipated Discretionary adjustments ����������������� Proposed Spending Limit ��������������������������������������������������������� N/A N/A N/A N/A N/A N/A +1,066,000 +1,086,000 +1,107,000 +1,131,000 +1,156,000 +1,182,000 +1,208,000 +1,234,000 N/A N/A –4,237 –4,316 –4,398 –4,481 –4,566 –4,651 –4,740 –4,831 N/A N/A +44,159 +44,159 +44,159 +44,159 +44,159 +44,159 +44,159 +44,159 N/A N/A +924 +1,123 +1,166 +1,309 +1,309 +1,309 +1,309 +1,309 N/A N/A +329 +361 +395 +414 +434 +454 +475 +496 N/A N/A +1,018 +1,327 +1,645 +1,975 +1,969 +2,011 +2,079 +2,148 N/A N/A N/A N/A +20 +25 +30 +35 +36 +37 +38 +39 N/A +46,450 +46,995 +47,395 +47,892 +47,907 +47,970 +48,060 +48,151 N/A 1,108,213 1,128,697 1,149,997 1,174,411 1,199,341 1,225,319 1,251,320 1,277,320 REVISED SECURITY CATEGORY Preview Report Spending Limit ������������������������������������������������ Restore limits to the bipartisan agreement in Title I of the Budget Control Act of 2011 �������������������������������������������� Proposed Spending Limit ��������������������������������������������������������� N/A 546,000 556,000 566,000 577,000 590,000 603,000 616,000 630,000 644,000 N/A N/A –546,000 N/A –556,000 N/A –566,000 N/A –577,000 N/A –590,000 N/A –603,000 N/A –616,000 N/A –630,000 N/A –644,000 N/A REVISED NONSECURITY CATEGORY Enacted Budget Control Act, Total Discretionary Spending ����� Restore limits to the bipartisan agreement in Title I of the Budget Control Act of 2011 �������������������������������������������� Proposed Spending Limit ��������������������������������������������������������� N/A 501,000 510,000 520,000 530,000 541,000 553,000 566,000 578,000 590,000 N/A N/A –501,000 N/A –510,000 N/A –520,000 N/A –530,000 N/A –541,000 N/A –553,000 N/A –566,000 N/A –578,000 N/A –590,000 N/A TOTAL DISCRETIONARY SPENDING Enacted Budget Control Act, Total Discretionary Spending ����� 1,043,000 1,047,000 1,066,000 1,086,000 1,107,000 1,131,000 1,156,000 1,182,000 1,208,000 1,234,000 Preview Report, Total Discretionary Spending ������������������������� 1,180,479 1,047,000 1,066,000 1,086,000 1,107,000 1,131,000 1,156,000 1,182,000 1,208,000 1,234,000 2013 Budget Proposed, Total Discretionary Spending ������������� 1,176,796 1,146,965 1,108,213 1,128,679 1,149,997 1,174,411 1,199,341 1,225,319 1,251,320 1,277,320 N/A = Not Applicable 162 • Emergency Appropriations and Overseas Contingency Operations/Global War on Terrorism (OCO/ GWOT).— These adjustments are authorized by section 251(b)(2)(A) of the BBEDCA and include funding for amounts that Congress designates in law and the President subsequently so designates as being either an emergency requirement or for OCO/GWOT activities on an account-by-account basis. The 2012 Defense, Homeland Security, and State and Foreign Operations appropriations acts provided a total of $126.5 billion for OCO/GWOT purposes for 2012. The President’s Budget does not propose any adjustments for emergency funding but does propose to place a cumulative ceiling on the OCO/GWOT cap adjustment of $450 billion over 2013-2021. The President’s Budget includes $96.7 billion for OCO/GWOT activities in 2013. The Budget also includes a cap adjustment of $44.2 billion for OCO/ GWOT activities for each year in 2014-2021. The 20142021 levels reflect placeholder annual amounts for a total funding level for OCO/GWOT activities but do not reflect specific policy decisions as to how the funds will ultimately be allocated across those years. • Continuing Disability Reviews (CDRs) and Redeterminations.—Section 251(b)(2)(B) of the BBEDCA authorizes adjustment of the caps by the amounts appropriated for CDRs and redeterminations. The maximum cap adjustment in each year is limited to the levels of budget authority specified in the BBEDCA, provided that a base level of $273 million is provided for these purposes in the underlying appropriations bill before the adjustment. In the 2012 Labor, HHS, and Education Appropriations Act, $483 million was provided as a cap adjustment—an amount sufficient only to maintain activities at roughly their 2011 level, and $140 million below the permitted adjustment under BBEDCA. The President’s Budget proposes to provide the additional $140 million in 2012 to increase funds for program integrity purposes to levels agreed to in section 251 of the BBEDCA. The Budget includes the full adjustment of $751 million in 2013 and for all years thereafter for these activities. Please see “Program Integrity Funding” in the President’s Budget Reform Proposals section of this chapter for a full description of this and other program integrity efforts along with OMB’s methodology in determining their effectiveness. • Health Care Fraud and Abuse Control (HCFAC).—Section 251(b)(2)(C) of the BBEDCA authorizes adjustment of the caps by amounts appropriated for HCFAC activities. The maximum HCFAC cap adjustment in each year is limited to the levels of budget authority specified in the BBEDCA, provided that a base level of $311 million for these purposes is provided in the underlying appropriations bill before the adjustment. Because the 2012 Labor, HHS, and Education Appropriations Act provided only $310 million of base funding (also an amount sufficient only to maintain activities at roughly their 2011 level), OMB’s Final Sequestra- ANALYTICAL PERSPECTIVES tion Report for 2012 did not include an adjustment for this funding. The President’s Budget proposes to increase the 2012 base funding to $311 million (which is fully offset) and to provide the additional $270 million in funding allowed by the cap adjustment agreed to in section 251 of the BBEDCA. The 2013 Budget also includes the full cap adjustment of $299 million in 2013 and for all years thereafter for these activities. Please see “Program Integrity Funding” in the President’s Budget Reform Proposals section of this chapter for a full description of this and other program integrity efforts and OMB’s methodology in determining their effectiveness. • Disaster Funding.—Section 251(b)(2)(D) of the BBEDCA authorizes an adjustment to the caps for appropriations that are designated by the Congress as being for “disaster relief,” which is defined as activities carried out pursuant to a determination under section 102(2) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5122(2)). The BBEDCA sets a limit for the adjustment equal to the total of the average funding provided for disaster relief over the previous 10 years (excluding the highest and lowest years) plus any portion of the allowable adjustment (funding ceiling) for the previous year that was not appropriated (excluding the portion of the previous year’s ceiling that was itself due to any unused amount from the year before). For the 2012 adjustment, OMB determined a preview estimate of $11,252 million. To date, $10,453 million in appropriations have been designated as for disaster relief in 2012, which is $799 million below the preview estimate. OMB will present its preview estimate for 2013 in its August Update Report. If no further appropriations enacted in 2012 are designated as being for disaster relief, OMB will add the $799 million underage to its preview estimate of the 2013 adjustment. The 2013 Budget includes a proposed cap adjustment of $5,648 billion for these activities. Please see “Disaster Relief Funding” in the President’s Budget Reform Proposals section of this chapter for a full description of this adjustment and the Administration’s 2013 Request. In addition to these adjustments, the 2013 Budget proposes to amend section 251(b)(2) by adding two further adjustments related to program integrity efforts. These new adjustments are for Internal Revenue Service enforcement and operations support for tax activities, including tax compliance to address the Federal tax gap, and for in-person reemployment and eligibility assessments and unemployment insurance improper payment reviews of the Department of Labor. These new adjustments total $691 million for IRS and $15 million for Labor in 2013 and are included in Table 14–3 as adjustments to the proposed limits in all years. These adjustments, along with the estimated savings generated by the proposed increases above discretionary spending limits, are discussed in greater detail in “Program Integrity Funding” below. 163 14. BUDGET PROCESS II. BUDGET REFORM PROPOSALS Joint Committee Reductions The BCA raised the statutory debt limit and created a Joint Select Committee on Deficit Reduction to recommend legislation to reduce the Federal deficit by at least $1.5 trillion over the period 2012-2021. The Act also provided for a process to implement alternative spending reductions in the event that a Joint Committee bill achieving more than $1.2 trillion of deficit reduction was not enacted by January 15, 2012. This section describes the enforcement procedures that will be triggered by the Joint Committee’s failure to recommend, and Congress’s failure to enact, legislation providing the necessary savings, unless the Congress and the President agree to an alternative approach. The President’s 2013 Budget proposes balanced deficit reduction measures that, in total, far exceed the $1.2 trillion minimum target. The Administration will work with Congress to enact sufficient deficit reduction to avoid the reductions otherwise required due to the failure of the Joint Committee process. Revised Discretionary Caps.—The only immediate impact of the failure of the Joint Committee process is that the discretionary spending limits (caps) established in Title I of the BCA are redefined, as discussed in the Preview Report section of this chapter. As a result, the limits on budget authority apply to two categories (security and nonsecurity) of discretionary programs for 20132021. The revised security category consists of all discretionary programs in the defense function (050), which consists mainly of the Department of Defense-Military Programs. The revised non-security category consists of all other discretionary programs. In conjunction with the President’s 2013 Budget proposals for deficit reduction exceeding $1.2 trillion and continued commitment to working with Congress to avoid the automatic reductions, the Administration proposes to restore the original security/nonsecurity definitions in the BBEDCA. Enforcement.—The BCA requires that any shortfall in enacted savings from a Joint Committee bill below the $1.2 trillion minimum target must be made up by automatic reductions in discretionary spending and non-exempt mandatory spending. OMB is required to calculate the amount of the spending reduction required for each year, 2013-2021 by: (1) starting with the $1.2 trillion minimum target; (2) subtracting the amount of deficit reduction achieved by the enactment of a Joint Committee bill; (3) reducing the difference by 18 percent to account for debt service; and (4) dividing the result by nine. Because no savings were enacted, approximately $109 billion of annual spending reductions would be required. Half of these reductions would be allocated to defense function programs and half to non-defense programs. Within each category, the reductions would be prorated between discretionary programs and mandatory programs using the sum of the discretionary spending limit for that category and non-exempt mandatory outlays as the base. For mandatory spending, the reductions in all years would be taken by an across-the-board sequestration of non-exempt programs, with limits imposed by special rules, such as a limit of 2 percent on the maximum reduction to certain Medicare spending. For discretionary programs, OMB would implement the reductions for 2014-2021 by reducing the discretionary cap for each discretionary category by the appropriate amount when OMB submits its sequestration preview report for that year. 1 In contrast, the discretionary reduction for 2013 would be taken by a sequestration of non-exempt discretionary spending on January 2, 2013. Of particular note, the President would have the authority to reallocate any reductions required for military personnel accounts to other Department of Defense discretionary accounts. Program Integrity Funding Critical programs such as Social Security, Medicare, and Medicaid, should be run efficiently and effectively. The Government made an estimated $115 billion in improper payments last year over all its programs. Although this amount reflects an improvement in both the payment error amount and the payment error rate, this level of error is unaffordable and unacceptable. The Administration, therefore, proposes to make significant investments in activities to ensure that taxpayer dollars are spent correctly, by expanding oversight activities in the largest benefit programs and increasing investments in tax compliance and enforcement activities. In addition, the Administration supports a number of legislative and administrative reforms in improper payments and debt collection. Many of these proposals will provide savings for the Government and taxpayers, and will support government-wide efforts to improve the management and oversight of Federal resources. If all of the legislative program integrity proposals are enacted, they are estimated to save at least $102.2 billion over 10 years. The Administration supports efforts to provide Federal agencies with the necessary resources and incentives to prevent, reduce, or recover improper payments. With the enactment of the Improper Payments Elimination and Recovery Act of 2010 (P. L. 111-204), and the release of three Presidential directives on improper payments under this Administration, agencies are well positioned to utilize these new tools and techniques to prevent, reduce, and recover improper payments. The Administration will continue to identify areas—n addition to those outlined in the Budget—where it can work with Congress to further improve agency efforts. Discretionary Program Integrity Initiatives.— There is solid and rigorous evidence that investments in administrative resources can significantly decrease the rate of improper payments and recoup many times their initial investment. For every $1 spent by the Social Security Administration (SSA) on a disability review, $9 is saved in erroneous payments. Similarly, for every additional $1 spent by HHS on program integrity efforts, 1 As provided in section 254 of BBEDCA, OMB submits its sequestration preview report with the President’s Budget. 164 ANALYTICAL PERSPECTIVES Table 14–4. MANDATORY AND RECEIPT SAVINGS FROM DISCRETIONARY PROGRAM INTEGRITY BASE FUNDING AND CAP ADJUSTMENTS (Budget authority in millions of dollars) 2012–2021 Cap Adjustment Proposal Savings Achieved from Full Funding of Cap Adjustments 2012 2013 2014 2015 2016 2017 2018 11-Year Total 2019 2020 2021 2022 –1,056 –6,004 –1,186 –6,655 –1,281 –7,223 –946 –6,627 –7,818 –47,935 –495 –690 –495 –722 –495 –755 Enacted Adjustments Pursuant to the Balanced Budget and Emergency Deficit Control Act of 1985, as Amended: SSA Program Integrity1 Enforcement Base ���������������������������������������� Allocation Adjustment ����������������������������������� Section 251(b)(2)(B) of BBEDCA 2,457 10,649 ......... –39 529 –452 –55 –2,183 Health Care Fraud and Abuse Control Program2 Enforcement Base ���������������������������������������� Allocation Adjustment ����������������������������������� –350 –3,264 –647 –4,343 –796 –4,821 –839 –5,133 Section 251(b)(2)(C) of BBEDCA 2,800 3,927 –1 –405 –495 –450 –495 –496 –495 –546 –495 –599 –495 –628 –495 –659 ......... ......... –4,456 –5,950 Proposed Adjustments Pursuant to the Balanced Budget and Emergency Deficit Control Act of 1985, as Amended: IRS Tax Enforcement3 Enforcement Base4 ������������������������������������������������������� Allocation Adjustment5 ��������������������������������� 97,072 14,861 Unemployment Insurance Improper Payments6 Enforcement Base ���������������������������������������� Allocation Adjustment ����������������������������������� 540 275 ......... –55,000 –55,000 –55,000 –55,000 –55,000 –55,000 –55,000 –55,000 –55,000 ......... –421 –1,123 –2,251 –3,455 –4,694 –5,585 –6,200 –6,483 –6,661 ......... ......... –121 –22 –243 –54 –245 –77 –248 –99 –250 –121 –254 –135 –258 –141 –262 –147 –266 –153 ......... –495,000 –2,520 –39,393 –137 –79 –2,284 –1,028 1 This is based on SSA's Office of the Actuary estimates of savings. In the first year, the enforcement base shows a positive outlay. This is due to the fact that redeterminations of eligibility can uncover underpayment errors as well as overpayment errors. SSI recipients are more likely to initiate a redetermination if they believe there is an underpayment, and SSA completes these beneficiary-initiated redeterminations in the enforcement base. In addition, corrections for underpayments are realized more quickly than corrections for overpayments. The cap adjustment does not show an outlay in the first year because SSA would target their cap adjustment redetermination dollars to cases where an overpayment is suspected. 2 These savings are based on estimates from the HHS Office of the Actuary for return on investment (ROI) from program integrity activities. 3 Savings for IRS are revenue increases rather than spending reductions. They are shown as negatives for consistency in presentation. 4 No official estimate for FY 2013 enforcement revenue has been produced, so this figure is an approximation and included only for illustrative purposes. 5 The Internal Revenue Service (IRS) cap adjustment funds cost increases for existing enforcement initiatives and activities and new initiatives. The IRS enforcement program helps maintain the more than $2 trillion in taxes paid each year without direct enforcement measures. The cost increases will help maintain the base revenue while generating additional revenue through targeted program investments. The activities and new initiatives funded out of the cap adjustment will yield more than $39 billion in savings over ten years, with the savings increasing to nearly $44 billion over 10 years when the cap spending is assumed to be sustained in 2022. Aside from direct enforcement revenue, the deterrence impact of these activities suggests the potential for even greater savings. 6 The maximum UI benefit period is typically 26 weeks unless temporary extended benefits programs are in effect. As a result, preventing an ineligible individual from collecting UI benefits would save at most a half year of benefits in the absence of extended benefits. The savings estimates are based on regular UI benefits and spread over two years, reflecting the fact that reemployment and eligibility assessments conducted late in the year affect individuals whose benefits would have continued into the subsequent fiscal year. As a result of the benefit savings, States will be able to reduce their unemployment taxes. The estimated revenue loss from the enforcement base is $626 million, net of the income tax offset. The estimated revenue loss from the increase in the cap adjustment is $247 million, net of the offset. approximately $1.50 is saved or averted, and the IRS enforcement activities recoup roughly $5 or $6 for every $1 spent. The BBEDCA, as amended by the BCA, recognizes that a multi-year strategy permitting agencies to pay closer attention to the risk of improper payments, commensurate with the large and growing costs of the programs administered by that agency, is a laudable goal. To support that goal, the BBEDCA provides for adjustments to the discretionary spending limits for additional funding for specific program integrity activities at SSA to reduce improper payments in the Social Security program and at the Department of Health and Human Services (HHS) to reduce improper payments in the Medicare and Medicaid programs. These adjustments are increases in the discre- tionary caps on budget authority through 2021 and are made only if appropriations bills increase funding for the specified program integrity purposes above specified base levels. This budget mechanism ensures that the additional funding does not supplant other Federal spending on these activities and is not diverted to other purposes. In addition to fully supporting the adjustments enacted in the BBEDCA, the Administration proposes to amend the BBEDCA to enact similar adjustments at the Internal Revenue Service (IRS) for tax code enforcement and the Department of Labor (DOL) to reduce improper payments in the Unemployment Insurance (UI) program. As shown in Table 14-4, the enacted and proposed adjustments, which are assumed to be sustained in 2022, are estimated to result in more than $94 billion in lower spending and 165 14. BUDGET PROCESS Table 14–5. DISCRETIONARY PROGRAM INTEGRITY BASE FUNDING AND CAP ADJUSTMENTS (Budget authority in millions of dollars) 2011 Actual 2012 Enacted Proposed 2013 2014 2015 2016 2017 2018 2019 2020 2021 Enacted Adjustments Pursuant to the Balanced Budget and Emergency Deficit Control Act of 1985, as Amended: SSA Program Integrity: Section 251(b)(2)(B) of BBEDCA Enforcement Base1 ����������������������������������������������������������������������� 273 273 273 273 273 273 273 273 273 273 273 Cap Adjustments: BA ��������������������������������������������������������������������������������������������� Outlays �������������������������������������������������������������������������������������� 484 484 483 483 751 751 924 924 1,123 1,123 1,166 1,166 1,309 1,309 1,309 1,309 1,309 1,309 1,309 1,309 1,309 1,309 Requested Additional Cap Funding for 2012: BA ��������������������������������������������������������������������������������������������� Outlays �������������������������������������������������������������������������������������� 140 140 Health Care Fraud and Abuse Control Program: Section 251(b)(2)(C) of BBEDCA Enforcement Base (Discretionary) ������������������������������������������������ 311 310 311 311 311 311 311 311 311 311 311 Cap Adjustments: BA ��������������������������������������������������������������������������������������������� Outlays �������������������������������������������������������������������������������������� ......... ......... ......... ......... 299 299 329 329 361 361 395 395 414 414 434 434 454 454 475 475 496 496 Requested Additional Base & Cap Funding for 2012: BA ��������������������������������������������������������������������������������������������� Outlays �������������������������������������������������������������������������������������� 271 271 Proposed Adjustments Pursuant to the Balanced Budget and Emergency Deficit Control Act of 1985, as Amended: IRS Tax Enforcement: Enforcement Base 1 ���������������������������������������������������������������������� Cap Adjustments: BA ��������������������������������������������������������������������������������������������� Outlays �������������������������������������������������������������������������������������� Unemployment Insurance Improper Payments: Enforcement Base ������������������������������������������������������������������������ Cap Adjustments: BA ��������������������������������������������������������������������������������������������� Outlays �������������������������������������������������������������������������������������� 9,569 9,246 9,487 9,753 10,039 10,355 10,714 11,092 11,493 11,876 12,263 ......... ......... ......... ......... 691 622 1,018 985 1,328 1,297 1,645 1,613 1,975 1,942 1,968 1,969 2,010 2,006 2,079 2,072 2,147 2,140 60 60 60 60 60 60 60 60 60 60 60 ......... ......... ......... ......... 15 15 20 20 25 25 30 30 35 35 36 36 37 37 38 38 39 39 10,131 10,397 10,683 10,999 11,358 11,736 12,137 12,520 12,907 1,756 1,687 2,291 2,258 2,837 2,806 3,236 3,204 3,733 3,700 3,747 3,748 3,810 3,806 3,901 3,894 3,991 3,984 TOTAL: Enforcement Base ������������������������������������������������������������������������ Cap Adjustments: BA ��������������������������������������������������������������������������������������������� Outlays �������������������������������������������������������������������������������������� 1 For 2011 through 2022, numbers reflect spending on CDRs and SSI redeterminations. Limited funding in the 2011 allocation adjustment was also used for asset verification processes. additional tax revenue over the next 10 years, with further savings after the 10-year period. Both the base level of funding and the additional funding that would trigger cap adjustments are listed in Table 14-5. Enacted Adjustments Pursuant to the BBEDCA.—For the Social Security Administration, the $751 million cap adjustment (and base funding of $273 million) will allow SSA to conduct at least 650,000 Continuing Disability Reviews (CDRs) and at least 2.6 million Supplemental Security Income (SSI) redeterminations of eligibility in 2013. CDRs determine whether an individual continues to qualify for Disability Insurance (DI) or SSI. The fund- ing provided for the SSA will enable the agency to work down a backlog of CDRs. As a result of increased funding provided by the cap adjustment, SSA would recoup more than $47.9 billion in gross savings in the DI and SSI programs, with additional savings after the ten-year period, according to estimates of SSA’s Office of the Actuary. Taking into account the $10.6 billion cost of the cap adjustments, this would produce net savings of $37.3 billion. SSA is required by law to conduct CDRs for all beneficiaries who are receiving DI benefits, as well as all children under age 18 who are receiving SSI. SSI redeterminations are also required by law, but the frequency is not specified 166 in statute. The baseline assumes the likely frequency of program integrity activities, given the baseline funding levels. The Budget shows the savings that would result from the increase in CDRs and redeterminations made possible by the program integrity cap adjustment. Note that since the Consolidated Appropriations Act, 2012 (P.L. 112-74) did not fully fund the cap adjustment for 2012 for CDRs and redeterminations, the Administration is proposing to increase funding for this purpose by $140 million in 2012, up to the adjustment level of $623 million permitted in that year pursuant to the BBEDCA. This will save an additional $800 million when compared to the current enacted amount for 2012. As stated above, the return on investment (ROI) for CDRs is approximately 9 to 1 in lifetime program savings. The ROI for redeterminations is approximately 6 to 1. The savings from one year of program integrity activities are realized over multiple years because some CDRs find that beneficiaries have medically improved and are capable of working, which may mean that they are no longer eligible to receive DI or SSI benefits. Redeterminations focus on an individual’s eligibility for the means-tested SSI program and generally result in a revision of the individual’s benefit level. However, the schedule of savings resulting from redeterminations will be different for the base funding and the cap adjustment. This is because redeterminations of eligibility can uncover underpayment errors as well as overpayment errors. SSI recipients are more likely to initiate a redetermination of eligibility if they believe there are underpayments, and these recipient-initiated redeterminations are included in the base. The estimated lifetime savings per dollar spent on CDRs and redeterminations was revised downward this year due to an interaction with a provision in the Affordable Care Act (ACA) that mandates Medicaid coverage beginning January 2014 for individuals under age 65 with income less than 133 percent of poverty. As a result of this provision, many SSI beneficiaries, who would otherwise lose Medicaid coverage due to a CDR or redetermination, would continue to be covered. In addition, some of these individuals will be eligible for the Medicaid ACA enhanced Federal matching rate, resulting in higher federal Medicaid costs. The discretionary base and cap adjustment of $610 million for Health Care Fraud and Abuse Control (HCFAC) activities is designed to support efforts to reduce the Medicare improper payment rate by 50 percent, expand the Health Care Fraud Prevention & Enforcement Action Team (HEAT) initiative, and to reduce Medicaid improper payment rates. The increased funding will also allow the Centers for Medicare and Medicaid Services (CMS) to deploy innovative efforts that focus on improving the analysis and application of data, including state-of-the-art predictive modeling capabilities, in order to prevent potentially wasteful, abusive, or fraudulent payments before they occur. The funding is to be allocated among CMS, the Health and Human Services Office of Inspector General, the Federal Bureau of Investigation, and Department of Justice. This $610 million will generate approximately $950 million in savings to Medicare and Medicaid in 2013, for a net deficit reduction of almost $340 million in ANALYTICAL PERSPECTIVES 2013, reflecting prevention and recoupment of improper payments made to providers, as well as recoveries related to civil and criminal penalties. As with CDRs and redeterminations, since the Consolidated Appropriations Act, 2012 (P.L. 112-74) did not fully fund the base or the cap adjustment for 2012 for HCFAC, the Administration is proposing to increase the appropriation by $1 million (offset with a cut to CMS Program Management) to fully fund the base for HCFAC and by $270 million for the cap adjustment in 2012, up to the adjustment level permitted in that year pursuant to BBEDCA. This will save an additional $406 million when compared to the current enacted amount for 2012. Proposed Adjustments to BBEDCA Limits.—For the IRS, the base funds current tax administration activities, including all tax enforcement and compliance program activities, in the Enforcement and Operations Support accounts. The additional $691 million cap adjustment funds new and continuing investments in expanding and improving the effectiveness and efficiency of the IRS’s overall tax enforcement program, and also provides funding needed to implement recently-enacted tax law changes. As a result of base tax enforcement and compliance activities, the IRS will collect roughly $55 billion in 2013 in direct enforcement revenue. The IRS estimates that the proposed new 2013 enforcement initiatives will yield an additional $660 million in revenue from the work done in 2013. Further, once the initiatives’ new staff are trained and become fully operational in 2015, the extra revenue brought in by the work done in each year will rise to at least $1.5 billion, or roughly $5 in additional revenue for every $1 in IRS expenses. New investments are also proposed beyond 2013, with cap adjustments in fiscal years 2014-2017 that include about $350 million in new revenue-producing enforcement initiatives each year. The activities and new initiatives funded out of the cap adjustments through 2021 will generate more than $39 billion in additional revenue over 10 years, with the revenue savings increasing to $44 billion over 10 years when the cap spending is assumed to be sustained in 2022. Taking into account the $14.9 billion cost of the cap adjustments, this would produce net savings of $24.5 billion. When the cap spending is assumed to be sustained in 2022, net savings of $26.6 billion would be realized. Notably, the ROI is likely understated because it only includes amounts received; it does not reflect the effect enhanced enforcement has on deterring non-compliance. This indirect deterrence helps to ensure the continued payment of well over $2 trillion in taxes paid each year without direct enforcement measures. The Budget proposes a series of cap adjustments for the Department of Labor’s (DOL) Unemployment Insurance (UI) State administrative grants program to reduce UI improper payments, a top management challenge identified by GAO and DOL’s Inspector General. The proposal would expand what is now a $60 million Reemployment and Eligibility Assessment (REA) initiative, begun in 2005 to finance in-person interviews at One-Stop Career Centers, to assess UI beneficiaries’ need for job finding services and their continued eligibility for 14. BUDGET PROCESS benefits. The current $60 million base effort, if continued through 2021, would result in a savings in UI benefit payments of an estimated $2,284 million. These benefit savings would allow States to reduce their UI taxes by over $600 million (net of the income tax offset), reducing the burden on employers. The request for additional funding for in-person reemployment and eligibility assessments of claimants of unemployment compensation builds upon the success of a number of States in reducing improper payments and speeding reemployment by using these assessments. Because most unemployment claims are now filed by telephone or online, in-person assessments conducted in the One-Stop Career Centers can help determine the continued eligibility for benefits and the adequacy of work search, verify the identity of beneficiaries where there is suspicion of possible identity theft, and provide a referral to reemployment assistance for those who need additional help. The savings from this REA initiative are short-term because the maximum UI benefit period is limited, typically 26 weeks for regular State UI programs, although durations are currently longer in response to the elevated unemployment rate. The proposed cap adjustments would begin at $15 million in 2013 and total $275 million through 2021, providing total gross outlay savings estimated at $1.028 billion. As with the base funding for REAs, these outlay savings from the cap adjustments would permit States to reduce their UI taxes by an estimated $250 million (net of the income tax offset). Net savings for the proposal, including the cost of the cap adjustments, the mandatory outlay savings, and the revenue loss, totals $506 million. In addition to the initiatives described above, the Budget includes administrative funds for the Partnership Fund for Program Integrity Innovation (Partnership Fund) to continue collaborating with State, local and other stakeholders to identify and pilot innovations to improve service delivery, payment accuracy, and administrative efficiency across Federal assistance programs administered by States—while protecting qualified beneficiaries. Already, the Partnership Fund has invested over $11 million in six pilot projects, which are estimated to lead to total savings of up to $200 million or more annually if the pilots are taken to scale – a return on investment 17 times. By law, Partnership Fund pilots must save at least as much as they cost, in aggregate. As the potential return on investment estimated for current pilots demonstrates, savings could ultimately be greater. The Consolidated Appropriations Act, 2012 extended the availability through 2013 of $10 million from the original appropriation for the Partnership Fund that would have otherwise expired at the end of 2012. Pilots launched to date include: • The Department of the Treasury is assessing how State data could be leveraged to help validate earned income tax credit (EITC) eligibility to reduce error and increase participation of eligible families; • The Department of Labor is working with States to 167 test how access to data from financial institutions could help to detect overpayments in the Unemployment Insurance program; • The Department of Agriculture is working with a State consortium to establish a National Accuracy Clearinghouse to strengthen program integrity and ensure continuity of Supplemental Nutrition Assistance Program (SNAP) and Disaster-SNAP benefits in disasters; • The Department of the Treasury is partnering with States to determine how expanding the Treasury Offset Program (TOP) could help States collect delinquent debt that includes Federal dollars; • The Centers for Medicare and Medicaid Services (CMS) and States are reducing administrative costs and promoting fraud detection in Medicaid provider enrollment through a shared services model for enrollment systems; • CMS and States are working to better identify provider fraud and share fraud information through automated risk assessment tools using integrated data from State Medicaid programs and the Federal Medicare program. Mandatory Program Integrity Initiatives.—Table 14-6 lays out the mandatory and receipt savings from other program integrity initiatives that are included in the 2013 Budget, beyond the expansion in resources resulting from the increases in discretionary funding discussed above. These savings total almost $7.9 billion over ten years. Almost 60 percent of these savings would be scored as PAYGO offsets because the legislation would authorize agencies to use new methods to reduce overpayments and combat fraud. These mandatory proposals to reduce improper payments and ensure agencies recover debt owed to the Federal Government reflect the importance of these issues to the Administration. Through these and other initiatives outlined in the Budget, the Administration can improve management efforts across the Federal Government. Expand CMS Program Integrity Authority.—The Budget includes new Medicare and Medicaid program integrity proposals to help prevent fraud and abuse before they occur; detect fraud and abuse as early as possible; more comprehensively enforce penalties and other sanctions when fraud and abuse occur; provide greater flexibility to the Secretary of Health and Human Services to implement program integrity activities that allow for efficient use of resources and achieve high returns-on-investment; and promote integrity in Federal-State financing. For example, the Budget proposes to authorize civil monetary penalties or other intermediate sanctions for providers who do not update enrollment records, permit exclusion of individuals affiliated with entities sanctioned for fraudulent or other prohibited action from Federal health care programs, and affirm Medicaid’s position as a payer of last resort when another entity is legally liable to pay claims for beneficiaries. Together, the CMS program 168 ANALYTICAL PERSPECTIVES Table 14–6. MANDATORY AND RECEIPT SAVINGS FROM OTHER PROGRAM INTEGRITY INITIATIVES (Receipts and outlays in millions of dollars) 2013 Department of Health and Human Services: Expand CMS Program Integrity Authority 1 �������������������������������������� Department of the Treasury: Increase levy authority for payments to Medicare providers with delinquent tax debt (receipt effect) ��������������������������������������������� Provide authority to contact delinquent debtors via their cell phones ���� Authorize Treasury to locate and recover assets of the United States and to retain a portion of amounts collected to pay for the cost of recovery �������������������������������������������������������������������������� 2014 2015 2016 2017 2018 2019 2020 2021 2022 10-year total –161 –236 –306 –336 –376 –386 –416 –451 –461 –487 –3,616 –56 –12 –66 –12 –68 –12 –70 –12 –72 –12 –74 –12 –76 –12 –77 –12 –78 –12 –80 –12 –717 –120 –2 –2 –2 –2 –2 –2 –2 –2 –2 –2 –20 Social Security Administration: Windfall Elimination Provision/Government Pension Offset Enforcement Provision (non-PAYGO) ���������������������������������������������� 13 20 17 –211 –456 –593 –626 –566 –529 –481 –3,412 Total, Mandatory and Receipt Savings ���������������������������������������������� PAYGO Savings ������������������������������������������������������������������������������� Non-PAYGO Savings ����������������������������������������������������������������������� –218 –231 13 –296 –316 20 –371 –388 17 –631 –420 –211 –918 –462 –456 –1,067 –474 –593 –1,132 –506 –626 –1,108 –542 –566 –1,082 –553 –529 –1,062 –581 –481 –7,885 –4,473 –3,412 1 Savings estimates may not include all interactions. integrity proposals are projected to save more than $3.6 billion over 10 years. Improve Treasury Debt Collection.—The Budget includes two proposals that would increase collections of delinquent debt: citizens from paying back the debt they owe their fellow citizens. The proposal would also allow the Federal Communications Commission to implement rules to protect consumers from being harassed and contacted unreasonably. This proposal would result in PAYGO savings of $120 million over 10 years. • Increase levy authority for payments to Medicare providers with delinquent tax debt.—The Budget proposes a change to the Department of the Treasury’s debt collection procedures that will increase the amount of delinquent taxes collected from Medicare providers. Through the Federal Payment Levy Program, Treasury deducts (levies) a portion of a Government payment to an individual or business in order to collect unpaid taxes. Pursuant to the Medicare Improvements for Patients and Providers Act of 2008, Medicare provider and supplier payments are included in the Federal Payment Levy Program, whereby Treasury is authorized to continuously levy up to 15 percent of a payment to a Medicare provider in order to collect delinquent tax debt. The Budget proposal will allow Treasury to levy up to 100 percent of a payment to a Medicare provider to collect unpaid taxes. This proposal would result in PAYGO savings of $717 million over ten years. • Authorize Treasury to locate and recover assets of the United States and to retain a portion of amounts collected to pay for the cost of recovery.—States and other entities hold assets in the name of the United States or in the name of departments, agencies and other subdivisions of the Federal Government. Many agencies are not recovering these assets due to lack of expertise and funding. Under current authority, Treasury collects delinquent debts owed to the United States and retains a portion of collections, which is the sole source of funding for its debt collection operations. While unclaimed Federal assets are generally not considered to be delinquent debts, Treasury’s debt collection operations personnel have the skills and training to recover these assets. The Budget proposes to authorize Treasury to use its resources to recover assets of the United States. This proposal would result in PAYGO savings of $20 million over 10 years. • Provide authority to contact delinquent debtors via their cell phones.—The Budget proposes to clarify that the use of automatic dialing systems and prerecorded voice messages is allowed when contacting wireless phones in the collection of debt owed to or granted by the United States. In this time of fiscal constraint, the Administration believes that the Federal Government should ensure that all debt owed to the United States is collected as quickly and efficiently as possible and this provision could result in millions of defaulted debt being collected. While protections against abuse and harassment are appropriate, changing technology should not absolve these Social Security Windfall Elimination Provision/ Government Pension Offset Enforcement Provision.—The Budget re-proposes legislation that would improve reporting for non-covered pensions by including up to $50 million for administrative expenses to develop a mechanism so that the Social Security Administration could enforce the offsets for non-covered employment, Windfall Elimination Provision (WEP), and Government Pension Offset (GPO). The proposal would require State and local governments to provide information on their noncovered pension payments to SSA so that the agency can apply the WEP and GPO adjustments. Under current 14. BUDGET PROCESS law, the WEP and GPO adjustments are dependent on self-reported pension data and cannot be independently verified. This proposal would result in savings in the OldAge, Survivors, and Disability Insurance program of more than $3.4 billion over 10 years, which would be scored as non-PAYGO savings because the program is off-budget. Other Program Integrity Initiatives.—Executive Order (EO) on Reducing Improper Payments.—Executive Order 13520 on Reducing Improper Payments and Eliminating Waste in Federal Programs intensifies agency efforts to eliminate errors (including waste, fraud, and abuse) in the major programs (i.e., those programs with the highest dollar value or majority of improper payments) administered by the Federal Government. There are three overarching EO requirements: 1. Increase transparency and public participation; 2. Intensify agency accountability and coordination; and 3. Use incentives to improve contractor and State and local efforts in eliminating payment errors. The EO provisions align with the President’s program integrity initiatives by (1) ensuring that performance measures exist to assess (either annually or more frequently) whether these actions are reducing errors; (2) requiring agencies to submit a remediation plan when reduction targets for those programs with the high dollar value of improper payments are missed two consecutive years; and (3) initiating studies to recommend incentives for reducing error. Agencies are continuing to make progress in implementing EO 13520, and agency results can be found on the Federal Government’s improper payments dashboard at http://www.PaymentAccuracy.gov/. Leveraging Technology to Reduce Improper Payments.— Under this Administration, the Federal Government has focused on utilizing technology to address improper payments. Specifically, when the Administration took office, in many cases Federal agencies were either unaware of or unable to utilize technology in a manner that could help prevent and reduce improper payments. In addition, approximately 35 percent (or $40 billion) of all payment errors in FY 2011 were due to the inability to verify applicant information such as earnings, income, assets, or work status. This type of information is frequently available in data sources maintained by Federal agencies and third parties, but access to these sources is often limited due to legal, regulatory, or cost impediments. Recognizing these barriers, the Administration has focused on enhancing agency use of technology to prevent improper payments in a number of ways, including the following activities. First, under EO 13520, work groups were created to analyze the role that cutting-edge forensic technologies could play in identifying and preventing fraud and other improper payments, as well as efforts that could be undertaken to improve data sharing between agencies. Second, the FY 2012 Budget requested $10 million and the Consolidated Appropriations Act, 2012 appropriated $10 million to support expansion of the “Do 169 Not Pay” list—created by a Presidential memorandum issued June 18, 2010—and to add forensic fraud detection capabilities to the basic “Do Not Pay” portal. Specifically, the funding will help expand the number of databases and infrastructure of the “Do Not Pay” list, procure the detection technology and hire staff to support an operations center to analyze fraud patterns utilizing public and private-sector information, and refer potential issues to agency management and the relevant agency Inspector General. Third, to enhance data sharing, the President issued a memorandum that directed that a single portal be established through which agencies could check multiple eligibility databases before making an award or payment, and in November 2010, OMB released a memorandum that encouraged agencies to share high-value data that can be used to support important Administration initiatives, including preventing improper payments. The Administration is continuing to pursue opportunities to improve information sharing by developing or enhancing policy and guidance and developing legislative proposals to leverage available information and technology in determining benefit eligibility and other opportunities to prevent improper payments. Social Security Workers’ Compensation Enforcement Provision.—The 2013 Budget re-proposes a proposal from the 2012 Budget to improve the collection of data on the receipt of Workers’ Compensation benefits. Similar to WEP/GPO (see description in the mandatory program integrity initiatives section above), this information is self-reported to SSA and is used to offset benefit amounts in the Social Security Disability Insurance and Supplemental Security Income programs. This proposal would develop a process to collect this information in a timely manner from States and private insurers to correctly offset Disability Insurance benefits and reduce SSI payments. The proposal includes $10 million to help fund States’ implementation costs. While the proposal is expected to generate long-term savings based on a pilot previously performed by SSA’s Inspector General, SSA has been unable to develop a savings estimate. Using Rigorous Evidence to Develop Cost Estimates.— OMB works with Federal agencies and CBO to develop PAYGO estimates for mandatory programs. OMB has issued guidance to agencies for scoring legislation under the statutory Pay-As-You-Go Act of 2010. This guidance states that agencies must score the effects of program legislation on other programs if the programs are linked by statute. (For example, effects on Medicaid spending that are due to statutory linkages in eligibility for Supplemental Security Income benefits must be scored.) In addition, even when programs are not linked by statute, agencies may score effects on other programs if those effects are significant and well documented. Specifically, the guidance states: “Under certain circumstances, estimates may also include effects in programs not linked by statute where such effects are significant and well documented. For example, such effects may be estimated where rigorous experimental research or past program experience has established a high probability that chang- 170 es in eligibility or terms of one program will have significant effects on participation in another program.” Rigorous evidence can help policy makers identify policies that reduce government spending overall. Because PAYGO accounts for long-term mandatory savings, it creates an incentive to invest in relatively cost-effective programs. Discretionary programs can save money too, but discretionary scoring typically does not capture these savings. For example, research shows investments in the Supplemental Nutrition Program for Women, Infants, and Children (WIC) reduce Medicaid costs for the mother and child. Although the interventions can reduce Federal costs, the appropriators do not get credit for any of these savings. As discussed earlier in this chapter, one exception to this is the program integrity cap adjustments, which allow the appropriators to provide money above the discretionary caps for activities that have been shown to generate cost savings. OMB would like to work with Congress and CBO to develop options to provide similar incentives to use rigorous evidence to reward discretionary program investments in interventions that reduce government spending in other areas. In addition to promoting better use of limited discretionary funding, such incentives would also stimulate better data collection and evaluation about the impacts of Federal spending. For more information on the specific program integrity funding proposals described in this section, see the Cuts, Consolidations, and Savings volume. Disaster Relief Funding Section 251(b)(2)(D) of the BBEDCA includes a provision to adjust the discretionary caps for appropriations that Congress designates as being for disaster relief in statute. The law allows for the discretionary cap to be increased by no more than the average funding provided for disaster relief over the previous ten years, excluding the highest and lowest years. The ceiling for each year’s adjustment (as determined by the ten year average) is then increased by the unused amount of the prior year’s ceiling (excluding the portion of the prior year’s ceiling that was itself due to any unused amount from the year before). Disaster relief is defined as activities carried out pursuant to a determination under section 102(2) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (42 U.S.C. 5122(2)) for major disasters declared by the President. As required by law, OMB transmitted a report on September 1, 2011 calculating that the ceiling on the potential adjustment for disaster relief funding is $11,252 million for fiscal year 2012. 2 As reflected in Table 14-7, the Congress has so far enacted a total of $10,453 million in 2012 that was designated for disaster relief. This is $799 million below the 2012 ceiling. OMB must include in its August Update Report a preview estimate of the ceiling on the adjustment for disaster relief funding for fiscal year 2013. This estimate will con2 For a full account of OMB’s complete analysis and methodology, see “OMB Report on Disaster Relief Funding” on OMB’s website: http:// www.whitehouse.gov/sites/default/files/omb/assets/legislative_reports/disaster_relief_report_sept2011.pdf. ANALYTICAL PERSPECTIVES tain an average funding calculation that incorporates nine years (2003 through 2011) using the definition of disaster relief from OMB’s September 1, 2011 report and one year using the funding the Congress designates in 2012 as for disaster relief pursuant to the BBEDCA, excluding the highest and lowest years. If no further appropriations designated for disaster relief are enacted in 2012, OMB will add the remaining $799 million referenced above to OMB’s preview estimate of the 2013 adjustment. Table 14-7 also presents the 2013 request for funding to be designated by the Congress as being for disaster relief. At this time, the Administration is requesting $5,648 million in funding in two accounts to be designated as for disaster relief by the Congress: almost $5.5 billion in the Federal Emergency Management Agency’s (FEMA’s) Disaster Relief Fund to cover the costs of Presidentiallydeclared major disasters, including identified costs for previously declared catastrophic events (defined by FEMA as events with expected costs that total more than $500 million) and the predictable annual cost of non-catastrophic events expected to obligate in 2013, and $167 million in the Small Business Administration’s Disaster Loans Program Account for administrative expenses. For these two programs, the Budget requests funding for both known needs based on expected costs of prior declared disasters and the typical average expenditures in these programs. This is consistent with past practice of requesting and funding these as part of regular appropriations bills. Also consistent with past practice, the 2013 request level does not seek to pre-fund anticipated needs in other programs arising out of disasters that have yet to occur, nor does the Budget seek funding for potential catastrophic needs. As additional information about the need to fund prior or future disasters becomes available, additional requests, in the form of either 2012 supplemental appropriations (designated as either disaster relief funding or emergency funding pursuant to BBEDCA) or budget amendments to the 2013 Budget, will be transmitted. Under the principles outlined above, since the Administration does not have adequate information about known or estimated needs that is necessary to state the total amount that will be requested in future years to be designated by the Congress for disaster relief, the Budget does not explicitly request to use the BBEDCA disaster designation in any year after the budget year. Instead, a placeholder for disaster relief is included in both the budget year, to capture unanticipated disasters, and in each of the outyears. See the discussion of this placeholder allowance later in this chapter in Section IV (Improved Definition of Baseline) under the heading titled “Adjustments for Disaster Costs”. Limit on Discretionary Advance Appropriations An advance appropriation first becomes available for obligation one or more fiscal years beyond the year for which the appropriations act is passed. Budget authority is recorded in the year the funds become available for obligation, not in the year the appropriation is enacted. 171 14. BUDGET PROCESS Table 14–7. FUNDS ENACTED IN 2012 AND FUNDS REQUESTED IN THE FISCAL YEAR 2013 BUDGET TO BE DESIGNATED FOR DISASTER RELIEF PURSUANT TO SECTION 251(b)(2)(D) OF THE BALANCED BUDGET AND EMERGENCY DEFICIT CONTROL ACT OF 1985, AS AMENDED (Budget authority in millions of dollars) 2012 Adjustment By Appropriations Subcommittee: 2013 Base* 2013 Adjustment Agriculture and Rural Development: Emergency Farm Loans ����������������������������������������������������������������������������������������������������������������������������������������������������������������� Emergency Conservation Program ������������������������������������������������������������������������������������������������������������������������������������������������ Watershed and Flood Prevention Operations ��������������������������������������������������������������������������������������������������������������������������������� Emergency Forest Restoration Program ���������������������������������������������������������������������������������������������������������������������������������������� ......... 122.7 215.9 28.4 1 ......... ......... ......... ......... ......... ......... ......... Total ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 367 1 ......... Commerce, Justice, Science, and Related Agencies: Economic Development Assistance Programs ������������������������������������������������������������������������������������������������������������������������������� 200 ......... ......... Energy and Water Development: Mississippi River and Tributaries [Corps of Engineers--Civil Works] ���������������������������������������������������������������������������������������������� Operation and Maintenance [Corps of Engineers--Civil Works] ����������������������������������������������������������������������������������������������������� Flood Control and Coastal Emergencies [Corps of Engineers--Civil Works] ���������������������������������������������������������������������������������� Construction [Corps of Engineers--Civil Works]. ���������������������������������������������������������������������������������������������������������������������������� 802 534 388 ......... ......... ......... ......... ......... ......... ......... ......... ......... Total ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,724 ......... ......... Financial Services and General Government: SBA, Disaster Loans Program Account** �������������������������������������������������������������������������������������������������������������������������������������������� ......... ......... 167 Homeland Security: Disaster Relief** ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������� Disaster Assistance Direct Loan Program** ����������������������������������������������������������������������������������������������������������������������������������� 6,400 ......... 608 ......... 5,481 ......... Total ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 6,400 608 5,481 Labor, HHS, Education: HHS, Children and Family Services Programs, Disaster Human Service Case Management** ���������������������������������������������������� ......... 2 ......... Transportation and Housing: Emergency Relief Program ������������������������������������������������������������������������������������������������������������������������������������������������������������ Community Development Fund** ��������������������������������������������������������������������������������������������������������������������������������������������������� 1,662 100 ......... ......... ......... ......... Total ����������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������������� 1,762 ......... ......... Total, Disaster Relief Funding ����������������������������������������������������������������������������������������������������������������������������������������������������������� 10,453 611 5,648 Total, 2012 Disaster Relief Ceiling for the Cap Adjustment ������������������������������������������������������������������������������������������������������������ 11,252 Room Remaining Under the 2012 Ceiling for the Cap Adjustment ����������������������������������������������������������������������������������������������� +799 * These funds will be requested for disaster spending in 2013, but not designated as disaster relief pursuant to section 251(b)(2)(D) of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended. ** These accounts received funding for disaster spending in 2012 that was not designated as disaster relief pursuant to section 251(b)(2)(D) of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, and was therefore subject to the discretionary spending limit in 2012. The SBA Disaster Loans Program Account received $117 million in administrative expenses, FEMA's Disaster Relief Fund received $700 million for non-major natural disasters, and FEMA's Disaster Assistance Direct Loan Program received $295,000 in subsidy appropriations for loans. In addition, HHS' Children and Family Services Programs received $2 million to provide referrals for human services case management during disasters and, of the appropriations provided to HUD's Community Development Fund, up to an additional $300 million was permitted to be used to fund disasters. There are legitimate policy reasons to use advance appropriations to fund programs. For example, funding for the Corporation for Public Broadcasting is customarily appropriated two years in advance. This gives the beneficiaries of this funding time to plan their broadcasting budgets before the broadcast season starts. However, advance appropriations can also be used in situations that lack a programmatic justification, as a gimmick to make room for expanded funding within the discretionary spending limits on budget authority for a given year under the BBEDCA, as amended by the BCA. For example, some education grants are forward funded (available beginning July 1 of the fiscal year) to provide certainty of funding for an entire school year, since school years straddle Federal fiscal years. This funding is recorded in the budget year because the funding is first legally available in that fiscal year. However, more than $22.6 billion of this funding is advance appropriated (available beginning three months later, on October 1) rather than forward funded. Prior Congresses increased advance appropriations and decreased the amounts of forward funding as a gimmick to free up room in the budget year without affecting the total amount available for a coming school year. This gimmick works because the advance appropriation is not recorded in the budget year but rather the following fiscal year. But it works only in the year in which funds are switched from forward funding to advance appropriations; that is, it works only in years in 172 which the amounts of advance appropriations for such “straddle” programs are increased. To curt
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