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FISCAL YEAR 2016 ANALYTICAL PERSPECTIVES 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 2016 contains the Budget Message of the President, information on the President’s priorities, and summary tables. Analytical Perspectives, Budget of the United States Government, Fiscal Year 2016 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 has supplemental materials (formerly part of the printed volume) that include tables showing the budget by agency and account and by function, subfunction, and program. These and other tables and additional supplemental materials are available on the internet at www.budget. gov/budget/Analytical_Perspectives and on the Budget CD-ROM. Historical Tables, Budget of the United States Government, Fiscal Year 2016 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 2016 or 2020. To the extent feasible, the data have been adjusted to provide consistency with the 2016 Budget and to provide comparability over time. The text and tables comprising the Historical Tables are available on the internet at www.budget.gov/budget/ Historicals and on the Budget CD-ROM. Appendix, Budget of the United States Government, Fiscal Year 2016 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 programs and appropriation accounts than any of the other budget documents. It includes for each agency: the proposed text of appropriations language; budget schedules for each account; 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. ELECTRONIC 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 printed budget documents in fully indexed PDF format along with the software required for viewing the documents. The CD-ROM also includes many of the budget tables in spreadsheet format, supplemental materials that were previously included in the printed Analytical Perspectives volume, and materials comprising the Historical Tables. 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. At the time the President’s 2016 Budget request was developed, the 2015 Department of Homeland Security Appropriations bill was not enacted; therefore, the discretionary programs and activities normally provided for in the full-year appropriations bill were operating under a continuing resolution (Public Law 113-235, Division L). For those programs and activities, full-year appropriations data included in the current year column (2015) in the budget Appendix, and in tables that show details on discretionary spending amounts in the Analytical Perspectives volume, reflect the annualized level provided by the continuing resolution. In the main Budget volume and the online Historical Tables volume, current year totals by agency and for the total Government match the President’s 2015 Budget request. U.S. GOVERNMENT PUBLISHING OFFICE, WASHINGTON 2015 -092680-8 90000 For sale by the Superintendent of Documents, U.S. Government Publishing 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 978-0-16-092680-8 TABLE OF CONTENTS Page List of Charts and Tables��������������������������������������������������������������������������������������������������������������������� iii Introduction 1. Introduction ��������������������������������������������������������������������������������������������������������������������������������3 Economic and Budget Analyses 2. Economic Assumptions and Interactions with the Budget�������������������������������������������������������9 3. Long-Term Budget Outlook�������������������������������������������������������������������������������������������������������21 4. Federal Borrowing and Debt�����������������������������������������������������������������������������������������������������31 Performance and Management 5. Social Indicators������������������������������������������������������������������������������������������������������������������������49 6. Delivering A High-Performance Government��������������������������������������������������������������������������59 7. Building Evidence with Administrative Data��������������������������������������������������������������������������65 8. Strengthening the Federal Workforce���������������������������������������������������������������������������������������75 9. Budget Concepts������������������������������������������������������������������������������������������������������������������������91 10. Coverage of the Budget�����������������������������������������������������������������������������������������������������������115 11. Budget Process�������������������������������������������������������������������������������������������������������������������������121 Federal Receipts 12. Governmental Receipts�����������������������������������������������������������������������������������������������������������149 13. Offsetting Collections and Offsetting Receipts����������������������������������������������������������������������205 14. Tax Expenditures���������������������������������������������������������������������������������������������������������������������219 Special Topics 15. Aid to State and Local Governments��������������������������������������������������������������������������������������265 16. Strengthening Federal Statistics��������������������������������������������������������������������������������������������275 17. Information Technology�����������������������������������������������������������������������������������������������������������281 18. Federal Investment������������������������������������������������������������������������������������������������������������������287 19. Research and Development�����������������������������������������������������������������������������������������������������293 20. Credit and Insurance���������������������������������������������������������������������������������������������������������������301 21. Budgetary Effects of the Troubled Asset Relief Program������������������������������������������������������329 22. Homeland Security Funding Analysis������������������������������������������������������������������������������������341 23. Federal Drug Control Funding�����������������������������������������������������������������������������������������������351 i Page 24. Federal Budget Exposure to Climate Risk ����������������������������������������������������������������������������353 Technical Budget Analyses 25. Current Services Estimates����������������������������������������������������������������������������������������������������361 26. Trust Funds and Federal Funds���������������������������������������������������������������������������������������������373 27. Comparison of Actual to Estimated Totals�����������������������������������������������������������������������������387 Detailed Functional Tables������������������������������������������������������������������������������������������������������������������ * Federal Budget by Agency and Account���������������������������������������������������������������������������������������������� * *Available on the Internet at http://www.whitehouse.gov/omb/budget/Analytical_Perspectives/ and on the Budget CD-ROM ii LIST OF CHARTS AND TABLES iii LIST OF CHARTS AND TABLES LIST OF CHARTS Page 2–1. Range of Uncertainty for the Budget Deficit�����������������������������������������������������������������������19 3–1. Publicly Held Debt Under Continuation of Current Policies����������������������������������������������22 3–2. Changes to Projected 2020 Deficit Under Continuation of Current Policies���������������������23 3–3. Comparison of Publicly Held Debt���������������������������������������������������������������������������������������24 3–4. 2016 Budget Policies�������������������������������������������������������������������������������������������������������������25 3–5. Alternative Productivity and Interest Assumptions�����������������������������������������������������������26 3–6. Alternative Health Care Costs���������������������������������������������������������������������������������������������27 3–7. Alternative Discretionary Projections����������������������������������������������������������������������������������27 3–8. Alternative Revenue Projections������������������������������������������������������������������������������������������28 3–9. Long-Term Uncertainties������������������������������������������������������������������������������������������������������28 8–1. Changes Since 1975 in Employment/Population by Sector�������������������������������������������������76 8–2. Masters Degree or Above by Year for Federal and Private Sectors������������������������������������79 8–3. High School Graduate or Less by Year for Federal and Private Sectors����������������������������79 8–4. Average Age by Year for Federal and Private Sectors���������������������������������������������������������80 8–5. Pay Raises for Federal vs. Private Workforce, 1978–2016���������������������������������������������������81 9–1. Relationship of Budget Authority to Outlays for 2016������������������������������������������������������104 17–1. Trends in Federal IT Spending�������������������������������������������������������������������������������������������282 20–1. Face Value of Federal Credit Outstanding�������������������������������������������������������������������������322 24–1. National Flood Insurance Program Paid Losses & Total Exposure���������������������������������354 24–2. Crop Insurance Total Cost to Government������������������������������������������������������������������������355 v LIST OF TABLES Page Economic and Budget Analyses Economic Assumptions and Interactions with the Budget 2–1. Economic Assumptions ���������������������������������������������������������������������������������������������������� 12 2–2. Comparison of Economic Assumptions in the 2015 and 2016 Budgets ������������������������ 13 2–3. Comparison of Economic Assumptions ��������������������������������������������������������������������������� 14 2–4. Sensitivity of the Budget to Economic Assumptions ����������������������������������������������������� 17 2–5. Forecast Errors, January 1982–Present ������������������������������������������������������������������������� 18 2–6. Differences Between Estimated and Actual Surpluses or Deficits for Five-Year Budget Estimates Since 1986 ��������������������������������������������������������������������������������������������������� 19 2–7. The Structural Balance ��������������������������������������������������������������������������������������������������� 20 Long-Term Budget Outlook 3–1. 25-Year Fiscal Gap (–)/Surplus (+) Under Budget Policies ������������������������������������������� 24 3–2. 25-Year Fiscal Gap (–)/Surplus (+) Under Alternative Budget Scenarios �������������������� 25 3–3. Intermediate Actuarial Projections for OASDI and HI ������������������������������������������������� 29 Federal Borrowing and Debt 4–1. Trends in Federal Debt Held by the Public �������������������������������������������������������������������� 4–2. Federal Government Financing and Debt ���������������������������������������������������������������������� 4–3. Debt Held by the Public Net of Financial Assets and Liabilities ��������������������������������� 4–4. Agency Debt ��������������������������������������������������������������������������������������������������������������������� 4–5. Debt Held by Government Accounts ������������������������������������������������������������������������������ 4–6. Federal Funds Financing and Change in Debt Subject to Statutory Limit ����������������� 4–7. Foreign Holdings of Federal Debt ����������������������������������������������������������������������������������� 32 34 37 39 40 44 45 Performance and Management Social Indicators 5–1. Social Indicators �������������������������������������������������������������������������������������������������������������� 51 5–2. Sources for Social Indicators ������������������������������������������������������������������������������������������� 55 Strengthening the Federal Workforce 8–1. Federal Civilian Employment in the Executive Branch ������������������������������������������������ 8–2. Occupations Of Federal And Private Sector Workforces ����������������������������������������������� 8–3. Total Federal Employment ���������������������������������������������������������������������������������������������� 8–4. Personnel Compensation and Benefits ��������������������������������������������������������������������������� 77 78 88 89 Budget Concepts Budget Calendar ����������������������������������������������������������������������������������������������������������������������������� 93 9–1. Totals for the Budget and the Federal Government ������������������������������������������������������ 98 Coverage of the Budget 10–1. Comparison of Total, On-Budget, and Off-Budget Transactions �������������������������������� 116 vii Page Budget Process 11–1. Enacted Cap Adjustments and Proposed Mandatory Funding, Including Mandatory Savings ������������������������������������������������������������������������������������ 11–2. Proposals for Discretionary Program Integrity Base Funding and Cap Adjustments, Including Mandatory and Receipts Savings ��������������������������������������� 11–3. Mandatory And Receipt Savings From Other Program Integrity Initiatives ������������ 11–4. Funding, Spending, Revenues, and Deposits Associated with the Transportation Trust Fund ���������������������������������������������������������������������������������������� 11–5. Effect of Student Aid Proposals on Discretionary Pell Funding Needs ���������������������� 124 125 127 137 139 Federal Receipts Governmental Receipts 12–1. Receipts by Source—Summary ������������������������������������������������������������������������������������� 12–2. Adjustments to the Balanced Budget and Emergency Deficit Control Act (BBEDCA) Baseline Estimates of Governmental Receipts ������������������������������������� 12–3. Reserve for Business Tax Reform that is Revenue Neutral in the Long Run ������������ 12–4. Other Budget Proposals ������������������������������������������������������������������������������������������������ 12–5. Receipts by Source ��������������������������������������������������������������������������������������������������������� 149 158 171 197 202 Offsetting Collections and Offsetting Receipts 13–1. Offsetting Collections and Offsetting Receipts from the Public ��������������������������������� 206 13–2. Offsetting Receipts by Type Summary ������������������������������������������������������������������������� 207 13–3. Gross Outlays, User Charges, Other Offsetting Collections and Offsetting Receipts from the Public, and Net Outlays ������������������������������������������������������������������������������ 208 13–4. User Charge Proposals in the 2016 Budget ����������������������������������������������������������������� 216 13–5. Offsetting Receipts by Type ���������������������������������������������������������������������������������������������� * Tax Expenditures 14–1. Estimates of Total Income Tax Expenditures for Fiscal Years 2014–2024 ����������������� 14–2A. Estimates of Total Corporate Income Tax Expenditures for Fiscal Years 2014–2024 ���������������������������������������������������������������������������������������������� 14–2B. Estimates of Total Individual Income Tax Expenditures for Fiscal Years 2014–2024 ���������������������������������������������������������������������������������������������� 14–3. Income Tax Expenditures Ranked by Total Fiscal Year 2015–2024 Projected Revenue Effect �������������������������������������������������������������������������������������������� 14–4. Present Value of Selected Tax Expenditures for Activity in Calendar Year 2014 ������ 222 228 234 240 243 Special Topics Aid to State and Local Governments 15–1. Trends in Federal Grants to State and Local Governments ��������������������������������������� 267 15–2. Federal Grants to State and Local Governments—Budget Authority and Outlays ������ * 15–3. Summary of Programs by Agency, Bureau, and Program ������������������������������������������� 273 15–4. Summary of Programs by State ������������������������������������������������������������������������������������ 274 15-5. – 15-41. 2016 Budget State-by-State Tables ����������������������������������������������������������������������� * Strengthening Federal Statistics 16–1. 2014–2016 Budget Authority for Principal Statistical Agencies �������������������������������� 279 *Available on the Internet at http://www.budget.gov/budget/Analytical_Perspectives and on the Budget CD-ROM viii Page Information Technology 17–1. Federal IT Spending ������������������������������������������������������������������������������������������������������ 281 Federal Investment 18–1. Composition of Federal Investment Outlays ��������������������������������������������������������������� 288 18–2. Federal Investment Budget Authority and Outlays: Grant and Direct Federal Programs �������������������������������������������������������������������������������������������� 290 Research and Development 19–1. Federal Research and Development Spending ����������������������������������������������������������� 298 Credit and Insurance 20–1. Top 10 Firms Presenting Claims (1975-2013) �������������������������������������������������������������� 319 20–2. Estimated Future Cost of Outstanding Direct Loans and Loan Guarantees ������������ 323 20–3. Direct Loan Subsidy Rates, Budget Authority, and Loan Levels, 2014–2016 ������������ 324 20–4. Loan Guarantee Subsidy Rates, Budget Authority, and Loan Levels, 2014–2016 ����� 326 20–5. Summary Of Federal Direct Loans And Loan Guarantees ���������������������������������������� 327 20–6. Reestimates of Credit Subsidies on Loans Disbursed Between 1992-2013 ������������������� * 20–7. Face Value of Government-Sponsored Lending ��������������������������������������������������������������� * 20–8. Lending and Borrowing by Government-Sponsored Enterprises (GSEs) ���������������������� * 20–9. Direct Loan Transactions of the Federal Government ���������������������������������������������������� * 20–10. Guaranteed Loan Transactions of the Federal Government ������������������������������������������� * Budgetary Effects of the Troubled Asset Relief Program 21–1. Change In Programmatic Costs Of Troubled Asset Relief Actions ���������������������������� 21–2. Troubled Asset Relief Program Current Value ������������������������������������������������������������ 21–3. Troubled Asset Relief Program Effects On The Deficit And Debt ������������������������������� 21–4. Troubled Asset Relief Program Effects On The Deficit And Debt Calculated On A Cash Basis ������������������������������������������������������������������������������������� 21–5. Troubled Asset Relief Program Reestimates ��������������������������������������������������������������� 21–6. Detailed TARP Program Levels and Costs ������������������������������������������������������������������ 21–7. Comparison of OMB and CBO TARP Costs ����������������������������������������������������������������� 330 331 332 333 334 335 336 Homeland Security Funding Analysis 22–1. Homeland Security Funding by Agency ����������������������������������������������������������������������� 344 22–2. Prevent and Disrupt Terrorist Attacks ������������������������������������������������������������������������ 345 22–3. Protect the American People, Our Critical Infrastructure, and Key Resources ��������� 346 22–4. Respond and Recover From Incidents �������������������������������������������������������������������������� 347 22–5. Discretionary Fee-Funded Homeland Security Activities by Agency ������������������������� 347 22–6. Mandatory Homeland Security Activities by Agency �������������������������������������������������� 348 22–7. Baseline Estimates—Total Homeland Security Funding by Agency �������������������������� 348 22–8. Total Homeland Security Funding by Function ���������������������������������������������������������� 349 22–9. Baseline Estimates—Total Homeland Security Funding by Function ����������������������� 349 Appendix -- Homeland Security Mission Funding by Agency and Budget Account �������������������� * Federal Drug Control Funding 23–1. Federal Drug Control Funding, 2014–2016 ����������������������������������������������������������������� 351 *Available on the Internet at http://www.budget.gov/budget/Analytical_Perspectives and on the Budget CD-ROM ix Page Technical Budget Analyses Current Services Estimates 25–1. Category Totals for the Adjusted Baseline ������������������������������������������������������������������� 363 25–2. Summary of Economic Assumptions ���������������������������������������������������������������������������� 364 25–3. Baseline Beneficiary Projections for Major Benefit Programs ������������������������������������ 366 25–4. Impact of Regulations, Expiring Authorizations, and Other Assumptions in the Baseline ������������������������������������������������������������������������������� * 25–5. Receipts by Source in the Projection of Adjusted Baseline ����������������������������������������� 367 25–6. Effect on Receipts of Changes in the Social Security Taxable Earnings Base ����������� 367 25–7. Change in Outlay Estimates by Category in the Adjusted Baseline �������������������������� 368 25–8. Outlays by Function in the Adjusted Baseline ������������������������������������������������������������ 369 25–9. Outlays by Agency in the Adjusted Baseline ��������������������������������������������������������������� 370 25–10. Budget Authority by Function in the Adjusted Baseline �������������������������������������������� 371 25–11. Budget Authority by Agency in the Adjusted Baseline ����������������������������������������������� 372 25–12. Current Services Budget Authority and Outlays by Function, Category and Program ������������������������������������������������������������������������������������* Trust Funds and Federal Funds 26–1. Receipts, Outlays and Surplus or Deficit by Fund Group ������������������������������������������� 374 26–2. Comparison of Total Federal Fund and Trust Fund Receipts to Unified Budget Receipts, Fiscal Year 2014 ������������������������������������������������������������������������������������������ 376 26–3. Income, Outgo, and Balances of Trust Funds Group ��������������������������������������������������� 377 26–4. Income, Outgo, and Balance of Major Trust Funds ����������������������������������������������������� 379 26–5. Income, Outgo, and Balance of Selected Special Funds ���������������������������������������������� 386 Comparison of Actual to Estimated Totals 27–1. Comparison Of Actual 2014 Receipts with the Initial Current Services Estimates �� 387 27–2. Comparison Of Actual 2014 Outlays with the Initial Current Services Estimates ��� 388 27–3. Comparison Of The Actual 2014 Deficit with the Initial Current Services Estimate ������������������������������������������������������������������������������������������������������� 389 27–4. Comparison of Actual and Estimated Outlays for Mandatory and Related Programs Under Current Law ����������������������������������������������������������������������������������� 390 27-5. Reconciliation of Final Amounts For 2014 ������������������������������������������������������������������� 391 Detailed Functional Tables 28–1. Budget Authority and Outlays by Function, Category and Program ������������������������������* Federal Budget by Agency and Account 29–1. Federal Budget by Agency and Account ����������������������������������������������������������������������������* *Available on the Internet at http://www.budget.gov/budget/Analytical_Perspectives and on the Budget CD-ROM x INTRODUCTION 1 2 1. INTRODUCTION The Analytical Perspectives volume presents analyses that highlight specific subject areas or provide other significant data that place the President’s 2016 Budget in context and assist the public, policymakers, the media, and researchers in better understanding the budget’s effects on the Nation. This volume complements the main Budget volume, which presents the President’s budget policies and priorities, and the Budget Appendix volume, which provides appropriations language, schedules for budget expenditure accounts, and schedules for selected receipt accounts. 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 volume. Beginning with the 1995 Budget, the volume has been named Analytical Perspectives. Several supplemental tables as well as several longer tables that were previously published within the volume are available at http://www.budget.gov/budget/ Analytical_Perspectives and on the Budget CD-ROM. These tables are shown in the List of Tables in the front of this volume with an asterisk instead of a page number. OVERVIEW OF THE CHAPTERS Economic and Budget Analyses Economic Assumptions and Interactions Between the Economy and the Budget. This chapter reviews recent economic developments; presents the Administration’s assessment of the economic situation and outlook, including the effects of macroeconomic policies; compares the economic assumptions on which the 2016 Budget is based with the assumptions for last year’s Budget and those of other forecasters; provides sensitivity estimates for the effects on the Budget of changes in specified economic assumptions; and reviews past errors in economic projections. It also provides estimates of the cyclical and structural components of the budget deficit. Long-Term Budget Outlook. This chapter assesses the long-term budget outlook under policies currently in effect and under the Budget’s proposals as well as progress towards fiscal sustainability since 2010. It focuses on 25-year projections of Federal deficits, debt, and the fiscal gap. It also provides budget projections for a 75-year period, and shows how alternative long-term budget assumptions would produce different results and discusses the actuarial status of the Social Security and Medicare programs. Federal Borrowing and Debt. This chapter analyzes Federal borrowing and debt and explains the budget estimates. It includes sections on special topics such as trends in debt, debt held by the public net of financial assets and liabilities, investment by Government accounts, and the statutory debt limit. Performance and Management Social Indicators. This chapter presents a selection of statistics that offers a numerical picture of the United States and illustrates how this picture has changed over time. Included are economic, demographic and civic, socioeconomic and health statistics. There are also indicators covering security and safety, environment, and energy. Delivering a High-Performance Government. This chapter describes the Administration’s approach to performance management—the Federal Government’s use of performance goals, measurement, regular data-driven reviews, and information dissemination to improve outcomes that matter to the American people and deliver returns on the taxpayers’ investment. It explains why this approach was chosen, progress made, and future plans. It also discusses implementation of the Government Performance and Results Modernization Act. Building Evidence with Administrative Data. This chapter explains the importance of improving access to administrative data, describes some of the key barriers, and outlines the Administration’s agenda, including both Budget proposals and ongoing work. The chapter also explains the strong framework of privacy, confidentiality, and data security protections that governs current uses of administrative data for research purposes, and it explains how these protections would extend to the Budget’s new proposals. Strengthening 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 Federal workforce challenges; presents opportunities for strengthening the personnel system to achieve critical agency missions; and discusses progress in improving employee engagement, performance, and human capital management. 3 4 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 those activities that are included in budget receipts and outlays (and are therefore classified as “budgetary”), as distinguished from those activities that are not included in the Budget (and are therefore classified as “non-budgetary”). The chapter also defines the terms “on-budget” and “off-budget.” Budget Process. This chapter discusses proposals to improve budgeting and fiscal sustainability within individual programs as well as across Government, describes the system of scoring mandatory and revenue legislation for purposes of the Statutory Pay-As-You-Go Act of 2010, and presents proposals to revise the budget baseline and improve budget presentation. Federal Receipts Governmental Receipts. This chapter presents information on estimates of governmental receipts, which consist of taxes and other compulsory collections. It includes detailed descriptions of tax legislation enacted in the last year 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. A detailed table, “Table 13–5, Offsetting Receipts by Type” is available at the Internet address cited above and on the Budget CD-ROM. 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 in the Budget. Detailed tables, including “Table 15–2, Federal Grants to State and Local Governments—Budget Authority and Outlays” and tables showing State-by-State spending for major grant programs, are available at the Internet address cited above and on the Budget CD-ROM. Strengthening Federal Statistics. This chapter discusses 2016 Budget proposals for the Government’s principal statistical programs. Information Technology. This chapter gives an overview of Federal investments in information technology (IT), and the major Administration initiatives to improve the management of Federal data and IT by integrating modern technology solutions to enhance mission and service ANALYTICAL PERSPECTIVES delivery and security. To achieve this, the Administration prioritizes three core objectives across the Federal IT portfolio discussed in the chapter: unlocking enterprise value and opportunities; delivering world-class digital services, including opening Government data to fuel entrepreneurship and innovation; and protecting Federal IT assets and information. Federal Investment. This chapter discusses Federallyfinanced spending that yields long-term benefits. It presents information on annual spending on physical capital, research and development, and education and training. 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 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). Five additional tables address transactions including direct loans, guaranteed loans, and government-sponsored enterprises. These tables are available at the Internet address cited above and on the Budget CD-ROM. Budgetary Effects of the Troubled Asset Relief Program. The chapter provides special analyses of the Troubled Asset Relief Program (TARP) as described in Section 202(a) of the Emergency Economic Stabilization Act of 2008, including information on the costs of TARP activity and its effects on the deficit and debt. 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 and on the Budget CD-ROM. Federal Drug Control Funding. This chapter displays enacted and proposed drug control funding for Federal departments and agencies. Federal Budget Exposure to Climate Risk. This chapter discusses climate change-related risks for the Federal budget, including the potential for rising direct and indirect costs and lost revenue. The chapter presents estimates of costs incurred as a result of the types of extreme weather projected to grow in frequency and intensity as the climate changes, and discusses additional areas of vulnerability across the Federal budget. 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 Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA). Two detailed tables addressing factors that affect the baseline and provide 5 1. INTRODUCTION details of the baseline budget authority and outlays are available at the Internet address cited above and on the Budget CD-ROM. Trust Funds and Federal Funds. This chapter provides summary information about the two fund groups in the budget—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. Comparison of Actual to Estimated Totals. This chapter compares the actual receipts, outlays, and deficit for 2014 with the estimates for that year published in the President’s 2014 Budget. The following materials are available at the Internet address cited above and on the Budget CD-ROM: Detailed Functional Table Detailed Functional Table. Table 28–1, “Budget Authority and Outlays by Function, Category, and Program,” displays budget authority and outlays for major Federal program categories, organized by budget function (such as health care, transportation, or national defense), category, and program. Federal Budget by Agency and Account The Federal Budget by Agency and Account. Table 29–1, “Federal Budget by Agency and Account,” displays budget authority and outlays for each account, organized by agency, bureau, fund type, and account. ECONOMIC AND BUDGET ANALYSES 7 8 2. ECONOMIC ASSUMPTIONS AND INTERACTIONS WITH THE BUDGET This chapter presents the economic forecast on which the 2016 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 the 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. The economy bottomed out in June 2009 and gradually started to recover in late 2009.2 Further measures to aid the recovery were taken in December 2010, such as temporarily cutting payroll taxes and continuing extended unemployment insurance. At the start of 2013, the American Taxpayer Relief Act of 2012 (ATRA) prevented income tax increases on the vast majority of taxpayers and provided greater certainty for the years ahead. However, sequestration cuts that took effect in March 2013 reduced Gross Domestic Product (GDP) and employment growth by 0.6 percentage points and 750,000 jobs, respectively, in calendar year 2013 according to estimates from the Congressional Budget Office (CBO). The government shutdown and debt limit standoff in October 2013 also took a toll on the economy. The Bureau of Economic Analysis estimated that the reduction in hours worked by federal employees during the October 2013 shutdown reduced real GDP growth in the fourth quarter of 2013 by 0.3 percentage points. Over the past 14 months, the Administration and Congress have come together to enact bipartisan legislation mitigating the harmful austerity imposed by sequestration and providing greater certainty. In December 2013, the President signed into law the Bipartisan Budget Act (BBA), undoing a portion of sequestration for 2014 and 2015. Congress followed this action with the enactment of full year appropriations for 2014 in January of last year and full year appropriations for 2015 for almost all departments and agencies in December. In December 1 Economic performance is discussed in terms of calendar years. Budget figures are discussed in terms of fiscal years. Economic growth figures are in real (inflation-adjusted) terms unless otherwise noted. 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. 2013, the Council of Economic Advisers estimated that the relaxation of sequestration achieved through the BBA would add about 350,000 jobs (cumulative) over the twoyear period ending in 2015. Over the past 21 quarters, through the third quarter of 2014, real GDP has grown at an average annual rate of 2.3 percent, and since February 2010, 11.2 million jobs have been added in the private sector. Job growth accelerated during 2014, with the most jobs created in any calendar year since 1999. Meanwhile, the unemployment rate has fallen fairly steadily from its October 2009 peak of 10.0 percent to 5.6 percent in December. The economy is projected to grow at a three percent pace in 2015 and in 2016 and at 2.7 percent in 2017. With healthy economic growth, the unemployment rate is expected to reach the level consistent with full employment by the end of 2015 and continue to decline to 4.8 percent by the end of 2017. The unemployment rate then stabilizes at 5.2 percent by 2020. This chapter contains several sections: • The first section reviews recent economic performance. • The second section discusses the Administration’s economic projections. • The third section compares the Administration’s assumptions with other forecasts and with the Administration’s projection in last year’s Budget. • The fourth section describes how changes in assumptions about key economic variables result in changes in receipts, outlays, and the deficit. • The fifth section presents information on past forecast errors for growth, inflation, and interest rates and how these forecast errors compare with those for forecasts made by the Congressional Budget Office (CBO) and the private-sector Blue Chip Consensus. • The sixth 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. 9 10 ANALYTICAL PERSPECTIVES Recent Economic Performance The accumulated stresses from falling house prices and shrinking homebuilding and the resulting strains on financial markets brought the 2001-2007 expansion to an end in December 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 more severe. By the time it ended, real GDP had fallen further and the downturn had lasted longer than any previous post-World War II recession. The recovery began in the third quarter of 2009, with real growth averaging 2.3 percent since that point, including 2.7 percent for the most recent four quarters, ending 2014-Q3. While the recovery strengthened over the past year, the unemployment rate is still elevated and the long-term unemployment rate remains particularly high. The Administration’s proposals will help to accelerate the return to full employment while also contributing to stronger growth in wages. Accelerating Progress in the Labor Market.— The unemployment rate peaked in 2009 at 10 percent, but has since declined to 5.6 percent. Private employment has grown for the past 58 straight months and December marked the eleventh consecutive month of job growth above 200,000. Moreover, the pace of job creation has jumped from about 195,000 per month in 2012-13 to 235,000 in 2014. However, the unemployment rate remains somewhat above the level consistent with stable inflation, estimated at about 5.2 percent. The rate of longterm unemployment (those out of work for more than 6 months) remains higher than normal for this stage of a recovery, although it has declined 0.7 percentage points over the past year. Domestic Energy Boom and Decline in Oil Prices— In the last five years, there has been a dramatic increase in domestic energy production. The United States is now the world’s largest producer of oil and gas. Over the past year, domestic production of crude oil exceeded imports of oil for the first time since 1995. This broad-based energy boom supports jobs directly in production and distribution, as well as indirectly by making the United States more attractive as a location for manufacturing by multinational firms in energy-intensive industries. The increase in U.S. production, combined with a decline in worldwide oil consumption due to slow growth abroad, increased energy efficiency, and alternative fuel production, led to a dramatic decline in oil prices over the last few months of 2014. The price of West Texas Intermediate crude declined from $107 per barrel in late June to less than $60 per barrel in December. Retail gasoline prices tumbled from $3.78 per gallon to less than $2.50/gallon in December. Although the lower prices may reduce domestic oil production somewhat in the near-term, the net effect on the economy is positive since the United States is still a net oil importer, and consumers and nonoil businesses will benefit from the price drop. Housing Markets Show Further Strength.—The housing market, a major cause of the financial crisis and recession, has shown clear signs of recovery. In 2006- 2007, housing prices peaked and, from 2007 through 2008, housing prices fell sharply according to all available measures.3 During the downturn, as house prices fell, investment in housing plummeted, reducing the rate of real GDP growth by an average of 1 percentage point per year. Housing prices started to rise again in 2012 with a cumulative gain of 16 percent over the last seven quarters, according to the Case-Shiller index. Residential investment began to increase steadily in the second quarter of 2011 and rose at an annual rate of about 14% in 2012 with smaller net increases in 2013 and 2014. In April 2009, housing starts fell to an annual rate of just 478,000 units, the lowest level on record for this series, which dates from 1959. Housing starts rose modestly over the next two years and increased to about one million units per year during 2014. Typically, about 1.65 million starts a year are needed to accommodate the needs of an expanding population with an increasing number of households and to replace older units, indicating potential for a substantial housing rebound. The Administration forecast assumes a continued recovery in housing activity that adds to real GDP growth over the forecast horizon, especially over the next three years. Consumption Steady—Between the first quarter of 2007 and the first quarter of 2009, the real net worth of American households declined by $15 trillion at 2009 prices (19 percent) – the equivalent of 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 household wealth, including financial assets, has risen substantially and now exceeds its previous peak. Most of this rebound is accounted for by the rise in equity prices. The turnaround in housing prices has raised residential wealth, although it remains well below its previous peak.4 In recent quarters, real consumption spending has increased at about a 2-1/2 to 3 percent rate, at or slightly above the long-run growth of the economy. The dramatic fall in oil prices in late 2014 will reduce nominal spending on gasoline and other petroleum products, boost real disposable income, and enable an increase in real spending on other consumer goods and services. Rebound in Business Investment.—Business fixed investment fell sharply during the 2008-2009 contraction. It rose rapidly in 2010 through 2014 and real investment at the end of 2013 exceeded its pre-recession levels for the first time. Real nonresidential fixed investment increased by almost 9 percent in the four quarters ending 2014-Q3 and should remain strong during the next stage of the recovery. The cost of capital is low and American corporations at the end of 2014 held substantial levels of cash reserves, which could provide funding for future investments as the economy continues to recover and 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 CaseShiller index peaked in 2006, while the FHFA index peaked in 2007. 4 Real wealth is computed by deflating household net worth from the Flow-of-Funds Accounts by the Chained Price Index for Personal Consumption Expenditures. Data are available through 2014:Q3. 2. ECONOMIC ASSUMPTIONS AND INTERACTIONS WITH THE BUDGET consumption remains relatively strong. Nevertheless, the pace of future growth could prove to be uneven, as investment tends to be volatile. Fiscal Drag Has Peaked.—Fiscal policy restraint substantially slowed the expansion in 2012-13, but was a much smaller factor in 2014 as the reduction in Federal Government expenditures slowed. In the four quarters ending 2014-Q3, real Federal spending fell by 0.6 percent and was offset by an increase in State and local spending of 0.9 percent. In the prior four quarters, Federal spending fell 7 percent while State and local outlays increased only 0.8 percent. In 2015 and going forward, real government purchases are expected to have a roughly neutral impact on economic growth. Economic Projections The economic projections underlying the 2016 Budget estimates are summarized in Table 2–1. The assumptions are based on information available as of mid-November 2014. This section discusses the Administration’s projections. The next section compares these projections with those of the Federal Reserve’s Open Market Committee (FOMC), the CBO, and the Blue Chip Consensus of private forecasters. As discussed below, the Administration’s economic forecast, as always, is based on the assumption that the Budget proposals are enacted in full. Real GDP.—Real GDP grew 2.7 percent during the four quarters ending 2014-Q3. The Administration projects the economic recovery that began in mid-2009 will continue with real GDP growing at an average annual rate of 2.8 percent over the next four years. Real GDP growth is projected to ease to 2.3 percent by 2019 and to remain at that rate for the final years of the forecast. The slower growth in the last few years is due to the exhaustion of the cyclical factors that are still present in the near term. Demographic factors also lower the labor force participation rate as the baby boom generation retires. Recent recoveries have been somewhat weaker than average, but the last two expansions that began in 1991 and 2001 were preceded by mild recessions, leaving relatively little pent-up demand after conditions improved. Because of the depth of the most recent recession, there was much more room for a rebound in spending and production than was true either in 1991 or 2001. On the other hand, lingering impediments from the credit crisis and other special factors limited the pace of the recovery in the first stages of the expansion, while less favorable demographics also slowed growth relative to previous recoveries. The U.S. economy has substantial 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 has fallen substantially since the recession trough and further progress in the labor market is expected in 2015-16. Monetary policy likely will continue to support growth as inflation remains below the Federal Reserve’s target. However, some European and Asian markets have been troubled by weak economic growth. The drag from a slowdown in foreign countries could hamper the growth of the U.S. economy. 11 Long-Term Growth.—The Administration’s 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. Real GDP grows at a rate of 2.3 percent in the final years of the projection. That is markedly slower than the average growth rate of real GDP since 1947 of 3.2 percent per year. In the 21st Century, real GDP growth in the United States is likely to be 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 due to a decline in the growth of the working-age population. As discussed below, these projections do not include the labor force effects of immigration reform, which has the potential to boost labor force growth. Unemployment.—In December 2014, the overall unemployment rate was 5.6 percent. In line with the increased growth in the economy projected after 2014, the unemployment rate is expected to decline to 4.8 percent by the end of 2017 and rebound modestly to 5.2 percent during the period of trend growth during the last few years of the forecast. The temporary reduction in the unemployment rate compared with the so-called ‘natural rate’ is a consequence of inflation running below the Federal Reserve target rate of 2 percent as measured by the price index for personal consumption expenditures; this leaves room for a further drop in unemployment without inflation exceeding the Federal Reserve target. Inflation.—The Consumer Price Index for all urban consumers (CPI-U) rose by 0.8 percent for the 12 months ending in December 2014, somewhat lower than in 2013. Excluding food and energy, “core” CPI inflation in 2014 was 1.6%, the same as in 2013. The lower rate of overall inflation as compared to the core index was due almost entirely to lower energy price inflation. By year’s end gasoline prices had fallen to a multi-year low. Weak demand, including from abroad, continues to hold down prices for many goods and services and continued elevated unemployment together with other measures of economic slack are expected to result in 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 target of around 2 percent per year. The Administration projects that the rate of change in the CPI-U will average 2.3 percent and that the GDP price index will increase at a 2.0 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 the levels observed before the financial crisis. During 2014, the 10-year rate fell by over 50 basis points to 2-1/4 percent, reversing most of the rise that occurred in 2013 after a temporary rise following the Federal Reserve’s announcement of a phased reduction in its program of quantitative easing. In the Administration’s projections, interest rates are expected to rise, but only 12 ANALYTICAL PERSPECTIVES Table 2–1. ECONOMIC ASSUMPTIONS1 (Calendar years; dollar amounts in billions) Actual 2013 Projections 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Gross Domestic Product (GDP): Levels, dollar amounts in billions: Current dollars ����������������������������������������������������������� Real, chained (2009) dollars �������������������������������������� Chained price index (2009 = 100), annual average ��� 16,768 17,394 18,188 19,039 19,933 20,847 21,770 22,717 23,705 24,736 25,812 26,934 15,710 16,058 16,552 17,049 17,528 17,979 18,406 18,830 19,263 19,706 20,159 20,623 106.7 108.4 109.9 111.7 113.8 116.0 118.3 120.7 123.1 125.6 128.1 130.6 28,106 21,097 133.2 Percent change, fourth quarter over fourth quarter: Current dollars ����������������������������������������������������������� Real, chained (2009) dollars �������������������������������������� Chained price index (2009 = 100) ����������������������������� 4.6 3.1 1.4 3.5 2.1 1.4 4.6 3.0 1.5 4.8 3.0 1.7 4.6 2.7 1.9 4.5 2.5 2.0 4.3 2.3 2.0 4.3 2.3 2.0 4.3 2.3 2.0 4.3 2.3 2.0 4.3 2.3 2.0 4.3 2.3 2.0 4.3 2.3 2.0 Percent change, year over year: Current dollars ����������������������������������������������������������� Real, chained (2009) dollars �������������������������������������� Chained price index (2009 = 100) ����������������������������� 3.7 2.2 1.5 3.7 2.2 1.5 4.6 3.1 1.4 4.7 3.0 1.6 4.7 2.8 1.8 4.6 2.6 2.0 4.4 2.4 2.0 4.3 2.3 2.0 4.3 2.3 2.0 4.3 2.3 2.0 4.3 2.3 2.0 4.3 2.3 2.0 4.3 2.3 2.0 Incomes, billions of current dollars: Domestic Corporate Profits ��������������������������������������� Employee Compensation ������������������������������������������ Wages and salaries ��������������������������������������������������� Other taxable income2 ����������������������������������������������� 1,704 8,845 7,125 4,012 1,672 9,250 7,468 4,134 1,796 1,858 1,861 1,833 1,801 1,763 1,761 1,765 1,779 1,825 9,610 10,036 10,528 11,047 11,570 12,109 12,671 13,259 13,882 14,510 7,746 8,102 8,507 8,939 9,358 9,792 10,236 10,708 11,210 11,713 4,266 4,506 4,771 5,084 5,396 5,708 5,997 6,278 6,554 6,829 1,865 15,173 12,234 7,121 Consumer Price Index (all urban):3 Level (1982–84 = 100), annual average �������������������� Percent change, fourth quarter over fourth quarter ��� Percent change, year over year ��������������������������������� 233.0 1.2 1.5 236.9 1.5 1.7 240.3 1.8 1.4 244.8 2.0 1.9 250.1 2.2 2.1 255.7 2.3 2.2 261.5 2.3 2.3 267.4 2.3 2.3 273.5 2.3 2.3 279.6 2.3 2.3 286.0 2.3 2.3 292.4 2.3 2.3 299.1 2.3 2.3 Unemployment rate, civilian, percent: Fourth quarter level ��������������������������������������������������� Annual average ���������������������������������������������������������� 7.0 7.4 5.7 6.2 5.3 5.4 4.9 5.1 4.8 4.9 4.9 4.9 5.0 5.0 5.2 5.1 5.2 5.2 5.2 5.2 5.2 5.2 5.2 5.2 5.2 5.2 Federal pay raises, January, percent: Military4 ���������������������������������������������������������������������� Civilian5 ���������������������������������������������������������������������� 1.7 0.0 1.0 1.0 1.0 1.0 1.3 1.3 NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA NA 3.4 4.5 3.5 4.5 3.5 4.5 3.5 4.5 Interest rates, percent: 91-day Treasury bills6 ������������������������������������������������� 0.1 * 0.4 1.5 2.4 2.9 3.2 3.3 3.4 10-year Treasury notes ���������������������������������������������� 2.4 2.6 2.8 3.3 3.7 4.0 4.3 4.5 4.5 * 0.05 percent or less. NA = Not Available. 1 Based on information available as of mid-November 2014. 2 Rent, interest, dividend, and proprietors’ income components of personal income. 3 Seasonally adjusted CPI for all urban consumers. 4 Percentages apply to basic pay only; percentages to be proposed for years after 2016 have not yet been determined. 5 Overall average increase, including locality pay adjustments. Percentages to be proposed for years after 2016 have not yet been determined. 6 Average rate, secondary market (bank discount basis). gradually as financial concerns are alleviated and the economy continues to strengthen. The 91-day Treasury bill rate is projected to average about 0.4 percent in 2015, consistent with the Federal Reserve’s announced intentions, and then to rise to 3.6 percent by 2023. The 10-year rate is expected to rise moderately in 2015 and reaches 4.5 percent by 2020. Consistent with the projections for GDP growth, the Administration forecast projects that interest rates will stabilize below their historical averages; both economic theory and historical data suggest that lower GDP growth is associated with lower interest rates. Income Shares.— In the expansion that ended in 2007, hourly labor compensation tended to lag behind the growth in productivity and that was also true for the surge in productivity growth in 2009-2010. Partly as a result, the share of labor compensation was extremely low by historical standards in 2014 at 53 percent of GDP. It is expected to stay near that level through 2018. As employment and wages increase, compensation is projected to rise slightly, reaching 54 percent of GDP in 2025. The share of wages and salaries is expected to rise from 43 percent of GDP in 2014 to 43-1/2 percent in 2025. The share of domestic corporate profits, presently near historic highs, is expected to decline gradually from almost 10 percent in 2014 to 6.6 percent in 2025. 13 2. ECONOMIC ASSUMPTIONS AND INTERACTIONS WITH THE BUDGET Table 2–2. COMPARISON OF ECONOMIC ASSUMPTIONS IN THE 2015 AND 2016 BUDGETS (Calendar years; dollar amounts in billions) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Nominal GDP: 2015 Budget Assumptions1 ������������������������������������������� 2016 Budget Assumptions ��������������������������������������������� 17,560 17,394 18,470 18,188 19,449 19,039 20,478 19,933 21,478 20,847 22,465 21,770 23,475 22,717 24,506 23,705 25,573 24,736 26,687 25,812 27,850 26,934 Real GDP (2009 dollars): 2015 Budget Assumptions1 ������������������������������������������� 2016 Budget Assumptions ��������������������������������������������� 16,208 16,058 16,753 16,552 17,312 17,049 17,872 17,528 18,377 17,979 18,843 18,406 19,303 18,830 19,754 19,263 20,208 19,706 20,673 20,159 21,148 20,623 Real GDP (percent change):2 2015 Budget Assumptions1 ������������������������������������������� 2016 Budget Assumptions ��������������������������������������������� 3.2 2.2 3.4 3.1 3.3 3.0 3.2 2.8 2.8 2.6 2.5 2.4 2.4 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 GDP Price Index (percent change):2 2015 Budget Assumptions 1 ������������������������������������������� 2016 Budget Assumptions ��������������������������������������������� 1.6 1.5 1.8 1.4 1.9 1.6 2.0 1.8 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 Consumer Price Index (all-urban; percent change):2 2015 Budget Assumptions 1 ������������������������������������������� 2016 Budget Assumptions ��������������������������������������������� 1.6 1.7 2.0 1.4 2.1 1.9 2.2 2.1 2.3 2.2 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 2.3 Civilian Unemployment Rate (percent):3 2015 Budget Assumptions 1 ������������������������������������������� 2016 Budget Assumptions ��������������������������������������������� 6.9 6.2 6.4 5.4 6.0 5.1 5.6 4.9 5.4 4.9 5.4 5.0 5.4 5.1 5.4 5.2 5.4 5.2 5.4 5.2 5.4 5.2 91-day Treasury bill rate (percent):3 2015 Budget Assumptions 1 ������������������������������������������� 2016 Budget Assumptions ��������������������������������������������� 0.1 * 0.3 0.4 1.2 1.5 2.3 2.4 3.2 2.9 3.6 3.2 3.7 3.3 3.7 3.4 3.7 3.4 3.7 3.5 3.7 3.5 3.0 2.6 3.5 2.8 4.0 3.3 4.3 3.7 4.6 4.0 4.7 4.3 4.9 4.5 5.0 4.5 5.0 4.5 5.0 4.5 5.0 4.5 10-year Treasury note rate (percent):3 2015 Budget Assumptions 1 ������������������������������������������� 2016 Budget Assumptions ��������������������������������������������� * 0.05 percent or less. 1 Adjusted for July 2014 NIPA revisions. 2 Calendar year over calendar year. 3 Calendar year average. Changes in Economic Assumptions from Last Year’s Budget.—The 2016 Budget forecast reflects economic developments over the past year, but many of the forecast values are similar to those of the 2015 Budget, especially in the long run (see Table 2–2). The current Budget anticipates less rapid growth in 2014-2018 than the prior Budget, but assumes the same 2.3 percent rate of potential GDP growth in the long run. The ultimate projection for the unemployment rate has been lowered by 0.2 percentage point, and dips below that rate in the near term. Projected short- and long-term maturity interest rates are slightly lower over the forecast in this year’s Budget, reflecting lower levels of interest rates than expected in 2014 and continued analysis of the relationship between GDP growth and interest rates. Inflation is lower in the near-term, but is projected to return to its long-run average consistent with Federal Reserve policy, estimated at 2.3 percent for the CPI-U and 2.0 percent for the GDP price index. Comparison with Other Forecasts Table 2–3 compares the economic assumptions for the 2016 Budget with projections by CBO, the Blue Chip Consensus—an average of about 50 private-sector economic forecasts—and, for some variables, the Federal Reserve Open Market Committee. These other forecasts differ from the Administration’s projections, but the differences are relatively small compared with the margin of error in all economic forecasts. Like the Administration’s forecast, the other forecasts project that real GDP will continue to grow as the economy returns to a normal level of unemployment. The forecasts also agree that inflation will be low and that interest rates will eventually rise to more normal levels, but below the historical average. The Administration projections were completed in mid-November, meaning that they do not reflect new data, such as the revision in real GDP to 5.0 percent in the third quarter of 2014. The nearly three-month lag between that date and the Budget release is due to the long lead time required to complete the estimates for agency programs that are incorporated in the Budget. The Blue Chip Consensus for 2015-2025 in this table was the latest available, from early January for projections through 2016 and from October for long-term projections. The CBO forecast is from the August 2014 update, because the January 2015 Budget Outlook was not available as 14 ANALYTICAL PERSPECTIVES Table 2–3. COMPARISON OF ECONOMIC ASSUMPTIONS (Calendar years) 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Nominal GDP: 2016 Budget �������������������������������������������������������������� CBO ��������������������������������������������������������������������������� Blue Chip ������������������������������������������������������������������� 17,394 17,336 17,434 18,188 18,204 18,258 19,039 19,169 19,154 19,933 20,119 20,084 20,847 21,009 21,019 21,770 21,916 21,975 22,717 22,855 22,975 23,705 23,821 23,997 24,736 24,816 25,064 25,812 25,839 26,179 26,934 26,886 27,344 28,106 NA 28,560 Real GDP (year-over-year): 2016 Budget �������������������������������������������������������������� CBO ��������������������������������������������������������������������������� Blue Chip ������������������������������������������������������������������� 2.2 1.5 2.4 3.1 3.2 3.2 3.0 3.5 2.9 2.8 3.0 2.7 2.6 2.4 2.5 2.4 2.3 2.4 2.3 2.3 2.4 2.3 2.2 2.3 2.3 2.2 2.3 2.3 2.1 2.3 2.3 2.0 2.3 2.3 NA 2.3 Real GDP (fourth-quarter-over-fourth-quarter): 2016 Budget �������������������������������������������������������������� 2.1 3.0 3.0 2.7 CBO ��������������������������������������������������������������������������� 1.5 3.4 3.4 2.7 Blue Chip ������������������������������������������������������������������� 2.5 2.9 2.8 2.7 Federal Reserve Central Tendency 3 ������������������������� 2.3 to 2.4 2.6 to 3.0 2.5 to 3.0 2.3 to 3.5 2.5 2.3 2.4 2.3 2.3 2.4 2.3 2.2 2.4 2.3 2.3 2.2 2.1 2.3 2.3 2.0 to 2.3 longer run 2.3 2.1 2.3 2.3 2.0 2.3 2.3 NA 2.3 GDP Price Index:1 2016 Budget �������������������������������������������������������������� CBO ��������������������������������������������������������������������������� Blue Chip ������������������������������������������������������������������� 1.5 1.7 1.5 1.4 1.8 1.5 1.6 1.7 2.0 1.8 1.9 2.1 2.0 2.0 2.1 2.0 2.0 2.1 2.0 2.0 2.1 2.0 2.0 2.1 2.0 2.0 2.1 2.0 2.0 2.1 2.0 2.0 2.1 2.0 NA 2.1 Consumer Price Index (CPI-U):1 2016 Budget �������������������������������������������������������������� CBO ��������������������������������������������������������������������������� Blue Chip ������������������������������������������������������������������� 1.7 2.0 1.6 1.4 2.2 0.8 1.9 2.0 2.2 2.1 2.1 2.3 2.2 2.2 2.4 2.3 2.3 2.3 2.3 2.4 2.3 2.3 2.4 2.3 2.3 2.4 2.3 2.3 2.4 2.3 2.3 2.4 2.3 2.3 NA 2.3 Unemployment Rate:2 2016 Budget �������������������������������������������������������������� CBO ��������������������������������������������������������������������������� Blue Chip ������������������������������������������������������������������� Federal Reserve Central Tendency3 �������������������������� 6.2 5.4 5.1 4.9 6.2 5.9 5.8 5.7 6.2 5.5 5.1 5.2 5.8 5.2 to 5.3 5.0 to 5.2 4.9 to 5.3 4.9 5.6 5.2 5.0 5.6 5.3 5.1 5.6 5.3 5.2 5.2 5.6 5.6 5.4 5.4 5.2 to 5.5 longer run 5.2 5.5 5.4 5.2 5.5 5.4 5.2 NA 5.4 * 0.1 * 2.9 3.1 3.4 3.2 3.5 3.4 3.3 3.5 3.4 3.4 3.5 3.4 3.4 3.5 3.4 3.5 3.5 3.4 3.5 3.5 3.4 3.5 NA 3.4 4.3 4.7 4.4 4.5 4.7 4.5 4.5 4.7 4.5 4.5 4.7 4.5 4.5 4.7 4.5 4.5 4.7 4.5 4.5 NA 4.5 Interest Rates:2 91-Day Treasury Bills (discount basis): 2016 Budget �������������������������������������������������������� CBO ��������������������������������������������������������������������� Blue Chip ������������������������������������������������������������� 0.4 0.3 0.4 1.5 1.1 1.7 2.4 2.1 2.9 10-Year Treasury Notes: 2016 Budget �������������������������������������������������������� 2.6 2.8 3.3 3.7 4.0 CBO ��������������������������������������������������������������������� 2.8 3.2 3.8 4.2 4.6 Blue Chip ������������������������������������������������������������� 2.5 2.7 3.4 4.2 4.4 * 0.05 percent or less. NA = Not Available. Sources: Administration; CBO, An Update to the Budget and Economic Outlook: Fiscal Years 2014 to 2024; October 2014 and January 2015 Blue Chip Economic Indicators, Aspen Publishers, Inc.; Federal Reserve Open Market Committee, December 18, 2013. 1 Year-over-year percent change. 2 Annual averages, percent. 3 Average of 4th quarter values. this volume went to print. The FOMC members’ central tendencies of their forecasts date from December 2014. Real GDP Growth.—Between 2015 and 2018, the Administration expects slightly more growth than Blue Chip and CBO, partly because the forecast assumes that all of the Budget proposals will be enacted (see discussion below). In the out-years, the Administration projects the same growth as the Blue Chip consensus, but stronger GDP growth than CBO. The difference from the CBO forecast principally reflects different assumptions about productivity. The Administration projects that still-high levels of unemployment and low inflation imply a few years of higher-than-normal growth as employment increases, the unemployment rate falls temporarily below 5 percent, and real GDP makes up the lost ground. In the Blue Chip projections, real GDP growth exceeds its long-run average only briefly in the 11-year forecast period. CBO anticipates a stronger recovery than Blue Chip between 2015 2. ECONOMIC ASSUMPTIONS AND INTERACTIONS WITH THE BUDGET and 2017—close to the Administration’s projection—but projects a sharper decline in growth in the later years than the Administration, Blue Chip, or the FOMC. CBO assumes slower growth in productivity and potential GDP in the long-term and also assumes that actual GDP will remain below potential after the economy has completed its cyclical recovery. The high end of the FOMC’s projections is about the same as the Administration’s. All economic forecasts are subject to error, and looking back, past forecast errors are generally much larger than the forecast differences discussed above. As discussed in a section later in this chapter, past forecast errors among the Administration, CBO, and the Blue Chip have been roughly similar. Unemployment, Inflation, and Interest Rates.— The Administration projects unemployment falling steadily over the next few years to a level of 4.8 percent at the end of 2017 and returning to 5.2 percent by the end of the forecast. The other forecasts are slightly less optimistic about employment in the long run. 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 two percent per year, which is consistent with the Federal Reserve’s long-run policy goal. All forecasts have interest rates increasing substantially in the long run to similar levels. Effects of policy on growth.— The Administration’s 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 it is safe to assume that they do not generally assume full enactment of the Administration’s budget proposals. CBO is required in making its projections to assume that current law will continue. The Administration’s Budget proposals provide important support for growth. They include: • A major investment in infrastructure through a six- year surface transportation reauthorization proposal, as well as additional investments in infrastructure, education and research. • Business tax reform that will boost the economy by moving to a more neutral tax system and improving the allocation of investment. • Policies to boost labor supply, particularly among fe- male workers, such as expansion of child care subsidies and the Child and Dependent Care Tax Credit, support for State paid leave programs, and creation of a second earner tax credit, as well as an expansion of the Earned Income Tax Credit for workers without children and noncustodial parents. • Comprehensive immigration reform. The Budget includes an allowance for immigration reform that takes into account its effects on population and the labor force. Therefore, the economic projections do not include the effects of immigration reform on population and employment, to avoid double counting. However, the allowance does not incorporate immi- 15 gration reform’s significant positive effects on total factor productivity. • Deficit reduction. The Budget would reduce deficits to sustainable levels and put debt on a declining path as a share of GDP, with positive effects on private investment and growth. 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 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 consumer price indices. Medicare and Medicaid outlays are affected directly by the prices paid for 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 changes in key 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 which does not account for how policymakers might change taxes and spending 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 employ- 16 ANALYTICAL PERSPECTIVES ment 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, the rate of growth of real GDP reflects mainly the rates of growth of productivity and the labor force because cyclical changes tend to offset each other over the longer term. Expected inflation and interest rates are also closely interrelated: a higher expected rate of inflation increases nominal interest rates, while lower expected inflation reduces them. 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 lasting effects if they permanently raise or lower 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. Highlights of the budgetary effects of these rules of thumb are shown in Table 2-4. For real growth and employment: • The first block shows the effect of a temporary re- duction 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 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 recoupment of the lost growth, accompanied by 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 percent- age 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 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 policymakers have traditionally prevented inflation 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 in- terest 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 per- centage point increase in inflation in the CPI and GDP price index 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. 17 2. ECONOMIC ASSUMPTIONS AND INTERACTIONS WITH THE BUDGET Table 2–4. SENSITIVITY OF THE BUDGET TO ECONOMIC ASSUMPTIONS (Fiscal years; in billions of dollars) Budget effect 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Total of Effects, 2015– 2025 Real Growth and Employment: Budgetary effects of 1 percent lower real GDP growth: (1) For calendar year 2015 only, with real GDP recovery in 2015–17: Receipts ����������������������������������������������������������������������������� Outlays ������������������������������������������������������������������������������ Increase in deficit (+) ���������������������������������������������������� –18.9 5.6 24.5 –30.1 14.3 44.4 –13.6 8.1 21.7 –1.3 2.8 4.1 0.3 2.9 2.6 0.3 3.2 2.8 0.3 3.3 3.0 0.3 3.4 3.2 0.2 3.6 3.4 0.3 3.7 3.4 0.2 3.8 3.6 –62.1 54.7 116.8 (2) For calendar year 2015 only, with no subsequent recovery: Receipts ����������������������������������������������������������������������������� Outlays ������������������������������������������������������������������������������ Increase in deficit (+) ���������������������������������������������������� –18.9 5.6 24.5 –40.2 17.4 57.6 –46.0 21.1 67.1 –48.4 24.3 72.8 –51.1 27.7 78.8 –53.9 31.0 84.9 –57.1 34.5 91.6 –60.4 38.5 98.9 –63.8 42.9 106.7 –67.2 47.5 114.7 –70.6 52.4 123.0 –577.7 342.9 920.6 (3) Sustained during 2015–2025, with no change in unemployment: Receipts ����������������������������������������������������������������������������� Outlays ������������������������������������������������������������������������������ Increase in deficit (+) ���������������������������������������������������� –19.1 –0.1 19.0 –62.4 –116.5 –175.4 –239.6 –308.8 –384.7 –467.1 –556.6 –652.9 –753.9 0.1 2.2 6.6 13.2 22.3 33.6 47.6 64.2 84.0 106.7 62.5 118.7 182.0 252.8 331.1 418.3 514.7 620.8 736.9 860.6 –3,737.1 380.4 4,117.6 Inflation and Interest Rates: Budgetary effects of 1 percentage point higher rate of: (4) Inflation and interest rates during calendar year 2015 only: Receipts ����������������������������������������������������������������������������� Outlays ������������������������������������������������������������������������������ Decrease in deficit (–) ��������������������������������������������������� 26.6 27.3 0.7 55.7 44.7 –11.0 54.7 38.1 –16.6 51.5 38.3 –13.2 54.4 38.2 –16.2 74.0 34.7 –39.4 636.6 401.0 –235.6 (5) Inflation and interest rates, sustained during 2015–2025: Receipts ����������������������������������������������������������������������������� Outlays ������������������������������������������������������������������������������ Decrease in deficit (–) ��������������������������������������������������� 26.6 25.3 –1.3 86.5 75.1 –11.4 148.2 119.9 –28.3 208.2 162.5 –45.7 277.0 356.9 443.2 534.8 635.1 743.6 858.5 207.2 252.8 297.5 346.9 390.0 432.1 484.8 –69.8 –104.1 –145.7 –187.8 –245.1 –311.6 –373.7 4,318.6 2,794.1 –1,524.5 (6) Interest rates only, sustained during 2015–2025: Receipts ����������������������������������������������������������������������������� Outlays ������������������������������������������������������������������������������ Increase in deficit (+) ���������������������������������������������������� 7.4 15.0 7.6 24.2 44.4 20.2 33.0 68.0 35.0 34.9 87.8 52.9 (7) Inflation only, sustained during 2015–2025: Receipts ����������������������������������������������������������������������������� Outlays ������������������������������������������������������������������������������ Decrease in deficit (–) ��������������������������������������������������� 19.1 10.3 –8.8 61.9 31.1 –30.9 114.6 52.9 –61.7 39.2 106.4 67.2 57.3 38.1 –19.3 48.1 125.1 77.0 Forecast Errors for Growth, Inflation, and Interest Rates As discussed in the previous section, the single most important variable that affects the accuracy of the budget 54.8 141.7 86.8 63.9 36.5 –27.4 172.4 236.5 307.1 386.3 473.3 569.1 673.8 785.2 76.6 104.1 132.9 163.4 199.7 232.4 264.7 309.6 –95.8 –132.4 –174.3 –222.8 –273.6 –336.7 –409.0 –475.7 3,799.4 1,577.8 –2,221.7 4.4 63.0 172.2 109.3 70.8 34.4 –36.4 499.0 1,305.4 806.4 4.2 59.0 158.0 99.0 67.2 34.5 –32.6 69.1 200.1 131.0 Interest Cost of Higher Federal Borrowing: (8) Outlay effect of $100 billion increase in borrowing in 2015 ���� 0.1 1.1 2.3 3.0 3.5 3.9 1 The unemployment rate is assumed to be 0.5 percentage point higher per 1.0 percent shortfall in the level of real GDP. 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. 60.6 36.2 –24.3 4.6 66.3 186.6 120.3 4.8 4.9 36.7 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 2-5 shows errors in short- and long-term projections in past Administration forecasts, and compares these errors to those of CBO and the Blue Chip Consensus of private forecasts for real GDP, inflation and short-term interest rates.5 5 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 18 ANALYTICAL PERSPECTIVES Table 2–5. 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. 0.1 1.1 1.5 CBO -0.2 1.1 1.4 Blue Chip -0.2 1.1 1.5 6-Year Average Annual Real GDP Growth Mean Error ���������������������������������������������������������������������������������������� Mean Absolute Error ������������������������������������������������������������������������� Root Mean Square Error ������������������������������������������������������������������ 0.3 0.9 1.1 0.0 0.9 1.2 0.0 0.9 1.2 2-Year Average Annual Change in the GDP Price Index ����������������� Mean Error ���������������������������������������������������������������������������������������� Mean Absolute Error ������������������������������������������������������������������������� Root Mean Square Error ������������������������������������������������������������������ Admin. 0.3 0.7 0.8 CBO 0.2 0.7 0.9 Blue Chip 0.4 0.7 0.8 6-Year Average Annual Change in the GDP Price Index Mean Error ���������������������������������������������������������������������������������������� Mean Absolute Error ������������������������������������������������������������������������� Root Mean Square Error ������������������������������������������������������������������ 0.4 0.6 0.8 0.5 0.7 0.9 0.7 0.9 1.0 2-Year Average 91-Day Treasury Bill Rate ���������������������������������������� Mean Error ���������������������������������������������������������������������������������������� Mean Absolute Error ������������������������������������������������������������������������� Root Mean Square Error ������������������������������������������������������������������ Admin. 0.3 1.0 1.2 CBO 0.4 0.8 1.1 Blue Chip 0.6 1.0 1.2 6-Year Average 91-Day Treasury Bill Rate Mean Error ���������������������������������������������������������������������������������������� Mean Absolute Error ������������������������������������������������������������������������� Root Mean Square Error ������������������������������������������������������������������ 0.6 1.2 1.5 1.1 1.3 1.6 1.3 1.4 1.7 INFLATION ERRORS INTEREST RATE ERRORS In the forecasts made since 1982, over a two-year horizon, the average error in projecting the annual real GDP growth rate was near zero for the Administration, but over a six-year horizon growth was slightly overestimated. Over the two-year period, growth was slightly underestimated by the CBO and Blue Chip. Overall, the differences between the three forecasters were minor. The mean absolute error in the annual average growth rate was about 1.5 percentage point per year for all forecasters for two-year projections and was about one-quarter 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 professional opinions on whether GDP growth is mean reverting are 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 six-year growth rate based on assumptions about the labor force, productivity, and other supply-side factors that affect GDP. from the budgets released starting in February 1982 (1983 Budget) and through February 2012 (2013 Budget), so that the last year included in the projections is 2013. The six-year forecasts are constructed similarly, but the last forecast used is from February 2008 (2009 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. Inflation, as measured by the GDP price index, was overestimated by all forecasters (with Blue Chip having the largest errors) 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 nominal interest rate on the 91-day Treasury bill was also overestimated by all three forecasters, with errors larger for the six-year time horizon. Again this reflects the secular decline in nominal 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 average errors were somewhat less for the Administration than for CBO and the Blue Chip forecasts. Uncertainty and the Deficit Projections The accuracy of the Administration’s 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. Table 2-6 shows total deficit errors as a percentage of GDP for the currentyear forecast in each year’s budget as well as the errors 19 2. ECONOMIC ASSUMPTIONS AND INTERACTIONS WITH THE BUDGET Table 2–6. DIFFERENCES BETWEEN ESTIMATED AND ACTUAL SURPLUSES OR DEFICITS FOR FIVE-YEAR BUDGET ESTIMATES SINCE 1986 (As a percent of GDP) Estimate for budget year plus Current year Budget year estimate estimate One year (BY+1) Two years (BY+2) Three years Four years (BY+3) (BY+4) Average difference 1 ����������������������������������������� 0.6 –0.4 –1.3 –1.8 Average absolute difference 2 �������������������������� 0.9 1.4 2.2 2.8 Standard deviation ������������������������������������������� 0.9 1.9 2.7 3.1 Root Mean Squared Error ������������������������������� 1.1 1.9 3.0 3.6 1 A positive figure represents an overestimate of the deficit or an underestimate of the surplus. 2 Average absolute difference is the difference without regard to sign. for the budget year and four following years. As expected, the size of the average absolute errors increases the farther ahead in the future for which the year the projection is made. Average errors have overestimated the current year’s deficit, but have underestimated future years by increasing amounts. 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 2-1 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 2.5 percent of GDP in 2020, but has a 90 percent chance of being within a range of a surplus of 2.8 percent of GDP and a deficit of 7.7 percent of GDP. 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 –2.2 3.2 3.3 4.0 level consistent with stable inflation, 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 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 the structural deficit. This measure provides a more useful perspective on the stance of fiscal policy than does the unadjusted budget deficit. The portion of the deficit traceable to the response of the automatic stabilizers to the 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 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. Chart 2-1. Range of Uncertainty for the Budget Deficit Percent of GDP 10 Percentiles: 95th 90th 5 75th 0 Forecast -5 25th 10th 5th -10 -15 2015 2016 2017 –2.5 3.5 3.2 4.1 2018 2019 2020 20 ANALYTICAL PERSPECTIVES Table 2–7. THE STRUCTURAL BALANCE (Fiscal years; in billions of dollars) 2013 2014 2015 2016 2017 Unadjusted surplus (–) or deficit ��������������������������������������� 680 485 583 474 463 Cyclical component ������������������������������������������������������� 344 308 241 156 74 Structural surplus (–) or deficit ����������������������������������������� 335 176 342 318 389 2018 479 2019 2020 2021 2022 600 626 2023 2024 635 2025 518 554 639 687 24 –6 –10 3 –1 0 0 0 455 523 564 598 627 634 639 687 (Fiscal years; percent of Gross Domestic Product) Unadjusted surplus (–) or deficit ��������������������������������������� 4.1 2.8 3.2 2.5 2.3 2.3 2.4 2.5 2.6 2.6 2.5 2.4 2.5 Cyclical component ������������������������������������������������������� 2.1 1.8 1.3 0.8 0.4 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Structural surplus (–) or deficit ����������������������������������������� 2.0 1.0 1.9 1.7 2.0 2.2 2.4 2.5 2.5 2.6 2.5 2.4 2.5 –1.0 0.9 –0.2 0.3 0.2 0.2 0.1 0.0 0.0 –0.1 –0.1 0.1 CHANGE IN STRUCTURAL DEFICIT (FISCAL DRAG) �� NOTE: The NAIRU is assumed to be 5.2%. Estimates of the structural deficit, shown in Table 2-7, 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 gains-related receipts and increased the deficit in 2009 and beyond. Some of this decline is cyclical in nature, but economists have not identified the cyclical component of the stock market with any precision and, for that reason, all of the stock market’s effect on capital gains 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 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, which probably understates the cyclical contribution to changes in deficits. 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 unem- ployment rate has fallen, receipts may remain cyclically depressed for some time until these lagged effects have dissipated. The recent recession added substantially to the estimated cyclical component of the deficit, but for all the reasons stated above, the cyclical component is probably understated. As the economy recovers, the cyclical deficit is projected to decline and turns negative after unemployment falls below 5.2 percent, the level assumed to be consistent with stable inflation. During that period, the structural deficit exceeds the total deficit. The estimated cyclical component returns to zero in the out years as unemployment returns to 5.2 percent, leaving only the structural deficit. 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 was 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. In addition, there was 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. The structural deficit shrank by seven percentage points between 2009 and 2014, reflecting the relatively sharp fiscal tightening measures taken during that period. Between 2015 and 2018, the cyclical component of the deficit is projected to decline sharply and falls below zero as the economy recovers at an above-trend rate of GDP growth and the unemployment rate declines temporarily to 4.8 percent. 3. LONG-TERM BUDGET OUTLOOK When the current Administration took office, budget deficits and debt were rising sharply, primarily as a result of the Great Recession. Revenues as a share of Gross Domestic Product (GDP) were at their lowest level since 1950, and spending on countercyclical programs had also risen sharply. As a result of both economic recovery and policy changes, deficits have since fallen rapidly. Last year’s deficit (2.8 percent of GDP) was less than one third the size of the deficit the President inherited, reflecting the fastest sustained deficit reduction since just after World War II. Both the Administration and the Congressional Budget Office (CBO) now project that deficits over the next few years will remain around 3 percent of GDP (even without additional changes in policy), roughly the level consistent with a stable debt-to-GDP ratio. In the wake of this progress in reducing near-term deficits, some observers have questioned whether there has been comparable progress in reducing medium- and, especially, long-term deficits. While the detailed estimates of receipts and outlays in the President’s Budget extend only 10 years, this chapter reviews the longer-term budget outlook, both under a continuation of current policies and under the policies proposed in the Budget. The analysis finds: • Legislation and other developments since 2010 have not only improved near-term projections, they have also substantially improved the medium- and longterm budget outlook. • The most significant sources of progress are lower projected health spending (revised in light of the historically slow health care cost growth rates of the last several years), discretionary policy changes, and revenue increases enacted in the American Taxpayer Relief Act of 2012 (ATRA). • Enacted policy changes, while significant, are insuf- ficient to stabilize debt over the next 10 or 25 years. Additional changes of about 1.1 percent of GDP are needed to achieve fiscal sustainability over the 25year horizon. • The deficit reduction proposed in the President’s Budget is sufficient to achieve fiscal sustainability. With the Budget’s proposals for health, tax, and immigration reforms and other policy changes, debt as a share of GDP declines modestly over the next decade and stabilizes after that. The projections discussed in this chapter are highly uncertain. As highlighted below, small changes in economic or other assumptions can make a large difference to the results. This is even more relevant for projections over longer horizons. For this reason, the chapter focuses pri- marily on 25-year projections, although it also provides budget estimates for a 75-year period, as well as results under different economic assumptions and for different policy scenarios. The chapter also discusses the status of the Social Security and Medicare Hospital Insurance trust funds, which are financed from dedicated revenue sources. The 2016 Budget would extend the life of both the Social Security and Medicare trust funds, through immigration reform and health savings proposals, respectively. Still, additional measures would be needed to achieve 75-year trust fund solvency. The Basis for the Long-Run Projections For the 10-year budget window, the Administration produces both baseline projections, which show how deficits and debt would evolve under current policies, and projections showing the impact of proposed policy changes. Like the budget baseline more generally, long-term projections should provide policymakers with information about the Nation’s expected fiscal trajectory in the absence of spending and tax changes. For this reason, the baseline long-term projections in this chapter assume that current policy continues for Social Security, Medicare, Medicaid, other mandatory programs, and revenues.1 (See the appendix for details.) In the case of discretionary spending, it is less clear how to implement a continuation of current policy in the absence of statutory caps, both the Administration’s and CBO’s 10-year baselines assume that discretionary funding levels generally grow slightly above the rate of inflation (about 2.5 percent per year). Long-run projections sometimes assume that discretionary funding remains constant as a share of the economy, implying long-run growth of a little over 4 percent per year. Meanwhile, discretionary funding has failed to even keep pace with inflation, falling by 11 percent in real terms over the past four years. The projections here adopt an intermediate approach, assuming that real per-person discretionary funding remains constant over the long run, which implies an annual growth rate of about 3 percent. For the many discretionary programs that provide services to individuals, it is reasonable to define current policy as maintain1 The long-run baseline projections are consistent with the Budget’s adjusted baseline concept, which departs from current law in two main respects: it assumes continuation of certain tax credits enacted in 2009 but scheduled to expire at the end of calendar year 2017, and it assumes that the Medicare Sustainable Growth Rate (SGR) physician payment reductions do not occur. If Congress continues to pay for SGR relief, as has occurred over the last few years, the projections would be modestly too pessimistic. The Budget’s adjusted baseline concept is explained in more detail in Chapter 25, “Current Services Estimates,” in this volume. 21 22 ANALYTICAL PERSPECTIVES Chart 3-1. Publicly Held Debt Under Continuation of Current Policies Percent of GDP 120 100 80 60 40 20 0 1940 1950 1960 1970 1980 ing the same level of services for the same share of the population, which can be approximated by holding real per-person discretionary funding constant. In contrast, holding discretionary spending constant as a share of GDP effectively assumes large increases in per-person service levels over time, as well as large increases in real funding levels for national defense, research, infrastructure, and other public goods. Long-Run Projections Under Continuation of Current Policies Chart 3-1 shows the path of debt as a share of GDP under continuation of current policies, without the policy changes proposed in the President’s Budget. Over the next 10 years, debt rises modestly from 74 percent of GDP last year to 81 percent of GDP in 2025. Beyond the 10year horizon, debt increases more sharply, reaching 103 percent of GDP by 2040. The key drivers of that increase are an aging population, health care cost growth, and insufficient revenues to keep pace with these trends. Aging population. — Over the next 10 years, an aging population will put significant pressure on the budget. In 2008, when the oldest members of the baby boom generation became eligible for early retirement under Social Security, the ratio of workers to Social Security beneficiaries was 3.2. By the end of the 10-year budget window, that ratio will fall to 2.4, and it will reach about 2.1 in the early 2030s, at which point most of the baby boomers will have retired. With fewer active workers paying taxes and more retired workers eligible for Social Security, Medicare, and Medicaid (including long-term care), budgetary pressures will increase. Social Security program costs will grow from 4.9 percent of GDP today to 5.9 percent of GDP by 2040, with about two thirds of that growth occurring 1990 2000 2010 2020 2030 2040 within the 10-year budget window. Likewise, even if perbeneficiary health care costs grew at the same rate as GDP per capita, Medicare and Medicaid costs would still increase substantially as a share of GDP, due solely to the aging population. Health costs. — Health care costs per capita have risen much faster than per-capita GDP growth for decades, leading both public and private spending on health care to increase as a share of the economy. However, the last few years have seen a sharp departure from long-term trends, with per-capita health costs growing in line with per-capita GDP, and per-beneficiary costs for Medicare growing more slowly than per-capita GDP. While some of the slowdown reflects the Great Recession and its aftermath, there is strong evidence that a portion of it is the result of structural changes. For example, since Medicare beneficiaries are typically retired or disabled, Medicare costs tend to be less sensitive to economic conditions than overall health spending. But Medicare cost growth has slowed in line with the overall slowdown in health care costs, suggesting that the recession was not the primary driver of the recent slowdown, particularly in public programs. Based on projections of Medicare enrollment and expenditures included in the 2014 Medicare Trustees Report, the projections here assume that Medicare perbeneficiary spending growth will accelerate over the next few years, with the growth rate averaging about 0.8 percentage points above the growth rate of per-capita GDP over the next 25 years.2 (This average growth rate is still below the historical average for the last 25 years.) Under these assumptions, Medicare and Medicaid costs increase by a total of 2.6 percentage points as a share of GDP by 2040. 2 For this year’s report, the Trustees’ changed their projections to reflect a projected baseline scenario, which assumes that the sharp physician payment reductions required under the current-law sustainable growth rate formula will be permanently overridden by lawmakers. 23 3. LONG-TERM BUDGET OUTLOOK Chart 3-2. Changes to Projected 2020 Deficit Under Continuation of Current Policies Dollars in billions 1,600 1,400 1,200 Pre-Sequester Spending Cuts 1,000 Sequestration 800 600 Savings from Winding Down Wars 2011 Budget Projection 2016 Budget Projection 400 200 0 Plus Economic & Plus Health Non-Health Technical Revisions Revisions* Plus Discretionary Plus High-Income Policy Changes Revenue Increases * Also includes minor policy changes (e.g. mandatory sequestration). Revenues. — Without any further changes in tax laws, revenues will grow slightly faster than GDP over the long run, but not fast enough to keep pace with the increase in social insurance costs that results from an aging population. The increase in revenues as a share of GDP occurs because individuals’ real, inflation-adjusted incomes grow over time, and so a portion of their income falls into higher tax brackets. (Bracket thresholds are indexed for inflation but do not grow in real terms.) Other programs. — Other mandatory programs are generally projected to decline relative to the size of the economy and to consume a smaller share of revenues over time. For example, spending on non-health safety net programs will decline as incomes grow. Likewise, pension benefits for Federal workers will shrink as a share of the economy as a result of reductions initiated in the 1980s. Overall, spending on mandatory programs outside of health care and Social Security equals 16.7 percent of revenues today, but is projected to equal 15.1 percent of revenues by 2040. Likewise, discretionary spending will consume a smaller share of revenues over time. Fiscal Progress to Date The deficit as a share of the economy began declining in 2010. Since then deficits have fallen rapidly, sharply improving the near-term budget outlook. Taking 2010 as the point of departure, Charts 3-2 and 3-3 show that this progress extends to reducing medium- and long-term deficits and debt. As Chart 3-2 shows, in the 2011 Mid-Session Review, published in July 2010, the Administration projected a 2020 deficit of $1230 billion, or 5.1 percent of GDP under continuation of current policies.3 The 2016 Budget projects 3 For comparability, all projections include continuation of the 2001 and 2003 tax cuts and Alternative Minimum Tax Relief and assume that the Medicare SGR reductions do not take effect. a baseline deficit of $739 billion, or 3.3 percent of GDP in 2020, a reduction of 1.9 percentage points or $491 billion (40 percent). As shown in the chart, one major contributor to the improvement is lower than expected Federal health spending. Revisions to health spending forecasts based on the historically slow growth of the past several years (and based on the assumption that only a portion of the slowdown will continue) will save the Federal government $262 billion in 2020, accounting for about half of the net improvement in the deficit. Another important factor is the high-income revenue increases enacted in ATRA (about a fifth of the net improvement). Discretionary spending restraint has also played a large role, although the impact of sequestration is much less than the impact of the pre-sequestration Budget Control Act cuts and less than the savings from winding down wars.4 There has been a similar improvement in projected long-term deficits and debt. Chart 3-3 shows the projected path of debt as a share of GDP under current policies, as of the 2011 Budget (February 2010) projection of current policy, and as of today.5 A few years ago, debt in 2040 was projected to reach 149 percent of GDP. Today, it is pro4 To simplify the comparisons of projected health spending, these comparisons start from the 2011 Mid-Session Review, following the enactment of the Affordable Care Act. However, the ACA itself also reduced projected deficits. CBO estimated that the ACA would reduce the deficit by $25 billion in 2020 and by over $1 trillion in the decade starting in 2023. These direct, scored effects of the ACA are separate from any contributions to the broader health care cost growth slow-down, discussed below. 5 The “2010 projections” are based on 2010 data and Trustees assumptions but - for comparability - use the Administration’s current methodology for long-term projections, in particular assuming that discretionary funding grows with inflation plus population growth. While the Administration did not produce a comparable long-term projection for the 2011 Mid-Session Review, the long-term projections from the 2011 Budget projection of current policy can be used to illustrate the fiscal improvements achieved since 2010; the comparison relative to the 2011 Mid-Session Review would be qualitatively similar. 24 ANALYTICAL PERSPECTIVES Chart 3-3. Comparison of Publicly Held Debt Percent of GDP 160 2011 Budget Continuation of Current Policies 140 120 100 2016 Budget Continuation of Current Policies 80 60 40 20 2000 2005 2010 2015 jected to reach 103 percent of GDP. While it is difficult to precisely decompose the contributing factors over long periods, the major drivers behind the improvement are the same: lower projected health care costs, revenue increases from ATRA, and lower discretionary spending. The Fiscal Gap One way to quantify the size of the Nation’s long-term fiscal challenges is the “fiscal gap.” The fiscal gap is defined as the present value of the combined increase in taxes or reduction in non-interest spending needed to keep the debt-to-GDP ratio stable over a given period (more precisely, the present value adjustment required for the debt-to-GDP ratio at the end of the period to equal its level at the beginning of the period). If publicly held debt at the end of the period is projected to be lower than current debt, there is a fiscal surplus rather than a fiscal gap. Table 3-1 shows the 25-year fiscal gap under the baseline projections, under the President’s policies, and as of 2010. Under the base case current policy projections, the 25-year fiscal gap is 1.1 percent of GDP. This means that policy adjustments of about 1.1 percent of GDP would be needed each year to put the Nation on a sustainable fiscal course for the next two-and-a-half decades. For context, this is equivalent to about half the legislated deficit reduction since 2010. In contrast, as of 2010, adjustments of 2.4 percent of GDP would have been needed to achieve the goal of stabilizing debt over 25 years. While the two values are not strictly comparable (due to the different 25-year time periods), the difference underscores the significant improvement in the fiscal outlook over the last few years. 2020 2025 2030 2035 2040 The Impact of 2016 Budget Policies on the Long-Term Fiscal Outlook The President’s 2016 Budget proposes non-interest spending reductions and revenue increases equal to about 1.4 percent of GDP when fully in effect, sufficient to put the Nation on a fiscally sustainable course over the next 25 years. As shown in Chart 3-4, over the 10-year budget window, the Budget brings down deficits to about 2.5 percent of GDP and modestly reduces the debt-to-GDP ratio. Over the subsequent decade and a half, the debt-to-GDP ratio remains stable at 73 percent of GDP. The Budget policies result in a small 25-year fiscal surplus of 0.1 percent of GDP. Table 3–1. 25-YEAR FISCAL GAP (–)/SURPLUS (+) UNDER BUDGET POLICIES (Percent of GDP) 2011 Budget Continuation of Current Policies �������������������������������������������������� 2016 Budget Continuation of Current Policies �������������������������������������������������� 2016 Budget Policy –2.4 –1.1 0.1 Breakdown of changes in 2016 Budget Policy: Health reform ������������������������������������������������������������������������������������������ Tax reform ����������������������������������������������������������������������������������������������� Immigration reform ��������������������������������������������������������������������������������� Other policies ������������������������������������������������������������������������������������������ +0.3 +0.3 +0.1 +0.5 In addition to paying for all new investments, the 2016 Budget reduces deficits and debt through health, tax, and immigration reform. Additional health reforms building on the ACA.— As discussed above, the last few years have seen historically slow growth in health care spending in both Medicare and the private market. While the slowdown reflects a variety of factors, there is evidence that the 25 3. LONG-TERM BUDGET OUTLOOK Chart 3-4. 2016 Budget Policies Surplus(+)/Deficit(-) as a percent of GDP 4 2 0 Full 2016 Budget Policy -2 Immigration Reform Tax Reform -4 Continuation of Current Policies Health Policy -6 -8 -10 -12 2000 2005 2010 2015 reforms enacted in the Affordable Care Act are already contributing to this slowdown, as discussed below. The 2016 Budget builds on the ACA with about $400 billion of additional health savings that will strengthen the Medicare trust fund, create incentives for both providers and beneficiaries to choose more cost-effective methods of care, and improve health care quality. The Budget also backstops these savings with a proposal to strengthen the Independent Payment Advisory Board (IPAB) by lowering its target growth rate to 0.5 percentage points above percapita GDP growth.6 As shown in Chart 3-4 and Table 3-1, these reforms have a large effect on the long-run budget outlook, reducing the fiscal gap by 0.3 percent of GDP. Tax reform.— The Budget’s tax reform proposals increase revenues by about $640 billion over the first 10 years by curbing inefficient tax benefits for high-income households, as discussed in Chapter 12, “Governmental Receipts,” of this volume. These tax reforms reduce the fiscal gap by an additional 0.3 percent of GDP. Commonsense immigration reform.— The 2016 Budget continues to propose commonsense, comprehensive immigration reform that would strengthen border security, modernize the legal immigration system, and provide a path to earned citizenship. By adding younger workers to the labor force, immigration reform would help balance an aging population as the baby boom generation retires. CBO estimates that the 2013 Senate-passed immigration bill would have reduced deficits by almost $1 6 The ACA established an Independent Payment Advisory Board (IPAB) that is required to propose changes in Medicare should Medicare per beneficiary cost growth exceed target growth rates specified in law; such IPAB-proposed changes would take effect automatically, unless overridden by the Congress. The Budget includes a proposal that would strengthen the IPAB mechanism by lowering the target growth rate applicable for 2020 onward from GDP +1.0 percentage points to GDP +0.5 percentage points. 2020 2025 2030 2035 2040 trillion over 20 years. It would also boost economic growth and strengthen Social Security. The Budget’s 10-year projections include an allowance for deficit reduction from immigration reform based on the CBO estimate. The long-run projections are based on CBO’s “second-decade” estimate extended as a constant share of GDP from 2035 to 2040. As shown in Chart 3-4 and Table 3-1, higher immigration has a positive effect on the budget, reducing the fiscal gap by an additional 0.1 percentage points. Other 2016 Budget policies.— The remaining policies in the 2016 Budget reduce the fiscal gap by 0.5 Table 3–2. 25-YEAR FISCAL GAP (–)/SURPLUS (+) UNDER ALTERNATIVE BUDGET SCENARIOS (Percent of GDP) 2016 Budget Continuation of Current Policies �������������������������������������������������� –1.1 Health: Excess cost growth averages 1.5% �������������������������������������������������������������� Zero excess cost growth ������������������������������������������������������������������������������� –1.8 –0.5 Discretionary Outlays: Grow with inflation ���������������������������������������������������������������������������������������� Grow with GDP ��������������������������������������������������������������������������������������������� –1.0 –1.4 Revenues: Income tax brackets are regularly increased ������������������������������������������������ –1.3 Productivity and Interest: 1 Productivity grows by 0.25 percentage point per year faster than the base case ��������������������������������������������������������������������������������������������������������� –0.3 Productivity grows by 0.25 percentage point per year slower than the base case ��������������������������������������������������������������������������������������������������������� –1.9 1 Interest rates adjust commensurately with increases or decreases in productivity. percentage points. The Budget obtains these additional savings from ending our combat mission in Afghanistan and from additional spending reductions and tax changes beyond those needed to pay for its investments in education, infrastructure, research, and other areas. 26 ANALYTICAL PERSPECTIVES Chart 3-5. Alternative Productivity and Interest Assumptions Surplus(+)/Deficit(-) as a percent of GDP 4 2 0 Continuation of Current Policies -2 Higher Productivity Growth -4 -6 Lower Productivity Growth -8 -10 -12 2000 2005 2010 2015 Uncertainty and Alternative Assumptions Future budget outcomes depend on a host of unknowns: changing economic conditions, unforeseen international developments, unexpected demographic shifts, and unpredictable technological advances. These uncertainties make even short-run budget forecasting quite difficult. For example, a 90 percent confidence interval around the budget’s five-year deficit projection extends from a deficit of 7.7 percent of GDP to a surplus of 2.8 percent of GDP. The longer budget projections are extended, the more the uncertainties increase. Table 3-2 gives a sense of the degree of uncertainty in the 25-year projections under continuation of current policies. Under plausible alternative assumptions, the 25-year fiscal gap ranges from a gap of 1.9 percent of GDP to a gap of 0.3 percent of GDP. Alternative assumptions considered include: Productivity and interest rates.—The rate of future productivity growth has a major effect on the long-run budget outlook (see Chart 3–5). Higher productivity growth improves the budget outlook, because it adds directly to the growth of the major tax bases while having a smaller effect on outlay growth. Meanwhile, productivity and interest rates tend to move together, but have opposite effects on the budget. Economic growth theory suggests that a 0.1 percentage point increase in productivity should be associated with a roughly equal increase in interest rates. Productivity growth is also highly uncertain. For much of the last century, output per hour in nonfarm business grew at an average rate of around 2.2 percent per year, but there were long periods of sustained output growth at notably higher and lower rates than the long-term average. The base case long-run projections assume that real GDP per hour worked will grow at an average annual rate of 1.8 percent per year, slower than the historical average, and assumes interest rates on 10-year Treasury securi- 2020 2025 2030 2035 2040 ties of 4.5 percent. The alternative scenarios highlight the effect of raising and lowering the projected productivity growth rate by 0.25 percentage point and changing interest rates commensurately. The 25-year fiscal gap ranges from a fiscal gap of 0.3 percent of GDP in the high productivity scenario to a gap of 1.1 percent of GDP in the base case and 1.9 percent of GDP in the low productivity scenario. Health spending.—Health care cost growth represents another large source of uncertainty in the long-term budget projections (see Chart 3-6). As noted above, the baseline projections follow the Medicare Trustees in assuming that Medicare per-beneficiary costs grow an average of about 0.8 percentage points faster than per-capita GDP growth over the next 25 years. But historically, especially prior to 1990, health care costs grew even more rapidly. Conversely, over the last few years, per-capita health care costs have grown roughly in line with GDP per-capita and even more slowly in Medicare and Medicaid. As noted above, there is evidence that a significant portion of the recent decline in health care cost growth is structural (rather than related to the recession), and that the ACA is playing a contributing role, for example through Medicare provider payment reforms and incentives for hospitals to reduce readmissions. The ACA also enacted an array of more fundamental delivery system reforms that encourage efficient, high-quality care, including incentives for the creation of accountable care organizations and the launch of a wide variety of payment reform demonstrations. Though in their early stages, these reforms have generated promising early results and could have major effects on health care quality and cost going forward. Table 3-2 shows the large impact that either slower or faster health care cost growth would have on the budget. If health care cost growth averaged 1.5 percentage points, instead of roughly 0.8 percentage points, faster than per- 27 3. LONG-TERM BUDGET OUTLOOK Chart 3-6. Alternative Health Care Costs Surplus(+)/Deficit(-) as a percent of GDP 4 2 0 Continuation of Current Policies -2 Lower Average Cost Growth -4 -6 Higher Average Cost Growth -8 -10 -12 2000 2005 2010 2015 capita GDP growth, the current policy 25-year fiscal gap would increase from 1.1 to 1.8 percent of GDP. If health care costs grew with GDP per capita, the 25-year fiscal gap would be 0.5 percent of GDP. Policy assumptions.— As evident from the discussion of the 2016 Budget, policy choices will also have a large impact on long-term budget deficits and debt. The current base projection for discretionary spending assumes that after 2025, discretionary spending grows with inflation and population (see Chart 3–7). As discussed above, alternative assumptions are to grow discretionary spending with GDP or inflation. As shown in Table 3–2, the 25-year fiscal gap increases from 1.1 percent of GDP in the base case to 1.4 percent of GDP in the growth with GDP scenario, and falls to 1.0 percent of GDP in the growth with inflation scenario. 2020 2025 2030 2035 2040 In the base case projection, tax receipts rise gradually relative to GDP as real incomes rise, consistent with what would occur under current law. Chart 3–8 shows alternative receipts assumptions. Assuming that Congress will act to cut taxes to avoid the revenue increases associated with rising incomes would bring about higher deficits and publicly held debt. The 25-year fiscal gap rises from 1.1 percent of GDP in the base case to 1.3 percent of GDP in the alternative case. Finally, Chart 3-9 shows how uncertainties magnify over a 75-year forecast horizon. As the chart shows, under the baseline projections, without policy changes, debt exceeds 100 percent of GDP by 2038 before starting a slow decline in the very long run. Alternatively, assuming a combination of slower productivity growth and higher health care cost growth results in a debt explosion, Chart 3-7. Alternative Discretionary Projections Surplus(+)/Deficit(-) as a percent of GDP 4 2 0 Continuation of Current Policies -2 Discretionary Spending Grows with Inflation -4 -6 Discretionary Grows with GDP -8 -10 -12 2000 2005 2010 2015 2020 2025 2030 2035 2040 28 ANALYTICAL PERSPECTIVES Chart 3-8. Alternative Revenue Projections Surplus(+)/Deficit(-) as a percent of GDP 4 2 0 -2 Continuation of Current Policies -4 -6 Tax Brackets Regularly Increased -8 -10 -12 2000 2005 2010 2015 2020 with debt-to-GDP reaching 460 percent by the end of the window. Meanwhile, assuming a combination of higher productivity growth and slower health care cost growth results in the debt being completely paid off by 2061. Despite the striking uncertainties, long-term projections are helpful in highlighting some of the known budget challenges on the horizon, especially the impact of an aging population. In addition, the projections highlight the need for policy awareness and potential action to address drivers of future budgetary costs. Actuarial Projections for Social Security and Medicare While the Administration’s long-run projections focus on the unified budget outlook, Social Security and Medicare Hospital Insurance benefits are paid out of 2025 2030 2035 2040 trust funds financed by dedicated payroll tax revenue. Projected trust fund revenues fall short of the levels necessary to finance projected benefits over the next 75 years. The Social Security and Medicare 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. Table 3–3 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 2012 and the 2013 reports are shown along with the latest data from Chart 3-9. Long-Term Uncertainties Percent of GDP 500 Publicly Held Debt as a Percent of GDP Pessimistic 400 300 200 Continuation of Current Policies 100 0 -100 -200 -300 Optimistic 2000 2010 2020 2030 2040 2050 2060 2070 2080 2090 29 3. LONG-TERM BUDGET OUTLOOK Table 3–3. INTERMEDIATE ACTUARIAL PROJECTIONS FOR OASDI AND HI 2013 2020 2030 2040 2080 Percent of Payroll Medicare Hospital Insurance (HI) Income Rate 2012 Trustees’ Report �������������������������������������������������������������������������������������� 2013 Trustees’ Report �������������������������������������������������������������������������������������� 2014 Trustees’ Report �������������������������������������������������������������������������������������� 3.3 3.3 3.3 3.5 3.4 3.4 3.6 3.6 3.6 3.8 3.7 3.7 4.3 4.2 4.2 Cost Rate 2012 Trustees’ Report �������������������������������������������������������������������������������������� 2013 Trustees’ Report �������������������������������������������������������������������������������������� 2014 Trustees’ Report �������������������������������������������������������������������������������������� 3.7 3.6 3.6 3.6 3.5 3.3 4.7 4.4 4.2 5.5 5.2 4.8 6.3 5.9 5.6 –0.4 –0.4 –0.3 –0.2 –0.1 * –1.0 –0.8 –0.6 25 years –0.7 –0.6 –0.4 –1.8 –1.4 –1.1 50 years –1.2 –1.0 –0.8 –2.0 –1.6 –1.4 75 years –1.4 –1.1 –0.9 Annual Balance 2012 Trustees’ Report �������������������������������������������������������������������������������������� 2013 Trustees’ Report �������������������������������������������������������������������������������������� 2014 Trustees’ Report �������������������������������������������������������������������������������������� Projection Interval: ����������������������������������������������������������������������������������������������� Actuarial Balance: 2012 Trustees’ Report �������������������������������������������������������� Actuarial Balance: 2013 Trustees’ Report �������������������������������������������������������� Actuarial Balance: 2014 Trustees’ Report �������������������������������������������������������� Percent of Payroll Old Age Survivors and Disability Insurance (OASDI) Income Rate 2012 Trustees’ Report �������������������������������������������������������������������������������������� 2013 Trustees’ Report �������������������������������������������������������������������������������������� 2014 Trustees’ Report �������������������������������������������������������������������������������������� 12.8 12.7 12.8 13.1 13.0 13.0 13.2 13.1 13.2 13.3 13.2 13.2 13.3 13.2 13.3 Cost Rate 2012 Trustees’ Report �������������������������������������������������������������������������������������� 2013 Trustees’ Report �������������������������������������������������������������������������������������� 2014 Trustees’ Report �������������������������������������������������������������������������������������� 14.0 14.0 14.0 14.4 14.3 14.3 17.0 16.5 16.6 17.4 17.0 17.1 17.6 17.8 17.9 –1.1 –1.3 –1.2 –1.3 –1.3 –1.4 –3.8 –3.4 –3.5 25 years –1.2 –1.3 –1.5 –4.1 –3.8 –3.9 50 years –2.3 –2.2 –2.4 –4.3 –4.5 –4.6 75 years –2.7 –2.7 –2.9 Annual Balance 2012 Trustees’ Report �������������������������������������������������������������������������������������� 2013 Trustees’ Report �������������������������������������������������������������������������������������� 2014 Trustees’ Report �������������������������������������������������������������������������������������� Projection Interval: ����������������������������������������������������������������������������������������������� Actuarial Balance: 2012 Trustees’ Report �������������������������������������������������������� Actuarial Balance: 2013 Trustees’ Report �������������������������������������������������������� Actuarial Balance: 2014 Trustees’ Report �������������������������������������������������������� * 0.05 percent or less. Note: Values from the 2014 Medicare Trustees’ Report are not fully comparable to values for earlier years’ reports, as 2014 Medicare Trustees Report numbers are based on a projected baseline rather than a current law baseline. the 2014 reports. Following the passage of the ACA in 2010, there have been major improvements in trust fund solvency, although there is a continued imbalance in the long-run projections of the HI program due to demographic trends and continued high per-person costs. In the 2012 Trustees’ report, Medicare HI trust fund costs as a percentage of Medicare covered payroll were projected to rise from 3.7 percent to 6.3 percent between 2013 and 2080 and the HI trust fund imbalance was projected to be -2.0 percent in 2080. In the 2013 report, costs rose from 3.6 percent of Medicare taxable payroll in 2013 to 5.9 percent in 2080 and the imbalance in the HI trust fund in 2080 was -1.6 percent. On average, the HI cost rate declined slightly in the 2014 report compared with 2013. In the 2014 report, HI costs rise from 3.6 percent of Medicare taxable payroll in 2013 to 5.6 percent in 2080 and the imbalance in the HI trust fund in 2080 is -1.4 percent. The HI trust fund is now projected to become insolvent in 2030, versus 2017 in the last report before passage of the ACA and 2026 in the 2013 projections. Under the Medicare Modernization Act (MMA) of 2003, the Medicare Trustees must issue a “warning” when two consecutive Trustees’ reports project that the share of Medicare funded by general revenues will exceed 45 percent in the current year or any of the subsequent six years. For the first time since 2007, the 2014 Trustees’ Report did not include such a warning. The MMA requires that, if there is a Medicare funding warning, the President 30 ANALYTICAL PERSPECTIVES submit proposed legislation responding to that warning, within 15 days of submitting the Budget. In accordance with the Recommendations Clause of the Constitution and as the Executive Branch has noted in prior years, the Executive Branch considers a requirement to propose specific legislation to be advisory. 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, when the trust fund began using a portion of its interest earnings to cover benefit payments. The 2014 Social Security Trustees’ report projects that the trust fund will not return to cash surplus, but the program will continue to experience an overall surplus for several more years because of the interest earnings. After that, 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 14.0 percent of Social Security covered payroll in 2013 to 14.3 percent of payroll in 2020, 16.6 percent of payroll in 2030 and 17.9 percent of payroll in 2080. Revenues excluding interest are projected to rise only slightly from 12.8 percent of payroll today to 13.3 percent in 2080. Thus the annual balance is projected to decline from -1.2 percent of payroll in 2013 to -1.4 percent of payroll in 2020, -3.5 percent of payroll in 2030, and -4.6 percent of payroll in 2080. On a 75-year basis, the actuarial deficit is projected to be -2.9 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 2033. 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. However, benefits could still be partially funded from current revenues. The 2014 Trustees’ report presents projections on this point. Beginning in 2033, 77 percent of projected Social Security scheduled benefits would be funded. This percentage would eventually decline to 72 percent by 2088. The 2016 Budget would improve the condition of both trust funds. The health savings proposed in the Budget would extend the life of the HI trust fund by approximately five years, according to estimates by the Medicare Actuary. Meanwhile, the Social Security Actuary estimated the Senate-passed immigration bill would reduce the Social Security shortfall by 8 percent, extending the life of the trust fund by two years. Nonetheless, additional reforms will be needed to restore 75-year solvency in both programs. TECHNICAL NOTE: SOURCES OF DATA AND METHODS OF ESTIMATING The long-run 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 2015-2025, the assumptions are drawn from the Administration’s economic projections used for the 2016 Budget. 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 2014 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—1.8 percent per year. CPI inflation holds stable at 2.3 percent per year, the unemployment rate is constant at 5.2 percent, the yield on 10-year Treasury notes is steady at 4.5 percent, and the 91-day Treasury bill rate is 3.5 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 75-year projection period total population growth is nearly as low as 0.4 percent per year. Real GDP growth is projected to be less than its historical average of around 3.4 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, real GDP growth averages between 2.1 percent and 2.3 percent per year for the period following the end of the 10-year budget window. 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 makes it easier to interpret the comparisons of alternative policies and is a reasonable simplification given the large uncertainties surrounding the long-run outlook. Budget projections.—For the period through 2025, receipts and outlays in the baseline and policy projections follow the 2016 Budget’s adjusted baseline and policy estimates respectively. After 2025, total tax receipts rise gradually relative to GDP as real incomes also rise. Discretionary spending grows at the rate of growth in inflation plus population afterwards. Long-run Social Security spending is projected by the Social Security actuaries using this chapter’s long-run economic and demographic assumptions. Medicare benefits are projected based on a projection of beneficiary growth and excess health care cost growth from the 2014 Medicare Trustees’ report projected baseline; for the policy projections, these assumptions are then also adjusted to account for the Budget’s IPAB proposal. Medicaid outlays are based on the economic and demographic projections in the model, which assume excess cost growth of approximately 1.2 percentage points above growth in GDP per capita. 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. 4. FEDERAL BORROWING AND DEBT Debt is the largest legally and contractually binding obligation of the Federal Government. At the end of 2014, the Government owed $12,780 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 $271 billion of interest on this debt. At the same time, the Government also held financial assets, net of financial liabilities other than debt, of $1,324 billion. Therefore, debt net of financial assets was $11,455 billion. The $12,780 billion debt held by the public at the end of 2014 represents an increase of $797 billion over the level at the end of 2013. This increase is the result of the $485 billion deficit in 2014 and other financing transactions totaling $313 billion. Debt held by the public increased from 72.3 percent of Gross Domestic Product (GDP) at the end of 2013 to 74.1 percent of GDP at the end of 2014. Meanwhile, financial assets net of liabilities grew by $268 billion in 2014, so that debt held by the public net of financial assets increased by $529 billion during 2014. Debt net of financial assets increased from 65.9 percent of GDP at the end of 2013 to 66.4 percent of GDP at the end of 2014. The deficit is estimated to increase to $583 billion, or 3.2 percent of GDP, in 2015, and to fall below 3 percent of GDP starting in 2016. With deficits declining after 2015 and continued GDP growth, debt held by the public is projected to reach 75.1 percent of GDP at the end of 2015 and then to decline gradually in subsequent years, falling to 73.3 percent at the end of 2025. Debt net of financial assets is expected to increase to 66.9 percent of GDP at the end of 2015, then similarly decline gradually in the following years, falling to 63.7 percent of GDP at the end of 2025. Trends in Debt Since World War II Table 4–1 depicts trends in Federal debt held by the public from World War II to the present and estimates from the present through 2020. (It is supplemented for earlier years by Tables 7.1–7.3 in the Budget’s historical tables, available as supplemental budget material.1) Federal debt peaked at 106.1 percent of GDP in 1946, just after the end of the war. From that point until the 1970s, Federal debt as a percentage of GDP decreased almost every year because of relatively small deficits, an expanding economy, and unanticipated 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 1 The historical tables are available at http://www.budget.gov/budget/ Historicals and on the Budget CD-ROM. 78.5 percent of GDP to 24.5 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 48 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 budget surpluses emerged. Debt fell from 47.8 percent of GDP in 1993 to 31.4 percent of GDP in 2001. Over that same period, debt fell from 26.4 percent of total credit market debt to 17.6 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 costs of the wars in Iraq and Afghanistan. Deficits ensued and the 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 substantially in 2009 as the Government continued to 31 32 ANALYTICAL PERSPECTIVES take aggressive steps to restore the health of the Nation’s economy and financial markets. The deficit fell somewhat in 2010, increased only slightly in 2011, and decreased in each of 2012, 2013, and 2014. Under the proposals in the Budget, the deficit is projected to increase in 2015 and then to fall to below 3 percent of GDP starting in 2016. Debt held by the public as a percent of GDP is estimated to be 75.1 percent at the end of 2015, after which it declines to 75.0 percent at the end of 2016 and continues to decline gradually in subsequent years. Debt net of financial assets as a percent of GDP is estimated to grow to 66.9 percent at the end of 2015 and then fall to 66.5 percent at the end of 2016 and continue to decline thereafter. Debt Held by the Public and Gross Federal Debt The Federal Government issues debt securities for two main purposes. First, it borrows from the public Table 4–1. TRENDS IN FEDERAL DEBT HELD BY THE PUBLIC (Dollar amounts in billions) Fiscal Year Debt held by the public: Current dollars FY 2014 dollars 1 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 debt 2 Total outlays GDP 1946 ����������������������������������������������������������������������������������������������������� 241.9 2,383.8 106.1 N/A 7.4 1.8 1950 ����������������������������������������������������������������������������������������������������� 1955. ����������������������������������������������������������������������������������������������������� 219.0 226.6 1,746.4 1,588.0 78.5 55.7 53.3 43.2 11.4 7.6 1.7 1.3 1960 ����������������������������������������������������������������������������������������������������� 1965 ����������������������������������������������������������������������������������������������������� 236.8 260.8 1,470.5 1,516.5 44.3 36.7 33.7 26.9 8.5 8.1 1.5 1.3 1970 ����������������������������������������������������������������������������������������������������� 1975 ����������������������������������������������������������������������������������������������������� 283.2 394.7 1,372.2 1,409.5 27.0 24.5 20.8 18.4 7.9 7.5 1.5 1.6 1980 ����������������������������������������������������������������������������������������������������� 1985 ����������������������������������������������������������������������������������������������������� 711.9 1,507.3 1,769.3 2,859.0 25.5 35.3 18.6 22.3 10.6 16.2 2.2 3.6 1990 ����������������������������������������������������������������������������������������������������� 1995 ����������������������������������������������������������������������������������������������������� 2,411.6 3,604.4 3,933.0 5,187.5 40.8 47.5 22.6 26.5 16.2 15.8 3.4 3.2 2000 ����������������������������������������������������������������������������������������������������� 3,409.8 4,523.8 33.6 19.1 13.0 2.3 2005 ����������������������������������������������������������������������������������������������������� 2006 ����������������������������������������������������������������������������������������������������� 2007 ����������������������������������������������������������������������������������������������������� 2008 ����������������������������������������������������������������������������������������������������� 2009 ����������������������������������������������������������������������������������������������������� 4,592.2 4,829.0 5,035.1 5,803.1 7,544.7 5,435.5 5,536.0 5,619.5 6,345.2 8,154.4 35.6 35.3 35.2 39.3 52.3 17.3 16.7 16.1 17.5 21.9 7.7 8.9 9.2 8.7 5.7 1.5 1.7 1.8 1.8 1.4 2010 ����������������������������������������������������������������������������������������������������� 2011 ����������������������������������������������������������������������������������������������������� 2012 ����������������������������������������������������������������������������������������������������� 2013 ����������������������������������������������������������������������������������������������������� 2014 ����������������������������������������������������������������������������������������������������� 9,018.9 10,128.2 11,281.1 11,982.7 12,779.9 9,663.0 10,635.5 11,634.8 12,165.4 12,779.9 60.9 65.9 70.4 72.3 74.1 25.5 27.9 29.8 30.5 31.3 6.6 7.4 6.6 7.5 7.7 1.5 1.7 1.4 1.6 1.6 2015 estimate ��������������������������������������������������������������������������������������� 2016 estimate ��������������������������������������������������������������������������������������� 2017 estimate ��������������������������������������������������������������������������������������� 2018 estimate ��������������������������������������������������������������������������������������� 2019 estimate ��������������������������������������������������������������������������������������� 13,506.3 14,108.5 14,704.9 15,315.0 15,959.2 13,326.4 13,702.9 14,030.7 14,335.7 14,645.1 75.1 75.0 74.6 74.3 74.1 N/A N/A N/A N/A N/A 7.5 8.5 9.7 10.7 11.6 1.6 1.8 2.1 2.3 2.5 2020 estimate ��������������������������������������������������������������������������������������� 16,634.7 14,965.4 74.0 N/A 12.4 2.7 N/A = Not available. 1 Debt in current dollars deflated by the GDP chain-type price index with fiscal year 2014 equal to 100. 2 Total credit market debt owed by domestic nonfinancial sectors, modified in some years to be consistent with budget concepts for the measurement of Federal debt. 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). 33 4. FEDERAL BORROWING AND DEBT to finance the Federal deficit.2 Second, it issues debt to Federal Government accounts, primarily trust funds, that 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 domestic or international 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. 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, under its direct loan programs, the Government uses borrowed funds to acquire financial assets that might otherwise require 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 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 fu2 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 4–4, but also certain Government-guaranteed securities and the debt of the Government-Sponsored Enterprises listed in Table 20–7 in the supplemental materials to the “Credit and Insurance” chapter. (Table 20-7 is available on the Internet at: http://www.budget.gov/budget/Analytical_Perspectives and on the Budget CD-ROM.) ture 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.4 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. 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 4–2 summarizes Federal borrowing and debt from 2014 through 2025.5 In 2014 the Government bor4 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 Department of the Treasury in coordination with the Office of Management and Budget. 5 For projections of the debt beyond 2025, see Chapter 3, “Long-Term 34 ANALYTICAL PERSPECTIVES Table 4–2. FEDERAL GOVERNMENT FINANCING AND DEBT (In billions of dollars) Estimate Actual 2014 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 liabilities 2 ������������������������������������������������ 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 ����������������������������������������������������� Debt Subject to Statutory Limitation, End of Year: Debt issued by Treasury ���������������������������������������� Less: Treasury debt not subject to limitation (–) 3 �� Agency debt subject to limitation ��������������������������� Adjustment for discount and premium 4 ����������������� Total, debt subject to statutory limitation 5 ������� 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 484.6 582.5 474.3 462.8 478.9 517.7 554.1 600.5 625.6 634.9 638.6 686.8 69.9 41.7 ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... 121.5 12.4 95.8 7.6 131.9 –2.8 137.5 –2.6 133.4 –0.9 129.3 –1.6 124.6 –2.0 118.8 –3.8 116.7 –5.4 119.3 –7.7 117.4 –8.3 116.1 –8.0 –5.7 128.2 –0.6 102.8 –0.1 129.0 –0.1 134.8 –0.2 132.3 –0.1 127.6 –0.1 122.5 –0.1 114.9 –0.1 111.2 –0.1 111.6 –0.1 109.0 –* 108.1 0.9 –0.3 –0.9 –0.9 –0.8 –0.7 –0.7 –0.7 –0.7 –0.5 –0.5 –0.4 113.8 ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... 312.8 –0.3 144.2 –0.3 128.2 –0.3 133.9 –0.3 131.5 –0.3 126.9 –0.3 121.7 –0.3 114.2 –0.3 110.5 –0.3 111.1 –0.3 108.5 –0.3 107.6 –0.4 312.6 143.9 127.9 133.6 131.2 126.6 121.4 113.9 110.2 110.7 108.1 107.3 797.2 726.5 602.2 596.4 610.0 644.2 675.5 714.3 735.8 745.6 746.8 794.0 797.2 277.9 726.5 106.6 602.2 104.1 596.4 164.8 610.0 165.2 644.2 125.7 675.5 97.3 714.3 85.7 735.8 4.3 745.6 16.1 746.8 32.7 794.0 –26.1 6.7 0.8 2.2 2.0 2.4 2.8 1.8 2.5 1.7 1.8 1.5 0.1 1,081.7 833.9 708.4 763.2 777.7 772.8 774.6 802.5 741.8 763.5 781.0 768.0 17,768.2 18,600.3 19,306.7 20,068.4 20,844.9 21,616.2 22,389.2 23,190.5 23,931.2 24,693.4 25,473.5 26,241.5 –14.6 –12.8 –10.9 –9.3 –8.2 –6.6 –5.1 –3.9 –2.7 –1.5 –0.5 –0.5 * * * * * * * * * * * * 27.5 27.5 27.5 27.5 27.5 27.5 27.5 27.5 27.5 27.5 27.5 27.5 17,781.1 18,615.0 19,323.4 20,086.6 20,864.3 21,637.0 22,411.7 23,214.2 23,956.0 24,719.5 25,500.5 26,268.5 Debt Outstanding, End of Year: Gross Federal debt: 6 Debt issued by Treasury ���������������������������������� Debt issued by other agencies ������������������������ Total, gross Federal debt ����������������������������� 17,768.2 18,600.3 19,306.7 20,068.4 20,844.9 21,616.2 22,389.2 23,190.5 23,931.2 24,693.4 25,473.5 26,241.5 26.3 27.3 27.1 26.7 25.4 24.1 23.9 22.6 22.1 21.5 21.0 20.9 17,794.5 18,627.6 19,333.8 20,095.1 20,870.4 21,640.3 22,413.1 23,213.2 23,953.3 24,715.0 25,494.5 26,262.4 Held by: Debt held by Government accounts ���������������� 5,014.6 5,121.2 5,225.3 5,390.2 5,555.4 5,681.1 5,778.4 5,864.1 5,868.5 5,884.5 5,917.3 5,891.2 Debt held by the public 7 ���������������������������������� 12,779.9 13,506.3 14,108.5 14,704.9 15,315.0 15,959.2 16,634.7 17,349.0 18,084.8 18,830.4 19,577.2 20,371.3 *$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 the Federal Financing Bank and Treasury securities 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 Legislation enacted February 15, 2014, (P.L. 113–83) temporarily suspends the debt limit through March 15, 2015. 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 2014, the Federal Reserve Banks held $2,451.7 billion of Federal securities and the rest of the public held $10,328.1 billion. Debt held by the Federal Reserve Banks is not estimated for future years. 4. FEDERAL BORROWING AND DEBT rowed $797 billion, increasing the debt held by the public from $11,983 billion at the end of 2013 to $12,780 billion at the end of 2014. The debt held by Government accounts increased by $278 billion, and gross Federal debt increased by $1,075 billion to $17,794 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.6 Table 4–2 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 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 2, “Economic Assumptions and Interactions with the Budget,’’ in this volume. The total or unified budget deficit consists of two parts: the on-budget 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 two Social Security trust funds (Old-Age and Survivors Insurance and Disability Insurance) and the Postal Service Fund.7 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 Government’s need to borrow and can vary considerably in size from year to year. The other transactions affecting borrowing from the public are presented in Table 4–2 (where an increase in the need to borrow is represented by a positive sign, like the deficit). In 2014 the deficit was $485 billion while these other factors increased the need to borrow by $313 billion, or 39 percent of total borrowing from the public. As a result, the Government borrowed $797 billion from the public. The other factors are estimated to increase borrowing by $144 billion (20 percent of total borrowing from the public) in 2015, and $128 billion (21 percent) in 2016. In 2017–2025, these other factors are expected to increase borrowing by annual amounts ranging from $107 billion to $134 billion. Budget Outlook.” 6 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. 7 For further explanation of the off-budget Federal entities, see Chapter 10, “Coverage of the Budget.’’ 35 Three specific factors presented in Table 4–2 have historically been especially important. Change in Treasury operating cash balance.—The cash balance increased by $3 billion, to $88 billion, in 2013 and increased by $70 billion, to $158 billion, in 2014. The operating cash balance is projected to increase by $42 billion, to $200 billion at the end of 2015. 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. Net financing disbursements of the direct loan and guaranteed loan financing accounts.—Under the Federal Credit Reform Act of 1990 (FCRA), the budgetary program account for each credit program records the estimated subsidy costs–the present value of estimated net losses–at the time when the direct or guaranteed loans are disbursed. The individual cash flows to and from the public associated with the loans or guarantees, such as the disbursement and repayment of loans, the default payments on loan guarantees, the collection of interest and fees, and so forth, are recorded in the credit program’s non-budgetary financing account. Although the non-budgetary financing account’s cash flows to and from the public are not included in the deficit (except for their impact on subsidy costs), they affect Treasury’s net borrowing requirements.8 In addition to the transactions with the public, the financing accounts include several types of intragovernmental transactions. In particular, they receive payment from the credit program accounts for the subsidy costs of new direct loans and loan guarantees and for any upward reestimate of the costs of outstanding direct and guaranteed loans. The financing accounts also pay any downward reestimate of costs to budgetary receipt accounts. The total net collections and gross disbursements 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 credit program, financing, and downward reestimate receipt accounts do not affect Federal borrowing from the public. Although the deficit changes because of the budgetary account’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, receipts from the public collected by the financing account 8 The FCRA (sec. 505(b)) requires that the financing accounts be nonbudgetary. They are non-budgetary in concept because they do not measure cost. For additional discussion of credit programs, see Chapter 20, “Credit and Insurance,” and Chapter 9, “Budget Concepts.’’ 36 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 budgetary receipts. Borrowing due to credit financing accounts was $128 billion in 2014. In 2015 credit financing accounts are projected to increase borrowing by $103 billion. After 2015, the credit financing accounts are expected to increase borrowing by amounts ranging from $108 billion to $135 billion over the next 10 years. 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 2014, there was a net upward reestimate of $0.4 billion. In 2015, there was a net upward reestimate of $18.2 billion, with the largest net upward reestimate coming from direct student loans. Net purchases of non-Federal securities by the National Railroad Retirement Investment Trust (NRRIT).— This trust fund, which was established by the Railroad Retirement and Survivors’ Improvement Act of 2001, invests its assets primarily in private stocks and bonds. The Act required special treatment of the purchase or sale of non-Federal assets by the NRRIT trust fund, treating such purchases as a means of financing rather than as 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 transactions” and, with the opposite sign, in NRRIT’s net outlays in the deficit, for no net impact on borrowing from the public. In 2014, net increases, including purchases and gains, were $0.9 billion. A $0.3 billion net decrease is projected for 2015 and net annual decreases ranging from $0.4 billion to $0.9 billion are projected for 2016 and subsequent years.9 Net change in other financial assets and liabilities.— In addition to the three factors discussed above, in 2013 and 2014, the net change in other financial assets and liabilities was also particularly significant. Generally, the amounts in this category are relatively small. For example, this category decreased the need to borrow by $1 billion in 2012 and increased the need to borrow by $5 billion in 2011. However, in 2013, this “other” category reduced the need to borrow by a net $114 billion. Of the net $114 billion, $120 billion—offset slightly by other factors—was due to the temporary suspension of the daily reinvestment of the Thrift Savings Plan (TSP) Government Securities Investment Fund (G-Fund).10 The Department of the Treasury is authorized to suspend the issuance of obligations to the TSP G-Fund as an “extraordinary measure” if issuances could not be made without causing the public debt of the United States to exceed the 9 The budget treatment of this fund is further discussed in Chapter 9, “Budget Concepts.’’ 10 The TSP is a defined contribution pension plan for Federal employees. The G-Fund is one of several components of the TSP. ANALYTICAL PERSPECTIVES debt limit. The suspension of the daily reinvestment of the TSP G-Fund resulted in the amounts being moved from debt held by the public to deposit fund balances, an “other” financial liability. Once Treasury is able to do so without exceeding the debt limit, Treasury is required to fully reinvest the TSP G-Fund and restore any foregone interest. Accordingly, the TSP G-Fund was fully reinvested in October 2013. Table 4–2 reflects the $120 billion reinvestment in 2014, which returned the amount from deposit fund balances to debt held by the public. The debt ceiling and the use of the TSP G-Fund are discussed in further detail below. The $120 billion TSP reinvestment was somewhat offset by other factors, resulting in total net other changes in financial assets and liabilities of $114 billion in 2014. 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 91 percent of the total Federal debt held by Government accounts at the end of 2014. Investment may differ from the surplus due to changes in the amount of cash assets not currently invested. In 2014, the total trust fund surplus was $129 billion, and trust fund investment in Federal securities increased by $241 billion. This $113 billion difference was primarily due to the Civil Service Retirement and Disability Fund (CSRDF), which had a surplus of $15 billion but invested $138 billion, largely to restore the fund’s investment balance following the extraordinary measures that the Treasury Department is authorized to take with the fund when the Government is at the debt ceiling. For further details on such measures, see the discussion below. 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 4–5. 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 United States 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 37 4. FEDERAL BORROWING AND DEBT Table 4–3. DEBT HELD BY THE PUBLIC NET OF FINANCIAL ASSETS AND LIABILITIES (Dollar amounts in billions) Actual 2014 Estimate 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Debt Held by the Public: Debt held by the public ������������������������������������������������������� 12,779.9 13,506.3 14,108.5 14,704.9 15,315.0 15,959.2 16,634.7 17,349.0 18,084.8 18,830.4 19,577.2 20,371.3 As a percent of GDP ������������������������������������������������������ 74.1% 75.1% 75.0% 74.6% 74.3% 74.1% 74.0% 74.0% 73.9% 73.7% 73.5% 73.3% Financial Assets Net of Liabilities: Treasury operating cash balance ��������������������������������������� 158.3 Credit financing account balances: Direct loan accounts ������������������������������������������������������ 1,065.2 Guaranteed loan accounts �������������������������������������������� 2.0 Troubled Asset Relief Program equity purchase accounts ������������������������������������������������������������������� 0.9 Subtotal, credit financing account balances ������������� 1,068.2 Government-sponsored enterprise preferred stock ������������ 95.8 Non-Federal securities held by NRRIT ������������������������������� 25.1 Other assets net of liabilities ����������������������������������������������� –22.9 Total, financial assets net of liabilities ���������������������������� 1,324.5 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 1,161.1 9.6 1,292.9 6.8 1,430.4 4.2 1,563.8 3.3 1,693.1 1.7 1,817.7 –0.4 1,936.5 –4.2 2,053.2 –9.5 2,172.5 –17.2 2,290.0 –25.6 2,406.1 –33.6 0.3 1,171.0 95.8 24.9 –22.9 1,468.7 0.2 1,300.0 95.8 24.0 –22.9 1,596.9 0.1 1,434.7 95.8 23.1 –22.9 1,730.7 –* 1,567.0 95.8 22.3 –22.9 1,862.2 –0.2 1,694.6 95.8 21.5 –22.9 1,989.0 –0.3 1,817.1 95.8 20.8 –22.9 2,110.8 –0.4 1,932.0 95.8 20.1 –22.9 2,224.9 –0.5 2,043.2 95.8 19.3 –22.9 2,335.5 –0.6 2,154.8 95.8 18.9 –22.9 2,446.5 –0.7 2,263.8 95.8 18.3 –22.9 2,555.0 –0.7 2,371.8 95.8 17.9 –22.9 2,662.7 Debt Held by the Public Net of Financial Assets and Liabilities: Debt held by the public net of financial assets ������������������� 11,455.4 12,037.6 12,511.6 12,974.2 13,452.8 13,970.1 14,523.9 15,124.1 15,749.3 16,383.9 17,022.2 17,708.6 As a percent of GDP ������������������������������������������������������ 66.4% 66.9% 66.5% 65.8% 65.3% 64.9% 64.6% 64.5% 64.4% 64.2% 63.9% 63.7% *$50 million or less. 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 loan. Similarly, when NRRIT 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. Table 4–3 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 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, and other collections, such as program fees. NRRIT’s holdings of non-Federal securities are marked to market on a monthly basis. GovernmentSponsored Enterprise (GSE) preferred stock is measured at market value. Net financial assets increased by $268 billion, to $1,324 billion, in 2014. At the end of 2014, debt held by the public was $12,780 billion, or 74.1 percent of GDP. The Government held $1,324 billion in net financial assets, including a cash balance of $158 billion, net credit financing account balances of $1,068 billion, and other assets and liabilities that aggregated to a net asset of $98 billion. Therefore, debt net of financial assets was $11,455 billion, or 66.4 percent of GDP. As shown in Table 4–3, the value of the Government’s net financial assets is projected to increase to $1,469 billion in 2015, due to increases in the net balances of credit financing accounts and other factors. While debt held by the public is expected to increase from 74.1 percent to 75.1 percent of GDP during 2015, net debt is expected to increase from 66.4 percent to 66.9 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 38 ANALYTICAL PERSPECTIVES 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. 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 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, because it is very liquid, can be bought and sold on the secondary market at narrow bid-offer spreads. Treasury also sells to the public a relatively small amount of nonmarketable securities, such as savings bonds and State and Local Government Series securities (SLGS).11 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-inflationindexed) 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 daily to reflect inflation as measured by changes in the Consumer Price Index (CPI-U-NSA, with a two-month lag). Although the principal value may be adjusted downward if inflation is negative, at maturity, the securities will be redeemed at the greater of their inflation-adjusted principal or par amount at original issue. Historically, the average maturity of outstanding debt issued by Treasury has been about five years. The average maturity of outstanding debt was 68 months at the end of 2014. Traditionally, Treasury has issued securities with a fixed interest rate. In 2014, Treasury began to issue floating rate securities, to complement its existing suite of securities and to support its broader debt management objectives. Floating rate securities have a fixed par value but bear interest rates that fluctuate based on movements in a specified benchmark market interest rate. Treasury’s floating rate notes are benchmarked to the Treasury 13week bill. Currently, Treasury is issuing floating rate securities with a maturity of two years. 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.12 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 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, which enhances the demand for Treasuries at initial auction. The demand for 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 credit “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 2014, there was net disinvestment in nonmarketables, necessitating additional marketable borrowing to finance the redemption of nonmarketable debt.13 Agency Debt A few Federal agencies other than Treasury, shown in Table 4–4, 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 past borrowing. Agency debt fell from $27.7 billion at the end of 2013 to $26.3 billion at the end of 2014. Agency debt is less than 12 11 Under the SLGS 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. Noncompetitive bids cannot exceed $5 million per bidder. 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 the Treasury. 13 Detail 39 4. FEDERAL BORROWING AND DEBT Table 4–4. AGENCY DEBT (In millions of dollars) 2014 Actual Borrowing/ Repayment(–) 2015 Estimate Debt, End-of-Year Borrowing/ Repayment(–) 2016 Estimate Debt, End-of-Year Borrowing/ Repayment(–) Debt, End-of-Year Borrowing from the public: Housing and Urban Development: Federal Housing Administration ������������������������������������������������ Architect of the Capitol �������������������������������������������������������������������� National Archives ����������������������������������������������������������������������������� ......... –7 –18 19 114 116 * –7 –20 19 107 97 ......... –9 –21 19 98 75 Tennessee Valley Authority: Bonds and notes ������������������������������������������������������������������������� Lease/leaseback obligations ������������������������������������������������������ Prepayment obligations �������������������������������������������������������������� Total, borrowing from the public ���������������������������������������� –1,199 –101 –100 –1,425 23,617 2,041 410 26,316 1,225 –109 –100 990 24,842 1,932 310 27,306 36 –114 –100 –208 24,878 1,818 210 27,098 Borrowing from other funds: Tennessee Valley Authority 1 ������������������������������������������������������������� Total, borrowing from other funds ����������������������������������������� Total, agency borrowing ����������������������������������������������������� –2 –2 –1,427 3 3 26,319 ......... ......... 990 3 3 27,309 ......... ......... –208 3 3 27,101 23,620 1,225 24,845 36 24,881 Memorandum: Tennessee Valley Authority bonds and notes, total �������������������������� –1,201 * $500,000 or less. 1Represents open market purchases by the National Railroad Retirement Investment Trust. one-quarter of one percent of Federal debt held by the public. Primarily as a result of TVA activity, agency debt is estimated to increase by $1.0 billion in 2015 and to decrease by $0.2 billion in 2016. The predominant agency borrower is TVA, which had borrowings of $26.1 billion from the public as of the end of 2014, or 99 percent of the total debt of all agencies other than Treasury. TVA issues debt primarily to finance capital projects. 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.14 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. OMB 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 refi14 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. nancing debt previously incurred 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.15 The budget presentation is consistent with the reporting of these obligations as liabilities on TVA’s balance sheet under generally accepted accounting principles. Table 4–4 presents these alternative financing methods separately from TVA bonds and notes to distinguish between the types of borrowing. Obligations for lease/leasebacks were $2.0 billion at the end of 2014 and are estimated to be $1.9 billion at the end of 2015 and $1.8 billion at the end of 2016. Obligations for prepayments were $0.4 billion at the end of 2014 and are estimated to be $0.3 billion at the end of 2015 and $0.2 billion at the end of 2016. 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 15 This budgetary treatment differs from the treatment in the Monthly Treasury Statement of Receipts and Outlays of the United States Government (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 other factors are adjustments for the timing of the reporting of Federal debt held by NRRIT and treatment of the Federal debt held by the Securities Investor Protection Corporation. 40 ANALYTICAL PERSPECTIVES 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 Fiscal Service (Fiscal Service) or the Federal Financing Bank (FFB), both within the Department of the Treasury. Agency borrowing from the FFB or the Fiscal Service is not included in gross Federal debt. It would be double counting to add together (a) the agency borrowing from the Fiscal Service or FFB and (b) the Treasury borrowing from the public that is needed to provide the Fiscal Service 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. Total investment by trust funds and other Government accounts increased by $278 billion in 2014. Investment by Government accounts is estimated to be $107 billion in 2015 and $104 billion in 2016, as shown in Table 4–5. The holdings of Federal securities by Government accounts are estimated to increase to $5,225 billion by the end of 2016, or 27 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 Table 4–5. DEBT HELD BY GOVERNMENT ACCOUNTS1 (In millions of dollars) Investment or Disinvestment (-) Description 2014 Actual 2015 Estimate 2016 Estimate Holdings, End of 2016 Estimate Investment in Treasury debt: Energy: Nuclear waste disposal fund 1 ���������������������������������������������������������������������������������������������������������������������������������� Uranium enrichment decontamination fund ������������������������������������������������������������������������������������������������������������� 2,073 –330 586 –100 585 175 33,642 3,419 Health and Human Services: Federal hospital insurance trust fund ���������������������������������������������������������������������������������������������������������������������� Federal supplementary medical insurance trust fund ���������������������������������������������������������������������������������������������� Vaccine injury compensation fund ��������������������������������������������������������������������������������������������������������������������������� Child enrollment contingency fund �������������������������������������������������������������������������������������������������������������������������� –3,803 1,006 116 3 1,598 –9,158 68 4 –2,587 –12,004 102 ......... 201,218 47,229 3,530 2,105 Homeland Security: Aquatic resources trust fund ������������������������������������������������������������������������������������������������������������������������������������ Oil spill liability trust fund ����������������������������������������������������������������������������������������������������������������������������������������� 20 489 –53 782 21 601 1,854 5,085 Housing and Urban Development: Federal Housing Administration mutual mortgage fund ������������������������������������������������������������������������������������������ Guarantees of mortgage-backed securities ������������������������������������������������������������������������������������������������������������ 6,379 –1,661 6,804 8,149 7,187 3,800 20,370 12,100 Interior: Abandoned mine reclamation fund �������������������������������������������������������������������������������������������������������������������������� Federal aid in wildlife restoration fund ��������������������������������������������������������������������������������������������������������������������� Environmental improvement and restoration fund ��������������������������������������������������������������������������������������������������� Justice: Assets forfeiture fund ���������������������������������������������������������������������������������������������������������������������������������������� 60 –307 28 2,392 38 158 6 –1,875 –7 –197 14 –95 2,842 1,075 1,375 5,098 Labor: Unemployment trust fund ���������������������������������������������������������������������������������������������������������������������������������������� Pension Benefit Guaranty Corporation 1 ������������������������������������������������������������������������������������������������������������������ State: Foreign service retirement and disability trust fund �������������������������������������������������������������������������������������������� 6,441 –227 428 4,681 1,637 395 –8,721 2,685 392 31,879 21,587 18,579 Transportation: Airport and airway trust fund ����������������������������������������������������������������������������������������������������������������������������������� Transportation trust fund ������������������������������������������������������������������������������������������������������������������������������������������ Aviation insurance revolving fund ���������������������������������������������������������������������������������������������������������������������������� 951 8,739 200 –1,756 –9,914 13 –228 19,205 50 10,775 19,987 2,200 Treasury: Exchange stabilization fund ������������������������������������������������������������������������������������������������������������������������������������� Treasury forfeiture fund �������������������������������������������������������������������������������������������������������������������������������������������� Comptroller of the Currency assessment fund �������������������������������������������������������������������������������������������������������� –20 –765 –368 –2 441 374 17 ......... 20 22,664 2,500 1,320 41 4. FEDERAL BORROWING AND DEBT Table 4–5. DEBT HELD BY GOVERNMENT ACCOUNTS1—Continued (In millions of dollars) Investment or Disinvestment (-) Description 2014 Actual 2015 Estimate 2016 Estimate Holdings, End of 2016 Estimate Veterans Affairs: National service life insurance trust fund ����������������������������������������������������������������������������������������������������������������� Veterans special life insurance fund ������������������������������������������������������������������������������������������������������������������������ Corps of Engineers: Harbor maintenance trust fund ����������������������������������������������������������������������������������������������������� –627 –51 595 –616 –114 596 –680 –100 596 4,333 1,649 9,494 Other Defense-Civil: Military retirement trust fund ������������������������������������������������������������������������������������������������������������������������������������ Medicare-eligible retiree health care fund ��������������������������������������������������������������������������������������������������������������� Education benefits fund ������������������������������������������������������������������������������������������������������������������������������������������� Environmental Protection Agency: Hazardous substance trust fund ����������������������������������������������������������������������������� International Assistance Programs: Overseas Private Investment Corporation ����������������������������������������������������������� 61,785 11,708 –210 259 135 52,633 8,419 –134 26 –50 56,296 8,131 –92 26 9 592,040 216,922 1,343 3,498 5,486 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 ������������������������������������������������������������������������������������������������������������������������������ 137,712 6,144 1,262 129 13,855 7,055 545 878 12,598 7,220 693 1,158 883,622 62,743 44,451 25,594 Social Security Administration: Federal old-age and survivors insurance trust fund 2 ���������������������������������������������������������������������������������������������� Federal disability insurance trust fund 2 ������������������������������������������������������������������������������������������������������������������� District of Columbia: Federal pension fund �������������������������������������������������������������������������������������������������������������������� Farm Credit System Insurance Corporation: Farm Credit System Insurance fund ������������������������������������������������������� Federal Communications Commission: Universal service fund ������������������������������������������������������������������������������������� Federal Deposit Insurance Corporation: Deposit insurance fund ���������������������������������������������������������������������������������� National Credit Union Administration: Share insurance fund ����������������������������������������������������������������������������������������� Postal Service funds 2 ���������������������������������������������������������������������������������������������������������������������������������������������������� Railroad Retirement Board trust funds �������������������������������������������������������������������������������������������������������������������������� Securities Investor Protection Corporation 3 ������������������������������������������������������������������������������������������������������������������ United States Enrichment Corporation fund ������������������������������������������������������������������������������������������������������������������ Other Federal funds ������������������������������������������������������������������������������������������������������������������������������������������������������� Other trust funds ������������������������������������������������������������������������������������������������������������������������������������������������������������ Unrealized discount1 ������������������������������������������������������������������������������������������������������������������������������������������������������ Total, investment in Treasury debt 1 ����������������������������������������������������������������������������������������������������������������� 57,207 –30,678 492 241 506 11,886 381 2,590 214 305 4 –128 –268 –5,550 277,886 43,384 –31,335 5 313 * 8,549 234 * 58 270 4 –403 –406 ......... 106,641 -16,066 13,117 –2 270 ......... 9,611 433 ......... ......... 270 4 –299 –146 ......... 104,063 2,740,123 51,895 3,704 4,026 7,656 66,910 11,691 5,450 2,661 2,625 1,620 5,688 5,091 –7,443 5,225,305 –2 –2 277,884 ......... ......... 106,641 ......... ......... 104,063 3 3 5,225,309 Investment in agency debt: Railroad Retirement Board: National Railroad Retirement Investment Trust ������������������������������������������������������������������������������������������������������� Total, investment in agency debt 1 ������������������������������������������������������������������������������������������������������������������� Total, investment in Federal debt 1 �������������������������������������������������������������������������������������������������������������� Memorandum: Investment by Federal funds (on-budget) ���������������������������������������������������������������������������������������������������������������������� 39,498 40,254 39,862 520,048 Investment by Federal funds (off-budget) ��������������������������������������������������������������������������������������������������������������������� 2,590 * ......... 5,450 Investment by trust funds (on-budget) ��������������������������������������������������������������������������������������������������������������������������� 214,818 54,337 67,150 1,915,235 Investment by trust funds (off-budget) ��������������������������������������������������������������������������������������������������������������������������� 26,529 12,049 –2,949 2,792,018 Unrealized discount 1 ����������������������������������������������������������������������������������������������������������������������������������������������������� –5,550 ......... ......... –7,443 * $500 thousand or less. ¹Debt 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 2014 the debt figures would be $19.1 billion higher for the Nuclear Waste Disposal Fund and $0.2 billion higher for PBGC than recorded in this table. 2Off-budget Federal entity. 3Amounts on calendar-year basis. 42 Old-Age and Survivors Insurance (OASI) and Disability Insurance (DI) trust funds; the Medicare Hospital Insurance (HI) and Supplementary Medical Insurance (SMI) trust funds; and four Federal employee retirement funds. These Federal employee retirement funds include two trust funds, the Military Retirement Fund and the Civil Service Retirement and Disability Fund, and two special funds, the uniformed services MedicareEligible Retiree Health Care Fund (MERHCF) and the Postal Service Retiree Health Benefits Fund (PSRHBF). At the end of 2016, these Social Security, Medicare, and Federal employee retirement funds are estimated to own 92 percent of the total debt held by Government accounts. During 2014–2016, the Military Retirement Fund has a large surplus and is estimated to invest a total of $171 billion, 35 percent of total net investment by Government accounts. CSRDF is projected to invest $164 billion, 34 percent of the net total, due largely to the 2014 reinvestment following Treasury’s use of extraordinary measures, discussed above. The Social Security OASI fund is projected to invest $85 billion, 17 percent of the net total. Some Government accounts reduce their investments in Federal securities during 2014–2016. During these years, the Social Security DI fund disinvests $49 billion, or 10 percent of the total net investment. 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 are 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 4–5 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 $19.2 billion at the end of 2014. 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 4–5 it is shown as a separate item at the end of the table and not distributed by account. The amount was $7.4 billion at the end of 2014. Debt Held by the Federal Reserve The Federal Reserve acquires marketable Treasury securities as part of its exercise of monetary policy. For purposes of the Budget and reporting by the Department of the Treasury, the transactions of the Federal Reserve are considered to be non-budgetary, and accordingly the ANALYTICAL PERSPECTIVES Federal Reserve’s holdings of Treasury securities are included as part of debt held by the public.16 Federal Reserve holdings were $2,452 billion (19 percent of debt held by the public) at the end of 2014, up from $2,072 billion (17 percent of debt held by the public) at the end of 2013. Over the last 10 years, the Federal Reserve holdings have averaged 14 percent of debt held by the public. The historical holdings of the Federal Reserve are presented in Table 7.1 in the Budget’s historical tables. The Budget does not project Federal Reserve holdings for future years. 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 U.S. Government. The third part of Table 4–2 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 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 CSRDF on November 15, 2004, in exchange for an equal amount of regular Treasury securities. The securities were issued with maturity dates ranging from June 30, 2009, through June 30, 2019. On October 1, 2013, the FFB issued $9 billion of securities to the CSRDF, in exchange for an equal amount of specialissue Treasury securities issued by the Treasury and held by the CSRDF. The securities issued in October 2013 mature on dates from June 30, 2015, through June 30, 2024. The FFB securities have the same interest rates and maturities as the Treasury securities for which they were exchanged. At the end of 2014, a total of $14 billion of this FFB borrowing remained outstanding. The Housing and Economic Recovery Act of 2008 created another type of debt not subject to limit. This debt, termed “Hope Bonds,” has been issued by Treasury to the FFB for the HOPE for Homeowners program. The outstanding balance of Hope Bonds was $494 million at the end of 2014 and is projected to fall to $34 million at the end of 2015 and then to increase gradually in subsequent years. 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 $484 million at 16 For further detail on the monetary policy activities of the Federal Reserve and the treatment of the Federal Reserve in the Budget, see Chapter 10, “Coverage of the Budget.” 4. FEDERAL BORROWING AND DEBT the end of 2014 and is projected to gradually decline over time. The sole agency debt currently subject to the general limit, $209,000 at the end of 2014, 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 $27.5 billion at the end of 2014 compared with the total unamortized discount (less premium) of $55.9 billion on all Treasury securities. Changes in the debt limit.—The statutory debt limit has been changed many times. Since 1960, the Congress has passed 81 separate acts to raise the limit, revise the definition, extend the duration of a temporary increase, or temporarily suspend the limit.18 The three most recent laws addressing the debt limit have each provided for a temporary suspension followed by an increase in an amount equivalent to the debt that was issued during that suspension period in order to fund commitments requiring payment through the specified end date. The No Budget, No Pay Act of 2013 suspended the debt limit from February 4, 2013, through May 18, 2013, and then raised the debt limit on May 19, 2013, by $305 billion, from $16,394 billion to $16,699 billion. Subsequently, Treasury began to take extraordinary measures to meet the Government’s obligation to pay its bills and invest its trust funds while remaining below the statutory limit. The Continuing Appropriations Act, 2014, suspended the $16,699 billion debt ceiling from October 17, 2013, through February 7, 2014, and then raised the debt limit on February 8, 2014, by $512 billion to $17,212 billion. Again, Treasury began to take extraordinary measures to meet the Government’s obligations. The Temporary Debt Limit Extension Act suspended the $17,212 billion debt ceiling from February 15, 2014, through March 15, 2015. At many times in the past several decades, including 2013 and 2014, the Government has reached the statutory debt limit before an increase has been enacted. When this has occurred, it has been necessary for the Department of the Treasury to take extraordinary measures to meet the Government’s financial obligations. As mentioned above, 17 At the end of 2014, there were also $18 million of FHA debentures not subject to limit. 18 The Acts and the statutory limits since 1940 are listed in Table 7.3 of the Budget’s historical tables, available at http://www.budget.gov/ budget/Historicals. 43 one such measure is the partial or full suspension of the daily reinvestment of the Thrift Savings Plan G-Fund. The Treasury 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 December 2014, the TSP G-Fund had an outstanding balance of $191 billion. The Secretary is also authorized to suspend investments in the CSRDF and to declare a debt issuance suspension period, which allows him or her to redeem a limited amount of securities held by the CSRDF. The Postal Accountability and Enhancement Act of 2006 provides that investments in the Postal Service Retiree Health Benefits Fund shall be made in the same manner as investments in the CSRDF.19 Therefore, Treasury is able to take similar administrative actions with the PSRHBF. The law requires that when any such actions are taken with the G-Fund, the CSRDF, or the PSRHBF, 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. 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 December 2014. As the debt has neared the limit, including in 2013 and 2014, Treasury has also suspended the issuance of SLGS to reduce unanticipated fluctuations in the level of the debt. In addition to these steps, Treasury has previously exchanged Treasury securities held by the CSRDF 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 October 2013. 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 long-term 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 value 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 em19 Both the CSRDF and the PSRHBF are administered by the Office of Personnel Management. 44 ANALYTICAL PERSPECTIVES Table 4–6. FEDERAL FUNDS FINANCING AND CHANGE IN DEBT SUBJECT TO STATUTORY LIMIT (In billions of dollars) Description Actual 2014 Change in Gross Federal Debt: Federal funds deficit (+) ������������������������������������������������������������ 613.2 Other transactions affecting borrowing from the public— Federal funds 1 ��������������������������������������������������������������������� 311.6 Increase (+) or decrease (–) in Federal debt held by Federal funds ������������������������������������������������������������������������������������ 42.1 Adjustments for trust fund surplus/deficit not invested/ disinvested in Federal securities 2 ���������������������������������������� 113.7 Change in unrealized discount on Federal debt held by Government accounts ��������������������������������������������������������� –5.6 Total financing requirements ������������������������������������������ 1,075.0 Change in Debt Subject to Limit: Change in gross Federal debt �������������������������������������������������� 1,075.0 Less: increase (+) or decrease (–) in Federal debt not subject to limit ���������������������������������������������������������������������������������� 6.5 Less: change in adjustment for discount and premium 3 ���������� –13.2 Total, change in debt subject to limit ������������������������������ 1,081.7 Estimate 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 691.6 578.9 591.3 609.2 604.1 614.0 652.2 594.8 610.5 625.1 615.6 144.2 128.7 134.5 132.0 127.3 122.1 114.6 110.9 111.2 108.7 107.7 40.3 39.9 36.4 35.0 39.2 37.5 34.0 35.1 40.5 46.3 45.1 –43.0 –41.2 –0.9 –0.8 –0.7 –0.7 –0.7 –0.7 –0.5 –0.5 –0.4 ......... 833.1 ......... 706.2 ......... 761.3 ......... 775.3 ......... 769.9 ......... 772.8 ......... 800.0 ......... 740.1 ......... 761.7 ......... 779.5 ......... 767.9 833.1 706.2 761.3 775.3 769.9 772.8 800.0 740.1 761.7 779.5 767.9 –0.8 ......... 833.9 –2.2 ......... 708.4 –2.0 ......... 763.2 –2.4 ......... 777.7 –2.8 ......... 772.8 –1.8 ......... 774.6 –2.5 ......... 802.5 –1.7 ......... 741.8 –1.8 ......... 763.5 –1.5 ......... 781.0 –0.1 ......... 768.0 Memorandum: Debt subject to statutory limit 4 ��������������������������������������������� 17,781.1 18,615.0 19,323.4 20,086.6 20,864.3 21,637.0 22,411.7 23,214.2 23,956.0 24,719.5 25,500.5 26,268.5 1 Includes Federal fund transactions that correspond to those presented in Table 4–2, 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 Legislation enacted February 15, 2014, (P.L. 113–83) temporarily suspends the debt limit through March 15, 2015. ployee salaries, payments to vendors and contractors, and other obligations. The debt subject to limit is estimated to increase to $18,615 billion by the end of 2015 and to $19,323 billion by the end of 2016. Federal funds financing and the change in debt subject to limit.—The change in debt held by the public, as shown in Table 4–2, 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 4–2. The change in debt held by Government accounts results in 10 percent of the estimated total increase in debt subject to limit from 2015 through 2025. 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.20 20 For further discussion of the trust funds and Federal funds groups, see Chapter 26, “Trust Funds and Federal Funds.’’ 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. Table 4–6 derives the change in debt subject to limit. In 2014 the Federal funds deficit was $613 billion, and other factors increased financing requirements by $312 billion. The change in the Treasury operating cash balance increased financing requirements by $70 billion, the net financing disbursements of credit financing accounts increased financing requirements by $128 billion, and other factors increased financing requirements by $114 billion. As discussed earlier in this chapter, this net $114 billion 45 4. FEDERAL BORROWING AND DEBT Table 4–7. FOREIGN HOLDINGS OF FEDERAL DEBT (Dollar amounts in billions) Change in debt held by the public 2 Debt held by the public Fiscal Year Percentage foreign Foreign 1 Total Total Foreign 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 ����������������������������������������������������� 9,018.9 4,324.2 47.9 1,474.2 753.6 2011 ����������������������������������������������������� 10,128.2 4,912.1 48.5 1,109.3 587.9 2012 ����������������������������������������������������� 11,281.1 5,476.1 48.5 1,152.9 564.0 2013 ����������������������������������������������������� 11,982.7 5,652.8 47.2 701.6 176.7 2014 ����������������������������������������������������� 12,779.9 6,066.4 47.5 797.2 413.6 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, annual June benchmark revisions for 2002–2010, and additional revisions. 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. in other factors was mainly due to the October 2013 reinvestment of the TSP G-Fund. In addition, special funds and revolving funds, which are part of the Federal funds group, invested a net of $42 billion in Treasury securities. A $114 billion 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 NRRIT’s investments in non-Federal securities). As discussed above, this unusually large adjustment amount is due primarily to the restoration of the CSRDF following Treasury’s use of extraordinary measures. As a net result of all these factors, $1,075 billion in financing was required, increasing gross Federal debt by that amount. Since Federal debt not subject to limit increased by $6 billion and the adjustment for discount and premium changed by $13 billion, the debt subject to limit increased by $1,082 billion, while debt held by the public increased by $797 billion. Debt subject to limit is estimated to increase by $834 billion in 2015 and by $708 billion in 2016. 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 4–6. While debt held by the public increases by $7,591 billion from the end of 2014 through 2025, debt subject to limit increases by $8,487 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 4–7. At the end of 2014, foreign holdings of Treasury debt were $6,066 billion, which was 47 percent of the total debt held by the public.21 Foreign central banks and other foreign official institutions owned 68 percent of the foreign holdings of Federal debt; private investors owned nearly all the rest. At the end of 2014, the nations holding the 21 The debt calculated by the Bureau of Economic Analysis is different, though similar in size, because of a different method of valuing securities. 46 largest shares of U.S. Federal debt were China, which held 21 percent of all foreign holdings, and Japan, which held 20 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 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. Since 2008, foreign holdings have remained relatively stable as a percentage of Federal debt. As a percent of total Federal borrowing from the public, foreign holdings were 47 percent at the end of 2013 and 2014. The dollar increase in foreign holdings was about 52 percent of total Federal borrowing from the public in 2014 and 48 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 ANALYTICAL PERSPECTIVES 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 The Government’s effects on the credit markets arise not only from its own borrowing but also from the direct 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 are discussed in Chapter 20, “Credit and Insurance,’’ in this volume. Detailed data are presented in tables accompanying that chapter. PERFORMANCE AND MANAGEMENT 47 48 5. SOCIAL INDICATORS The social indicators presented in this chapter illustrate in broad terms how the Nation is faring in selected areas in which the Federal Government has significant responsibilities. Indicators are drawn from six selected domains: economic, demographic and civic, socioeconomic, health, security and safety, and environment and energy. The indicators shown in the tables in this chapter were chosen in consultation with statistical and data experts from across the Federal Government. These indicators are only a subset of the vast array of available data on conditions in the United States. In choosing indicators for these tables, priority was given to measures that are broadly relevant to Americans and consistently available over an extended period. Such indicators provide a current snapshot while also making it easier to draw comparisons and establish trends. The 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 impacts of Government policies. However, they do provide a quantitative picture of the progress (or lack of progress) toward some of the ultimate ends that Government policy is intended to promote, and of the baseline on which future policies are set. Subsequent chapters in the Performance and Management section of this volume discuss approaches to assessing the impacts of Government programs and improving their quality. The President has made it clear that policy decisions should be based upon evidence—evidence that identifies the Nation’s greatest needs and challenges and evidence about which strategies are working to overcome those challenges. The social indicators in this chapter provide useful context both for prioritizing budgetary and policymaking resources and for evaluating how well existing approaches are working. Economic: The 2008-2009 economic downturn produced the worst labor market since the Great Depression. The employment-population ratio dropped sharply from its pre-recession level, and real GDP per person also declined. The economy is steadily recovering, with the unemployment rate declining to 5.6 percent in December 2014 from a high of 10 percent in October 2009, and job growth accelerating in 2014. However, although employment has improved, there remains room for further recovery. For example, rates of marginally attached and underemployed workers are still well above pre-recession levels. Over the entire period from 1960 to 2014, the primary pattern has been one of economic growth and rising living standards. Real GDP per person has nearly tripled as technological progress and the accumulation of human and physical capital have increased the Nation’s productive capacity. The stock of physical capital including consumer durable goods like cars and appliances amounted to over $54 trillion in 2013, more than four times the size of the capital stock in 1960, after accounting for inflation. National saving, a key determinant of future prosperity because it supports capital accumulation, fell from 5.7 percent in 2000 to 2.7 percent in 2005 as Federal budget surpluses turned to deficits, and fell even further in the recession that followed, turning negative in 2010. Since then, national saving has modestly increased to 1.7 percent in 2014. Meanwhile, the labor force participation rate, also critical for growth, has declined for more than a decade, in large part reflecting the beginning of a trend in which the baby boom generation retires. The United States continues to be a leader in innovation. From 1970 to 2013, the rate of patents for invention by U.S. inventors increased from 231 to 423 per million population. National Research and Development (R&D) spending has hovered between 2.2 percent and 2.8 percent of GDP for the past 50 years, trending upward in recent years. Demographic and Civic: The U.S. population has steadily increased from 1970, when it numbered 204 million, to 319 million in 2014. The foreign born population has increased rapidly since 1970, quadrupling from about 10 million in 1970 to 41 million in 2013. The U.S. population is getting older, due in part to the aging of the baby boomers, improvements in medical technology, and declining birth rates. From 1970 to 2013, the percent of the population over age 65 increased from 9.8 to 14.1, and the percent over age 85 increased from 0.7 to 1.9. The composition of American households and families has evolved considerably over time. The percent of Americans who have ever married continues to decline as it has over the last five decades. Average family sizes have also fallen over this period, a pattern that is typical among developed countries. After increasing for over three decades, births to unmarried women age 15-17 and the fraction of single parent households reached a turning point in 1995. From 1995 to 2013, the number of births per 1,000 unmarried women age 15-17 fell from 30 to 12, the lowest level since at least 1970. Meanwhile, the fraction of single parent households stopped increasing in 1995, stabilizing at about 9 percent of all households. Charitable giving among Americans, measured by the average charitable contribution per itemized tax return, has generally increased over the past 50 years.1 The effects of the 2008-2009 recession are evident in the sharp drop in charitable giving from 2005 to 2010, but much of that decline was reversed in 2012. More Americans are 1 This measure includes charitable giving only among those who claim itemized deductions. It is therefore influenced by changes in tax laws and in the characteristics of those who itemize. 49 50 volunteering. In 1990, 20 percent of Americans volunteered at least once; in 2013, 25 percent volunteered. The political participation of Americans, measured by the voting rate in Presidential elections, declined from about 63 percent in 1964 to 57 percent in 1972. It fell further in the 1996 and 2000 elections, reaching a low of only 50 percent in 1996. However, the Presidential election voting rate rebounded in the past three elections, averaging close to 57 percent. The cultural engagement of Americans has changed over time. The percentage of adults attending visual or performing arts activities, including movie going, decreased from 72 percent in 1980 to 64 percent in 2012. The percentage of Americans engaging in leisure reading decreased from 66 percent in 1990 to 58 percent in 2012. However, new modes of cultural engagement have emerged, such as consumption of entertainment and new kinds of media via the internet and electronic devices. Socioeconomic: Education is a critical component of the Nation’s economic growth and competitiveness, while also benefiting society in areas such as health, crime, and civic engagement. Between 1960 and 1980, the percentage of 25- to 34-year olds who have graduated from high school increased from 58 percent to 84 percent, a gain of 13 percentage points per decade. Progress has slowed since then with a five percentage point gain over the past 33 years. But the percentage of 25- to 34-year olds who have graduated from college continues to rise, from only 11 percent in 1960 to 33 percent in 2013. Reading and mathematics achievement show little if any improvement for American 17-year olds over the period from 1970 to 2012. However, achievement in these areas has improved among 9- and 13-year olds, especially for mathematics and particularly since the 2004 assessment. While the percentage of the population with a graduate degree has risen over time, the percentage of graduate degrees in science and engineering fell by half in the period between 1960 to 1980, from 22 percent to 11 percent, and remained at 13 percent in 2013. Although national prosperity has grown considerably over the past 50 years, these gains have not been shared equally. Real disposable income per capita more than tripled since 1960, but real income for the median household increased only 21 percent from 1970 to 2000, and has declined by 9 percent since 2000. The income share of the top 1 percent of taxpayers, approximately 9 percent in 1980, rose to 22 percent in 2012. In contrast, the income share of the bottom 50 percent of taxpayers declined from 18 percent in 1980 to 11 percent in 2012. From 2000 to 2012, the poverty rate, the percentage of food-insecure households, and the percentage of Americans receiving benefits from the Supplemental Nutrition Assistance Program (formerly known as the Food Stamp Program), increased as Americans struggled with the economic downturn. However, each of these measures has declined slightly in the last one or two years as the economic recovery has taken hold. After increasing from 1990 to 2005, homeownership rates have fallen since the 2008 housing crisis. The share ANALYTICAL PERSPECTIVES of families with children and severe housing cost burdens more than doubled from 8 percent in 1980 to 18 percent in 2011, before falling to 16 percent in 2013. Health: America has by far the most expensive health care system in the world, yet has historically had much higher rates of uninsured than other countries with comparable wealth. National health expenditures as a share of GDP have increased from about 5 percent in 1960 to over 17 percent in 2013. This increase in health care spending has coincided with improvements in medical technology that have improved health, but the level of per capita spending in the United States is far greater than that in other Organization for Economic Cooperation and Development (OECD) countries that have experienced comparable health improvements. In recent years, however, health care spending as a share of GDP has leveled off, reflecting some combination of structural changes and economic conditions. Rates of uninsured, at 17 percent for non-elderly adults and 6 percent for children in 2014, appear to have declined substantially since the major coverage provisions of the Affordable Care Act took effect in 2014.2 A number of surveys have found that the Affordable Care Act reduced the number of uninsured by about 10 million in 2014, and it is projected to further reduce the number of uninsured in the years ahead.3,4 Some key indicators of national health have improved since 1960. Life expectancy at birth increased by nine years, from 69.7 in 1960 to 78.8 in 2012. Infant mortality fell from 26 to approximately 6 per 1,000 live births, with a rapid decline occurring in the 1970s. Improvement in health-related behaviors among Americans has been mixed. Although the percent of adults who smoke cigarettes in 2013 was less than half of what it was in 1970, rates of obesity have soared. In 1980, 15 percent of adults and 6 percent of children were obese; in 2011, 35 percent of adults and 17 percent of children were obese. Adult obesity continued to rise even as the share of adults engaging in regular physical activity increased from 15 percent in 2000 to 21 percent in 2013. Security and Safety: The last three decades have witnessed a remarkable decline in crime. From 1980 to 2013, the property crime rate dropped by 74 percent while the murder rate fell by half. Road transportation has also become safer. Safety belt use increased by 16 percentage points from 2000 to 2013, and the annual number of highway fatalities fell by 36 percent from 1970 to 2012 despite the increase in the population. The number of military personnel on active duty has declined for several years, reflecting the withdrawal of U.S. troops from Iraq and Afghanistan. In 2013 the active duty count fell below the level in 2000, prior to the wars in Iraq and Afghanistan. The highest count of active duty military personnel was 3.07 million in 1970, reached 2 Rates of uninsured in 2014 are based on preliminary January-June 2014 data from the National Health Interview Survey. http://www.cdc. gov/nchs/data/nhis/earlyrelease/insur201412.pdf 3 http://www.whitehouse.gov/blog/2014/12/18/2014-has-seenlargest-coverage-gains-four-decades-putting-uninsured-rate-or-near-his 4 Congressional Budget Office. 2014. “Updated Estimates of the Effects of the Insurance Coverage Provisions of the Affordable Care Act, April 2014.” Washington, DC: Congressional Budget Office. 51 5. SOCIAL INDICATORS during the Vietnam War. The number of veterans has declined from 29 million in 1980 to 22 million in 2013. Environment and Energy: The Nation’s future well-being and prosperity depend on stewardship of our natural resources, the environment, and on our ability to grow a clean energy economy. Substantial progress has been made on air quality in the United States, with the concentration of particulate matter falling 34 percent from 2000 to 2013. Although technological advances and a shift in production patterns mean that Americans now use less than half as much energy per real dollar of GDP as they did 50 years ago, rising income levels have contributed to a level of per capita consumption that has remained relatively constant over the last 40 years. The percent of U.S. electricity production from renewable sources grew from 8.8 percent in 2005 to 12.9 percent in 2013. Moving forward, the greatest environmental challenge is reducing greenhouse gas emissions. In 2014, the President announced a target reduction in the range of 26-28 percent of 2005 net greenhouse gas emissions by 2025.5 From 2005 to 2012, gross greenhouse gas emissions fell by 10 percent. Gross greenhouse gas emissions per capita and per unit of GDP fell by 15 and 17 percent, respectively. However, annual mean atmospheric carbon dioxide (CO2) concentration, a global measure of climate change, continues to rise. In 1960 the level of CO2 concentration was 13 percent above its pre-industrial level of 280 ppm; in 2014 it was 42 percent above the pre-industrial level. 5 http://www.whitehouse.gov/the-press-office/2014/11/11/factsheet-us-china-joint-announcement-climate-change-and-clean-energy-c Table 5–1. SOCIAL INDICATORS Calendar Years 1960 1970 1980 1990 1995 2000 2005 2010 2011 2012 2013 2014 Economic 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 General Economic Conditions Real GDP per person (chained 2009 dollars) 1 ���������������������������� 17,199 23,024 28,326 35,795 38,166 44,474 48,089 47,724 48,137 48,908 49,642 Real GDP per person change, 5-year annual average 1 �������� 0.8 2.5 2.7 2.5 1.3 3.3 1.6 –0.2 –0.3 –0.2 0.4 Consumer Price Index 2 ���������������������������������������������������������������� 12.7 16.7 35.4 56.1 65.4 73.9 83.8 93.6 96.6 98.6 100.0 Private goods producing (%) ������������������������������������������������������� N/A N/A N/A N/A N/A 24.9 23.9 22.3 22.8 22.8 22.8 Private services producing (%) ���������������������������������������������������� N/A N/A N/A N/A N/A 75.1 76.1 77.7 77.2 77.2 77.2 Jobs and Unemployment Labor force participation rate (%) ������������������������������������������������� Employment (millions) ������������������������������������������������������������������ Employment-population ratio (%) ������������������������������������������������� Payroll employment change - December to December, SA (millions) ���������������������������������������������������������������������������������� Payroll employment change - 5-year annual average, NSA (millions) ���������������������������������������������������������������������������� Civilian unemployment rate (%) ���������������������������������������������������� Unemployment plus marginally attached and underemployed (%) ���� Receiving Social Security disabled-worker benefits (% of population) 3 ���������������������������������������������������������������������������� 50,244 1.4 N/A N/A N/A 59.4 65.8 56.1 60.4 78.7 57.4 63.8 99.3 59.2 66.5 118.8 62.8 66.6 124.9 62.9 67.1 136.9 64.4 66.0 141.7 62.7 64.7 139.1 58.5 64.1 139.9 58.4 63.7 142.5 58.6 63.2 143.9 58.6 62.9 146.3 59.0 –0.4 –0.5 0.3 0.3 2.2 1.9 2.5 1.1 2.1 2.2 2.3 3.0 0.7 5.5 N/A 2.0 4.9 N/A 2.7 7.1 N/A 2.4 5.6 N/A 1.6 5.6 10.1 2.9 4.0 7.0 0.4 5.1 8.9 –0.7 9.6 16.7 –0.9 8.9 15.9 –0.8 8.1 14.7 –0.2 7.4 13.8 1.5 6.2 12.0 0.9 2.0 2.8 2.5 3.3 3.7 4.5 5.5 5.7 5.9 5.9 5.9 Infrastructure, Innovation, and Capital Investment Nonfarm business output per hour (average 5 year % change) 4 ��� 1.8 2.1 1.2 1.6 1.6 2.8 3.2 2.0 1.8 1.7 1.7 Corn for grain production (million bushels) ����������������������������������� 3,907 4,152 6,639 7,934 7,400 9,915 11,112 12,447 12,358 10,780 13,925 Real net stock of fixed assets and consumer durable goods (billions of 2012$) 5 ������������������������������������������������������������������ 13,242 19,784 29,219 33,148 35,420 41,197 51,026 53,117 53,172 53,572 54,281 Population served by secondary wastewater treatment or better (%) 6 ����������������������������������������������������������������������������������������� N/A 41.6 56.4 63.7 61.1 71.4 74.3 72.0 N/A N/A N/A Electricity net generation (kWh per capita) ����������������������������������� 4,202 7,486 10,076 12,170 12,594 13,475 13,723 13,336 13,159 12,896 12,837 Patents for invention, U.S. origin (per million population) 7 ����������� N/A 231 164 190 209 301 253 348 349 386 423 Net national saving rate (% of GDP) 1 ������������������������������������������ 10.8 8.5 7.2 3.9 4.0 5.8 2.7 –0.9 –0.1 1.8 2.4 R&D spending (% of GDP) 8 �������������������������������������������������������� 2.52 2.44 2.21 2.54 2.40 2.61 2.50 2.72 2.76 2.80 N/A N/A 14,475 N/A N/A N/A N/A 1.7 N/A Demographic and Civic 22 23 24 25 26 Population Total population (millions) 9 ����������������������������������������������������������� Foreign born population (millions) 10 �������������������������������������������� 17 years and younger (%) 9 ���������������������������������������������������������� 65 years and older (%) 9 ��������������������������������������������������������������� 85 years and older (%) 9 ��������������������������������������������������������������� N/A 9.7 N/A N/A N/A 204.0 9.6 N/A 9.8 0.7 227.2 14.1 28.0 11.3 1.0 249.6 19.8 25.7 12.5 1.2 266.3 N/A 26.1 12.7 1.4 282.2 31.1 25.7 12.4 1.5 295.5 37.5 24.9 12.4 1.6 309.3 40.0 24.0 13.1 1.8 311.6 40.4 23.7 13.3 1.8 313.9 40.8 23.5 13.7 1.9 316.1 41.3 23.3 14.1 1.9 318.9 N/A 23.1 N/A N/A 27 Household Composition Ever married (% of age 15 and older) 11 �������������������������������������� 78.0 75.1 74.1 73.8 72.9 71.9 70.9 69.3 69.2 68.8 68.6 68.3 52 ANALYTICAL PERSPECTIVES Table 5–1. SOCIAL INDICATORS—Continued Calendar Years 28 29 30 31 32 33 34 35 12 Average family size ������������������������������������������������������������������� Births to unmarried women age 15–17 (per 1,000 unmarried women age 15–17) ������������������������������������������������������������������ Single parent households (%) ������������������������������������������������������ Civic and Cultural Engagement Average charitable contribution per itemized tax return (2012 dollars) 13 ��������������������������������������������������������������������������������� Voting for President (% of voting age population) 14 ��������������������� Persons volunteering (% age 16 and older) 15 ����������������������������� Attendance at visual or performing arts activity, including movie going (% age 18 and older) 16 ������������������������������������������������� Leisure reading (books not required for work or school) 16 ���������� 1960 1970 1980 1990 1995 2000 2005 2010 2011 2012 2013 2014 3.7 3.6 3.3 3.2 3.2 3.2 3.1 3.2 3.1 3.1 3.1 3.1 N/A 4.4 17.1 5.2 20.6 7.5 29.6 8.3 30.1 9.1 23.9 8.9 19.4 8.9 16.8 9.1 14.9 9.1 13.7 9.3 11.9 9.1 N/A 8.9 2,172 63.4 N/A 2,155 57.0 N/A 2,486 55.1 N/A 3,125 56.4 20.4 3,322 49.8 N/A 4,409 52.1 N/A 4,514 56.7 28.8 3,843 58.3 26.3 3,847 N/A 26.8 4,372 54.9 26.5 N/A N/A 25.4 N/A N/A N/A N/A N/A N/A N/A 71.7 N/A 72.1 66.0 N/A N/A 70.1 58.9 N/A N/A N/A N/A 63.9 58.9 63.5 58.2 N/A N/A N/A N/A 58.1 11.0 N/A N/A 71.5 15.5 285 304 84.2 23.3 285 298 84.1 22.7 290 305 N/A N/A 288 306 83.9 27.5 288 308 86.4 29.9 283 305 87.2 31.1 286 306 87.9 31.5 N/A N/A 88.4 32.2 287 306 88.6 32.9 N/A N/A N/A N/A N/A N/A 22.0 17.2 11.2 14.7 14.2 12.6 12.7 12.1 12.4 12.6 13.2 N/A N/A N/A 10.1 11.4 12.4 13.3 13.7 13.0 12.9 12.9 N/A N/A Socioeconomic Education High school graduates (% of age 25–34) 17 ��������������������������������� College graduates (% of age 25–34) 18 ���������������������������������������� Reading achievement score (age 17) 19 ��������������������������������������� Math achievement score (age 17) 20 �������������������������������������������� Science and engineering graduate degrees (% of total graduate degrees) ���������������������������������������������������������������������������������� 41 Receiving special education services (% of age 3–21 public school students) ���������������������������������������������������������������������� 36 37 38 39 40 42 43 44 45 46 47 48 49 50 51 52 53 Income, Savings, and Inequality Real median income: all households (2013 dollars) ������������������� N/A 46,759 47,668 51,735 51,719 56,800 55,278 52,646 51,842 51,759 51,939 Real disposable income per capita (chained 2009 dollars) 1 �������� 11,877 16,643 20,159 25,555 27,180 31,524 34,424 35,688 36,314 37,156 36,815 Adjusted gross income share of top 1% of all taxpayers �������������� N/A N/A 8.5 14.0 14.6 20.8 21.2 18.9 18.7 21.9 N/A Adjusted gross income share of lower 50% of all taxpayers �������� N/A N/A 17.7 15.0 14.5 13.0 12.9 11.7 11.6 11.1 N/A Personal saving rate (% of disposable personal income) 1 ���������� 10.1 12.6 10.5 7.8 6.4 4.2 2.5 5.6 6.0 7.2 4.9 Poverty rate (%) 21 ������������������������������������������������������������������������ 22.2 12.6 13.0 13.5 13.8 11.3 12.6 15.1 15.0 15.0 14.5 Food-insecure households (% of all households) 22 ��������������������� N/A N/A N/A N/A 11.9 10.5 11.0 14.5 14.9 14.5 14.3 Supplemental Nutrition Assistance Program (% of population on SNAP) 23 ���������������������������������������������������������������������������������� N/A 3.3 9.5 8.2 9.9 6.1 8.9 13.5 14.6 15.0 15.0 Median wealth of households, age 55–64 (in thousands of 2013 dollars) 24 ��������������������������������������������������������������������������������� 78 N/A 153 177 175 243 311 192 N/A N/A 166 Housing Homeownership among households with children (%) ����������������� Families with children and severe housing cost burden (%) 25 ����� Families with children and inadequate housing (%) 26 ����������������� N/A N/A N/A N/A 4.9 N/A N/A 14.5 N/A N/A N/A N/A N/A N/A N/A N/A 8 9 63.6 10 9 65.1 12 7 67.5 11 7 68.4 14.5 5.4 65.5 17.9 5.3 63.3 18.3 5.5 62.9 17.0 5.2 62.5 15.7 5.0 N/A N/A N/A Health 54 55 56 57 58 59 Health Status Life expectancy at birth (years) ���������������������������������������������������� Infant mortality (per 1,000 live births) ������������������������������������������� Low birthweight [<2,500 gms] (% of babies) 27 ���������������������������� Activity limitation (% of age 5–17) 28 �������������������������������������������� Activity limitation (% of age 18 and over) 29 ���������������������������������� Difficulties with activities of daily living (% of age 65 and over) 30 ��� 69.7 26.0 7.7 N/A N/A N/A 70.8 20.0 7.9 N/A N/A N/A 73.7 12.6 6.8 N/A N/A N/A 75.4 9.2 7.0 N/A N/A N/A 75.8 7.6 7.3 N/A N/A N/A 76.8 6.9 7.6 7.0 27.9 6.3 77.6 6.9 8.2 8.0 29.1 6.2 78.7 6.2 8.2 9.2 29.9 6.8 78.7 6.1 8.1 9.3 29.8 7.3 78.8 6.0 8.0 9.4 28.4 6.5 N/A N/A 8.0 9.2 29.5 7.3 N/A N/A N/A N/A N/A N/A 60 61 62 63 64 Health Behavior Engaged in regular physical activity (% of age 18 and older) 31 ��� Obesity (% of age 20–74 with BMI 30 or greater) 32 �������������������� Obesity (% of age 2–19) 33 ����������������������������������������������������������� Cigarette smokers (% of age 18 and older) ���������������������������������� Excessive alcohol use (% of age 18 and older) 34 ������������������������ N/A 13.4 N/A N/A N/A N/A N/A N/A 39.2 N/A N/A 15.0 5.5 32.7 N/A N/A 23.2 10.0 25.3 N/A N/A N/A N/A 24.6 N/A 15.0 30.9 13.9 23.1 8.7 16.6 35.1 15.4 20.8 8.9 20.7 36.1 16.9 19.3 10.1 21.0 35.3 16.9 19.0 9.4 20.8 N/A N/A 18.2 9.6 21.0 N/A N/A 17.9 9.5 N/A N/A N/A N/A N/A 65 66 67 68 Access to Health Care Total national health expenditures (% of GDP) ����������������������������� Persons without health insurance (% of age 18–64) 35 ����������������� Persons without health insurance (% of age 17 and younger) 35 ���� Children age 19–35 months with recommended vaccinations (%) 36 ��� 5.0 N/A N/A N/A 7.0 N/A N/A N/A 8.9 N/A N/A N/A 12.1 N/A N/A N/A 13.4 16.9 13.0 55.1 13.4 18.9 12.6 72.8 15.5 19.3 9.3 76.1 17.4 22.3 7.8 56.6 17.4 21.2 7.0 68.5 17.4 20.9 6.6 68.4 17.4 20.5 6.6 70.4 N/A 17.0 6.1 N/A 53 5. SOCIAL INDICATORS Table 5–1. SOCIAL INDICATORS—Continued Calendar Years 1960 1970 1980 1990 1995 2000 2005 2010 2011 2012 2013 2014 Security and Safety Crime Property crimes (per 100,000 households) 37 ������������������������������ Violent crime victimizations (per 100,000 population age 12 or older) 38 ����������������������������������������������������������������������������������� 71 Murder rate (per 100,000 persons) ����������������������������������������������� 69 70 N/A N/A 49,610 34,890 31,547 19,043 15,947 12,541 13,868 15,584 13,144 N/A N/A 5.1 N/A 7.9 2,317 4.5 N/A N/A 72 73 National Security Military personnel on active duty (thousands) 39 �������������������������� 2,475 3,065 2,051 2,044 1,518 1,384 1,389 1,431 1,425 1,400 1,382 Veterans (thousands) ������������������������������������������������������������������� 22,534 26,976 28,640 27,320 26,198 26,551 24,521 23,032 22,676 22,328 21,973 1,338 N/A 74 75 Transportation Safety Safety belt use (%) ����������������������������������������������������������������������� N/A N/A N/A N/A N/A 71 82 85 84 86 Highway fatalities �������������������������������������������������������������������������� 36,399 52,627 51,091 44,599 41,817 41,945 43,510 32,999 32,479 33,561 4,940 10.2 4,410 9.4 7,068 8.2 3,749 5.5 2,842 5.6 1,928 4.8 2,257 4.7 2,612 4.7 87 N/A N/A N/A Environment and Energy 76 77 78 79 80 81 82 Air Quality and Greenhouse Gases Ground level ozone (ppm) based on 222 monitoring sites ����������� Particulate matter 2.5 (ug/m3) based on 537 monitoring sites ����� Annual mean atmospheric CO2 concentration (Mauna Lao, Hawaii; ppm) 40 ������������������������������������������������������������������������ Gross greenhouse gas emissions (teragrams CO2 equivalent) 41 ���� Net greenhouse gas emissions, including sinks (teragrams CO2 equivalent) ������������������������������������������������������������������������������� Gross greenhouse gas emissions per capita (metric tons CO2 equivalent) ������������������������������������������������������������������������������� Gross greenhouse gas emissions per 2005$ of GDP (kilograms CO2 equivalent) ����������������������������������������������������������������������� N/A N/A N/A N/A 0.101 N/A 0.090 N/A 0.090 N/A 0.082 13.5 0.080 12.8 0.073 9.9 0.074 9.8 0.076 9.1 0.068 8.9 N/A N/A 316.9 N/A 325.7 N/A 338.7 N/A 354.4 6,233 360.8 6,613 369.5 7,107 379.8 7,254 389.9 6,875 391.6 6,753 393.8 6,526 396.5 N/A 398.6 N/A N/A N/A N/A 5,402 5,809 6,415 6,223 5,907 5,773 5,546 N/A N/A N/A N/A N/A 24.6 24.5 24.8 24.2 21.9 21.4 20.5 N/A N/A N/A N/A N/A 0.697 0.654 0.566 0.510 0.465 0.449 0.422 N/A N/A Energy 83 Energy consumption per capita (million Btu) �������������������������������� 250 331 344 338 342 350 339 317 313 303 309 N/A 84 Energy consumption per 2009$ GDP (thousand Btu per 2009$) ��� 14.5 14.4 12.1 9.4 8.9 7.9 7.0 6.6 6.5 6.2 6.2 N/A 85 Electricity net generation from renewable sources, all sectors (% of total) ������������������������������������������������������������������������������������� 19.7 16.4 12.4 11.8 11.5 9.4 8.8 10.4 12.5 12.2 12.9 N/A N/A=Number is not available. 1 Data for 2014 are averages of the first 3 quarters. 2 Adjusted CPI-U. 2013=100. 3 Gross prevalence rate for persons receiving Social Security disabled-worker benefits among the estimated population insured in the event of disability at end of year. Gross rates do not account for changes in the age and gender composition of the insured population over time. 4 Values for prior years have been revised from the prior version of this publication. 5 Data adjusted by OMB to real 2012 dollars. 6 Data correspond to years 1972, 1982, 1992, 1996, 2000, 2004, 2008. 7 Patent data adjusted by OMB to incorporate total population estimates from U.S. Census Bureau. 8 The R&D to GDP ratio is now revised to reflect the new methodology introduced in the 2013 comprehensive revision of the GDP and other National Income and Product accounts by the U.S. Bureau of Economic Analysis (BEA). In late July 2013, BEA reported GDP and related statistics that were revised back to 1929. The new GDP methodology treats R&D as investment in all sectors of the economy, among other methodological changes. The net effects of these changes are somewhat higher levels of GDP year to year and corresponding decreases in the R&D to GDP ratios reported annually by the National Science Foundation (NSF). For further details see NSF’s InfoBrief “R&D Recognized as Investment in U.S. Gross Domestic Product Statistics: GDP Increase Lowers R&D-to-GDP Ratio” at >http://www.nsf.gov/statistics/<. 9 Data source and values for 2010 to 2013 have been updated relative to the prior version of this publication. 10 Data source for 1960 to 2000 is the decennial census; data source for 2006, 2010, 2011, 2012, and 2013 is the American Community Survey. 11 For 1960, age 14 and older. 12 Average size of family households. Family households are those in which there is someone present who is related to the householder by birth, marriage, or adoption. 13 Charitable giving reported as itemized deductions on Schedule A. 14 Data correspond to years 1964, 1972, 1980, 1992, 1996, 2000, 2004, 2008, and 2012. The voting statistics in this table are presented as ratios of official voting tallies, as reported by the U.S. Clerk of the House, to population estimates from the Current Population Survey. 15 Refers to those who volunteered at least once during a one-year period, from September of the previous year to September of the year specified. For 1990, refers to 1989 estimate from the CPS Supplement on volunteers. 16 The 1980, 1990, 2000, and 2011 data come from the 1982, 1992, 2002, and 2008 waves of the survey, respectively. 17 For 1960, includes those who have completed 4 years of high school or beyond. For 1970 and 1980, includes those who have completed 12 years of school or beyond. For 1990 onward, includes those who have completed a high school diploma or the equivalent. 18 For 1960 to 1980, includes those who have completed 4 or more years of college. From 1990 onward, includes those who have a bachelor’s degree or higher. 19 Data correspond to years 1971, 1980, 1990, 1994, 1999, 2004, 2008, and 2012. 20 Data correspond to years 1973, 1982, 1990, 1994, 1999, 2004, 2008, and 2012. 21 The poverty rate does not reflect noncash government transfers. 22 Food-insecure classification is based on reports of three or more conditions that characterize households when they are having difficulty obtaining adequate food, out of a total of 10 such conditions. 54 ANALYTICAL PERSPECTIVES Table 5–1. SOCIAL INDICATORS—Continued 23 2014 reflects average monthly participation from January through June 2014 due to lags in data availability. 24 Data values shown are 1962, 1983, 1989, 1995, 2001, 2004, 2010, and 2013. For 1962, the data source is the SFCC; for subsequent years, the data source is the SCF. 25 Expenditures for housing and utilities exceed 50 percent of reported income. Some data interpolated. 26 Inadequate housing has moderate to severe problems, usually poor plumbing, or heating or upkeep problems. Some data interpolated. 27 Data for 2013 are preliminary. 28 Total activity limitation includes receipt of special education services; assistance with personal care needs; limitations related to the child’s ability to walk; difficulty remembering or periods of confusion; limitations in any activities because of physical, mental, or emotional problems. 29 Activity limitation among adults aged 18 and over is defined as having a basic action difficulty in one or more of the following: movement, emotional, sensory (seeing or hearing), or cognitive. 30 Activities of daily living include personal care activities: bathing or showering, dressing, getting on or out of bed or a chair, using the toilet, and eating. Persons are considered to have an ADL limitation if any condition(s) causing the respondent to need help with the specific activities was chronic. 31 Participation in leisure-time aerobic and muscle-strengthening activities that meet 2008 Federal physical activity guidelines. 32 BMI refers to body mass index. The 1960, 1980, 1990, 2000, 2005, 2010, 2011 data correspond to survey years 1960–1962, 1976–1980, 1988–1994, 1999–2000, 2005–2006, 2009–2010 and 2011–2012, respectively. 33 Percentage at or above the sex-and age-specific 95th percentile BMI cutoff points from the 2000 CDC growth charts. The 1980, 1990, 2000, 2005, 2010, 2011 data correspond to survey years 1976–1980, 1988–1994, 1999–2000, 2005–2006, 2009–2010, and 2011–2012, respectively. 34 Percent of age 18 and over who had five or more drinks in a day on at least 12 days in the past year. 35 A person was defined as uninsured if he or she did not have any private health insurance, Medicare, Medicaid, CHIP (1999–2011), state-sponsored, other government-sponsored health plan (1997–2011), or military plan. A person was also defined as uninsured if he or she had only Indian Health Service coverage or had only a private plan that paid for one type of service such as accidents or dental care. In 1993–1996 Medicaid coverage is estimated through a survey question about having Medicaid in the past month and through participation in Aid to Families with Dependent Children (AFDC) or Supplemental Security Income (SSI) programs. In 1997 to 2013, Medicaid coverage is estimated through a question about current Medicaid coverage. Beginning in the third quarter of 2004, a Medicaid probe question was added to reduce potential errors in reporting Medicaid status. Persons under age 65 with no reported coverage were asked explictly about Medicaid coverage. 36 Recommended vaccine series changed over time. 1995 and 2000 data correspond with the 4:3:1:3:3 recommended series; 2005 data correspond with the 4:3:1:3:3:1 series; 2010, 2011, 2012, and 2013 data correspond with the 4:3:1:3*:3:1:4 series. 37 Property crimes, including burglary, motor vehicle theft, and property theft, reported by a sample of households. Includes property crimes both reported and not reported to law enforcement. 38 Violent crimes include rape, robbery, aggravated assault, and simple assault. Includes crimes both reported and not reported to law enforcement. Due to methodological changes in the enumeration method for NCVS estimates from 1993 to present, use caution when comparing 1980 and 1990 criminal victimization estimates to future years. Estimates from 1995 and beyond include a small number of victimizations, referred to as series victimizations, using a new counting strategy. High-frequency repeat victimizations, or series victimizations, are six or more similar but separate victimizations that occur with such frequency that the victim is unable to recall each individual event or describe each event in detail. Including series victimizations in national estimates can substantially increase the number and rate of violent victimization; however, trends in violence are generally similar regardless of whether series victimizations are included. See Methods for Counting High-Frequency Repeat Victimizations in the National Crime Victimization Survey, NCJ 237308, BJS web, April 2012 for further discussion of the new counting strategy and supporting research. 39 For all years, the actuals reflect Active Component only excluding full-time Reserve Component members and RC mobilized to active duty. End Strength for 2014 is preliminary. 40 Data for 2014 are preliminary. 41 The gross emissions indicator does not include sinks, which are processes (typically naturally occurring) that remove greenhouse gases from the atmosphere. Gross emissions are therefore more indicative of trends in energy consumption and efficiency than are net emissions. 55 5. SOCIAL INDICATORS Table 5–2. SOURCES FOR SOCIAL INDICATORS Indicator Source Economic 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 General Economic Conditions Real GDP per person (chained 2009 dollars) ������������������������������������������������� Bureau of Economic Analysis, National Economic Accounts Data. http://www.bea.gov/ national/ Real GDP per person change, 5-year annual average ����������������������������� Bureau of Economic Analysis, National Economic Accounts Data. http://www.bea.gov/ national/ Consumer Price Index ������������������������������������������������������������������������������������ Bureau of Labor Statistics, BLS Consumer Price Index Program. http://www.bls.gov/cpi/ Private goods producing (%) �������������������������������������������������������������������������� Bureau of Economic Analysis, National Economic Accounts Data. http://www.bea.gov/ national/ Private services producing (%) ����������������������������������������������������������������������� Bureau of Economic Analysis, National Economic Accounts Data. http://www.bea.gov/ national/ Jobs and Unemployment Labor force participation rate (%) ������������������������������������������������������������������� Employment (millions) ������������������������������������������������������������������������������������ Employment-population ratio (%) ������������������������������������������������������������������� Payroll employment change - December to December, SA (millions) ������������ Payroll employment change - 5-year annual average, NSA (millions) ������ Civilian unemployment rate (%) ���������������������������������������������������������������������� Unemployment plus marginally attached and underemployed (%) ���������������� Receiving Social Security disabled-worker benefits (% of population) ����������� Bureau of Labor Statistics, Current Population Survey. http://www.bls.gov/cps Bureau of Labor Statistics, Current Population Survey. http://www.bls.gov/cps Bureau of Labor Statistics, Current Population Survey. http://www.bls.gov/cps Bureau of Labor Statistics, Current Employment Statistics program. http://www.bls.gov/ces/ Bureau of Labor Statistics, Current Employment Statistics program. http://www.bls.gov/ces/ Bureau of Labor Statistics, Current Population Survey. http://www.bls.gov/cps Bureau of Labor Statistics, Current Population Survey. http://www.bls.gov/cps Social Security Administration, Office of Research, Evaluation, and Statistics, Annual Statistical Supplement to the Social Security Bulletin, tables 4.C1 5.A4. http://www.ssa.gov/policy/ docs/statcomps/supplement/ Infrastructure, Innovation, and Capital Investment Nonfarm business output per hour (average 5 year % change) ��������������������� Bureau of Labor Statistics, Major Sector Productivity Program. http://www.bls.gov/lpc/ Corn for grain production (million bushels) ����������������������������������������������������� National Agricultural Statistics Service, Agricultural Estimates Program. http://www.nass. usda.gov/ Real net stock of fixed assets and consumer durable goods (billions of Bureau of Economic Analysis, National Economic Accounts Data. http://www.bea.gov/ 2012$) ������������������������������������������������������������������������������������������������������� national/ Population served by secondary wastewater treatment or better (%) ������������ U.S. Environmental Protection Agency, Clean Watersheds Needs Survey. http://www.epa.gov/ cwns Electricity net generation (kWh per capita) ����������������������������������������������������� U.S. Energy Information Administration, Monthly Energy Review, October 2014, Table 7.2a http:// www.eia.gov/totalenergy/data/monthly/index.cfm; EIA, Annual Energy Review 2011, Table D1 (1960-2005) http://www.eia.gov/totalenergy/data/annual/index.cfm; and, U.S. Census Bureau, Population Division, Vintage 2013 Population Estimates (2010-2013) http://www.census.gov/popest/data/national/totals/2013/index.html. Patents for invention, U.S. origin (per million population) ������������������������������� U.S. Patent and Trademark Office, Patent Technology Monitoring Team, U.S. Patent Statistics Chart, Calendar Years 1963-2013. http://www.uspto.gov/web/offices/ac/ido/oeip/taf/ us_stat.htm; and, U.S. Census Bureau, Population Division. Net national saving rate (% of GDP) �������������������������������������������������������������� Bureau of Economic Analysis, National Economic Accounts Data. http://www.bea.gov/ national/ R&D spending (% of GDP) ����������������������������������������������������������������������������� National Science Foundation, National Patterns of R&D Resources. http://www.nsf.gov/ statistics/natlpatterns/ Demographic and Civic 22 23 24 25 26 Population Total population (millions) ������������������������������������������������������������������������������� U.S. Census Bureau, Population Division, Vintage 2014 Population Estimates (2014), Vintage 2013 Population Estimates (2010-2013), 2000-2010 Intercensal Estimates (2000-2005), 19901999 Intercensal Estimates (1990-1995), 1980-1990 Intercensal Estimates (1980), 1970-1980 Intercensal Estimates (1970). Foreign born population (millions) ������������������������������������������������������������������ U.S. Census Bureau, Population Division, Decennial Census and American Community Survey. http://www.census.gov/prod/www/abs/decennial/ and http://www.census.gov/ acs 17 years and younger (%) ������������������������������������������������������������������������������ U.S. Census Bureau, Population Division, Vintage 2014 Population Estimates (2014), Vintage 2013 Population Estimates (2010-2013), 2000-2010 Intercensal Estimates (2000-2005), 19901999 Intercensal Estimates (1990-1995), 1980-1990 Intercensal Estimates (1980), 1970-1980 Intercensal Estimates (1970). 65 years and older (%) ����������������������������������������������������������������������������������� U.S. Census Bureau, Population Division, Vintage 2014 Population Estimates (2014), Vintage 2013 Population Estimates (2010-2013), 2000-2010 Intercensal Estimates (2000-2005), 19901999 Intercensal Estimates (1990-1995), 1980-1990 Intercensal Estimates (1980), 1970-1980 Intercensal Estimates (1970). 85 years and older (%) ����������������������������������������������������������������������������������� U.S. Census Bureau, Population Division, Vintage 2014 Population Estimates (2014), Vintage 2013 Population Estimates (2010-2013), 2000-2010 Intercensal Estimates (2000-2005), 19901999 Intercensal Estimates (1990-1995), 1980-1990 Intercensal Estimates (1980), 1970-1980 Intercensal Estimates (1970). Household Composition 56 ANALYTICAL PERSPECTIVES Table 5–2. SOURCES FOR SOCIAL INDICATORS—Continued Indicator 27 28 29 30 31 32 33 34 35 Source Ever married (% of age 15 and older) ������������������������������������������������������������ U.S. Census Bureau, Current Population Survey. http://www.census.gov/hhes/families/ Average family size ����������������������������������������������������������������������������������������� U.S. Census Bureau, Current Population Survey. http://www.census.gov/hhes/families/ Births to unmarried women age 15-17 (per 1,000 unmarried women age Centers for Disease Control and Prevention, National Center for Health Statistics, National Vital 15-17) �������������������������������������������������������������������������������������������������������� Statistics System (natality); Births: Final data for 2013: http://www.cdc.gov/nchs/data/ nvsr/nvsr64/nvsr64_01.pdf. Single parent households (%) ������������������������������������������������������������������������ U.S. Census Bureau, Current Population Survey. http://www.census.gov/hhes/families/ Civic and Cultural Engagement Average charitable contribution per itemized tax return (2012 dollars) ���������� U.S. Internal Revenue Service, Statistics of Income - Individual Income Tax Returns (IRS Publication 1304). http://www.irs.gov/uac/SOI-Tax-Stats-Individual-Income-Tax-ReturnsPublication-1304-(Complete-Report) Voting for President (% of voting age population) ������������������������������������������� The Office of the Clerk of the U.S. House of Representatives and the U.S. Census Bureau, Current Population Survey. http://www.census.gov/cps/ Persons volunteering (% age 16 and older) ��������������������������������������������������� Bureau of Labor Statistics, Current Population Survey. http://www.bls.gov/cps Attendance at visual or performing arts activity, including movie going (% The National Endowment for the Arts, Survey of Public Participation in the Arts. age 18 and older) �������������������������������������������������������������������������������������� Leisure reading (books not required for work or school) �������������������������������� The National Endowment for the Arts, Survey of Public Participation in the Arts. Socioeconomic 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 Education High school graduates (% of age 25-34) �������������������������������������������������������� U.S. Census Bureau, Decennial Census and American Community Survey. http://www.census. gov/prod/www/abs/decennial/ and http://www.census.gov/acs College graduates (% of age 25-34) ��������������������������������������������������������������� U.S. Census Bureau, American Community Survey. http://www.census.gov/acs Reading achievement score (age 17) ������������������������������������������������������������� National Center for Education Statistics, National Assessment of Educational Progress. http:// nces.ed.gov/nationsreportcard/ Math achievement score (age 17) ������������������������������������������������������������������ National Center for Education Statistics, National Assessment of Educational Progress. http:// nces.ed.gov/nationsreportcard/ Science and engineering graduate degrees (% of total graduate degrees) ��� National Center for Education Statistics, Integrated Postsecondary Education Data System. http://nces.ed.gov/ipeds/ Receiving special education services (% of age 3-21 public school students) ����� National Center for Education Statistics, Digest of Education Statistics, 2012. http://nces. ed.gov/programs/digest/d12/tables/dt12_046.asp Income, Savings, and Inequality Real median income: all households (2013 dollars) ��������������������������������������� U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements. http://www.census.gov/hhes/www/income/data/historical/household/ Real disposable income per capita (chained 2009 dollars) ���������������������������� Bureau of Economic Analysis, National Economic Accounts Data. http://www.bea.gov/ national/ Adjusted gross income share of top 1% of all taxpayers �������������������������������� U.S. Internal Revenue Service, Statistics of Income. http://www.irs.gov/uac/SOI-Tax-StatsIndividual-Statistical-Tables-by-Tax-Rate-and-Income-Percentile Adjusted gross income share of lower 50% of all taxpayers �������������������������� U.S. Internal Revenue Service, Statistics of Income. http://www.irs.gov/uac/SOI-Tax-StatsIndividual-Statistical-Tables-by-Tax-Rate-and-Income-Percentile Personal saving rate (% of disposable personal income) ������������������������������� Bureau of Economic Analysis, National Economic Accounts Data. http://www.bea.gov/ national/ Poverty rate (%) ���������������������������������������������������������������������������������������������� U.S. Census Bureau, Current Population Survey, Annual Social and Economic Supplements. http://www.census.gov/hhes/www/poverty/publications/pubs-cps.html Food-insecure households (% of all households) ������������������������������������������� Economic Research Service, Household Food Security in the United States report series. http:// www.ers.usda.gov/topics/food-nutrition-assistance/food-security-in-the-us/ readings.aspx Supplemental Nutrition Assistance Program (% of population on SNAP) ������ Food and Nutrition Service, USDA Median wealth of households, age 55-64 (in thousands of 2013 dollars) ������ Board of Governors of the Federal Reserve System, Survey of Consumer Finances 2013 Estimates inflation-adjusted to 2013 dollars (Internal Data) http://www.federalreserve. gov/econresdata/scf/scfindex.htm Housing Homeownership among households with children (%) ����������������������������������� U.S. Census Bureau, American Housing Survey (Current Housing Report). Estimated by Housing and Urban Development’s Office of Policy Development and Research. http://www.census. gov/housing/ahs 52 Families with children and severe housing cost burden (%) ��������������������������� U.S. Census Bureau, American Housing Survey. Tabulated by Housing and Urban Development’s Office of Policy Development and Research. http://www.census.gov/housing/ahs 53 Families with children and inadequate housing (%) ��������������������������������������� U.S. Census Bureau, American Housing Survey. Tabulated by Housing and Urban Development’s Office of Policy Development and Research. http://www.census.gov/housing/ahs 51 Health Health Status Life expectancy at birth (years) ���������������������������������������������������������������������� Centers for Disease Control and Prevention, National Center for Health Statistics, National Vital Statistics System (mortality); Deaths: Final data for 2012: http://www.cdc.gov/nchs/data/ nvsr/nvsr63/nvsr63_09.pdf, Health, United States, 2014 forthcoming, Table 16. 55 Infant mortality (per 1,000 live births) ������������������������������������������������������������� Centers for Disease Control and Prevention, National Center for Health Statistics, National Vital Statistics System (mortality); Deaths: Final data for 2012: http://www.cdc.gov/nchs/data/ nvsr/nvsr63/nvsr63_09.pdf, Health, United States, 2014 forthcoming, Table 12. 54 57 5. SOCIAL INDICATORS Table 5–2. SOURCES FOR SOCIAL INDICATORS—Continued Indicator 56 57 58 59 60 61 62 63 64 Source Low birthweight [<2,500 gms] (% of babies) �������������������������������������������������� Centers for Disease Control and Prevention, National Center for Health Statistics, National Vital Statistics System (natality); Births: Final data for 2013: http://www.cdc.gov/nchs/data/ nvsr/nvsr64/nvsr64_01.pdf, Health, United States, 2014 forthcoming, Table 6. Activity limitation (% of age 5-17) ������������������������������������������������������������������� Centers for Disease Control and Prevention, National Center for Health Statistics, National Health Interview Survey; America’s Children in Brief: Key National Indicators of Well-Being, Table HEALTH5, crude percentages; http://www.childstats.gov/americaschildren/tables/ health5.asp?popup=true and unpublished data from National Health Interview Survey. Activity limitation (% of age 18 and over) ������������������������������������������������������� Centers for Disease Control and Prevention, National Center for Health Statistics, National Health Interview Survey, http://www.cdc.gov/nchs/nhis.htm, Health, United States, 2014 forthcoming, Table 47, age-adjusted. Difficulties with activities of daily living (% of age 65 and over) ���������������������� Centers for Disease Control and Prevention, National Center for Health Statistics, National Health Interview Survey: http://www.cdc.gov/nchs/nhis.htm. Health Behavior Engaged in regular physical activity (% of age 18 and older) ������������������������� Centers for Disease Control and Prevention, National Center for Health Statistics, National Health Interview Survey, http://www.cdc.gov/nchs/nhis.htm, Health, United States, 2014 forthcoming, Table 63, age adjusted. Obesity (% of age 20-74 with BMI 30 or greater) ������������������������������������������� Centers for Disease Control and Prevention, National Center for Health Statistics, National Health and Nutrition Examination Survey, http://www.cdc.gov/nchs/nhanes.htm. Health E-stat: http://www.cdc.gov/nchs/data/hestat/obesity_adult_11_12/obesity_ adult_11_12.pdf. Obesity (% of age 2-19) ���������������������������������������������������������������������������������� Centers for Disease Control and Prevention, National Center for Health Statistics, National Health and Nutrition Examination Survey, http://www.cdc.gov/nchs/nhanes.htm. Health E-stat: http://www.cdc.gov/nchs/data/hestat/obesity_child_11_12/obesity_ child_11_12.pdf. Cigarette smokers (% of age 18 and older) ���������������������������������������������������� Centers for Disease Control and Prevention, National Center for Health Statistics, National Health Interview Survey, http://www.cdc.gov/nchs/nhis.htm, Health, United States, 2014 forthcoming, Table 52, age adjusted. Excessive alcohol use (% of age 18 and older) ���������������������������������������������� Centers for Disease Control and Prevention, National Center for Health Statistics, National Health Interview Survey, http://www.cdc.gov/nchs/nhis.htm, Health, United States, 2014 forthcoming, Table 58, age adjusted. Access to Health Care Total national health expenditures (% of GDP) ����������������������������������������������� Centers for Medicare and Medicaid Services, National Health Expenditures Data. http://www. cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-andReports/NationalHealthExpendData/index.html 66 Persons without health insurance (% of age 18-64) ��������������������������������������� Centers for Disease Control and Prevention, National Center for Health Statistics, National Health Interview Survey. 67 Persons without health insurance (% of age 17 and younger) ����������������������� Centers for Disease Control and Prevention, National Center for Health Statistics, National Health Interview Survey. 68 Children age 19-35 months with recommended vaccinations (%) ����������������� Centers for Disease Control and Prevention, National Center for Health Statistics, National Immunization Survey (for 1995-2005): http://www.cdc.gov/vaccines/imz-managers/ coverage/nis/child/index.html; (for 2010, 2011, 2012 and 2013): Table 1 in http://www. cdc.gov/mmwr/pdf/wk/mm6334.pdf. 65 Security and Safety Crime Property crimes (per 100,000 households) ���������������������������������������������������� Bureau of Justice Statistics, National Crime Victimization Survey. http://www.bjs.gov/index. cfm?ty=dcdetail&iid=245 70 Violent crime victimizations (per 100,000 population age 12 or older) ����������� Bureau of Justice Statistics, National Crime Victimization Survey. http://www.bjs.gov/index. cfm?ty=dcdetail&iid=245 71 Murder rate (per 100,000 persons) ����������������������������������������������������������������� Federal Bureau of Investigation, Uniform Crime Reports, Crime in the United States. http://www. fbi.gov/about-us/cjis/ucr/ucr 69 National Security Military personnel on active duty (thousands) ������������������������������������������������ ES actuals for 1960 and 1970 as reported in Table 2-11 of the DoD Selected Manpower Statistics for FY 1997 (DoD WHS, Directorate for Information Operations and Reports). The source for the remaining fiscal year actuals are the Service budget justification books. 73 Veterans (thousands) ������������������������������������������������������������������������������������� U.S. Department of Veterans Affairs. 1960-1999: Annual Report of the Secretary of Veterans Affairs; 2000-2009: VetPop07, Office of Actuary; 2010-2013: VetPop11, Office of Actuary. 72 Transportation Safety Safety belt use (%) ����������������������������������������������������������������������������������������� National Highway Traffic Safety Administration, National Center for Statistics and Analysis. http:// www-nrd.nhtsa.dot.gov/Pubs/811875.pdf 75 Highway fatalities �������������������������������������������������������������������������������������������� National Highway Traffic Safety Administration, National Center for Statistics and Analysis. http:// www-nrd.nhtsa.dot.gov/Pubs/812032.pdf 74 Environment and Energy Air Quality and Greenhouse Gases Ground level ozone (ppm) based on 222 monitoring sites ����������������������������� U.S. Environmental Protection Agency, AirTrends Website. http://www.epa.gov/airtrends/ ozone.html 77 Particulate matter 2.5 (ug/m3) based on 537 monitoring sites ����������������������� U.S. Environmental Protection Agency, AirTrends Website. http://www.epa.gov/airtrends/ pm.html 76 58 ANALYTICAL PERSPECTIVES Table 5–2. SOURCES FOR SOCIAL INDICATORS—Continued Indicator 78 79 80 81 82 Source Annual mean atmospheric CO2 concentration (Mauna Lao, Hawaii; ppm) ���� National Oceanic and Atmospheric Administration. http://www.esrl.noaa.gov/gmd/ccgg/ trends/ Gross greenhouse gas emissions (teragrams CO2 equivalent) ��������������������� U.S. Environmental Protection Agency, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2012. http://epa.gov/climatechange/ghgemissions/usinventoryreport.html Net greenhouse gas emissions, including sinks (teragrams CO2 equivalent) ��� U.S. Environmental Protection Agency, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2012. http://epa.gov/climatechange/ghgemissions/usinventoryreport.html Gross greenhouse gas emissions per capita (metric tons CO2 equivalent) ��� U.S. Environmental Protection Agency, Inventory of U.S. Greenhouse Gas Emissions and Sinks: 1990-2012. http://epa.gov/climatechange/ghgemissions/usinventoryreport.html Gross greenhouse gas emissions per 2005$ of GDP (kilograms CO2 U.S. Environmental Protection Agency, Inventory of U.S. Greenhouse Gas Emissions and Sinks: equivalent) ������������������������������������������������������������������������������������������������� 1990-2012. http://epa.gov/climatechange/ghgemissions/usinventoryreport.html Energy Energy consumption per capita (million Btu) �������������������������������������������������� U.S. Energy Information Administration (EIA), Monthly Energy Review, October 2014, Table 1.3 http://www.eia.gov/totalenergy/data/monthly/index.cfm; EIA, Annual Energy Review 2011, Table D1 (1960-2005) http://www.eia.gov/totalenergy/data/annual/index.cfm; and, U.S. Census Bureau, Population Division, Vintage 2013 Population Estimates (2010-2013) http://www.census.gov/popest/data/national/totals/2013/index.html. 84 Energy consumption per 2009$ GDP (thousand Btu per 2009$) ������������������� U.S. Energy Information Administration, Monthly Energy Review (October 2014), Table 1.7 http:// www.eia.gov/totalenergy/data/monthly/index.cfm. 85 Electricity net generation from renewable sources, all sectors (% of total) ���� U.S. Energy Information Administration, Monthly Energy Review (October 2014), Table 7.2a. http://www.eia.gov/totalenergy/data/monthly/index.cfm. 83 6. DELIVERING A HIGH-PERFORMANCE GOVERNMENT Since taking office, the President has challenged Federal leaders and managers to deliver a Government that is leaner, smarter, and more effective, while delivering the best results for the American taxpayer. In designing the Administration’s performance management approach, OMB reviewed successful practices from public and private organizations. Based on that review, it was clear that the critical success factor of any performance management system is that it is used by senior leadership and managers to drive results. Beginning in 2009, the Administration shifted the emphasis from the publication of performance information to a focus on increasing its use to inform decision-making and deliver greater impact. Importantly, in 2010 the Administration worked with the Congress to enact the Government Performance and Results (GPRA) Modernization Act which incorporated lessons learned and ensured these reforms continue into future administrations. The approach to delivering more effective and efficient Government rests on the following proven management practices: • Engaging Leaders • Focusing on Clear Goals and Data-Driven Reviews • Expanding Impact through Strategic Planning and Strategic Reviews • Strengthening and Learning Agency Capabilities, Collaboration, • Communicating Performance Results Effectively The remainder of this chapter provides an update on progress for these practices. Engaging Leaders Frequent and sustained leadership engagement is foundational to any successful performance management effort. The Administration has taken steps to clearly define the roles and responsibilities of key leaders. To lead the performance management efforts at each agency, the Secretary or equivalent is required to name a Chief Operating Officer (COO), often the Deputy Secretary. OMB has outlined several roles and responsibilities for each COO, including conducting data-driven performance reviews at least once per quarter. COOs are critical to bringing a broader set of actors together to solve problems across the organization. Each COO also names a Performance Improvement Officer (PIO) who reports directly to the COO and is responsible for coordinating performance improvement efforts across the agency with program managers, and other agencies. For each strategic objective and Agency Priority Goal, specific Goal Leaders are also held accountable for leading implementation efforts such as determining strategies, managing execution toward goals, and engaging others to make course corrections. These responsibilities often go beyond their traditional organizational scope to engage all components that are needed to deliver against the specified goals. Focusing on Clear Goals and Data-Driven Reviews To accelerate progress, OMB and agency heads have identified a limited set of implementation-focused priorities that have the potential to advance the well-being of the American people, to stimulate economic growth and job creation, and to cut the costs of delivery. In February 2014, OMB established 15 Cross-Agency Priority (CAP) Goals, and each major Federal agency published a small number of Agency Priority Goals, totaling 91 across the Federal Government. Detailed information on these goals is available on Performance.gov. Cross-Agency Priority Goals The Administration uses the CAP Goals to help break down organizational barriers and achieve better results than one agency can achieve on its own. For each of the CAP Goals, OMB identifies Goal Leaders, regularly tracks performance throughout the year, holds goal teams accountable for results, and publishes quarterly results on Performance.gov. OMB, the Performance Improvement Council (PIC), and agencies have worked to support progress on the CAP goals. Results have been promising. For example, to achieve the Job-Creating Investment goal, agencies have committed to promoting investment tools, resources and interagency coordination to encourage foreign direct investment in the United States, spurring job growth. This work has leveraged more than 200 major events, such as industry trade shows, in 38 countries around the world to promote the United States to approximately 60,000 potential investors. To achieve the Open Data goal, agencies have provided publicly-accessible data intended to strengthen the Nation’s democracy by empowering individuals and businesses to create jobs and new industries that improve Americans’ quality of life. Since 2009, the Administration has released over 138,000 data sets to the public, while continuing to protect individual privacy, with over 67,000 of these data sets released in the last year alone. As a result of this goal, homeowners who are struggling to pay their mortgages now have access to prompt, clear responses because companies are competing based on open consumer financial product complaint data. Similarly, patients can now comparison-shop to see which hospitals have the best outcomes and best prices. While results have been encouraging on CAP Goal priorities, delivery across agency boundaries remains a challenge. Often there is little capacity dedicated to identifying and solving interagency challenges, and in many 59 60 ANALYTICAL PERSPECTIVES cases significant management improvements require investments that cut across agencies. To drive further progress, the Administration is taking two actions to institutionalize capacity to address cross-cutting challenges. First, the President’s Budget proposes authority for agencies, with prior notification to the Congress from the Director of OMB, to transfer up to $15 million from agency budgets to support these cross-cutting management initiatives. This proposal institutionalizes a capability to fund cross-agency efforts, rather than handling the challenges on a case-by-case basis, and would provide a powerful tool to turn management ideas into real and lasting results for the American people. Second, to provide support for driving progress on the Cross-Agency Priority goals, the President announced the creation of a White House Leadership Development Program on December 9th. Through this program, emerging leaders and Senior Executive Service (SES) candidates will participate in full-time rotational assignments for one year, with these leaders responsible for driving progress on the Cross-Agency Priority Goals. This program is part of a continued commitment to developing and strengthening the next generation of Federal career leaders. These emerging leaders will play a key role in addressing the Government’s critical management challenges, and participants will gain valuable experience to bring back as they take on leadership roles in their agency. Agency Priority Goals Agencies establish Priority Goals with clearly-identified Goal Leaders every two years and use quarterly metrics and milestones to manage progress. COOs lead data-driven reviews at least quarterly to remove barriers and accelerate results. Progress on the goals is updated quarterly on Performance.gov. For example, agency leaders have set goals for improving access to capital to enhance job creation, reducing foodborne illness through targeted inspections, coordinating multiple agency services to reduce veteran homelessness, and reducing hospital acquired infections. Some illustrative results this year include: • Veteran Homelessness. Since 2010, the Administration has reduced veteran homelessness by one-third or by nearly 25,000 people. • Protect Vulnerable People: The Department of Justice is working with Federal, State, local, and tribal partners to protect vulnerable citizens. During the final quarter of 2014, 97 percent of children reported missing were recovered within 72 hours of an AMBER alert issuance. • Strategic Sourcing. Although the General Services Administration fell short of its $111 million savings goal, GSA saved its customer agencies $97 million as part of its strategic sourcing priority goal. • Renewable Energy. As part of efforts to expand the development of clean, domestic sources of energy, the Department of the Interior has greatly expanded permitting for renewable energy projects on Interi- or-managed lands in recent years. Since 2009, the Department has approved over 14,100 megawatts of renewable energy capacity which if fully built, would help power approximately 4.8 million homes. • Climate Change. The United States Agency for In- ternational Development and State Department have made progress on their climate change goal. 13 countries have planned, proposed, strengthened, or adopted strategies, plans, policies, processes, or activities to support Low Emission Development Strategies (LEDS). Moreover, 2,386 officials and practitioners have received relevant training or assistance. In addition to the outcomes demonstrated, the focus on use of performance information to inform decisionmaking is beginning to have a broader, measurable impact. Using data from nationwide surveys1 conducted over the last decade by GAO in the major 24 agencies, researchers have found evidence that mid- and upperlevel Federal managers engaged in the implementation of the priority goals, and exposed to data-driven reviews, were significantly more likely to “use performance data to manage programs and employees, and identify and solve problems”, suggesting “success…where prior [Federal] reforms have struggled”.2 Prior reforms tended to increase the passive collection and reporting of performance information but not its active use, which is more likely to lead to performance improvements. Turning this success into further improvements required expanding the scope of performance reviews beyond priority goals, as well as continual improvements in the quality of the performance reviews, as discussed in the following two sections. Expanding Impact through Strategic Plans and Strategic Reviews To expand proven performance management practices more broadly across Federal agencies, and ensure agency leaders have effective processes to review objectives outlined in the agency plans as required by the GPRA Modernization Act,3 the Administration established annual “strategic reviews.” The strategic reviews provide a comprehensive framework at each agency to make improved strategic and budget decisions based on evidence. The annual assessments incorporate evaluation results, performance goals, indicators, challenges, risks, and external factors to inform the decision-making processes at the agency, as well as with OMB and the Congress. Agencies published new strategic plans on Performance. gov and agency websites with the President’s 2015 Budget 1 Agencies’ Trends in the Use of Performance Information to Make Decisions. GAO measured agency use of performance information by creating an index from manager survey data collected in 2007 and 2013. The index reflected the extent to which managers reported that their agencies used performance information for various management activities. September 2014. http://www.gao.gov/products/GAO-14-747 2 Moynihan et al. Working Paper: Performance Management Routines that Work? An Early Assessment of the GPRA Modernization Act University of Wisconsin-Madison. May 2014 https://www.lafollette. wisc.edu/images/publications/workingpapers/moynihan2014-005.pdf 3 GPRA Modernization Act 31 U.S.C. § 1116 (f) 6. DELIVERING A HIGH-PERFORMANCE GOVERNMENT in February 2014. These plans include strategic goals, objectives, and performance indicators that reflect the scope of the agency’s mission—in total more than 350 strategic objectives from major agencies reflecting the breadth of Federal activities and outcomes.4 Outcomes are advanced by strategic objectives, which are supported by specific performance goals and indicators. As an example, the Department of Commerce has a strategic objective shared by several bureaus that seeks to accelerate growth of innovation-intensive economic sectors by building public and private capacity to invent, improve, and commercialize new products and services. Shortly after publication of strategic plans, Federal agencies finalized their approach to conducting the strategic reviews and began their initial baseline assessments. OMB conducted kickoff meetings with each agency prior to the first strategic review in 2014. The PIC also held working groups that engaged more than 100 participants from across the Government to share best practices. Agencies were provided flexibility to tailor their review approach to their unique agency missions and capabilities, and were encouraged to develop a multiyear maturity model, recognizing that effective reviews would take multiple years to establish. OMB has also encouraged agencies to use proven management principles for their implementation, such as leveraging existing business processes, engaging the right stakeholders, and balancing a focus on learning from the reviews with the traditional focus on accountability. Agencies provided their initial results to OMB beginning in May 2014. Decisions based on input from the reviews were discussed during the summer and fall and were finalized with the President’s Budget. A progress update is provided for each major agency’s strategic objective on Performance.gov, and also in the 2014 Annual Performance Reports. Initial Results of the First Annual Strategic Reviews 2014 was the first year agencies were required to conduct strategic reviews in accordance with OMB guidance and the GPRA Modernization Act. Of the 23 major Federal agencies required to conduct reviews in consultation with OMB, 17 completed their initial reviews of progress.5 In most cases, the assessment considered performance goals and other indicators related to each strategic objective, as well as other challenges, risks, and external factors that 4 Strategic objectives for the Department of Defense have not yet been finalized in accordance with OMB guidance and will be added in the future. The 350 objectives reviewed do not include all government corporations and independent establishments, rather consist of the 24 CFO Act Agencies excluding the Nuclear Regulatory Commission. 5 Six major agencies did not complete their initial strategic review of objectives prior to the President’s Budget release. The Department of Transportation and Department of Energy both released their strategic plans later in 2014 than other agencies, requiring them to delay their initial strategic reviews until 2015. The Department of Defense completed its Quadrennial Defense Review in 2014, and is currently in the process of developing its framework for strategic and performance review in the coming year. The Department of Agriculture, Department of State and USAID are working to finalize results of their strategic review and plan to release them later in 2015. 61 may affect outcomes. In some cases, program evaluation results were incorporated into the assessment, where available and relevant. Agencies reported a wide range of benefits from their initial reviews, including improved interagency collaboration, a chance to identify existing evidence gaps, and the opportunity to better inform resource allocation decisions using evidence. For example: • The Department of Homeland Security (DHS) conducted a strategic review involving over 250 individuals, over 500 pieces of evidence. The review assessed progress for the first time against the 16 cross-cutting strategic and management objectives in the agency strategic plan. The central DHS performance office created a common methodology, deliverable templates, and other tools, but let each team shape their approach to how they were going to review the evidence. This created an environment for teams to collaborate and also encouraged transparency within the agency’s review process. • At the Environmental Protection Agency (EPA), pro- grammatic decision-making is primarily dispersed across six major program offices and 10 regional offices. Strategic objective leads were provided discretion to conduct reviews of the activities under their responsibility and engage in discussions across the Agency to identify areas making noteworthy progress or facing challenges. Senior managers appreciated the ability to consider a broader context than had occurred in previous performance discussions. The managers used the strategic reviews as an opportunity to increase the use of evidence and data in understanding progress. For example, comparing EPA’s programs’ with relevant data from other sources, such as comparing brownfields and census data, gave further insight to the direction of those programs. As for EPA’s tribal program, consideration of agency-wide data during the review process enhanced understanding of the program’s scope and long-term challenges. As a result, the program identified a number of follow up actions, such as pursuing flexibilities and developing comprehensive assessments of resource needs and environmental protection priorities in Indian Country. To facilitate management decisions, agency assessments identified relative levels of performance across the agency’s portfolio of strategic objectives. Agencies specifically identified a limited number of areas where the agency made noteworthy progress and a limited number as focus areas for improvement. Areas demonstrating noteworthy progress could be identified as a result of new innovations in strategy, program design, or operations that have led to notable improvements in outcomes or cost reductions. Focus areas for improvement could be the result of challenges during program execution, for example, or when a problem the strategic objective seeks to address is growing more quickly than current actions or resources can address it. 62 Across the strategic objectives analyzed, agencies identified approximately 14 percent as making noteworthy progress, and 12 percent as focus areas for improvement.6 Because these results are from the initial baseline assessment, some caution must be used in interpreting the findings. The validity and implications of these findings will continue to be reviewed annually for refinement. Nonetheless, some trends seemed visible in the first year. For instance, areas of noteworthy progress often resulted from identifiable improvements in program policies or management procedures. For example, OPM developed a common definition and model of employee engagement, as it specifically relates to the Federal workforce that provides a practical approach to measuring and improving it. This noteworthy progress has informed the Administration’s concerted effort to monitor and improve employee engagement across the Federal sector. A growing body of evidence in the public and private sector has shown a strong relationship between high levels of employee engagement and improved organizational results. Conversely, the identification of a focus area for improvement was more likely to be the result of perceived challenges in funding, human capital or legislative barriers. More information is available in the progress updates provided for each major agency’s strategic objectives on Performance.gov, and also in the 2014 Annual Performance Reports. Agencies summarize proposed next steps in the 2016 Annual Performance Plans. Preparing for Future Strategic Reviews Major Federal agencies will conduct a second round of strategic reviews in 2015, with expected improvements in quality and relevance for decision-makers as managers gain experience with the reviews, learn from other agencies, and have more data to analyze since the publication of the strategic plan. Agencies have come together to prepare for the upcoming reviews by analyzing lessons learned from the first round and sharing best practices. Collaboration across the Performance Improvement Council and OMB will continue to be a priority to promote learning and innovation in conducting strategic reviews in the coming years. As the strategic reviews mature, OMB anticipates that they will play an expanded role in informing budget development and operational decisions, and will facilitate a broader improvement in the use of evidence for decision-making by managers across the Federal Government. Strengthening Agency Capabilities, Collaboration, and Learning The Performance Improvement Council (PIC) has played an important role in sharpening and broadening the application of performance management tools throughout the Federal Government by providing opportunities for Federal program managers and performance professionals to share practices and build their own capabilities. It does this in the context of surveys high6 Results summarized in this chapter do not include the six major agencies that did not complete their initial strategic review for the 2016 President’s Budget release. The latest results for each agency will continue to be available on Performance.gov. ANALYTICAL PERSPECTIVES lighting areas of strength and of need. In the 2014 Federal Managers Survey, GAO found that 82 percent of agency managers said there are performance measures defined for their programs, operations, or projects, yet only 64 percent of agency managers’ report having sufficient analytical tools to collect, analyze, and use performance data. The Employee Viewpoint Survey7 also shows that 83 percent of all employees report knowing how their work relates to the agency goals and priorities; however, only 61 percent say managers review and evaluate organizations progress toward meeting their goals and objectives. The PIC offers a number of ways for agencies to collaborate and build capabilities. A data-driven reviews monthly working group—active now since 2011—provides an opportunity for agencies to learn in-depth about effective practices, most recently focused on strategic review implementation. The PIC holds a speaker series on performance issues and larger-scale collaboration events for employees across government to work together to solve common challenges around the Government Performance and Results Modernization Act implementation. These collaboration opportunities have brought together hundreds of people across two dozen agencies and will continue. The PIC has also established a training program around the core building blocks of performance management offered at no charge to Federal employees three-times per year, as well as a professional development program called the Performance Enthusiast and Ambassador Program. These programs permit employees to learn about performance topics and transfer that knowledge back to their agency. On to its fourth cohort, the Performance Enthusiast and Ambassadors Programs provide a part-time, three to six month learning and practice program with a mentoring component that delivers both contextual and applied capability building around performance management. The PIC also provides professional development opportunities using an intensive six-month cross-agency experience. Since 2011, the PIC has supported the President’s Management Council (PMC) Interagency Rotation Fellows Program, where selected applicants are assigned to different agencies to carry out highly scoped projects. Now in its 7th cohort, PMC Fellows explore opportunities to modernize government management to develop multi-agency project management skills. Communicating Performance Results Effectively and Looking Ahead In support of the President’s commitment to transparency and implementation of the GPRA Modernization Act, the Administration continues to develop Performance. gov to inform stakeholders on performance improvement efforts. Compared to reports posted to individual agency web sites, Performance.gov has helped to improve accountability and provide one place for the public to find 7 Office of Personnel Management’s Federal Employee Viewpoint Survey (FEVS) is a tool that measures employees’ perceptions of whether, and to what extent, conditions characterizing successful organizations are present in their agencies. 2014 http://www.fedview.opm.gov/ 6. DELIVERING A HIGH-PERFORMANCE GOVERNMENT information on agency programs, goals, and regular progress updates. Over the last year, the Performance Improvement Council also released two websites designed to share more information with interested stakeholders about the PIC’s mission and work. PIC.gov provides news about the Federal performance management and improvement community. The Performance Learning Center, https:// LearnPerformance.gov/, is a site for skills enhancement and career development related to the application of performance management and improvement techniques. The website provides users with a variety of learning activities, training course information from various sources, and is designed for multiple audiences, including performance and other analysts, program managers, and others con- 63 tributing to Government performance management and improvement. In the coming years, the PIC will continue its work to strengthen the performance framework, spark targeted improvements, and expand agency capabilities. Moving forward, the Administration will continue to deliver more value for the taxpayer’s dollar by building on its track record of increasing the usage and effectiveness of performance management practices across Government. While significant progress has been made since the President took office, the Administration continues to enhance its efforts to engage leadership, present clear goals, measure and analyze progress, and conduct reviews to further improve Government, help the American people in their daily lives, and deliver the greatest impact for every dollar spent. 7. BUILDING EVIDENCE WITH ADMINISTRATIVE DATA Introduction “We’ve got Democratic and Republican elected officials across the country who are ready to roll up their sleeves and get to work. And this should be a challenge that unites us all. I don’t care whether the ideas are Democrat or Republican. I do care that they work. I do care that they are subject to evaluation. . .” -- President Obama, “Remarks on Promise Zones,” January 9, 2014 The Administration is committed to living up to this principle through a broad-based set of activities to better integrate evidence and rigorous evaluation in budget, management, and policy decisions, including through: (1) making better use of already-collected data within government agencies; (2) promoting the use of high-quality, low-cost evaluations and rapid, iterative experimentation; (3) adopting more evidence-based structures for grant programs; and (4) building agency evaluation capacity and developing tools to better communicate what works. Several Administration documents lay out this “evidence agenda,” including previous versions of this chapter, the “Evaluation as a Tool for Improving Federal Programs” chapter of the Council of Economic Advisers’ 2014 Economic Report of the President, and the July 2013 memo, “Next Steps in the Evidence and Innovation Agenda,” jointly signed by the Office of Management and Budget, the Domestic Policy Council, the Office of Science and Technology Policy, and the Council of Economic Advisers. The 2016 Budget moves the agenda forward through a range of investments in evidence building, as well as by increasing investment in programs with strong evidence of effectiveness. These proposals are described in the main budget volume and accompanying documents.1 This chapter focuses on the Administration’s efforts to address one especially important next step in the evidence agenda: making better use of “administrative data.” Administrative data are data collected by government entities for program administration, regulatory, or law enforcement purposes. Federal and state administrative data include rich information on labor market outcomes, health care, criminal justice, housing, and other important topics, but they are often greatly underutilized in evaluating programs’ effects, as well as in day-to-day performance measurement and for informing the public about how society and the economy are faring. Administrative data have played a key role in some of the most important evidence agenda accomplishments to date. As described below, insights obtained from adminis1 See http://www.whitehouse.gov/omb/evidence. trative data are already influencing education and health policy, among other areas. Access to administrative data has been pivotal in some of the most innovative Federal grant reforms and in increasing accountability and transparency across a range of programs; it has also played an important role in innovation and experimentation at the State and local levels. Meanwhile, as the evidence agenda matures, lack of access to appropriate data is increasingly a key obstacle to progress along a number of dimensions. Whether the objective is to facilitate more rapid, low-cost evaluations, to base more grant decisions on strong evidence, to adopt program structures that permit greater innovation and flexibility in exchange for greater accountability for results, or to provide more and better performance information to the public, administrative data are often a crucial untapped resource. A significant focus in this year’s Budget is improving access to administrative data for purposes of evaluation, accountability and transparency, performance management, and other research and analytic purposes. (While not discussed in this chapter, the Budget also includes separate proposals to improve the use of administrative data to protect program integrity, for example to combat identity theft.) The Budget proposes a number of specific access and infrastructure improvements across multiple programs and agencies, efforts that build on the longstanding use of Federal statistics to describe the condition of the economy and society and inform Federal policy decisions (see Chapter 5, “Social Indicators,” and Chapter 16, “Strengthening Federal Statistics”). The Budget also embraces Representative Paul Ryan and Senator Patty Murray’s proposal to create a commission that would make recommendations about how to fully realize the potential of administrative data to improve Federal programs. That proposal exemplifies the high-level and bipartisan momentum for doing more to tap this important resource. This chapter explains the importance of improving access to administrative data, describes some of the key barriers, and outlines the Administration’s agenda, including both Budget proposals and ongoing work. The chapter also explains the strong framework of privacy, confidentiality, and data security protections that governs current uses of administrative data for research purposes, and it explains how these protections would extend to the Budget’s new proposals. Background Administrative data are data collected by government entities for program administration, regulatory, or law enforcement purposes. Examples include: data on employment and earnings collected through the Unemployment Insurance (UI) program, data on medical conditions and 65 66 payments collected through Medicare and Medicaid, data on local pollution levels collected to administer the Clean Air and Clean Water Acts, and criminal histories maintained as part of police records or arrests. Such data are usually collected on the universe of individuals, businesses, or communities affected by a particular program, in contrast to survey data that are collected for samples of broader populations, typically for research or other statistical purposes. Administrative data are used for a wide range of purposes, such as reimbursing service providers, determining benefit eligibility, and ensuring compliance with safety or environmental regulations. Sometimes data collected to administer one program can also be useful for administering another. For example, employment and earnings data collected through the UI system could be used to determine eligibility for a means-tested program. Administrative data can also be useful for program integrity efforts to minimize waste, fraud, and abuse. Linking data across programs for administrative purposes can sometimes make government more efficient, but it is not the focus of this chapter. This chapter is focused on reusing administrative data for “statistical” purposes: the use of data to better understand the characteristics, behavior, or needs of groups of individuals or communities. Statistical purposes exclude uses that affect the rights, benefits, or privileges of individuals: indeed, one of the defining characteristics of statistical use is that data about an individual are never made public, and are never used to make decisions about that individual. But statistical purposes include a wide range of analytic uses, where only aggregated and de-identified data are made public. For example, statistical use encompasses both traditional program evaluations and the newer “rapid-cycle” experimentation and other data analytics techniques increasingly employed by innovative private-sector firms. It also encompasses transparency and accountability efforts, such as scorecards, that provide Federal agencies, State and local governments, and the public with information on the relative performance of different hospitals, training programs, or other service providers. And it encompasses efforts to quantify how housing, health care, education, or other needs vary across communities, as well as other analysis of patterns and trends for groups of individuals. Using administrative data for these purposes, alone or in combination with survey data (data gathered from a sample population gathered specifically for research or other statistical purposes), can have a number of advantages over survey data alone, which is typically the alternative. First, because administrative data are collected through the normal administration of programs, they can often be obtained at much lower cost than fielding a new survey. Second, administrative data are sometimes more accurate than survey self-reports, especially with respect to information directly used to administer the program (e.g. earnings in the case of UI or health care utilization in the case of Medicare records). Third, administrative data, especially when linked across multiple programs, are often available for long time periods, permitting study of ANALYTICAL PERSPECTIVES long-term impacts that would be prohibitively expensive with a survey. For example, recent studies have used administrative records to look at the effect of being assigned a smaller class size in elementary school on college-going and earnings and at the effect of losing one’s job on mortality over the subsequent 20 years.2 Perhaps most important, reusing administrative data often allows for much larger sample sizes than surveys. Surveying program participants requires tracking them down, getting each to agree to participate in a survey, and constructing and administering the survey itself. Since each of these activities is expensive, evaluations, performance measurement, and other research based on surveys typically draw on small samples. Sometimes, the sample sizes are so small that the resulting studies lack the statistical power to reliably detect policy-relevant effects of programs, even when these effects exist. For example, consider a randomized controlled trial of a job training program with 1,000 participants (and 1,000 nonparticipants in the control group), where a 2 percentage point increase in employment would be enough to justify the cost of the program. With samples that size, the trial would need at least a 4.4 percentage point increase in employment to be statistically significant (meaning statistically distinguishable from 0) and a 6.4 percentage point increase to have confidence that it was cost-effective.3 In fact, even with a 2.4 percentage point reduction in employment, one could not rule out the possibility of cost-effectiveness, illustrating the lack of precision that results from small (or even medium-size) samples. Greater use of administrative data can reduce the costs of collecting data on large samples, helping reduce the number of underpowered studies that misdiagnose programs as “not working” when the problem is actually with the small-sample studies, not the programs. Meanwhile, large administrative datasets also allow for quasi-experimental studies that would be impossible in most survey datasets, particularly research designs that depend on detecting small differences in outcomes based on small but nearrandom variation in program participation. That said, administrative data are no panacea. Since administrative data are collected to meet the needs of the relevant program - not the needs of the research design - they will sometimes lack information important for a given evaluation or other statistical use, such as demographic details needed to understand how policies and programs affect different groups within the population. Administrative data usually provide information only on participants and not on those eligible but not participating, who are sometimes the most relevant comparison group for a study. In addition, it may be costly to make administrative data usable for statistical purposes, especially if the original data are incomplete, inconsistent, or 2 Chetty, Raj et al, “How Does Your Kindergarten Classroom Affect Your Earnings? Evidence from Project Star,” The Quarterly Journal of Economics, March 2011, 126(4), pp. 1593-1660. Sullivan, Daniel and Till von Wachter, “Job Displacement and Mortality: An Analysis using Administrative Data,” The Quarterly Journal of Economics, August 2009, 124(3), pp., 1265-1306. 3 These calculations assume a standard 95 percent confidence threshold. 7. BUILDING EVIDENCE WITH ADMINISTRATIVE DATA poorly documented. Neither administrative nor survey data are perfect, but together they can yield greater insight than either can alone.4 Examples of Successful Reuse of Administrative Data In certain areas, including education and health care, reusing administrative data is comparatively common and is already having a large impact on policy. In part as a result of No Child Left Behind and other Federal efforts to improve State education data, some individual States have developed high-quality longitudinal data systems for kindergarten through college (although others remain weak, and there is no national system letting researchers track or compare students across States). These State data and related school district administrative data have been used for important and influential research on topics ranging from teacher value-added to disparities in educational outcomes by family income to the effects of universal pre-kindergarten, charter schools, intensive tutoring programs, and community college remediation programs.5 Research on student aid simplification - showing the feasibility and importance of simplifying the Free Application for Federal Student Aid (FAFSA) - also relied on administrative records.6 This research has in4 For a more extensive discussion of the advantages and disadvantages of administrative and survey data, see: Blank, Rebecca M., Kerwin Kofi Charles, and James M. Sallee, “A Cautionary Tale about the Use of Administrative Data: Evidence from Age of Marriage Laws,” American Economic Journal: Applied Economics, 2009, 1(2): pp. 128-49; Prell et al., Working Paper: “Profiles in Success of Statistical Uses of Administrative Data,” Federal Committee on Statistical Methodology, 2014; National Research Council, “Reengineering the Survey of Income and Program Participation,” Panel on the Census Bureau’s Reengineered Survey of Income and Program Participation, 2009; Cito, Constance F. and John Karl Scholz, editors, Committee on National Statistics, Division of Behavioral and Social Sciences and Education, Washington, DC: The National Academies Press; and Prewitt, Kenneth, “Science Starts Not after Measurement, but with Measurement,” The ANNALS of the American Academy of Political and Social Science, September 2010, 631(1), pp. 7-16. 5 See Rivkin, Steven G., Eric A. Hanushek, and John F. Kain, “Teachers, Schools, and Academic Achievement,” Econometrica, March 2005, 73(2), pp. 417-458; Papay, John P., Richard J. Murnane, and John B. Willett, “Income-based Inequality in Educational Outcomes: Learning from State Longitudinal Data Systems,” NBER Working Paper No. 20802, December 2014; Andrews, Rodney J., Jargowsky, Paul, and Kuhne, Kristin. “The Effects of Texas’s Targeted Pre-Kindergarten Program on Academic Performance,” NBER Working Paper No. 18598, December 2012; Abdulkadiroğlu, Atila, et al., “Accountability and Flexibility in Public Schools: Evidence from Boston’s Charters and Pilots,” The Quarterly Journal of Economics, 2011, 126(2) pp. 699–748; Fryer, Roland G., Jr., “Injecting Charter School Best Practices into Traditional Public Schools: Evidence from Field Experiments,” The Quarterly Journal of Economics, April 2014, 129(3), pp. 1355-1407; and Calcagno, Juan C. and Bridget T. Long, “The Impact of Postsecondary Remediation Using a Regression Discontinuity Approach: Addressing Endogenous Sorting and Noncompliance,” The National Center for Postsecondary Education Working Paper, April 2008. 6 Dynarski, Susan M. and Judith E. Scott-Clayton, “College Grants on a Postcard: A Proposal for Simple and Predictable Federal Student Aid,” Hamilton Project Discussion Paper, February 2007 utilized the National Postsecondary Student Aid Study, which combines administrative and survey records. Bettinger, Eric P., et al., “The Role of Application Assistance and Information in College Decisions: Results from the H&R Block FAFSA Experiment,” The Quarterly Journal of Economics, April 2012, 127(3), pp. 1205-1242 utilized Federal administrative records to 67 fluenced steps the Administration has already taken to simplify the FAFSA and motivated both Administration and Congressional proposals to make further progress through legislation. State education data systems have also contributed to the success of the Department of Education’s Investing in Innovation (“i3”) tiered evidence program, one of the Administration’s most successful grant reform efforts. In a tiered evidence grant program, grantees can receive smaller grants under the “Development” (proof of concept) tier to begin testing new models that have high potential; larger grants under the “Validation” tier to further test interventions that have emerging evidence of effectiveness; or the highest level of funding under the “Scale-up” tier when they have strong evidence that their proposed approach delivers impact. Grants in each tier include funding for rigorous evaluations. To date, i3 has funded over 130 innovative Development and Validation studies, as well as six larger Scale-up projects, and it has helped uncover successful interventions in the areas of teacher and principal effectiveness, turning around low-performing schools, and implementing college- and career-ready standards and assessments. Nearly all of i3’s Scale-up grantees have used administrative data for their evaluations, as have many of the Development and Validation grantees. In the health arena, the Centers for Medicare and Medicaid Services (CMS) has a strong and longstanding infrastructure for making administrative data available for statistical uses, including by outside researchers, with strong privacy protections. Medicare claims data have been the basis for important and influential research on regional variation in health care utilization and costs, payment policies, and other topics.7 The availability of these data is essential to ongoing Center for Medicare and Medicaid Innovation (CMMI) delivery system demonstrations that are testing innovative payment and service delivery models to reduce expenditures while preserving or improving quality. CMS and the Department of Housing and Urban Development (HUD) are also collaborating to match Medicare and Medicaid data with HUD tenant data to evaluate the impact of housing assistance on health care utilization and costs over time. Preliminary findings from 12 jurisdictions were released in 2014,8 with results feeding into a new demonstration on the cost effectiveness of Federal housing and services interventions that assist seniors who wish to age in place, avoiding the costs of institutionalization. CMS has also been a leader in using administrative data from Federal programs to provide the public with actionable information about different service providers. In 2014, the Administration for the first time released Medicare utilization and cost data summarized at the physician-level, letting Americans compare their own doctors’ practice patterns with national norms. Likewise, the measure take-up of financial aid. 7 See, for example, the Dartmouth Atlas of Health Care project. 8 Department of Health and Human Services and the Lewin Group, “Picture of Housing and Health: Medicare and Medicaid Use Among Older Adults in HUD-Assisted Housing,” March 2014. 68 ANALYTICAL PERSPECTIVES CMS “Hospital Compare” feature provides information on how almost every U.S. hospital performs with respect to clinical quality metrics (such as whether patients receive appropriate care in a timely fashion) and hospital readmission rates. Barriers to Effective Use of Administrative Data The examples above highlight the potential gains from making greater use of administrative data, including the gains from being able to link administrative data from one program to administrative data or survey data from another (for example, linking education to earnings data). A number of agencies, including those assisting businesses as well as social service programs, are exploring new ways to use and to link administrative data to study program impacts. Unfortunately, there are significant barriers to doing so, which generally fall into three categories. • Legislative barriers to access. Some authorizing statutes explicitly prohibit Federal agencies from sharing data with one another, or even from routinely reusing their own data for statistical purposes. Sometimes, these legislative barriers are oversights, resulting from out-of-date statutes that have not been updated for modern technology and data analytic techniques. In other cases, they may reflect legitimate concerns about privacy and confidentiality that need to be fully addressed in any proposal to expand data access (and are discussed in detail below). • Policy and legal interpretations. Even where data sharing is legally allowed, agencies may be unsure about the rules and may therefore default to the assumption that data cannot be shared. Meanwhile, many agencies do not have established policies and processes for receiving, reviewing, and approving requests for administrative data and for negotiating the agreements typically required before data are provided. As a result, it can take years for other agencies (or even offices within the same agency) to obtain access to needed data, a major barrier to providing timely information to inform policy debates. Anticipated difficulties with negotiating access to data can also discourage agencies from seeking access in the first place. • Resource and capacity constraints. Even when access barriers are cleared, other challenges remain. As noted above, administrative data are often poorly documented, to the point where individuals not involved in administering the relevant program may have no way to know what key variables mean. Data can also be inconsistent and incomplete. Many agencies lack the technological infrastructure and appropriate personnel to make their data interpretable and usable by researchers outside the program, or to conduct their own analysis using administrative data. Moreover, it would be inefficient for every agency to build this technological infrastructure. Meanwhile, agencies that do have these capacities (including Federal statistical agencies,9 such as the Census Bureau) may lack the resources needed to negotiate agreements to obtain or share data, to address external researcher requests for access to data, and to assist other agencies in utilizing the data. Ongoing Efforts and Initiatives Despite the legal and operational barriers discussed above, OMB and other Federal agencies are making notable progress to improve, expand access to, and better utilize administrative data for statistical purposes. Examples include: • OMB guidance on using administrative data for statistical purposes. Earlier this year OMB issued path-breaking guidance to help both program and statistical agencies better leverage administrative data for statistical purposes. The memo builds on earlier guidance designed to increase the value of existing data and creates “a presumption in favor of openness to the extent permitted by law and subject to privacy, confidentiality, security, or other valid restrictions.”10 The guidance encourages agencies to develop strong data stewardship and data management processes so that statistical use of administrative data is “designed in” from the start. It also assists agencies in overcoming barriers created by inertia and confusion by addressing a host of legal interpretation, policy, interagency agreement and data quality challenges. Since the guidance was issued last year, agencies have reported to OMB what datasets they would like to acquire and indicated both successes and barriers in acquiring them. OMB has been working with agencies on these priorities and continues to assess how to promote agency progress in using administrative data for statistical purposes. • Increased utilization of key administrative data resources and improvements in data quality. Given the potential of administrative data to complement surveys as the foundation of the nation’s evidence base, Federal statistical agencies continue to pursue additional uses of these data for statistical purposes. For example, the Bureau of Justice Statistics (BJS) is using crime reports from local law enforcement agencies to develop the first-ever time- 9 “Statistical agency” refers to “an agency or organizational unit of the executive branch whose activities are predominantly the collection, compilation, processing, or analysis of information for statistical purposes” [PL-107347, Title V—CIPSEA, Section 502 (8)]. The statistical agencies within the executive branch of the Federal Government are: the Bureau of Economic Analysis; the Bureau of Justice Statistics; the Bureau of Labor Statistics; the Bureau of Transportation Statistics; the Census Bureau; the Economic Research Service; the Energy Information Administration; the National Agricultural Statistics Service; the National Center for Education Statistics; the National Center for Health Statistics; the National Center for Science and Engineering Statistics; the Office of Research, Evaluation, and Statistics at SSA; and Statistics of Income at IRS. 10 See OMB Memorandum M-14-06, “Guidance for Providing and Using Administrative Data for Statistical Purposes,” February 2014. 69 7. BUILDING EVIDENCE WITH ADMINISTRATIVE DATA ly, detailed, and accurate national measures of crime incidents, which will increase the Nation’s ability to monitor, respond to, and prevent crime. BJS is also using corrections data to produce better longitudinal statistics on offender re-entry and re-integration patterns and costs. Likewise, the National Center for Education Statistics (NCES) is making greater use of student financial aid and enrollment records to increase what the nation knows about the costs of college attendance and student debt. And the National Center for Health Statistics (NCHS) is helping States improve the quality and timeliness of vital birth and death records to help track priority health initiatives in prevention, cancer control, and teenage pregnancy prevention. NCHS is also providing increased secure researcher access to linked survey and administrative data to examine the factors that influence disability, chronic disease, health care utilization, morbidity, and mortality. • Improving the use of data at the Department of Labor (DOL). In FY 2014, DOL established a data analytics unit within the Office of the Chief Evaluation Officer. That office focuses on supporting agencies in their efforts to improve administrative data quality, access data, use data to conduct both simple and complex analysis to answer important program and policy questions, and improve program operations. Agencies within the Department, working independently and in conjunction with the DOL analytics unit, have greatly expanded their data analytics activities in the past year. For example, the Occupational Safety and Health Administration (OSHA) has made great strides in using administrative data from a variety of sources to better identify and target enforcement on severe violators of health and safety standards. The 2016 Budget would establish an OSHA-specific Data Analytics Unit that will support more in depth analysis of data on the effectiveness and impact of OSHA’s enforcement, consultation, outreach, and whistleblower protection strategies and activities. Budget Proposals While the Administration is already taking steps to realize administrative data’s potential to contribute to evidence building, fully unlocking that potential will require legislative changes. The 2016 Budget includes a package of proposals that aim to overcome the statutory and operational barriers discussed above, making additional administrative data from Federal agencies and programs legally and practically available for policy development, program evaluation, performance measurement, and accountability and transparency efforts. The package reflects two guiding principles: 1. Consistent with the philosophy behind the Administration’s “Open Data” Initiative,”11 Federally-funded data should be available to the public and for public purposes to the greatest extent consistent with strong privacy, confidentiality, and data security protections. 2. Federal statistical agencies should be equipped to facilitate reuse of administrative data, including by other Federal agencies and, where safe and appropriate, State and local governments and outside researchers, to answer policy-relevant questions. As discussed below, the 2016 Budget includes proposals to: (1) improve access to specific administrative data sets; (2) invest in the infrastructure needed to support more effective use of Federal and State administrative data; and (3) lay the groundwork for further progress going forward. Expanding Access to Data Employment and earnings data are among the most valuable Federal administrative data. Because many Federal (and State and local) programs are intended, in whole or in part, to increase employment and earnings, accurate employment and earnings data are needed to construct meaningful performance measures or conduct rigorous evaluations across a range of programs. These data can also shed light on local labor market dynamics and on how different groups are succeeding or failing in the labor market, informing program design. As noted above, timely and reliable quarterly employment and earnings data are collected as part of administering the Unemployment Insurance (UI) program. While UI data are collected and held by individual States, the Federal government maintains two national databases of quarterly UI records compiled from State data: the Department of Health and Human Services’ National Directory of New Hires (NDNH) and the Census Longitudinal Employer-Household Dynamics (LEHD) program. However, both databases are subject to stringent access restrictions, and, despite the fact that Federal government funds support UI data collection, neither is available for most Federal statistical uses. For example, even though the Department of Labor administers the UI system, neither database can generally be used to evaluate the impact of Federally-funded job training programs. On top of these restrictions on data sharing, the Workforce Investment Act (WIA) has since 1998 prohibited the “development of a national database of personally identifiable information on individuals receiving [WIA] job training services.”12 The implication of the ban is that even if the Department of Labor obtained consent to collect personal identifiers for participants in Federal job training programs, and even if it could then obtain access to UI earnings records, it still could not take advantage of these data to create a national database that could be used to streamline and standardize performance report11 See OMB Memorandum M-13-13, “The Open Data Policy - Managing Information as an Asset,” May 2013. 12 Workforce Innovation Act, Section 504b. 70 ing and transparency efforts for the workforce system or to evaluate which job training programs work best for what types of beneficiaries. This ban was reiterated in the 2014 reauthorization of WIA (the Workforce Innovation and Opportunity Act or WIOA), despite the fact that WIOA recognized that “[performance] reporting and evaluation requirements are important tools in measuring effectiveness, especially for the core [WIOA] programs.”13 The 2016 Budget includes three proposals that would facilitate greater use of employment and earnings data. First, consistent with bipartisan Congressional proposals, the Budget would allow select Federal statistical and evaluation units to access the NDNH for statistical purposes, subject to strong privacy and confidentiality protections. The proposal would allow NDNH data to be used to evaluate Federal job training and other programs intended to increase employment and earnings, as well as to construct job training service provider “scorecards” based on participant employment and earnings outcomes, consistent with WIOA and the goals laid out as part of the Administration’s review of job-training programs.14 The proposal would also permit the use of NDNH data to improve the completeness and efficiency of the Census LEHD program and the 2020 decennial census. Access to NDNH could help Census reduce the cost of the decennial census by $1.2 billion or more by using administrative records to identify who resides in non-responding households. The NDNH access proposal would prohibit the Federal statistical and evaluation units from releasing personally identifiable information, and it includes strong criminal penalties for individuals if they willfully make an unauthorized disclosure. A version of this proposal passed the House of Representatives with bipartisan support in 2013 and the Senate Finance Committee in 2014.15 Second, the Budget proposes to eliminate the WIOA database ban. WIOA laid out a vision for a streamlined workforce system that improves outcomes through standardized performance requirements, integrated service delivery, and stronger evaluation requirements. However, it did not include provisions to allow DOL to further streamline, standardize, and more accurately capture the outcome information essential to these goals. Eliminating the WIOA database ban, in combination with granting DOL access to UI records, would greatly simplify ongoing efforts to evaluate job training programs while reducing State burden associated with WIOA performance reporting and transparency requirements. These authorities would also help improve the accuracy and completeness of performance and transparency efforts, by simplifying State efforts to capture outcomes for WIOA participants 13 160 Cong. Rec. S3982-3990, “Statement of the Managers to Accompany the Workforce Innovation and Opportunity Act,” daily ed. June 25, 2014. 14 The White House, “Ready to Work: Job-Driven Training and American Opportunity,” July 2014. 15 The Budget also proposes to allow NDNH data sharing for certain non-statistical (administrative) purposes that will help make programs more efficient and effective. For principles governing these other NDNH access proposals, see the Department of Health and Human Services’ Administration for Children and Families FY 2016 Justification of Estimates for Appropriations Committees. ANALYTICAL PERSPECTIVES who move to another state and making it easier to identify participants who take advantage of multiple WIOA programs. Third, as part of a broader UI solvency and reform package, the Budget would require States that receive new Federal funding for UI modernization to allow broader statistical use of the UI earnings records they already provide to the Census Bureau for the LEHD. The UI reform package would also provide incentives for States to improve UI data quality and to take advantage of these data to provide UI recipients with better information on workforce opportunities. Beyond wage data, the Budget includes a number of other proposals that would improve access to important administrative data resources. For example: • Expanding access to Medicare data to spur improvements in health care quality. The Affordable Care Act allowed the Centers for Medicare and Medicaid Services to make certain Medicare claims data available to qualified healthcare research organizations for the purpose of performance evaluation. The Budget expands this authority to allow the data to be used for a broader array of purposes, such as fraud prevention activities and value-added analysis for physicians to enable better care coordination and practice improvement. • Providing targeted access to business tax data to improve economic statistics. Current law authorizes access to business tax data by the Census Bureau, and these data are important for developing timely and accurate economic statistics. However, the Bureau of Labor Statistics (BLS) lacks access to business tax data, and the Bureau of Economic Analysis (BEA) has only limited access. These restrictions prevent sharing of business information for statistical purposes among these agencies, especially for the large and growing non-corporate sector. The Budget proposes to augment BEA’s current access to business tax data and permit BLS to receive Census Bureau data for businesses with limited tax information. This would allow the agencies to collaborate in producing and verifying business datasets, reducing costs and correcting errors that can degrade the quality of key economic statistics. Investing in Data Infrastructure Almost all Federal agencies could make greater use of their own or other agencies’ administrative data to build evidence. In addition, many agencies have data that would be useful to other agencies, other levels of government, or outside researchers for these same purposes. At the same time, not all agencies have the technological infrastructure or the expertise needed to utilize, share, or link data themselves, nor does it make sense to fully duplicate these capacities at every agency. Federal statistical agencies already play a leading role in bringing together data from multiple sources, protecting privacy and confidentiality and ensuring data security, 71 7. BUILDING EVIDENCE WITH ADMINISTRATIVE DATA using data to create a wide variety of statistical products, and providing secure access to researchers inside and outside of government to conduct a broad array of policy- and program-relevant analyses. The Census Bureau in particular already has much of the infrastructure and capacity needed to serve as a leader for this often highly technical work. The Budget requests $10 million in additional funding for the Census Bureau to build on its existing strengths and start developing a more comprehensive infrastructure for linking, sharing, and analyzing key datasets. Specifically, the additional funds would allow the Census Bureau to: • Accelerate the process of acquiring and processing additional data sets. Census has explicit legal authority to request data from any public or private entity, but it generally needs to negotiate access, often a time-consuming and resource-intensive process. Census is already in the process of acquiring Supplemental Nutrition Assistance Program (SNAP) data from States, and additional funding would allow it to accelerate the process of acquiring other Federal and Federally-sponsored program data. • Expand and improve infrastructure for processing and linking data. As discussed above, because they are collected for program administration rather than statistical purposes, administrative data are often poorly documented, inconsistently formatted, and otherwise difficult to work with. The proposed investment will provide the Census Bureau with resources to document, link, and anonymize additional data sources to make them usable for analysis. • Improve the infrastructure for providing data to non-Census researchers. Most Census data can be accessed through the Census Bureau’s network of Research Data Centers (RDCs), which allow non-Census researchers, including both staff from other Federal agencies or levels of government and outside experts, to access these data. However, limited Census resources sometimes lead to long delays in reviewing and approving RDC project proposals. With additional funding, the Census Bureau would be able to improve and expedite the process of approving proposals to use RDC data. Census would also expand capacity in RDCs and, building on existing models, would offer other statistical and nonstatistical agencies the opportunity to make their data available through the RDC network. Finally, the Census Bureau would explore the feasibility and desirability of creating secure virtual access to select datasets, as some other agencies have done. In addition to the major Census investment, the Budget also includes other investments in making administrative data usable and available for statistical purposes, including proposals that would: • Improve higher education data and increase the Department of Education’s capacity to utilize these data to inform policy and management. The Budget provides $11.6 million for the second phase of the Department’s Enterprise Data Warehouse project, which will allow for deeper analysis of the Federal student loan portfolio and borrower behavior. The Budget also provides increases at NCES for more frequent administration of the National Postsecondary Student Aid Study (NPSAS). The NPSAS, which integrates student aid administrative data with robust survey data on demographics and student experiences, is a leading example of using administrative and survey data together to provide greater insight than either can alone. The Budget proposal will make more timely data on educational costs, financial aid, enrollment, and student progress available to policymakers and the public. • Help States improve their workforce and edu- cation data systems. The Budget includes $107 million through the Workforce Data Quality Initiative and the State Longitudinal Data Systems grant programs (at the Labor and Education Departments, respectively) to help states build and use integrated and longitudinal data systems across their workforce and education programs. The Budget also includes $60 million to support state consortia as they modernize their UI tax and benefit systems, which will improve both the claimant experience and the quality of the UI data. Finally, to help address some of the policy and legal interpretations that states grapple with when trying to make better use of their own workforce and education data, the Budget includes funding for a joint DOL and Education team that will serve as the central point of contact and technical assistance for States, Federal programs, and researchers on issues related to accessing, collecting, and using workforce and education data. • Support linking Bureau of Justice Statistics (BJS) data with the Department of Justice’s grants management system data. This proposal would enable the BJS to explore the feasibility of linking its statistical collections to the Department of Justice’s grants management system data. Linking these data would shed light on the variation in funding across geographies and over time and on the effects of Federal justice system funding (both by amount and type) on recidivism and other outcomes. Setting the Stage for Future Progress In November, 2014, Representative Paul Ryan and Senator Patty Murray jointly introduced legislation (H.R. 5754/S. 2952) that would create a Commission on Evidence-Based Policymaking. The Commission would be charged with reviewing “the inventory, infrastructure, and protocols related to data from Federal programs and 72 ANALYTICAL PERSPECTIVES tax expenditures while developing recommendations for increasing the availability and use of these data in support of rigorous program evaluation.”16 In particular, the Commission would advise Congress on whether and how to create a “clearinghouse” for administrative and survey data that would facilitate accessing and linking data to evaluate program effectiveness and inform domestic policymaking. The Budget embraces the Ryan/Murray approach, putting forward a similar proposal to create a commission that would make recommendations for how to better utilize administrative data for evidence building. Specifically, the commission would be tasked with recommending how to make additional administrative data available for evaluation and other statistical uses by Federal and outside researchers, what legislative changes are needed to facilitate such access, how to expand access while ensuring data security and fully protecting privacy and confidentiality, and how to improve data quality. As in the Ryan/ Murray proposal, the commission would include executive and legislative branch appointees, selected based on their expertise in program evaluation, data analytics, data management, statistics, and privacy. The Budget proposes to fund the commission as part of the Census investment described above and to base the commission at Census to take advantage of the Census Bureau’s extensive expertise in utilizing, linking, and sharing sensitive data while protecting privacy. Privacy, Confidentiality, and Data Security Proposals to expand access to data can raise concerns about privacy, confidentiality, and data security. In this context, the term “privacy” includes limiting the collection of personally identifiable information to only that which is required for specific purposes. “Confidentiality” refers to protecting information against unauthorized disclosure by limiting the access and use of personally identifiable information, and “data security” refers to protecting information systems from unauthorized access, use, disclosure, disruption, modification, or destruction. Privacy, confidentiality, and data security are all high priorities for the Administration, and the Administration would not support data access changes without strong technical, legal, and policy protections to mitigate risk and prevent unauthorized use and disclosure of the data. The Census Bureau and other Federal statistical agencies adhere to a robust framework of privacy, confidentiality, and security protections governing the use of personally identifiable information, and these agencies have a longstanding and successful history of collecting, protecting, and making available in secure environments some of the Nation’s most sensitive information (including data on personal health status, immigration status, income, and proprietary business data). Federal statistical agencies are required to follow strict rules and protocols based in Federal law (described below) that include rigorous access and usage protections and other requirements to safeguard personally identifiable information and ensure its appropriate use for statistical purposes. Their 16 See the Evidence-Based Policymaking Commission Act of 2014. track record shows that it is possible to make extensive use of sensitive data to inform and improve public policy, while also protecting privacy, confidentiality, and security. Notably, response rates observed for Federal surveys administered by the Census Bureau and other statistical agencies have far surpassed private sector surveys, one indicator of the public’s confidence that Federal statistical agencies are able to appropriately safeguard personally identifiable information. The statistical agencies’ successful record reflects a strong data stewardship framework,17 key features of which include: • Limiting access to authorized statistical use. As explained above, statistical uses are those that, by definition, do not affect the rights, benefits, and privileges of individuals. Thus, they are inherently protective of individual privacy, since the goal is to learn about groups (e.g. participants in a given program or residents of a given community) and to release only aggregate information. Statistical agencies further limit data access to only those staff with a need to know and to authorized and approved projects. • Minimizing direct access to personally identifiable information. Existing rules and protocols minimize access to directly personally identifiable information, with all users using datasets that have been anonymized to the greatest extent compatible with the intended use. For example, at the Census Bureau, a small specialized unit receives administrative data from other agencies, strips off directly personally identifiable information (e.g. names or Social Security Numbers) and replaces such information with a “protected identification key” before even other Census Bureau employees can use the file. • Disclosure review and severe penalties for in- appropriate disclosure. Statistical agencies require expert review of any results that will be made public to protect against inadvertent disclosure of individual information. Existing statutes also provide severe penalties for disclosure of personally identifiable information. • Data security standards. Existing laws and regu- lations require strong technological and other safeguards for personally identifiable information. Statistical agencies implement stringent confidentiality laws and policies with a comprehensive set of physical and information technology data security practices that protect data throughout the entire chain of custody, including training for everyone who touches the data, even incidentally, firewalls within firewalls 17 For additional discussion about privacy, confidentiality, and data security protections see the “OMB implementation guidance issued for Title V of the E-Government Act, Confidential Information Protection and Statistical Efficiency Act of 2002” and “OMB Statistical Policy Directive No. 1: Fundamental Responsibilities of Federal Statistical Agencies and Recognized Statistical Units.” 73 7. BUILDING EVIDENCE WITH ADMINISTRATIVE DATA to protect against unauthorized access, and secure data enclaves to tightly control the process of authorized access. As cybersecurity challenges continue to affect Federal agencies, the protection of the Government’s information and information systems has become more critical in safeguarding the confidentiality of personally identifiable information. To further strengthen technological and other safeguards to protect data, the Budget funds key investments to enhance the Federal Government’s cybersecurity posture including the Continuous Diagnostics & Mitigation Program, the EINSTEIN intrusion detection and prevention system, government-wide testing and incident response training to mitigate the impact of evolving cyber threats, and investments in cyber research and development to strengthen our cybersecurity defenses. The Budget would extend this same data stewardship framework to any newly available administrative data. In particular, to the extent data would be made available to or through agencies that are not part of the Federal statistical system, these agencies would be held to the same core standards and would have to demonstrate their ability to meet them. For example, in the case of NDNH, the Department of Health and Human Services (HHS) has robust procedures to ensure that any other agency accessing the data has the required privacy and data security protections in place and has never experienced a data breach at the Federal level. In particular, HHS reviews the other agency’s security posture and those of its contractors, including computer system controls, safeguarding and oversight procedures, and administrative structure. The commission discussed above would also be charged with making recommendations regarding new privacy, confidentiality, or data security protocols and standards that should accompany further expansions in access to administrative data. Conclusion The administrative data package outlined in this chapter fits into the Budget’s broader emphasis on tackling challenging but important reforms that are integral to making government work better. Harnessing the full potential of administrative data can improve transparency and support efforts to hold programs and service providers accountable; allow Federal agencies to adopt privatesector best practices for using data analytics to improve performance and customer service; support ongoing innovation and experimentation, coupled with evaluations to learn what works; and permit a greater understanding of the different needs of different groups and communities. The proposals in this chapter represent a first step in this agenda and point the way to uncovering what more needs to be done. 8. STRENGTHENING THE FEDERAL WORKFORCE When President Obama addressed the Senior Leadership corps on December 9, 2014, he described both the challenge and caliber of the Federal workforce: “Many of you do what you do at extraordinary sacrifice. You could work at a lot of places. You made a decision at some point in your life to serve your country — your country is stronger because you made that decision. You keep America running — our airports, our embassies, our financial system. You take care of our troops and their families. You do it without fanfare — in fact, doing your job right often means nobody hears about you. They only report when something goes wrong, or when there’s a shutdown and suddenly somebody notices — oh, we need that and nobody is doing it.” Historically, this sentiment has had bipartisan support. President George H.W. Bush stated, “There is nothing more fulfilling than to serve your country and your fellow citizens and do it well. And that is what our system of self-government depends on.” The Federal Government is America’s largest employer, with more than 2.1 million civilian workers and 1.3 million active duty military who serve in all 50 States and around the world. About 85 percent of Federal employees work outside of the Washington, D.C. metropolitan area, and the majority of Federal employees directly serve the public. Federal employees are our neighbors, civic leaders, and taxpayers, too. The Federal Government is the Nation’s largest employer of doctors, and employs individuals responsible for protecting our forests, waterways and parks, and providing grants for research, housing, and education. Every day, Federal employees actively collaborate with the private and nonprofit sectors to advance our national priorities. During five years of delayed budgets, sequestration, pay freezes and award caps, Federal employees have come in every day to serve their country. In 2014 alone, Federal employees addressed a wide range of national priorities – from responding to the Ebola outbreak to working to end veterans’ homelessness to implementing the Affordable Care Act that helped millions obtain affordable health care. Thanks in part to the efforts of Federal employees, the economy is recovering. The annual unemployment rate in 2014 fell 1.2 percentage points from the previous year, the largest annual decline in the last 30 years. This chapter discusses four broad areas related to the Federal workforce. First, it describes trends in Federal employment levels over the past several decades and includes estimates for the FY 2016 Budget. Second, it outlines the shifts in composition of the Federal workforce over the past decades. Third, the chapter lays out some of the challenges the Federal workforce has faced, such as recent pay freezes, sequester, furloughs, and government shutdown. Finally, it discusses the Administration’s recent accomplishments and future plans to fully capitalize on the talents in the Federal workforce today, and recruit and develop the capabilities we need to serve the American people tomorrow. The President is committed to supporting the development of the Federal workforce. One of the four pillars of the President’s Management Agenda (PMA) is People & Culture, focused on unlocking the full potential of today’s Federal workforce and building the workforce we need in the future. This Cross-Agency Priority (CAP) Goal will improve how we effectively hire, engage and lead our workforce. Focusing on removing frustrating barriers that can prevent Federal employees from accomplishing their mission will allow us to achieve the breakthroughs and daily operational success that the American public expects, and fixing broken administrative processes while focusing on mission outcome will allow agencies to properly allocate resources and concentrate on outcomes. Trends in Federal Workforce Size Long-Term Trends The size of the Federal civilian workforce relative to the country’s population has declined dramatically over the past several decades, with occasional upticks due, for example, to military conflicts and the administration of the Census. Since the 1960s, the U.S. population increased by 66 percent, the private sector workforce increased 131 percent, and State and local government workforces (excluding education workers) increased 127 percent, while the size of the Federal workforce rose just 9 percent.1 Chart 8-1 highlights the sharp drops, relative to population, in both the security and non-security parts of the Federal workforce since 1975 (the end of the Vietnam War), compared to increases in the private sector and State and local governments (excluding education). Since 1975, the security and non-security parts of the Federal workforce have declined 33 and 38 percent, respectively, relative to the population, but the patterns in the declines differ. As could perhaps be expected, the Federal security workforce (63 percent of the current Federal civilian workforce) has largely tracked the history of U.S. engagement in conflict overseas – it fell at the end of the Vietnam War, increased in the early 1980s, and dropped significantly compared to the civilian population as the Cold War ended. That decline reversed itself after 9/11 and with the onset of the 1 Teachers, professors, and workers in schools, colleges, and universities make up almost half of the State and local workforce. To make the State and local workforce more comparable to the Federal workforce, those educational workers are excluded from these comparisons. 75 76 ANALYTICAL PERSPECTIVES Chart 8-1. Changes Since 1975 in Employment/Population by Sector 50% Federal - Security 40% Private Sector State & Local Federal - Non-Security 30% 20% 10% 0% -10% -20% -30% -40% -50% 1975 1979 1983 1987 1991 1995 1999 2003 Source: Office of Personnel Management and Bureau of Labor Statistics. 2007 2011 2014 Notes: Federal excludes the military and Postal Service. Security agencies include the Department of Defense, the Department of Homeland Security, the Department of State, and the Department of Veterans Affairs. Non-security agencies include the remainder of the Executive Branch. State & Local excludes educational workers. wars in Iraq and Afghanistan. After remaining mostly steady, the non-security workforced decreased drastically in the 1980s. While the 1990s reversed some of that decline, the non-security Federal workforce has declined by about 35 percentage points relative to the private sector since 1992. The divergent trends in Chart 8-1 are striking. While the evolution of the Federal security workforce largely tracks major foreign policy developments, the reasons for the decline in the non-security Federal workforce are less clear, particularly given increasing responsibilities at many Federal agencies. The Government Accountability Office reports declines in the workforce between 2004 and 2012 in the Departments of Agriculture, Education, Housing and Urban Development, Interior, the Environmental Protection Agency, GSA, NASA, and the Social Security Administration. In the same period 94 percent of the Federal workforce growth occurred in the Departments of Defense, Veterans Affairs, and Homeland Security.2 Possible explanations for the relative decline of the non-security Federal workforce include: (1) relative increases in efficiency in the Federal sector; (2) an increase in the contract workforce (which likely also plays a role on the security side); and (3) shifting of some duties of the Federal government to State and local governments. Also noteworthy, both an increased reliance on a contract workforce and shifting responsibilities to State and local governments have required the Federal workforce to take on greater management roles over time. As discussed in greater detail below, this may help explain why the skill level of the Federal workforce (as measured by education2 http://www.gao.gov/assets/670/660449.pdf. al level attained) has increased faster than that of the private sector workforce. Still, it is unclear if these increases in education level have been fast enough to keep up with the increased demands on the Federal workforce. Short-Term Trends Table 8-1 shows actual Federal civilian full-time equivalent (FTE) levels in the Executive Branch by agency for fiscal years 2013 and 2014, with estimates for 2015 and 2016. Estimated employment levels for 2016 result in an estimated 1.6 percent increase compared to 2015, or approximately 34,000 Federal jobs. This increase is primarily driven by growth at the Department of Veterans Affairs to strengthen the timeliness and quality of services to veterans and to implement the Veterans Choice Act; and restoring cuts made to the Department of the Treasury’s Internal Revenue Service (IRS) to improve customer service, program integrity efforts, and tax enforcement. In recent years, the Executive Branch has had made considerable progress hiring veterans, and the Federal government continues to benefit from retaining the dedication, leadership, and skills these veterans have honed. In November 2009, President Obama signed Executive Order 13518, establishing the Veterans Employment Initiative and establishing the Council on Veterans Employment. In FY 2011, veterans made up 29 percent of the total new hires in the Federal Government. By the end of FY 2013, veterans made up approximately 31 percent of new hires government-wide, and 54 percent of new hires at DOD. The total number of veterans employed by the Government also increased. In FY 2011, there were 602,775 veterans in the Federal Government, or 29 percent of the workforce. By the end of FY 2013 (the most 77 8. STRENGTHENING THE FEDERAL WORKFORCE Table 8–1. FEDERAL CIVILIAN EMPLOYMENT IN THE EXECUTIVE BRANCH (Civilian employment as measured by full-time equivalents (FTE) in thousands, excluding the Postal Service) Actual Agency 2013 Change: 2015 to 2016 Estimate 2014 2015 2016 FTE Percent 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 ���������������������������������������������� 88.0 39.9 738.3 4.1 15.3 70.1 183.7 8.7 67.3 114.8 17.2 33.2 55.9 102.3 312.8 86.1 39.5 723.9 4.0 15.0 69.9 183.2 8.4 64.4 112.4 16.7 33.1 54.1 99.2 323.0 91.1 43.6 744.5 4.0 16.1 72.8 185.7 8.6 66.9 117.4 17.1 33.3 56.2 97.9 342.3 91.8 45.1 741.6 4.3 16.2 75.4 189.5 8.9 68.3 119.3 17.9 33.3 57.1 107.3 353.9 0.7 1.5 –2.9 0.3 0.1 2.6 3.8 0.3 1.4 1.9 0.8 0.0 0.9 9.4 11.6 0.8% 3.4% –0.4% 7.5% 0.6% 3.6% 2.0% 3.5% 2.1% 1.6% 4.7% 0.0% 1.6% 9.6% 3.4% Other agencies—excluding Postal Service: Broadcasting Board of Governors ������������������ Corps of Engineers—Civil Works ������������������� Environmental Protection Agency ������������������ Equal Employment Opportunity Commission �� Federal Deposit Insurance Corporation ���������� General Services Administration �������������������� International Assistance Programs ����������������� National Aeronautics and Space Administration �� National Archives and Records Administration ��� 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 ���������������������������������� 1.8 22.4 15.8 2.1 7.7 11.9 5.4 17.9 3.0 1.6 1.4 3.7 5.3 0.9 4.0 3.9 5.1 62.5 12.6 17.4 1.7 21.8 15.3 2.1 7.3 11.5 5.5 17.7 2.9 1.5 1.4 3.8 5.0 0.9 4.2 3.3 4.9 60.8 11.3 17.6 1.9 22.5 15.5 2.3 7.3 12.0 5.6 17.6 3.0 1.6 1.4 3.8 5.4 0.9 4.4 3.3 5.3 64.3 11.7 18.5 1.9 22.5 15.5 2.4 7.1 11.8 5.6 17.4 3.0 1.6 1.4 3.8 5.5 0.9 4.9 3.3 5.5 65.5 11.6 19.2 0.0 0.0 0.0 0.1 –0.2 –0.2 0.0 –0.2 0.0 0.0 0.0 0.0 0.1 0.0 0.5 0.0 0.2 1.2 –0.1 0.7 0.0% 0.0% 0.0% 4.3% –2.7% –1.7% 0.0% –1.1% 0.0% 0.0% 0.0% 0.0% 1.9% 0.0% 11.4% 0.0% 3.8% 1.9% –0.9% 3.8% 2,058.0 2,033.4 2,105.8 2,140.3 34.5 1.6% Total, Executive Branch civilian employment *�� * Totals may not add due to rounding. recent available data), the number of veterans had grown to over 607,000, or 30 percent of the Federal workforce, and represented 47 percent of the workforce at DOD. By comparison, veterans comprise approximately 6 percent of the private sector non-agricultural workforce. Attributes of the Federal Workforce The previous section describes the long-term decline in the size of the Federal workforce relative to the U.S. population, the private sector workforce, and State and local government workforces. That relative reduction in size in the face of a Federal mission that has only grown more complex, along with an historical trend of greater reliance on contractors and State and local partners in many areas, results in Federal jobs that have become increasingly complex and require greater levels of skill. It is equally important to consider how the Federal workforce differs from the private sector and how it has changed over time. As discussed in more detail below, in comparison to private sector jobs, Federal jobs are concentrated in higher paying professions and are based in higher cost metropolitan areas. Also, Federal workers hold more high-level degrees, and the share possessing such degrees is growing. 78 ANALYTICAL PERSPECTIVES Table 8–2. 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 �������������������������������������������������������������������������������������������������������������������������������������������� Pilots, conductors, and related mechanics ����������������������������������������������������������������������������������������� Doctors, nurses, psychologists, etc. ��������������������������������������������������������������������������������������������������� Administrators, accountants, HR personnel ��������������������������������������������������������������������������������������� Miscellaneous professionals �������������������������������������������������������������������������������������������������������������� Inspectors ������������������������������������������������������������������������������������������������������������������������������������������� 1.9% 4.0% 4.9% 11.7% 2.0% 8.0% 6.5% 15.2% 1.4% 0.6% 1.9% 0.7% 13.7% 0.5% 6.2% 2.7% 8.7% 0.3% Total Percentage ����������������������������������������������������������������������������������������������������������������������������������� 55.6% 35.2% 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 ������������������������������������������������������������������������������������������������������������������������������������ Drivers of trucks and taxis ������������������������������������������������������������������������������������������������������������������ Laborers and construction workers ���������������������������������������������������������������������������������������������������� Clerks and administrative assistants �������������������������������������������������������������������������������������������������� Manufacturing ������������������������������������������������������������������������������������������������������������������������������������� 1.1% 3.2% 1.8% 9.2% 2.5% 1.4% 0.7% 4.0% 13.5% 2.5% 6.2% 4.4% 3.0% 0.8% 6.2% 0.6% 3.2% 9.3% 11.2% 7.5% Total Percentage ����������������������������������������������������������������������������������������������������������������������������������� 40.0% 52.3% Lowest Paid Occupations Ranked by Private Sector Salary Other miscellaneous service workers ������������������������������������������������������������������������������������������������� Janitors and housekeepers ���������������������������������������������������������������������������������������������������������������� Cooks, bartenders, bakers, and wait staff ������������������������������������������������������������������������������������������ 2.2% 1.4% 0.8% 5.9% 2.4% 4.1% Total Percentage ����������������������������������������������������������������������������������������������������������������������������������� 4.4% 12.4% Source: 2010-2014 Current Population Survey, Integrated Public Use Microdata Series. 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. Type of occupation. The last half century has seen significant shifts in the composition of the Federal workforce. Fifty years ago, most white-collar Federal employees performed clerical tasks, such as filing or data entry. Today their jobs are vastly different, requiring advanced skills to serve a knowledge-based economy. For example, the IRS previously required thousands of employees in warehouses to print and sort hard-copy tax returns, while thousands more manually adjudicated the returns. With the majority of tax returns now electronically filed, the IRS today requires more forensic accountants and analysts rather than warehouse clerks. Federal employees must manage highly sensitive tasks that require great skill, experience, and judgment. Many need sophisticated management and negotiation skills to effect change, not just across the Federal Government, but also with other levels of government and the private sector. Using data from the Bureau of Labor Statistics, of fulltime, full-year workers, Table 8-2 breaks all Federal and private sector jobs into 22 occupation groups to demonstrate the differences in composition between the Federal and private workforces. Professionals such as doctors, engineers, scientists, statisticians, and lawyers now make up a large and growing portion of the Federal workforce. For example, the Federal STEM workforce has increased by 12 percent from FY 2008 to FY 2012. More than half (56 percent) of Federal workers are employed in the nine highest-paying private sector occupation groups, such as judges and lawyers, engineers, and scientists, compared to about a third (35 percent) of private sector workers. In contrast, 12 percent of private sector workers are employed in the three lowest-paying occupation groups, as cooks, janitors, service workers, etc. Only about 4 percent of Federal workers are employed in those three lowestpaying occupation groups. 79 8. STRENGTHENING THE FEDERAL WORKFORCE Chart 8-2. Masters Degree or Above by Year for Federal and Private Sectors 30% 25% Federal Private Sector Large Firms Private Sector All Firms 20% 15% 10% 5% 0% 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 Source: 1992-2014 Current Population Survey, Integrated Public Use Microdata Series. Notes: Federal excludes the military and Postal Service, but includes all other Federal workers. Private Sector excludes the self-employed. Neither category includes State and local government workers. Large firms have at least 1,000 workers. This analysis is limited to full-time, full-year workers, i.e. those with at least 1,500 annual hours of work and presents five-year averages. Education level. The complexity of much Federal work – whether that work is analyzing security or financial risk, forecasting weather, planning bridges to withstand extreme events, conducting research to advance human health or energy efficiency, or pursuing scientific advancements in a laboratory – necessitates a highly educated workforce. Charts 8-2 and 8-3 pres- ent trends in educational levels for the Federal and private sector workforces over the past two decades. In 1992 there were only about half as many highly educated Federal workers (masters degrees or above) compared to less educated workers (high school degrees or less); in 2014 there were 74 percent more highly educated Federal workers than less educated workers. Chart 8-3. High School Graduate or Less by Year for Federal and Private Sectors 60% Federal Private Sector All Firms Private Sector Large Firms 50% 40% 30% 20% 10% 1992 1995 1998 2001 2004 2007 2010 Source: 1992-2014 Current Population Survey, Integrated Public Use Microdata Series. 2013 Notes: Federal excludes the military and Postal Service, but includes all other Federal workers. Private Sector excludes the self-employed. Neither category includes State and local government workers. Large firms have at least 1,000 workers. This analysis is limited to full-time, full-year workers, i.e. those with at least 1,500 annual hours of work and presents five-year averages. 80 ANALYTICAL PERSPECTIVES The private sector has also experienced increases in educational level, but the increases in highly educated workers have been slower than in the Federal sector. Even in large firms, the percentage of highly educated workers is less than half that of the Federal sector and the rate of growth over the last decade is only about half as fast. Size of organization and responsibilities. Another important difference between Federal workers and private sector workers is the average size of the organization in which they work. Federal agencies are large and often face challenges of enormous scale – distributing benefit payments to over 66 million Social Security and Supplemental Security Income beneficiaries each year, providing medical care to 8.9 million veterans, or managing defense contracts costing billions of dollars. Data shows that workers from large firms (those with 1,000 or more employees) are paid about 15 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. However, even large private sector firms may not be ideal comparisons to the Federal sector, because the Federal sector is larger and more highly educated (see Charts 8-2 and 8-3). 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, Federal workers, on average, are 45.6 years old – up 2.8 years from 20 years ago and higher than the average age of 42.1 years old in the private sector (even in large firms). Chart 8-4 shows the trends in average age in both the Federal and private sectors over the past two decades. Federal Compensation Trends Chart 8-5 shows how increases in the Federal pay scale have compared to increases in private sector wages since 1978. After more than a decade when the percentage increases 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 Employment Cost Index (ECI). The law gives the President the authority to propose alternative pay adjustments for both base and locality pay. Presidents have regularly supported alternative pay plans. While increases in Federal and private sector pay remained fairly even during the early 1990s, private sector pay incrementally rose in comparison to the public sector in the mid-1990s. That trend reversed itself in the 2000s when the Federal pay scale rose relative to private sector wages. Over the last few years, however, Federal sector wages have fallen consistently and significantly relative to the private sector. This primarily reflects the recent Federal pay freezes, discussed in further detail below. Furthermore, newly hired Federal employees have been required to pay additional contributions towards retirement, effectively a pay reduction relative to their longer-employed colleagues. In 2012, the Middle Class Tax Relief and Job Creation Act increased employee contributions to Federal defined benefit retirement plans, including the Federal Employees’ Retirement System, by 2.3 percentage points, effective for individuals joining the Federal workforce after December 31, 2012 with less than Chart 8-4. Average Age by Year for Federal and Private Sectors 48 Federal Private Sector All Firms Private Sector Large Firms 46 44 42 40 38 36 1992 1995 1998 2001 2004 2007 2010 Source: 1992-2014 Current Population Survey, Integrated Public Use Microdata Series. 2013 Notes: Federal excludes the military and Postal Service, but includes all other Federal workers. Private Sector excludes the self-employed. Neither category includes State and local government workers. Large firms have at least 1,000 workers. This analysis is limited to full-time, full-year workers, i.e. those with at least 1,500 annual hours of work and presents five-year averages. 81 8. STRENGTHENING THE FEDERAL WORKFORCE Chart 8-5. Pay Raises for Federal vs. Private Workforce, 1978-2016 2% 0% -2% -4% FEPCA passed -6% Changes in Federal Pay Scale Relative to Private Pay Including Increases in Retirement Contributions for New Employees -8% -10% 1978 1982 1986 1990 1994 1998 2002 Source: Public Laws, Executive Orders, and the Bureau of Labor Statistics. 2006 2010 2014 Notes: Federal pay is for civilians and includes base and locality pay. Private pay is measured by the Employment Cost Index wages and salaries, private industry workers series, lagged 15 months. five years of creditable civilian service. The Bipartisan Budget Act of 2013 increased employee contributions for those joining the Federal workforce after December 31, 2013 by an additional 1.3 percentage points. Taking into account both the recent pay freezes and the changes in retirement contributions, earnings for new Federal employees since these changes have fallen more than 10 percentage points relative to the private sector between 2009 and 2015. The President ended the three-year pay freeze with a one percent pay increase for General Schedule employees in 2014 and 2015. The 2016 Budget assumes a 1.3 percent pay increase in 2016 to help the Federal Government remain competitive in attracting and retaining a highcaliber workforce. Comparisons of Federal and Private Sector Compensation Federal worker compensation receives a great deal of attention, particularly in comparison to that of private sector workers. Comparisons of the pay and benefits of Federal employees and private sector employees must account for factors affecting pay, such as differences in skill levels, complexity of work, scope of responsibility, size of the organization, location, experience level, and exposure to personal danger, and should account for all types of compensation, including pay and bonuses, health benefits, retirement benefits, flexibility of work schedules, job security, training opportunities, and profit sharing. A series of reports released in January 2012 by the Congressional Budget Office (CBO) accounted for some, but not all, of the factors described above. CBO found that prior to the three-year Federal pay freeze, Federal pay, on average, was slightly higher (2.0 percent) than compara- ble private sector pay. CBO reported that overall Federal sector compensation (including benefits) was on average substantially higher, but noted that its findings about comparative benefits relied on far more assumptions and were less definitive than its pay findings. The CBO study also excluded forms of compensation, such as job security, that favor the Federal sector, and factors such as training opportunities and profit sharing that favor the private sector. Perhaps more importantly, CBO emphasized that focusing on averages is misleading, because the Federal/ private sector differentials vary dramatically by education and complexity of job. Compensation for highly educated Federal workers (or those in more complex jobs) is lower than for comparable workers in the private sector, whereas CBO found the opposite for less educated workers. These findings suggest that across-the-board compensation increases or cuts may not be the most efficient use of Federal resources. The CBO reports focus on workers and ask what employees with the educational backgrounds and other characteristics of Federal workers earn in the private sector. An alternative approach, used by the Federal Salary Council, focuses on jobs and asks what the private sector would pay people with the same roles and responsibilities as Federal workers. Unlike CBO, which found that Federal pay is (on average) roughly in line with private sector pay, the Federal Salary Council found that in 2014 Federal jobs paid 35 percent less than comparable nonFederal jobs. There are possible explanations for the discrepancy in the CBO versus the Federal Salary Council findings. First, methodological issues around the classification of Federal and private sector jobs introduce considerable 82 ANALYTICAL PERSPECTIVES uncertainty into the Federal Salary Council approach. It is significantly easier to compare college graduates in Federal versus private sector jobs than it is to determine what private sector job is most comparable to a given Federal job. Second, the studies ask fundamentally different questions, so their different answers are not necessarily in conflict. It could be the case that Federal and private sector workers with similar characteristics are paid about the same, but that jobs in the Federal sector are underpaid relative to their private sector counterparts. That would imply that, at least in some jobs, the Federal government could have difficulty hiring and retaining workers with the same skills or managerial experience as their counterparts in equivalent private sector jobs This could be a reason for concern, given the decline in the size of the Federal workforce relative to the population and the increasingly supervisory role it plays (e.g., supervising contractors and State and local governments). Workforce Challenges The Federal Government faces unique human capital challenges, including a personnel system that requires further modernization, an aging and retiring workforce, and the need to engage a future generation of Federal workers. If the Government loses top talent, experience, and institutional memory through retirements, but cannot recruit, retain, and train highly qualified workers, performance suffers. While the current Federal age distribution and potential for a large number of retiring workers poses a challenge, it also creates an opportunity to reshape the workforce and to infuse it with new workers excited about government service and equipped with strong management skills, problem-solving ability, technology skills, and fresh perspectives. A national climate of criticism of service in the Federal bureaucracy makes it difficult to recruit the needed workforce and convince them to commit their talents and develop into future leaders. President Obama, when welcoming employees back from the 2013 shutdown, explicitly made his pitch: “We have work to do, and the American people are counting on us to get it right. Those of us who have the privilege of serving this country may come from different parties, but we are Americans first. Each of us has specific responsibilities we are charged with carrying out on behalf of the American people, and we have an obligation to do it the best we can. I look forward to working with all of you to make sure we meet the high expectations of the citizens we serve.” Outdated Personnel System In the past sixty years, the private sector has developed innovative and more flexible personnel management systems, but the Federal personnel system has not kept up. While recent hiring reform efforts are showing some progress in simplifying hiring, additional reforms are needed to update the hiring, pay, classification, benefits systems, and the performance management process, including how to reward top performers and address low performers. The General Schedule (GS) pay system has been in effect since 1949. Enacted in 1951, aspects of the current benefit and leave laws are out of date and do not always provide adequate flexibility to reflect today’s employee and family structures. The Administration is committed to developing an alternative, cost-effective system that will allow the Government to compete for and reward top talent, incentivize performance, and encourage adequate flexibility to family caregivers, among other requirements. 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 purpose of a Congressionally-chartered Commission would be to 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. One clear manifestation of the challenges of the GS system is the continued requests for additional flexibilities and authorities that the agencies need to effectively manage their workforce. The various pay authorities and flexibilities create differentiation among agencies, placing some at a competitive disadvantage to recruit similar talent. While a fragmented personnel system may indeed provide needed customization, today’s personnel strategy and oversight are hampered by a legacy centralized rulemaking structure and is largely ineffective. Quite simply, a 21st Century Government cannot continue to operate using 20th Century processes. Aging Workforce The Federal workforce of 2014 is both older than Federal workforces of past decades and older than the private sector workforce. The number of Federal retirements has steadily increased, rising from 95,425 in 2009 to peak at 114,697 in 2013. The 101,568 Federal retirements in 2014 represent approximately five percent of the workforce, and increases in retirement are expected to continue. Twenty-five percent of respondents to the 2014 Employee Viewpoint Survey (EVS) expressed an intent to retire during the next five years, with four percent retiring in the next year alone. Given these demographics, the Federal Government faces a few immediate challenges: preparing for retirements by maximizing knowledge transfer from one generation to the next; succession planning to assure needed leadership; and hiring and developing the next generation of the Government workforce to accomplish the varied and challenging missions the Federal Government must deliver. Developing and Engaging Personnel to Improve Performance OPM administers the Government-wide Federal Employee Viewpoint Survey (EVS) to gather employee 83 8. STRENGTHENING THE FEDERAL WORKFORCE perceptions about whether, and to what extent, conditions characterizing successful organizations are present in their agencies. The EVS measures employee engagement, defined as employees’ sense of purpose, evident in their display of dedication, persistence, and effort in their work or overall attachment to their organization and its mission. The 2014 EVS results demonstrated that Federal employees continue to be engaged in their work, with just a one percent decrease reported in the year after a lapse in appropriations caused Federal offices to temporarily close. However, while levels of employee engagement have remained relatively steady, the continued declines across approximately one-third of the EVS questions serves as an important warning about the long-term consequences of the pay freezes, sequestration, and budget uncertainty that have driven the government-wide declines in satisfaction over the past three years. One well-documented challenge in any organization is managing a workforce so it is engaged, innovative, and committed to continuous improvement. Federal employees are extremely positive about the importance of their work and repeatedly express a willingness to put in extra effort to accomplish the goals of their agencies. Results from the 2014 EVS indicate that nearly 96 percent of respondents answer positively to the statement “When needed I am willing to put in the extra effort to get the job done.” However budgetary constraints have impacted a variety of issues that are important to Federal agencies and employees. For example, the number of employees reporting that their training needs were met dropped by five percentage points between 2012 and 2014, evidence of the impact that budget reductions have on workforce development. There are also cultural and management issues that must be addressed as evidenced by only 55 percent of employees government-wide “feel encouraged to come up with new and better ways of doing things.”. OPM has developed the EVS Employee Engagement Index, an important tool to measure the conditions likely to lead to employee engagement. The 2014 EVS results reflected a slight government-wide decline in two of the three subfactors (Leaders Lead, Supervisor/Employee Relationships, and Intrinsic Work Experiences) that comprise the index. While ratings of Leaders Lead and Intrinsic Work Experience had a slight decline, ratings for Supervisors rose to 71 percent. Engaging agency leaders and managers to make improvements in these areas is a top priority of the President’s Management Agenda, as discussed below. Budgetary Constraints The last several years have been challenging for the Federal workforce. 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, saving $60 billion over 10 years. The pay freeze was extended an additional year in 2013 by Congress. The President also issued a memorandum directing agencies to freeze pay schedules and forgo general pay increases for civilian Federal employees in ad- ministratively determined pay systems. Additionally, on his first day in office, the President froze salaries for all senior political appointees at the White House, and in 2010, the President eliminated bonuses for all political appointees across the Administration. The Office of Personnel Management (OPM) and the Office of Management and Budget (OMB) directed agencies to limit individual performance awards for almost all employees starting in fiscal years 2011 and 2012, and continuing. Looking forward, tight discretionary caps for 2016 and the possible resumption of sequester in 2016 will make it increasingly challenging for the Federal government to keep pace with the private sector, especially in hard to recruit fields, both in terms of pay and in areas such as training. Addressing Federal Workforce Challenges The Administration is committed to further accelerating its employee performance and human capital management. These initiatives are a core component of the President’s Management Agenda, as discussed in the main Budget volume. Multiple efforts are underway, including: building a workforce with the skills necessary to meet agency missions, developing and using personnel analytics to drive decision making, new programs to infuse talent into agencies, heightened attention to a diverse and inclusive workforce, continued focus on the Senior Executive Service (SES) hiring and performance appraisal systems, and strengthened labor-management partnerships. Mission Focused and Data Driven Personnel Management The Administration is committed to strengthening Federal agencies’ capacity to analyze human resources data to address workplace problems, improve productivity, and cut costs. OPM, in conjunction with OMB, is implementing several key initiatives that will lead to better evaluation and management of Federal employees. These efforts include using the EVS as a diagnostic tool to guide management of our Federal workers, expanding implementation of our successful data-driven Human Resources Statistics (HRStat) review sessions, greater alignment between human capital and mission performance, and quarterly updates of key HR performance indicators on Performance.gov. As discussed earlier, OPM’s EVS is a valuable management tool that helps agencies identify areas of strength and weakness and informs the implementation of targeted action plans to help improve employee engagement and agency performance. Notably, OPM has worked with agencies in recent years to increase the number of components within agencies for which office-specific results are available. Whereas only 1,687 components received results in 2011, more than 21,000 offices received results in 2014. The increased response and reporting granularity enables agencies to identify areas of strength, offering possible models for others, and areas of weakness needing attention. Agencies across Government are using EVS data to develop and implement targeted, mission-driven 84 action plans to address identified challenges. The 2014 release of UnlockTalent.Gov, a new OPM dashboard that provides engagement and satisfaction indices, allows managers across the agency to review their own data in comparison to the rest of government and their agency. The Budget continues its investment in OPM’s data analytics to increase the number of data sets available to Federal managers. Elevating employee engagement is a top priority for the Administration. In December 2014, the Director and Deputy Director of OMB, Director of OPM and Deputy Director of the White House Presidential Personnel Office co-signed a memorandum to the Heads of all Agencies that outlined the linkage between strengthening employee engagement and organizational performance. Building on strong evidence from the private sector and case studies within the Federal Government, Senior Leaders will be held accountable for ensuring that employee engagement is a priority and becomes an integral part of the performance-management system. Since 2012, Chief Human Capital Officer (CHCO) level agencies have utilized HRstat reviews. These quarterly data-driven reviews, which are led by the agency CHCOs in collaboration with the designated agency Performance Improvement Officer (PIO), focus on agency-specific human capital performance and key human resources management metrics. Agencies have the flexibility to focus on areas critical to their mission and use metrics to understand issues such as performance management, succession planning, recruitment timeliness, and strategic workforce planning. The HRstat reviews are intended to enable quick course correction, if needed, to help ensure progress is being made on key human resources issues. For example, through HRstat, the Treasury Department matched up different bureaus as partners to collaborate on veterans hiring and in one year more than doubled the rate of new veteran hires. In 2014, the final eight CHCO agencies completed the HRstat pilot, so that now all CHCO agencies are implementing the quarterly data-driven reviews. To further assist agencies in implementing and sustaining HRStat, OPM developed an “HRStat maturity model” and stood up a Community of Practice to work collaboratively across government on standards, guidance, tools, training and best practices. These products will be developed and rolled out in 2015, to ensure all agencies continue to mature their HR capabilities. Creating a Culture of Excellence and Engagement to Enable Higher Performance Leadership, organizational culture, and employee engagement are critical factors in the success of private and public institutions. While employee engagement is linked to everything from higher earnings per share, to lower workplace accidents and turnover, and overall high performance in the private sector3, the Administration’s focus on employee engagement and mission performance are 3 Heskett, J. L., T. O. Jones, G. W.Loveman, W. Earl Sasser, and L. A. Schlesinger.“Putting the Service-Profit Chain to Work.” Harvard Business Review 72, no. 2 (March-April 1994): 164-174; Heskett, J., W. E. Sasser Jr., and L. Schlesinger. The Service Profit Chain. N.Y.: Free Press, 1997 ANALYTICAL PERSPECTIVES crucial ingredients to supporting a Culture of Excellence that can improve all Federal services, and is an important component of the Management Agenda. As the President said in his remarks to the SES on December 9, 2014: “One of the things that we know in the private sector about continuous improvement is you’ve got to have the folks right there on the front lines able to make suggestions and know that they’re heard, and to not simply be rewarded for doing an outstanding job, but to see their ideas implemented in ways that really make a difference.” In 2014, OPM created an engagement dashboard based on EVS and other human resource data that serves as an accessible tool for Chief Operating Officers and supervisor alike. When coupled with agency mission performance data, this information provides actionable insights to target areas where improvement is needed the most. OPM will also support these areas of focus with increased crossgovernment attention on employee leadership and skill development. In 2014, OPM launched GovConnect, which consists of a set of tools being piloted by several agencies that allow managers to tap into skills from a wider range of people within and across agencies, and allow virtual teams to surge onto new projects, discrete initiatives, and crises. There are also effective tools available for managers and supervisors to address employee performance challenges. OPM offers periodic classroom training sessions; on-line training on HR University; and an OPM desk guide for supervisors to assist them in addressing and resolving poor performance of employees they supervise. Consistent with recommendations from the President’s Management Council, OPM will help agencies understand the authorities they have and how to use them effectively to spread best practices to deal with poor performers who fail to improve as needed or are ill suited to their current positions. As capabilities are enhanced and credibility is built, these efforts will incorporate continuous improvement in learning and development opportunities and tools available to Federal managers and employees. As part of the Government Performance and Results Act implementation, agencies are aligning strategic human capital planning, with mission planning – specifically strategic and performance plans. Building a World-Class Federal Management Team Starting with Enhancements to the Senior Executive Service Drawing from leading practices, the Administration is committed to investing in our civil service leadership by expanding on the strong experience and skills base across the Federal Executive Corps. The SES hiring process relies extensively on lengthy written qualifications statements and a centralized qualifications certification process which can impact our ability to successfully attract a broad sector of top talent. In 2014, we examined the SES hiring process to identify efficiencies and to ensure we have effective processes for hiring the best executive talent. We are building a stronger SES onboarding program so our leaders can more effectively transition into 85 8. STRENGTHENING THE FEDERAL WORKFORCE organizations, hit the ground running, and understand the high standards that are expected of them from the beginning. The Management Agenda continues the Administration’s commitment to expanding management development opportunities for SES and SES candidates by linking and coordinating existing cross-agency and cross-sector leadership initiatives. In 2015, OPM will strengthen the SES-wide leadership and engagement training curriculum – including an emphasis on diversity and the changing needs of the 21st century workforce. A half dozen agencies volunteered to pilot possible solutions, including new recruitment, application, and onboarding processes changes. The Budget also provides OPM with funding to develop and pilot new assessments that could reduce the time to hire while improving the quality of the selection. The Administration launched two new programs to focus on specific senior leadership changes. The White House Advisory Group on SES Reform will play a key role in providing input on the core components of the Administration’s efforts to improve the SES corps. Recommended by their agency leadership, these individuals are highly effective SES, Senior Level, and Senior Technical professionals and aspiring SES who will provide a broad set of advice on the current and future state of the senior career leadership. The group will play a key role in improving the way we recruit, hire, develop, and retain top senior career leaders. The White House Leadership Development Program for Future Senior Career Executives will provide top civil servants and SES candidates with rotational assignments with leaders responsible for driving progress on Cross-Agency Priority Goals. The program is a step towards fulfilling the vision of the Senior Executive Service and developing a cadre of senior civil servants with critical skill sets such as leading change, building coalitions, working across government to solve problems, and performance management. The first cohort will start in 2015. Enabling Agencies to Hire the Best Talent from All Segments of Society The Administration is committed to working with labor groups, universities, nonprofits and the private sector to improve hiring outcomes by exploring flexible approaches to recruit and retain individuals with high-demand talents and skills. As part of the Management Agenda, the Administration will launch demonstration projects in 2015 to identify promising practices in recruiting, hiring, onboarding, and deploying talent across agencies. The goal of these projects will be reducing skills gaps, increasing diversity, and improving organizational outcomes. OPM is working individually with agencies Government-wide to “untie the knots” that previously hindered effective recruitment and hiring. The Federal Government has also made progress towards pay equality. Based on recent studies, the gap between average male and female salaries in the Federal Government is about half the gap in the private sector. Family Friendly Workplace Policies A growing number of working Americans – both men and women – struggle to balance the needs of their families with the responsibilities of their jobs. Leading companies in the private sector are working to develop new tools to redesign their workplaces to provide greater flexibility to workers. While the Federal leave system has been enhanced over the years and is generally regarded as providing good benefits and flexibilities, there is room for further enhancements that would help the Federal Government in its efforts to recruit and retain a quality workforce. On June 23, 2014, the President issued a broadly focused Presidential Memorandum (PM) on Enhancing Workplace Flexibilities and Work-Life Programs that directs agency heads to ensure that various workplace flexibilities are available ‘to the maximum extent practicable,’ including the advancement of leave for employee and family care situations. The June PM requires that agencies review and assess the efficacy of existing workplace flexibilities and work-life programs in meeting employee needs. While Federal workers already have access to paid sick leave and vacation time, the government has fallen behind industry-leading companies and offers no paid time off specifically for family or parental leave. In order to recruit and retain the best possible workforce to provide outstanding service to American taxpayers, the President is proposing legislation that would provide federal employees with six weeks of paid administrative leave for the birth, adoption, or foster placement of a child. In addition, the proposal would allow parents to use sick days to care for a new child. In doing so, the proposals will strengthen Federal recruitment and retention, and make significant progress in bringing Federal parental leave policies in line with benefit programs already provided by many companies, while also encouraging wider adoption of such standards in the private sector. The costs of providing this benefit will be covered within agency budget requests for salaries and expenses. The President also signed a Presidential Memorandum in January, 2015, directing agencies to allow for the advance of 30 days of paid sick leave for parents with a new child, employees caring for ill family members, and other sick leave-eligible uses. This will allow new mothers the opportunity to recuperate after child birth, even if they have not yet accrued enough sick leave. It will also allow spouses and partners to care for a new mother during her recuperation period and both parents to attend proceedings relating to the adoption of a new child. Finally, it directs agencies to consider a benefit some agencies already provide—help finding, and in some cases subsidizing, emergency backup child care (as well as backup care for seniors and adults with disabilities) that parents can use for a limited numbers of days per year when they need to go to work but their regular care is not available. Some agencies provide this benefit through their Employee Assistance Program and it can help parents with a temporary need for safe care for their children. 86 The Federal government should be a model employer and has already aggressively increased the use of telework and other policies to promote family-friendly policies. The 2014 EVS indicated that teleworkers are more likely to feel empowered (46 percent versus 40 percent), and more likely to be satisfied with their jobs (68 percent compared to 63 percent of non-teleworkers). Finally, employees who telework are more likely to want to stay with their agencies (67 percent compared to 63 percent of non-teleworkers) and to recommend their agencies to others (67 percent compared to 63 percent of non-teleworkers). As documented by OPM’s 2013 report on the status of telework (the most recent available), the percentage of eligible Federal employees who participated in routine telework grew to 21 percent as of September 2012, compared to 10 percent during calendar year 2009. Equally important, the number of employees deemed eligible to telework increased by nearly 50 percent from 2011 to 2012. However, there is still more work to be done in breaking down barriers to the effective use of telework. Closing Skills Gaps in the Workforce The demands of the workplace necessitate new and agile skill sets in the Federal workforce. OPM’s mission is to ensure that the Federal Government recruits, retains, and honors the talent agencies require to serve the American people. In 2011, OPM partnered with the Chief Human Capital Officers (CHCO) Council to take on the challenge of closing skills gaps across the Government. This initiative was launched in response to the President’s 2012-2013 CAP Goal to close skills gaps, as well as GAO’s designation of human capital as a Government-wide high risk area. The Department of Defense joined OPM in chairing an inter-agency workgroup that designed a sustainable strategic workforce planning method to identify and close skills gaps in mission-critical occupations. Based on rigorous data analysis, the workgroup identified the following mission-critical occupations: IT-Cybersecurity Specialists, Acquisition Specialists, Economists, Human Resources Specialists, and Auditors. In addition, the workgroup identified STEM (science, technology, engineering, and mathematics) as a sixth functional area covering multiple occupations which requires sustained strategic attention across Government. In 2015, the workgroup is expanding its work to more broadly involve subject matter experts and examine more series. To close skills gaps in these areas, OPM designated sub-goal leaders from agencies whose missions critically depend on these occupations. Together with these subgoal leaders, OPM is developing and executing strategies to close skills gaps in these occupations. The sub-goal leaders meet quarterly with the OPM Director to apprise her of their progress, by providing updated metrics that will be reported on Performance.gov. OPM will continue to work with these occupations’ leaders to close skill gaps. In Cybersecurity, OPM has completed a major initiative to populate the EHRI database with a Cybersecurity data code that designates which Federal positions work in the Cybersecurity func- ANALYTICAL PERSPECTIVES tion, and in which specialty area. In FY 2014, all agencies met their targets to add a Cybersecurity identifier to all relevant positions. In FY 2015, OPM is validating and analyzing the data to identify tools that can be applied to workforce planning for this occupation, which poses high risk to the Federal government if the positions are not filled. In the STEM functional area, a specific Pathways Program was developed for attracting STEM applicants for the Presidential Management Fellows opportunity. The PMF-STEM Pathways track was piloted during FY 2014. The Acquisition area has begun to increase efficiencies in training, development, and management of the workforce by requiring civilian agency use of an integrated acquisition career management system. Interagency workgroups are exploring possible pilots to test special hiring and compensation authorities for several occupations, including Economist, STEM, and Cybersecurity roles. OPM is assisting the Auditor occupational area in studying what changes are needed to the classification and qualification requirements to increase the talent brought into that workforce. Individual agencies are also identifying and targeting critical skills gaps as a priority, and are piloting innovative approaches to competency gap closure. OPM is helping agencies share promising practices and lessons learned from these pilot projects, and will drive replication of best practices upon completion of the pilots. Successful skills gap closure is particularly dependent on a strong HR workforce that can provide strategies, programs, and tools that help occupational leaders design and implement skills gaps closure efforts. For this reason, OPM has been focusing heavily on this workforce and designated HR Skills Gaps as an Agency Priority Goal. One of the ways OPM is addressing skills gaps among human resources professionals is through HR University. Developed in 2011 by the CHCO Council, HR University provides an excellent foundation for human resources professionals to receive training to help them become more effective. HR University is a source of centralized training that takes courses and resources Federal agencies have already developed and provides a platform for cross-agency sharing. HR University realizes savings through the sharing of resources (agencies no longer need to independently develop courses that already exist) and economies of scale. In addition, HR University ensures that courses meet OPM’s high standards by vetting each course through a very rigorous quality review. In partnership with the CHCO Council, OPM will continue to expand HR University’s offerings. This effort may include more partnerships with colleges and universities, development of HR certifications, accreditation of courses, greater use of social media, website enhancements, and more courses on key topics that will close identified skill and competency gaps in the human resources field. OPM registered 77 percent of the human resources workforce onto HR University by September 30, 2014. In FY 2015, OPM will continue to engage with agencies to register additional HR specialists and to identify additional courses that can be added to the site. 87 8. STRENGTHENING THE FEDERAL WORKFORCE Developing an Agile Workforce Strengthening Labor-Management Relations To maximize effectiveness and potential, the Federal Government must continue to prepare its talent for challenges on the horizon. New cost-effective programs are being implemented to develop current employees, foster collaboration with innovators from the private sector, and enhance institutional knowledge transfer. For example, OPM has implemented a phased retirement program that provides employees who once had a financial incentive to retire fully, to work part time while mentoring and training new employees. Agencies are currently developing policies to fully implement Phased Retirement to maximize the benefits. These efforts are essential for developing a nimble, efficient 21st Century workforce that can help ensure agencies achieve their important missions under a tightening fiscal climate. In early FY 2015, OPM released a report on “Labor Management Relations in the Executive Branch,” describing how labor-management relations are structured and how they operate in the Federal Government. This report detailed examples of the benefits that can result from strengthening labor-management relationships. Specifically, improving labor-management relations facilitates opportunities for agencies to improve their performance. The Administration continues to fulfill the robust vision laid out in Executive Order 13522, Creating LaborManagement Forums to Improve Delivery of Government Services. Issued in 2009, this Executive Order created a National Council, which meets regularly to coordinate Government-wide efforts, and a multitude of labormanagement forums around government where agency management and union representatives work collaboratively to improve service delivery to the public. In 2015, Labor-Management Forums will continue to use metrics to track progress. At the Council’s meetings, representatives from both management and labor regularly provide details about their efforts to improve performance and productivity at their agencies by working together. Recently, the Council heard from participants in the U.S. Department of Justice, Bureau of Prisons and the American Federation of Government Employees, Council of Prison Locals, C-33’s labor-management forum. These presenters credited improvements in their labor-management relationship with the issuance of new policies developed in collaboration and which would enhance the safety of employees throughout the agency. The Council also heard from participants in the forum between the Department of Treasury, Bureau of Engraving and Printing, and its Joint Labor Council, which represents 15 different labor organizations. This group has engaged in pre-decisional involvement, consistent with Executive Order 13522, and has used it to foster employee engagement. As a result of these efforts, their agency’s standing in the Partnership for Public Service’s Best Places to Work in the Federal Government rankings improved from #219 in 2010 to #47 in 2013. The Council will continue to seek ways to spread these and other labor-management successes to other agencies in 2015 and 2016. One method employed by the Council has been to develop training and guidance to assist forums with successfully engaging in pre-decisional involvement and with using metrics to track their activities. More work in these areas is anticipated for 2015 and 2016. The Council has also partnered with the Chief Human Capital Officers (CHCO) Council to explore the relationship between effective labor-management relations and employee engagement, and to assist agencies with enhancing both areas. The Council will continue working to ensure that additional labor-management forums transition into effective partnerships with a focus on improving the productivity and effectiveness of the Federal Government. Informing Our Work with a Diversity of Experiences A rich diversity of experiences and talents inform the abilities of federal applicants and everyday work of federal employees. Opportunities exist both in employee hiring and throughout employment experiences to leverage this diversity. In recent years, OPM has been focusing on improving the way agencies use federal applicant and applicant flow data to improve the hiring process. OPM continues to increase the accessibility and use of this data by hiring managers, so they can determine whether outreach, recruitment, and hiring strategies have been successful in attracting and retaining a workforce that reflects the diversity of our country and the many talents of its people. Leveraging the diversity of our workforce also requires that we measure and improve the extent to which diversity and inclusion are supported in work units. To that end, and mirroring the aforementioned efforts to measure and target improvements in employee engagement, OPM developed a 20-question index of the EVS called the New Inclusion Quotient (New IQ) that represents each work unit’s inclusive intelligence and is providing feedback to executive leadership, program managers, and supervisors on how well work units are leveraging the unique experiences, perspectives, and viewpoints of their employees to improve program delivery. Importantly, the Budget recognizes that increased availability of this data is not sufficient. Fostering inclusive work environments and realizing the full potential of our workforce’s diversity requires agencies to employ effective management practices. OPM’s change management tools supplement the inclusion index. The index and tools, referred to jointly as the New Inclusion Quotient Plus, arm agencies with instruments and practices necessary to support diversity and inclusion more fully. In addition, OPM will continue to promote proven practices in using all workforce data to inform everyday support for diversity and inclusion in the workplace. 88 ANALYTICAL PERSPECTIVES Honoring a World-Class Workforce sure that somebody who didn’t have health care now has it, and as a consequence, are able to catch that disease before it kills them; to make sure that some child somewhere that doesn’t have much of a chance suddenly gets that chance, and their whole world, their whole life suddenly unfolds differently because of what you did. What an incredible privilege that is. What better way to spend your careers than what you do right now. I want you to wake up every day knowing that the President of the United States appreciates you for making that difference.” Federal Employees make a difference every single day in the lives of millions of people across the country and around the world. President Obama closed his December 2014 address to the Senior Leadership corps thanking them and stating: “Knowing that when you wake up every day, you have the chance to maybe make sure that somebody who didn’t have a job last week has a job; to make sure that somebody who is driving to work gets there safely because the road is safe; to make Table 8–3. TOTAL FEDERAL EMPLOYMENT (As measured by Full-Time Equivalents) Description 2014 Actual 2015 2016 Estimate Estimate Change: 2015 to 2016 FTE Percent Executive Branch Civilian: All Agencies, Except Postal Service ������������������������������������������������������������������� 2,033,394 2,105,847 2,140,290 34,443 1.6% Postal Service 1 ��������������������������������������������������������������������������������������������������� Subtotal, Executive Branch Civilian �������������������������������������������������������������� 569,513 2,602,907 569,201 2,675,048 559,740 2,700,030 –9,461 24,982 –1.7% 0.9% 1,411,373 40,557 7,128 1,459,058 4,061,965 1,364,837 41,851 7,236 1,413,924 4,088,972 1,343,401 41,576 7,231 1,392,208 4,092,238 –21,436 –275 –5 –21,716 3,266 –1.6% –0.7% –0.1% –1.5% 0.1% Legislative Branch 3 ������������������������������������������������������������������������������������������������ 29,674 33,839 33,448 Judicial Branch ������������������������������������������������������������������������������������������������������� 32,072 33,158 33,313 Grand total �������������������������������������������������������������������������������������������������� 4,123,711 4,155,969 4,158,999 1 Includes Postal Rate Commission. 2 Includes activated Guard and Reserve members on active duty. Does not include Full-Time Support (Active Guard & Reserve (AGRs)) 3 FTE data not available for the Senate (positions filled were used). –391 155 3,030 –1.2% 0.5% 0.1% Executive Branch Uniformed Military: Department of Defense 2 ������������������������������������������������������������������������������������ Department of Homeland Security (USCG) ������������������������������������������������������� Commissioned Corps (DOC, EPA, HHS) ����������������������������������������������������������� Subtotal, Uniformed Military ������������������������������������������������������������������������� Subtotal, Executive Branch ��������������������������������������������������������������������������� 89 8. STRENGTHENING THE FEDERAL WORKFORCE Table 8–4. PERSONNEL COMPENSATION AND BENEFITS (In millions of dollars) Description Change: 2015 to 2016 2014 Actual 2015 Estimate 2016 Estimate Dollars Percent Civilian Personnel Costs: Executive Branch (excluding Postal Service): Direct compensation ��������������������������������������������������������������� Personnel Benefits ����������������������������������������������������������������� Subtotal ���������������������������������������������������������������������������������� 177,668 75,355 253,023 185,155 81,318 266,473 191,641 84,350 275,991 6,486 3,032 9,518 3.5% 3.7% 3.6% Postal Service: Direct compensation ��������������������������������������������������������������� Personnel benefits ������������������������������������������������������������������ Subtotal ���������������������������������������������������������������������������������� 35,365 19,147 54,512 35,639 19,527 55,166 35,248 20,142 55,390 –391 615 224 –1.1% 3.1% 0.4% Legislative Branch: 1 Direct compensation ��������������������������������������������������������������� Personnel benefits ������������������������������������������������������������������ Subtotal ���������������������������������������������������������������������������������� 2,004 619 2,623 2,089 658 2,747 2,147 679 2,826 58 21 79 2.8% 3.2% 2.9% Judicial Branch: Direct compensation ��������������������������������������������������������������� Personnel benefits ������������������������������������������������������������������ Subtotal ���������������������������������������������������������������������������������� Total, Civilian Personnel Costs ���������������������������������������������������� 3,012 1,046 4,058 314,216 3,382 1,111 4,493 328,879 3,510 1,187 4,697 338,904 128 76 204 10,025 3.8% 6.8% 4.5% 3.0% Department of Defense Direct compensation ��������������������������������������������������������������� Personnel benefits ������������������������������������������������������������������ Subtotal ���������������������������������������������������������������������������������� 98,517 46,322 144,839 96,593 44,521 141,114 97,349 44,985 142,334 756 464 1,220 0.8% 1.0% 0.9% All other executive branch, uniformed personnel: Direct compensation ��������������������������������������������������������������� Personnel benefits ������������������������������������������������������������������ Subtotal ���������������������������������������������������������������������������������� Total, Military Personnel Costs 2 �������������������������������������������������� 3,305 717 4,022 148,861 3,218 676 3,894 145,008 3,254 671 3,925 146,259 36 –5 31 1,251 1.1% –0.7% 0.8% 0.9% Grand total, personnel costs ��������������������������������������������������������� 463,077 473,887 485,163 11,276 2.4% 81,606 11,359 45 83,432 11,958 48 85,772 12,659 50 2,340 701 2 2.8% 5.9% 4.2% Military personnel costs: ADDENDUM Former Civilian Personnel: Retired pay for former personnel Government payment for Annuitants: ������������������������������������� Employee health benefits ������������������������������������������������������� Employee life insurance ���������������������������������������������������������� Former Military personnel: Retired pay for former personnel ������������������������������������������������� 55,451 56,444 57,789 1,345 Military annuitants health benefits ����������������������������������������������� 9,294 9,618 9,983 365 1 Excludes members and officers of the Senate. 2 Amounts in this table for military compensation reflect direct pay and benefits for all service members, including active duty, guard, and reserve members. 2.4% 3.8% 9. 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 2016. (Fiscal year 2016 will begin on October 1, 2015, and end on September 30, 2016.) 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 2015, 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 2014, 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. 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. Others require the involvement of White House policy officials and the President. This decision-making process 91 92 ANALYTICAL PERSPECTIVES 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 and Interactions with the Budget,’’ 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 eliminate 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 appropriation of funds to carry out those 1 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). 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 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. There are procedural hurdles associated with considering appropriations bills (“discretionary” spending) that would breach or further breach an Appropriations subcommittee’s target. Similar procedural hurdles exist for considering 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. 93 9. BUDGET CONCEPTS 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 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 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 recommend changes in laws that affect receipts or mandatory spending. They direct 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 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 94 ANALYTICAL PERSPECTIVES 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. 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 means for enforcing these agreements, as described under “Budget Enforcement.” Budget Enforcement The Federal Government uses three primary enforcement mechanisms to control revenues, spending, and deficits. 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 Budget Control Act of 2011 (BCA), enacted on August 2, 2011, amended the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA) by reinstating limits (“caps”) on the amount of discretionary budget authority that can be provided through the annual appropriations process. 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 and imposed automatic spending cuts to achieve $1.2 trillion of deficit reduction over 9 years after the Joint Committee process failed to achieve its deficit reduction goal. 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 enforcement rules that apply to mandatory spending because permanent laws generally control receipts. Discretionary cap enforcement. BBEDCA specifies spending limits (“caps”) on discretionary budget authority for 2012 through 2021. Similar enforcement mechanisms were established by the Budget Enforcement Act of 1990 and were extended in 1993 and 1997, but expired at the end of 2002. The caps originally established by the BCA were divided between security and nonsecurity categories for 2012 and 2013, with a single cap for all discretionary spending established for 2014 through 2021. The security category included 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. As part of the enforcement mechanisms triggered by the failure of the BCA’s Joint Committee process, the security and nonsecurity categories were redefined and established for all years through 2021. The “revised security category” included discretionary budget authority in the defense budget function 050, which primarily consists of the Department of Defense. The “revised nonsecurity category” includes all discretionary budget authority not included in the defense budget function 050. The redefined categories are commonly referred to as the “defense” and “non-defense” categories, respectively, to distinguish them from the original categories. The American Taxpayer Relief Act of 2012 (ATRA) restored the caps for 2013 to the original security and nonsecurity definitions, but reduced the levels provided in the BCA by $4 billion in 2013 (split equally between the security and nonsecurity categories) and $8 billion in 2014 (split equally between the defense and non-defense categories). The Bipartisan Budget Act of 2013 (BBA) set new discretionary caps for 2014 at $520.5 billion for the defense category and $491.8 billion for the non-defense 9. BUDGET CONCEPTS category and for 2015 at $521.3 billion for the defense category and $492.4 billion for the non-defense category. In addition, the BBA reaffirmed the defense and non-defense category limits for 2016 through 2021, although these limits are still subject to Joint Committee reductions if those procedures remain in place. BBEDCA requires OMB to adjust the caps each year for: changes in concepts and definitions; appropriations designated by the Congress and the President as emergency requirements; and appropriations designated by the Congress and the President for Overseas Contingency Operations/Global War on Terrorism. BBEDCA also specifies cap adjustments (which are limited to fixed 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. BBEDCA requires OMB to provide cost estimates of each appropriations act in a report to the Congress within 7 business days after enactment of such act and to publish three discretionary 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 the Congress. The preview report explains the adjustments that are required by law to the discretionary caps, including any changes in concepts and definitions, and publishes the revised caps. The preview report may also provide a summary of policy changes, if any, proposed by the President in the Budget to those caps. 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 sequestration report for a given fiscal year indicates that the amount of discretionary budget authority provided in appropriations acts for that year exceeds the cap 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. 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. BBEDCA specifies special rules for reducing some programs and exempts some programs from sequestration entirely. For example, any sequestration of certain health and medical care accounts is limited to 2 percent. Also, if a continuing resolution is in effect when OMB issues its final sequestration report, the sequestration calculations will be based on the annualized amount provided by that continuing resolution. During the 1990s and so far under the BCA caps, 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 95 noncompliance. This is also true for mandatory sequestration under PAYGO, as discussed below. Supplemental appropriations can also trigger spending reductions. From the end of a session of the Congress through the following June 30th, a within-session discretionary sequestration of current-year spending is imposed if appropriations for the current year cause a cap to be breached. In contrast, if supplemental appropriations enacted in the last quarter of a fiscal year (i.e., July 1 through September 30) cause the caps to be breached, the required reduction is instead achieved by reducing the applicable spending limit for the following fiscal year by the amount of the breach, because the size of the potential sequestration in relation to the unused funding remaining for the current year could severely disrupt agencies’ operations. Direct spending enforcement. The Statutory PayAs-You-Go Act of 2010 requires that new legislation changing mandatory spending or revenue must be enacted on a “pay-as-you-go” (PAYGO) basis; that is, that the cumulative effects of such legislation must 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 spending must be fully offset by revenue increases or cuts in mandatory spending. This requirement of deficit neutrality is not enforced on a bill-by-bill basis, but is based on two cumulative scorecards that tally the cumulative budgetary effects of PAYGO legislation as averaged over rolling 5- and 10year periods starting with the budget year. Any impacts of PAYGO legislation on the current year deficit are counted as budget year impacts when placed on the scorecard. Like the discretionary caps, PAYGO is enforced by sequestration. Within 14 business days after a congressional session ends, OMB issues an annual PAYGO report and determines whether a violation of the PAYGO requirement has occurred. If either the 5- or 10-year scorecard shows net costs in the budget year column, the President is required to issue a sequestration order implementing across-the-board cuts to nonexempt mandatory programs by an amount sufficient to offset those net costs. The PAYGO effects of legislation may be directed in legislation by reference to statements inserted into the Congressional Record by the chairmen of the House and Senate Budget Committees. Any such estimates are determined by the Budget Committees and are informed by, but not required to match, the cost estimates prepared by the Congressional Budget Office (CBO). If this procedure is not followed, then the PAYGO effects of the legislation are determined by OMB. During the first year of statutory PAYGO, nearly half the bills included Congressional estimates. In the subsequent three years, OMB estimates were used for all but one of the enacted bills due to the absence of a Congressional estimate. Provisions of mandatory spending or receipts legislation that are designated 96 in that legislation as an emergency requirement are not scored as PAYGO budgetary effects. The PAYGO rules 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 as part of provisions 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 number of 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. For the 114th Congress, House rules require the official cost estimates of major legislation that are used for enforcing the budget resolution and other House rules to incorporate the budgetary effects of changes in economic output, employment, capital stock and other macroeconomic variables. This is known as dynamic scoring and involves estimating the impact of policy changes on the overall economy as well as secondary “feedback” effects. Joint Committee reductions. The failure of the Joint Select Committee on Deficit Reduction to propose, and the Congress to enact, legislation to reduce the deficit by at least $1.2 trillion triggered automatic reductions to discretionary and mandatory spending in fiscal years 2013 through 2021. The reductions are implemented through a combination of sequestration and reductions in the discretionary caps. These reductions have already taken place for 2013 through 2015, with some modifications as provided for in the ATRA and the BBA. Unless Congress acts, reductions for 2016 onward will be implemented by pro rata reductions to the discretionary caps, which are reflected in OMB’s discretionary sequestration preview report for that year, and by a sequestration of non-exempt mandatory spending, which is ordered when the President’s Budget is transmitted to Congress and takes effect beginning October 1 of the upcoming fiscal year. OMB is required to calculate the amount of the deficit reduction required for 2016 onward as follows: • The $1.2 trillion savings target is reduced by 18 percent to account for debt service. ANALYTICAL PERSPECTIVES • The resulting net savings of $984 billion is divided by nine to spread the reductions in equal amounts across the nine years, 2013 through 2021. • The annual spending reduction of $109.3 billion is divided equally between the defense and non-defense functions. • The annual reduction of $54.7 billion for each func- tional category of spending is divided proportionally between discretionary and direct spending programs, using as the base the discretionary cap, redefined as outlined in the discretionary cap enforcement section above, and the most recent baseline estimate of non-exempt mandatory outlays. • The resulting reductions in defense and non-defense direct spending are implemented through a sequestration order released with the President’s Budget and taking effect the following October 1st. The reductions in discretionary spending are applied as reductions in the discretionary caps, and are enforced through the discretionary cap enforcement procedures discussed earlier in this section. Subsequent to the enactment of the BCA, the mandatory sequestration provisions were extended beyond 2021 by the BBA, which extended sequestration through 2023, and P.L. 113-82, commonly referred to as the Military Retired Pay Restoration Act, which extended sequestration through 2024.2 Sequestration in these three years is to be applied using the same percentage reductions for defense and nondefense as calculated for 2021 under the procedures outlined above. The Bipartisan Budget Act took an important first step in moving away from manufactured crises and austerity budgeting by replacing a portion of the Joint Committee reductions with sensible long-term reforms, including a number of reforms proposed in previous President’s Budgets. However, the BBA did nothing to alleviate Joint Committee enforcement in 2016 and beyond. The 2016 Budget builds on the BBA’s progress by proposing increases to the discretionary caps that make room for a range of domestic and security investments that will accelerate growth and expand opportunity. These increases are offset by a balanced package of spending cuts, tax loophole closers, and program integrity measures. The President will work with the Congress to replace and repeal the Joint Committee reductions while putting the Nation on a sustainable fiscal path. Budget Execution Government agencies may not spend or obligate more than the Congress has appropriated, and they may use 2 Subsequent legislation also specified that, notwithstanding the 2 percent limit on Medicare sequestration in the BCA, in extending sequestration into 2023 the reduction in the Medicare program should be 2.90 percent for the first half of the sequestration period and 1.11 percent for the second half of the period, and in extending sequestration into 2024 the reduction in the Medicare program should be 4.0 percent for the first half of the sequestration period and zero for the second half of the period. 97 9. BUDGET CONCEPTS 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 offbudget 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. 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 Affordable Housing Program funds, 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 Federal Financial Institutions Examination Council, Electric Reliability Organizations (EROs) established pursuant to the Energy Policy Act of 2005, and the Corporation for Travel Promotion. 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 Government-sponsored enterprises, such as the Federal Home Loan Banks, 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 includes 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. 98 ANALYTICAL PERSPECTIVES Chapter 10 of this volume, “Coverage of the Budget,” provides more information on this subject. Functional Classification 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. Table 9–1. TOTALS FOR THE BUDGET AND THE FEDERAL GOVERNMENT (In billions of dollars) 2014 Actual Estimate 2015 2016 Budget authority Unified ������������������������������������������������������������������������� On-budget �������������������������������������������������������������� Off-budget �������������������������������������������������������������� 3,619 2,907 712 3,798 3,040 758 4,066 3,262 805 Receipts: Unified ������������������������������������������������������������������������� On-budget �������������������������������������������������������������� Off-budget �������������������������������������������������������������� 3,021 2,286 736 3,176 2,411 766 3,525 2,724 801 Outlays: Unified ������������������������������������������������������������������������� On-budget �������������������������������������������������������������� Off-budget �������������������������������������������������������������� 3,506 2,800 706 3,759 3,006 753 3,999 3,201 798 Deficit (–) / Surplus (+): Unified ������������������������������������������������������������������������� On-budget �������������������������������������������������������������� Off-budget �������������������������������������������������������������� –485 –514 30 –583 –595 13 –474 –477 3 The functional classification is used to organize 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 classification 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—enable the functional classification system to cover the entire 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 450 for Community and Regional Development, 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 In consultation with the Congress, the functional classification is adjusted from time to time as warranted. Detailed functional tables, which provide information on Government activities by function and subfunction, are available online at www.budget.gov/budget/Analytical_ Perspectives and on the Budget CD-ROM. 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 online at: www.budget.gov/budget/Analytical_ Perspectives and on the Budget CD-ROM. 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. 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 99 9. BUDGET CONCEPTS 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 26 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. However, the budget measures only costs, and the benefits with which these costs are compared, based on policy makers’ judgment, must be presented in supplementary materials. By these means, the budget allows the total cost of capital investment to be compared up front in a rough way with the total expected future net benefits. 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 18 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. or otherwise compel payment. Sometimes they are called receipts, budget 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 9–1, “Totals for the Budget and the Federal Government,” which appears earlier in this chapter.) Chapter 12 of this volume, “Governmental Receipts,’’ provides more information on governmental receipts. Governmental Receipts Offsetting Collections and Offsetting Receipts Governmental receipts are collections that result from the Government’s exercise of its sovereign power to tax Offsetting collections and offsetting receipts are recorded as offsets to (deductions from) spending, not as 100 ANALYTICAL PERSPECTIVES additions on the receipt side of the budget. These amounts 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). • 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 an important accounting mechanism for allocating costs to the programs and activities that cause the Government to incur the costs. • 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 and should conceptually be treated like Federal revenues and compared in total to outlays (e.g., tax receipts, regulatory fees, compulsory user charges, custom duties, license fees) but required by law or longstanding practice 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. 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 net 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 net 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 101 9. BUDGET CONCEPTS 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 net 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.” 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 13, “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 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 102 ANALYTICAL PERSPECTIVES 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 is also 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 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 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. 103 9. BUDGET CONCEPTS 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 2015 appropriations act extends the availability of unobligated budget authority that expired at the end of 2014, new budget authority would be recorded for 2015. This scorekeeping is used because a reappropriation has exactly the same effect as allowing the earlier appropriation to expire at the end of 2014 and enacting a new appropriation for 2015. For purposes of BBEDCA and the Statutory Pay-AsYou-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 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 104 ANALYTICAL PERSPECTIVES Chart 9-1. Relationship of Budget Authority to Outlays for 2016 (Billions of dollars) New Authority Recommended for 2016 4,066 Unspent Authority Enacted in Prior Years 2,305 To be spent in 2016 Outlays in 2016 3,187 To b e in fu spent ture year s nt pe e s 16 b To in 20 -6 3,999 813 88 0 Authority written off, expired, and adjusted (net) To be spent in Future Years 1,486 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 semi annual 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 re- Unspent Authority for Outlays in Future Years 2,365 corded as offsetting collections or offsetting receipts, not as governmental receipts. Not all of the new budget authority for 2016 will be obligated or spent in 2016. 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, $3,187 billion of outlays in 2016 (80 percent of the outlay total) will be made from that year’s $4,066 billion total of proposed new budget authority (a first-year spendout rate of 78 percent). Thus, the remaining $813 billion of outlays in 2016 (20 percent of the outlay total) will be made from budget authority enacted in previous years. At the same time, $880 billion of the new budget authority proposed for 2016 (22 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 32 percent of total outlays in 2014 ($1,121 billion) were discretionary and the remaining 68 percent ($2,385 billion in 2014) were mandatory spending and net interest. Such a large portion of total spending is mandatory because authorizing rather than appropriations legislation determines net interest ($229 billion in 2014) and the spending for a few programs with large amounts of spending each year, such as Social Security ($845 billion in 2014) and Medicare ($505 billion in 2014). 105 9. BUDGET CONCEPTS 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 provide assistance through 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 and includes economically equivalent transactions, such as the sale of Federal assets on credit terms. 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. FCRA treatment allows the comparison of direct loans and loan guarantees to each other, and to other methods of delivering assistance, 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 and from the public over the term of the loan, discounted using appropriate Treasury interest rates.3 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 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 3 Present value is a standard financial concept that considers 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. 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 subsidy 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 negative subsidy 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 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 106 ANALYTICAL PERSPECTIVES 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 under FCRA treatment for direct loan obligations and loan guarantee commitments made in 1992 or later. Under the authority provided in various acts, certain activities that do not meet the definition in FCRA of a direct loan or loan guarantee 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 FCRA discount rate for market risks. 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. In addition, the 2009 increases to the International Monetary Fund (IMF) quota and New Arrangements to Borrow (NAB) enacted in the Supplemental Appropriations Act of 2009 are treated on a FCRA basis, with a risk adjustment to the discount rate, as directed in that Act. However, the Administration proposes to restate these IMF increases on a present value basis. Under this proposal, the budget would still reflect a present value cost to Government for the quota increase proposed in 2016, but for the 2009 increase and the proposed 2016 increase, transactions would no longer be treated on a FCRA basis. For more information, see the discussion on United States Subscriptions to the IMF in the next section. 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 Federal 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 transactions affecting borrowing from the public, or 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, the net effect may be significant. 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 2014, the Government borrowed $797 billion from the public, bringing debt held by the public to $12,780 billion. This borrowing financed the $485 billion deficit in that year as well as the net cash requirements 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 4 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 receipts, 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. 9. BUDGET CONCEPTS 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 amounts held in 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, interest-bearing, Special Drawing Right (SDR)-denominated claim in the form of an increase in the U.S. reserve position in the 107 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 monetary assets (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 to allow appropriators to have jurisdiction over changes to the IMF quota, 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 111–32, Title XIV, International Monetary Programs) and directed that the increases in this Act be scored under the requirements of the Federal Credit Reform Act of 1990, with an adjustment to the discount rate for market risk. Accordingly, for the quota and the NAB increases provided by the Supplemental Appropriations Act of 2009, the baseline reflects obligations and outlays for the estimated present value cost to Government as if these transactions were direct loans under credit reform, plus an additional risk premium. Like credit programs, under this treatment, the nominal cash flows between the U.S. Treasury and the IMF are treated as a means of financing (see “Credit Financing Accounts” earlier in this chapter), and 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 2016 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 SDR-denominated interestbearing portion of the U.S. reserve position—the amount of the quota actually being used by the IMF for its lending programs. Changes in the value of the portion of the U.S. quota held at Treasury in a letter of credit are recorded as a change in obligations. The 2016 Budget includes the Administration’s proposal to implement IMF reforms agreed to by the IMF membership in 2010, which would reduce U.S. participation in the NAB, and increase the U.S. quota by an equal amount. The Administration also proposes to reflect the costs of these transactions on a present value basis. Under the proposed treatment, the budget would still reflect obligations and outlays for the present value 108 ANALYTICAL PERSPECTIVES cost to Government, and costs would be the same as those estimated under FCRA. However, there would be no additional fair value market risk premium added to the cost. The change also provides Treasury flexibility to account for the nominal cash flows with the IMF in a manner more consistent with how the quota and NAB operate. Increases to the quota and the NAB provided in the 2009 Supplemental Appropriations Act would be restated to reflect the same present value treatment, and recorded in the same accounts with changes resulting from the 2010 Agreement. The Budget assumes enactment of this proposal in 2016. Investments of the National Railroad Retirement Investment Trust Under longstanding rules, the budget has generally treated investments in non-Federal equities and debt securities 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 (NRRIT) to be treated as a means of financing in the budget, rather than as an outlay. Earnings on investments by the 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 10-year 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 8 of this volume, “Strengthening the Federal Workforce,’’ provides employ- ment 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 The past year column (2014) 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 re- ports 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 27 of this volume, “Comparison of Actual to Estimated Totals,” for a summary of these differences). 109 9. BUDGET CONCEPTS Data for the Current Year Baseline The current year column (2015) includes estimates of transactions and balances based on the amounts of budgetary resources that were available when the budget was prepared. 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. 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 consistent with 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. Data for the Budget Year The budget year column (2016) 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. 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 (2017 through 2025) 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 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. • 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. A number of significant changes in policies are embedded in the baseline rules specified in BBEDCA. For example, certain provisions relating to the child tax credit, earned income tax credit, and American opportunity tax credit that were originally enacted in the American Recovery and Reinvestment Act (ARRA) of 2009 and extended as part of the American Taxpayer Relief Act of 2012 are scheduled under current law to expire at the end of 2017. As another example, the BBEDCA baseline rules for discretionary programs would inflate discretionary spending for future years above the statutory caps that limit such spending. Because the expiration of the ARRA tax credit provisions and the inflation of discretionary spending above the statutory 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 25 of this volume, “Current Services Estimates,” provides more information on the baseline, including the differences between the baseline as calculated under the rules of 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. 110 ANALYTICAL PERSPECTIVES 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. 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 con- trols 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. Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA) refers to legislation that altered the budget process, primarily by replac- ing 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. 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. 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.) Budget Control Act of 2011 refers to legislation that, among other things, amended BBEDCA to reinstate discretionary spending limits on budget authority through 2021 and restored the process for enforcing those spending limits. The legislation also increased the statutory debt ceiling; 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. It also provided a process to implement alternative spending reductions in the event that legislation achieving at least $1.2 trillion of deficit reduction was not enacted. Budget resolution—see concurrent resolution on the budget. 9. BUDGET CONCEPTS 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 on-budget 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. 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 (i.e. consolidated) totals for Federal activity. Budget year refers to the fiscal year for which the budget is being considered, that is, with respect to a session of Congress, the fiscal year of the government that starts on October 1 of the calendar year in which that session of Congress begins. 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 BBEDCA 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 BBEDCA 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, a designation of the increase or decrease by the Congress, (and in some circumstances, 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 consultation with the Congressional Appropriations and 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 111 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.) Direct spending—see mandatory spending. Disaster funding means a discretionary appropriation 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 BBEDCA. 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 pro- 112 grams) 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. Such a discretionary appropriation that is subsequently designated by the President as an emergency requirement results in a cap adjustment to the limits on discretionary spending under BBEDCA. 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, separate financing accounts are required for direct loan cash flows and for loan guarantee cash flows. (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. 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 chartered by the Federal Government for public policy purposes. They are classified as non-budgetary and not included in the Federal budget 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 ANALYTICAL PERSPECTIVES 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. 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 funds and the Postal Service 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 pay- 9. BUDGET CONCEPTS ments 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 (OCO/GWOT) means a discretionary appropriation that is enacted that the Congress and, subsequently, the President have so designated on an account by account basis. Such a discretionary appropriation that is designated as OCO/GWOT results in a cap adjustment to the limits on discretionary spending under BBEDCA. Funding for these purposes has 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 business-like 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 adher- 113 ence 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 cancellations 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 crossreferences BBEDCA 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 dedicated 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 that remains available for obligation under law in unexpired accounts. The term “expired balances available for adjustment only” refers to unobligated amounts in expired accounts. User charges are charges assessed for the provision of Government services and for the sale or use of Government 114 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 ANALYTICAL PERSPECTIVES 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). 10. COVERAGE OF THE BUDGET The Federal budget is the central instrument of national policy making. It is the Government’s financial plan for proposing and deciding the allocation of resources to serve national objectives. The budget provides information on the cost and scope of Federal activities to inform decisions and serves as a means to control the allocation of resources. When enacted it establishes the level of public goods and services provided by the Government. Federal Government activities can be characterized as either “budgetary” or “non-budgetary.” Those Federal Government activities that involve direct and measurable allocation of Federal resources are characterized as budgetary. The payments to and from the public resulting from budgetary activities are included in the budget’s accounting of receipts and expenditures. Federal activities that do not involve direct and measurable allocation of Federal resources are characterized as non-budgetary and are not included in the budget’s accounting of receipts and expenditures. The budget documents include information on some non-budgetary activities because they can be important instruments of Federal policy and provide insight into the scope and nature of Federal activities. For example, data on the deposit funds owned by Native American Indian Tribes are not included in the budget because these funds are privately owned. The Government manages these funds only in a fiduciary capacity. The budget also includes information on cashflows that are a means of financing Federal activity. However, means of financing amounts are not included in the estimates of receipts or expenditures to avoid double-counting; the costs of the underlying Federal activities are already reflected in the deficit.1 Similarly, while budget totals of receipts and expenditures do not include non-Federal costs resulting from Federal regulation, the Office of Management and Budget (OMB) annually reports on the costs and benefits of Federal regulation to non-Federal entities.2 This chapter provides details about the budgetary and non-budgetary activities of the Federal Government Budgetary Activities The Federal Government has used the unified budget concept—which consolidates receipts and outlays from federal funds and trust funds, including the Social Security Trust Funds—since 1968, starting with the 1 For more information on means of financing, please see the “Budget Deficit or Surplus and Means of Financing” section of Chapter 9, “Budget Concepts,” in this volume. 2 For the 2014 draft of the “Report to Congress on the Benefits and Costs of Federal Regulation and Unfunded Mandates on State, Local and Tribal Entities,” see http://www.whitehouse.gov/sites/default/files/ omb/inforeg/2014_cb/draft_2014_cost_benefit_report-updated.pdf. 1969 Budget. This change was based on a recommendation made by the 1967 President’s Commission on Budget Concepts (Commission) to include the financial transactions of all of the Federal Government’s programs and agencies. Thus, the budget includes information on the financial transactions of all 15 Executive departments, all independent agencies (from all three branches of Government), and all Government corporations.3 The budget reflects the legal distinction between onbudget 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, conceptually there is no difference between the two. Off-budget Federal activities reflect the same kinds of governmental roles as on-budget activities and result in outlays and receipts. 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. Many, though not all, Government corporations are entities with business-type operations and charge the public for services at prices intended to allow the entity to be self-sustaining. Often these entities are more independent than other agencies and have limited exemptions from certain Federal personnel requirements to allow for flexibility. All accounts in Table 29-1, “Federal Budget by Agency and Account,” in the supplemental materials to this volume are budgetary.4 The 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. 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 of Peace. Although the 3 Government corporations are Government entities that are defined as corporations pursuant to the Government Corporation Control Act, as amended (31 U.S.C. 9101), or elsewhere in law. Examples 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, the Tennessee Valley Authority, the African Development Foundation (22 U.S.C. 290h-6), the Inter-American Foundation (22 U.S.C. 290f), the Presidio Trust (16 U.S.C. 460bb note), and the Valles Caldera Trust (16 U.S.C. 698v-4). 4 Table 29-1 can be found on the Budget CD-ROM and on the Internet at: http://www.budget.gov/budget/analytical_perspectives. 115 116 ANALYTICAL PERSPECTIVES Table 10–1. COMPARISON OF TOTAL, ON-BUDGET, AND OFF-BUDGET TRANSACTIONS 1 (In billions of dollars) Fiscal Year Receipts Total Outlays On-budget Off-budget Total Surplus or deficit (-) On-budget 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 �������������������������������������������������������������������������������������������������� 2013 �������������������������������������������������������������������������������������������������� 2014 �������������������������������������������������������������������������������������������������� 2,162.7 2,303.5 2,450.0 2,775.1 3,021.5 1,531.0 1,737.7 1,880.5 2,101.8 2,285.9 631.7 565.8 569.5 673.3 735.6 3,457.1 3,603.1 3,537.0 3,454.6 3,506.1 2,902.4 3,104.5 3,029.4 2,820.8 2,800.0 554.7 498.6 507.6 633.8 706.1 -1,294.4 -1,299.6 -1,087.0 -679.5 -484.6 -1,371.4 -1,366.8 -1,148.9 -719.0 -514.1 77.0 67.2 61.9 39.5 29.5 765.6 801.0 844.0 885.1 926.0 964.4 3,758.6 3,999.5 4,217.8 4,423.3 4,652.6 4,886.4 3,006.0 3,201.1 3,364.6 3,512.5 3,683.8 3,851.5 752.6 798.4 853.2 910.8 968.8 1,034.8 -582.5 -474.3 -462.8 -478.9 -517.7 -554.1 -595.5 -476.8 -453.6 -453.2 -474.8 -483.7 13.0 2.6 -9.2 -25.7 -42.8 -70.4 2015 estimate ������������������������������������������������������������������������������������ 3,176.1 2,410.5 2016 estimate ������������������������������������������������������������������������������������ 3,525.2 2,724.2 2017 estimate ������������������������������������������������������������������������������������ 3,755.0 2,911.0 2018 estimate ������������������������������������������������������������������������������������ 3,944.4 3,059.3 2019 estimate ������������������������������������������������������������������������������������ 4,135.0 3,209.0 2020 estimate ������������������������������������������������������������������������������������ 4,332.2 3,367.8 1 Off-budget transactions consist of the Social Security trust funds and the Postal Service fund. Federal payments to these entities are budgetary, the entities themselves are non-budgetary. Whether an entity was created or chartered by the Government does not alone determine its budgetary status. The Commission recommended that the budget be comprehensive but it also recognized that proper budgetary classification required weighing all relevant factors regarding establishment, ownership, and control of an entity. Generally, entities that are primarily owned and controlled by the Government are classified as budgetary. Determinations regarding the budgetary classification of entities are made by the OMB, the Congressional Budget Office (CBO), and the Budget Committees of the Congress. 10. COVERAGE OF THE BUDGET Off-budget Federal activities.—Despite the Commission’s recommendation that the budget be comprehensive, every year since 1971 at least one Federal program or agency has been presented as off-budget because of a legal requirement.5 Such off-budget Federal activities are funded by the Government and administered according to Federal legal requirements but their net costs are excluded, by law, from the rest of the budget totals, which are also known as the “on-budget” totals. 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 1990.6 Other activities that had been designated in law as off-budget at various times before 1986 have been classified as on-budget by law since at least 1985. Activities that were off-budget at one time but that are now on-budget are classified as on-budget for all years in historical budget data. Social Security is the largest single program in the unified budget and it is classified by law as off-budget; as a result, the off-budget accounts constitute a significant part of total Federal spending and receipts. Table 10–1 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 to provide a consistent comparison over time. 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 These activities can 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 non-Fed5 While the term “off-budget” is sometimes used colloquially to mean non-budgetary, the term has a meaning distinct from non-budgetary. Off-budget activities would be considered budgetary, absent legal requirement to exclude these activities from the budget totals. 6 See 42 U.S.C. 911, and 39 U.S.C. 2009a, respectively. 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 on-budget mandatory account with the Office of Personnel Management. The off-budget Social Security accounts consist of the Federal Old-Age and Survivors Insurance trust fund and the Federal Disability Insurance trust fund, both of which have mandatory and discretionary funding. 7 Tax expenditures, which are discussed in Chapter 14 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. 117 eral borrowers. The Federal Credit Reform Act of 1990 (FCRA), as amended by the Balanced Budget Act of 1997, established the current budgetary treatment for credit programs. Under FCRA, the budgetary cost of a credit program is known as the “subsidy cost.” The subsidy cost is the estimated lifetime cost to the Government of a loan or a loan guarantee on a net present value basis, excluding administrative costs. Outlays equal to the subsidy cost are recorded in the budget up front as they are incurred— for example, when a loan is made or guaranteed. Credit program cash flows to and from the public are recorded in non-budgetary financing accounts and the information is included in budget documents to provide insight into the program size and costs. For more information, the mechanisms of credit programs are discussed in more detail in Chapter 9 of this volume, “Budget Concepts,” and credit programs are discussed in more detail in Chapter 20 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 for Federal employees who participate in the Government’s defined contribution retirement plan, the Thrift Savings Plan (which is similar to privatesector 401(k) plans). 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 transactions of the Fund are not resource allocations by the Government and are therefore non-budgetary.8 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 (GSEs).— Government-Sponsored Enterprises are privately owned and therefore distinct from government corporations. The Federal Government has chartered 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. 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 20 of this volume, “Credit and Insurance.” 8 The administrative functions of the Federal Retirement Thrift Investment Board are carried out by Government employees and included in the budget totals. 118 In September 2008, in response to the financial market crisis, the director of the Federal Housing Finance Agency (FHFA)9 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 non-budgetary private entities in conservatorship rather than as Government agencies. By contrast, CBO treats these GSEs as budgetary Federal agencies. Both treatments include budgetary and nonbudgetary amounts. While all of the GSEs’ transactions with the public are reflected as non-budgetary the payments from the Treasury to the GSEs are recorded as budgetary outlays and dividends received by the Treasury are recorded as budgetary receipts. Under CBO’s approach, the subsidy costs—or expected losses over time—of Fannie Mae’s and Freddie Mac’s past credit activities have already been recorded in the budget estimates; 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 Fannie Mae’s and Freddie Mac’s losses as Government outlays—which increase Government deficits. The two approaches, however, reflect the losses as budgetary costs at different times. Other federally-created non-budgetary entities.— In addition to 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 these are incorporated as non-profit entities and some of which are incorporated as for-profit entities.10 9 FHFA is the regulator of Fannie Mae, Freddie Mac, and the Federal Home Loans Banks. 10 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 non-profit entities that are non-budgetary. These include patriotic, charitable, and educational organizations under Title 36 of the U.S. 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 non-profit 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 non-profits, includ- ANALYTICAL PERSPECTIVES FFRDCs are entities that conduct agency-specific research under contract or cooperative agreement. Some FFRDCs were created by and conduct research for the Department of Defense and are administered by colleges, universities, or other non-profit entities. Despite some being classified as non-budgetary, many FFRDC’s do receive direct resource allocation from the Government and are included as budget lines in various agencies. Examples of FFRDCs include the Center for Naval Analysis and the Jet Propulsion Laboratory.11 Even though FFRDCs are non-budgetary, Federal 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 (current and retired). Nearly 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 are financed by proceeds from the sale of goods or services and do not receive direct appropriations. As a result they have been characterized as non-budgetary but any agency payments to the NAFIs are recorded as budget outlays. A number of entities created by the Government receive a significant amount of non-Federal funding. Certain of these entities are significantly controlled by non-Federal individuals or organizations. These entities include Gallaudet University, Howard University, and the Universal Services Administrative Company, among others.12 Most of these entities receive direct appropriations or other recurring payments from the Government. The appropriations or other payments are budgetary and included in Table 29-1. However, many of these entities are themselves non-budgetary. Generally, entities that receive a significant portion of funding from non-Federal sources and that are not controlled by the Government are treated as non-budgetary. Regulation.—Federal Government regulations often require the private sector or other levels of government to make expenditures for specified purposes that are intended to have public benefits, such as workplace 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 ing the Red Cross, would be budgetary, the non-profits themselves are classified as non-budgetary. On March 14, 2013, the Subcommittee on Immigration and Border Security 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. 11 The National Science Foundation maintains a list of FFRDCs at www.nsf.gov/statistics/ffrdc. 12 Under section 415(b) of the Amtrak Reform and Accountability Act of 1997, (49 U.S.C. 24304 and note), Amtrak was 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. 10. COVERAGE OF THE BUDGET plans are described in the annual Regulatory Plan and the semi-annual Unified Agenda of Federal Regulatory and Deregulatory Actions.13 The estimated costs and benefits of Federal regulation have been published annually by OMB since 1997.14 Monetary policy.— 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 economic 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.”15 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.16 By law, the Federal Reserve System is a self-financing entity that is independent of the Executive Branch and subject only to broad oversight by the Congress. Consistent with the recommendations of the Commission, the effects of monetary policy and the actions of the Federal Reserve 13 The most recent Regulatory Plan and introduction to the Unified Agenda issued by the General Services Administration’s Regulatory Information Service Center are available on-line at www.reginfo.gov and at www.gpoaccess.gov. 14 In the most recent report, OMB indicates that the estimated annual benefits of Federal regulations it reviewed from October 1, 2003, to September 30, 2013, range from $217 billion to $863 billion, while the estimated annual costs range from $57 billion to $84 billion. 15 See 12 U.S.C. 225a. 16 See 15 U.S.C. 3101 et seq. 119 System are non-budgetary, with exceptions for excess income generated through its operations. The Federal Reserve System earns income from a variety of sources including interest on Government securities, foreign currency investments and loans to depository institutions, and fees for services (e.g., check clearing services) provided to depository institutions. The Federal Reserve System remits to Treasury any excess income over expenses annually. For the fiscal year ending September 2014, Treasury recorded $99.2 billion in receipts from the Federal Reserve System. In addition to remitting excess income to Treasury, the Federal Reserve is required by law to transfer a portion of its excess earnings to the Consumer Financial Protection Bureau (CFPB), an independent bureau of the Federal Reserve.17 The Board of Governors of the Federal Reserve 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. 17 See section 1011 of Public Law 111-203 (12 U.S.C. 5491), (2010). The CFPB is an executive agency, led by a director appointed by the President and reliant on Federal funding, that serves the governmental function of regulating Federal consumer financial laws. Accordingly, it is included in the Budget. 11. BUDGET PROCESS Since taking office, the Administration has sought 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 the 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 description of three broad categories of budget reform. First, the chapter discusses proposals to improve budgeting and fiscal sustainability with respect to individual programs as well as across Government. These proposals include: legislation that exceeds the remaining savings required for the Joint Select Committee on Deficit Reduction, repeals the Joint Committee reductions, and restores amounts that would be reduced by the 2016 mandatory sequestration order; various initiatives to reduce improper payments; funding requested for disaster relief; reforms to reduce the Federal Government’s real property inventory; limits on advance appropriations; structural reforms for surface transportation programs; maximum Pell Grant award funding; Postal Service reforms; changes to the budgetary treatment of the International Monetary Fund quota; reclassification proposals; and providing a fast-track procedure for the Congress to consider certain rescission requests. Second, the chapter describes the system un- der the Statutory Pay-As-You-Go Act of 2010 (PAYGO) of scoring 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, 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.1 1 Pursuant to section 254 of the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA), OMB issues a sequestration preview report covering discretionary spending each fiscal year. The OMB Sequestration Preview Report for FY 2016 is available on the OMB website. I. BUDGET REFORM PROPOSALS Joint Committee Enforcement In August 2011, as part of the BCA, bipartisan majorities in both the House and Senate voted to establish the Joint Select Committee for Deficit Reduction to recommend legislation to achieve at least $1.2 trillion of deficit reduction over the period of fiscal years 2012 through 2021. The BCA included automatic reductions as a mechanism to encourage the Congress to enact legislation to achieve this goal. On multiple occasions, the President has presented comprehensive plans to replace these reductions with a mix of specific spending cuts and revenue proposals. The failure of the Congress to enact such comprehensive deficit reduction legislation to achieve the $1.2 trillion goal has already triggered a sequestration of discretionary and mandatory spending in 2013, reductions to the discretionary caps and a mandatory sequestration in 2014, and a mandatory sequestration in 2015. The BCA requires further automatic reductions to be made to the 2016 discretionary caps and a sequestration of mandatory spending, which is scheduled to take effect beginning on October 1 based on the order released with the 2016 Budget. To date, legislation has been enacted to partially address the reductions required in two of these years. The American Taxpayer Relief Act of 2012 reduced the sequestration required of 2013 discretionary and mandatory spending by $24 billion. The Bipartisan Budget Act of 2013 (BBA) (P.L. 113-67) decreased the reductions otherwise required to the 2014 discretionary caps by $44.8 billion and set new discretionary caps in 2015 that are approximately $18.5 billion more than the Congressional Budget Office’s (CBO) estimate of the post-reduction discretionary spending limits in that year. All of these revisions were paid for by enacting alternative deficit reduction. In addition to the discretionary cap reductions and mandatory sequestration for 2016 noted above, damaging annual reductions of $109 billion will continue to be required for each of fiscal years 2017 through 2021, unless the Congress enacts balanced deficit reduction legislation that replaces and repeals the Joint Committee reductions. Further, the BBA and P.L. 113-82, commonly referred to as the Military Retired Pay Restoration Act, extended the sequestration of mandatory spending through 2024 121 122 at the percentage reduction required for 2021.2 The reductions to discretionary spending for fiscal years 2016 through 2021 are to be implemented in the sequestration preview report for each year by reducing the discretionary caps. The reductions to mandatory programs are to be implemented by a sequestration of non-exempt mandatory budgetary resources in each of fiscal years 2016 through 2024, which is triggered by the transmittal of the President’s Budget for each year and takes effect on the first day of the fiscal year. The Bipartisan Budget Act took an important first step in moving away from manufactured crises and austerity budgeting by replacing a portion of the Joint Committee reductions with sensible long-term reforms, including a number of reforms proposed in previous President’s Budgets. However, the BBA did nothing to alleviate Joint Committee enforcement in 2016 and beyond. The 2016 Budget builds on the BBA’s progress by proposing increases to the discretionary caps that make room for a range of domestic and security investments that will accelerate growth and expand opportunity. These increases are offset by a balanced package of spending cuts, tax loophole closers, and program integrity measures. The President will work with the Congress to replace and repeal the Joint Committee reductions while putting the Nation on a sustainable fiscal path. Program Integrity Funding Critical programs such as Social Security, Medicare, and Medicaid, should be run efficiently and effectively. Nevertheless, the Government made an estimated $125 billion in improper payments last year, which is an increase from the improper rate of 3.53 percent in 2013 to 4.02 percent in 2014. This level of error is unaffordable and unacceptable. Therefore, the Administration 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 order to reduce improper payments and improve 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. 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 Improper Payments Elimination and Recovery Improvement Act of 2012 (P.L. 112-248), and the release of three 2 Subsequent legislation also specified that, notwithstanding the 2 percent limit on Medicare sequestration in the BCA, in extending sequestration into 2023, the reduction in the Medicare program should be 2.90 percent for the first half of the sequestration period and 1.11 percent for the second half of the period. In extending sequestration into 2024, the reduction in the Medicare program should be 4.0 percent for the first half of the sequestration period and zero for the second half of the period. ANALYTICAL PERSPECTIVES 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—in addition to those outlined in the Budget—where it can work with the Congress to further improve agency efforts. Administrative Funding for Program Integrity.— There is compelling evidence that investments in administrative resources can significantly decrease the rate of improper payments and recoup many times their initial investment. The Social Security Administration (SSA) estimates that continuing disability reviews conducted in 2016 will yield net Federal program savings over the next 10 years of roughly $9 on average per $1 budgeted for dedicated program integrity funding, including the Old Age, Survivors, and Disability Insurance Program (OASDI), Supplemental Security Income (SSI), Medicare and Medicaid program effects. Similarly, for Health Care Fraud and Abuse Control (HCFAC) program integrity efforts, CMS actuaries conservatively estimate approximately $2 is saved or payments averted for every additional $1 spent. The Internal Revenue Service (IRS) enforcement activities recoup roughly $6 for every $1 spent. Enacted Adjustments Pursuant to BBEDCA.—The Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA) recognized that a multi-year strategy of agencies focusing attention and resources on reducing the rate 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, BBEDCA provided for adjustments to the discretionary spending limits to allow for additional funding for specific program integrity activities to reduce improper payments in the Social Security program and in the Medicare and Medicaid programs. These adjustments are increases in the discretionary caps on budget authority through 2021 and are made only if appropriations bills increase funding for the specified program integrity purposes above specified minimum, or base levels. This budget mechanism was intended to ensure that the additional funding did not supplant other Federal spending on these activities and that such spending was not diverted to other purposes. The Consolidated and Further Continuing Appropriations Act, 2015 (P.L. 113-235) fully funded the adjustment to the discretionary spending limit for HCFAC for the first time and SSA for the second time since the cap adjustment was available in 2012. Tens of billions of dollars in deficit savings over the next 10 years from curtailing improper payments will be realized if the levels of administrative expenses for program integrity envisioned by BBEDCA continue to be provided. To ensure these important program integrity investments are made, the Budget is proposing to continue the discretionary cap adjustment for SSA in 2016 and for HCFAC through 2025. For SSA, starting in 2017, it also proposes to provide a dedicated dependable source of mandatory funding that will achieve the savings envisioned by the BCA in place of the BBEDCA discretionary cap adjustment. The Budget 11. BUDGET PROCESS ensures SSA, the Department of Health and Human Services (HHS) and the Department of Justice (DOJ) have the resources that they need to conduct necessary program integrity activities and make certain that the right people receive the right payment for the right reason at the right time. Because the SSA adjustment was fully funded for 2015, the base SSA program integrity funding ($273 million) and the SSA cap adjustment ($1,166 million) are proposed to be funded through discretionary appropriations in 2016. However, once that transition year has passed, to maximize the potential savings, the Budget proposes only mandatory funding for SSA program integrity starting in 2017. For HCFAC for 2016, the Budget proposes continuation through 2025 of the base funding that was provided in 2015 ($311 million for HHS and DOJ) through discretionary appropriations and cap adjustments aligned with those enacted in BBEDCA. The Budget also proposes that HCFAC funding support efforts at the Centers for Medicare & Medicaid Services (CMS) to monitor and prevent fraud, waste, and abuse in the private health insurance market including the Health Insurance Marketplace. As part of the Administration’s overall program integrity proposals, the Budget proposes an annual reduction to the discretionary spending limits in section 251(c) of BBEDCA beginning in 2017 to offset the cost of shifting the base SSA funding from discretionary to mandatory. These proposals, including the more stable mandatory program integrity funding for SSA, will produce new net deficit savings of almost $37 billion over 10 years. Social Security Administration Continuing Disability Reviews and Redeterminations of Eligibility.—For the Social Security Administration, the Budget’s proposed $1,439 million in discretionary funding in 2016 ($273 million in base funding and $1,116 million in cap adjustment funding) will allow SSA to conduct at least 908,000 Continuing Disability Reviews (CDRs) and at least 2.6 million SSI redeterminations of eligibility. CDRs determine whether an individual continues to qualify for Disability Insurance (DI) or SSI. The mandatory funding provided for the SSA will enable the agency to work down a backlog of CDRs. As a result of the discretionary funding requested in 2016 and the increased mandatory funding requested in 2017 through 2025, SSA would recoup almost $46 billion in gross savings in the DI and SSI programs, with additional savings after the 10-year period, according to estimates of SSA’s Office of the Actuary. Taking into account the $12.8 billion cost of the increased mandatory funding and the $1.2 billion provided in the 2016 cap adjustment, this would produce new net deficit savings of $32 billion in the 10-year window, and additional savings in the out-years. These costs and savings are reflected in Table 11-1. The cost of shifting the current SSA base funding of $273 million from discretionary to mandatory in 2017 through 2025 is not reflected in the new net deficit savings because, as noted above, it is being offset with an annual reduction to the discretionary spending limits in section 251(c) of BBEDCA if the mandatory funding proposal is enacted. 123 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. However, the frequency of CDRs and redeterminations is constrained by the availability of funds to support these activities. As noted above, for 2015, the base amounts, as well as an additional $1,123 million discretionary cap adjustment pursuant to section 251(b)(2)(B) of BBEDCA were enacted in the annual appropriations bill. The mandatory savings from the base funding in every year and the enacted discretionary cap adjustment funding in 2015 are included in the BBEDCA baseline because the baseline assumes the continued funding of program integrity activities. The Budget shows the savings that would result from the increase in CDRs and redeterminations made possible by the discretionary funding requested in 2016 and the increased mandatory funding requested in 2017 through 2025. The mandatory funding should eliminate SSA’s backlog of CDRs by the end of 2019 and prevent a new backlog from developing during the budget window. As stated above, current estimates indicate that CDRs conducted in 2016 will yield a return on investment (ROI) of about $9 on average in net Federal program savings over 10 years per $1 budgeted for dedicated program integrity funding, including OASDI, SSI, Medicare and Medicaid program effects. Similarly, SSA estimates indicate that non-medical redeterminations conducted in 2016 will yield a ROI of about $4 on average of net Federal program savings over 10 years per $1 budgeted for dedicated program integrity funding, including SSI and Medicaid program effects. As in prior years, the ROI for CDRs is calculated based on the direct costs of processing CDRs. The Budget proposes funding only the direct costs of CDRs in 2016 and beyond. 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 funding in 2016 or increased mandatory funding in 2017 through 2025. 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 savings per dollar spent on CDRs and redeterminations reflects an interaction with a provision in the Affordable Care Act (ACA) that allows States to expand Medicaid coverage beginning January 2014 for individuals under age 65 with income less than 133 percent of poverty. As a result of this provision, some SSI beneficiaries, who would otherwise lose Medicaid coverage due to a CDR or redetermination, would continue to be covered. In addition, some of the coverage costs for these individuals will be 124 ANALYTICAL PERSPECTIVES Table 11–1. ENACTED CAP ADJUSTMENTS AND PROPOSED MANDATORY FUNDING, INCLUDING MANDATORY SAVINGS (Outlays in millions of dollars) 2016 SSA Program Integrity Discretionary Costs 1 ������������������������������������������������������������������������������� Mandatory Cost 1 ������������������������������������������������������������������������������������� Mandatory Savings 2 �������������������������������������������������������������������������������� Net Savings ���������������������������������������������������������������������������������������� 1,166 ......... –237 929 2016 - 2025 Total 2017 2018 2019 2020 2021 2022 2023 2024 2025 ......... 1,532 –2,090 –558 ......... 1,455 –3,109 –1,654 ......... 1,403 –4,025 –2,622 ......... 1,309 –4,697 –3,388 ......... 1,302 –5,271 –3,969 ......... 1,358 –6,119 –4,761 ......... 1,415 –6,386 –4,971 ......... 1,474 –6,574 –5,100 ......... 1,166 1,535 12,783 –7,409 –45,917 –5,874 –31,968 Health Care Fraud and Abuse Control Program Discretionary Costs ��������������������������������������������������������������������������������� 395 414 434 454 475 496 518 541 565 590 4,882 Mandatory Savings 3 �������������������������������������������������������������������������������� –749 –795 –844 –894 –947 –991 –1,036 –1,085 –1,135 –1,187 –9,663 Net Savings ���������������������������������������������������������������������������������������� –354 –381 –410 –440 –472 –495 –518 –544 –570 –597 –4,781 1 The cost of shifting the current SSA base funding ($273 million) from discretionary to mandatory is not reflected above in 2017 through 2025 because it is being offset with an annual reduction to the discretionary spending limits in section 251(c) of the Balanced Budget and Emergency Deficit Control Act of 1985 (BBEDCA). For 2015 the base amounts was enacted in the annual appropriations bill and an additional $1,123 million was provided as a discretionary cap adjustment pursuant to section 251(b)(2)(B) of BBEDCA. For 2016, the Budget continues to request the SSA base funding through discretionary appropriations, as well as the $1,166 million enacted discretionary cap adjustment. The mandatory savings from the base funding in every year and the 2015 enacted discretionary cap adjustment funding continues to be included in the BBEDCA baseline. 2 This is based on SSA’s Office of the Actuary estimates of savings. In the first year, there is no net savings. This is due to the fact that redeterminations of eligibility can uncover underpayment errors as well as overpayment errors and corrections for underpayments are realized more quickly than corrections for overpayments. 3 These savings are based on estimates from the CMS Office of the Actuary for return on investment (ROI) from program integrity activities. eligible for the Medicaid ACA enhanced Federal matching rate, resulting in higher Federal Medicaid costs in those states. Health Care Fraud and Abuse Program.—The 2016 Budget proposes base and cap adjustment funding levels over the next 10 years and continues the program integrity cap adjustment through 2025. The discretionary base funding of $311 million and cap adjustment of $395 million for HCFAC activities in 2016 are designed to reduce the Medicare improper payment rate, support the Health Care Fraud Prevention & Enforcement Action Team (HEAT) initiative, reduce Medicaid improper payment rates, and monitor and prevent fraud, waste, and abuse in the private health insurance market including the Health Insurance Marketplace. The investment will also allow CMS to deploy innovative efforts that focus on improving the analysis and application of data, including state-of-theart 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, and DOJ. Over 2016 through 2025, as reflected in Table 11-1, this $4.9 billion investment in HCFAC cap adjustment funding will generate approximately $9.7 billion in savings to Medicare and Medicaid, for new net deficit reduction of $4.8 billion over the 10-year period, reflecting prevention and recoupment of improper payments made to providers, as well as recoveries related to civil and criminal penalties. The mandatory savings from base funding, assuming that amount is to continue in future years, are included in the BBEDCA baseline, as are the savings from the 2015 enacted the cap adjustment funding of $361 million. Proposed Adjustments to BBEDCA Discretionary Spending Limits.—The Administration also proposes to amend BBEDCA to enact adjustments to the discre- tionary spending limits at the IRS and Treasury’s Alcohol and Tobacco Tax and Trade Bureau (TTB) for tax code enforcement and the Department of Labor (DOL) to reduce improper payments in the Unemployment Insurance (UI) program. As shown in Table 11-2, the proposed adjustments are estimated to result in more than $61 billion in lower spending and additional tax revenue over the next 10 years, with further savings after the ten-year period. Both the base level of funding and the additional funding that would trigger cap adjustments are also listed in Table 11-2. Internal Revenue Service and Treasury’s Alcohol and Tobacco Tax and Trade Bureau.—For the IRS and TTB, the base funds current tax administration activities, including all tax enforcement and compliance program activities, in the Enforcement and Operations Support accounts at IRS and the Salaries and Expenses account at TTB. The additional $667 million cap adjustment funds new and continuing investments in expanding and improving the effectiveness and efficiency of the IRS’s and TTB’s overall tax enforcement program. As a result of base tax enforcement and compliance activities, the Government will collect roughly $57 billion in 2016 in direct enforcement revenue. The IRS estimates that the proposed new 2016 enforcement initiatives will yield an additional $432 million in revenue from the work done in 2016. Further, once the new staff are trained and become fully operational in 2018, the extra revenue brought in by the work done in each year will rise to $2.9 billion, or roughly $6 in additional revenue for every $1 in IRS expenses. New investments are also proposed beyond 2016, with cap adjustments in fiscal years 2017 through 2019 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 2025 will generate $60 billion in additional revenue over 10 years and will cost $18.7 billion for an estimated net 125 11. BUDGET PROCESS savings of $41 billion. 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 over $3 trillion in taxes paid each year without direct enforcement measures. Unemployment Insurance.—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 an $80 million initiative to conduct Reemployment and Eligibility Assessments and Reemployment Services (REA/RES). The REA initiative was begun in 2005 to finance inperson interviews at American Job Centers (also known as “One-Stop Career Centers”), to assess UI beneficiaries’ need for job finding services and their continued eligibility for benefits. Research, including a random-assignment evaluation, shows that a combination of eligibility reviews and reemployment services reduces the time on UI, increases earnings, and reduces improper payments to claimants who are not eligible for benefits. Based on this research, the Budget proposes to expand funding for the REA/RES initiative to allow States to conduct robust reemployment services along with REAs. These reemployment services, which may include the development of reemployment and work search plans, provision of skills assessments, career counseling, job matching and referrals, and referrals to training as appropriate. The funding proposed in the Budget would allow States to provide REA/RES services to focus the top one-third of UI claimants identified as most likely to exhaust their UI benefits as well as all newly separated veterans claiming unemployment compensation for ex-service members. The proposed expansion to the base effort to $151 million, if continued through 2025, would result in savings in UI benefit payments of an estimated $4.2 billion. These benefit savings would allow States to reduce their UI taxes Table 11–2. PROPOSALS FOR DISCRETIONARY PROGRAM INTEGRITY BASE FUNDING AND CAP ADJUSTMENTS, INCLUDING MANDATORY AND RECEIPTS SAVINGS (Budget authority in millions of dollars) 2016 2017 2016– 2025 Total 2018 2019 2020 2021 2022 2023 2024 2025 14,186 111,050 IRS Tax Enforcement Proposed Adjustments Pursuant to the Balanced Budget and Emergency Deficit Control Act of 1985: Enforcement Base. ��������������������������������������������������������������������� 9,572 9,783 10,009 10,242 10,479 10,721 10,970 11,223 13,865 Cap Adjustments: BA ����������������������������������������������������������������������������������������� Outlays ��������������������������������������������������������������������������������� 667 627 1,039 1,017 1,403 1,381 1,781 1,758 2,170 2,147 2,232 2,228 2,276 2,273 2,329 2,326 2,382 2,379 2,437 2,434 18,716 18,570 Receipt Savings from Discretionary Program Integrity Base Funding and Cap Adjustments:1 Enforcement Base2 ��������������������������������������������������������������������� –57,000 –57,000 –57,000 –57,000 –57,000 –57,000 –57,000 –57,000 –57,000 –57,000 –570,000 Cap Adjustment3 ����������������������������������������������������������������������� –432 –1,451 –2,926 –4,476 –6,095 –7,481 –8,475 –9,077 –9,503 –9,819 –59,735 Unemployment Insurance Improper Payments Proposed Adjustments Pursuant to the Balanced Budget and Emergency Deficit Control Act of 1985: Enforcement Base. ��������������������������������������������������������������������� 151 151 151 151 151 151 151 151 151 151 1,510 Cap Adjustments: BA ����������������������������������������������������������������������������������������� Outlays ��������������������������������������������������������������������������������� 30 30 35 35 40 40 45 45 50 50 55 55 60 60 65 65 70 70 75 75 525 525 Mandatory Savings from Discretionary Program Integrity Base Funding and Cap Adjustments:4 Enforcement Base ���������������������������������������������������������������������� –164 –393 –408 –423 –433 –449 –458 –474 –491 –495 –4,188 Cap Adjustment. ������������������������������������������������������������������������� –34 –96 –114 –133 –151 –172 –192 –215 –240 –259 –1,606 1 Savings for IRS are revenue increases rather than spending reductions. They are shown as negatives for consistency in presentation. 2 No official estimate for FY 2016 enforcement revenue has been produced, so this figure is an approximation and included only for illustrative purposes. 3 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 $41.1 billion in savings over ten years. Aside from direct enforcement revenue, the deterrence impact of these activities suggests the potential for even greater savings. 4 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, many States will be able to reduce their unemployment taxes. The estimated reduction in State UI taxes from the enforcement base is $970 million, net of the income tax offset. The reduction in State UI taxes from the cap adjustment is $316 million, net of the offset. 126 ANALYTICAL PERSPECTIVES by $970 million (net of the income tax offset), reducing the burden on employers. Because most unemployment claims are now filed by telephone or online, in-person assessments conducted in the 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 benefit savings from this initiative are short-term because the maximum UI benefit period is limited, typically 26 weeks for regular State UI programs. The proposed cap adjustments would begin at $30 million in 2016 and total $525 million through 2025, providing total deficit savings estimated at $1.6 billion. These deficit savings from the cap adjustments would result in some States reducing their UI taxes, which would result in an estimated revenue loss of $316 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 declines, totals $765 billion. Partnership Fund for Program Integrity Innovation.—Funded from fiscal year 2010 through 2013, the Partnership Fund invested over $29 million in eleven 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. As evaluations are completed and results finalized, OMB will work with Federal agencies, States and local governments, and other stakeholders to disseminate lessons learned and apply the tools and methods tested more broadly across programs and levels of government. Pilot results so far include: • The Department of Labor conducted a pilot simulation with three States to test how access to data from financial institutions could help to detect overpayments in the Unemployment Insurance program. For the 15-month period, the pilot analysis found approximately $65 million in potential overpayments due to 27,562 potential instances of unreported earnings that the State may not have found otherwise using currently available data. DOL is now partnering with additional States to test the pilot approach in actual practice; • CMS and States worked 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, finding that collaborative data analysis could help to identify potential fraud. While this approach holds promise, the pilot has not been able to quantify potential savings; • CMS, working with States, issued a series of chal- lenges to produce a prototype shared services solution for States to verify Medicaid provider eligibility. The prototype solution is now being tested in a live environment by one State. CMS estimated the cost to procure the crowd-sourced solution as approximately one-fifth the cost of traditional procurement methods, exclusive of ongoing support costs; and • ACF and States worked to explore and plan improved interoperability and integration in eligibility and enrollment, case management, and other related functions to help streamline administration processes and strengthen program integrity in federal assistance programs across health and human services information technology systems. Pilots expected to yield early results in the next year include: • The National Accuracy Clearinghouse pilot, in which FNS is working with States to test an interstate database of program information to support the Supplemental Nutrition Assistance Program (SNAP) and Disaster SNAP (D-SNAP) eligibility determinations by allowing States to determine whether an applicant is already receiving benefits in a different participating State. • The Trusted On-Line Credentials pilot, in which Commerce is working with States to develop effective and secure identity verification solutions to support convenient customer access and program integrity across different services and agencies. • The Identifying State Innovations for Improving Temporary Assistance for Needy Families (TANF) Program Administration pilot, in ACF is working with States to which to develop cost-effective approaches and best practices to maximize TANF block grants by reducing improper payments and directing cash assistance payments to eligible families not participating. • The Supporting Permanent Placements of Foster Care Children through Electronic Records Exchange pilot, in which ACF and States are implementing real-time, on-line data exchange for States to share records and other information to support permanent placements of children and youth in foster care when they are placed in homes across state lines. Mandatory Program Integrity Initiatives.—Table 11-3 presents the mandatory and receipt savings from other program integrity initiatives that are included in the 2016 Budget, beyond the expansion in resources resulting from the increases in administrative funding discussed above. These savings total almost $11.5 billion over 10 years. 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. Cut Waste, Fraud, and Abuse in Medicare and Medicaid.—The Budget includes a robust package of 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 127 11. BUDGET PROCESS Table 11–3. MANDATORY AND RECEIPT SAVINGS FROM OTHER PROGRAM INTEGRITY INITIATIVES (Receipts and outlays in millions of dollars) 2016 Department of Health and Human Services: Cut Waste, Fraud, and Abuse in Medicare and Medicaid1 ������������������������������������� Cut Waste, Fraud, and Abuse in Medicare and Medicaid (non-PAYGO)1 �������������� Department of Labor: Electronic Transmission of Unemployment Compensation Claims Information ����� Electronic Transmission of Unemployment Compensation Claims Information (non-PAYGO receipt effect) ������������������������������������������������������������������������������ Cross-Match Prisoner Data to Reduce Improper Payments ���������������������������������� Cross-Match Prisoner Data to Reduce Improper Payments (non-PAYGO receipt effect) ���������������������������������������������������������������������������������������������������������������� 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���������������� Increase delinquent Federal non-tax debt collection ��������������������������������������������� Social Security Administration: Windfall Elimination Provision/Government Pension Offset Enforcement Provision (non-PAYGO) ������������������������������������������������������������������������������������ Reconcile OPM/SSA retroactive disability payments �������������������������������������������� Allow SSA to Use Commercial Databases to Verify Wages in SSI ������������������������ Expand Authority to Require Authorization to Verify Financial Information for Overpayment Waiver Requests 1 ���������������������������������������������������������������������� Hold Fraud Facilitators Liable for Overpayments 1 ������������������������������������������������� Government Wide Use of CBP Entry/Exit Data to Prevent Improper Payment 1 ���� Office of Personnel Management: Reconcile OPM/SSA retroactive disability payments �������������������������������������������� Total, Mandatory and Receipt Savings ������������������������������������������������������������������� PAYGO Savings ����������������������������������������������������������������������������������������������������� Non-PAYGO Savings ��������������������������������������������������������������������������������������������� 1 Savings estimates may not include all interactions. 2017 2018 2019 2020 2021 2022 2023 2024 10-year total 2025 146 –90 183 –156 180 –262 189 –407 215 –556 243 –652 272 –712 303 –762 336 –818 –5 –10 –16 –17 –18 –19 –19 –20 –21 –22 –167 ......... –3 ......... –7 1 –8 2 –8 2 –9 3 –10 6 –10 6 –10 7 –11 9 –11 36 –87 ......... ......... ......... 1 2 2 3 3 4 4 19 –34 –12 –50 –12 –50 –12 –51 –12 –52 –12 –54 –12 –54 –12 –56 –12 –56 –12 –57 –12 –514 –120 –3 –32 –3 –32 –3 –32 –3 –32 –3 –32 –3 –32 –3 –32 –3 –32 –3 –32 –3 –32 –30 –320 18 6 ......... 28 ......... ......... 24 ......... ......... –352 ......... –71 –776 ......... –36 –1047 ......... –24 –1142 ......... –21 –1085 ......... –19 –1075 ......... –17 –5 ......... ......... –16 ......... ......... –17 –1 –2 –18 –1 –7 –19 –1 –14 –20 –1 –22 –20 –1 –33 –21 –1 –40 –22 –1 –43 –22 –1 –52 –180 –8 –213 ......... ......... –48 –48 –48 –48 –48 –48 –48 –48 –384 –14 58 –72 –75 53 –128 –246 –9 –237 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 strengthens Medicaid and the Children’s Health Insurance Program (CHIP) by providing tools to States, Territories, and the Federal Government to fight fraud, waste, and abuse. Together, the CMS program integrity authority would net approximately $2.9 billion over 10 years in non-PAYGO savings. Unemployment Insurance Integrity.—The Budget includes two proposals that would implement improved integrity in the Unemployment Insurance program and would result in $254 million in PAYGO savings over 10 years and allow States to reduce their unemployment taxes by $55 million: 372 2,439 –883 –5,298 –1054 –6,461 ......... 6 –18 –206 –835 –1,357 –1,696 –1,826 –1,797 –1,812 –1,830 –11,488 –79 –29 –2 19 41 70 94 216 –756 –1,328 –1,694 –1,845 –1,838 –1,882 –1,924 –11,704 • Electronic Transmission of Unemployment Compensation Information.—The Budget proposes to require all State agencies to use a system designated by the Secretary of Labor to obtain information from employers relating to UI claims, which could be the existing State Information Data Exchange System (SIDES) or else a successor system. The Department of Labor’s SIDES system is designed to help employers more quickly provide to States the information necessary to determine a claimant’s eligibility by providing a secure electronic data exchange between States and employers or their third party administrators. SIDES is currently used by about 44 States. The improvements in speed and accuracy resulting from use of such a system will help avoid overpayments or underpayments, and provide for more efficient and effective administration of the UI program. • Cross-Match Prisoner Data to Reduce Improper Payments.—The Budget proposes to expand State Unemployment Insurance agency use of the SSA’s 128 ANALYTICAL PERSPECTIVES Prisoner Update Processing System (PUPS), which contains Federal, State, and local prisoner data. Recent legislation has expanded the information the prisons are required to report to SSA to include release dates, making the system more valuable to users. The PUPS data will help prevent prisoners from illegally receiving unemployment compensation. Improve Treasury Debt Collection.—The Budget includes four proposals that would increase collections of delinquent debt: • 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 $514 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 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. • 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 $30 million over 10 years. • Increase delinquent Federal non-tax debt collections. Authorize administrative bank garnishment for non-tax debts of commercial entities.—Allow Federal agencies to collect non-tax debt by garnishing the bank and other financial institution accounts of delinquent commercial debtors without a court order and after providing full administrative due process. The Budget proposes to direct the Secretary of the Treasury to issue government-wide regulations implementing the authority of bank garnishment for non-tax debts of commercial entities. Bank garnishment orders under this authority would be subject to Treasury’s rule (31 CFR 212) protecting exempt benefit payments from garnishment. To reach income of commercial entities and other non-wage income and funds available to commercial debtors owing delinquent nontax obligations to the United States, this proposal would authorize agencies to issue garnishment orders to financial institutions without a court order. Agencies would be required to provide debtors with appropriate administrative due process and other protections to ensure that debtors have had the full opportunity to contest the debts and/or enter into repayment agreements to avoid issuance of an order. The Internal Revenue Service currently has similar authority to collect Federal tax debts. The Debt Collection Improvement Act of 1996 (DCIA) authorized Federal agencies to collect delinquent non-tax debt by garnishing the wages of debtors without the need to first obtain a court order. Since July 2001, the U.S. Department of the Treasury’s Bureau of the Fiscal Service has collected $221.4 million in garnished wages (as of December 31, 2014) on behalf of Federal agencies. This proposal would result in estimated savings of $320 million over 10 years in commercial debts. Preventing Improper Payments in Social Security.—Overall, the Budget proposes legislation that would avert more than $7 billion in improper payments in Social Security over 10 years. While much of this savings is considered off-budget and would be non-PAYGO, about $1 billion from various proposals would be PAYGO savings. • Improve Collection of Pension Information from States and Localities.—The Budget reproposes legislation that would improve reporting for non-covered pensions by including up to $70 million for administrative expenses, $50 million of 11. BUDGET PROCESS which would be available to the States, 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 law, the WEP and GPO adjustments are dependent on selfreported pension data and cannot be independently verified. This proposal would result in savings in the Old-Age, Survivors, and Disability Insurance program of almost $6.5 billion over 10 years, which would be scored as non-PAYGO savings because the program is off-budget. • Coordination of Disability Benefit Payments between the Office of Personnel Management (OPM) and SSA through Automation.—The Budget proposes legislation to provide SSA with authority to automate coordination of disability benefit payments with OPM, which would substantially reduce OPM overpayments. This proposal would result in PAYGO savings of $378 million over 10 years. SSA is provided $6 million in 2015 to administer the coordination effort. • Allow SSA to Use Commercial Databases to Verify Wages in SSI.—The Budget will propose to allow SSA to use commercial databases to verify wages in SSI. This would allow SSA to automate its current process of manually accessing the information. Consent to allow SSA to access these databases would be a condition of benefit receipt for new beneficiaries. All other current due process and appeal rights would be preserved. This proposal would result in an estimated $206 million in savings over 10 years. • Expand Authority to Require Authorization to Verify Financial Information for Overpayment Waiver Requests.—The Budget will require OASDI recipients seeking overpayment waivers to grant SSA authority to certify financial information. This new authority would extend the current practice of requiring SSI recipients to provide SSA authorization to access data from their financial institutions to determine their available resources. Currently, there is no verification of financial assets for overpayment waiver claims for OASDI. This proposal would result in an estimated $180 million in savings over 10 years. • Hold Fraud Facilitators Liable for Overpayments.—The Budget proposes to hold fraud facilitators liable for overpayments by allowing SSA to recover the overpayment from a third party if the third party was responsible for making fraudulent statements providing false evidence that allowed the beneficiary to receive payments that should not 129 have been paid. This proposal would result in an estimated $8 million in savings over 10 years. • Government Wide Use of Custom and Border Pa- trol (CBP) Entry/Exit Data to Prevent Improper Payments.—The Budget will provide for the use of CBP Entry/Exit data to prevent improper OASDI and SSI payments. An SSI beneficiary who is outside the United States for 30 consecutive days is not eligible for benefits for that month. Generally, U.S. citizens can receive benefits regardless of residence. Non-citizens may be subject to additional residence requirements depending on the country of residence and benefit type. This data has the potential to be useful across government to prevent improper payments. This proposal would result in an estimated $213 million in savings over 10 years. Other Program Integrity Initiatives.— Data Analytics to Reduce Improper Payments.—Under this Administration, the Federal Government has focused on increased use of technology to address improper payments. First, pursuant to Executive Order 13520 (issued November 20, 2009), 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, a “Do Not Pay” list was created by a Presidential memorandum issued June 18, 2010. The “Do Not Pay” list established a single portal through which agencies could check multiple eligibility databases before making an award or payment. The 2012 Budget requested (and the Consolidated Appropriations Act, 2012 appropriated) $10 million to the Treasury Department to support expansion of the “Do Not Pay” list and to add forensic fraud detection capabilities to the basic “Do Not Pay” portal. Specifically, the funding helped to: (1) expand the number of databases and infrastructure of the “Do Not Pay” list; (2) procure the detection technology and hire staff to support an operations center to analyze fraud patterns utilizing public and private sector information; and (3) refer potential issues to agency management and the relevant agency Inspector General. Third, 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 Improper Payments and Elimination and Recovery Improvement Act of 2012 (IPERIA; P.L. 112-248) reinforced the Administration’s “Do Not Pay” initiative already underway. OMB designated the Department of the Treasury to spearhead the Do Not Pay working system and to integrate the five databases of information specified by IPERIA. The Do Not Pay system provided as an online portal and single location for agencies to verify payment accuracy pre-award, pre-enrollment, and pre-payment. In addition, agencies reviewed their own processes for verifying payment accuracy to address both the cost of improper payments and the integrity of their 130 programs. Since 2013, agencies have been checking all payments and awards through a Do Not Pay working system as appropriate. The BBA expanded the Do Not Pay initiative to include additional information collected by the Social Security Administration’s Prisoner Updates Processing System (PUPS) to prevent the improper payment of Federal funds to incarcerated individuals. The effective use of data analytics provides insight into methods of reducing costs and improving performance and decision-making capabilities. The Do Not Pay initiative will expand and continue to incorporate other agency best practices and activities that further promote program integrity and benefits to the taxpayer. Current examples of agencies using data to improve payment accuracy include the Centers for Medicare & Medicaid Services’ (CMS) Fraud Prevention System (FPS), a stateof-the-art predictive analytics technology used to identify and prevent fraud in the program; and the Department of Labor’s Unemployment Insurance (UI) Integrity Center for Excellence, a Federal-State partnership which facilitates the development and implementation of UI integrity tools by the states and shares best practices in the detection and reduction of improper payments Use of the Death Master File to Prevent Federal Improper Payments.—The Administration is continuing to pursue opportunities to improve information sharing by developing or enhancing policy guidance, ensuring privacy protection, and developing legislative proposals to leverage available information and technology in determining benefit eligibility and other opportunities to prevent improper payments. OMB Memorandum M-13-20, “Protecting Privacy while Reducing Improper Payments with the Do Not Pay Initiative”, updated guidance for Federal agencies and enabled Treasury to publish a System of Records Notification in accordance with the Privacy Act of 1974 for the Do Not Pay system. The Budget proposes to improve payment accuracy further by sharing available death data across government agencies to prevent improper payments. This proposal provides the Do Not Pay system at Treasury access to the SSA full death data to prevent, identify, or recover improper payments to include information received from a State, or any other source, about the deceased; provides additional agencies authorities to share death notices directly with SSA for quality and completeness; and expands the use of the Do Not Pay system the legislative and the judicial branches of government as well as to states, to improve the integrity of federal benefit programs administered by the states. Social Security Workers’ Compensation Enforcement Provision.—The Budget reproposes the improvement of data collection 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 ANALYTICAL PERSPECTIVES and reduce SSI payments. The proposal includes $10 million to help fund States’ implementation costs and would reduce program overpayments and underpayments. 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 PAYGO. 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 changes 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 Special 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 appropriations bills are scored with the discretionary costs but are not credited with the savings in mandatory spending. 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 the 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. Disaster Relief Funding Section 251(b)(2)(D) of BBEDCA includes a provision to adjust the discretionary caps for appropriations that the 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 10 years, excluding the highest and lowest years. The ceiling for each year’s adjustment (as determined by the 10 year average) is then increased by the unused amount of the prior year’s ceiling (exclud- 131 11. BUDGET PROCESS ing 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. The request amends BBEDCA to extend the discretionary cap adjustment for disaster funding through 2025. As required by law, OMB included in its Sequestration Update Report for FY 2015 a preview estimate of the 2015 adjustment for disaster relief. The ceiling for the disaster relief adjustment in 2015 was calculated to be $18,430 million. In the Continuing Appropriations Resolution, 2015 (P.L. 113-164, extended through February 27, 2015, by division L of the Consolidated and Further Continuing Appropriations Act, 2015 (P.L. 113-235)), the Congress provided $5,626 million designated for disaster relief in the Federal Emergency Management Agency’s Disaster Relief Fund (DRF). Further, P.L. 113-235 provided an additional $91 million in disaster relief funding for the Department of Agriculture’s Emergency Forest Restoration Program, Emergency Conservation Program, and Watershed and Flood Prevention Operations accounts, for a total of $5,717 million. OMB must include in its Sequestration Update Report for FY 2016 a preview estimate of the ceiling on the adjustment for disaster relief funding for 2016. This estimate will contain an average funding calculation that incorporates six years (2006 through 2011) using the definition of disaster relief from OMB’s September 1, 2011 report and four years using the funding the Congress designated in 2012 through 2015 for disaster relief pursuant to BBEDCA excluding the highest and lowest years. The amounts enacted as full-year or continuing appropriations for disaster relief in 2015 are $12,713 million below the preview adjustment estimate of $18,430 million. However, pursuant to section 251(b)(2)(D)(i)(II) of BBEDCA, any unused carryover from 2014 cannot carry forward into the calculation of the 2016 preview estimate. As a result, only $6,196 million of this total underage will carry forward into the calculation of the 2016 preview adjustment in OMB’s August 2015 Sequestration Update Report for Fiscal Year 2016 if no further appropriations are enacted in 2015 that are designated for disaster relief, and if the current continuing appropriation remains unchanged when final appropriations for the Department of Homeland Security are completed. At this time, the Administration is requesting $6,872 million in funding in two accounts to be designated for disaster relief by the Congress: more than $6.7 billion in FEMA’s DRF to cover the costs of Presidentially declared 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 2016, and $159 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 2016 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 2015 supplemental appropriations (designated as either disaster relief or emergency requirements pursuant to BBEDCA) or budget amendments to the Budget, may be transmitted. Under the principles outlined above, since the Administration does not have the 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 III (Improved Definition of Baseline) under the heading titled “Adjustments for Emergency and Disaster Costs.” Proposed Adjustment to the Discretionary Spending Limits for Wildfire Suppression Operations at the Departments of Agriculture and the Interior On December 19, 2013, Senator Ron Wyden and Senator Mike Crapo introduced the Wildfire Disaster Funding Act of 2013 (S. 1875). On February 5, 2014 Representative Mike Simpson and Representative Kurt Schrader introduced a companion bill in the House (H.R. 3992), with Representative Peter Defazio and Representative Raul Labrador as cosponsors. This legislation would have amended section 251(b)(2) of BBEDCA to add an adjustment to the discretionary spending limits for wildfire suppression operations. The adjustment allowed for an increase in the discretionary caps for each of fiscal years 2014 through 2021 of up to $2.7 billion if appropriations bills provide funding for wildfire suppression operations at specified base levels. The $2.7 billion permissible adjustment is a ceiling, rather than a target. It is intended to give flexibility to respond to severe, complex, and threatening fires or a severe fire season that is not captured by the historical averages. In addition, it does not increase overall discretionary spending, since it would reduce the ceiling for the existing disaster relief cap adjustment by an equivalent amount as is provided for wildfire suppression operations. The base levels are defined in the legislation as 70 percent of the average costs for wildfire suppression operations over the previous 10 years. These base levels ensure that the cap adjustment would only be used for the most severe fire activity, since it is 1 percent of fires that cause 30 percent of costs. Only extreme fires that require emergency response or are near urban areas or 132 activities during abnormally active fire seasons including large fires that require emergency response, which rightly should be considered disasters, would be permitted to be funded through the adjustment to the discretionary spending limits. Wildfire suppression operations are defined by the legislation as the emergency and unpredictable aspects of wildland firefighting including support, response, and emergency stabilization activities, other emergency management activities, and funds necessary to repay any transfers needed for those costs. This means that related activities, such as fire preparedness, must continue to be funded from base appropriations and are not considered when determining if the cap adjustment is triggered. As described above, the legislation does not allow for an increase in total discretionary spending. Rather, by its design, total funding for disasters is not expected to increase above currently estimated levels because the bill allocates funding for wildfire suppression operations from within the existing disaster relief funding cap adjustment described under the previous heading. Specifically, the ceiling for the disaster relief adjustment would be reduced by the amount provided for wildfire suppression operations under the cap adjustment for the preceding fiscal year. The two introduced Wildfire Disaster Funding Acts and the Senate Appropriations committee markup of the Department of the Interior, Environment, and Related Agencies Appropriations Act, 2015, which included similar language, attempt to create a more responsible way to budget for wildfire suppression operations that allows for improved agency planning and management. The reality is that the Government has historically - and will in the future - fully fund wildfire suppression operations. It is inefficient and ineffective to provide those resources on an ad hoc basis and to raid other critical land management operations to pay for suppression operation needs. The practice of doing so in prior years led to destabilizing transfers from other accounts, and ultimately to underinvesting in other areas that are critical to long-term forest health and resilience. That is why the Administration is including a wildfire suppression operations cap adjustment as a proposal in this Budget. The Budget assumes that the cap adjustment will begin in 2016 and will remain in effect through 2025. The only significant departure from the two introduced Wildfire Disaster Funding Acts is that the Budget proposes to phase in the size of the cap adjustment, beginning with a maximum permissible adjustment of $1.5 billion in 2016 that increases slowly to $2.7 billion by 2022 and remains at that level thereafter. At this time, the Administration is requesting to fund only $1.1 billion through the wildfire suppression operations cap adjustment in 2016 ($855 million in the Department of Agriculture and $200 million in the Department of the Interior). If the cap adjustment were to be enacted, additional requests, in the form of amendments to the Budget, might be transmitted as additional information about the severity of the fire season becomes known. ANALYTICAL PERSPECTIVES Civilian Property Realignment Saving on Real Estate Costs.—The Federal Government is the largest property owner in the United States. There are opportunities for savings by using Federal space more efficiently and disposing of unneeded space, and the President has made it a priority to shrink and reduce the cost of operating the Federal real estate inventory. Laying the groundwork for the Administration’s long-term strategy on real property, in 2012 the Administration issued a Freeze the Footprint policy and directed agencies to freeze the growth in their office and warehouse real estate inventory. As a result, the government reduced its office and warehouse baseline by 10.2 million square feet, from 730.1 million to 719.9 million square feet in 2013. The Administration is implementing a five-year National Strategy to freeze growth in the federal real property portfolio, measure the cost and utilization of individual real property assets to support their more efficient use, and reduce the size of the portfolio through asset disposal. In addition, a companion real property policy will be issued in 2015, requiring agencies to set annual reduction targets for office and warehouse space and to implement annual disposal targets for all building types to reduce costs and improve the portfolio’s efficiency. In addition, the Budget includes $57 million to implement the Civilian Property Realignment Act (CPRA). CPRA would create an independent board of private and public sector real estate experts that would perform Government-wide, independent portfolio analysis and make recommendations to the Congress on properties that should be disposed, consolidated, co-located, or reconfigured. Enactment of CPRA would help consolidate government operations, streamline the disposal process, generate an estimated $1.2 billion in sales proceeds, and provide funds for real property reinvestment. Further, the enactment of CPRA, would fully support implementation of the Administration’s National Strategy. CPRA has the same project objectives and planned outcomes as the National Strategy, and it implements the same level and type of real estate analysis to identify and prioritize real estate actions. CPRA would accelerate the identification and prioritization of disposal, consolidation renovation, and co-location projects through the Boards’ independent portfolio analysis, and provide agencies with a clear set of priority real estate actions. Actions the Board recommends but does not prioritize for inclusion in the CPRA portfolio will be identified and implemented through collaboration and portfolio analysis among agencies and the General Services Administration. 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. There are legitimate policy reasons to use advance appropriations to fund programs. For example, funding for the Corporation for Public Broadcasting is customarily 133 11. BUDGET PROCESS 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 BBEDCA. 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 which the amounts of advance appropriations for such “straddle” programs are increased. To curtail this gimmick, which allows over-budget funding in the budget year and exerts pressure for increased funding in future years by committing upfront a portion of the total budget authority limits under the discretionary caps in BBEDCA, in those years, congressional budget resolutions since 2001 have set limits on the amount of advance appropriations. When the congressional limit equals the amount that had been advance appropriated in the most recent appropriations bill, there is no additional room to switch forward funding to advance appropriations, and so no room for this particular gimmick to operate in that year’s budget. The Budget includes $28,835 million in advance appropriations for 2017 and freezes them at this level in subsequent years. In this way, the Budget does not employ this potential gimmick. Moreover, the Administration supports limiting advance appropriations to the proposed level for 2017, similar to the limits enacted as sections 112 and 115(c) of the BBA for the Senate and the House, respectively. Those limits apply only to the accounts explicitly specified in a statement submitted to the Congressional Record by the Chairman of the Committee on the Budget in each House. In addition, the Administration would allow advance appropriations for the Corporation for Public Broadcasting, which is typically enacted two years in advance, and for Veterans Medical Care, as is required by the Veterans Health Care Budget Reform and Transparency Act (P.L. 111-81). The advance appropriations funding level for the veterans medical care accounts (comprising Medical Services, Medical Support and Compliance, and Medical Facilities) is largely determined by the Enrollee Health Care Projection Model of the Department of Veterans Affairs (VA). This actuarial model projects the funding requirement for over 80 types of health care services, including primary care, specialty care, and mental health. The remaining funding requirement is estimated based on other models and assumptions for services such as readjustment counseling and special activities. The Department of Veterans Affairs has included detailed information in its Congressional Budget Justifications about the overall 2017 VA medical care funding request. For the first time, the Administration is also requesting advance appropriations for the VA mandatory benefit accounts (Compensation and Pension; Readjustment Benefits; and Veterans Insurance and Indemnities), based on projections of anticipated benefit payments, in compliance with the new requirement under the Consolidated and Further Continuing Appropriations Act, 2015 (P.L. 113-235). The Administration also proposes to allow advance appropriations for the spending and collections of the payments in the General Services Administration (GSA) Federal Buildings Fund. This net zero proposal supports capital requirements as well as operating expenses. This would provide greater certainty to support capital projects and ensure that the funds that agencies pay to GSA are used promptly to construct, maintain, and operate GSA facilities. For a detailed table of accounts that have received discretionary and mandatory advance appropriations since 2014 or for which the Budget requests advance appropriations for 2017 and beyond, please refer to the Advance Appropriations chapter in the Appendix. Budgetary Treatment of Surface Transportation Infrastructure Funding Overview.—Currently, surface transportation programs financed from the Highway Trust Fund (HTF) are treated as hybrids: contract authority is classified as mandatory, while outlays are classified as discretionary. Broadly speaking, this framework evolved as a mechanism to ensure that collections into the HTF (e.g., motor fuel taxes) were used to pay only for programs that benefit surface transportation users, and that funding for those programs would generally be commensurate with collections. However, HTF collections are no longer adequate to support current law spending levels. The National Commission on Fiscal Responsibility and Reform (the “Fiscal Commission”) recommended changing the scorekeeping treatment of surface transportation programs to close loopholes in the present system. This hybrid treatment results in less accountability for transportation spending. The Commission plan reclassifies spending from the Transportation Trust Fund to make both contract authority and outlays mandatory. Specifically, rather than skirting the two mechanisms intended to control spending, caps on discretionary budget authority and PAYGO, the Fiscal Commission’s recommendation would establish surface transportation programs as subject to PAYGO. The 2016 Budget includes structural reforms to surface transportation programs that mirror the recommendation of the Fiscal Commission. These reforms help ensure that when crafting a surface transportation plan, the 134 ANALYTICAL PERSPECTIVES President and the Congress will work together to ensure that funding increases do not increase the deficit. The Budget uses transition revenue from pro-growth business tax reform to offset the cost of President’s sixyear surface transportation proposal beyond what the current funding mechanism can cover. Beyond the reauthorization window (2016-2021), the Budget assumes that spending returns to baseline levels based on what was enacted in 2015 – and accordingly the structural gap between baseline trust fund spending and baseline trust fund receipts returns. This reflects the assumption that while the Administration has identified a revenue source that will sustain baseline spending levels and programmatic increases proposed in the pending reauthorization, the offset does not offer a permanent solution. The proposal fills both the gap between baseline receipts and baseline spending for the six-year period of the reauthorization and all of the outlays associated with programmatic increases during the six-year reauthorization. Policy-makers will need to work together to develop other fiscally responsible solutions beyond the six-year reauthorization period. The Budget also includes a surface transportation reauthorization proposal that would broaden the scope of programs included under the Trust Fund umbrella: the HTF is renamed the Transportation Trust Fund (TTF), and supports additional highway safety and transit programs, as well as passenger rail programs and multimodal programs administered by the Department of Transportation. The mechanics of the 2016 proposal are described in greater detail below. Generally speaking: • Hybrid treatment is ended; all TTF accounts have mandatory contract authority and mandatory outlays. • For the sake of comparability, the Budget reclassi- fies current law spending for all TTF activities as mandatory. This is intended to allow policy makers to: 1) transparently calculate the difference between baseline levels and the President’s proposal, and 2) account for that difference under a unified, existing scorekeeping regime, PAYGO. • Rescissions of contract authority in appropriations acts would be scored as CHIMPs (discretionary changes that would be rebased as mandatory subsequent to enactment, following long-standing scorekeeping conventions). As proposed by the Administration, this unified scoring framework does not radically alter traditional roles and jurisdictional relationships as they are conceived of under current law and scorekeeping practice. Authorizing committees would be scored with the full cost of contract authority and outlays associated with their proposal; discretionary outlays would no longer be a central feature of the scorekeeping system. However, under the proposal, the Appropriations Committees would continue to set obligation limitations that are legally binding. In addition, the Appropriations Committees would continue to liquidate contract authority. As under current law, multi-year authorizing bills would set initial expectations for spending. The new scorekeeping regime would fully reflect the cost of that legislation in terms of both budget authority and outlays. While the Administration envisions both types of committees playing important roles, the central innovation of the proposed scorekeeping regime is that it would require all stakeholders to identify offsets for new spending during the authorization process. A scorekeeping regime that closes loopholes in current practice and forecloses options that are not fiscally responsible is necessary for budget discipline and to drive policy makers towards consensus. The proposal for surface transportation and the corresponding structural reforms are essentially similar to the proposal presented in 2015 Budget. The 2015 Budget presented the Administration’s proposal for a four-year $302 billion reauthorization of transportation programs that would substantially increase average annual spending over the four years compared to MAP-21, while the 2016 Budget proposes a six-year $478 billion proposal. As discussed above, the Administration proposes to pay for the reauthorization proposal by using transition revenue from pro-growth business tax reform. As a matter of policy, the Administration believes that the proceeds from existing Highway Trust Fund excise taxes should be dedicated solely to the highway and transit accounts; no existing excise taxes would be diverted to rail or other activities. Rather, under the Administration’s proposal, transition revenue from business tax reform would offset the General Fund transfers that have been used in recent years to compensate for the projected shortfall in the Highway and Mass Transit accounts, cover increased funding for highways and mass transit, and finance passenger rail and multimodal activities. This budget process reform is only one element of the Administration’s comprehensive plan to rebuild the Nation’s transportation infrastructure. The Budget and Appendix volumes discuss the broader policy in more detail. Account-by-Account Budgetary Treatment.—The Budget proposes the enactment of contract authority for the Transportation Trust Fund for each year, 2016-2021, totaling $478 billion over six years. The contract authority is to be enacted by the reauthorization bill and, as under current law, will be classified as mandatory. Under the budget, outlays flowing from that contract authority will also be treated as mandatory. The same treatment is applied to outlays flowing from prior obligations of the Highway Trust Fund, which will now be attributed to the Transportation Trust Fund; this is a departure from current law. As is the case for all other programs, this aligns outlays with budget authority. By placing outlays on the PAYGO scorecard, it gives real scoring effect to funding increases for surface transportation programs. For all of the resources in the surface transportation reauthorization proposal, the Budget proposes that the reauthorization contain annual obligation limits at the same level as the contract authority, and also that annual appropriations bills include obligation limits at those levels. The obligation limits enacted by the appropriators 135 11. BUDGET PROCESS enable the Administration and the Congress to review TTF policies and resource levels on an annual basis, but under a framework that will continue to give external stakeholders a high level of certainty regarding the multiyear resource trajectory for highways, transit, passenger rail, and multimodal activities. The Budget modifies individual accounts to conform to the proposed budgetary treatment in all years. Specifically: • For accounts that are presently classified as having discretionary budget authority and outlays, but that the Administration proposes to incorporate into the TTF (for example, the Federal Transit Administration’s Capital Investment Grants account), the Budget includes separate schedules that: Show baseline budget authority and outlays as discretionary, consistent with current classifications. Reclassify baseline budget authority and outlays as mandatory in all years, including 2014 and 2015, for comparability purposes (i.e., to enable a comparison of funding levels across years in an account). Show adjustments (subject to PAYGO) to the reclassified mandatory amounts so that the proposal properly accounts for requested program growth in the new trust fund accounts. • For accounts that are presently funded from the HTF and that the Administration proposes to incorporate into the TTF (for example, Federal-Aid Highways), the Budget includes separate schedules that: Show baseline levels of mandatory contract authority and discretionary outlays resulting from obligation limitations contained in appropriations acts. Since the current law surface transportation extension will expire May 31, 2015, the contract authority is frozen in all years subsequent to that date, consistent with current scorekeeping conventions. Reclassify discretionary outlays from obligation limitations as mandatory outlays from mandatory contract authority for the 2015 estimate and create a new baseline of contract authority that is equal to the previous inflated discretionary baseline for obligation limitations. Reclassify 2014 enacted budget authority and outlays as mandatory for comparability purposes (i.e., to enable a comparison of funding levels across years in an account). Show proposed mandatory spending above or below the baseline as PAYGO costs or savings. • For proposed new accounts supported by the TTF (for example, the Federal Railroad Administration’s Rail Service Improvement Program account), the Budget includes a schedule that includes new man- datory contract authority and outlays requested to support those programs. The discretionary accounts that are incorporated into the TTF construct are: • Office of the Secretary, National Infrastructure Investments. • Federal Railroad Administration (FRA): Operating Subsidy Grants to the National Railroad Passenger Corporation; Capital and Debt Service Grants to the National Railroad Passenger Corporation; Capital Assistance for High-Speed Rail Corridors. • National Highway Traffic Safety Administration (NHTSA): Operations and Research. • Federal Transit Administration (FTA): Administra- tive Expenses; Capital Investment Grants; Transit Research; Technical Assistance and Training; Public Transportation Emergency Relief. Amounts in these accounts total $4.2 billion in discretionary budget authority for 2015. The baseline levels for these amounts are what constitute the discretionary cap adjustment noted in the OMB Sequestration Preview Report to the President and Congress for Fiscal Year 2016. Note that in a number of cases, activities captured in these accounts are requested under a new account in the Administration’s reauthorization proposal. For example, activities under the two existing Amtrak accounts are requested as part of the Federal Railroad Administration’s new Current Passenger Rail Service account. In those instances, the PAYGO impact of the Administration’s reauthorization proposal must be calculated at the aggregate level rather than the individual account level (i.e., the change between the reclassified baseline amounts in the existing General Fund accounts and the proposed levels in the successor account). Outyear Assumptions.—Beyond the reauthorization proposal, the Budget assumes that contract authority will return to baseline levels, as calculated from 2015, for 2022 and thereafter. This reflects that while the Administration has identified savings to offset the presently-pending reauthorization, policy-makers will need to develop alternative fiscally responsible solutions for 2022 and beyond. Transportation Trust Fund Mechanics.—As discussed earlier, the Budget proposes a successor to the Highway Trust Fund, the Transportation Trust Fund, containing four accounts: • The Highway Account subsumes the highway and highway safety activities currently in the Highway Trust Fund plus the NHTSA Operations and Research account, currently a General Fund account. • The Mass Transit Account subsumes the transit ac- tivities currently in the Highway Trust Fund plus five FTA accounts currently financed by the General Fund: Capital Investment Grants; Transit Research; and Technical Assistance and Training; Public 136 ANALYTICAL PERSPECTIVES Transportation Emergency Relief; and Administrative Expenses. with those budgetary resources, including prior year outlays from the HTF. • The Rail Account focuses on developing high-perfor- • Lines five and six calculate the mandatory budget • The • Line mance rail and also subsumes activities currently financed from the General Fund: Capital Assistance for High-Speed Rail Corridors; Capital and Debt service grants to AMTRAK; and Operating Grants to AMTRAK. Multimodal Account includes a multimodal, competitive program that the Department currently operates: National Infrastructure Investments (TIGER) grants. The goal of a broader Trust Fund is to allow policy-makers to review surface transportation policy and spending in a more comprehensive way. Offsets.—The 2016 Budget fully pays for the 20162021 reauthorization proposal by applying transition revenue from pro-growth business tax reform to cover outlays associated with: 1) new spending associated with the Administration’s six-year surface transportation reauthorization proposal; and 2) shortfalls between revenue and spending that exist under current law for the same time period. As discussed above, the Budget proposes to make surface transportation spending subject to PAYGO rules, and specific savings are identified to cover the PAYGO costs. Because the Budget retains the Trust Fund concept, fully-offset transfers from the General Fund to the TTF are reflected to maintain TTF solvency through the reauthorization period and to cover outlays generated from the six-year proposal but projected to occur beyond the reauthorization period. Offsets from business tax reform are only used to cover the structural deficit for six years and all new outlays associated with the reauthorization proposal for the 10-year window. Since the Administration’s proposed offset is finite, after the reauthorization period spending levels drop back to baseline levels calculated from 2015 and spending again outstrips revenue. Explanation of the Administration’s Proposal and PAYGO Treatment.—Table 11-4 details the Administration’s surface transportation reauthorization proposal. • Line one illustrates the proposed contract authority levels for accounts under the TTF, including accounts presently reflected as General Fund budget authority, HTF-funded accounts (hybrid treatment), and new activities. Line two illustrates outlay estimates associated with that contract authority, as well as prior-year outlays from the HTF. • Line three illustrates the baseline level of budgetary resources for all activities proposed under the TTF (including enacted appropriations and programs authorized under MAP-21). For comparability, those budgetary resources that were previously classified as discretionary are displayed here as mandatory. Line four illustrates the outlay estimates associated authority and outlay changes—the increases over the baseline levels. As previously noted and indicated in this line, after this reauthorization period, spending falls back to baseline levels. Line six is the amount that would be subject to PAYGO. seven indicates the assumed deposits to the Transportation Trust Fund necessary to liquidate outlays. That figure is made up of two components: estimates associated with current law receipts (line eight) to the Highway Trust Fund and offset transfers needed to maintain Trust Fund solvency during the six-year reauthorization and cover outlays from this reauthorization that are expected to occur after 2021 (line nine). • Line 10 illustrates the net cash flow to the TTF assumed in each year (revenues minus outlays). • Line eleven illustrates the notional cash balances of the TTF over the ten-year period. As mentioned above, offsets from transition revenue from business tax reform only cover the structural deficit for six years and new outlays associated with the reauthorization proposal; since the Administration’s proposed offset is finite, after the reauthorization period spending levels drop back to baseline levels calculated from 2015 and structural deficits return. In order to ensure the successful transition of these programs to a fiscally responsible framework, the Administration’s proposal—or any proposal to make surface transportation programs subject to PAYGO—must consider two initial adjustments. First, congressional scorekeeping must accommodate the initial shift from discretionary to mandatory outlays. As illustrated by line four, the activities that the administration proposes to incorporate in the TTF as mandatory outlays would generate discretionary outlays under current law totaling an estimated $347 billion over six years. If those outlays are reclassified, they should not be added to the PAYGO cost of any legislation by virtue of the fact that they are new to the mandatory side of the budget. Rather, the mandatory baseline should be adjusted to include those outlays that would occur under current law—as the 2016 Budget does—and calculate any changes from that baseline. Without this initial accommodation, scorekeeping rules would overstate the cost of legislation intended to reform the hybrid system. Second, to reflect the true cost of fully funding the surface transportation program for the six-year reauthorization period, any offset should be required to cover: 1) the difference between current law revenues and baseline HTF outlays ($85 billion, including a $5 billion cash management cushion for the reauthorization period) to restore solvency to the existing HTF, 2) any reclassification of the inflated baseline activities currently financed by the General Fund ($27 billion in the Administration’s 137 11. BUDGET PROCESS Table 11–4. FUNDING, SPENDING, REVENUES, AND DEPOSITS ASSOCIATED WITH THE TRANSPORTATION TRUST FUND 1 (Dollars in billions) 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 6-year 10-year 1. Funding for the Transportation Trust Fund (Contract Authority) ���� 77 78 79 80 81 82 63 64 65 67 478 737 2. Estimated outlays ������������������������������������������������������������������������� 60 68 73 75 77 79 77 72 70 69 433 720 3. Baseline funding (Contract Authority and Budget Authority) �������� 56 57 58 59 60 62 63 64 65 67 352 610 4. Estimated baseline outlays 2 ��������������������������������������������������������� 55 56 58 58 59 60 61 63 64 65 347 599 5. Proposed funding increase ����������������������������������������������������������� 21 21 21 21 21 21 ......... ......... ......... ......... 126 126 6. Estimated outlay increase ������������������������������������������������������������� 5 11 15 17 18 19 16 10 6 4 85 121 7. Deposits into the Transportation Trust Fund ��������������������������������� 79 79 80 80 80 80 40 40 40 40 477 637 8. Highway Trust Fund revenues (at current rates) ��������������������������� 39 40 40 40 40 40 40 40 40 40 238 399 9. Corporate Tax Proposal Savings �������������������������������������������������� 40 40 40 40 40 40 ......... ......... ......... ......... 238 238 10. Transportation Trust Fund annual cash flow (net) ����������������������� 19 11 7 4 2 1 (37) (32) (30) (29) 44 (83) 11. Transportation Trust Fund end-of-year balances ������������������������ 19 30 37 41 43 44 7 (25) (54) (83) 214 60 1 This table includes $5 billion in outlays from the GROW AMERICA proposal that were erroneously omitted from the totals in other parts of this Budget. 2 Note that the FY16 proposal would incorporate into the Transportation Trust Fund all new spending from accounts that would previously have been considered discretionary (e.g. the Federal Transit Administration’s Capital Investment Grants account), and future outlays from these accounts will now be paid from the Transportation Trust Fund. FY15 enacted levels for these accounts total $4.2 billion. proposal, of which $21 billion outlays over the first six years), and 3) all program increases relative to the inflated baseline ($126 billion). While PAYGO rules only require an offset to spending above the BBEDCA baseline, the Administration believes that for both scoring purposes and Trust Fund solvency the offset should cover both proposed spending increases and the gap between baseline spending and current law revenue. As discussed earlier, the outyears beyond the reauthorization, 2022-2025, reflect lower surface transportation spending at baseline levels calculated from 2014 to illustrate that after the current reauthorization, the structural deficit returns and the Transportation Trust Fund faces insolvency. As a matter of policy, the Administration believes that the spending levels under its reauthorization proposal should be the starting point for subsequent authorizations, but policy makers will again have to confront the gap between spending and revenue. Pell Grants The Pell Grant program includes features that make it unlike other discretionary programs including that Pell Grants are awarded to all applicants who meet income and other eligibility criteria. From the start of the Great Recession through 2011, when many Americans returned to school to improve their skills while their own job prospects were not strong, the number of students receiving Pell Grants increased by 3.8 million. This increase in participation, coupled with greater average financial need, resulted in a significant rise in Pell program costs. Since this peak, the number of Pell Grant recipients has slowly decreased, and program costs that were once growing have started to decline. This section provides some background on the unique nature of the Pell Grant program and explains how the Budget accommodates these changes in discretionary costs. A later section of this chapter discusses the treatment of Pell Grants in the adjusted baseline. Under current law, the Pell Grant program has several notable features: • The Pell Grant program acts like an entitlement program, such as the Supplemental Nutrition Assistance Program or Supplemental Security Income, in which everyone who meets specific eligibility requirements and applies for the program receives a benefit. As a result, the size of the individual award and the number of eligible applicants together determine the cost in any given year. Specifically, Pell Grant costs depend on the maximum award set in statute, the number of eligible applicants, and the award for which those applicants are eligible based on their needs and costs of attendance. The maximum Pell award for the academic year 2014-2015 is $5,730, of which $4,860 will be established in the annual appropriations act and the remaining $870 is provided automatically by the College Cost Reduction and Access Act (CCRAA). Under the CCRAA, the amount needed to index the Pell Grant for inflation is provided through the mandatory funds through the 2017-18 award year. • The cost of each Pell Grant is funded by discretion- ary budget authority provided in annual appropriations acts, along with mandatory budget authority provided not only by the CCRAA, and the BCA, but also by amendments to the Higher Education Act of 1965 contained in the 2011 and 2012 appropriations acts. There is no programmatic difference between the mandatory and discretionary funding. • If valid applicants are more numerous than expected, or if these applicants are eligible for higher awards than anticipated, the Pell Grant program will cost more than the appropriations provided. If the costs during one academic year are higher than provided for in that year’s appropriation, the Department of 138 ANALYTICAL PERSPECTIVES Education funds the extra costs with the subsequent year’s appropriation.3 • To prevent deliberate underfunding of Pell costs, in 2006 the congressional and Executive Branch scorekeepers agreed to a special scorekeeping rule for Pell. Under this rule, the annual appropriations bill is charged with the full estimated cost of the Pell Grant program for the budget year, plus or minus any cumulative shortfalls or surpluses from prior years. This scorekeeping rule was adopted by the Congress as §406(b) of the Concurrent Resolution on the Budget for Fiscal Year 2006 (H. Con. Res. 95, 109th Congress). Given the nature of the program, it is reasonable to consider Pell Grants an individual entitlement for purposes of budget analysis and enforcement, and in the 2010 and 2011 Budgets, the Administration requested that Pell Grants be converted into a mandatory program. The Congress has chosen to continue treating the portion funded in annual appropriations acts as discretionary, counting that budget authority for Pell Grants against the discretionary spending caps pursuant to section 251 of BBEDCA, and appropriations allocations established annually under §302 of the Congressional Budget Act. The 2016 Budget maintains this discretionary treatment. The total cost of Pell Grants can fluctuate from year to year, even with no change in the maximum Pell Grant award, because of changes in enrollment, college costs, and family resources. In addition, since 2009 the program has relied on temporary mandatory or emergency appropriations to fund the program well above the level that could have been provided as a practical matter by the regular discretionary appropriation. The 2016 Budget expects program costs to exceed the discretionary level in 2018, when those extra mandatory funds in large part run out. In prior years the Budget expected the temporary funding to run out before 2018. Pell program costs and student enrollment have both declined since a 2010 peak, however, and the funding has lasted longer than anticipated. The Budget now projects a 10 year funding shortfall of $29.7 billion, $13.9 billion less than the 10 year forecast from 2015 (see Table 11-5). These estimates have changed significantly from year to year, which illustrates remaining uncertainty about the amount of the Pell shortfall, and the year in which the shortfall will reemerge. Administration policy is to ensure that students have access to the maximum Pell award, and that the Pell 3 This ability to “borrow” from a subsequent appropriation is unique to the Pell Grant program. It comes about for two reasons. First, like many education programs, the Pell Grant program is “forward-funded”—the budget authority enacted in the fall of one year is intended for the subsequent academic year, which begins in the following July. Second, even though the amount of funding is predicated on the expected cost of the program during one academic year, the money is made legally available for the full 24-month period covering the current fiscal year and the subsequent fiscal year. This means that, if the funding for an academic year proves inadequate, the following year’s appropriation will legally be available to cover the funding shortage for the first academic year. The 2016 appropriation, for instance, will support the 2016-2017 academic year beginning in July 2016 but will become available in October 2015 and can therefore help cover any shortages that may arise in funding for the 2015-2016 academic year. grant keeps up with inflation. As in prior years, the Budget provides sufficient resources to fully fund Pell grants in the award years covered by the budget year, and the subsequent year. The Budget provides $22.5 billion in discretionary budget authority in 2016, the same level of discretionary budget authority provided in 2015. Levelfunding Pell in 2016 provides $3.9 billion more than is needed to fully fund the program in the 2016-17 award year, because of the mandatory funding provided in prior legislation that remains available. Funding the Pell Grant program above the level needed to fund grants in 2016 is a first step in addressing the funding cliff in 2018. Cutting the budget authority in Pell to only the level needed to fund the program in 2016 would have a doubly detrimental impact on the 2018 cliff; it would reduce the budget authority carried forward from 2016, while simultaneously reducing the discretionary base funding level in the program. Since 2013, the Pell maximum award has increased annually to account for inflation. Under current law, these adjustments are set to expire in 2017, and students will no longer benefit from annual aid increases designed to offset rises in student costs. The Budget proposes to provide mandatory funding to continue indexing Pell for inflation beyond 2017. It also proposes to expand and reform the Perkins loan program and to make legislative changes to the Pay As You Earn plan that would complement administrative actions announced last year that extend Pay As You Earn to all borrowers. The Budget would devote the savings from these proposals toward indexing Pell. In addition, the Budget proposes to make several student aid reforms that impact Pell Grant program costs: • First, it will strengthen academic progress requirements in the Pell Grant program to encourage students to complete their studies on time. • Second, the Budget will limit the receipt of additional Pell disbursements by recipients who are not advancing academically. • Third, it proposes to include other federal student aid programs, such as the Department of Defense Tuition Assistance and GI Bill Benefits, in the 90 percent portion of the 90/10 calculation. Currently, for institutions participating in federal student aid programs, no more than 90% of revenue can come from federal student loans and grants. • Fourth, the Budget would move Iraq and Afghani- stan Service Grants to the Pell Grant program to ensure our veterans’ children receive the full, nonsequestered Pell award for which they are eligible. • Fifth, the Administration also supports the simpli- fication of the Free Application for Federal Student Aid (FAFSA). The Budget proposes eliminating questions related to assets, non-IRS untaxed income, non-IRS income exclusions, and other income adjustments, which have been shown to confuse students. To prevent resulting decreases in Pell Grant awards, the Budget also proposes a $600 reduction in Expected Family Contributions. 139 11. BUDGET PROCESS Table 11–5. EFFECT OF STUDENT AID PROPOSALS ON DISCRETIONARY PELL FUNDING NEEDS (Dollars in billions) 2015 Full Funding, Discretionary Pell ��������������������������������������������������� Mandatory Funding Previously Provided ������������������������������������� Discretionary Need ���������������������������������������������������������������������� Fund Pell at 2016 Full Funding Estimate ������������������������������������� Discretionary Funding Gap ���������������������������������������������������������� Fund Pell at 2015 Enacted Level ������������������������������������������������� Remaining Funding Gap �������������������������������������������������������������� Carry Forward 2015 BA Request to Help Fund 2016 �������������������� Remaining Funding Gap �������������������������������������������������������������� 22.5 22.5 2016 20.5 ......... 20.5 20.5 ......... 2.0 2.0 (2.0) ......... 2017 26.0 (1.6) 24.4 20.5 (3.9) 2.0 (1.9) 2.0 0.0 2018 26.2 (1.4) 24.9 20.5 (4.3) 2.0 (2.4) ......... (2.4) 2019 26.7 (1.4) 25.3 20.5 (4.8) 2.0 (2.8) ......... (2.8) 2020 26.9 (1.4) 25.5 20.5 (5.0) 2.0 (3.0) ......... (3.0) 2021 27.3 (1.1) 26.1 20.5 (5.6) 2.0 (3.6) ......... (3.6) 2022 27.5 (1.1) 26.4 20.5 (5.9) 2.0 (3.9) ......... (3.9) 2023 2024 27.9 (1.1) 26.7 20.5 (6.2) 2.0 (4.3) ......... (4.3) 28.3 (1.1) 27.1 20.5 (6.6) 2.0 (4.6) ......... (4.6) 2025 28.7 (1.1) 27.5 20.5 (7.0) 2.0 (5.0) ......... (5.0) 2016– 2025 (49.3) (29.7) (29.7) Student Aid Proposals Require Satisfactory Academic Progress �������������������������������� 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 1.1 Limit Pell Disbursements to Those Not Advancing Academically ���������������������������������������������������������������������� 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 Include Vet & DoD Benefits in 90/10 Rule ������������������������������� ......... ......... 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 Move Iraq Afghanistan Service Grants to Pell ������������������������� (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) (0.0) Simplify the FAFSA ������������������������������������������������������������������ 0.0 0.0 (0.0) (0.0) (0.1) (0.1) (0.2) (0.2) (0.2) (0.2) (1.1) Net Changes to Reduce Pell Costs* �������������������������������������������� 0.2 0.2 0.1 0.1 0.1 0.1 (0.0) (0.0) (0.1) (0.1) 0.5 Remaining Funding Surplus or Gap �������������������������������������������� 0.2 0.2 (2.2) (2.7) (3.0) (3.6) (3.9) (4.3) (4.7) (5.1) (29.1) *Moving Iraq Afghanistan Service Grants and adjusting aid classifications for 90/10 rule compliance generates $72 million in mandatory savings over 10 years. Most of these savings come in later years. These savings can be appropriated toward paying for the discretionary portion of Pell and is included in the calculated $0.5 billion in discretionary savings over ten years. Together, these student aid reforms reduce future discretionary Pell program costs by $0.5 billion over 10 years (see Table 11-5). Postal Service Reforms The Administration proposes reform of the Postal Service, necessitated by the serious financial condition of the Postal Service Fund. The policy proposals are discussed in the Postal Service and Office of Personnel Management sections of the Appendix. As a matter of law, the Postal Service is designated as an off-budget independent establishment of the Executive Branch. This designation and budgetary treatment was most recently mandated in 1989, in part to reflect the policy agreement that the Postal Service should pay for its own costs through its own revenues and should operate more like an independent business entity. Statutory requirements on Postal Service expenses and restrictions that impede the Postal Service’s ability to adapt to the ongoing evolution to paperless written communications have made this goal increasingly difficult to achieve. To address its current financial and structural challenges, the Administration proposes specific financial relief and reform measures to ensure that USPS can continue to operate in the short term and work toward viability in the long run. The Administration also proposes PAYGO scoring of Postal legislation on a unified budget basis to better reflect how and when such legislation will affect overall deficits and debt. That is, for the purposes of entering amounts on the statutory PAYGO scorecards, the applicable estimates should include both the off-budget and the on-budget costs and savings produced by the legisla- tion. This scorekeeping change would be accomplished by a provision contained within Postal reform legislation. Budgetary Treatment of IMF Quota In 2010, G-20 Leaders and the International Monetary Fund (IMF) membership decided on a set of quota and governance reforms designed to strengthen the IMF’s critical role in the international system. To implement the reforms, the Budget proposes an increase to the U.S. quota and an equivalent rollback in U.S. participation in the New Arrangements to Borrow (NAB), with no net change in overall U.S. financial participation in the IMF. As explained below, the budgetary treatment of the U.S. participation in the IMF has changed over time to address jurisdictional and other political exigencies, most recently in 2009, which most accurately reflects the nature of U.S. participation in the IMF. The Administration would prefer to return to the pre-2009 budgetary treatment. However, recognizing the Congress’ desire to show a financial cost for the IMF, as explained below, the Budget proposes to begin estimating the transactions on a present value basis. History of Budgetary Treatment.—The United States participates in the IMF through a quota subscription, denominated in Special Drawing Rights (SDRs). Quotas are the main metric used by the Fund to assign voting shares, and to determine the amount of countries’ international reserves counted towards the IMF’s general resources and access to IMF financing. The United States also participates in the NAB, which is a standing arrangement among certain IMF members to supplement IMF quota resources if necessary to forestall or cope with an impairment of the international monetary system or to 140 deal with an exceptional situation that poses a threat to the stability of the system. Beginning with the establishment of the IMF through 1980, IMF quota increases were treated as an exchange of monetary assets, similar to purchases of gold and to U.S. deposits in commercial bank accounts. When the United States transfers dollars or other reserve assets to the IMF under the U.S. quota subscription, the United States receives an equal, offsetting, and interest-bearing claim on the IMF, which is reflected as an increase in U.S. international monetary reserves. Because such transactions neither increase nor decrease the Government’s assets or obligations, they were not recorded as budget authority or outlays in the Federal budget, a treatment that was affirmed by the President’s Commission on Budget Concepts. 4 As a result of a compromise reached in 1980 between the Administration and the Appropriations Committees in order to allow Appropriators to have jurisdiction over IMF quota increases, appropriations for IMF increases were recorded as budget authority, reflecting the appropriations language, but no outlays were recorded, reflecting the principle that these transactions are exchanges of equivalent monetary assets. 5 The same scoring was applied to the NAB when it was established in 1998. To accommodate the relatively large and infrequent appropriations for these purposes, the budget process allowed for adjustments to the limits on discretionary spending equal to these appropriations. For example, OMB’s final sequestration report for 1993 included a $12.3 billion adjustment to the budget authority limit on discretionary international spending, which was a 57 percent increase to the $21.5 billion limit. 6 An amount this large clearly could not be accommodated within a limit on appropriations for annually-recurring expenses. This scoring agreement remained in place until 2009, when the President’s Budget proposed to return to the pre1980 practice of recording IMF quota increases solely as a means of financing, with no impact on budget authority or outlays. The Congress did not accept the proposed scoring change. Instead, the Supplemental Appropriations Act of 2009 (Public Law 111-32) directed that the 2009 appropriation to increase the U.S. participation in the IMF be scored in accordance with the Federal Credit Reform Act of 1990 (FCRA), including an additional adjustment to the discount rate for market risk. 7 Given that the 2016 proposal rolls back part of the 2009 appropriation, it is understandable that the scoring might entail estimating subsidy costs. However, the application 4 Report of the President’s Commission on Budget Concepts, October 1967, p. 31. The Report notes that the IMF “is more like a bank in which funds are deposited and from which funds in the form of needed foreign currencies can be withdrawn.” 5 However, the budget records actual interest earnings received from the IMF and changes in the exchange rate of the dollar relative to Special Drawing Rights (in which the U.S. quota is denominated) as receipts or outlays. 6 OMB Final Sequestration Report to the President and Congress for Fiscal Year 1993, Office of Management and Budget, October 23, 1992, p.3. 7 The fair value adjustment to the discount rate for market risks is intended to capture private sector pricing for comparable instruments. ANALYTICAL PERSPECTIVES of FCRA with a market risk adjustment to the quota appropriation is not the best method for measuring cost. The U.S. reserve position in the IMF consists of U.S. international monetary reserves that are readily available to meet a U.S. balance-of-payments financing need. Since its inception nearly seventy years ago, the IMF has never defaulted on any U.S. reserve claims on the IMF, even after the worst financial crisis since the Great Depression. The IMF is also recognized by its entire membership as the preferred creditor, with the unique ability to set conditions to assure repayment. U.S. reserve claims on the IMF are backed by the IMF’s sound financial management and exceptionally strong balance sheet with reserves and gold holdings worth more than total credit outstanding. In addition, the United States earns interest on its reserve position in the IMF. 8 For all of these reasons, the risk of loss—and consequently the FCRA cost to Government—is negligible. Treating the U.S. quota or participation in the NAB as a loan is not likely to lead to better decisions by the President and Congress about the U.S. participation in the IMF or by program officials who manage the U.S. participation. Instead, FCRA imposes a number of operational requirements that are appropriate for managing a loan portfolio but have little relevance to the IMF quota, such as treating each cash deposit into the IMF as a separate risk category that must be estimated and tracked in perpetuity as long as the U.S. maintains its membership in the IMF. Under FCRA, the cost of a credit program equals the present value cost to Government—setting loans and loan guarantees on a comparable basis to each other and other forms of spending, and thereby improving the allocation of resources. In contrast, fair value cost estimates reflect market pricing and include costs that are not relevant to taxpayers—overstating the cost to Government and introducing a bias relative to other forms of Federal spending. Beyond conceptual concerns, there are practical ones that call into question the treatment’s usefulness in decision making. Estimating the adjustment to the interest rate requires making assumptions about how the market might price different characteristics. The fair value estimate is particularly distorting for IMF transactions, as there is no private market equivalent to inform or validate such adjustments—introducing more noise than valuable information to inform allocation decisions. Proposed Budgetary Treatment.—The 2014 Budget proposed to return to the pre-2009 scoring arrangement, with budget authority reflecting the dollar amount of the change in the size of the U.S. quota to the IMF authorized by the Congress and zero outlays, which recognized that the transaction is an exchange of equivalent monetary 8 When a quota increase occurs, 75 percent is held in a Department of Treasury letter of credit (LOC) and the remaining 25 percent is deposited with the IMF in any combination of yen, euros, British pounds, U.S. dollars, or SDRs. Funds held in the reserve tranche, which are denominated in SDRs, are part of the U.S. international reserves and earn interest paid to Treasury. The amount held in the reserve tranche relative to the LOC changes over time, rising as the IMF draws upon the U.S. quota temporarily for loans to other IMF members and falling as the IMF returns the funds. 141 11. BUDGET PROCESS assets. Recognizing the connection between the 2010 agreement and the FY 2009 Supplemental Appropriations Act and the desire to show budget authority and outlay costs relative to the scoring of that Act, the 2016 Budget, like the 2015 Budget, proposes to estimate costs on a present value basis, using Treasury rates to discount the cash flows. This will result in the restatement of the transactions from the FY 2009 supplemental on this basis. The methods for estimating present value would be similar to the methods used under FCRA, but FCRA requirements for program and financing accounts, cohort-accounting, and reestimates would not apply. Under this proposal, the Budget would record budget authority and outlays equal to the estimated present value in the year that the U.S. contribution is enacted. Cash deposits into the IMF account at the Federal Reserve Bank of New York would be treated as a means of financing, similar to the treatment of other monetary assets. Interest earnings and realized gains and losses due to currency fluctuations would continue to be recorded in the budget on a cash basis, as they are for quota increases authorized prior to 2009. Revisions to the U.S. position at the NAB would receive the same treatment. Additional Reclassification Proposals Contract Support Costs.—The Budget proposes a reclassification of the Bureau of Indian Affairs’ (BIA) and Indian Health Service’s (IHS) Contract Support Costs from a discretionary to a mandatory appropriation. The Contract Support Costs proposal would reduce the discretionary spending limits in section 251(c) of BBEDCA beginning in 2017, to offset the cost of shifting the base funding from discretionary to mandatory. In addition, the mandatory appropriation includes a three-year program expansion to fully fund Contract Support Costs as well as a new investment to ensure program integrity. Through a reauthorization process, updated Contract Support Costs estimates will be provided to set funding levels. Consider Reclassifying HUD Negative Subsidies.—For negative subsidy credit programs, the present value of fees, loan repayments, and other income to the Government exceed payments by the Government over the life of the loan and is recorded in the Budget as offsetting receipts. For HUD negative subsidy programs, the discretionary offsetting receipts reduce against the overall amount of budget authority that is scored against the discretionary caps. While it is reasonable to classify these negative subsidies as discretionary, significant volatility in the amounts and differences between OMB’s estimates and CBO’s estimates for HUD’s negative subsidy programs introduces uncertainty in the appropriations process. Over the past 5 years, the budget year estimates for total HUD receipts have ranged from less than $1 billion to more than $14 billion, and differences between OMB’s and CBO’s estimates have ranged from -$0.9 billion to over $4 billion. Furthermore, the classification has changed more than once over the last 20 years. The Administration would like to work with the Congress to examine whether reclassifying HUD negative subsidies as mandatory would be more appropriate. Expedited Rescission The Administration continues to support enactment of the President’s proposal for expedited rescission, transmitted May 24, 2010. That legislation would create an important tool for reducing unneeded funding. In short, the bill would provide the President with additional authority to propose a package of rescissions that would then receive expedited consideration in the Congress and a guaranteed up-or-down vote. The proposal is crafted in a way that preserves the constitutional balance of power between the President and the Congress while providing the President with important, but limited, powers that would allow the President and the Congress to work together more effectively to eliminate unnecessary funding that could be deployed more effectively in other areas. II. STATUTORY PAYGO The Statutory Pay-As-You-Go Act of 2010 (PAYGO, or “the Act”) was enacted on February 12, 2010. The Act strengthens the rules of budget discipline, which is a key priority for the Administration. Drawing upon the PAYGO provisions enacted as part of the Budget Enforcement Act, the Act requires that, subject to specific exceptions, all legislation enacted during each session of the Congress changing taxes or mandatory expenditures and collections not increase projected deficits. Mandatory spending encompasses any spending except that controlled by the annual appropriations process.9 The Act established 5- and 10-year scorecards to record the budgetary effects of legislation; these scorecards are 9 Mandatory spending is termed direct spending in the PAYGO Act. The term mandatory encompasses entitlement programs, e.g., Medicare and Medicaid, and any funding not controlled by annual appropriations bills, such as the automatic availability of immigration examination fees to the Department of Homeland Security. maintained by OMB and are published on the OMB web site (http://www.whitehouse.gov/omb/paygo_default). The Act also established special scorekeeping rules that affect whether all estimated budgetary effects of PAYGO bills are entered on the scorecards. Off-budget programs and provisions designated by the Congress in law as emergencies are not included. As originally in force, PAYGO also provided exemptions for the costs of extending certain policies that were already in place, but that were scheduled to expire, such as the costs of extending tax cuts enacted in 2001 and 2003, and the costs of extending relief from scheduled reductions in Medicare physician payments. The authority for these exemptions, known as “current policy adjustments,” expired as of December 31, 2011. In addition to the exemptions in the PAYGO Act itself, Congress has enacted laws affecting revenues or direct spending with a provision directing that the budgetary 142 ANALYTICAL PERSPECTIVES effects of all or part of the law be held off of the PAYGO scorecards. In the most recent Congressional session, for example, five pieces of legislation were enacted with such provisions. For more information, see the 2014 Annual PAYGO Report on the OMB web site (http://www.whitehouse.gov/omb/paygo_default). The requirement of budget neutrality is enforced by an accompanying requirement of automatic across-the-board cuts in selected mandatory programs if enacted legislation, taken as a whole, does not meet that standard. If the Congress adjourns at the end of a session with net costs—that is, more costs than savings—in the budgetyear column of either the 5- or 10-year scorecard, OMB is required to prepare, and the President is required to issue, a sequestration order implementing across-the-board cuts to non-exempt mandatory programs in an amount sufficient to offset the net costs on the PAYGO scorecards. Exemptions from a PAYGO sequestration order generally include Social Security; most unemployment benefits; veterans’ benefits; interest on the debt; Federal retirement; and the low-income entitlements such as Medicaid, the Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps), and SSI.10 The major remaining mandatory programs, which are subject to sequestration, include most Medicare payments (limited to a maximum sequestration of 4 percent), farm price supports, vocational rehabilitation basic State grants, mineral leasing payments to States, the Social Services Block Grant, and many smaller programs. The list of exempt programs and the special sequestration rules for certain programs are contained in sections 255 and 256 of BBEDCA, and the exemptions and special rules generally apply to the following sequestrations: the sequestration pursuant to the PAYGO Act, the sequestration to eliminate excess spending above discretionary caps specified in section 251 of BBEDCA, and the sequestration currently required by the BCA as a result of the failure of the Joint Committee process. 10 Although many programs are exempt from sequestration, those programs are rarely exempt from PAYGO. For example, a bill to increase veterans’ disability benefits or Medicaid benefits must be offset, even though a sequestration, if it is required, will not reduce those benefits. Even though sequestration is calculated to fully offset any net costs on the PAYGO scorecard, it historically has acted as a successful deterrent to enacting legislation with net costs, and so, has not been implemented. During the 1990s, under the first statutory PAYGO law, the sequestration rules and exemptions were almost identical to those in the current Act. The Congress complied with PAYGO throughout that decade. As a result, no PAYGO sequestration ever occurred. As was the case during 1990s PAYGO, sequestration has not been required during the five Congressional sessions since the PAYGO Act reinstated the statutory PAYGO requirement. For each of those sessions, OMB’s annual PAYGO reports showed net savings in the budget year column of both the 5- and 10-year scorecards. For the second session of the 113th Congress, the most recent session, enacted legislation added net savings of $626 million in each year of the 5-year scorecard and $1,521 million in each year of the 10-year scorecard. Balances in 2015, the budget year column, of net savings from prior sessions of the Congress on each scorecard created total net savings of $10,595 million on the 5-year scorecard and $9,730 million on the 10-year scorecard, so no sequestration was required. As of the end of the most recent session, the 5-year scorecard showed net costs of $440 million in the 2016 column. Absent legislation to address these net costs, a PAYGO sequestration order would be required after the end of the 2015 Congressional session.11 Administrative PAYGO The Administration continues to review potential administrative actions by Executive Branch agencies affecting entitlement programs, as stated in a memorandum issued on May 23, 2005, by the Director of the Office of Management and Budget. This effectively establishes a PAYGO requirement for administrative actions involving mandatory spending programs. Exceptions to this requirement are only provided in extraordinary or compelling circumstances.12 11 OMB’s annual PAYGO reports and other explanatory material about the PAYGO Act are available at www.whitehouse.gov/omb/paygo_default. 12 For a review of the application of Administrative PAYGO, see USDA’s Application of Administrative PAYGO to Its Mandatory Spending Programs, GAO, October 31, 2011, GAO-11-921R. III. IMPROVED BASELINE AND BUDGET PRESENTATION Improved Definition of Baseline The Administration suggests changes to the concepts used in formulating baseline projections to make the resulting product more useful to the public and to policymakers: extending certain major expiring tax and mandatory provisions, using a more meaningful method for reflecting future disaster costs, and reflecting the cost of fully funding the Pell Grant program. In addition, as explained above, the proposal to provide mandatory funding for a surface transportation and rail authorization proposal involves adjusting presentations, including baselines, so that corresponding funding and spending levels will be displayed on a comparable basis. The Administration also makes modifications to the baseline to reflect the discretionary caps on budget authority enacted in BBEDCA, including the cap adjustments permitted by the Act for Overseas Contingency Operations (OCO) inflated at the inflation rates in the baseline, and to reflect the Joint Committee enforcement procedures. For years, the baseline used by the Congress has followed the definition contained in section 257 of BBEDCA. However, the BBEDCA baseline does not accurately reflect a continuation of current policy. In each of its Budgets, this Administration has built its budget propos- 11. BUDGET PROCESS als starting from a baseline that adjusts the BBEDCA baseline to better represent the thrust of current policy in certain major cases, and recommends that the Congress, the Congressional Budget Office, and the public use such a baseline in their own analyses as well. The deficit impacts of the adjustments to the BBEDCA baseline are summarized in Summary Table S-8 of the Budget. The adjustments are described below. Further detail about the adjusted baseline is provided in Chapter 25, “Current Services Estimates,” in this volume. While the adjusted baseline provides a more realistic basis for analyzing budgets, it is not intended to replace the BBEDCA baseline with respect to mandatory programs and revenues, either for legal purposes or to alter the application of the Statutory PAYGO Act of 2010. Specifically, the costs or savings from legislation affecting mandatory spending or revenues are measured relative to the BBEDCA baseline for purpose of entries on the PAYGO scorecards, discussed earlier in the chapter. Adjustments to Reflect Certain Expiring Provisions Affecting Middle Class Tax Credits.—In recent years, the Congress has repeatedly extended provisions of the tax code that have a large deficit impact or signaled its intention that a provision be extended when it enacted the provision for a limited number of years. The Administration’s adjusted baseline assumes permanent extension of the following tax credits provided to individuals and families under the American Recovery and Reinvestment Act of 2009 (ARRA), which were extended through 2017 by the American Taxpayer Relief Act of 2012 (ATRA): increased refundability of the child tax credit, expansions in the earned income tax credit (EITC) for larger families and married taxpayers filing a joint return, and the American opportunity tax credit (AOTC). Adjustments to Reflect Medicare Physician Payment Relief.—As with the tax provisions noted in the previous paragraph, in recent years, the Congress has repeatedly extended relief from scheduled reductions in Medicare physician payment rates that would otherwise take place under the Sustainable Growth Rate (SGR) formula. The Administration’s adjusted baseline assumes permanent extension of current Medicare physician payment rates, as opposed to the large reductions in physician payment rates that would take place under current law. This adjustment is similar, although not identical, to a current policy adjustment previously provided under the PAYGO Act for SGR relief through 2014. Adjustments for Emergency and Disaster Costs.— Because the BBEDCA baseline extends all appropriations already enacted for the year in progress, it can be subject to huge swings as a result of funding enacted as an emergency requirement or as disaster relief funding pursuant to the cap adjustments for these items permitted by section 251(b)(2) of BBEDCA. At times, the BBEDCA baseline could extend large one-time emergency or disaster appropriations for the next 10 years; at other times it might extend very little. The Administration’s baseline includes adjustments to account for these swings. Specifically, the Administration’s adjusted baseline removes the extension of enacted or continuing appro- 143 priations that were designated by the Congress in 2015 as emergency requirements or as disaster relief funding. In addition, the Administration’s adjusted baseline substitutes an allowance for disaster costs in the budget year and future fiscal years. This allowance reflects the fact that the disaster relief cap adjustment has already allowed funding for $5.7 billion in BBEDCA-designated disaster relief in 2015, the Budget is specifically requesting $6.9 billion in 2016 for major disasters, and major natural or man-made disasters may occur in the near future and are likely to occur at some point in subsequent years. Obviously, both the timing and amounts are unknowable in advance. In addition to the inclusion of this entry in the baseline, the Administration includes the same allowance in its Budget. The baseline and Budget figures are not a “reserve fund,” nor are they a request for discretionary budget authority or congressional legislation of any kind. Instead, they are placeholders that represent a meaningful down payment on potential future disaster relief requirements that are not for known needs in the budget year. For more information, see the discussion of disaster relief funding earlier in this chapter in Section I (Budget Reform Proposals) under the heading titled “Disaster Relief Funding.” Including a meaningful down payment for the future costs of potential disaster relief funding makes the budget totals more honest and realistic. Adjustments to Reflect the Full Cost of Existing Pell Grants.—As explained earlier in this chapter, the discretionary portion of the Pell Grant program has attributes that make it unique among programs classified as discretionary: it annually receives both mandatory and discretionary funding but the two types are indistinguishable in purpose or effect; the amount of discretionary funding has little or no effect on the size or cost of the program; and in recognition of this fact, congressional and Executive Branch scorekeepers agreed in 2006 to a special scorekeeping rule under which appropriations acts would be scored as providing the amount of discretionary budget authority estimated to fully fund the cost of Pell Grants in the budget year (which includes covering any shortfalls from prior years), even if the appropriations bill in question provides a lower amount. Under these circumstances, the Administration believes that the BBEDCA baseline, which projects discretionary programs by adjusting current-year budget authority for inflation, is inconsistent with both the reality and the existing budgetary scorekeeping for Pell Grants. Since the special scorekeeping rule charges the Appropriations Committees with the full cost of providing Pell Grants to all eligible applicants plus covering any shortfalls from prior years, the baseline should do the same. This is especially the case because adhering to the BBEDCA baseline level of budget authority for Pell makes no difference to the actual size and cost of the program in the budget year; funding “cuts” or “increases” from such a baseline do not represent actual reductions or increases in costs, at least in the budget year. Therefore, the Administration adjusts the BBEDCA baseline to follow the existing scorekeeping 144 rule, reflecting the full cost of funding the discretionary portion of Pell while covering any prior shortfalls. As described earlier, an estimate of the full cost of Pell in any year depends in part on the size of the maximum award for that year. The current maximum award for the discretionary portion of Pell is $4,860 per student per year. The adjusted baseline assumes that award level will remain constant in nominal terms over the next 10 years. The baseline projection of the discretionary portion of Pell therefore changes from year to year primarily because of estimated changes in the number of valid applicants. Changes in student income and level of tuition can also make a difference in the size of an individual student’s award and therefore the cost of the program. The Administration believes that baselines prepared by the Congressional Budget Office and others would likewise be more realistic and better reflect the congressional scorekeeping rule if they projected the discretionary portion of Pell Grants in this way. This adjustment does not produce a net increase in the amount of discretionary budget authority in the baseline, because total discretionary budget authority remains limited by the BBEDCA caps. Adjustment to Reflect the Anticipated Postal Service Default on Retiree Health Benefit Prefunding.—Under the Postal Accountability and Enhancement Act of 2006 (P.L. 109-435), the United States Postal Service (USPS) is required to make specified annual payments through 2016 to the Postal Service Retiree Health Benefits (RHB) Fund in the Office of Personnel Management. These payments are designed to prefund unfunded liabilities for health costs for future Postal retirees. Starting in 2017, the USPS’s remaining unfunded liability is amortized over a 40-year period. Because of its current financial challenges, the USPS defaulted on four statutory RHB payments due in 2012, 2013, and 2014, totaling $22.4 billion. While the BBEDCA baseline shows USPS making the payments due in 2015 and 2016 as required, the adjusted baseline assumes that these payments will not be made, given the likelihood of continued default. While defaulted payments remain as outstanding statutory liabilities, any default is factored into the 40-year amortization schedule mentioned above. Nuclear Waste Fund The Nuclear Waste Policy Act of 1982 (NWPA) established a broad policy framework for the permanent disposal of used nuclear fuel and high-level radioactive waste derived from nuclear power generation. The NWPA authorized the Government to enter into contracts with reactor operators—the generators and current owners of used nuclear fuel—providing that, in exchange for the payment of fees, the Government would assume responsibility for permanent disposal. The fees were to ensure that the reactor owners and power generators pay the full cost of the disposal of their used nuclear fuel and highlevel radioactive waste. Nuclear Waste Fund Settlements and the Judgment Fund Baseline.—The Federal Government did not meet its contractual obligation to begin accepting used nuclear fuel by 1998. As a result of litigation ANALYTICAL PERSPECTIVES by contract holders, the Government was found in partial breach of contract, and is now liable for damages to some utilities to cover the costs of on-site, at-reactor storage. The cost of the Government’s growing liability for partial breach of contracts with nuclear utilities is paid from the Judgment Fund of the U.S. Government. While payments are extensively reviewed by Department of Energy, and must be authorized by the Attorney General prior to disbursement by the Department of the Treasury, as mandatory spending they are not subject to Office of Management and Budget or Congressional approval. Past payments are included in full in the Budget, but until fiscal year 2014 the Budget has included only a partial estimate of the potential future cost of continued insufficient action. To improve budget projections, the baseline for the Judgment Fund now reflects a more complete estimate of potential future cost of these liabilities. By reflecting a more complete estimate of the liability payments in the baseline, costs over the life of the nuclear waste management and disposal program would eventually be offset by reductions in liabilities as the Government begins to pick up sufficient waste from commercial sites. Nuclear Waste Fee Collections.—On November 19, 2013, the U.S. Court of Appeals for the District of Columbia Circuit sustained a challenge to the Department’s determination of the adequacy of the Nuclear Waste Fund fee, and directed the Department to transmit to the Congress a proposal to reduce the fee to zero. The Department complied and, after a congressional review period, its proposal became effective May 16, 2014. The 2016 Budget assumes no change in the estimates of receipts into the Nuclear Waste Fund from the estimates presented in the Mid-Session Review of the President’s 2015 Budget. These amounts were a placeholder utilizing a probabilistic estimate that assumes that the fee will not remain uncollected indefinitely. Fannie Mae and Freddie Mac The Budget continues to present Fannie Mae and Freddie Mac, the housing Government-Sponsored Enterprises (GSEs) currently in Federal conservatorship, as non-Federal entities. However, Treasury equity investments in the GSEs are recorded as budgetary outlays, and the dividends on those investments are recorded as offsetting receipts. In addition, the budget estimates reflect collections from the 10 basis point increase in GSE guarantee fees that was enacted under the Temporary Payroll Tax Cut Continuation Act of 2011 (P.L. 112-78). The GSEs are discussed in more detail in Chapter 20, “Credit and Insurance.” Fair Value for Credit Programs In recent years, some analysts have argued that Federal direct loan and loan guarantee programs impose costs on taxpayers that are not reflected under the current budgeting rules, such as the risk that assets may not perform as expected, and propose to require that the Budget use “fair value” estimates for these credit programs. Under fair value, comparable market interest rates would be used to discount expected cash flows, 11. BUDGET PROCESS instead of the Federal Government’s cost of borrowing. While fair value may offer some useful insights and inform decision-making in some cases, using fair value for budgetary cost estimates of credit programs raises serious conceptual and implementation problems. Most important, it would compromise the central objective of current budgeting rules for credit, which are designed to put credit program estimates on a comparable basis to other forms of Federal spending and improve the allocation of resources. In addition, many of the factors reflected in fair value pricing are irrelevant or less relevant to taxpayers than to private investors; including these factors in budgetary cost estimates would overstate the cost of credit assistance and introduce a bias relative to other forms of Federal assistance. On top of these and other conceptual issues, implementing fair value may prove extremely costly and introduce inconsistencies in how costs are estimated across programs, reducing the consistency and transparency of the Budget. For a detailed discussion of the conceptual and implementation issues raised by fair value estimates, see the “Credit and Insurance” chapter of the Analytical Perspectives volume of the 2015 Budget. Debt Net of Financial Assets In the Summary Tables included in the main Budget volume, Tables S-1 and S-13 display both debt held by the public and debt held by the public net of financial assets. Borrowing from the public is normally a good approxima- 145 tion of the Federal demand on credit markets. However, it provides an incomplete picture of the financial condition of the Government and under some circumstances may misrepresent the net effect of Federal activity on credit markets. Some transactions that increase the Federal debt also increase the financial assets held by the Government. For example, when the Government lends money to a private firm or individual, the Government acquires a financial asset that provides a stream of future payments of principal and interest, net of the Government’s expected losses on the loan. At the time the loan is made, debt held by the public reflects only Treasury’s borrowing to finance the loan, failing to reflect the value of the loan asset acquired by the Government. Similarly, the estimate of debt held by the public does not reflect estimated liabilities on loan guarantees. In contrast, debt held by the public net of financial assets provides a more accurate measure of the Government’s net financial position by including the value of loans and other financial assets held by the Government. While Federal borrowing reduces the amount of private saving that is available through financial markets for private-sector investment, Federal acquisition of financial assets has the opposite effect—it injects cash into financial markets. Thus, the change in debt net of financial assets can also better indicate the effect of the Federal Government on the financial markets. For further discussion of debt net of financial assets, see Chapter 4, “Federal Borrowing and Debt.” FEDERAL RECEIPTS 147 148 12. GOVERNMENTAL RECEIPTS A simpler, fairer, and more efficient tax system is critical to achieving many of the President’s fiscal and economic goals. At a time when middle-class and working parents remain anxious about how they will meet their families’ needs, the tax system does not do enough to reward hard work, support working families, or create opportunity. After decades of rising income and wealth inequality, the tax system continues to favor unearned over earned income, and a porous capital gains tax system lets the wealthy shelter hundreds of billions of dollars from taxes each year. In a period where an aging population will put increasing pressure on the Federal budget, a wide range of inefficient tax breaks prevents the tax system from raising the level of revenue the Nation needs. And while commerce around the world is increasingly interconnected, an out-of-date, loophole-ridden business tax system puts U.S. companies at a disadvantage relative to their competitors, while also failing to encourage investment in the United States. The tax reform proposals outlined in this chapter address each of these challenges. The Budget would reform and simplify tax incentives that help families afford child care, pay for college, and save for retirement, while expanding tax benefits that support and reward work. It would pay for these changes by reforming the system of capital gains taxation and by imposing a new fee on large, heavily-leveraged financial firms, and it would raise revenue for deficit reduction by curbing high-income tax benefits and closing loopholes. Finally, the Budget includes proposals to broaden the business tax base, strengthen incentives for research and clean energy, grow and create innovative small businesses, and reform the international tax system, while devoting the transition revenue from international tax reform to major investments in infrastructure. Going forward, the President is committed to working with the Congress and other stakeholders to build on the foundation laid by the Budget to create a tax system that is fair, simple, and efficient, one that is right for the 21st century American economy. ESTIMATES OF GOVERNMENTAL RECEIPTS Governmental receipts (on-budget and off-budget) are taxes and other collections from the public that result from the exercise of the Federal Government’s sovereign or governmental powers. The difference between governmental receipts and outlays is the surplus or deficit. The Federal Government also collects income from the public from market-oriented activities. Collections from these activities, which are subtracted from gross outlays, rather than added to taxes and other governmental receipts, are discussed in the next Chapter. Total governmental receipts (hereafter referred to as “receipts”) are estimated to be $3,176.1 billion in 2015, an increase of $154.6 billion or 5.1 percent from 2014. The estimated increase in 2015 is attributable primarily to the growth in personal income and corporate profits as the economy continues to recover from the recession. These sources of income affect payroll taxes and individual and corporation income taxes, the three largest sources of receipts. Receipts in 2015 are estimated to be 17.7 percent of Gross Domestic Product (GDP), which is higher than in 2014, when receipts were 17.5 percent of GDP. Table 12–1. RECEIPTS BY SOURCE—SUMMARY (In billions of dollars) 2014 Actual Estimate 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 Individual income taxes �������������������������������������������� 1,394.6 1,478.1 1,645.6 1,770.3 1,886.9 1,999.8 2,118.4 2,243.7 2,374.2 2,508.3 2,643.3 2,781.2 Corporation income taxes ����������������������������������������� 320.7 341.7 473.3 499.8 503.0 507.2 512.5 493.3 489.7 504.6 518.8 530.4 Social insurance and retirement receipts ����������������� 1,023.5 1,065.0 1,111.9 1,173.3 1,228.6 1,280.4 1,332.2 1,402.6 1,473.1 1,538.5 1,609.1 1,675.5 (On-budget) ���������������������������������������������������������� (287.9) (299.4) (311.0) (329.3) (343.4) (354.4) (367.8) (385.9) (406.4) (424.1) (442.7) (460.9) (Off-budget) ���������������������������������������������������������� (735.6) (765.6) (801.0) (844.0) (885.1) (926.0) (964.4) (1,016.7) (1,066.7) (1,114.4) (1,166.4) (1,214.6) Excise taxes ������������������������������������������������������������� 93.4 95.9 112.1 120.3 122.4 124.3 126.4 128.8 131.4 134.1 137.3 141.2 Estate and gift taxes ������������������������������������������������� 19.3 19.7 21.3 30.5 33.0 35.7 38.5 42.0 45.5 49.5 54.0 58.5 Customs duties ��������������������������������������������������������� 33.9 36.8 38.4 41.9 44.9 47.4 49.8 52.4 55.3 58.2 61.2 64.3 Miscellaneous receipts ��������������������������������������������� 136.1 138.9 120.5 106.9 97.7 101.1 109.4 115.6 121.9 128.7 135.5 140.4 Allowance for immigration reform ����������������������������� ......... ......... 2.0 12.0 28.0 39.0 45.0 47.0 55.0 64.0 77.0 87.0 Total, receipts ������������������������������������������������������ 3,021.5 3,176.1 3,525.2 3,755.0 3,944.4 4,135.0 4,332.2 4,525.2 4,746.0 4,986.0 5,236.2 5,478.5 (On-budget) ���������������������������������������������������� (2,285.9) (2,410.5) (2,724.2) (2,911.0) (3,059.3) (3,209.0) (3,367.8) (3,508.6) (3,679.3) (3,871.6) (4,069.8) (4,263.8) (Off-budget) ���������������������������������������������������� (735.6) (765.6) (801.0) (844.0) (885.1) (926.0) (964.4) (1,016.7) (1,066.7) (1,114.4) (1,166.4) (1,214.6) Total receipts as a percentage of GDP ����������������� 17.5 17.7 18.7 19.1 19.1 19.2 19.3 19.3 19.4 19.5 19.6 19.7 149 150 ANALYTICAL PERSPECTIVES Receipts are estimated to rise to $3,525.2 billion in 2016, an increase of $349.1 billion or 11.0 percent relative to 2015. Receipts are projected to grow at an average annual rate of 5.3 percent between 2016 and 2020, rising to $4,332.2 billion. Receipts are projected to rise to $5,478.5 billion in 2025, growing at an average annual rate of 4.8 percent between 2020 and 2025. This growth is largely due to assumed increases in incomes resulting from both real economic growth and inflation, as well as the effect of the Budget’s receipt proposals. As a share of GDP, receipts are projected to increase from 17.7 percent in 2015 to 18.7 percent in 2016, and to rise to 19.7 percent in 2025. LEGISLATION ENACTED IN 2014 THAT AFFECTS GOVERNMENTAL RECEIPTS Several laws were enacted during 2014 that affect receipts. The major provisions of those laws that had a significant impact on receipts are described below.1 HIGHWAY AND TRANSPORTATION FUNDING ACT OF 2014 (PUBLIC LAW 113-159) This Act was signed into law by President Obama on August 8, 2014. The only major provision of this Act that affects receipts is described below. Modify interest rate corridors for single-employer pension funding rules.—For purposes of applying the minimum finding rules that apply to single-employer defined benefit plans, the Internal Revenue Code generally specifies the interest rates that must be used. Since 2012, the interest rates have been adjusted to fit within a specified percentage of the 25-year average of those rates. This Act modifies the specified percentage so that the narrowest range around the 25-year average applies for plan years beginning before 2017, which has the effect of raising the applicable interest rates and thereby reducing the minimum required contributions for these plans. CONSOLIDATED AND FURTHER CONTINUING APPROPRIATIONS ACT, 2015 (PUBLIC LAW 113-235) This Act was signed into law by President Obama on December 16, 2014. The provisions of this Act that affect receipts are described below. Modify treatment of expatriate health plans.—The Affordable Care Act (ACA) imposes various requirements with respect to health plans, including market reform rules and an allocated fee assessed on certain insurers of U.S. health risks. As originally enacted, the ACA included no clear exclusion from these requirements for expatriate plans in which substantially all participants were nonresident persons temporarily working within the United States or U.S. citizens working abroad. This Act exempts expatriate plans from many provisions of the ACA, provided the plans meet certain criteria, including indicia of global operations, compliance with coverage thresholds, and substantial participation by qualified expatriates. In 1 In the discussions of enacted legislation, years referred to are calendar years, unless otherwise noted. addition, this Act provides that an individual enrolled in an expatriate health plan is not a U.S. health risk for purposes of the insurer allocated fee. As applied to expatriate plans, this Act generally is effective for plans issued or renewed on or after July 1, 2015, except that the insurer fee paid by an expatriate plan issuer for the years 2014 and 2015 is reduced by a ratio reflecting the percentage of premiums that are for expatriate health plans. Modify certain rules regarding multiemployer pension plans.—This Act made a number of changes to the special rules for multiemployer plans in critical or endangered status. New provisions added by the Act permit the suspension of benefits for multiemployer plans that are in “critical and declining status” under certain circumstances. This Act also repealed the sunset of automatic approvals of certain changes in funding methods and certain extensions of amortizations periods. Extend the travel promotion surcharge.—Under the Travel Promotion Act of 2009, a $10 surcharge was added to the existing Electronic System for Travel Authorization user fee that travelers from visa waiver countries pay before arriving in the United States. This Act extended the authorization to collect the surcharge, which was scheduled to expire on September 31, 2015, through September 30, 2020. TO AMEND THE INTERNAL REVENUE CODE OF 1986 TO EXTEND CERTAIN EXPIRING PROVISIONS AND MAKE TECHNICAL CORRECTIONS, TO AMEND THE INTERNAL REVENUE CODE OF 1986 TO PROVIDE FOR THE TAX TREATMENT OF ABLE ACCOUNTS ESTABLISHED UNDER STATE PROGRAMS FOR THE CARE OF FAMILY MEMBERS WITH DISABILITES, AND FOR OTHER PURPOSES (PUBLIC LAW 113-295) This Act was signed into law by President Obama on December 19, 2014. The provisions of this Act that affect receipts are described below. Individual Tax Extenders Extend the above-the-line deduction for qualified out-of-pocket classroom expenses.—Certain teachers and other elementary and secondary school professionals are permitted to deduct up to $250 in annual qualified out-of-pocket classroom expenses. This Act extended this above-the-line deduction for one year, effective for such 151 12. GOVERNMENTAL RECEIPTS expenses incurred after December 31, 2013, and before January 1, 2015. Extend the ability to exclude discharges of indebtedness on principal residences from gross income.—Up to $2 million (or up to $1 million per spouse for married taxpayers filing separate returns) of discharges of certain indebtedness on a principal residence may be excluded from gross income. This Act extended the exclusion for one year, to apply to indebtedness discharged after December 31, 2013, and before January 1, 2015. Extend parity for exclusion from income for employer-provided mass transit and parking benefits.—Qualified transportation fringe benefits provided by an employer through transit passes and vanpooling can be excluded from an employee’s income up to a statutory maximum of $100 per month in combined transit pass and vanpool benefits and $175 per month in qualified parking benefits. Both statutory limits are adjusted annually for inflation and, for 2014, were $130 per month for combined transit pass and vanpool benefits and $250 per month for qualified parking benefits. Prior law temporarily provided parity in these benefits by increasing the monthly exclusion for combined employer-provided transit pass and vanpool benefits to the same level as the exclusion for employer-provided parking benefits. This Act extended that parity for one year, effective for benefits provided after December 31, 2013, and before January 1, 2015. Under this provision, the monthly limit on the exclusion for combined transit pass and vanpool benefits increased from $130 to $250 for 2014. Extend deduction for mortgage insurance premiums.—Certain premiums paid or accrued for qualified mortgage insurance by a taxpayer in connection with acquisition indebtedness on a qualified residence are deductible for income tax purposes. This Act extended the deduction for one year, to apply to amounts paid or accrued in 2014 that are not properly allocable to any period after December 31, 2014. Extend optional deduction for State and local general sales taxes.—A taxpayer is allowed to elect to take an itemized deduction for State and local general sales taxes in lieu of the itemized deduction for State and local income taxes. This Act extended this deduction for one year, effective for taxable years beginning after December 31, 2013, and before January 1, 2015. Extend increased limits on contributions of partial interest in real property for conservation purposes.—Special rules for the deductibility of qualified conservation contributions were temporarily enhanced, applicable for qualified conservation contributions made in taxable years beginning after December 31, 2005, and before January 1, 2014. These enhancements: (1) increased the cap on deductions for qualified conservation contributions from 30 percent to 50 percent of the excess of the donor’s contribution base over the amount of all other allowable charitable contributions; (2) increased the cap on deductions for qualified conservation contributions applicable to qualified ranchers and farmers to 100 percent of the excess of the donor’s contribution base over the amount of all other allowable charitable contributions in the case of individuals and to 100 percent of the excess of taxable income over the amount of all other allowable charitable contributions in the case of corporations; and (3) increased the number of years qualified conservation contributions in excess of the 50- and 100-percent caps may be carried forward from five to 15 years. This Act extended these enhanced special rules for one year, applicable for qualified conservation contributions made in taxable years beginning after December 31, 2013, and before January 1, 2015. Extend deduction for qualified tuition and related expenses.—An above-the-line deduction of up to $4,000 is provided for qualified higher education expenses paid by a qualified taxpayer during the taxable year. For a given taxable year, the deduction may not be claimed: (1) if an education tax credit is claimed for the same student; (2) for amounts taken into account in determining the amount excludable from income due to a distribution from a Coverdell education savings account or the amount of interest excludable from income with respect to education savings bonds; and (3) for the amount of a distribution from a qualified tuition plan that is excludable from income, except that the deduction may be claimed for the amount not attributable to earnings. This Act extended the deduction for one year, to apply to expenses incurred in taxable years beginning after December 31, 2013, and before January 1, 2015. Extend tax-free distributions from Individual Retirement Accounts (IRAs) for charitable contributions.—An exclusion from gross income is provided for otherwise taxable distributions from a traditional or a Roth IRA made directly to a qualified charitable organization. The exclusion for these qualified charitable distributions may not exceed $100,000 per taxpayer per taxable year and is applicable only to distributions made on or after the date the IRA owner attains age 70 1/2. This Act extended the exclusion for one year, to apply to distributions made in taxable years beginning after December 31, 2013, and before January 1, 2015. Business Tax Extenders Extend research and experimentation (R&E) tax credit.—A tax credit of 20 percent is provided for qualified research and experimentation expenditures above a base amount. An alternative simplified credit (ASC) of 14 percent is also provided. This Act extended these tax credits for one year, to apply to expenditures paid or incurred before January 1, 2015. Extend temporary minimum Low-Income Housing tax credit (LIHTC) rate for non-Federally subsidized new buildings.—The LIHTC is provided to owners of qualified low-income rental units. The credit may be claimed over a 10-year period for a portion of the cost of rental housing occupied by tenants having incomes below specified levels. Under prior law, a temporary minimum credit percentage of nine percent was provided for newly constructed non-Federally subsidized buildings that received an allocation of a housing credit dollar amount before January 1, 2014. This Act extended the nine- 152 percent rate for one year, to apply to projects that have received an allocation before January 1, 2015. Extend treatment of basic housing allowances for the purpose of LIHTC income eligibility rules.—In general, to be eligible for the LIHTC, a qualified lowincome housing project must satisfy one of two tests at the election of the taxpayer: (1) 20 percent or more of the residential units in the project are both rent-restricted, and occupied by individuals whose income is 50 percent or less of area median gross income; or (2) 40 percent or more of the residential units in the project are both rentrestricted, and occupied by individuals whose income is 60 percent or less of area median gross income. These income requirements are adjusted for family size. Effective for income determinations made after July 30, 2008, and before January 1, 2014, for buildings that are located in certain counties, the basic housing allowance (payments provided under section 403 of title 37, United States Code) provided to military personnel was not included in income for the purpose of LIHTC income eligibility rules. This Act extended the disregard of basic housing allowances for purposes of LIHTC income eligibility rules for one year, effective for income determinations made before January 1, 2015. Extend tax incentives for employment on Indian reservations.—This Act extended for one year, for taxable years beginning before January 1, 2015, the employment tax credit for qualified workers employed on an Indian reservation. The employment tax credit is not available for employees involved in certain gaming activities or who work in a building that houses certain gaming activities. Extend the New Markets tax credit (NMTC).—The NMTC is a 39-percent credit for qualified equity investments made in qualified community development entities that are held for a period of at least seven years. This Act extended the NMTC, which expired at the end of 2013, for one year, to apply to 2014. Up to $3.5 billion in qualifying investment is allowed for 2014. Extend railroad track maintenance credit.—A 50-percent business tax credit is provided for qualified railroad track maintenance expenditures paid or incurred by an eligible taxpayer in taxable years beginning after December 31, 2004, and before January 1, 2014. The credit was limited to the product of $3,500 times the number of miles of railroad track owned or leased by, or assigned to, an eligible taxpayer as of the close of the taxable year. This Act extended the credit for one year, to apply to qualified expenses incurred in taxable years beginning after December 31, 2013, and before January 1, 2015. Extend credit for mine rescue training.—An eligible taxpayer may claim a general business tax credit with respect to each qualified mine rescue team employee equal to the lesser of: (1) 20 percent of the amount paid or incurred by the taxpayer during the taxable year with respect to the training program costs of the qualified mine rescue team employee; or (2) $10,000. This Act extended the credit for one year, to apply to costs incurred in taxable years beginning after December 31, 2013, and before January 1, 2015. ANALYTICAL PERSPECTIVES Extend employer wage credit for employees who are active duty members of the uniformed services.—Some employers voluntarily pay their employees who are called to active duty in the armed forces of the United States the difference between the compensation that they would have paid the employee during the period of military service and the amount of pay received by the employee from the military. This payment by the employer is often referred to as “differential pay.” Eligible small business employers are provided a tax credit equal to 20 percent of up to $20,000 in annual eligible differential wage payments made to each qualified employee. This Act extended the credit for one year, making it available for eligible differential wage payments made to a qualified employee after December 31, 2013, and before January 1, 2015. Extend the work opportunity tax credit (WOTC).— The WOTC provides incentives to employers for hiring individuals from one or more of nine targeted groups. This Act extended the credit for one year, to apply to wages paid to qualified individuals who begin work for the employer after December 31, 2013, and before January 1, 2015. Extend the issuance of qualified zone academy bonds.—This Act extended the qualified zone academy bond program for one year, authorizing the issuance of $400 million in such bonds in calendar year 2014. Extend classification of certain race horses as three-year property.—Under this Act, the three-year recovery period applicable to race horses placed in service after December 31, 2008, and before January 1, 2014, was extended for one year, to apply to race horses placed in service before January 1, 2015. This Act also extended the start date by one year whereby a three-year recovery period would apply to any race horse more than two years old at the time such horse is placed in service, effective for such horses placed in service after December 31, 2014. Extend modified recovery period for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.—This Act extended the 15-year recovery period for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property for one year, effective for such property placed in service after December 31, 2013, and before January 1, 2015. Extend seven-year recovery period for motorsports entertainment complexes.—Under this Act, the seven-year recovery period applicable to motorsports entertainment complexes placed in service after October 22, 2004, and before January 1, 2014, was extended for one year, to apply to such facilities placed in service before January 1, 2015. Extend accelerated depreciation for business property on Indian reservations.—This Act extended for one year, through December 31, 2014, the accelerated depreciation rules for qualified property used in the active conduct of a trade or business within an Indian reservation. Property used to conduct or house certain gaming 12. GOVERNMENTAL RECEIPTS activities is not eligible for the accelerated depreciation rules. Extend 50-percent first-year depreciation deduction for certain property.—This Act extended for one year the additional first-year depreciation deduction equal to 50 percent of the adjusted basis of the property, to apply to qualifying property acquired and placed in service in calendar year 2014. The placed-in-service deadline was extended through 2015 for certain longer-lived property, transportation property, and certain aircraft, with respect to the property’s adjusted basis attributable to production activity occurring before 2015. Corporations are allowed to claim additional alternative minimum tax (AMT) credits in lieu of claiming the additional first-year depreciation. For purposes of determining the percentage of completion under the long-term contract rules, the cost of certain property is determined as if the additional first-year depreciation deduction had not been allowed. The Act extended this provision by one year, for qualified property placed in service before January 1, 2015. Extend the enhanced charitable deduction for contributions of food inventory.—A taxpayer’s deduction for charitable contributions of inventory generally is limited to the taxpayer’s basis (typically cost) in the inventory or, if less, the fair market value of the inventory. For certain contributions of inventory, C corporations may claim an enhanced deduction equal to the lesser of: (1) basis plus one-half of the item’s appreciation; or (2) two times basis. However, any taxpayer (not just a C corporation) engaged in a trade or business is eligible to claim the enhanced deduction for donations of food inventory. To qualify for the enhanced deduction, the donated food inventory must meet certain quality and labeling standards and cannot exceed 10 percent of the taxpayer’s net income from the related trade or business. This Act extended the enhanced charitable deduction for contributions of food inventory for one year, to apply to contributions made after December 31, 2013, and before January 1, 2015. Extend increased expensing for small business.— Business taxpayers are allowed to expense up to $500,000 in annual investment expenditures for qualifying property (including off-the-shelf computer software) placed in service in taxable years beginning after 2009 and before 2014. The maximum amount that can be expensed is reduced by the amount by which the taxpayer’s cost of qualifying property exceeds $2,000,000. Effective for property placed in service after 2009 and before 2014, the definition of qualifying property is expanded to include certain real property, such as qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property; however, the maximum amount of such real property that can be expensed is $250,000. This Act extended for one year, effective for qualifying property placed in service in taxable years beginning in 2014 (including off-the-shelf computer software and certain real property), the annual expensing and investment limits that were in effect in 2010 through 2013. Extend expensing of advanced mine safety equipment.—Taxpayers are allowed to immediately expense 50 percent of the cost of underground mine safety equipment 153 that is above and beyond existing safety equipment requirements. This Act extended this provision for one year, to apply to property placed in service after December 31, 2013, and before January 1, 2015. Extend expensing for certain qualified film and television productions.—Taxpayers could elect to deduct up to $15 million ($20 million for productions in certain areas) of the aggregate costs of any qualifying film and television production in the year in which the expenses were incurred, in lieu of capitalizing the cost and recovering it through depreciation allowances. This Act extended this provision for one year, to apply to qualified film and television productions commencing after December 31, 2013, and before January 1, 2015. Extend the domestic production activities deduction for activities in Puerto Rico.—A deduction is provided for a portion of a taxpayer’s qualified production activities income. Qualified production activities income generally is equal to domestic production gross receipts reduced by the sum of the costs of goods sold and other expenses, losses, or deductions that are properly allocable to those receipts. Domestic production gross receipts generally only include receipts from activities performed within the United States, and do not include receipts from activities performed in Puerto Rico. For taxable years beginning after May 17, 2006, the amount of the deduction for a taxable year is limited to 50 percent of the wages paid by the taxpayer and properly allocable to domestic production gross receipts during the calendar year that ends in such taxable year. Wages paid to bona fide residents of Puerto Rico generally are not included in the wage limitation amounts. However, effective for the first eight taxable years of a taxpayer beginning after December 31, 2005, and before January 1, 2014, a taxpayer with gross receipts from sources within the Commonwealth of Puerto Rico can treat production activities performed in Puerto Rico as performed in the United States for purposes of determining qualified production activities income, and can take into account wages paid to bona fide residents of Puerto Rico for services performed in Puerto Rico in computing the 50-percent wage limitation, provided all of the taxpayer’s gross receipts are subject to the Federal income tax. This Act extended this provision for one year, to apply to the first nine taxable years of a taxpayer beginning after December 31, 2005, and before January 1, 2015. Extend special rule regarding tax treatment of certain payments to controlling exempt organizations.—Interest, rents, royalties, and annuities generally are excluded from the tax on unrelated business income of tax-exempt organizations, unless such income is received from a taxable or tax-exempt subsidiary that is 50-percent controlled by the parent tax-exempt organization. However, such income received by a tax-exempt parent organization from a controlled subsidiary before January 1, 2014, is taxable only to the extent that it exceeds amounts that would have been received if such payments had been determined under the arm’s length principles of section 482 of the Internal Revenue Code. This Act extended this 154 provision for one year, to apply to such income received before January 1, 2015. Extend special tax rules applicable to regulated investment companies (RICs).—This Act extended for one year, through December 31, 2014, the following special tax rules applicable to RICs: (1) the exemption from U.S. withholding tax for certain interest-related dividends and short-term capital gain dividends paid by a RIC to a foreign shareholder; and (2) the treatment of RICs as “qualified investment entities” for purposes of the provisions regarding foreign investment in U.S. real property interests. Extend subpart F “active financing” and “lookthrough” exceptions.—Under the rules contained in sections 951 and 964 of the Internal Revenue Code (subpart F), U.S. shareholders of a controlled foreign corporation (CFC) are subject to U.S. tax currently on certain income earned by the CFC, whether or not such income is distributed. Exceptions from subpart F are provided for: (1) certain income derived in the active conduct of a banking, financing, insurance, or similar business (active financing exception); and (2) dividends, interest, rents, and royalties received by one CFC from a related CFC to the extent attributable or properly allocable to income of the related CFC that is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States (look-through exception). This Act extended both the subpart F active financing and look-through exceptions to apply to taxable years beginning after December 31, 2013, and before January 1, 2015. Extend exclusion of 100 percent of gain on certain small business stock.—Capital gains realized on the sale of certain small business stock held by an individual for more than five years are excluded from tax, effective for stock issued after September 27, 2010, and before January 1, 2014. This Act extended the 100-percent exclusion for one year, to apply to qualified small business stock issued after December 31, 2013, and before January 1, 2015. Extend basis adjustment to stock of S corporations contributing appreciated property.—Each shareholder of an S corporation must take into account his or her pro rata share of a charitable contribution by the S corporation in determining his or her income tax liability. For donations of property, this generally is the pro rata share of the property’s fair market value; the shareholder’s basis in the stock of the company is reduced by the amount of the charitable contribution that flows through to the shareholder. However, effective for charitable contributions made by an S corporation in taxable years beginning after December 31, 2005, and before January 1, 2014, shareholders are allowed to adjust their basis in the stock of the company by their pro rata share of the adjusted basis of the contributed property instead of by their pro rata share of the market value of the contributed property. This Act extended this provision for one year, to apply to charitable contributions made by an S corporation in taxable years beginning before January 1, 2015. ANALYTICAL PERSPECTIVES Extend reduction in recognition period for S corporation built-in gains tax.—A “small business corporation” may elect to be treated as an S corporation. Unlike C corporations, S corporations generally pay no corporate-level tax; instead, items of income and loss of an S corporation pass through to its shareholders. A corporate level tax, at the highest marginal tax rate applicable to corporations (currently 35 percent), is imposed on the net recognized built-in gain of an S corporation that arose prior to the conversion of a C corporation to the S corporation and that is recognized by the S corporation during the “recognition period.” The “recognition period” is the 10-year period beginning with the first day of the first taxable year for which the election to be treated as an S corporation is in effect; however, the “recognition period” was reduced to five years for dispositions of property in taxable years beginning in 2011, 2012, and 2013. This Act extended the five-year recognition period for one year, to apply to dispositions of property in taxable years beginning in 2014. Extend tax incentives for empowerment zones.— This Act extended the tax incentives (including employment credits and low-cost loans) that are provided to businesses located in the 40 federally-designated empowerment zones (30 in urban areas and 10 in rural areas) for one year, through December 31, 2014. Extend temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands.—A $13.50-per-proof-gallon excise tax is imposed on distilled spirits produced in or imported into the United States. Under current law, $10.50 per proof gallon of the tax imposed on rum imported into the United States is covered over (paid) to Puerto Rico and the Virgin Islands. A temporary increase in the amount covered over to Puerto Rico and the Virgin Islands to $13.25 per proof gallon expired with respect to rum imported into the United States after December 31, 2013. This Act extended the $13.25-per-proof-gallon cover over amount for one year, to apply to rum imported into the United States after December 31, 2013, and before January 1, 2015. Extend the economic development credit for American Samoa.—Under prior law, a domestic corporation that was an existing possession tax credit claimant with respect to American Samoa and elected the application of the tax credit for its last taxable year beginning before January 1, 2006, was allowed to claim a possession tax credit based on the economic activity-based limitation rules for the first eight taxable years beginning after December 31, 2005, and before January 1, 2014. A domestic corporation that was an existing possession tax credit claimant and did not elect the application of the tax credit for its last taxable year beginning before January 1, 2006, was allowed to claim a possession tax credit based on the economic activity-based limitation rules for the first two taxable years beginning after December 31, 2011, and before January 1, 2014. This Act extended the ability of domestic corporations to claim a possession tax credit based on the economic activity-based limitation rules for one year, to apply to taxable years beginning after December 31, 2013, and before January 1, 2015. 12. GOVERNMENTAL RECEIPTS Energy Tax Extenders Extend credit for nonbusiness energy property.—A tax credit is provided for the purchase of qualified energy efficient improvements to existing homes located in the United States and owned and used by the taxpayer as the taxpayer’s principal residence. This Act extended the credit for one year, to apply to property purchased and placed in service after December 31, 2013, and before January 1, 2015. Extend second generation biofuel producer credit.—An income tax credit (generally equal to $1.01 per gallon) is provided to producers of second generation biofuel. This Act extended the credit for one year, to apply to fuel produced after December 31, 2013, and before January 1, 2015. Extend credits for renewable diesel and biodiesel fuels.—An excise tax credit (or a payment) of $1.00 is provided for each gallon of biodiesel and agri-biodiesel used by a taxpayer in producing a biodiesel mixture for sale or use in a trade or business. An income tax credit for biodiesel fuels (the biodiesel fuels credit) is also provided. The biodiesel fuels income tax credit is the sum of three credits: (1) the biodiesel mixture credit, which is $1.00 for each gallon of biodiesel and agri-diesel used by the taxpayer in the production of a qualified biodiesel mixture; (2) the biodiesel credit, which is $1.00 for each gallon of biodiesel and agri-diesel that is not in a mixture with diesel when used as a fuel or sold at retail; and (3) the small agri-biodiesel producer credit, which is a 10-cents-pergallon credit for up to 15 million gallons of agri-biodiesel produced by small producers. Renewable diesel is eligible for the excise tax credit (or payment) and the income tax credit provided to biodiesel fuels at a rate of $1.00 per gallon. This Act extended for one year, through December 31, 2014, these credits and payments for biodiesel and renewable diesel fuels. Extend credit for the production of Indian coal.— This Act extended for one year, through December 31, 2014, the credit for the production of coal from reserves owned by Indian tribes at facilities placed in service before January 1, 2009. Extend tax credit with respect to facilities producing energy from certain renewable sources.— Taxpayers are allowed a tax credit for electricity produced from wind, closed-loop biomass, open-loop biomass, geothermal energy, solar energy, small irrigation power, municipal solid waste, qualified hydropower, and marine and hydrokinetic renewable energy at qualified facilities (the renewable electricity production credit). To qualify for the credit, electricity generally must be sold by the taxpayer to an unrelated person and must be produced at a qualified facility. For the production of electricity from solar energy and small irrigation power, a facility is qualified if it was placed in service before January 1, 2006, and October 3, 2008, respectively. For the production of electricity from wind, closed-loop biomass, open-loop biomass, geothermal energy, municipal solid waste, qualified hydropower, geothermal energy, and marine and hydrokinetic renewable energy, a facility is qualified if 155 construction began before January 1, 2014. This Act extended for one year, through December 31, 2014, the date on which construction must commence for a facility that produces electricity from wind, closed-loop biomass, openloop biomass, geothermal energy, municipal solid waste, qualified hydropower, and marine and hydrokinetic renewable energy to be a qualified facility. This Act also extended for one year, through December 31, 2014, the election to treat qualified facilities as energy property eligible for the 30-percent energy production credit, in lieu of the renewable electricity production credit. Extend credit for the construction of energy-efficient new homes.—An eligible contractor is provided a tax credit for each qualified new energy-efficient home that is constructed and acquired from the contractor by a person for use as a residence. This Act extended the credit for one year, to apply to homes purchased after December 31, 2013, and before January 1, 2015. Extend special allowance for second generation biofuel plant property.—This Act extended the additional first-year depreciation deduction, equal to 50 percent of the adjusted basis of qualified second generation biofuel plant property, for one year, to apply to such property placed in service before January 1, 2015. Extend deduction for energy-efficient commercial building property.—A deduction is provided for the cost of energy-efficient commercial building property placed in service before January 1, 2014. This Act extended the deduction for one year, to apply to such property placed in service after December 31, 2013, and before January 1, 2015. Extend special rules for sales or dispositions to implement Federal Energy Regulatory Commission (FERC) or State electric restructuring rules for qualified electric utilities.—Under a special provision of prior law, taxpayers were allowed to elect to recognize gain from the sale or disposition of qualifying electric transmission property ratably over an eight-year period beginning in the year of sale if the amount realized from such sale was used to purchase exempt utility property (reinvestment property) within the applicable period. Any gain realized in excess of the amount used to purchase the reinvestment property was recognized as income in the year of the qualifying electric transmission transaction. This Act extended this special rule for one year, to apply to the sale or disposition of qualifying electric transmission property after December 31, 2013, and before January 1, 2015. Extend alternative fuels excise tax credits.—Two per-gallon excise tax credits are available for the production of alternative fuel: the alternative fuel credit and the alternative fuel mixture credit. Alternative fuel means liquefied petroleum gas, P Series fuels, compressed or liquefied natural gas, liquefied hydrogen, liquid fuel derived from coal through the Fischer-Tropsch process, compressed or liquefied gas derived from biomass, or liquefied fuel derived from biomass. The alternative fuel credit is 50 cents per gallon of alternative fuel or gasoline gallon equivalents of nonliquid alternative fuel sold by the taxpayer for use as a motor fuel in a motor vehicle or 156 ANALYTICAL PERSPECTIVES motorboat, sold for use in aviation or so used by the taxpayer. The alternative fuel mixture credit is 50 cents per gallon of alternative fuel used in producing an alternative fuel mixture for sale or use in a trade or business of the taxpayer. A taxpayer is also allowed to file a claim for payment equal to the amount of the alternative fuel credit or the alternative fuel mixture credit. Under prior law, the credits and payments for non-hydrogen fuels expired with respect to fuel used or sold after December 31, 2013; the credits and payments with respect to liquefied hydrogen expired with respect to fuel used or sold after September 30, 2014. This Act extended the alternative fuel credit, the alternative fuel mixture credit, and related payments for non-hydrogen fuels for one year, to apply to fuel sold or used before January 1, 2015. Extend credit for alternative fuel vehicle refueling property.—A tax credit is provided for the cost of qualified clean-fuel vehicle refueling property to be used in a trade or business of the taxpayer or installed at the principal residence of the taxpayer. Under prior law, the credit is available for hydrogen refueling property placed in service before January 1, 2015, and for non-hydrogen refueling property placed in service before January 1, 2014. This Act extended the credit for non-hydrogen refueling property for one year, to apply to property placed in service after December 31, 2013, and before January 1, 2015. Achieving a Better Life Experience (ABLE) Accounts Create ABLE accounts.—This Act allowed each State to establish and operate an ABLE program under which a tax-favored ABLE account may be set up for the benefit of any eligible State resident diagnosed before age 26 as blind or disabled, effective for taxable years beginning after December 31, 2014. Contributions to an ABLE account can be made by anyone, regardless of their relationship to the designated beneficiary of the account. Contributions are not tax deductible, but earnings on an ABLE account and distributions from the account (including portions attributable to investment earnings) to a designated beneficiary for qualified expenses (expenses related to the beneficiary’s disability) generally are not included in the taxable income of the contributor to the account or the designated beneficiary. Distributions from the account for non-qualified expenses are subject to both income tax and a 10-percent penalty on the portion of such distributions attributable to earnings from the account. Designated beneficiaries are limited to one ABLE account, total annual contributions by all individuals to such an account are limited to the annual gift tax exclusion ($14,000 in 2015, adjusted annually for inflation), and aggregate contributions are subject to the State limit for section 529 education savings accounts. Assets in the account and distributions from the account for qualified disability expenses are disregarded when determining the designated beneficiary’s eligibility for most Federal means-tested benefits. Offsets Increase excise tax on fuel used on certain waterways.—This Act increased the excise tax imposed on fuel used to power certain vessels transporting commercial cargo on listed inland and intra-coastal waterways, from 20 cents per gallon to 29 cents per gallon. The increase is effective for fuel used after March 31, 2015. Authorize certification of professional employer organization (PEOs) by the Internal Revenue Service (IRS) for the withholding and remittance of taxes with respect to the customer’s employees.—If a business contracts with a PEO to administer its payroll functions, the business customer remains responsible for the withholding and remittance of taxes with respect to its employees, and compliance with related reporting requirements. This Act authorizes the IRS to certify qualifying PEOs to become solely responsible for the withholding and remittance of taxes with respect to the customer’s employees, as well as compliance with related reporting requirements. To be certified by the IRS, the PEO must satisfy various requirements, including posting a bond in case it fails to satisfy its tax withholding and remittance obligations. The PEO would also be subject to an annual certification fee not to exceed $1,000. The IRS is required to establish the PEO certification program by July 1, 2015, and the provision is generally effective for wages paid by a certified PEO for services performed by a customer’s employees after 2015. Exclude dividends from CFCs from the definition of personal holding company income for purposes of the personal holding company rules.—In addition to the regular corporation income tax, a corporation that is a personal holding company (a company that is majority-owned by five or fewer individuals and more than 60 percent of its income consists of certain types of passive income) must pay an additional 20-percent tax on undistributed personal holding company income above a threshold amount. Personal holding company income includes dividends, interest, certain rents, and other generally passive investment income, including dividends derived from an active trade or business of a foreign subsidiary. Under this Act, dividends received by a 10-percent U.S. shareholder from a CFC are excluded from the definition of personal holding company income for purposes of the personal holding company tax, effective for taxable years ending on or after the date of enactment. Index certain penalties under the Internal Revenue Code for inflation.—Generally, the amount of a tax penalty that is a set dollar amount is established when the penalty is added to the Internal Revenue Code. Often significant time passes and the penalty amount is too low to continue serving as an effective deterrent. Under current practice, most penalties can only be increased by amendment to the Internal Revenue Code. Effective for returns required to be filed after December 31, 2014, this Act indexes annually for inflation (subject to specified rounding rules) select fixed-dollar civil tax penalties for: (1) the failure to file a tax return but only with respect to the $135 amount applicable in the case of 157 12. GOVERNMENTAL RECEIPTS a failure to file the return within 60 days of the date prescribed for filing (determined with regard to extensions); (2) the failure by exempt organizations and certain trusts to file certain returns; (3) the failure of a paid preparer to meet certain obligations; (4) the failure of a partnership or an S corporation to timely file a correct return; and (5) the failure to timely file correct information returns and payee statements. Increase levy authority for payments to Medicare providers with delinquent tax debt.—Through the Federal Payment Levy Program (FPLP), the Department of the Treasury deducts (levies) a portion of a Government payment to an individual or business 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 FPLP. Under prior law, the Department of the Treasury is authorized to continuously levy up to 15 percent of a payment to a Medicare provider to collect delinquent tax debt. This Act allows the Department of the Treasury to levy up to 30 percent of a payment to a Medicare provider to collect delinquent tax debt, effective for payments made more than 180 days after the date of enactment. ADJUSTMENTS TO THE BALANCED BUDGET AND EMERGENCY DEFICIT CONTROL ACT (BBEDCA) BASELINE The BBEDCA baseline, which is commonly used in budgeting and is defined in the statute, reflects, with some exceptions, the projected receipt and outlay levels under current law. However, current law includes a number of scheduled policy changes that prevent the BBEDCA baseline from serving as an appropriate benchmark for judging the effect of new legislation. In particular, the American Taxpayer Relief Act of 2012 (ATRA) permanently extended most of the 2001/2003 tax cuts (as amended by subsequent legislation), but extended some tax relief provided to individuals and families under the American Recovery and Reinvestment Act of 2009 (ARRA) only through taxable year 2017. This tax relief includes increased refundability of the child tax credit, expansions in the Earned Income Tax Credit (EITC) for larger families and married taxpayers filing a joint return, and increased assistance for qualified tuition and related expenses provided by the American Opportunity Tax Credit (AOTC). The adjusted baseline permanently continues the tax relief provided to individuals and families under ARRA that was extended only through taxable year 2017 under ATRA. A more general explanation of the adjusted baseline concept is provided in Chapter 25 of this volume, “Current Services Estimates.” Permanently extend increased refundability of the child tax credit.—ARRA increased the refundability of the child tax credit by reducing the earnings threshold for refundability to $3,000 (unindexed) from $10,000 (indexed after 2001). The adjusted baseline permanently extends the $3,000 earnings threshold, effective for taxable years beginning after December 31, 2017. Permanently extend EITC marriage penalty relief.—ARRA provided tax relief to married couples filing a joint return (regardless of the number of qualifying children) by increasing the amount by which the income thresholds for the phaseout of the EITC exceed the thresholds for other taxpayers from $3,000 (indexed for inflation after 2008) to $5,000 (indexed for inflation after 2009). The adjusted baseline permanently extends the $5,000 increase in the thresholds for the phaseout of the EITC, effective for taxable years beginning after December 31, 2017. Permanently extend EITC for larger families.—Under ARRA, a fourth credit schedule was added providing a larger credit for families with three or more qualifying children. This fourth schedule is permanently extended under the adjusted baseline, effective for taxable years beginning after December 31, 2017. Permanently extend AOTC.—The AOTC, which was created under ARRA, provides taxpayers a credit of up to $2,500 per eligible student per year for qualified tuition and related expenses paid for each of the first four years of the student’s post-secondary education in a degree or certification program. The student must be enrolled at least half-time to receive the credit, which is partially refundable and phased out above specified income thresholds. The adjusted baseline extends the credit permanently, effective for taxable years beginning after December 31, 2017. 158 ANALYTICAL PERSPECTIVES Table 12–2. ADJUSTMENTS TO THE BALANCED BUDGET AND EMERGENCY DEFICIT CONTROL ACT (BBEDCA) BASELINE ESTIMATES OF GOVERNMENTAL RECEIPTS (In billions of dollars) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 BBEDCA baseline receipts ������������������������� 3,175.1 3,429.6 3,577.4 3,743.5 3,915.8 4,099.6 4,312.7 4,534.5 4,756.9 4,985.2 5,209.5 18,765.9 42,564.8 Adjustments to BBEDCA baseline: Extend increased refundability of the child tax credit 1 �������������������������������������������� Extend EITC marriage penalty relief 1 ������ Extend EITC for larger families 1 ��������������� Extend AOTC 1 ����������������������������������������� Total, adjustments to BBEDCA baseline ����������������������������������������� ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... –* –* –0.5 ......... –0.1 –* –5.3 ......... –0.1 –* –5.1 ......... –0.1 –* –4.8 ......... –0.1 –* –4.5 ......... –0.1 –* –4.3 ......... –0.1 –* –3.8 ......... ......... ......... –0.6 –5.4 –5.3 –4.9 –4.7 –4.4 –4.0 Adjusted baseline receipts ������������������������� 3,175.1 3,429.6 3,577.4 3,743.0 3,910.4 4,094.3 4,307.8 4,529.8 4,752.5 4,981.2 *$50 million or less. 1 This provision affects both receipts and outlays for refundable tax credits. Only the receipt effect is shown above. The outlay effects are listed below: 2015 Extend increased refundability of the child tax credit ����������������������������������������������� Extend EITC marriage penalty relief ��������� Extend EITC for larger families ������������������ Extend AOTC ��������������������������������������������� Total, outlay effects of adjustments to BBEDCA baseline �������������������������� 2016 2017 2018 2019 2020 2021 2022 2023 2024 2016-20 2016-25 ......... –0.1 –* –3.6 ......... –0.2 –0.1 –11.0 ......... –0.9 –0.3 –32.0 –3.8 –11.3 –33.1 5,205.7 18,754.6 42,531.6 2025 2016–20 2016–25 ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... 0.5 0.1 0.1 ......... 10.9 1.3 2.0 2.1 11.0 1.3 2.0 4.6 11.1 1.4 2.0 4.7 11.1 1.4 2.1 4.7 11.1 1.4 2.1 4.7 11.3 1.4 2.2 4.8 11.3 1.4 2.2 4.8 22.5 2.7 4.1 6.7 78.3 9.6 14.7 30.5 ......... ......... ......... 0.7 16.3 18.9 19.2 19.3 19.3 19.6 19.7 36.0 133.1 RESERVE FOR BUSINESS TAX REFORM THAT IS REVENUE NEUTRAL IN THE LONG RUN The number of special deductions, credits, and other tax preferences provided to businesses in the Internal Revenue Code has expanded significantly since the last comprehensive tax reform effort nearly three decades ago. Such tax preferences help well-connected special interests, but do little for economic growth. To be successful in an increasingly competitive global economy, the Nation cannot afford to maintain a tax code burdened with such tax breaks; instead, the tax code needs to ensure that the United States is the most attractive place for entrepreneurship and business growth. Therefore, in the Budget, the President is calling on the Congress to immediately begin work on business tax reform that achieves the following five goals: (1) cut the corporate tax rate and pay for it by making structural reforms and eliminating loopholes and subsidies; (2) strengthen American manufacturing and innovation; (3) strengthen the international tax system; (4) simplify and cut taxes for small businesses; and (5) avoid adding to deficits in the short-term or the long-term. Consistent with these goals, the Budget includes a detailed set of business proposals that close loopholes and provide incentives for growth in a fiscally responsible manner. The Administration proposes that these policies be enacted as part of business tax reform that is revenue neutral over the long run. As a result, the net savings from these proposals, which are described below, are not reflected in the budget estimates of receipts and are generally not counted toward meeting the Administration’s deficit reduction goals. However, as part of transitioning to a reformed international tax system, the President’s plan would impose a one-time transition toll charge of 14 percent on the $1 to $2 trillion of untaxed foreign earnings that U.S. companies have accumulated overseas. The Budget proposes to use the one-time savings from this toll charge to pay for investment in transportation infrastructure. Reform the U.S. International Tax System Restrict deductions for excessive interest of members of financial reporting groups.—Section 163(j) of the Internal Revenue Code generally places a cap on the amount of interest expense paid to related parties (and to unrelated parties on debt guaranteed by a related party) that a corporation can deduct relative to its U.S. earnings, but does not consider whether a foreign-parented group’s U.S. operations are more leveraged than the rest of the group’s operations. In lieu of applying section 163(j), the Administration’s proposal would limit the interest expense deduction of an entity that is a member of a group that prepares consolidated financial statements if the member’s net interest expense for financial statement purposes exceeds the member’s proportionate share of the group’s financial statement net interest expense (excess financial statement net interest expense). The member’s share of the groups’ financial statement net interest expense would be determined based on the member’s proportionate share of the group’s reported earnings. If a member has excess financial statement net interest expense, a member will have excess net interest expense 12. GOVERNMENTAL RECEIPTS for tax purposes for which a deduction is disallowed in the same proportion that the member’s net interest expense for financial statement purposes is excess financial statement net interest expense. Alternatively, if a member fails to substantiate its share of the group’s net interest expense, or a member so elects, the member’s interest deduction would be limited to 10 percent of the member’s U.S. adjusted taxable income. The proposal would not apply to financial services entities or financial reporting groups that would otherwise report less than $5 million of net U.S. interest expense for a taxable year. The proposal would be effective for taxable years beginning after December 31, 2015. Provide tax incentives for locating jobs and business activity in the United States and remove tax deductions for shipping jobs overseas.—To provide a tax incentive for U.S. companies to move jobs into the United States from offshore, the Administration proposes to create a credit against income tax equal to 20 percent of the expenses paid or incurred in connection with insourcing a U.S. trade or business. In addition, to reduce incentives for U.S. companies to move jobs offshore, the proposal would disallow deductions for expenses paid or incurred in connection with outsourcing a U.S. trade or business. For this purpose, insourcing (outsourcing) a U.S. trade or business means reducing or eliminating a trade or business or line of business currently conducted outside (inside) the United States and starting up, expanding, or otherwise moving the same trade or business within (outside) the United States. Also for this purpose, expenses paid or incurred in connection with insourcing or outsourcing a U.S. trade or business are limited solely to expenses associated with the relocation of the trade or business and do not include capital expenditures, severance pay, or other assistance to displaced workers. The proposal would be effective for expenses paid or incurred after the date of enactment. Repeal delay in the implementation of worldwide interest allocation.—The rules for allocating and apportioning interest expense between U.S. and foreign source income are based on the theory that money is fungible and, therefore, interest expense is properly attributable to all investments of a taxpayer. Under current law, however, interest expense of the domestic members of a worldwide group of companies is allocated by treating only the domestic members as a single corporation. Consequently, U.S. members are required to allocate their U.S. interest expense to their U.S. and foreign investments without taking into account any third party interest expense incurred by foreign members of the group. Under current law, an election is available for taxable years beginning after December 31, 2020, to allow members of an affiliated group of U.S. corporations to allocate interest on a worldwide group basis under which interest expense incurred in the United States would be allocated against foreign-source income only to the extent that the debt-toasset ratio is higher for U.S. than for foreign investments. Under the Administration’s proposal, this election would be permitted for taxable years beginning after December 31, 2015. 159 Extend the exception under subpart F for active financing income.—Under subpart F, U.S. shareholders of a CFC are subject to U.S. tax currently on certain passive and other highly mobile income (subpart F income) earned by the CFC, whether or not such income is distributed to the shareholders. For taxable years beginning before January 1, 2015, the active financing exception excludes certain income derived in the active conduct of a banking, financing, insurance or similar business from subpart F income. Under the Administration’s proposal, this exception would be permanently extended. Extend the look-through treatment of payments between related CFCs.—For taxable years beginning before January 1, 2015, the look-through exception excludes from subpart F income interest, dividends, rents, and royalties received or accrued from a related CFC to the extent attributable or properly allocable to income of the CFC that is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States. Under the Administration’s proposal, this exception would be permanently extended. Impose a 19-percent minimum tax on foreign income.—Subject to certain limited exceptions under subpart F, U.S. companies are able to defer paying U.S. tax on the profits earned by their CFCs until the profits are repatriated. This ability to defer U.S. tax creates an incentive for U.S. multinationals to locate production overseas and shift profits abroad, eroding the U.S. tax base. In addition, the current system discourages these companies from bringing low-taxed foreign earnings back to the United States. To address these problems, the Administration proposes to supplement the existing subpart F regime with a per-country minimum tax on foreign earnings. Under the Administration’s proposal, foreign earnings, other than subpart F income, would be subject to current U.S. taxation at a rate of 19 percent less 85 percent of the per-country foreign effective tax rate. The tentative minimum tax base for each country would be the total earnings of all business units that are tax resident in that country under foreign law, net of dividends received. The tentative minimum tax base would be reduced by an allowance for corporate equity that would provide a risk-free return on equity invested in active assets. The minimum tax would be imposed on foreign earnings regardless of whether they are repatriated to the United States, and all foreign earnings of a CFC could be repatriated without further U.S. tax. Thus under the proposal, all CFC earnings would be subject to U.S. tax either immediately or not at all. Foreign source royalty and interest payments paid to U.S. persons would be taxed at the U.S. statutory rate, but certain income attributable to a foreign branch or to the performance of services abroad would be eligible for taxation at the minimum tax rate. Interest expense allocated and apportioned to earnings for which the minimum tax is paid would be deductible at the U.S. minimum tax rate on those earnings. No deduction would be permitted for interest expense allocated and apportioned to foreign earnings for which no U.S. income tax is paid. While sub- 160 part F generally would continue in effect as under current law, the rules regarding CFC investments in U.S. property and previously taxed earnings would be repealed, and the subpart F high-tax exception would be made mandatory. The proposal would be effective for taxable years beginning after December 31, 2015. Impose a 14-percent one-time tax on previously untaxed foreign income.—Under current law, U.S. multinational companies do not pay U.S. tax on the profits earned by their CFCs until those profits are repatriated, subject to a limited exception under subpart F for passive and other highly mobile income. Under the Administration’s proposal for companies to pay a minimum tax on foreign income, no U.S. tax would be imposed on a CFC’s payment of a dividend to a U.S. shareholder. Therefore, the Administration proposes to impose a onetime 14-percent tax on the accumulated earnings of CFCs that were not previously subject to U.S. tax. A credit would be allowed for the amount of foreign income taxes associated with such earnings, multiplied by the ratio of the one-time tax rate to the otherwise applicable U.S. corporate tax rate. The earnings subject to the one-time tax could then be repatriated without any further U.S. tax. The proposal pays for outlays associated with: (1) the Administration’s surface transportation reauthorization proposal; and (2) shortfalls between surface transportation revenue and spending that exist under current law for the proposal period. Limit shifting of income through intangible property transfers.—Under current law, there is a lack of clarity regarding the scope of the definition of intangible property under section 936(h)(3)(B) of the Internal Revenue Code. This definition of intangible property applies for purposes of the special rules under section 367 of the Internal Revenue Code relating to transfers of intangible property by a U.S. person to a foreign corporation and the allocation of income and deductions among taxpayers under section 482 of the Internal Revenue Code to prevent inappropriate shifting of income outside the United States. The Administration’s proposal would provide that the definition of intangible property under section 936(h) (3)(B) (and therefore for purposes of sections 367 and 482) also includes workforce in place, goodwill and going concern value, and any other item owned or controlled by a taxpayer that is not a tangible or financial asset and that has substantial value independent of the services of any individual. The proposal would be effective for taxable years beginning after December 31, 2015. Disallow the deduction for excess non-taxed reinsurance premiums paid to affiliates.—U.S affiliates of foreign insurance companies can avoid U.S. taxation of their profits from their U.S. insurance business by reinsuring that business with affiliated foreign insurance companies. Under the Administration’s proposal, a U.S. insurance company would be denied a deduction for certain non-taxed reinsurance premiums paid to foreign affiliates, offset by an income exclusion for return premiums, ceding commissions, reinsurance recovered, or other amounts received from such affiliates. A foreign corporation that is paid premiums that would be affected by this ANALYTICAL PERSPECTIVES provision could instead elect to treat those premiums and the associated investment income as income effectively connected with the conduct of a trade or business in the United States and attributable to a permanent establishment for tax treaty purposes. For foreign tax credit purposes, such effectively connected income would be treated as foreign source income and would be placed into a separate category for purposes of applying the credit limitation rules. The proposal would be effective for policies issued in taxable years beginning after December 31, 2015. Modify tax rules for dual capacity taxpayers.— The Administration proposes to tighten the foreign tax credit rules that apply to taxpayers that are subject to a foreign levy and that also receive (directly or indirectly) a specific economic benefit from the levying country (socalled “dual capacity” taxpayers). The proposal would be effective for taxable years beginning after December 31, 2015. Tax gain from the sale of a partnership interest on look-through basis.—Under the Administration’s proposal, gain or loss from the sale of a partnership interest would be treated as effectively connected with the conduct of a trade or business in the United States and subject to U.S. income taxation to the extent attributable to the partner’s share of the partnership’s unrealized gain or loss from property used in a trade or business in the United States. The proposal would also require the purchaser of a partnership interest to withhold 10 percent of the purchase price to ensure the seller’s compliance. The proposal would be effective for sales and exchanges after December 31, 2015. Modify sections 338(h)(16) and 902 to limit credits when non-double taxation exists.—The Administration proposes to modify the foreign tax credit rules to reduce the availability of foreign tax credits in circumstances where no double taxation would otherwise exist. Under section 338 of the Internal Revenue Code, taxpayers can elect to treat certain acquisitions of the stock of a corporation as an acquisition of the corporation’s assets for U.S. tax purposes. Because this election does not alter the foreign tax consequences of the transaction, section 338(h)(16) limits the ability of taxpayers to claim additional foreign tax credits by generally requiring the seller to continue to treat the gain recognized on the transaction as gain from the sale of stock for foreign tax credit purposes. The Administration proposes to extend these rules to other similar transactions that are treated as asset acquisitions for U.S. tax purposes but as acquisitions of an equity interest in an entity for foreign tax purposes. In addition, under the Administration’s proposal, foreign income taxes paid by a foreign corporation would be reduced for U.S. tax purposes if a redemption transaction results in the elimination of earnings and profits of the foreign corporation. The foreign income taxes reduced under the proposal would be the foreign income taxes that are associated with the eliminated earnings and profits. The proposals would be effective for transactions occurring after December 31, 2015. 12. GOVERNMENTAL RECEIPTS Close loopholes under subpart F.—Certain rules under subpart F rely on technical distinctions that may be manipulated or circumvented contrary to subpart F’s policy of requiring current U.S. taxation of passive and other highly mobile income earned by CFCs. In order to close these loopholes, the Administration proposes to: (1) create a new category of subpart F income, foreign base company digital income, which generally would include income of a CFC from the lease or sale of a digital copyrighted article or from the provision of a digital service in cases where the CFC uses intangible property developed by a related party (including property developed under a cost sharing arrangement) to produce the income and the CFC does not, through its own employees, make a substantial contribution to the development of the property or services that give rise to the income; (2) expand the category of foreign base company sales income to include income of a CFC from the sale of property manufactured on behalf of the CFC by a related person, regardless of whether the CFC is characterized as obtaining the property through a purchase transaction or through a manufacturing service contract; (3) amend the ownership attribution rules of section 958(b) of the Internal Revenue Code so that certain stock directly owned by a foreign person is attributed to a related U.S. person for purposes of determining whether a foreign corporation is a CFC or a U.S. person is a U.S. shareholder; and (4) eliminate the requirement that a foreign corporation must be a CFC for an uninterrupted period of at least 30 days in order for a U.S. shareholder to have a subpart F income inclusion with respect to the corporation. The proposal would be effective for taxable years beginning after December 31, 2015. Restrict the use of hybrid arrangements that create stateless income.—Taxpayers currently use a variety of cross-border hybrid arrangements to claim deductions without corresponding inclusions in any jurisdiction or to claim multiple deductions for the same payment in different jurisdictions. The Administration proposes to deny deductions for interest and royalty payments paid to related parties when either: (1) as a result of a hybrid arrangement there is no corresponding inclusion to the recipient in the foreign jurisdiction; or (2) a hybrid arrangement would permit the taxpayer to claim an additional deduction for the same payment in more than one jurisdiction. Additionally, sections 954(c)(3) and 954(c) (6) of the Internal Revenue Code would not apply to payments made to a foreign reverse hybrid held directly by a U.S. owner when such amounts are treated as deductible payments by a foreign related person. Regulatory authority would be granted to the Department of the Treasury to issue any regulations necessary to carry out the purposes of this proposal, including regulations that would deny all or a portion of the deduction claimed with respect to an interest or royalty payment that, as a result of the hybrid arrangement, is subject to inclusion in the recipient’s jurisdiction pursuant to a preferential regime that has the effect of reducing the generally applicable statutory rate by at least 25 percent. The proposal would be effective for taxable years beginning after December 31, 2015. 161 Limit the ability of domestic entities to expatriate.—Section 7874 of the Internal Revenue Code applies to certain transactions (known as “inversion transactions”) in which a U.S. corporation is replaced by a foreign corporation as the parent company of a worldwide affiliated group. Under current law, if an inversion transaction occurs, certain adverse tax consequences apply depending upon whether the continuing ownership of historical shareholders of the U.S. corporation in the foreign acquiring corporation is either 80 percent or more (in which case the foreign acquiring corporation is treated as a domestic corporation for all U.S. tax purposes) or at least 60 percent but less than 80 percent (in which case the foreign status of the acquiring corporation is respected but other penalties apply). The Administration proposes to broaden the definition of an inversion transaction by reducing the 80-percent shareholder continuity threshold to a greater-than-50-percent threshold, and by eliminating the 60-percent threshold. The Administration also proposes to provide that, regardless of the level of shareholder continuity, an inversion transaction will occur if the fair market value of the stock of the U.S. corporation is greater than the fair market value of the stock of the foreign acquiring corporation, and the affiliated group is primarily managed and controlled in the United States and does not conduct substantial business activities in the relevant foreign country. In addition, the proposal would provide the IRS with authority to share with authorized employees of other Federal agencies, upon request, information collected with respect to the identity of companies that are the subject of an inversion transaction. The proposal generally would be effective for transactions that are completed after December 31, 2015, except that, effective January 1, 2016, the proposal would provide the IRS with the authority to share with other Federal agencies the specified information without regard to when the inversion transaction occurred. Simplification and Tax Relief for Small Business Expand and permanently extend increased expensing for small business.—Business taxpayers were allowed to expense up to $500,000 in annual investment expenditures for qualifying property (including off-theshelf computer software) placed in service in taxable years beginning in 2010 through 2014. The maximum amount that could be expensed was reduced by the amount by which the taxpayer’s cost of qualifying property exceeded $2,000,000. The Administration proposes to permanently extend these expensing and investment limits, effective for qualifying property placed in service in taxable years beginning after December 31, 2014. For qualifying property placed in service in taxable years beginning after December 31, 2015, the maximum amount that can be expensed would be increased to $1,000,000. The limits would be indexed for inflation in taxable years beginning after 2016. Qualifying property would permanently include off-the-shelf computer software, but would not include certain real property. 162 Expand simplified accounting for small business and establish a uniform definition of small business for accounting methods.—Current law contains several small business exceptions from various accounting requirements based on a taxpayer’s average annual gross receipts. Exception thresholds vary between $1 million and $25 million of gross receipts, depending on the specific accounting rule, and the legal status and business activity of the taxpayer. The Administration proposes to create a uniform small business threshold at $25 million in average annual gross receipts for allowing exceptions from certain accounting rules, effective for taxable years beginning after December 31, 2015. This threshold would be indexed for inflation with respect to taxable years beginning after December 31, 2016. Satisfaction of the gross receipts test would allow an entity to elect one or more of the following items: (1) use of the cash method of accounting in lieu of an accrual method (regardless of whether the entity holds inventories): (2) the non-application of the uniform capitalization (UNICAP) rules: and (3) the use of an inventory method of accounting that either conforms to the taxpayer’s financial accounting method or is otherwise properly reflective of income. These rules would supersede the special cash method exceptions that apply to farm corporations, but current exceptions allowing the cash method by personal service corporations and by business entities that are not C corporations (other than partnerships with a C corporation partner) would continue. The exceptions from UNICAP not based on a gross receipts test would also continue. Eliminate capital gains taxation on investments in small business stock.—A 100-percent exclusion from tax is provided for capital gains realized on the sale of qualified small business stock issued after September 27, 2010, and before January 1, 2015, and held for more than five years. The amount of gain eligible for the exclusion is limited to the greater of $10 million or 10 times the taxpayer’s basis in the stock. For stock acquired prior to September 28, 2010, a portion of the excluded gain is subject to the AMT. A taxpayer may elect to roll over capital gain from the sale of qualified small business stock held for more than six months if other qualified small business stock is purchased during the 60-day period beginning on the date of sale. The exclusion is limited to individual investments and not the investments of a corporation. The Administration proposes to permanently extend the 100-percent exclusion, extend the rollover period from 60 days to six months for stock held at least three years, and no longer treat the excluded gain as a preference that is subject to tax under the AMT. The proposal would clarify that small business stock can include stock acquired upon the exercise of warrants and options if such stock rights are acquired at original issue from the corporation, and that all relevant holding periods for such stock start on the date the stock is issued by the corporation to the taxpayer. Reporting requirements would be tightened to ensure compliance. These proposals would be effective for qualified small business stock issued after December 31, 2014. ANALYTICAL PERSPECTIVES Increase the limitations for deductible new business expenditures and consolidate provisions for start-up and organizational expenditures.—A taxpayer generally is allowed to elect to deduct up to $5,000 of start-up expenditures in the taxable year in which an active trade or business begins. Similarly, a taxpayer may also elect to deduct up to $5,000 of organizational expenditures in the taxable year in which a corporation or partnership begins business. In each case, the $5,000 amount is reduced (but not below zero), by the amount by which such expenditures exceed $50,000. To lower the tax cost of investigating new business opportunities and investing in new business activities, as well as tax administration and business compliance costs, the Administration proposes to consolidate the Internal Revenue Code provisions relating to start-up expenditures and organizational expenditures and to double permanently, from $10,000 to $20,000, the combined amount of new business expenditures that a taxpayer may elect to deduct, effective for taxable years beginning after December 31, 2015. That amount would be reduced (but not below zero) by the amount by which the combined new business expenditures exceed $120,000. Start-up and organizational expenditures that are not deducted under these provisions would continue to be amortized over a 180-month period, beginning with the month in which the active trade or business begins. Expand and simplify the tax credit provided to qualified small employers for non-elective contributions to employee health insurance.—The ACA provides a tax credit to help small employers provide health insurance for employees and their families. To claim the credit, a qualified employer must have fewer than 25 full-time equivalent employees during the taxable year with annual full-time equivalent employee wages that average less than $50,000 and make non-elective uniform contributions of at least 50 percent of the premium. The credit is generally available only for health insurance purchased through an Affordable Insurance Exchange and only for a maximum coverage period of two consecutive taxable years. The maximum credit, which is a specified percentage of premiums the employer pays during the taxable year, is reduced on a sliding scale between 10 and 25 full-time equivalent employees as well as between average annual wages of $25,000 and $50,000. Because the reductions are additive, an employer with fewer than 25 full-time equivalent employees paying average wages of less than $50,000 might not be eligible for any tax credit. The qualified amount of the employer contribution is reduced if the premium for the coverage purchased exceeds the average premium for the small group market in the rating areas in which the employee enrolls for coverage. The Administration proposes to expand the credit to employers with up to 50 (rather than 25) full-time equivalent employees and to begin the phaseout of the maximum credit at 20 full-time equivalent employees (the credit would be reduced on a sliding scale between 20 and 50, rather than between 10 and 25, full-time equivalent employees). In addition, there would be a change to 12. GOVERNMENTAL RECEIPTS the coordination of the phaseouts of the credit that apply as the number of employees and average wages increase (using a formula that is multiplicative rather than additive) so as to provide a more gradual combined phaseout and to ensure that employers with fewer than 50 employees and an average wage less than $50,000 may be eligible for the credit, even if they are nearing the end of both phaseouts. The Administration also proposes to reduce taxpayer complexity by eliminating the requirement that an employer make a uniform contribution on behalf of each employee (although applicable non-discrimination laws will still apply), and eliminating the reduction in the qualifying contribution for premiums that exceed the average premium in the rating area. The proposal would be effective for taxable years beginning after December 31, 2014. Incentives for Manufacturing, Research, and Clean Energy Enhance and make permanent research incentives.—The R&E tax credit calculated according to the “traditional” method is 20 percent of qualified research and experimentation expenditures above an historic base amount. An alternative simplified credit (ASC) of 14 percent is also provided. These R&E tax credits expired with respect to expenditures paid or incurred after December 31, 2014. The Administration proposes to permanently extend the R&E tax credit for expenditures paid or incurred after December 31, 2014, with the exception of the traditional method, which would not apply for expenditures paid or incurred after December 31, 2015. In addition, for expenditures paid or incurred after December 31, 2015, the following changes would apply: (1) the rate of the ASC would be increased to 18 percent; (2) the reduced ASC rate of 6 percent for businesses without qualified research expenses in the prior three years would be eliminated; (3) the credit would be allowed to offset AMT liability; (4) contract research expenses would include 75 percent of payments to qualified non-profit organizations (such as educational institutions) for qualified research; and (5) the special rule for owners of a pass-through entity, which limits the amount of credit to the amount of tax attributable to that portion of a person’s taxable income that is allocable or apportionable to the person’s interest in such trade, business or entity would be repealed. In addition, the proposal would repeal the requirement that research and experimentation costs be amortized over 10 years when calculating individual AMT. This would apply to expenditures paid or incurred after December 31, 2015. Extend and modify certain employment tax credits, including incentives for hiring veterans.—The WOTC provides incentives to employers for hiring individuals from one or more of nine targeted groups and the Indian employment tax credit provides incentives to employers for hiring individuals who are members of an Indian tribe. The Indian employment tax credit applies to increases in qualified wages and health insurance costs over qualified wages and health insurance costs incurred 163 in calendar year 1993 (the base year). The Administration proposes to permanently extend both credits, which include the Returning Heroes and Wounded Warrior credits enacted in 2011. In addition, beginning in 2016, the Administration proposes to: (1) expand the definition of disabled veterans eligible for the WOTC to include disabled veterans who use the GI bill to receive education or training starting within one year after discharge and who are hired within six months of leaving the program; and (2) modify the Indian employment tax credit by changing the base year wages and health insurance costs to the average of those costs in the two years prior to the year for which the credit is being claimed. Modify and permanently extend renewable electricity production tax credit and investment tax credit.—Current law provides production tax credits for renewable energy facilities, the construction of which began before the end of 2014. Qualified energy resources include wind, closed-loop biomass, open-loop biomass, geothermal energy, small irrigation power, municipal solid waste, qualified hydropower production, and marine and hydrokinetic renewable energy. Current law also provides an investment tax credit for renewable energy property. The investment tax credit is 30 percent of eligible basis for solar, fuel cell, and small wind property placed in service by December 31, 2016, and 10 percent for microturbine, combined heat and power system property, and geothermal property. For solar and non-heat pump geothermal property placed in service after 2016, a 10-percent credit is available The Administration proposes to extend the current law production tax credit for facilities on which construction begins before the end of 2015. For facilities on which construction begins after December 31, 2015, the proposal would permanently extend the production tax credit and make it refundable. The production tax credit would also be available to otherwise eligible renewable electricity consumed directly by the producer rather than sold to an unrelated third party, to the extent that its production can be independently verified. The production tax credit would also be available to individuals who install qualified energy property associated with a dwelling unit. In addition, the proposal would permanently extend the investment tax credit under the terms available in 2016. Specifically, the proposal would permanently extend the 30-percent investment tax credit for solar, fuel cell, and small wind property and the 10-percent credit for geothermal, microturbine, and combined heat and power property. The proposal would also make permanent the election to claim the investment tax credit in lieu of the production tax credit for qualified facilities eligible for the production tax credit. Modify and permanently extend the deduction for energy-efficient commercial building property.—The Administration proposes to extend the current deduction for energy-efficient building property for property placed in service before January 1, 2015. For property placed in service after calendar year 2015, the Administration proposes to offer fixed deductions for the installation of energy-efficient commercial building property that reach an energy savings target. In addition, the proposal would 164 enable existing buildings to qualify for the deductions. The new deductions would be permanent. Provide a carbon dioxide investment and sequestration tax credit.—The Administration proposes to authorize $2 billion in refundable investment tax credits for property installed at a new or retrofitted electric generating unit that captures and permanently “sequesters” carbon dioxide. New plants must capture greater than 75 percent of their carbon dioxide emissions. Eligible investment for retrofitted units must capture greater than 75 percent of the carbon dioxide emissions. Retrofits must apply to existing plant units that have capacities greater than 250 megawatts and that capture and store more than 1 million metric tons of carbon dioxide annually. No more than 60 percent of the total credits may flow to either class of project. In addition, no more than 40 percent of the total credits may flow to any one of the following technology categories: (1) liquid solvents, (2) solid sorbents, (3) gas-separation membranes, (4) warm gas clean-up, (5) oxygen fired combustion systems, and (6) hybrid systems. A minimum of 70 percent of the credits must flow to projects fueled by greater than 75 percent coal. The Administration also proposes to provide a 20-year, refundable sequestration tax credit for facilities qualifying for the investment credit at a rate of $50 per metric ton for carbon dioxide permanently sequestered and not beneficially reused and $10 per metric ton for carbon dioxide that is permanently sequestered and beneficially reused or is associated with an industrial non-power source. Both credit rates would be indexed for inflation. Provide additional tax credits for investment in qualified property used in a qualifying advanced energy manufacturing project.—A 30-percent credit for investment in eligible property used in a qualifying advanced energy manufacturing project was provided under ARRA. A qualifying advanced energy manufacturing project re-equips, expands, or establishes a manufacturing facility for the production of: (1) property designed to be used to produce energy from the sun, wind, geothermal deposits, or other renewable resources; (2) fuel cells, microturbines, or an energy storage system for use with electric or hybrid-electric motor vehicles; (3) electric grids to support the transmission of intermittent sources of renewable energy, including the storage of such energy; (4) property designed to capture and sequester carbon dioxide; (5) property designed to refine or blend renewable fuels (excluding fossil fuels) or to produce energy conservation technologies; (6) new qualified plug-in electric drive motor vehicles or components that are designed specifically for use with such vehicles; or (7) other advanced energy property designed to reduce greenhouse gas emissions as may be determined by the Department of the Treasury. Eligible property must be depreciable (or amortizable) property used in a qualifying advanced energy project and does not include property designed to manufacture equipment for use in the refining or blending of any transportation fuel other than renewable fuels. The credit is available only for projects certified by the Department of the Treasury (in consultation with the Department of Energy). The Administration proposes ANALYTICAL PERSPECTIVES to provide an additional $2.5 billion in credits, thereby increasing the amount of credits to $4.8 billion. In addition, the Administration proposes to allow up to $200 million of these credits to be allocated to the construction of infrastructure that contributes to networks of refueling stations that serve alternative fuel vehicles. Provide new Manufacturing Communities tax credit.—The Administration proposes to provide new tax credit authority to support qualified investments in communities affected by military base closures or mass layoffs, such as those arising from plant closures. This would provide about $2 billion in credits for qualified investments approved in each of the three years, 2016 through 2018. Extend the tax credit for second generation biofuel production.—The Administration proposes to retroactively extend the tax credit for blending cellulosic fuel, which expired on December 31, 2014, at $1.01 per gallon through December 31, 2020. The amount of the credit would then be reduced by 20.2 cents per gallon in each subsequent year, so that the credit would expire after December 31, 2024. Incentives to Promote Regional Growth Modify and permanently extend the New Markets tax credit (NMTC).—The NMTC is a 39-percent credit for qualified equity investments made in qualified community development entities that are held for a period of seven years. The NMTC provision expired at the end of 2014. The Administration proposes to permanently extend the NMTC. Up to $5 billion in qualifying investment would be allowed in each year beginning in 2015. The proposal would also permit the NMTC to permanently offset AMT liability. Reform and expand the Low-Income Housing tax credit (LIHTC).—The LIHTC provides a tax incentive for affordable rental housing developments. The Administration proposes to make several changes to the rules governing LIHTCs. First, States would be empowered to convert some private-activity-bond volume cap into authority to allocate additional LIHTCs. Also, a building would be able to qualify for 30-percent-present-value LIHTCs without issuing bonds if the building receives an adequate allocation of tax-exempt volume cap. This proposal would provide States greater flexibility to address their affordable housing priorities, and would reduce transaction and financing costs. These changes would be effective for new volume cap received by States for calendar years beginning after the date of enactment, or for volume cap that is allocated to a building after that date. Second, to provide incentives for creating mixed-income housing, projects would be allowed to comply with an income-average rule for LIHTC eligibility. Under this new rule, the average income for at least 40 percent of the units in a project could not exceed 60 percent of area median income (AMI). None of these units could be occupied by households with income greater than 80 percent of AMI. Buildings must meet this new average income 12. GOVERNMENTAL RECEIPTS threshold calculated both: (1) with all low-income units weighted equally; and (2) with each low-income unit weighted according to imputed LIHTC occupancy rules. For rehabilitation projects containing units that receive ongoing subsidies administered by the Department of Housing and Urban Development or the Department of Agriculture (e.g., rental assistance, operating subsidies, or interest subsidies), a special rule would permit certain non-income qualified tenants to remain in residence without impairing the LIHTCs earned by the project. This provision adds to the two income criteria currently available for LIHTC developments, and would apply to LIHTC elections that are made after the date of enactment. Third, the formulas that produce the rates for the credits that are subject to the LIHTC allocation cap would be changed. The revised formulas would produce annual credit rates that are higher than those produced under current law, and would result in a more consistent benefit over the interest rate spectrum. This change would apply to allocations made on or after the date of enactment. Fourth, preservation of federally-assisted affordable housing would be added to the selection criteria for LIHTC allocation. This factor would join the ten criteria that State housing agencies must include in the qualified action plans that they consider when awarding LIHTCs. This change would apply to allocations made in calendar years beginning after the date of enactment. Fifth, the Administration proposes to allow the Department of Housing and Urban Development (HUD) to designate as a qualified census tract (QCT) any census tract that meets certain criteria for the prevalence of poverty or low-income households. A building in a QCT earns 30 percent more LIHTCs than it would in another location. The proposal would remove a current limit under which the aggregate population in census tracts designated as QCTs cannot exceed 20 percent of the metropolitan area’s population. As a result of this limit, some census tracts with qualifying levels of poverty or lowincome households may currently fail to be designated as QCTs because neighboring tracts also qualify. This change would apply to allocations made after the date of enactment. Sixth, the proposal adds protection for victims of domestic violence as a mandatory provision of the longterm-use agreement required by the Internal Revenue Code between each LIHTC taxpayer and the State. To make the protection meaningful, victims of domestic violence would be given a right to enforce the agreement in State courts. Incentives for Investment in Infrastructure Provide America Fast Forward Bonds and expand eligible uses.—ARRA created the Build America Bond program as an optional new lower cost borrowing incentive for State and local governments on taxable bonds issued in 2009 and 2010 to finance new investments in governmental capital projects. Under the original program applicable to Build America Bonds issued in 2009 and 2010, the Department of the Treasury makes direct 165 subsidy payments (called “refundable tax credits”) to State and local governmental issuers in a subsidy amount equal to 35 percent of the coupon interest on the bonds. The Administration proposes to create a new permanent America Fast Forward Bond program, which would be an optional alternative to traditional tax-exempt bonds. Like Build America Bonds, America Fast Forward Bonds would be conventional taxable bonds issued by State and local governments in which the Federal Government makes direct payments to State and local governmental issuers (refundable tax credits). The subsidy rate would be 28 percent, which is approximately revenue neutral in comparison to the Federal tax losses from traditional tax-exempt bonds. The Administration proposes to expand the eligible uses for America Fast Forward Bonds beyond those for the Build America Bond program to include financing for governmental capital projects, current refundings of prior public capital project financings, short-term governmental working capital financings for governmental operating expenses subject to a 13-month maturity limitation, financing for section 501(c)(3) nonprofit entities, and financing for the types of projects and programs that can be financed with qualified private activity bonds subject to applicable State bond volume caps for the qualified private activity bond category. Further, eligible uses would include projects that can be financed with a new category of qualified private activity bond, known as “Qualified Public Infrastructure bonds,” under a separate budget proposal described below. The proposal, which would be effective for bonds issued beginning in 2016, recommends exempting direct payments to State and local government issuers under the American Fast Forward Bond program from sequestration under BBEDCA. Allow current refundings of State and local governmental bonds.—Current law provides Federal tax subsidies for lower borrowing costs on debt obligations issued by State and local governments for eligible purposes under various programs. These programs include traditional tax-exempt bonds and other temporary or targeted qualified tax credit bond programs (e.g., qualified school construction bonds) and direct borrowing subsidy payment programs (e.g., Build America Bonds). State and local bond programs have varied in the extent to which they expressly allow or treat refinancings (as distinguished from original financings to fund eligible program purposes). In a “current refunding” of State and local bonds, the refunded bonds are retired promptly within 90 days after issuance of the refinancing bonds. These refundings generally reduce borrowing costs for State and local governmental issuers, and they also reduce Federal revenue losses due to the Federal borrowing subsidies for State and local bonds. A general authorization for current refundings of State and local bonds not currently covered by specific refunding authority would promote greater uniformity, tax certainty, and borrowing cost savings. The Administration proposes to allow current refundings of these State and local bonds if: (1) the principal amount of the current refunding bonds is no greater than the outstanding principal amount of the refunded bonds, and (2) 166 the weighted average maturity of the current refunding bonds is no longer than the remaining weighted average maturity of the refunded bonds. This proposal would be effective as of the date of enactment. Repeal the $150 million non-hospital bond limitation on all qualified 501(c)(3) bonds.—The Tax Reform Act of 1986 established a $150 million limit on the volume of outstanding non-hospital, tax-exempt bonds used for the benefit of a section 501(c)(3) organization. The provision was repealed in 1997 with respect to bonds issued after August 5, 1997, at least 95 percent of the net proceeds of which are used to finance capital expenditures incurred after that date. The limitation continues to apply to bonds more than five percent of the net proceeds of which finance or refinance: (1) working capital expenditures, or (2) capital expenditures incurred on or before August 5, 1997. The Administration proposes to repeal in its entirety the $150 million limit on the volume of outstanding, non-hospital, tax-exempt bonds for the benefit of a section 501(c)(3) organization, effective for bonds issued after the date of enactment. Increase national limitation amount for qualified highway or surface freight transfer facility bonds.— Tax-exempt private activity bonds may be used to finance qualified highway or surface freight transfer facilities. A qualified highway or surface freight transfer facility is any surface transportation, international bridge, or tunnel project that receives Federal assistance under title 23 of the United States Code, or any facility for the transfer of freight from truck or rail to truck that receives Federal assistance under title 23 or title 49 of the United States Code. Tax-exempt bonds issued to finance qualified highway or surface freight transfer facilities are not subject to State volume cap limitations. Instead, the Secretary of Transportation is authorized to allocate a total of $15 billion of issuance authority to qualified highway or surface freight transfer facilities in such manner as the Secretary determines appropriate. The Administration proposes to increase the $15 billion aggregate amount permitted to be allocated by the Secretary of Transportation to $19 billion with the elimination of this category of bond and conversion to qualified public infrastructure bonds once these funds are allocated. Provide a new category of qualified private activity bonds for infrastructure projects referred to as “qualified public infrastructure bonds” (QPIBs).— Under the proposal, QPIBs, a new category of tax-exempt private activity bonds, would be available for the financing of newly constructed or substantially rehabilitated infrastructure facilities owned by governmental entities and available for general public use. Infrastructure facilities eligible for QPIB financing would include airports, docks and wharves, mass commuting facilities, facilities for the furnishing of water, sewage facilities, solid waste disposal facilities, and qualified highway or surface freight transfer facilities. Existing overlapping categories of qualified private activity bonds that can be financed with QPIBs generally would be eliminated. The existing category for qualified highway or surface freight transfer facilities would continue to be available for the existing $15 billion ANALYTICAL PERSPECTIVES bond volume authorization and the proposed additional $4 billion authorization under the preceding Budget proposal. QPIBs would not be subject to volume cap and the interest would not be a preference that is subject to tax under the AMT. The proposal also expands the safe harbor rule for ownership by a governmental unit where such facilities are leased or subject to concession agreements or management contracts to QPIBs, which would open up use of tax-exempt financing for public-private partnerships. The proposal would be effective for bonds issued beginning in 2016. Modify qualified private activity bonds for public education facilities.—Current law permits tax-exempt private activity bond financing for different specified types of eligible exempt facilities and programs, including, among others, “qualified public educational facilities” that are part of public elementary or secondary schools. The current eligibility rules require that a private “corporation” own the public school facilities under a public-private partnership agreement with a public State or local educational agency and that the private corporation transfer the ownership of the school facilities to the public agency at the end of the term of the bonds for no additional consideration. The proposal would eliminate the private corporation ownership requirement and instead would allow any private person, including private entities organized in ways other than as corporations, either to own the public school facilities or to operate those school facilities through lease, concession, or other operating arrangements. Further, since private ownership would no longer be an eligibility condition, the proposal would remove the requirement to transfer the school facilities to a public agency at the end of the term of the bonds for no additional consideration. In addition, the proposal would remove the separate volume cap for qualified public educational facilities and instead would include these facilities under the unified annual State bond volume cap. The proposal would be effective for bonds issued after the date of enactment. Modify treatment of banks investing in tax-exempt bonds.—Under current law, financial institutions’ interest deductions are generally reduced by 100 percent of the interest expense allocable to assets that produce tax-exempt interest income. Financial institutions, however, can generally deduct 80 percent of interest expense allocated to qualified small issuer bonds. Qualified small issuer bonds are certain tax-exempt bonds issued by States and localities that annually issue no more than $10 million of such bonds. The proposal would increase the size limit for the qualified small issuer bond exception from $10 million to $30 million. Moreover, under current law, if a bank has made the election to be taxed under subchapter S or if the bank is a qualified subchapter S subsidiary, the bank is exempt even from the 20-percent disallowance of interest expense allocable to qualified small issuer bonds. The proposal would make these banks subject to the 20-percent disallowance and thus would equalize the treatment of financial institutions. Finally, the proposal also would allow financial institutions to deduct up to 80 percent of interest expense allocable to any tax-exempt obligations 167 12. GOVERNMENTAL RECEIPTS (whether or not a qualified small issuer bond) subject to a cap that would limit the benefit of this rule to interest expense allocable to bonds representing no more than two percent of the basis of the institution’s assets. This two-percent cap, however, would not apply to the qualified small issuer bond exception. The proposal would apply to bonds issued in calendar years beginning on or after January 1, 2016. Repeal tax-exempt bond financing of professional sports facilities.—Current law permits the use of taxexempt governmental bond proceeds for private activities unless both of the following apply: (1) more than 10 percent of the payment of the debt service is from a private business source, and (2) more than 10 percent of the use of the facility is for a private business use. Thus, even if use by a professional sports team of a bond-financed stadium exceeds 10 percent of the total use of the facility, the financing will be tax-exempt if the debt service is paid from sources other than sports facility revenues or other private payments. The proposal would eliminate the private payment test for professional sports facilities such that bonds to finance professional sports facilities would be taxable private activity bonds if more than 10 percent of the use of the facility is for a private business purpose. By removing the private payment test, tax-exempt governmental bond financing of sports facilities for professional sports teams would be eliminated. The proposal would be effective for bonds issued after December 31, 2015. Allow more flexible research arrangements for purposes of private business use limits.—Under current law, the IRS provides safe harbors that allow certain basic research arrangements with private businesses at tax-exempt bond financed research facilities. The existing safe harbors impose certain constraints on setting the terms of use of patents or other products resulting from the research, based on specific legislative history. In particular, the terms of use of resulting products for both research sponsors and other users alike must be set only after the products become available for use even though research arrangements typically are made prior to discoveries. The Administration proposes to provide additional flexibility for bona fide arm’s length arrangements relating to basic research that would allow setting the terms of use of resulting products in advance of when the products become available for use. The proposal would be effective for research arrangements entered into after the date of enactment. Modify tax-exempt bonds for Indian tribal governments (ITGs).—In general, current law limits ITGs in their use of tax-exempt bonds to the financing of certain “essential governmental function” activities that are customarily performed by State and local governments. ARRA provided a limited $2 billion authorization of “Tribal Economic Development Bonds,” which gives ITGs more flexibility to use tax-exempt bonds under standards that are more comparable to those applied to State and local governments in their use of tax-exempt bonds (subject to certain express targeting restrictions that require financed projects to be located on Indian reservations and that prohibit the financing of certain gaming facilities). In December 2011, the Department of the Treasury submitted a required report to the Congress regarding its study of the Tribal Economic Development Bond provision and its recommendations for ITG tax-exempt bond financing. The Administration proposes to modify the standards for ITG tax-exempt bond financing to reflect the recommendations in this report. In particular, the Administration’s proposal generally would adopt the State or local government standard for tax-exempt governmental bonds without a bond volume cap on such governmental bonds for purposes of ITG eligibility to issue tax-exempt governmental bonds. The proposal would repeal the existing essential governmental function standard for ITG taxexempt bond financing. In addition, the proposal would allow ITGs to issue tax-exempt private activity bonds for the same types of projects and activities as are allowed for State and local governments, under a modified national bond volume cap to be administered by the Department of the Treasury. Further, the proposal generally would continue an existing targeting restriction that would require projects financed with ITG bonds to be located on Indian reservations, with some additional flexibility to finance projects that have a requisite nexus to Indian reservations and that serve resident populations of Indian reservations. Finally, the proposal would continue an existing targeting restriction that prohibits financing of certain gaming projects. This proposal would be effective as of the date of enactment. Exempt foreign pension funds from the application of the Foreign Investment in Real Property Tax Act (FIRPTA).—Under current law, gains of foreign investors from the disposition of U.S. real property interests are generally subject to U.S. tax under FIRPTA. Gains of U.S. pension funds from the disposition of U.S. real property interests are generally exempt from U.S. tax. The Administration proposes to exempt from U.S. tax under FIRPTA certain gains of foreign pension funds from the disposition of U.S. real property interests. The proposal would be effective for dispositions of U.S. real property interests occurring after December 31, 2015. Eliminate Fossil Fuel Tax Preferences Eliminate fossil fuel tax preferences.—Current law provides a number of credits and deductions that are targeted towards certain oil, natural gas, and coal activities. In accordance with the President’s agreement at the G-20 Summit in Pittsburgh to phase out inefficient subsidies for fossil fuels so that the Nation can transition to a 21st century energy economy, the Administration proposes to repeal a number of tax preferences available for fossil fuels. The following tax preferences available for oil and natural gas activities are proposed to be repealed beginning in 2016: (1) the enhanced oil recovery credit for eligible costs attributable to a qualified enhanced oil recovery project; (2) the credit for oil and natural gas produced from marginal wells; (3) the expensing of intangible drilling costs; (4) the deduction for costs paid or incurred for any tertiary injectant used as part of a tertiary recovery method; (5) the exception to passive loss limitations 168 ANALYTICAL PERSPECTIVES provided to working interests in oil and natural gas properties; (6) the use of percentage depletion with respect to oil and natural gas wells; (7) the ability to claim the domestic production manufacturing deduction against income derived from the production of oil and natural gas; and (8) two-year amortization of independent producers’ geological and geophysical expenditures, instead allowing amortization over the same seven-year period as for integrated oil and natural gas producers. The following tax preferences available for coal activities are proposed to be repealed beginning in 2016: (1) expensing of exploration and development costs; (2) percentage depletion for hard mineral fossil fuels; (3) capital gains treatment for royalties; and (4) the ability to claim the domestic manufacturing deduction against income derived from the production of coal and other hard mineral fossil fuels. In addition, under the proposal, publicly traded partnerships with qualifying income and gains from activities relating to fossil fuels would be taxed as C corporations beginning in 2021. Reform the Treatment of Financial and Insurance Industry Products Require that derivative contracts be marked to market with resulting gain or loss treated as ordinary.—Under current law, derivative contracts are subject to various rules on timing and character. The Administration’s proposal would require that gain or loss from a derivative contract be reported on an annual basis as if the contract were sold for its fair market value no later than the last business day of the taxpayer’s taxable year. Gain or loss resulting from the contract would be treated as ordinary and as attributable to a trade or business of the taxpayer. A derivative contract would be broadly defined to include any contract the value of which is determined, directly or indirectly, in whole or in part, by actively traded property. A derivative contract that is embedded in another financial instrument or contract is subject to mark to market if the derivative by itself would be marked. In addition, a taxpayer that enters into a derivative contract that substantially diminishes the risk of loss on actively traded stock that is not otherwise marked to market would be required to mark the stock to market with preexisting gain recognized at that time and loss recognized when the financial instrument would have been recognized in the absence of the straddle. An exception from mark-to-market treatment would be provided for business hedging transactions. The proposal would apply to contracts entered into after December 31, 2015. Modify rules that apply to sales of life insurance contracts.—The seller of a life insurance contract generally must report as taxable income the difference between the amount received from the buyer and the adjusted basis of the contract. When death benefits are received under the contract, the buyer is taxed on the excess of those benefits over the amounts paid for the contract, unless an exception to this “transfer-for-value” rule applies. Among the exceptions are transfers to the insured, to a partner of the insured, to a partnership in which the in- sured is a partner, or to a corporation in which the insured is a shareholder or officer. The Administration proposes to replace these excepted transfers with exceptions for transfers to the insured, or to a partnership or a corporation of which the insured owns at least 20 percent of the partnership or corporation. Furthermore, in response to the growth in the number and size of life settlement transactions, the Administration proposes to expand information reporting on the sale of life insurance contracts and the payment of death benefits on contracts that were sold. The proposal would apply to sales or assignments of interests in life insurance policies and payments of death benefits for taxable years beginning after December 31, 2015. Modify proration rules for life insurance company general and separate accounts.—Under current law, a life insurance company is required to “prorate” its net investment income between a company’s share and the policyholders’ share. The result of this proration calculation is used to limit the funding of tax-deductible reserve increases with tax-preferred income. However, the complexity of this proration regime has generated significant controversy between life insurance companies and the IRS. The Administration proposes to replace the current regime with one that is simpler and less controversial. Under the proposal, a company’s share would be calculated for a life insurance company’s general account and individually for each of its separate accounts. The company’s share would equal one less the ratio of an account’s mean reserves to its mean assets. The company’s share would determine the portion of the non-affiliated corporate dividends received by the company that would be eligible for a dividends-received deduction. It would also determine the portion of interest earned on State and local bonds and the portion of increases for the taxable year in certain policy cash values of life insurance and annuity policies that would be exempt from tax. The proposal would be effective for taxable years beginning after December 31, 2015. Expand pro rata interest expense disallowance for corporate-owned life insurance.—The interest deductions of a business other than an insurance company are reduced to the extent the interest paid or accrued is allocable to unborrowed policy cash values on life insurance and annuity contracts. The purpose of this pro rata disallowance is to prevent the deduction of interest expense that is allocable to the inside buildup of insurance and annuity contracts that is either tax-deferred or not taxed at all. An exception to this rule applies under current law to contracts covering the lives of officers, directors, employees, and 20-percent owners of the taxpayer. The Administration proposes to repeal the exception for officers, directors, and employees unless those individuals are also 20-percent owners of the business that is the owner or beneficiary of the contracts. Thus, purchases of life insurance by small businesses and other taxpayers that depend heavily on the services of a 20-percent owner would be unaffected, but the funding of deductible interest expenses with tax-exempt or tax-deferred inside buildup would be curtailed. The proposal would apply 12. GOVERNMENTAL RECEIPTS to contracts issued after December 31, 2015, in taxable years ending after that date. Conform net operating loss (NOL) rules of life insurance companies to those of other corporations.—Current law generally allows businesses to carry back an NOL up to two taxable years preceding the taxable year of loss (loss year) and to carry forward an NOL up to 20 taxable years following the loss year. Life insurance companies, however, may carry a “loss from operations” (a life insurance company’s NOL equivalent) back three taxable years preceding the loss year and forward 15 taxable years following the loss year. The proposal would establish operating loss conformity for life insurance companies by allowing a loss from operations to be carried back up to two taxable years prior to the loss year, and carried forward 20 taxable years following the loss year. The proposal would be effective for taxable years beginning after December 31, 2015. Other Revenue Changes and Loophole Closers Repeal last-in, first-out (LIFO) method of accounting for inventories.—Under the LIFO method of accounting for inventories, it is assumed that the cost of the items of inventory that are sold is equal to the cost of the items of inventory that were most recently purchased or produced. The Administration proposes to repeal the use of the LIFO accounting method for Federal tax purposes, effective for taxable years beginning after December 31, 2015. Assuming inventory costs rise over time, taxpayers required to change from the LIFO method under the proposal generally would experience a permanent reduction in their deductions for cost of goods sold and a corresponding increase in their annual taxable income as older, cheaper inventory is taken into account in computing taxable income. Taxpayers required to change from the LIFO method also would be required to change their method of accounting for inventory and report their beginning-of-year inventory at its first-in, first-out (FIFO) value in the year of change. Taxpayers would recognize any income resulting from the change in accounting ratably over 10 years. Repeal lower-of-cost-or-market inventory accounting method.—The Administration proposes to prohibit the use of the lower-of-cost-or-market and subnormal goods methods of inventory accounting, which currently allow certain taxpayers to take cost-of-goodssold deductions on certain merchandise before the merchandise is sold. The proposed prohibition would be effective for taxable years beginning after December 31, 2015. Taxpayers would recognize any income resulting from the change in accounting method ratably over four years. Modify like-kind exchange rules for real property and collectibles.—Under section 1031 of the Internal Revenue Code, no gain or loss is recognized when business or investment property is exchanged for “like-kind” business or investment property. The Administration proposes to limit the amount of capital gain deferred under section 1031 from the exchange of real property 169 to $1,000,000 (indexed for inflation) per taxpayer per taxable year. In addition, art and collectibles would no longer be eligible for like-kind exchanges. The proposal would be effective for like-kind exchanges completed after December 31, 2015. Modify depreciation rules for purchases of general aviation passenger aircraft.—Under current law, airplanes used in commercial and contract carrying of passengers and freight generally are depreciated over seven years. Airplanes not used in commercial or contract carrying of passengers or freight, such as corporate jets, generally are depreciated over five years. The Administration proposes to increase the depreciation recovery period for general aviation airplanes that carry passengers to seven years, effective for such airplanes placed in service after December 31, 2015. Expand the definition of substantial built-in loss for purposes of partnership loss transfers.—Upon a sale or exchange of a partnership interest, certain partnerships, including partnerships that have a substantial built-in loss in their assets, must adjust the basis of those assets. A substantial built-in loss is defined by reference to the partnership’s adjusted basis – that is, there is a substantial built-in loss if the partnership’s adjusted basis in its assets exceeds by more than $250,000 the fair market value of such property. Although the provision prevents the duplication of losses where the partnership has a substantial built-in loss in its assets, it does not prevent the duplication of losses where the transferee partner would be allocated a loss in excess of $250,000 if the partnership sold all of its assets, but the partnership itself does not have a substantial built-in loss in its assets. Accordingly, the Administration proposes to measure a substantial built-in loss also by reference to whether the transferee would be allocated a loss in excess of $250,000 if the partnership sold all of its assets immediately after the sale or exchange. The proposal would apply to sales or exchanges after the date of enactment. Extend partnership basis limitation rules to nondeductible expenditures.—A partner’s distributive share of loss is allowed as a deduction only to the extent of the partner’s adjusted basis in its partnership interest at the end of the partnership year in which such loss occurred. Any excess is allowed as a deduction at the end of the partnership year in which the partner has sufficient basis in its partnership interest to take the deductions. This basis limitation does not apply to partnership expenditures that are not deductible in computing its taxable income and not properly chargeable to capital account. Thus, even though a partner’s distributive share of nondeductible expenditures reduces the partner’s basis in its partnership interest, such items are not subject to the basis limitation and the partner may deduct or credit them currently even if the partner’s basis in its partnership interest is zero. The Administration proposes to allow a partner’s distributive share of expenditures not deductible in computing the partnership’s taxable income and not properly chargeable to capital account only to the extent of the partner’s adjusted basis in its partnership interest at the end of the partnership year in which such 170 expenditure occurred. The proposal would apply to a partnership’s taxable year beginning on or after the date of enactment. Limit the importation of losses under related party loss limitation rules.—If a loss sustained by a transferor is disallowed under section 267(a)(1) or section 707(b)(1) of the Internal Revenue Code because the transferor and transferee are related, then the transferee may reduce any gain the transferee later recognizes on a disposition of the transferred asset by the amount of the loss disallowed to the transferor. This has the effect of shifting the benefit of the loss from the transferor to the transferee. Thus, losses can be imported where gain or loss with respect to the property is not subject to Federal income tax in the hands of the transferor immediately before the transfer but any gain or loss with respect to the property is subject to Federal income tax in the hands of the transferee immediately after the transfer. To prevent this, the Administration proposes to limit application of the gain reduction rule to the extent gain or loss with respect to the property is not subject to Federal income tax in the hands of the transferor immediately before the transfer but any gain or loss with respect to the property is subject to Federal income tax in the hands of the transferee immediately after the transfer. The proposal would apply to transfers made after the date of enactment. Deny deduction for punitive damages.—The Administration proposes to deny tax deductions for punitive damages paid or incurred by a taxpayer, whether upon a judgment or in settlement of a claim. Where the liability for punitive damages is covered by insurance, such damages paid or incurred by the insurer would be included in the gross income of the insured person. This proposal would apply to damages paid or incurred after December 31, 2015. Conform corporate ownership standards.—Taxfree treatment of corporate reorganizations, distributions, and incorporations generally turns on whether shareholders acquire or retain “control” of the relevant corporation. For this purpose, control is defined as the ownership of 80 percent of the corporation’s voting stock and 80 percent of the number of shares of all other classes of stock of the corporation. In contrast, the ownership standard for corporate affiliation (required for filing consolidated returns, tax-free parent-subsidiary liquidations, and treating certain stock dispositions as asset sales) is the direct or indirect ownership by a parent corporation of at least 80 percent of the total voting power of another corporation’s stock and at least 80 percent of the total value of that other corporation’s stock. The control test for tax-free reorganizations, distributions, and incorporations is easily manipulated by allocating voting power among the shares of a corporation, and the absence of a value component allows shareholders to retain voting control of a corporation but to economically “sell” a significant amount of the value of the corporation. In addition, the existence of two ownership standards in the corporate tax area causes unnecessary complexity and traps for the unwary. The Administration proposes to substitute the ownership test for affiliation for the control test used in connection with ANALYTICAL PERSPECTIVES tax-free incorporations, distributions, and reorganizations. The proposal would be effective for transactions occurring after December 31, 2015. Tax corporate distributions as dividends.—The Administration proposes to amend the Internal Revenue Code to ensure that a transfer of property by a corporation to its shareholder better reflects the corporation’s dividend paying capacity. First, the Administration proposes to tax non-dividend “leveraged distributions” from a distributing corporation as a dividend distribution made by a related corporation directly to the distributing corporation’s shareholder to the extent the related corporation funded the distribution with a principal purpose of not treating the distribution from the distributing corporation to its shareholder as a dividend. Second, the Administration proposes to repeal the “boot-within-gain” limitation under section 356(a) of the Internal Revenue Code in reorganization transactions in which the shareholder’s exchange has the effect of the distribution of a dividend. For this purpose, the Administration also proposes to align the available pool of earnings and profits for such distributions with that for ordinary distributions. Third, the Administration proposes amending section 312(a)(3) of the Internal Revenue Code so that earnings and profits are reduced only by the distributing corporation’s basis in any high-basis distributed stock, determined without regard to basis adjustments resulting from actual or deemed dividend equivalent redemptions, or any series of distributions or transactions undertaken with a view to create and distribute high-basis stock of any corporation. Fourth, the Administration proposes disregarding a subsidiary’s purchase of “hook stock” issued by a controlling corporation in exchange for property so that the property used to purchase the hook stock gives rise to a deemed distribution from the purchasing subsidiary (through any intervening entities) to the issuing corporation. The hook stock would be treated as being contributed by the issuer (through any intervening entities) to the subsidiary. The proposal would grant the Secretary of the Treasury authority to prescribe regulations necessary to achieve the purposes of this proposal, including regulations to: (1) treat transactions as leveraged distributions; (2) treat purchases of interests in shareholder entities other than corporations as hook stock and provide rules related to hook stock within a consolidated group; and (3) treat a transaction as undertaken with a view to create and distribute high-basis stock of any corporation. The first, second and fourth proposals would be effective for transactions occurring after December 31, 2015. The third proposal would be effective upon enactment. Repeal Federal Insurance Contribution Act (FICA) tip credit.—Certain employers in food and beverage service industries may receive an income tax credit for FICA taxes they pay on employee tip income. The credit applies to Social Security and Medicare taxes paid on the portion of an employee’s tip income that, when added to the employee’s non-tip wages, exceeds $5.15 per hour. The Administration proposes to repeal the income tax credit for the FICA taxes an employer pays on tips, effective for taxable years beginning after December 31, 2015. 171 12. GOVERNMENTAL RECEIPTS Repeal the excise tax credit for distilled spirits with flavor and wine additives.—Distilled spirits are taxed at a rate of $13.50 per proof gallon. Some distilled spirits are flavored with wine or other additives. Current law allows a credit against the $13.50 per proof gallon excise tax on distilled spirits for flavor and wine additives. As a result of the credit, flavorings of up to 2.5 percent of the distilled spirit mixture are tax exempt, and wine in a distilled spirits mixture is taxed at the lower rate on wine. Thus, the credit reduces the effective excise tax rate paid on distilled spirits with such content. The proposal would repeal this credit effective for all spirits produced in or imported into the United States after December 31, 2015. Table 12–3. RESERVE FOR BUSINESS TAX REFORM THAT IS REVENUE NEUTRAL IN THE LONG RUN (In millions of dollars) 2015 Reform the U.S. international tax system: Restrict deductions for excessive interest of members of financial reporting groups ��� Provide tax incentives for locating jobs and business activity in the United States and remove tax deductions for shipping jobs overseas ������������������������������������������������� Repeal delay in the implementation of worldwide interest allocation ������������������� Extend the exception under subpart F for active financing income �������������������������� Extend the look-through treatment of payments between related CFCs ����������� Impose a 19-percent minimum tax on foreign income ���������������������������������������� Impose a 14-percent one-time tax on previously untaxed foreign income 1 ������� Limit shifting of income through intangible property transfers ����������������������������������� Disallow the deduction for excess non-taxed reinsurance premiums paid to affiliates ���� 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2016–20 2016–25 ......... 2,566 4,533 4,987 5,485 6,034 6,637 7,301 8,031 8,834 9,718 23,605 64,126 ......... –13 –22 –23 –24 –25 –25 –27 –28 –29 –31 –107 –247 ......... –1,352 –2,308 –2,400 –2,496 –2,596 –1,055 ......... ......... ......... ......... –4,081 –7,006 –7,356 –7,724 –8,110 –8,516 –8,942 –9,389 –9,858 –10,351 –34,277 –81,333 ......... –488 –838 –880 –924 –971 –1,019 –1,070 –1,124 –1,180 –1,239 –4,101 ......... 11,881 19,710 19,873 20,246 20,633 21,200 21,799 22,675 23,478 24,481 92,343 205,976 ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... 88 167 201 237 275 315 361 413 473 542 968 3,072 ......... 346 616 667 708 744 784 829 863 897 934 3,081 7,388 Modify tax rules for dual capacity taxpayers ���� Tax gain from the sale of a partnership interest on look-through basis ���������������� Modify sections 338(h)(16) and 902 to limit credits when non-double taxation exists �� ......... 533 914 956 999 1,043 1,089 1,119 1,168 1,220 1,274 4,445 10,315 ......... 183 253 266 279 293 308 323 339 356 374 1,274 2,974 ......... 55 95 102 105 105 105 105 105 106 106 462 989 Close loopholes under subpart F ���������������� Restrict the use of hybrid arrangements that create stateless income �������������������������� Limit the ability of domestic entities to expatriate ������������������������������������������������ Total, reform the U.S. international tax system ���������������������������������������������� ......... 1,449 2,519 2,699 2,890 3,094 3,312 3,543 3,789 4,051 4,330 12,651 31,676 ......... 116 201 215 230 246 264 283 304 326 350 1,008 2,535 ......... 113 311 530 769 1,031 1,317 1,630 1,970 2,340 2,743 2,754 12,754 ......... 11,396 19,145 19,837 20,780 21,796 24,716 27,254 29,116 31,014 33,231 –7,200 –10,941 –8,935 –7,300 –6,254 –5,502 –5,108 –4,968 –4,896 –4,929 –5,012 –38,932 –63,845 –472 –12,333 –14,757 Simplification and tax relief for small business: Expand and permanently extend increased expensing for small business ������������������ Expand simplified accounting for small business and establish a uniform definition of small business for accounting methods ������������������������������� Eliminate capital gains taxation on investments in small business stock ������� Increase the limitations for deductible new business expenditures and consolidate provisions for start-up and organizational expenditures ������������������������������������������� Expand and simplify the tax credit provided to qualified small employers for nonelective contributions to employee health insurance 2 ���������������������������������������������� Total, simplification and tax relief for small business ���������������������������������� Incentives for manufacturing, research, and clean energy: ......... –11,152 –12,207 –9,733 92,954 238,285 ......... –5,812 –3,809 –1,443 –762 –507 –492 –493 –488 –479 ......... ......... ......... ......... ......... –206 –710 –1,277 –1,811 –2,342 –2,869 –206 –9,215 ......... –359 –446 –440 –434 –431 –428 –426 –423 –419 –415 –2,110 –4,221 –24 –305 –328 –218 –174 –148 –102 –113 –76 –60 –26 –1,173 –1,550 –7,224 –17,417 –13,518 –9,401 –7,624 –6,794 –6,840 –7,277 –7,694 –8,229 –8,794 –54,754 –93,588 172 ANALYTICAL PERSPECTIVES Table 12–3. RESERVE FOR BUSINESS TAX REFORM THAT IS REVENUE NEUTRAL IN THE LONG RUN—Continued (In millions of dollars) Enhance and make permanent research incentives ������������������������������������������������ Extend and modify certain employment tax credits, including incentives for hiring veterans �������������������������������������������������� Modify and permanently extend renewable electricity production tax credit and investment tax credit 2 ����������������������������� Modify and permanently extend the deduction for energy-efficient commercial building property ������������������������������������� Provide a carbon dioxide investment and sequestration tax credit 2 ������������������������ Provide additional tax credits for investment in qualified property used in a qualifying advanced energy manufacturing project ���� Provide new Manufacturing Communities tax credit ������������������������������������������������� Extend the tax credit for second generation biofuel production ����������������������������������� Total, incentives for manufacturing, research, and clean energy �������������� 2015 2016 2017 –3,552 –7,529 –9,290 –10,356 –11,389 –12,396 –13,387 –14,370 –15,352 –16,336 –17,327 –50,960 –127,732 –403 –796 –885 –950 –997 –1,033 –1,074 –1,121 –1,167 –1,210 –1,255 –4,661 –10,488 ......... 596 –869 –2,323 –2,775 –3,283 –3,695 –4,075 –4,524 –4,991 –5,513 –8,654 –31,452 ......... –170 –256 –294 –302 –298 –290 –280 –270 –260 –252 –1,320 –2,672 ......... ......... ......... –174 –1,094 –1,149 –600 –466 –495 –521 –541 –2,417 –5,040 ......... ......... –73 –192 –1,111 –772 –94 14 48 40 37 –2,148 –2,103 ......... –87 –256 –457 –600 –683 –745 –784 –689 –447 –145 –2,083 –4,893 –35 –80 –119 –149 –163 –175 –183 –158 –113 –65 –18 –686 –1,223 –3,990 2018 2019 2020 2021 2022 2023 2024 2025 2016–20 2016–25 –8,066 –11,748 –14,895 –18,431 –19,789 –20,068 –21,240 –22,562 –23,790 –25,014 –72,929 –185,603 Incentives to promote regional growth: Modify and permanently extend the NMTC ��� –18 –119 –289 –491 –720 –968 –1,226 –1,470 –1,605 –1,620 –1,586 Reform and expand the LIHTC �������������������� Total, incentives to promote regional growth ����������������������������������������������� ......... –9 –42 –130 –233 –345 –441 –541 –641 –751 –860 –18 –128 –331 –621 –953 –1,313 –1,667 –2,011 –2,246 –2,371 –2,446 ......... –1 –5 –11 –14 –22 –28 –35 –41 –48 –53 –53 –258 ......... –1 –5 –5 –5 –5 –5 –5 –5 –5 –5 –21 –46 ......... ......... –1 –3 –5 –7 –9 –11 –13 –16 –17 –16 –82 –6 –28 –60 –93 –125 –153 –167 –163 –136 –96 –55 –459 –1,076 ......... –25 –117 –251 –386 –524 –638 –695 –714 –733 –751 –1,303 –4,834 ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... –5 –38 –131 –225 –317 –405 –493 –574 –630 –616 –716 –3,434 ......... 3 11 23 35 47 60 72 85 97 109 119 542 ......... ......... ......... ......... –1 –1 –1 –3 –3 –3 –4 –2 –16 ......... –4 –12 –12 –12 –12 –12 –12 –12 –12 –12 –52 –112 ......... –120 –206 –216 –227 –238 –250 –263 –276 –290 –304 –1,007 –2,390 –6 –181 –433 –699 –965 –1,232 –1,455 –1,608 –1,689 –1,736 –1,708 ......... ......... ......... ......... ......... ......... 303 322 341 358 375 ......... 1,699 ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... ......... 2,267 3,182 2,351 1,867 1,566 1,243 848 695 723 753 11,233 15,495 Incentives for investment in infrastructure: Provide America Fast Forward Bonds and expand eligible uses 2 ����������������������������� Allow current refundings of State and local governmental bonds ������������������������������� Repeal the $150 million non-hospital bond limitation on all qualified 501(c)(3) bonds Increase national limitation amount for qualified highway or surface freight transfer facility bonds ������������������������������ Provide a new category of qualified private activity bonds for infrastructure projects referred to as QPIBs ������������������������������� Modify qualified private activity bonds for public education facilities ������������������������ Modify treatment of banks investing in taxexempt bonds ����������������������������������������� Repeal tax-exempt bond financing of professional sports facilities �������������������� Allow more flexible research arrangements for purposes of private business use limits ������������������������������������������������������� Modify tax-exempt bonds for ITGs ��������������� Exempt foreign pension funds from the application of FIRPTA ����������������������������� Total, incentives for investment in infrastructure ������������������������������������� Eliminate fossil fuel tax preferences: Treat publicly-traded partnerships for fossil fuels as C corporations ��������������������������� –2,587 –10,094 –759 –3,993 –3,346 –14,087 –3,510 –11,706 Eliminate oil and natural gas preferences: Repeal enhanced oil recovery credit 3 ����� Repeal credit for oil and natural gas produced from marginal wells 3 �������� Repeal expensing of intangible drilling costs ������������������������������������������������� 173 12. GOVERNMENTAL RECEIPTS Table 12–3. RESERVE FOR BUSINESS TAX REFORM THAT IS REVENUE NEUTRAL IN THE LONG RUN—Continued (In millions of dollars) 2015 Repeal deduction for tertiary injectants ��� Repeal exception to passive loss limitations for working interests in oil and natural gas properties ���������������� Repeal percentage depletion for oil and natural gas wells ������������������������������� Repeal domestic manufacturing deduction for oil and natural gas production ����������������������������������������� Increase geological and geophysical amortization period for independent producers to seven years ����������������� Subtotal, eliminate oil and natural gas preferences ����������������������������������� Eliminate coal preferences: Repeal expensing of exploration and development costs ���������������������������� Repeal percentage depletion for hard mineral fossil fuels ���������������������������� Repeal capital gains treatment for royalties �������������������������������������������� Repeal domestic manufacturing deduction for the production of coal and other hard mineral fossil fuels ���� Subtotal, eliminate coal preferences ��� Total, eliminate fossil fuel tax preferences ������������������������������ Reform the treatment of financial and insurance industry products: Require that derivative contracts be marked to market with resulting gain or loss treated as ordinary ��������������������������������� Modify rules that apply to sales of life insurance contracts �������������������������������� Modify proration rules for life insurance company general and separate accounts ���� Expand pro rata interest expense disallowance for corporate-owned life insurance ������������������������������������������������ Conform NOL rules of life insurance companies to those of other corporations ��������������������� Total, reform the treatment of financial and insurance industry products ������� Other revenue changes and loophole closers: Repeal LIFO method of accounting for inventories ���������������������������������������������� Repeal lower-of-cost-or-market inventory accounting method ��������������������������������� Modify like-kind exchange rules for real property and collectibles ������������������������� Modify depreciation rules for purchases of general aviation passenger aircraft ��������� Expand the definition of substantial built-in loss for purposes of partnership loss transfers �������������������������������������������������� Extend partnership basis limitation rules to nondeductible expenditures �������������������� Limit the importation of losses under related party loss limitation rules ������������������������ 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2016–20 2016–25 ......... 7 10 10 10 10 10 10 10 10 10 47 97 ......... 9 17 19 20 20 20 20 20 20 20 85 185 ......... 1,118 1,790 1,669 1,585 1,498 1,375 1,246 1,122 994 856 7,660 13,253 ......... 647 1,115 1,139 1,173 1,208 1,242 1,280 1,321 1,366 1,413 5,282 11,904 ......... 91 341 537 532 440 337 226 147 125 100 1,941 2,876 ......... 4,139 6,455 5,725 5,187 4,742 4,227 3,630 3,315 3,238 3,152 26,248 43,810 ......... 40 68 70 74 77 77 75 73 71 69 329 694 ......... 183 299 288 278 266 254 241 228 214 199 1,314 2,450 ......... 27 54 53 54 55 58 61 61 62 62 243 547 ......... 45 48 50 53 54 57 59 62 65 68 250 561 ......... 295 469 461 459 452 446 436 424 412 398 2,136 4,252 ......... 4,434 6,924 6,186 5,646 5,194 4,976 4,388 4,080 4,008 3,925 28,384 49,761 ......... 2,926 4,769 4,138 2,731 1,733 1,186 731 531 535 516 16,297 19,796 ......... 23 43 46 48 50 54 56 58 61 63 210 502 ......... 385 676 722 762 792 816 836 843 849 862 3,337 7,543 65 159 252 364 492 641 809 980 1,160 1,357 1,332 6,279 ......... 15 27 29 30 32 34 36 37 39 40 133 319 ......... 3,414 5,674 5,187 3,935 3,099 2,731 2,468 2,449 2,644 2,838 21,309 34,439 ......... 5,505 7,866 7,812 8,012 7,908 8,070 7,752 7,644 7,931 7,592 37,103 76,092 ......... 743 1,491 1,501 1,511 889 266 278 291 304 317 6,135 7,591 ......... 659 2,005 2,026 2,048 2,070 2,094 2,119 2,145 2,174 2,202 8,808 19,542 ......... 108 338 499 531 596 593 395 198 139 141 2,072 3,538 ......... 6 7 7 7 7 8 8 10 10 10 34 80 ......... 69 97 102 105 108 110 112 114 116 118 481 1,051 ......... 63 87 92 95 97 99 100 102 104 106 434 945 Deny deduction for punitive damages ��������� ......... 30 43 44 45 46 47 48 49 51 52 208 455 Conform corporate ownership standards ���� ......... 1 17 32 33 34 35 36 38 40 42 117 308 Tax corporate distributions as dividends ����� ......... 48 82 86 90 94 98 103 108 113 118 400 940 174 ANALYTICAL PERSPECTIVES Table 12–3. RESERVE FOR BUSINESS TAX REFORM THAT IS REVENUE NEUTRAL IN THE LONG RUN—Continued (In millions of dollars) 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2016–20 2016–25 Repeal FICA tip credit ��������������������������������� ......... 480 993 1,062 1,137 1,216 1,301 1,389 1,483 1,581 1,687 4,888 12,329 Repeal the excise tax credit for distilled spirits with flavor and wine additives 4 ���� ......... 85 112 112 112 112 112 112 112 112 112 533 1,093 Total, other revenue changes and loophole closers �������������������������������� ......... 7,797 13,138 13,375 13,726 13,177 12,833 12,452 12,294 12,675 12,497 61,213 123,964 Total, reserve for business tax reform that i
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