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THE BUDGET DOCUMENTS
Budget of the United States Government, 1988 contains the Budget Message of the
President and presents an overview of the President's budget proposals. It includes
summary information on goals of the 1988 Budget, economic assumptions, receipts
and outlays, defense and international programs, social security benefits, other
programmatic changes, financing changes, reductions and terminations, a listing of
the budget by agency and account, and various summary data tables.
Budget of the United States Government, 1988—Supplement repeats the Budget
Message of the President and the summary information. In addition it includes
sections on the Federal program by function, perspectives on the budget, the budget
system and concepts, reform of the Federal credit system, and summary tables (both
the tables included in the Budget and additional tables).
United States Budget in Brief, 1988 is designed for use by the general public. It
provides a more concise, less technical overview of the 1988 budget than the above
volumes, including summary and historical tables on the Federal budget and debt,
together with graphic displays.
Budget of the United States Government, 1988—Appendix contains detailed information on the various appropriations and funds that constitute the budget. The
Appendix contains more detailed information than any of the other budget documents. It includes for each agency: the proposed text of appropriation language,
budget schedules for each account, new legislative proposals, explanations of the
work to be performed and the funds needed, and proposed general provisions applicable to the appropriations of entire agencies or groups of agencies. Supplemental
and rescission proposals for the current year are presented separately. Information
is also provided on certain activities whose outlays are not part of the budget totals.
Special Analyses, Budget of the United States Government, 1988 contains analyses
that are designed to highlight specified program areas or provide other significant
presentations of budget data. This document includes information about alternative
views of the budget; i.e., current services and national income accounts; economic
and financial analyses of the budget covering Government finances and operations
as a whole; and Government-wide program and financial information for Federal
research and development programs. Data on Federal civilian employment are also
included in this volume.
Historical Tables, Budget of the United States Government, 1988 provides data on
budget receipts, outlays, surpluses or deficits, and Federal debt covering extended
time periods—in many cases from 1940-1992. These are much longer time periods
than those covered by similar tables in other budget documents. The data in this
volume and all other historical data in the budget documents are consistent with
the concepts and presentation used in the 1988 Budget, so the data series are
comparable over time.
Management of the United States Government, 1988 includes the President's Management Message and provides the goals and strategies of the President's Management Improvement Program. It reports on the nine point credit management program, the program to improve financial management in executive branch agencies,
the President's Productivity Program, the activities of the President's Council on
Integrity and Efficiency, and the President's Council on Management Improvement.
This document also describes the status of Grace Commission recommendations, the
status of debt collection and prompt payment efforts, and a report on the motor
vehicle cost reductions required by the Consolidated Omnibus Budget Reconciliation
Act (COBRA) of 1985.
Instructions for purchasing copies of any of these documents are on the last two
pages of this volume.
GENERAL NOTES
1. All years referred to are fiscal years, unless otherwise noted.
2. Detail in the tables, text and charts of this volume may not add to the
totals because of rounding.
For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D.C. 20402

TABLE OF CONTENTS
Page

PART 1. ALTERNATIVE VIEWS OF THE BUDGET
A. Current services estimates
B. Federal transactions in the national income and
product accounts
PART 2. ANALYSES OF THE TOTALS
C. Funds in the budget
D. Federal investment and operating outlays
E. Borrowing and debt
F. Federal credit programs
G. Tax expenditures
H. Federal aid to State and local governments
I. Civilian employment in the executive branch
J. Research and development

1-1
A-l
B-l
2-1
C-l
D-l
E-l
F-l
G-l
H-l
1-1
J-l
iii

PART 1

ALTERNATIVE VIEWS OF
THE BUDGET

1-1

INTRODUCTION
Part 1 includes two alternative views of the budget—current
services estimates and the national income and product accounts.
The data include both on-budget and off-budget amounts (i.e.,
transactions of the Federal old-age, survivors, and disability insurance trust funds). These special analyses are designated A and B.
Special Analysis A (Current Services Estimates) presents the
estimates required by the Congressional Budget Act of 1974 (31
U.S.C. 1109(a)). These estimates reflect the anticipated costs of
continuing ongoing Federal programs and activities at present
levels without any policy changes. Estimates are provided through
1992.
Special Analysis B (Federal Transactions in the National Income
and Product Accounts) presents the Federal Government estimates
through 1988 in terms of the national income and product accounts
(NIPA). It also explains the relationship of the unified budget to
the NIPA, which constitute the most widely used measure of aggregate economic activity in the United States.
1-2

SPECIAL ANALYSIS A
CURRENT

SERVICES

ESTIMATES

The Congressional Budget Act of 1974, as amended, requires that
the President submit to the Congress estimates of the outlays and
budget authority needed to maintain current Government services
and activity levels. The Act defines the current services levels as
. . . the estimated budget outlays and proposed budget
authority that would be included in the budget for the
following fiscal year if programs and activities of the
United States Government were carried on during that
year at the same level as the current year without a
change in policy.
Since current services estimates show what outlays, receipts, and
budget authority would be if no policy changes were made, they
provide a base with which the administration's budget proposals, or
other proposals, may be compared. Such comparisons are made in
various parts of the budget and serve to highlight the effects of
recommended policy changes.
Since long range estimates of Presidential policy are included in
the Budget, current services estimates are also provided for the 4
years beyond the budget year. Generally, these long-range current
services estimates are based on the same concepts as the budget
year current services estimates. Current services estimates include
both on- and off-budget receipts and outlays.
THE CURRENT SERVICES CONCEPT

The current services estimates are neither recommended
amounts nor forecasts of what the budget results for 1987-1992 will
actually be. Rather, they provide a base against which budgetary
alternatives may be assessed. This base embodies the cumulative
effects of all past congressional and Presidential budgetary choices.
Since the estimates indicate the budgetary implications of the current directions of Federal programs, they in effect answer the
question: "What would the budget be if enacted budget policy were
continued unchanged?"
The guiding principle in establishing a conceptual basis for the
current services estimates was to make the results useful to the
Congress and the public. The current services concepts used in this
analysis, and in previous current services estimates submitted by

A-l

A-10

THE BUDGET FOR FISCAL YEAR 1988

the Executive Branch, are not the only ones possible. Different
concepts may be useful for different purposes. The current services
estimates presented in this analysis generally reflect the expected
costs of continuing ongoing Federal programs at 1987 levels in real
terms, without policy change; that is, they omit all proposed new
legislative initiatives, presidential or congressional, that are not
now enacted. (The major exceptions to this approach are described
below.) In general, the 1987 level on which the current services
estimates are based is that which is authorized or implied by
enacted 1987 appropriations or substantive legislation as modified
by administrative actions anticipated to be in place before the end
of 1987. The estimates allow for the future implications of current
law and final regulations, and for anticipated changes of a relatively uncontrollable nature (as distinct from policy changes) such as
increases in the number of medicare beneficiaries.
The current services estimates are based on the same economic
assumptions as the President's budget proposals. /Changes in economic conditions significantly affect budget estimates because of
their effects on tax receipts, unemployment benefits, interest on
the Federal debt, and other programs under which spending varies
with the unemployment, interest, or inflation rates. As a result, if
different economic assumptions were used, it would be very difficult to separate the effects of policy differences from the effects of
differences in the economic assumptions.
The economic assumptions assume that all the President's
budget proposals will be adopted. Continuation of all programs and
tax laws unchanged at current services levels would result in different economic conditions than would occur under the budget
proposals. The economic assumptions common to the budget and
the current services estimates are summarized in table A - l . For
further details and discussion of the sensitivity of the estimates to
the selected economic assumptions, see Part 3 of the Budget of the
United States Government, Fiscal Year 1988—Supplement
The current services estimates reflect the effects of inflation on
virtually all budget accounts, including discretionary programs.
The current services estimates thus provide a "constant real program" base against which to measure the President's budget proposals. To facilitate the comparison between the current services
estimates and the President's budget proposals, the current services estimates are presented in the same account structure as the
budget, even if legislation is required to effect any structural
changes that may be proposed in the budget.
Specific guidelines for this year's detailed programmatic estimates are:
—For the Department of Defense—Military and other programs
in the national defense function, the current services budget

A-ll

SPECIAL ANALYSIS A
Table A-l. SUMMARY OF ECONOMIC ASSUMPTIONS
(Fiscal years)

Gross national product (in billions of current dollars)
Change in constant dollar GNP (percent
change, year over year)
Inflation measures (percent change, year
over year):
GNP deflator
Consumer Price Index
Federal construction deflator
State and local purchases deflator
Unemployment rate (percent, annual average)
Interest rate, 91-day Treasury bills (percent)
Interest rate, 10-year Treasury notes (percent)
ADDENDUM
Federal pay raise (percent): 1
Military
Civilian
1
2

1986

1987

1988

1989

1990

1991

1992

4,163

4,419

4,731

5,076

5,434

5,790

6,133

2.7

2.9

3.4

3.7

3.6

3.4

2.9
2.2
2.5
4.0

3.1
2.3
2.9
3.3

3.5
3.7
3.3
3.7

3.5
3.6
3.3
3.7

3.3
3.4
3.1
3.5

2.9
2.9
2.7
3.0

2.4
2.4
2.3
2.5

6.9

6.7

6.4

6.1

5.8

5.6

5.5

6.4

5.4

5.5

5.4

4.9

4.3

3.8

8.3

6.9

6.6

6.3

5.6

5.1

4.6

3.0
0.0

3.0
3.0

4.0
2.0

4.3
3.0

4.6
3.0

4.5
3.0

4.2
3.0

All pay raises are effective on January 1, unless otherwise noted.
Effective October 1, 1985.

authority and outlay levels are the same as those proposed by
the President. The budget authority for 1988 represents a 3percent increase in real terms over the 1987 enacted level. A
lesser amount, such as zero real growth, would not provide
adequate funding to carry out the decisions Congress has already made. Defining current services as being zero real
growth would cause additional problems if the 1987 program
mix was simply extended through the projection period. This
approach would ignore the shift toward faster spending accounts that is occurring. For more discussion of the defense
current services concept, see Part 3 of the Budget of the United
States, Fiscal Year 1988.
—For entitlement programs (such as social security), the current
services estimates take into account changes in the benefit
base (usually determined by past earnings), and changes in the
anticipated numbers of beneficiaries. In addition, inflation adjustments are applied where mandatory under current law or
required to maintain real program level.
—The impact of regulations that are required to be issued under
current law in order to set specific program parameters (such
as Commodity Credit Corporation price support levels) is included in current services at the level assumed in the President's Budget. The impact of all other proposed regulations is
not reflected in current services.

A-10

THE BUDGET FOR FISCAL YEAR 1988

—Individual grants to State and local governments are assumed
to support the same program levels or to be funded at the
same real (constant-dollar) amounts as in 1987 unless the
grants are: (a) set by law at specified amounts; (b) tied by
legislation to cost-of-living increases or the unemployment
rate; (c) affected by changes in beneficiary populations or other
factors that alter benefit payments under entitlement programs; or (d) affected by spending from prior-year commitments (for example, highway grants).
—Procurement and construction activities are assumed to proceed in an orderly fashion, consistent with current law and
past appropriation levels. Outlays for these programs are
largely determined by prior-year contracts and obligations.
Some appropriations provide for anticipated inflation in the
cost of multiyear projects. In other cases, however, current
services estimates may reflect constraints on spending levels
imposed by available funding.
—As already set by law, the 1987 Federal pay was 3 percent for
civilians and military personnel. Absorption of the increased
costs associated with the pay raise is assumed to be at the level
proposed by the President. For 1988 through 1992, Federal pay
is assumed to increase at the same rates as assumed in the
President's Budget. The President's final recommendation on
pay, issued in August of each year, is implemented unless
overturned by Congress. The pay raise assumptions are shown
in table A - l . In 1987, absorption of the increased costs associated with the new Federal employee retirement system is also
assumed to be at the level proposed by the President. For 1988
through 1992, the full cost of the new system is incorporated.
—Interest on the public debt is estimated on the basis of the
current services deficits and the interest rate assumptions
shown in Table A - l .
—Offsetting receipts are estimated on the basis of judgment as to
their most likely level, assuming no change in current law.
—Budget authority for certain major trust funds consists of trust
fund receipts. These are estimated using standard revenue estimating techniques.
—Proposed rescissions of nondefense budget authority and discretionary nondefense program supplemental are not reflected.
—It is assumed that deferral actions continue in effect for the
period specified in the special message transmitted to the Congress under the Impoundment Control Act of 1974 (unless they
have been overturned by the Congress).
Many Federal programs are authorized for a limited number of
years, but are routinely renewed. If authority for such a program is
scheduled to expire before or during the projection period, it is

A-ll

SPECIAL ANALYSIS A

generally assumed for purposes of current services estimates that it
will be renewed and that budget authority will be held constant in
real terms. Programs that are clearly temporary in nature, such as
temporary study commissions, are assumed to expire.
The estimates of receipts on a current services basis assume that
future tax changes will occur as scheduled under current law.
Provisions that are clearly temporary in nature are assumed to
expire. Airport and airway trust fund taxes, highway trust fund
taxes, and hazardous substance response trust fund taxes scheduled
to expire under current law are assumed to be extended at present
rates.
CURRENT SERVICES TOTALS

As shown in Table A-2, current services outlays are estimated to
be $1,060.5 billion in 1988, 4.3 percent higher than in 1987, and
budget authority is estimated to be $1,172.2 billion, an increase of
6.3 percent over 1987. Outlays are projected to grow at an average
annual rate of 4.4 percent from 1988 to 1992. Receipts for 1988 are
estimated to increase 8.1 percent on a current services basis, from
$842.3 billion in 1987 to $910.4 billion in 1988. Receipts are projected to grow at an average annual rate of 6.8 percent from 1988 to
1992. The resulting 1988 current services deficit is $150.1 billion,
$24.4 billion lower than the $174.5 billion deficit for 1987. The
deficit is projected to decline further each year, falling to $78.3
billion in 1992.
Table A-2. CURRENT SERVICES TOTALS
(In billions of dollars)
1986
actual

Budget authority
(On-budget)
(Off-budget)
Receipts
(On-budget)
(Off-budget)
Outlays
(On-budget)
(Off-budget)
Surplus or deficit ( - )
(On-budget)
(Off-budget)

1,072.8
(883.2)
(189.6)
769.1
(568.9)
(200.2)
989.8
(806.3)
(183.5)
.

1987

1,102.6
(888.5)
(214.0)
842.3
(628.3)
(214.0)
1016.8
(822.3)
(194.5)

1988

1,172.2
(930.5)
(241.7)
910.4
(668.7)
(241.7)
1,060.5
(857.9)
(202.7)

1989

1,251.8
(988.9)
(262.8)
968.2
(705.3)
(262.8)
1,115.1
(903.0)
(212.1)

1990

1991

1992

1,323.0
(1,037.0)
(286.0)
1,039.7
(753.6)
(286.0)
1,165.4
(942.5)
(223.0)

1,410.6
(1,103.6)
(307.1)
1,114.3
(807.3)
(307.1)
1,215.5
(981.5)
(234.0)

1,460.8
(1,136.2)
(324.6)
1,182.3
(857.7)
(324.6)
1,260.6
(1,016.0)
(244.6)

-220.7
-174.5
-150.1
-125.7
-101.2
-146.9
-78.3
(-237.5) (-194.0) (-189.2) (-197.7) (-188.8) (-174.3) (-158.3)
(19.5)
(39.0)
(50.8)
(63.1)
(73.1)
(80.0)
(16.7)

Receipts.—Table A-3 shows receipts by major source on a current services basis. Current services receipts are projected to increase by $68.1 billion from 1987 to 1988 and by $271.9 billion from
1988 to 1992, largely due to assumed increases in incomes resulting
from both real economic growth and inflation.

A-10

THE BUDGET FOR FISCAL YEAR 1988

Individual income taxes are estimated to increase by $27.7 billion
from 1987 to 1988 on a current services basis. This growth of 7.6
percent is the net effect of increased collections resulting from
rising personal incomes, partially offset by the reductions provided
in the Tax Reform Act of 1986. Individual income taxes are projected to grow at an average annual rate of 7.5 percent between 1988
and 1992, to $522.3 billion.
Corporation income taxes on a current services basis are estimated to grow by $11.4 billion or 10.9 percent from 1987 to 1988, in
large part due to higher corporate profits. Corporation income
taxes are projected to increase at an average annual rate of 8.1
percent from 1988 to 1992.
Table A-3. CURRENT SERVICES RECEIPTS BY SOURCE
(In billions of dollars)

Individual income taxes
Corporation income taxes
Social insurance taxes and contributions
(On-budget)
(Off-budget)
Excise taxes
Other
Total
(On-budget)
(Off-budget)

1986
actual

1987

1988

1989

1990

1991

1992

349.0
63.1

364.0
104.8

391.7
116.2

415.9
127.1

449.5
138.3

487.6
147.6

522.3
158.8

283.9
(83.7)
(200.2)
32.9
40.2

301.5
(87.4)
(214.0)
32.6
39.5

330.7
(89.0)
(241.7)
32.2
39.5

353.8
(91.0)
(262.8)
31.6
39.7

380.5
(94.4)
(286.0)
32.4
39.1

406.3
(99.2)
(307.1)
33.1
39.8

427.6
(103.1)
(324.6)
33.9
39.6

769.1
(568.9)
(200.2)

842.3
(628.3)
(214.0)

910.4
(668.7)
(241.7)

968.2
(705.3)
(262.8)

1,039.7
(753.6)
(286.0)

1,114.3
(807.3)
(307.1)

1,182.3
(857.7)
(324.6)

Social insurance taxes and contributions are estimated to increase by $29.3 billion on a current services basis between 1987 and
1988, and by an additional $96.9 billion between 1988 and 1992. The
estimates reflect assumed increases in total wages and salaries
paid; scheduled increases in the combined employer-employee
social security (OASDHI) tax rate from 14.3 percent to 15.02 percent on January 1, 1988 and to 15.3 percent on January 1, 1990;
and annual increases in the social security taxable earnings base to
$55,800 in 1992.
On a current services basis, excise taxes are estimated to decrease by $0.4 billion or 1.1 percent from 1987 to 1988 and are
estimated to increase by $1.7 billion from 1988 to 1992. The decrease between 1987 and 1988 is in large part due to expiration of
the telephone excise tax on December 31, 1987. The estimates for
1988-92 assume extension of the airport and airway trust fund
taxes scheduled to expire December 31, 1987, the highway trust
fund taxes scheduled to expire September 30, 1988, and the hazardous substance response trust fund taxes scheduled to expire September 30, 1991.

SPECIAL ANALYSIS A

A-ll

Other receipts (estate and gift taxes, customs duties, and miscellaneous receipts) are projected to increase on a current services
basis by $0.2 billion from 1987 to 1992.
Outlays.—The level of outlays necessary to continue ongoing Federal programs and activities at current services levels is estimated
at $1,060.5 billion in 1988. The increase in current services outlays
from 1987 to 1988 is $43.7 billion, or 4.3 percent. Between 1988 and
1992 current services outlays are projected to increase at an average annual rate of 4.4 percent.
Table A-4 shows current services outlays by function. Estimates
by agency are presented in table A-5. The nondefense outlay increases from 1987 to 1988 are largely due to increases in the
number of beneficiaries, cost-of-living adjustments, increases in the
prices of goods and services purchased or financed and, in the case
of interest, increased borrowing requirements.
Table A-6 shows the major components of the changes in current
services outlays between 1987 and 1988. Outlays for social security
(OASDI) are estimated to increase by $11.6 billion between 1987
and 1988, from $207.9 billion in 1987 to $219.5 billion in 1988.
Medicare outlays are estimated to increase by $6.6 billion, from
$71.6 billion in 1987 to $78.2 billion in 1988, largely as a result of
increases in medical care prices and utilization. Outlays for income
security programs are estimated to rise by $4.5 billion, from $125.0
billion in 1987 to $129.5 billion in 1988. This increase includes a
$1.4 billion increase in the earned income tax credit, resulting from
the Tax Reform Act of 1986, and a $1.4 billion increase for supplemental security income, resulting from an automatic cost-of-living
adjustment and increases in the number of beneficiaries. Outlays
for the remaining income security programs are estimated to grow
by $1.7 billion on net. Table A-7 shows caseload projections for
these and other major benefit programs and other selected programmatic assumptions.
Outlays in the national defense function increase $15.3 billion
from 1987 to 1988 from spending approved in prior years and
assumed real growth in budget authority. The decline of $4.5 billion for the agriculture function between 1987 and 1988 results
primarily from a decrease in estimated outlays required for farm
price supports and related Commodity Credit Corporation programs. Undistributed offsetting receipts increase by $3.8 billion
largely as a result of increased agency contributions for employee
retirement required for the new Federal employee retirement
system. These receipts offset higher outlays included in the other
functions.
Other large changes in current services outlays between 1987
and 1988 are a $3.2 billion decrease in commerce and housing
credit primarily from reduced Federal Deposit Insurance Corpora-

A-10

THE BUDGET FOR FISCAL YEAR 1988
Table A-4. CURRENT SERVICES OUTLAYS BY FUNCTION
(In billions of dollars)
Current services
1986
actual

National defense:
Department of Defense—Military
Other
International affairs
General science, space, and technology
Energy
Natural resources, and environment
Agriculture
Commerce and housing credit
Transportation
Community and regional development
Education, training, employment, and social services
Health
Medicare
Income security
Social security

On-budget

Veterans benefits and services
Administration of justice
General government
General purpose fiscal assistanceNet interest

On-budget

Allowances:
Civilian agency pay raises
Savings from reform of Davis-Bacon and Service
Contract Act
Credit reform initiative
Proposed change in Goverment contribution for
employee health benefits
Undistributed offsetting receipts:
Employer share, employee retirement (on-budget)
Employer share, employee retirement (offbudget)
Rents and royalties on the Outer Continental
Shelf
Sale of major assets
Total Undistributed offsetting receipts..

On-budget

Total outlays..

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

265.6
7.7
14.2
9.0
4.7
13.6
31.4
4.4
28.1

7.2

30.6
35.9
70.2
119.8
198.8

(8.1)

(190.7)
26.4
6.6

6.1
6.4
136.0
(140.3)
(-4.3)

1987
estimate

274.2
8.0

14.7
9.5
4.0
14.1
31.1
10.1
26.8
6.3
30.3
40.0
71.6
125.0
207.9
(5.0)
(202.9)
26.8
8.2
6.7
1.9
136.6
(141.6)
(-5.1)

1988
estimate

289.3
8.3

1988
administration
proposals

11.1
6.2
15.7
26.6
6.9
26.9
6.7

289.3
8.3
15.2
11.4
3.3
14.2
26.3
2.5
25.5
5.5

32.7
42.0
78.2
129.5
219.5
(4.9)
(214.6)
27.5
8.9
7.2
1.8
139.0
(145.5)
(-6.6)

28.4
38.9
73.0
124.8
219.4
(4.9)
(214.5)
111
9.2
7.5
1.5
139.0
(145.6)
(-6.6)

0.7

0.7
*

16.8

-1.3
-0.1

-25.4

-28.0

-31.8

-32.1

-2.9

-3.3

-5.4

-5.5

-4.7

-3.9
-1.9

-3.7

-3.7
-4.1

-33.0
(-30.2)
(-2.9)

-37.1
(-33.8)
(-3.3)

-40.9
(-35.5)
(-5.4)

-45.4
-39.9)
(-5.5)

1,016.8
1,060.5
1,024.3
989.8
(806.3) (822.3) (857.9) (821.9)
(183.5) (194.5) (202.7) (202.4)

* $50 million or less.

tion and Federal Savings and Loan Corporation outlays, a $1.5
billion increase in medicaid and a $0.7 billion increase in allowances for the 1988 civilian agency pay raise.
The estimated 1988 current services deficit of $150.1 billion
would add a like amount to the Federal debt. Primarily because of
this increase in debt, net interest outlays would increase by $2.4
billion between 1987 and 1988 under current services assumptions.

A-ll

SPECIAL ANALYSIS A
Table A-5. CURRENT SERVICES OUTLAYS BY AGENCY
(In billions of dollars)
Current services
1986
actual

Legislative Branch
The Judiciary
Executive Office of the President
Funds Appropriated to the President
Department of Agriculture
Department of Commerce
Department of Defense—Military
Department of Defense—Civil
Department of Education
Department of Energy
Department of Health and Human Services, except
Social Security
Department of Health and Human Services, Social
Security
Department of Housing and Urban Development
Department of the Interior
Department of Justice
Department of Labor
Department of State
Department of Transportation
Department of the Treasury
Environmental Protection Agency
General Services Administration
National Aeronautics and Space Administration
Office of Personnel Management
Small Business Administration
Veterans Administration
Other Independent Agencies
Allowances:
Civilian agency pay raises
Savings from reform of Davis-Bacon and Service
Contract Acts
Credit reform initiative
Proposed changes in Government contributions
for employee health benefits
Undistributed offsetting receipts:
Interest received by on-budget trust funds
Interest received by off-budget trust funds
Interest received by OCS escrow account
Employer share, employee retirement (on-budget)
Employer share, employee retirement (offbudget)
Rents and royalties on the Outer Continental
Shelf
Sale of major assets
Total Undistributed offsetting receipts

On-budget
Off-budget

Total outlays.

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

1.7
1.1

0.1

11.4
58.7

1987
estimate

2.1
1.2

0.1
12.1

1988
estimate

administration
proposals

0.1

2.2
I.4
0.1

18.8
10.8

50.7
2.3
289.3
22.1
14.7
10.2

2.1
1.3
12.3
58.0
2.5
289.3
22.2

11.2

265.6
20.3
17.7
11.0

56.3
2.5
274.2
20.9
17.2
10.7

143.3

145.6

155.8

146.8

190.7
14.1
4.8
3.8
24.1
2.9
27.4
179.2
4.9
0.2
7.4
24.0
0.6
26.5
11.4

202.9
14.7
5.3
4.7
24.5
3.2
26.0
179.3
4.6

214.6
15.6
5.1
5.1
24.5
3.3
26.0
187.4
4.8*
9.4
28.8
0.2
27.4
13.6

214.5
13.9
4.4
5.8
25.4
3.6
24.6
187.3
4.6
-0.4
9.5
26.8
-0.3
27.0
II.5

0.7

2.1

-0.1

7.9
27.7
0.1
27.0
17.9

-1.3
-0.1

-31.4

-31.6

-6.6
-0.6

-6.6

-25.4

-28.7
-5.1
-0.9
-28.0

-31.8

-32.1

-2.9

-3.3

-5.4

-5.5

-26.6

-4.3
-1.1

-4.7
-65.0
(-57.8)
(-7.2)

-3.9
-1.9
-71.8
(-63.4)
(-8.4)

-3.7
-79.4
(-67.5)
(-12.0)

-0.6

-3.7
-4.1
-84.2
(-72.1)
(-12.1)

1,060.5
989.8
1,016.8
1,024.3
(806.3) (822.3) (857.9) (821.9)
(183.5) (194.5) (202.7) (202.4)

* $50 million or less.

Budget Authority.—Current services budget authority is estimated to total $1,172.2 billion in 1988, $69.6 billion more than in 1987.
Increases in budget authority between 1987 and 1988 generally
reflect the higher funding levels that would be necessary to main-

A-10

THE BUDGET FOR FISCAL YEAR 1988

Table A-6. CHANGE IN CURRENT SERVICES BUDGET AUTHORITY AND OUTLAYS, 1987 TO 1988
(In billions of dollars)
Budget
authority

1987 current services estimate
(On-budget)
(Off-budget)
Changes:
National defense
Social security
Medicare
Income security:
General retirement and disability (excluding social security)
Federal employee retirement and disability
Unemployment compensation
Housing assistance
Food and nutrition assistance
Other income security programs
Subtotal, income security
International affairs
General science, space, and technology
Energy programs
Natural resources and environment
Agriculture
Commerce and housing credit
Transportation programs
Community and regional development
Education
Training and Employment
Social and other labor services
Medicaid
Other health programs
Veterans programs
Net interest
Allowances for civilian agency pay raises
Undistributed offsetting receipts
All other programs, net
Subtotal, changes
(On-budget)
(Off-budget)
1988 current services estimate
(On-budget)
(Off-budget)

1,102.6
(888.5)
(214.0)
19.0
31.2
4.9
0.3
4.9
_- 3 *. 5
0.5
2.8
5.0
0.4
-1.2

3.0
3.4
-4.4
0.6
2.3
-0.3
*1.2

1.2
1.5
0.5
0.6

2.4
0.7
-3.8
1.3
69.6
(41.9)
(27.7)
1,172.2
(930.5)
(241.7)

* $50 million or less.

tain 1987 program levels in real terms in 1988. In the case of most
trust funds, however, the funds' receipts automatically become
budget authority; thus increases in budget authority for these
funds simply reflect year-to-year growth in expected receipts.
Budget authority for some programs displays erratic year-to-year
changes due to sporadic funding patterns or advance funding.
Tables A-8 and A-9 show the estimates of current services
budget authority by function and by agency, respectively. The
major components of the changes in current services budget authority between 1986 and 1987 are also shown in table A-6.

A-ll

SPECIAL ANALYSIS A
Table A-7. PROGRAMMATIC ASSUMPTIONS
Fiscal years
1987

Beneficiaries (annual average, in thousands):
Social security (OASDI)1
Railroad retirement
Federal civil service retirement
Military retirement
Veterans compensation
Veterans pensions
Disabled coal miners programs
Supplemental security income2
Maintenance assistance (AFDC)
Food stamps
HUD Housing subsidy recipients (households)
Medicaid
Medicare:
Hospital insurance
Supplementary medical insurance
Automatic benefit increases (percent):
Social security and veterans pensions (January)
Federal employee retirement (January)
Food stamps (October)
Unemployment rate (percent, annual average):
Total
Insured 3
Strategic petroleum reserves annual fill rate
(millions of barrels)

1988

1989

1990

1991

1992

37,877
935
2,054
1,526
2,546
1,304
357
4,280
11,010
19,447

38,496
922
2,101
1,557
2,525
1,235
337
4,388
11,012
19,301

39,052
909
2,148
1,587
2,503
1,176
318
4,487
11,042
19,002

39,660
894
2,195
1,614
2,480
1,124
298
4,582
11,095
18,635

40,334
879
2,242
1,643
2,457
1,081
280
4,669
11,167
18,359

40,935
862
2,289
1,673
2,433
1,055
264
4,752
11,241
18,154

4,196
23,346

4,376
23,787

4,488
23,959

4,583
24,161

4,467
24,332

4,764
24,538

31,400
31,041

31,998
31,617

32,602
32,230

33,209
32,822

33,782
33,364

34,309
33,901

1.3
1.3
2.3

3.5
3.5
3.6

3.6
3.6
3.6

3.6
3.6
3.1

3.1
3.1
2.7

2.7
2.7
2.1

6.8
2.7

6.4
2.5

6.1
2.3

5.8
2.2

5.6
2.1

5.5
2.0

27.4

In current pay status as of June.
Includes those receiving federally administered State supplements.
This measures unemployment under State regular unemployment insurance as a percentage of covered employment under that program. It
does not include recipients of extended benefits under that program.
1

2
3

An increase in budget authority of $31.2 billion for social security is primarily due to higher social security trust fund receipts.
Budget authority for the national defense function increases by
$19.0 billion to reach 3 percent real growth level above the 1987
enacted level. Other major changes in current services budget authority include a $4.9 billion increase for Federal employee retirement and disability, a $4.9 billion increase for medicare, and a $4.4
billion decrease in agriculture programs.
Change in Current Services Since Release of the 1987 Budget—
When the 1987 Budget was released in February, 1986, the current
services deficit for 1987 was estimated to be $182 billion. These
projections were based on the 1986 continuing resolution and enacted law at the time they were issued. The current estimate for
1987 is $175 billion, or $7 billion less. The major reasons for the
decline are the following. The net effect of changes in the national
defense function have reduced the estimate of the 1987 deficit by
$3 billion since last February. Changes in economic assumptions

A-10

THE BUDGET FOR FISCAL YEAR 1988
Table A-8. CURRENT SERVICES BUDGET AUTHORITY BY FUNCTION
(In billions of dollars)
Current services
1986
actual

On-budget

Veterans benefits and services
Administration of justice
General government
General purpose fiscal assistance..
Net interest

On-budget

Total budget authority..

On-budget
Off-budget

281.4
7.8
16.7
9.3
6.0
11.7
29.9
11.0
28.9
6.9
30.3
36.6
87.2
158.0
201.7
(196.8)
27.2
6.8
6.8

5.8
136.0
(140.3)
(-4.3)

1987
estimate

284.9
8.0
16.8

12.2
3.7
13.1
27.3
8.6
26.9
7.5
32.9
40.2
88.9
160.6
227.4
(5.0)
(222.4)
27.2

8.6
6.8

1.6

136.6
(141.6)
(-5.1)

estimate

1988
administration
proposals

303.3
8.7
17.1
11.0
6.7
16.5
22.9
9.2
29.2
7.1

303.3
8.7
19.1
11.5
2.5
14.1
22.2
8.8
24.6
5.3

35.3
42.2
93.8
165.6
258.5
(4.9)
(253.7)
27.8
8.9
7.4
1.9
139.0
(145.5)
(-66)

28.8
41.4
94.4

259.1
(4.9)
(254.2)
27.7
9.0
7.5
1.5
139.0
(145.6)
(-66)

0.7

160.2

-0.2

-1.3
-0.1

-25.4

-28.0

-31.8

-32.1

-2.9

-3.3

-5.4

-5.5

-4.7

-3.9
-1.9

-3.7

-3.7
-4.1

-33.0
(-30.2)
(-2.9)

-37.1
(-33.8)
(-3.3)

-40.9
(-35.5)
(-5.4)

-45.4
(-39.9)
(-55)

1,142.2
1,102.6
1,172.2
1,072.8
(883.2) (888.5) (930.5) (900.1)
(189.6) (214.0) (241.7) (242.1)

* $ 5 0 million or less.

have increased the deficit by approximately $17 billion, from the
net effect of reducing receipts due primarily to lower real growth
and reducing outlays due primarily to lower inflation and interest
rates. Nondefense policy changes have reduced the 1987 deficit by
approximately $34 billion, mostly from one time savings including
the Tax Reform Act of 1986, mandated asset sales and loan prepayments, and timing adjustments for medicare payments and Outer

A-ll

SPECIAL ANALYSIS A
Table A-9. CURRENT SERVICES BUDGET AUTHORITY BY AGENCY
(In billions of dollars)
Current services
1986
actual

On-budget
Off-budget

Total budget authority..

On-budget
Off-budget

1987
estimate

estimate

1988
administration
proposals

2.2
1.5

0.1
II.5
55.5
2.2
284.9
34.5
19.5
9.8

2.1
1.4
0.1
11.6
56.0
2.5
303.3
36.5
20.7
11.5

303.3
36.7
14.0
10.5

156.5

163.4

172.0

171.0

196.8
15.9
4.6
3.9
28.8
4.0
28.1
179.7
3.4
0.3
7.8
44.2
0.7
27.1
18.2

222.4
15.2
4.9
5.1
29.4
3.7
26.0
179.4
4.1

253.7
15.7
5.1
5.2
26.6
3.7
28.3
187.5
5.5
0.2
9.3
47.4

254.2

1.7
1.0
0.1
11.1
59.2
2.0
281.4
32.7
17.9
10.6

I.9

1.2

0.1

10.5
44.8
0.5
27.1
16.6

0.1

13.1
49.0
2.1

10.2

4.4
5.6
28.3
4.3
23.6
187.1
4.6
-0.2

16.6

9.5
47.0
0.4
27.6
17.0

0.7

0.6

27.7

-0.2

-1.3
-0.1

-31.4

-25.4

-28.7
-5.1
-0.9
-28.0

-31.8

-32.1

-2.9

-3.3

-5.4

-5.5

-3.7

-3.7
-4.1
-84.2
(-72.1)
(-12.1)

-26.6

-4.3
-1.1

-4.7
-65.0
(-57.8)
(-7.2)

-3.9
-1.9
-71.8
(-63.4)
(-8.4)

-6.6
-0.6

-79.4
(-67.5)
(-12.0)

-31.6
-6.6

-0.6

1,072.8
1,102.6
1,172.2
1,142.2
(883.2) (888.5) (930.5) (900.1)
(189.6) (214.0) (241.7) (242.1)

* $50 million or less.

Continental Shelf receipts. Technical reestimates account for the
remaining $13 billion increase in the 1987 current service deficit.

A-10

THE BUDGET FOR FISCAL YEAR 1988

DIFFERENCES BETWEEN CURRENT SERVICES AND THE BUDGET

The differences between the administration's budget proposals
and the current services estimates are summarized in Table A-10.
The administration's proposals would reduce the current services
budget deficit by $42.4 billion in 1988 and would reduce the 1992
deficit by $90.6 billion. Between 1987 and 1992, the cumulative
deficit reductions proposed by the administration total $334.5 billion. Receipts proposals would reduce the deficit by a total of $40.6
billion, whereas proposed outlay reductions would reduce the deficit by $294.0 billion. As shown in Table A - l l , cumulative increases
for international affairs, space and science, and administration of
justice are $9.7 billion. Reductions to human resources programs
account for $154.6 billion or 46% of the cumulative reduction in
total deficits. Reductions in other domestic programs account for
$126.3 billion or 38% of the total deficit reduction. Net interest
savings from all of the reductions during 1987-1992 total $22.7
billion.
Table A-10. SUMMARY OF CURRENT SERVICES AND PROPOSED BUDGET TOTALS
(In billions of dollars)

1986
actual

Estimate
1991

1992

968.2 1,039.7
8.0
8.6

1,114.3
8.8

1,182.3
8.9

976.2

1.048.3

1,123.2

1,191.2

1,060.5
-36.2

1,115.1 1.165.4
-46.1 -57.6

1,215.5
-71.1

1,260.6
-81.7

1,024.3

1,069.0

1987

1988

1989

769.1

842.3
0.1

910.4
6.1

Administration budget
Total outlays:
Current services
Effect of proposals

769.1

842.4

916.6

989.8

1,016.8
-1.3

Administration budget
Total surplus or deficit ( - ) :
Current services
Effect of proposals

989.8

1,015.6

Receipts:
Current services
Effect of proposals

Administration budget

1990

1,107.8

1,144.4 1,178.9

-220.7 -174.5 -150.1 -146.9 -125.7 -101.2
66.2
42.4
79.9
54.2
1.3
-220.7 -173.2 -107.8

-92.8

-59.5

-21.3

-78.3
90.6
12.3

A-ll

SPECIAL ANALYSIS A
Table A - U . COMPOSITION OF ADMINISTRATION BUDGET PROPOSALS:
CHANGE FROM CURRENT SERVICES
(In billions of dollars)

1987

1988

1989

1990

1991

1992

Total 19871992

National defense
International affairs,
space and science, and
justice
Human resources1
Net interest
Other domestic programs...

-1.1
0.9
-1.1

-0.9
-17.8
0.1
-17.6

1.9
-23.9
-1.3
-22.8

2.3
-31.4
-3.7
-24.8

3.1
-37.4
-7.1
-29.7

3.2
-43.0
-11.5
-30.4

9.7
-154.6
-22.7
-126.3

Subtotal, outlays..
Receipts2

-1.3
-0.1

-36.2
-6.1

-46.1
-8.0

-57.6
-8.6

-71.1
-8.8

-81.7
-8.9

-294.0
-40.6

-1.3
(-1.3)

-42.4
(-41.7)
(-0.6)

-54.2
(-53.2)
(-1.0)

-66.2
(-65.1)
(-1.2)

-79.9
(-78.6)
(-1.3)

Total deficit
reduction
(On-budget)....
(Off-budget)

-334.5
-90.6
( - 8 9 . 2 ) (-329.1)
(-5.5)
(-1.4)

* 5 0 million or less.
1 Education, training, employment and social services; Health; Medicare; Income security; Social security; and Veterans functions.
2 Receipt increases are shown as a negative because they reduce the deficit.

Receipts.—As shown in table A-12, the administration's estimate
of receipts for 1987 is only $0.1 billion greater than the current
services level of $842.3 billion.
Current services receipts for 1988 are estimated at $910.4 billion.
Legislative and administrative proposals, which are estimated to
increase receipts to $916.6 billion, or $6.1 billion above the current
services level, include the following: Internal Revenue Service (IRS)
initiatives to close the gap between taxes owed and taxes paid,
extension of medicare hospital insurance (HI) coverage to State and
local government employees, repeal of exemptions from gasoline
and other highway excise taxes, an increase in rail pension contributions, the requirement that employers pay the employer portion
of the social security (OASDHI) payroll tax on total tips, an increase in the excise tax on coal production, and extension of social
security (OASDHI) coverage to certain earnings. A more detailed
discussion of the administration's receipts proposals is presented in
the Budget of the United States Government, Fiscal Year 1988—
Supplement, Part 4, "Federal Receipts by Source/'
The administration's proposals are estimated to increase receipts
above the current services level by $8.0 billion to $8.9 billion in
each year, 1989-1992.

A-10

THE BUDGET FOR FISCAL YEAR 1988

Table A-12. DIFFERENCES BETWEEN CURRENT SERVICES AND ADMINISTRATION POLICY RECEIPTS
(In billions of dollars)
1987

Current services receipts estimates..
(On-budget)
(Off-budget)
Differences:
IRS initiatives
Extend HI coverage to State and
local employees
Increase contribution to rail industry pension plan
Require employer tax on total
tips 1
Repeal gasoline and other highway tax exemptions1
Increase tax on coal production 1
Extend OASDHI coverage to certain earnings
Customs user fee 1
Other
Total differences
(On-budget)
(Off-budget)
Administration policy receipts estimates
(On-budget)
(Off-budget)

1988

1989

1990

1992

910.4
(668.7)
(241.7)

968.2
(705.3)
(262.8)

2.4

3.1

3.3

3.4

1.6

2.2

0.1

0.3

0.2

0.3

0.4

0.6

0.3

0.3
0.1
0.5

0.3
0.1
0.9

0.4
0.5
0.8

0.1
(0.1)

6.1
(5.8)
(0.4)

8.0
(7.5)
(0.6)

8.6
(8.0)
(0.6)

8.8
(8.1)
(0.7)

8.9
(8.2)
(0.7)

842.4
(628.4)
(214.0)

916.6
(674.5)
(242.1)

976.2
(712.8)
(263.4)

1,048.3
(761.6)
(286.6)

1,123.2
(815.4)
(307.7)

1,191.2
(865.9)
(325.3)

842.3
(628.3)
(214.0)

0.1

1,039.7
(753.6)
(286.0)

1991

1,114.3
(807.3)
(307.1)

1,182.3
(857.7)
(324.6)

* $ 5 0 million or less.
1 Net of income tax offsets.

Outlays.—The total outlay change proposed by the administration is, on net, a $36 billion reduction for 1988. Of this reduction,
$16 billion is from user fees, loan asset sales, privatization initiatives, and other revenue changes. The remaining $20 billion is the
net effect of program reforms, increases, and reductions, and debt
service. Table A-13 shows the major differences between the administration's budget request and current services for outlays by
function.
A summary description of the administration's proposals is in
the Budget of the United States Government, Fiscal Year 1988—
Supplement, Part 2, "Budget Summary and Priorities."
A detailed discussion of the administration's budget authority
and outlay proposals is presented in the Budget of the United
States Government, Fiscal Year 1988—Supplement, Part 5, "Meeting National Needs: The Federal Program by Function."

A-ll

SPECIAL ANALYSIS A

Table A-13. DIFFERENCES BETWEEN CURRENT SERVICES AND ADMINISTRATION POLICY OUTLAYS
(Outlays; in billions of dollars)
1987

Current services estimates
(On-budget)
(Off-budget)
Differences:
National defense
International affairs:
International development and
humanitarian assistance
International security assistance:
Military assistance
Other
Subtotal, International
security assistance
Conduct of foreign affairs ..
Foreign information and exchange activities
International financial programs

1988

1,016.8
(822.2)
(194.5)

0.1

1989

1990

1991

1992

1,215.5
(981.5)
(234.0)

1,260.6
(1,016.0)
(244.6)

1,060.5
(857.9)
(202.7)

1,115.1
(903.0)
(212.1)

1,165.4
(942.5)
(223.0)

-0.2

-0.1

-0.2

0.1

0.3
0.7

0.4
0.6

0.4
0.4

0.4*

-1.2

0.9
0.4

0.9
0.5

0.8
0.6

0.4
0.5

0.1

0.4

0.6

0.7

1.4

1.7

2.0

1.7

*
-0.4
-0.3
0.2
*

Subtotal, international affairs

-0.1

General science, space, and
technology

_ *

0.4

0.7

1.1

1.5

Energy

-0.3

-2.9

-3.0

-2.7

-3.7

-3.8

Natural resources and environment

-0.2

-1.4

-1.8

-2.0

-2.2

-2.4

-0.1

-4.9

-7.6

-8.3

-0.2

-0.3

-0.4

_ *

-0.3

-5.2

-7.9

-8.7

-0.8

-4.2
0.3

- 3 . 2*

-3.3
0.2

-3.1
0.2

-4.3
0.4

-0.5

-0.3

0.1

-0.2

-0.4

-4.4

-3.5

-3.0

-3.1

-4.2

0.1
0.1

-1.3
0.1
- 0 . 2*

-2.2
0.3
- 0_. 3*

-3.3
0.4
- 0_. *3

-4.2
0.3
- 0_. *3

-4.5
0.3
- 0 . 3*

0.2

-1.4

-2.3

-3.3

-4.2

-4.5

-0.1

-1.2

-3.4

-2.6

-2.4

-2.6

Agriculture:
Farm income stabilization
Agricultural research and
services
Subtotal agriculture
Commerce and housing credit:
Mortgage credit and deposit
insurance
Postal service
Other advancement of commerce
Subtotal, commerce and
housing credit
Transportation:
Ground transportation
Air transportation
Water transportation
Other transportation
Subtotal, transportation .
Community and regional development

-0.8
*

A-10

THE BUDGET FOR FISCAL YEAR 1988

Table A-13. DIFFERENCES BETWEEN CURRENT SERVICES AND ADMINISTRATION POLICY OUTLAYS—
Continued
(Outlays; in billions of dollars)

Education, training, employment,
and social services:
Education
Training and employment
Social services and other
Subtotal, education, training, employment, and
social services
Health:
Medicaid
Other health
Subtotal, health

1987

1988

1989

1990

1991

- 0_. 3*
-0.1

-4.1
0.2
-0.3

-6.6
0.7
-0.6

-8.7
0.4
-0.8

-9.9
0.3
-1.0

-10.9
0.3
-1.2

-0.5

-4.2

-6.5

-9.0

-10.6

-11.8

-0.3

-1.4
-1.8

-3.0
-2.2

-4.0
-2.6

-5.2
-3.1

-6.6
-3.4

-0.3

-3.2

-5.1

-6.6

-8.2

-10.0

-5.2

-5.8

-8.2

-10.0

-12.0

-0.4

- 1 . 5*

-1.9
-0.1
-1.3
-1.4
-1.4

-2.1

- 2_. *2

-1.9
-1.4
-1.7

-1.9
-1.4
-2.0

Medicare
Income security:
General retirement and disability (excluding social
security)
Federal employee retirement
and disability
Unemployment compensation
Housing assistance
Food and nutrition assistance...
Other income security
Subtotal, income security

-0.1
- 0 . 1*

-0.3
-1.2
-1.3

-1.7
-0.1
-0.8
-1.3
-1.4

-0.1

-4.7

-5.8

-6.4

-7.5

-8.1

-0.1
(-*)
(-0.1)

-0.2
(-*)
(-0.2)

-0.3
(-*)
(-0.3)

Social Security
(On-budget)
(Off-budget)
Veterans benefits and services:
Income security for veterans....
Hospital and medical care for
veterans
Other
Subtotal, veterans benefits
and services
Administration of justice:
Federal law enforcement activities
Federal correctional activities...
Other
Subtotal, administration of
justice
General government:
Central fiscal operations
Other
Subtotal, general government

1992

_ *

_ *
*

-0.1
-0.1

-0.1
-0.3

-0.5

-0.8

-0.1
-0.7

-0.7

-0.2

-0.4

-0.6

-0.8

0.1
0.2
-0.3

0.1
0.2
-0.4

0.1

0.3
0.1
-0.1

0.3
-0.4

0.1
0.3
-0.4

0.1

0.3

0.1

-0.2

-0.1

0.1*

0.6
-0.4

0.8
-0.1

0.8•

0.7
0.1

0.7
-0.3

0.1

0.3

0.8

0.4

•

A-ll

SPECIAL ANALYSIS A

Table A-13. DIFFERENCES BETWEEN CURRENT SERVICES AND ADMINISTRATION POLICY OUTLAYS—
Continued
(Outlays; in billions of dollars)
1987

1988

1989

1990

1991

1992

-0.4

0.1
(0.1)
(-*)

-1.3
(-1.3)
(-*)

-3.7
(-3.6)
(-0.1)

-7.1
(-6.9)
(-0.1)

-11.5
(-11.4)
(-0.2)

-1.4

-1.1

0.1

1.1

2.1

-0.4
(-0.3)
(-0.1)

-0.8
(-0.6)
(-0.2)

-1.2
(-1.0)
(-0.2)

-1.5
(-1.3)
(-0.2)

-1.7
(-1.5)
(-0.2)

-4.1

-2.3

-2.5

-5.4

-4.5

-4.5
(-4.4)
(-0.1)

-3.1
(-3.0)
(-0.2)

-3.7
(-3.5)
(-0.2)

-6.9
(-6.7)
(-0.2)

-6.2
(-6.0)
(-0.2)

-1.3
(-1.3)

-36.2
(-36.0)
(-0.2)

-46.1
(-45.7)
(-0.4)

-57.6
(-57.1)
(-0.6)

-71.1
(-70.4)
(-0.7)

-81.7
(-81.0)
(-0.7)

1,015.6
(821.1)
(194.5)

1,024.3
(821.9)
(202.4)

1,069.0
(857.3)
(211.7)

1,107.8
(885.4)
(222.4)

1,144.4
(911.1)
(233.3)

1,178.9
(935.1)
(243.9)

General purpose fiscal assistance
0.9
(0.9)

Net interest
(On-budget)
(Off-budget)
Allowances
Undistributed offsetting receipts:
Employer share, employee retirement
(On-budget)
(Off-budget)
Rents and royalties on the
Outer Continental Shelf
Sale of major physical assets
Subtotal, undistributed offsetting receipts
(On-budget)
(Off-budget)
Total, differences
(On-budget)
(Off-budget)
Administration policy
estimates
(On-budget)
(Off-budget)
* $ 5 0 million or less.

The effects of the administration's budget proposals on Federal
borrowing and debt held by the public are substantial. As shown in
Table A-14, the budget proposals would reduce the debt held by
the public in 1992 by $334.5 billion, from $2,509.2 billion to $2,174.7
billion.
Table A-14. DIFFERENCES BETWEEN CURRENT SERVICES AND ADMINISTRATION BUDGET REQUEST
BORROWING REQUIREMENTS
(In billions of dollars)

Requirements for borrowing from the public-.
Current services
Budget proposals
Difference
End of year debt held by the public:
Current services
Budget proposals
Difference

1987

1988

1989

1990

1991

1992

163.6
162.2

149.1
106.7

146.5
92.3

125.3
59.1

100.7
20.9

77.9
-12.7

1.3

42.3

54.2

66.2

79.9

90.6

1,909.7 2,058.8 2,205.3 2,330.6 2,431.4 2,509.2
1,908.4 2,015.1 2,107.5 2,166.5 2,187.4 2,174.7
1.3

43.7

97.9

164.1

244.0

334.5

A-10

THE BUDGET FOR FISCAL YEAR 1988

Tables A-15 and A-16 provide a more detailed comparison (by
function, subfunction, and program) of the President's policy estimates for 1987 with the current services budget authority and
outlay estimates.
Table A-15. CURRENT SERVICES BUDGET AUTHORITY BY FUNCTION AND PROGRAM
(In millions of dollars)
Current services
1986
actual

050 NATIONAL DEFENSE
051 Department of Defense-Military:
Military personnel
Operation and maintenance
Procurement
Research, development, test and evaluation
Military construction
Family housing
Revolving funds and other
Offsetting receipts
Allowances: Civilian pay raises
Allowances: Military pay raises and benefits
Allowances: Other legislation (proposed)
Subtotal, Department of Defense-Military
053 Atomic energy defense activities
054 Defense-related activities
Total budget authority

1987
estimate

1988
estimate

1988
administration
proposals

67,794
74,888
92,506
33,609
5,281
2,803
5,262
-753

74,203
79,674
85,847
36,724
5,382
3,121
678
-699

76,299
86,065
83,974
43,719
6,592
3,484
1,225
-750
505
2,008
174

281,390

284,931

303,295

7,287

7,478

8,050

470

518

622

289,146

292,927

311,967

150 INTERNATIONAL AFFAIRS
151 International development and humanitarian
assistance:
Multilateral development banks:
Existing law
Proposed legislation
International organizations
Agency for International Development
P.L. 480 food aid
Refugee assistance
Other
Offsetting receipts

1,143

949

983

261
2,026
1,243
324
220
-457

237
2,044
1,083
361
293
-583

239
2,117
1,134
360
303
-572

1,774
44
194
2,192
965
314
269
-568

Subtotal, International development and humanitarian assistance

4,760

4,384

4,563

5,185

4,947
798
3,762
95
-58

4,040
900
3,600
98
-76

4,182
916
3,674
101
-111

4,421
1,330
3,600
112
-111

152 International security assistance:
Foreign military sales credit
Military assistance
Economic support fund
Other
Offsetting receipts

9,543

8,562

8,762

9,352

153 Conduct of foreign affairs:
Administration of foreign affairs
International organizations and conferences
Other

2,445
477
81

2,022
420
80

2,058
436
82

2,655
506
89

Subtotal, Conduct of foreign affairs

3,003

2,521

2,576

3,250

958

980

1,091

1,147

-3,034
1,514

412

241

Subtotal, International security assistance

154 Foreign information and exchange activities
155 International financial programs:
Foreign military sales trust fund (net)
Other

A-ll

SPECIAL ANALYSIS A

Table A-15. CURRENT SERVICES BUDGET AUTHORITY BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
actual

Offsetting receipts
Subtotal, International financial programs
Total budget authority
250 GENERAL SCIENCE, SPACE, AND TECHNOLOGY
251 General science and basic research:
National Science Foundation programs
Department of Energy general science programs ...

-87

1987
estimate

-89

1988
estimate

-90

1988
administration
proposals

-90

-1,607

323

151

16,659

16,770

17,142

19,085

1,472
650

1,636
708

1,685
781

1,898
814

2,121

2,345

2,466

2,712

253 Space flight

4,240

6,532

5,153

5,254

254 Space, science, applications, and technology

2,107

2,264

2,242

2,361

819

1,039

1,140

1,141

9,286

12,180

11,002

11,468

2,070
199
9
-565
131
985
3

1,697

2,374

-100
-486
58
1,450*

-142
-540
-12
213*

2,187
-231
-142
-540
-12
213*

1,914

3,304

27
-27

4,745

2,648

5,196

1,474

426

234
1

288

Subtotal, General science and basic research

255 Supporting space activities
Total budget authority
270 ENERGY
271 Energy supply:
Research and development
Uranium enrichment
Other power marketing
Petroleum reserves
Nuclear waste disposal fund
Tennessee Valley Authority
Subsidies for nonconventional fuel production
Rural electric and telephone:
Existing law
Proposed legislation
Subtotal, Energy supply
272 Energy conservation:
Energy conservation grants and R&D
Solar Energy and Energy Conservation Bank
Subtotal, Energy conservation

426

235

288

274 Emergency energy preparedness

113

153

597

276

276 Energy information, policy, and regulation

763

662

664

676

6,047

3,698

6,745

2,513

2,774
768
298
-161

3,354
953
216
-422

3,507
1,074
225
-462

3,503
1,053
87
-475

3,678

4,101

4,344

4,168

1,946
470
278
595
307

1,978
569
304
622
315

2,149
578
313
2,038
326

1,828
487
292
1,801
218

-2,166

-2,217

-2,336

-2,292

Total budget authority
300 NATURAL RESOURCES, AND ENVIRONMENT
301 Water resources:
Corps of Engineers
Bureau of Reclamation
Other
Offsetting receipts
Subtotal, Water resources
302 Conservation and land management:
Management of national forests, cooperative forestry,
and forestry research (Forest Service)
Management of public lands (BLM)
Mining reclamation and enforcement
Conservation of agricultural lands
Other resources management
Offsetting receipts:
Existing law
Proposed legislation

A-10

THE BUDGET FOR FISCAL YEAR 1988

Table A-15. CURRENT SERVICES BUDGET AUTHORITY BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
actual

Subtotal, Conservation and land management.
303 Recreational resources:
Federal land acquisition:
Existing law
Proposed legislation
Urban park ana historic preservation funds
Operation of recreational resources:
Existing law
Proposed legislation
Offsetting receipts:
Existing law
Proposed legislation
Subtotal, Recreational resources..
304 Pollution control and abatement:
Regulatory, enforcement, and research programs..
Hazardous substance response fund
Oil pollution funds (gross)
Sewage treatment plant construction grants:
Existing law
Proposed legislation
Leaking underground storage tank trust fund
Offsetting receipts:
Existing law
Proposed legislation
Subtotal, Pollution control and abatement..
306 Other natural resources:
Program activities:
Existing law
Proposed legislation
Offsetting receipts
Subtotal, Other natural resources.,
Total budget authority
350 AGRICULTURE
351 Farm income stabilization:
Commodity price support and related programs:
Existing law
Proposed legislation
Crop insurance:
Existing law
Proposed legislation
Agricultural credit:
Existing law
Proposed legislation
Other programs and unallocated overhead
Subtotal, Farm income stabilization
352 Agricultural research and services:
Research programs:
Existing law
Proposed legislation
Extension programs
Marketing programs:
Existing law
Proposed legislation
Animal and plant health programs:
Existing law

1987

1988
estimate

1,430

1,572

3,069

195

246

261

24"

25"

1,312

1,410

1,498

-74

-49

-84

1,456

1,631

1,700

1,373
261

1,444
1,411
7

1,476
1,463
5

1,774

1,200

2,500

-35

-57

3,399

4,077

5,439

1,778

1,764

1,981
"-19"

-16

-17

-15"

1,761

1,749

1,961

11,724

13,130

16,514

23,085

21,514

16,108

344

345

746

4,627

3,506

4,068

*"
20,922

28,065

25,365

775

862

"328"

332

133

134

142

310

308

331

852
..........

A-ll

SPECIAL ANALYSIS A

Table A-15. CURRENT SERVICES BUDGET AUTHORITY BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
1987
estimate

Proposed legislation
Economic intelligence
Other programs and unallocated overhead:
Existing law
Proposed legislation
Offsetting receipts
Subtotal, Agricultural research and services..
Total budget authority
370 COMMERCE AND HOUSING CREDIT
371 Mortgage credit and deposit insurance:
Mortgage purchase activities (GNMA)
Mortgage credit (FHA and other)
Housing for the elderly or handicapped
Rural housing programs (FmHA)
Federal Savings and Loan Insurance Corporation and
other
Subtotal, Mortgage credit and deposit insurance..
372 Postal service:
Existing law
Proposed legislation
Subtotal, Postal service..
376 Other advancement of commerce:
Small and minority business assistance..
Science and technology
Economic and demographic statistics
International trade and other
Subtotal, Other advancement of commerce.
Total budget authority
400 TRANSPORTATION
401 Ground transportation:
Highways
Highway safety
Mass transit
Railroads:
Existing law
Proposed legislation
Regulation:
Existing law
Proposed legislation
Subtotal, Ground transportation..
402 Air transportation:
Airports and airways (FAA)
Aeronautical research and technology..
Air carrier subsidies
Subtotal, Air transportation
403 Water transportation:
Marine safety and transportation:
Existing law
Proposed legislation
Proposed Coast Guard fees
Ocean shipping:
Existing law

1988
estimate

182

188

198

206

211

221

-97

-99

-102

1,836

1,938

1,986

29,901

27,303

22,908

137
493
3,036

90
506
3,086

473
546
3,155

6,666

3,683

4,175

2,504

3,183

3,010

2,504

3,183

3,010

757
323
217
493

565
334
298
562

631
416
422
592

3,000

1,790

1,758

2,061

10,960

J,624

9,246

14,644
254
3,616

13,476
303
3,504

15,733
337
3,601

789

668

709

19,349

17,997

20,430

4,815
642
27

4,799
699
30

5,150
723

5,484

5,528

5,873

2,306

2,575

2,656

1,609

646

109

A-10

THE BUDGET FOR FISCAL YEAR 1988

Table A-15. CURRENT SERVICES BUDGET AUTHORITY BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
actual

1987
estimate

1988
estimate

Proposed legislation
Subtotal, Water transportation

1988
administration
proposals

-29
3,915

3,220

2,765

2,676

407 Other transportation

115

131

135

Total budget authority

28,863

26,861

29,199

24,604

3,023
316
144
244

3,000
225
320
241

3,111
233
310
245

2,510

Subtotal, Community development

3,726

3,785

3,900

2,811

452 Area and regional development:
Rural development
Economic development assistance
Indian programs
!
Regional commissions
Tennessee Valley Authority
Offsetting receipts

1,552
216
968
120
100
-273

2,275
217
1,057
108
100
-298

1,742
214
1,090
113
104
-301

1,306
1,169
1
73
-298

2,684

3,459

2,962

2,251

346

120

125

450 COMMUNITY AND REGIONAL DEVELOPMENT
451 Community development:
Community development block grants
Urban development action grants
Rental rehabilitation and rental development
Other

Subtotal, Area and regional development
453 Disaster relief and insurance:
Disaster relief
National flood insurance fund
Other
Subtotal, Disaster relief and insurance
Total budget authority
500 EDUCATION, TRAINING, EMPLOYMENT, AND
SOCIAL SERVICES
501 Elementary, secondary, and vocational
education:
Block grant and special programs:
Existing law
Proposed legislation
Compensatory education:
Existing law
Proposed legislation
Education for the handicapped
Impact aid
Vocational and adult education
Other
Subtotal, Elementary, secondary, and vocational
education
502 Higher education:
Student financial assistance:
Existing law
Proposed legislation
Receipts
Guaranteed student loan program:
Existing law
Proposed legislation
Other
Subtotal, Higher education

75
227

129

125
48
96

475

210

269

202

6,884

7,454

7,130

5,264

675

935

969

175
609

3,537

3,952

4,098

1,350
683
907
528

1,742
718
988
568

1,806
744
1,024
596

4,144
1,488
548
130
487

7,680

8,902

9,238

7,581

4,823

5,196

6,854

-67

-70

-73

6,133
-2,797

3,266

3,004

2,223

754

876

841

2,510
-1,334
546

8,776

9,006

9,846

5,058

A-ll

SPECIAL ANALYSIS A

Table A-15. CURRENT SERVICES BUDGET AUTHORITY BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
actual

503 Research and general education aids
504 Training and employment:
Employment and training assistance:
Existing law
Proposed legislation
Older Americans employment
Work incentive program
Federal-State employment service
Other
Subtotal, Training and employment
505 Other labor services
506 Social services:
Social services block grant
Community service programs
Rehabilitation services
Family social services
Social services activities
Domestic volunteer programs
Other social services
Subtotal, Social services
Total budget authority
550 HEALTH
551 Health care services:
Medicaid grants:
Existing law
Proposed legislation
Federal employees' health benefits:
Existing law
Proposed legislation
Other health care services

1987
estimate

1988
estimate

1988
administration
proposals

1,184

1,295

1,360

1,217

3,337

3,686

3,759

312
203
958
65

326
103
959
67

326

3,286
1,130
326

1,000
67

873
74

4,875

5,141

5,152

5,688

679

730

782

812

2,584
352
1,310
761
1,929
145
23

2,700
368
1,485
994
2,098
156
26

2,700
382
1,535
1,062
2,173
160
957

2,700
310
1,401
682
2,277
153
953

7,104

7,826

8,969

8,476

30,298

32,900

35,347

28,832

24,644

26,740

28,225

28,120
-1,256

1,537

1,459

1,789

3,237

3,631

3,540

1,789
-502
3,332

Subtotal, Health care services

29,418

31,830

33,554

31,483

552 Health research:
National Institutes of Health research
Other research programs

5,013
539

5,894
726

6,093
677

7,970
639

Subtotal, Health research

5,552

6,621

6,770

8,609

553 Education and training of health care work
force:
Research training
Clinical training
Other

262
206
39

286
202
32

297
208
33

291
36
30

Subtotal, Education and training of health care
work force

507

521

538

357

794

857

891

363

392

421

881
-397
422

554 Consumer and occupational health and safety:
Consumer safety:
Existing law
Proposed legislation
Occupational safety and health
Subtotal, Consumer and occupational health and
safety
Total budget authority

1,157

1,249

1,311

906

36,634

40,220

42,174

41,355

A-10

THE BUDGET FOR FISCAL YEAR 1988

Table A-15. CURRENT SERVICES BUDGET AUTHORITY BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
actual

570 MEDICARE
571 Medicare:
Hospital insurance (HI):
Existing law
Proposed legislation
Supplementary medical insurance (SMI):
Existing law
Proposed legislation
Medicare premiums and collections:
Existing law
Proposed legislation
Interfund transactions
Total budget authority..
600 INCOME SECURITY
601 General retirement and disability insurance
(excluding social security):
Railroad retirement:
Existing law
Proposed legislation
Special benefits for disabled coal miners:
Existing law
Proposed legislation
Other
Subtotal, General retirement and disability insurance (excluding social security)

1987
estimate

1988
estimate

67,037

67,627

67,842

25,004

27,805

34,267

-5,739

-6,545

-8,340

87,228

88,887

93,769

5,541

4,589

4,497

2,213

1,170

1,574

926

67"

87"

7,820

5,846

6,165

43,296

44,039

46,243

29,896*

266

31,246
612
226

33,120
1,514
170

73,458

76,122

81,046

22,066

23,242

19,733

22,066

23,242

19,733

Public housing operating subsidies
Low-rent public housing loans
Other housing assistance

9,394
1,159
895
196

7,506
1,350
1,829
225

7,769
1,329
1,552
236

Subtotal, Housing assistance

11,643

10,910

10,886

12,582

12,646

12,842

6,221

6,699

7,020

18,803

19,345

19,862

10,171

10,856

12,231

602 Federal employee retirement and disability:
Civilian retirement and disability programs:
Existing law
Proposed legislation
Military retirement
Thrift investment fund
Federal employees workers' compensation (FECA)
Subtotal, Federal employee retirement and disability
603 Unemployment compensation:
Existing law
Proposed legislation
Subtotal, Unemployment compensation..
604 Housing assistance:

A-ll

SPECIAL ANALYSIS A

Table A-15. CURRENT SERVICES BUDGET AUTHORITY BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
actual

Family support payments:
Existing law
Proppsed legislation
Earned income tax credit (EITC).
Refugee assistance
Other
Subtotal, Other income security..
Total budget authority
650 SOCIAL SECURITY
651 Social security:
Old-age and survivors insurance (OASI)— Offbudget:
Existing law
Proposed legislation
Old-age and survivors insurance (OASI)—On-budget:
Existing law
Proposed legislation
Disability insurance (Dl)—Off-budget:
Existing law
Proposed legislation
Disability insurance (Dl)—On-budget
Interfund transactions (Off-budget)
Interfund transactions (On-budget)
Total budget authority..

1987
estimate

estimate

9,899

10,414

10,330

1,415
403
2,281

1,491
340
2,078

2,910
333
2,151

24,170

25,179

27,954

157,960

160,644

165,647

183,055

207,743

236,399

-854

-542

-560

22,718

20,237

22,759

-45
-8,971
5,760

-53
-5,603
5,603

-54
-5,497
5,497

201,662

227,384

258,544

(4,883)
(5,008)
(4,861)
(196,802) (222,377) (253,661)
700 VETERANS BENEFITS AND SERVICES
701 Income security for veterans:
Service-connected compensation:
Existing law
Proposed legislation
Non-service-connected pensions
Burial and other benefits:
Existing law
Proposed legislation
National service life insurance trust fund...
All other insurance programs:
Existing law
Proposed legislation
Insurance program receipts
Subtotal, Income security for veterans..
702 Veterans education, training, and rehabilitation:
Readjustment benefits (Gl Bill and related
programs):
Existing law
Proposed legislation
Post-Vietnam era education
All-volunteer force educational assistance trust fund:
Existing law
Proposed legislation
Veterans jobs program
Subtotal, Veterans education, training, and rehabilitation

10,430
3,850

10,489
...............

10,653
..............

129

128

142

1,367

1,372

1,375

-443

-405

-404

15,363

15,433

15,636

896

741

626

-105

-178

-186

563

440

""35"

826

A-10

THE BUDGET FOR FISCAL YEAR 1988

Table A-15. CURRENT SERVICES BUDGET AUTHORITY BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
actual

703 Hospital and medical care for veterans:
Medical care and hospital services
Construction
Medical administration, research, and other
Third-party reimbursement
Subtotal, Hospital and medical care for veterans.
704 Veterans housing:
Existing law
Proposed legislation
Subtotal, Veterans housing..
705 Other veterans benefits and services:
Cemeteries, administration of veterans benefits, and
other
Non-VA support programs

1987
estimate

estimate

9,130
601
233*

9,629
531
256
-65

10,041
557
242
-250

9,964

10,350

10,590

200

320

200

320

784
73

780

799

857

842

27,151

27,204

27,828

1,522
167
1,375
293

1,784
193
1,908
335

1,878
2,014
359

371

384

406

3,728

4,604

4,865

834

1,044

1,096

1,063
292

1,252
306

1,411
312

2,190

2,601

2,820

753 Federal correctional activities

595

867

708

754 Criminal justice assistance

265
6,777

8,560

8,903

1,412

1,566

1,698

110

116

128

3,826

4,368

4,678

220

286

298

4,046

4,654

4,976

10
-70
14
97

-345
15
102

-189
16
110

Subtotal, Other veterans benefits and servicesTotal budget authority
750 ADMINISTRATION OF JUSTICE
751 Federal law enforcement activities:
Criminal investigations (DEA, FBI, and OCDE)
Alcohol, tobacco, and firearms investigation (ATF).
Border enforcement activities (Customs and INS)...
Protection activities (Secret Service)
Other enforcement:
Existing law
Proposed legislation
Subtotal, Federal law enforcement activities..
752 Federal litigative and judicial activities:
Civil and criminal prosecution and representation:
Existing law
Proposed legislation
Federal judicial activities
Representation of indigents in civil cases
Subtotal, Federal litigative and judicial activities..

Total budget authority
800 GENERAL GOVERNMENT
801 Legislative functions
802 Executive direction and management..
803 Central fiscal operations:
Collection of taxes
Other fiscal operations-.
Existing law
Proposed legislation
Subtotal, Central fiscal operations.,
804 General property and records management:
Federal buildings fund
Property receipts
Personal property
Records management

731

208

510

A-ll

SPECIAL ANALYSIS A

Table A-15. CURRENT SERVICES BUDGET AUTHORITY BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
actual

Other:
Existing law
Proposed legislation

1987
estimate

1988
estimate

1988
administration
proposals

330

342

361

418
-169

382

113

298

-119

136

139

143

146

136

139

143

146

221
153
8
277
101

76
146
2
349
65

144
98
2
339
65

144
77
2
350
62

760

638

649

635

-78

-450

-450
-6
14

Subtotal, Deductions for offsetting receipts

-78

-450

-442

Total budget authority

6,768

6,776

7,440

7,542

4,192

-34

287

553

497

685

274

296

296
-270

423

435

445

391

95
100
381
5

89
105
378
9

63
105
386
7

Subtotal, Other general purpose fiscal assistance

1,655

1,576

1,855

1,475

Total budget authority

5,847

1,582

1,855

1,475

190,166

191,749

199,295

198,150
244

190,166

191,749

199,295

198,394

902 Interest received by on-budget trust funds:
Existing law
Proposed legislation

-26,570

-28,680

-31,368

-31,372
-236

Subtotal, Interest received by on-budget trust
funds

-26,570

-28,680

-31,368

-31,608

Subtotal, General property and records management
805 Central personnel management:
Existing law
Proposed legislation
Subtotal, Central personnel management
806 Other general government:
Compact of free association
Territories
Indian affairs
Treasury claims
Other
Subtotal, Other general government
809 Deductions for offsetting receipts:
Existing law
Sallie Mae fees (proposed)
Other proposed offsetting receipts

850 GENERAL PURPOSE FISCAL ASSISTANCE
851 General revenue sharing
852 Other general purpose fiscal assistance:
Payments and loans to the District of Columbia
Payments to States and counties from Forest Service
receipts:
Existing law
Proposed legislation
Payments to States from receipts under the Mineral
Leasing Act
Payments .to States and counties from Federal land
management activities
Payments in lieu of taxes
Payments to territories and Puerto Rico
Other

900 NET INTEREST
901 Interest on the public debt:
Existing law
Proposed legislation
Subtotal, Interest on the public debt

A-10

THE BUDGET FOR FISCAL YEAR 1988

Table A-15. CURRENT SERVICES BUDGET AUTHORITY BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
actual

1987
estimate

1988
estimate

1988
administration
proposals

903 Interest received by off-budget trust funds:
Existing law
Proposed legislation

-4,329

-5,084

-6,586

-6,586
-8

Subtotal, Interest received by off-budget trust
funds

-4,329

— 5,084

-6,586

-6,594

1,814
-16,377
-2,190
-770
-1,072

1,668
— 14,738
-1,741
-1,105
-901

1,621
-15,836
-1,849
-1,095
-604

1,621
-14,475
-1,878
-1,024
-604

-4,689

-4,615

-4,598
-201

Subtotal, Other interest

-23,285

-21,432

-22,379

-21,159

Total budget authority

135,982

136,553

138,962

139,032

908 Other interest:
Interest on refunds of tax collections
Interest on loans to Federal Financing Bank
Interest on loans to CCC
Interest on loans to FmHA
OCS interest
Other:
Existing law
Proposed legislation

On-budget
Off-budget.

(140,311) (141,636) (145,548) (145,626)
(-4,329) (-5,084) (-6,586) (-6,594)

920 ALLOWANCES
921 Civilian agency pay raises:
Civilian agency pay raises
Coast Guard military pay raises
Subtotal, Civilian agency pay raises

656
48

704

923 Savings from reform of Davis-Bacon and
Service Contract Acts:
Proposed legislation

-163

Subtotal, Savings from reform of Davis-Bacon and
Service Contract Acts

-163

924 Credit reform initiative:
Proposed legislation

-1,284

Subtotal, Credit reform initiative

-1,284

925 Proposed change in Government contribution
for employee health benefits:
Proposed legislation

-140

Subtotal, Proposed change in Government contribution for employee health benefits

-140

Total budget authority
950 UNDISTRIBUTED OFFSETTING RECEIPTS
951 Employer share, employee retirement (onbudget):
Military retired contributions
Federal retirement thrift
Other contributions:
Existing law
Proposed legislation

704

-883

-17,429

-18,193
-422

-18,495
-1,324

-18,782
-1,324

-8,006

-9,398

-11,985

-11,985
-38

Subtotal, Employer share, employee retirement
(on-budget)

-25,434

-28,013

-31,803

-32,128

952 Employer share, employee retirement (offbudget):
Existing law

-2,857

-3,275

-5,367

SPECIAL ANALYSIS A

A-ll

Table A-15. CURRENT SERVICES BUDGET AUTHORITY BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
actual

1987
estimate

1988
estimate

Proposed legislation
Subtotal, Employer share, employee retirement
(off-budget)
953 Rents and royalties on the Outer Continental
Shelf:
Existing law
Proposed legislation
Subtotal, Rents and royalties on the Outer Continental Shelf

-117
-2,857

-3,275

-5,367

-5,484

-4,716

-3,903

-3,686

-4,716

-3,903

-3,686

954 Sale of major assets:
Sale of Conrail
Sale of petroleum reserve (proposed)
Sale of Amtrak (proposed)
Auction receipts, FCC (proposed)

-1,900

Subtotal, Sale of major assets
Total budget authority
On-budget
Off-budget.
Total budget authority
On-budget
Off-budget.
* $ 5 0 0 thousand or less.

1988
administration
proposals

-2,500
-1,000
-600

-1,900
-33,007
(-30,150)
(-2,857)
1,072,773
(883,158)
(189,615)

-37,091
(-33,816)
(-3,275)
1,102,565
(888,547)
(214,018)

-4,100
-40,857
(-35,490)
(-5,367)
1,172,170
(930,462)
(241,708)

-45,399
(-39,915)
(-5,484)
1,142,180
(900,082)
(242,098)

A-10

THE BUDGET FOR FISCAL YEAR 1988
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM
(In millions of dollars)
Current services
1986
actual

1987
estimate

1988
estimate

1988
administration
proposals

71,511
75,259
76,517
32,283
5,067
2,819
2,933
-753

70,808
76,714
82,695
34,178
4,952
2,767
2,785
-699

75,677
81,368
82,798
38,266
5,186
3,012
1,212
-750
496
1,979
57

265,636

274,200

289,300

7,445

7,440

7,817

294

606

433

613
-180

294

606

433

273,375

282,246

297,550

1,607

1,029

1,585

231
1,990
1,095
348
154
-457

259
2,014
1,083
330
150
-583

262
2,114
1,134
358
189
-572

1,617
22
229
2,103
1,007
318
172
-568

Subtotal, International development and humanitarian assistance

4,968

4,282

5,071

4,899

4,763
753
4,684
255
102
-58

4,470
198
4,191
8
101
-76

4,311
455
4,092

3,002
594
4,097

100
-111

113
-111

10,499

8,892

8,847

7,695

153 Conduct of foreign affairs:
Administration of foreign affairs
International organizations and conferences
Other

1,717
499
64

2,170
306
94

2,085
435
84

2,395
501
91

Subtotal, Conduct of foreign affairs

2,280

2,570

2,604

2,987

907

999

1,048

1,114

-1,016
-1,167
-772
-1,460

500
-2,389
-32
-73

200
-858
-31

200
-1,564
-31

152 International security assistance:
Foreign military sales credit
Military assistance
Economic support fund
Guarantee reserve fund
Other
Offsetting receipts
Subtotal, International security assistance

154 Foreign information and exchange activities
155 International financial programs:
Foreign military sales trust fund (net)
Export-Import Bank
Exchange stabilization fund
Other

- 1

A-ll

SPECIAL ANALYSIS A
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
actual

Offsetting receipts
Subtotal, International financial programs
Total outlays
250 GENERAL SCIENCE, SPACE, AND TECHNOLOGY
251 General science and basic research:
National Science Foundation programs
Department of Energy general science programs

1987
estimate

1988
estimate

1988
administration
proposals

-87

-89

-90

-4,501

-2,083

-781

-1,486

14,152

14,660

16,790

15,209

1,550
671

1,571
697

1,603
761

1,806
782

2,221

2,268

2,364

2,588

253 Space flight

3,794

4,308

5,472

5,569

254 Space, science, applications, and technology

2,127

2,184

2,188

2,250

Subtotal, General science and basic research

835

774

1,032

1,031

8,976

9,535

11,057

11,439

2,404
-91
-408
-415
17
783
120

2,431
-200
-500
-442
2
806
89

2,593
-185
-556
-539
-12
318
38

2,335
-231
-556
-539
-12
318
38

429

-6

2,926

1,692
-979

2,839

2,180

4,582

2,065

483
32

449
13

292*

152*

515

462

292

153

274 Emergency energy preparedness

597

733

683

448

276 Energy information, policy, and regulation

785

675

652

678

4,735

4,049

6,209

3,344

2,855
1,050
298
-161

3,373
1,007
293
-422

3,526
1,074
242
-462

3,522
907
144
-475

4,041

4,251

4,380

4,099

1,846
529
327
553
299

1,983
566
345
668
322

1,901
577
327
2,052
324

1,841
494
327
1,889
216

-2,166

-2,217

-2,336

-2,292

255 Supporting space activities
Total outlays
270 ENERGY
271 Energy supply:
Research and development
Uranium enrichment
Other power marketing
Petroleum reserves
Nuclear waste disposal fund
Tennessee Valley Authority
Subsidies for nonconventional fuel production
Rural electric and telephone:
Existing law
Proposed legislation
Subtotal, Energy supply
272 Energy conservation:
Energy conservation grants and R&D
Solar Energy and Energy Conservation Bank
Subtotal, Energy conservation

Total outlays
300 NATURAL RESOURCES, AND ENVIRONMENT
301 Water resources:
Corps of Engineers
Bureau of Reclamation
Other
Offsetting receipts
Subtotal, Water resources
302 Conservation and land management:
Management of national forests, cooperative forestry,
and forestry research (Forest Service)
Management of public lands (BLM)
Mining reclamation and enforcement
Conservation of agricultural lands
Other resources management
Offsetting receipts:
Existing law
Proposed legislation

A-10

THE BUDGET FOR FISCAL YEAR 1988
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
actual

Subtotal, Conservation and land management.
303 Recreational resources:
Federal land acquisition
Urban park and historic preservation funds
Operation of recreational resources:
Existing law
Proposed legislation
Offsetting receipts:
Existing law
Proposed legislation
Subtotal, Recreational resources..
304 Pollution control and abatement:
Regulatory, enforcement, and research programs..
Hazardous substance response fund
Oil pollution funds (gross)
Sewage treatment plant construction grants:
Existing law
Proposed legislation
Leaking underground storage tank trust fund
Offsetting receipts:
Existing law
Proposed legislation
Subtotal, Pollution control and abatement..
306 Other natural resources:
Program activities:
Existing law
Proposed legislation
Offsetting receipts
Subtotal, Other natural resources..
Total outlays
350 AGRICULTURE
351 Farm income stabilization:
Commodity price support and related programs:
Existing law
Proposed legislation
Crop insurance:
Existing law
Proposed legislation
Agricultural credit:
Existing law
Proposed legislation
Other programs and unallocated overhead
Subtotal, Farm income stabilization
352 Agricultural research ami services:
Research programs:
Existing law
Proposed legislation
Extension programs
Marketing programs:
Existing law
Proposed legislation
Animal and plant health programs-.
Existing law
Proposed legislation
Economic intelligence

1987
estimate

1988
estimate

1,388

1,668

2,846

262

315
33

276

1,293

1,396

1,478

-74

-49

-84

1,513

1,695

1,697

1,291
435
9

1,434
550
10

1,469
932
5

3,113

2,592

2,410

26
-16

-35

-57

4,831

4,558

4,785

1,883

1,948

1,965

-17

-15

-19

1,866

1,932

1,945

13,639

14,103

15,653

25,891

25,288

21,002

516

637

660

3,234

3,187

2,928

-33

29,608

29,163

24,590

761

843

883

340

332

"343"

154

152

142

283
..........

298
..........

331
..........

A-ll

SPECIAL ANALYSIS A
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
actual

Other programs and unallocated overhead:
Existing law
Proposed legislation
Offsetting receipts
Subtotal, Agricultural research and servicesTotal outlays
370 COMMERCE AND HOUSING CREDIT
371 Mortgage credit and deposit insurance:
Mortgage-backed securities (GNMA)
Mortgage purchase activities (GNMA)
Mortgage credit (FHA and other):
Existing law
Proposed legislation
Housing for the elderly or handicapped
Rural housing programs (FmHA)
Federal Deposit Insurance Corporation
Federal Savings and Loan Insurance Corporation and
other:
Existing law
Proposed legislation
National Credit Union Administration
Subtotal, Mortgage credit and deposit insurance..
372 Postal service:
Existing law
Proposed legislation
Subtotal, Postal service..
376 Other advancement of commerce:
Small and minority business assistance..
Science and technology
Economic and demographic statistics
International trade and other

203
............

1987
estimate

218
..........

1988
estimate

223
..........

1,841

1,932

2,016

31,449

31,095

26,605

-293
-790

-315
-373

-407
58

-1,750

-2,398

-2,432

531
3,235

262

515
1,285
4,046

501
2,419
1,535

1,072

3,745

850

'-'368'

— 203

—326

1,899

6,302

2,197

758

1,781

2,707

758

1,781

2,707

774
334
208
475

632
479
270
636

553
404
415
613

Subtotal, Other advancement of commerce.,

1,790

2,016

1,985

Total outlays

4,448

10,099

6,889

14,138
257
3,399

12,633
272
4,010

13,035
328
3,681

400 TRANSPORTATION
401 Ground transportation:
Highways
Highway safety
Mass transit
Railroads:
Existing law
Proposed legislation
Existing law
Proposed legislation
Subtotal, Ground transportation..

885

786

18,725

17,844

17,880

402 Air transportation:
Airports and airways (FAA)
Aeronautical research and technology..
Air carrier subsidies

4,615
648
24

4,565
621
33

5,130
682
2

Subtotal, Air transportation.

5,287

5,219

5,814

A-10

THE BUDGET FOR FISCAL YEAR 1988
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
actual

403 Water transportation:
Marine safety and transportation:
Existing law
Proposed legislation
Proposed Coast Guard fees
Ocean shipping:
Existing law
Proposed legislation
Subtotal, Water transportation

1987
estimate

1988
estimate

1988
administration
proposals

2,491

2,642

2,698

2,753
15
-355

1,473

993

360

483
-25

3,964

3,636

3,058

2,871

140

130

136

28,117

26,829

26,881

25,523

3,337
461
142
155

3,292
440
334
228

3,200
378
214
138

2,996
355
282
28

Subtotal, Community development

4,095

4,295

3,930

3,661

452 Area and regional development:
Rural development
Economic development assistance
Indian programs
Regional commissions
Tennessee Valley Authority
Other
Offsetting receipts

1,505
253
957
163
122
-5
-273

624
351
1,043
147
118
-2
-298

1,451
236
1,050
138
122
-12
-301

565
170
1,145
123
98
-12
-298

2,723

1,983

2,684

1,791

-172
336
144
108

-457
313
-23
151

-305
225
35
105

-304
225
-9
99

407 Other transportation
Total outlays
450 COMMUNITY AND REGIONAL DEVELOPMENT
451 Community development:
Community development block grants
Urban development action grants
Rental rehabilitation and rental development
Other

Subtotal, Area and regional development
453 Disaster relief and insurance:
Small business disaster loans
Disaster relief
National flood insurance fund
Other
Subtotal, Disaster relief and insurance
Total outlays
500 EDUCATION, TRAINING, EMPLOYMENT, AND
SOCIAL SERVICES
501 Elementary, secondary, and vocational education:
Block grant and special programs:
Existing law
Proposed legislation
Compensatory education:
Existing law
Proposed legislation
Education for the handicapped
Impact aid
Vocational and adult education
Other
Subtotal, Elementary, secondary, and vocational
education
502 Higher education:
Student financial assistance:
Existing law

416

-16

7,233

6,261

6,674

5,463

619

675

939

833
54

3,405

3,109

3,956

1,628
684
1,035
461

1,440
805
1,054
563

1,543
730
836
567

3,746
207
1,318
581
524
491

7,832

7,645

8,571

7,755

4,585

5,244

5,510

4,317

A-ll

SPECIAL ANALYSIS A
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
actual

Proposed legislation
Receipts
Guaranteed student loan program:
Existing law
Proposed legislation
Other
Subtotal, Higher education
503 Research and general education aids
504 Training and employment:
Employment and training assistance:
Existing law
Proposed legislation
Older Americans employment
Work incentive program
Federal-State employment service
Other
Subtotal, Training and employment
505 Other labor services
506 Social services:
Social services block grant
Community service programs
Rehabilitation services
Family social services
Social services activities
Domestic volunteer programs
Other social services
Subtotal, Social services
Total outlays
550 HEALTH
551 Health care services:
Medicaid grants:
Existing law
Proposed legislation
Federal employees' health benefits:
Existing law
Proposed legislation
Other health care services

1987
estimate

1988
estimate

-67

-70

-73

3,323

2,367

2,741

1988
administration
proposals

-630

574

287

539

2,741
-959
67

8,415

7,828

8,717

5,535

1,164

1,408

1,361

1,251

3,661

3,560

3,609

321
227
986
62

319
110
961
73

326
11
977
69

3,405
513
326
11
872
74

5,257

5,023

4,992

5,201

672

730

778

802

2,671
348
1,311
808
1,933
154
20

2,686
366
1,492
931
2,015
152
26

2,697
381
1,513
1,050
2,130
158
327

2,697
327
1,389
111
2,216
154
323

7,246

7,668

8,256

7,885

30,585

30,301

32,676

28,429

24,995

26,740

28,225

28,120
-1,256

638

1,871

1,768

3,217

3,500

3,550

1,768
-492
3,313

Subtotal, Health care services

28,850

32,111

33,543

31,453

552 Health research:
National Institutes of Health research
Other research programs

4,859
534

5,401
687

5,976
670

5,483
674

5,393

6,088

6,646

6,158

256

273

294

279

232

224

212

42
-2
31

529

526

538

350

Subtotal, Health research
553 Education and training of health care work
force:
Research training
Clinical training:
Existing law
Proposed legislation
Other
Subtotal, Education and training of health care
work force

A-10

THE BUDGET FOR FISCAL YEAR 1988
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1987
estimate

actual

1988
estimate

554 Consumer and occupational health and safety:
Consumer safety:
Existing law
Proposed legislation
Occupational safety and health

799

854

"366"

391

417

Subtotal, Consumer and occupational health and
safety

1,165

1,245

1,306

35,936

39,970

42,034

49,685

48,273

52,537

26,217

29,886

34,051

-5,739

-6,545

-8,340

70,164

71,614

78,248

3,755

3,855

3,943

1,616

1,611

1,584

-106

-4

171
..........

Total outlays
570 MEDICARE
571 Medicare:
Hospital insurance (HI):
Existing law
Proposed legislation
Supplementary medical insurance (SMI):
Existing law
Proposed legislation
Medicare premiums and collections:
Existing law
Proposed legislation
Interfund transactions
Total outlays..
600 INCOME SECURITY
601 General retirement and disability insurance
(excluding social security):
Railroad retirement:
Existing law
Proposed legislation
Special benefits for disabled coal miners:
Existing law
Proposed legislation
Pension Benefit Guaranty Corporation:
Existing law
Proposed legislation
Other
Subtotal, General retirement and disability insurance (excluding social security)
602 Federal employee retirement and disability:
Civilian retirement and disability programs:
Existing law
Proposed legislation
Military retirement
Thrift investment fund
Federal employees workers' compensation (FECA)
Federal employees life insurance fund
Subtotal, Federal employee retirement and disability
603 Unemployment compensation:
Existing law
Proposed legislation
Subtotal, Unemployment compensation..

64"

5,330

5,543

5,789

24,237

26,696

27,874

17,621

17,953
-644

-1,828

266

226

18,887

-760

-679

170
-694

41,363

43,551

44,410

17,753

17,983

17,724

17,753

17,983

17,724

10,041

9,472

10,438

604 Housing assistance:
Existing law..
Proposed legislation..

A-ll

SPECIAL ANALYSIS A
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
actual

1987
estimate

1988
estimate

Public housing operating subsidies
Low-rent public housing loans
Other housing assistance

1,181
1,018
144

1,381
1,872
278

1,425
1,605
274

Subtotal, Housing assistance

12,383

13,003

13,742

12,443

12,731

12,835

6,159

6,698

6,982

18,602

19,430

19,817

10,345

10,947

12,303

9,877

10,607

10,330

1,415
435
2,293

1,491
379
2,100

2,910
339
2,150

605 Food and nutrition assistance:
Food stamps and aid to Puerto Rico:
Existing law
Proposed legislation
Child nutrition and other programs:
Existing law
Proposed legislation
Subtotal, Food and nutrition assistance..
609 Other income security:
Supplemental security income (SSI)
Family support payments:
Existing law
Proiwsed legislation
Earned income tax credit (EITC)
Refugee assistance
Other
Subtotal, Other income security..
Total outlays
650 SOCIAL SECURITY
651 Social security:
Old-age and survivors insurance

25,523

28,033

125,034

129,515

179,412

187,699

198,537

-854

-542

-560

20,243

20,761

21,577

-45
-8,971
8,971

-53
-5,603
5,603

-54
-5,497
5,497

198,757

207,865

219,500

(OASI)—Off-

Existing law
Proposed legislation
Old-age and survivors insurance (OASI)—On-budget:
Existing law
Proposed legislation
Disability insurance (Dl)—Off-budget:
Existing law
Proposed legislation
Disability insurance (Dl)—On-budget
Interfund transactions (Off-budget)
Interfund transactions (On-budget)
Total outlays...

On-budget..
700 VETERANS BENEFITS AND SERVICES
701 Income security for veterans:
Service-connected compensation:
Existing law..
Non-service-connected pensions
Burial and other benefits:
Existing law
Proposed legislation
National service life insurance trust fund..
All other insurance programs:
Existing law
Proposed legislation
Insurance program receipts

24,364
119,796

(5,008)
(8,072)
(190,684) (202,857) (214,617)

10,426

10,499

10,640

3,874

3,830

3,840

122

136

142

1,037

1,047

1,086

-29

-23

"-443"

—405

-404"

A-10

THE BUDGET FOR FISCAL YEAR 1988
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current
1986
1987
estimate

Subtotal, Income security for veterans.,
702 Veterans education, training, and rehabilitation:
Readjustment benefits (Gl Bill and related programs):
Existing law
Proposed legislation
Post-Vietnam era education
All-volunteer force educational assistance trust fund:
Existing law
Proposed legislation
Veterans jobs program
Other:
Existing law
Proposed legislation
Subtotal, Veterans education, training, and rehabilitation
703 Hospital and medical care for veterans:
Medical care and hospital services
Construction
Medical administration, research, and other
Third-party reimbursement
Subtotal, Hospital and medical care for veterans.
704 Veterans housing:
Loan guaranty revolving fund:
Existing law
Proposed legislation
Direct loan revolving fund
Other (HUD participation sales trust fund)
Subtotal, Veterans housing..
705 Other veterans benefits and services:
Cemeteries, administration of veterans benefits, and
other
Non-VA support programs
Subtotal, Other veterans benefits and services..
Total outlays
750 ADMINISTRATION OF JUSTICE
751 Federal law enforcement activities:
Criminal investigations (DEA, FBI, and OCDE)
Alcohol, tobacco, and firearms investigation (ATF).
Border enforcement activities (Customs and INS)...
Protection activities (Secret Service)
Other enforcement:
Existing law
Proposed legislation
Subtotal, Federal law enforcement activities..
752 Federal litigative and judicial activities:
Civil and criminal prosecution and representation:
Existing law
Proposed legislation
Federal judicial activities
Representation of indigents in civil cases
Subtotal, Federal litigative and judicial activities..

estimate

15,031

15,079

918

756

"-99"

-T

-321

-413

-300

15,279

646
..........

- 6

526

372

363

9,095
539
238

9,500
638
257
-65

9,915
646
250
-250

9,872

10,331

10,561

163

278

330

-29

-37
-19

-30
153

114

222

454

764
49

772

782
70

-20

813

840

852

26,356

26,843

27,509

1,538
166
1,291
290

1,754
190
1,939
329

1,854
204
1,989
353

348

385

406

3,632

4,597

4,806

781

948

1,000

1,090
305

1,232
303

1,383
312

2,176

2,483

2,696

A-ll

SPECIAL ANALYSIS A
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
actual

753 Federal correctional activities
754 Criminal justice assistance

614

1987
estimate

754

1988
administration
proposals

1988
estimate

836

936

181

344

527

387

6,603

8,178

8,864

9,170

1,383

1,650

1,737

1,824

109

116

126

128

3,754

4,280

4,559

4,974

-149

103

146
170

3,605

4,383

4,640

5,290

19
-70
12
96

-81
-345
14
102

-189
15
110

- 1

-18
-494
16
111

418

339

358

391
-166

475

294

-161

126

147

142

144

126

147

142

144

10
173
8
277
13

278
167
2
349
62

144
100
2
339
176

144
77
2
350
173

482

858

761

746

-78

-450

-450
-6
14

Subtotal, Deductions for offsetting receipts

-78

-450

-442

Total outlays

6,102

6,733

7,250

7,528

5,121

-34

287

553

497

399

560

290

296
-270

423

435

445

391

Total outlays
800 GENERAL GOVERNMENT
801 Legislative functions
802 Executive direction and management
803 Central fiscal operations:
Collection of taxes
Other fiscal operations:
Existing law
Proposed legislation
Subtotal, Central fiscal operations
804 General property and records management:
Federal buildings fund
Property receipts
Personal property
Records management
Other:
Existing law
Proposed legislation
Subtotal, General property and records management
805 Central personnel management:
Existing law
Proposed legislation
Subtotal, Central personnel management
806 Other general government:
Compact of free association
Territories
Indian affairs
Treasury claims
Other
Subtotal, Other general government
809 Deductions for offsetting receipts:
Existing law
Sallie Mae fees (proposed)
Other proposed offsetting receipts

•

A-10

THE BUDGET FOR FISCAL YEAR 1988
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
actual

Payments to States and counties from Federal land
management activities
Payments in lieu of taxes
Payments to territories and Puerto Rico
Other

31
100
384
8

1987
estimate

88
105
380
8

1988
estimate

63
105
386
7

1988
administration
proposals

63
105
386
7

Subtotal, Other general purpose fiscal assistance

1,310

1,862

1,849

1,475

Total outlays

6,431

1,944

1,849

1,475

190,166

191,749

199,295

198,150
244

190,166

191,749

199,295

198,394

-26,570

-28,680

-31,368

-31,372
-236

-26,570

-28,680

-31,368

-31,608

-4,329

-5,084

-6,586

-6,586
-8

-4,329

-5,084

-6,586

-6,594

1,814
-16,377
-2,190
-770
-1,072

1,668
-14,738
-1,741
-1,105
-901

1,621
-15,836
-1,849
-1,095
-604

1,621
-14,475
-1,878
-1,024
-604

-4,702

-4,609

-4,615

-4,598
-201

-23,298

-21,426

-22,379

-21,159

135,969

136,559

138,962

139,032

900 NET INTEREST
901 Interest on the public debt:
Existing law
Proposed legislation
Subtotal, Interest on the public debt
902 Interest received by on-budget trust funds:
Existing law
Proposed legislation
Subtotal, Interest received by on-budget trust
funds
903 Interest received by off-budget trust funds:
Existing law
Proposed legislation
Subtotal, Interest received by off-budget trust
funds
908 Other interest:
Interest on refunds of tax collections
Interest on loans to Federal Financing Bank
Interest on loans to CCC
Interest on loans to FmHA
OCS interest
Other:
Existing law
Proposed legislation
Subtotal, Other interest
Total outlays

On-budget
Off-budget
920 ALLOWANCES
921 Civilian agency pay raises:
Civilian agency pay raises
Coast Guard military pay raises
Subtotal, Civilian agency pay raises

(140,298) (141,643) (145,548) (145,626)
(-4,329) (-5,084) (-6,586) (-6,594)
630
48

630
48

678

923 Savings from reform of Davis-Bacon and
Service Contract Acts:
Proposed legislation

-24

Subtotal, Savings from reform of Davis-Bacon and
Service Contract Acts

-24

924 Credit reform initiative:
Proposed legislation
Subtotal, Credit reform initiative

-1,284
-1,284

A-ll

SPECIAL ANALYSIS A
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services
1986
actual

1987
estimate

1988
estimate

925 Proposed change in Government contribution
for employee health benefits:
Proposed legislation

-140

Subtotal, Proposed change in Government contribution for employee health benefits

-140

Total outlays
950 UNDISTRIBUTED OFFSETTING RECEIPTS
951 Employer share, employee retirement (onbudget):
Military retired contributions
Federal retirement thrift
Other contributions:
Existing law
Proposed legislation
Subtotal, Employer share, employee retirement
(on-budget)
952 Employer share, employee retirement (offbudget):
Existing law
Proposed legislation
Subtotal, Employer share, employee retirement
(off-budget)
953 Rents and royalties on the Outer Continental
Shelf:
Existing law
Proposed legislation
Subtotal, Rents and royalties on the Outer Continental Shelf

Total outlays

On-budget
Off-budget

* $ 5 0 0 thousand or less.

-770

-18,193
-422

-18,495
-1,324

-18,782
-1,324

-8,006

-9,398

-11,985

-11,985
-38

-25,434

-28,013

-31,803

-32,128

-2,857

-3,275

-5,367

-5,367
-117

-2,857

-3,275

-5,367

-5,484

-4,716

-3,903

-3,686

-4,716

-3,903

-3,686

-1,900

Subtotal, Sale of major assets

On-budget
Off-budget.

678

-17,429

954 Sale of major assets:
Sale of Conrail
Sale of petroleum reserve (proposed)
Sale of Amtrak (proposed)
Auction receipts, FCC (proposed)
Total outlays

1988
administration
proposals

-2,500
-1,000
-600
-4,100

-1,900
-40,857

-45,399

(-30,150) (-33,816) (-35,490)
(-2,857) (-3,275) (-5,367)

-33,007

(-39,915)
(-5,484)

989,815

-37,091

1,016,827

1,060,535

1,024,328

(806,318) (822,329) (857,872) (821,900)
(183,498) (194,498) (202,663) (202,427)

SPECIAL ANALYSIS B
FEDERAL TRANSACTIONS IN THE NATIONAL INCOME
AND PRODUCT ACCOUNTS
The budget is designed to serve several purposes:
• It sets forth the President's request to the Congress for appropriations action on existing or new programs and for changes
in tax legislation.
• It proposes an allocation of resources between the private and
public sectors and within the public sector. Through its
impact on consumption, investment, and the distribution of
income it also affects the allocation of resources within the
private sector.
• It is an economic document that reflects the taxing and spending policies of the Government for promoting economic
growth, high employment, and a stable price level.
• It is a report to the Congress and the people on how the
Government has spent the funds entrusted to it in past years.
No single budget concept can satisfy all these purposes fully. The
budget documents and related Treasury reports provide complete,
detailed information on the finances of the Federal Government
and on the tax and spending programs proposed by the President.
For study of aggregate economic activity, however, the national
income and product accounts (NIPA) of the United States provide
the most useful measures. This special analysis shows Federal finances as measured in the NIPA. The analysis is divided into three
major sections. The first shows the size, composition, and trends in
Federal sector receipts and expenditures. Additional details will be
published in the February 1987 issue of the Department of Commerce publication, Survey of Current Business. The second section
of this analysis shows quarterly estimates of Federal sector receipts
and expenditures. The final section explains the major differences
between the budget and the NIPA concepts. A discussion of fiscal
policy can be found in Part 3a of the Budget—Supplement and in
the Economic Report of the President.
FEDERAL SECTOR RECEIPTS AND EXPENDITURES

Table B-1 shows Federal sector NIPA receipts, expenditures, and
deficits for 1986-88.

B-l

A-10

THE BUDGET FOR FISCAL YEAR 1988
Table B - l . FEDERAL SECTOR RECEIPTS AND EXPENDITURES IN THE NIPA
(In billions of dollars)
Description

1986 actual

1987 estimate

RECEIPTS
Personal tax and nontax receipts
Corporate profits tax accruals
Indirect business tax and nontax accruals.
Contributions for social insurance
Total receipts..

355.8
83.0
52.2
323.7

368.7
108.9
53.8
343.2

814.7

874.6

367.1
(274.8)
(92.3)
394.2
(380.4)
(13.8)
107.4
136.8
19.9

384.8
(291.0)
(93.8)
409.5
(395.3)
(14.2)
104.6
138.5
25.1

EXPENDITURES
Purchases of goods and services
Defense
Nondefense
Transfer payments
Domestic ("to persons")
Foreign
Grants-in-aid to State and local governments
Net interest paid
Subsidies less current surplus of Government enterprises..
Wage disbursements less accruals

-2.0

Total expenditures..

1,025.4

1,060.5

Deficit (—)

-210.7

-185.9

Note: The estimates for 1987 and 1988 are preliminary; revisions will be published in the February 1987 issue of the Survey of Current

Trends in Federal sector receipts.—Table B - l divides receipts into
four major categories, which are also illustrated in the chart on the
distribution of Federal sector receipts by category. Table B-2 shows
3-year averages of Federal sector receipts by category as a percent
of the gross national product (GNP). The receipts are shown at 10year intervals to provide a perspective relative to the 1988 levels.
For the earlier periods, 3-year averages eliminate the impact of
annual fluctuations, thereby permitting greater focus on trends.
Table B-2. FEDERAL SECTOR RECEIPTS AS A PERCENT OF GNP
Description

Personal tax and nontax receipts
Corporate profits tax accruals
Indirect business tax and nontax accruals
Contributions for social insurance
Total receipts

1955-57
average
actual

1965-67
average
actual

1975-77
average
actual

1985-87
average
estimate

1988
estimate

8.0
4.9
2.6
2.6

7.8
4.0
2.2
4.2

8.3
3.0
1.4
6.5

8.5
2.1
1.3
7.8

8.4
2.8
1.2
8.1

18.1

18.3

19.2

19.7

20.5

Personal tax and nontax receipts.—The largest receipt category—
personal tax and nontax receipts—is composed primarily of individual income taxes but also includes estate and gift taxes and some
miscellaneous receipts. Increases in income, because of both real

SPECIAL ANALYSIS A

A-ll

growth and inflation, cause these receipts to increase automatically. Since personal income tax rates are progressive, in the past
these receipts normally grew at a faster rate than personal income.
Periodically, tax reductions were enacted that partially offset the
increase in effective tax rates resulting from the progressive tax
structure. However, the Economic Recovery Tax Act of 1981
(ERTA) dramatically altered those circumstances. That act provided for across-the-board tax reductions and—starting in 1985—indexing of income tax brackets, the zero bracket amount, and the
personal exemption to inflation. Although subsequent legislation
limited the reduction in personal tax and nontax receipts anticipated in ERTA, its central components—rate reductions and indexation—remained largely intact. Largely due to the rate reductions
enacted in 1981, personal tax and nontax receipts fell from a peak
of 9.9 percent of GNP in 1982 to 8.5 percent in 1986.
The Tax Reform Act of 1986, which was enacted after a comprehensive review of the income tax law by the Treasury Department
and the Congress, is expected to reduce further the personal tax
and nontax receipts share of GNP—to 8.4 percent in 1988.
Corporate profits tax accruals.—Corporate profits tax accruals
change significantly from year to year because corporate profits
are highly volatile. The NIPA corporate profits taxes differ from
the corresponding budget category primarily because: (1) the NIPA
include the deposit of earnings by the Federal Reserve System as
corporate profits taxes, whereas the budget treats these collections
as miscellaneous receipts; and (2) the NIPA record corporate profits
taxes when the profits are earned (that is, accrued), while the
unified budget records the cash receipts.
The gradual decline in corporate profits tax accruals relative to
GNP and to total receipts, as shown in the chart on the next page,
resulted mainly from three factors: (1) a long-term decline in corporate profits relative to GNP; (2) a narrowing of the corporate
profits tax base resulting from changes in the definition of corporate profits for tax purposes (largely increases in permissible depreciation allowances); and (3) reductions in effective tax rates on
corporate profits resulting from statutory rate reductions and tax
credits. Provisions of ERTA designed to stimulate investment further accelerated this trend, but subsequent legislation offset their
effect on corporate profits tax accruals, which are now expected to
increase.
Indirect business tax and nontax accruals.—These receipts are
composed of excise taxes, customs duties, and various miscellaneous receipts. Over time, indirect business tax and nontax accruals
have become a much less important part of total Federal sector
receipts for two reasons. First, they normally do not rise in propor-

A-10

THE BUDGET FOR FISCAL YEAR 1988

[Insert chart: DISTRIBUTION OF FEDERAL
SECTOR RECEIPTS BY CATEGORY]

Distribution of Federal Sector Receipts by Category
Percent

Percent

1960

Fiscal Years

88
Estimate

tion to the nominal growth in the economy; most are taxes on
physical quantities rather than on the value of a good. Second,
some excise taxes have been reduced or repealed.
Despite their long-term decline as a general-purpose source of
tax receipts, the use of excise taxes as user charges to finance
Federal programs, such as highways and airports and airways,
makes them an important source of financing for certain specialized programs in the budget.
Contributions for social insurance.—This is the second largest
category of Federal sector receipts. The increase in contributions
for social insurance since World War II has been caused by the
growth in the labor force and in wage rates, the expanded coverage
of existing social insurance programs, the enactment of new ones,
and increases in the taxable wage base and tax rates needed to
finance liberalization of benefits. As a result of the rapid rise in
social insurance taxes (mainly social security) and the passage of
legislation reducing or eliminating individual income taxes for

SPECIAL ANALYSIS A

A-ll

many low- and moderate-income individuals and families, millions
of Americans now pay significantly higher social insurance taxes
than income taxes. The reductions in individual income tax rates
provided by the Economic Recovery Tax Act of 1981 and the Tax
Reform Act of 1986, combined with the increases in social security
and other social insurance taxes mandated by the Social Security
Amendments of 1983 and the Railroad Retirement Act of 1983,
reinforce the trend toward increases in social insurance contributions relative to total NIPA receipts.
Major tax changes.—In the past 6 years, major tax legislation
has been passed to reduce tax rates and increase investment incentives; to curb tax shelter abuse, limit unwarranted tax benefits,
and increase taxpayer compliance; to increase payroll taxes as part
of overall legislation to restore the solvency of the social security
system; and to increase gasoline taxes to fund infrastructure improvements.
One of the most sweeping overhauls of the Federal income tax
code in the Nation's history became law in October 1986, when the
President signed the Tax Reform Act of 1986. The major provisions
of this Act, which broadened the individual and corporation income
tax bases and substantially lowered individual and corporation
income tax rates, were designed to restore simplicity and fairness
to the tax code.
In this budget, the administration proposes several minor modifications of the existing tax system, the effects of which are included
in both the budget and the NIPA estimates. Details about enacted
and proposed tax changes on a unified budget basis can be found in
Part 4 of the Budget—Supplement; additional details on an NIPA
basis will be published in the February 1987 Survey of Current
Business.
Trends in Federal sector expenditures.—Federal sector expenditures are divided into several major NIPA categories. The principal
distinction is between purchases of goods and services (which are
divided between defense and nondefense purchases) and all other
transactions. Purchases are that portion of the Nation's output
that is bought directly by the Federal Government and, therefore,
are included in the GNP. The other expenditure categories consist
primarily of transfer payments to individuals, net interest payments, and grants to State and local governments. These individuals and governments, in turn, can use the income to finance their
own purchases of goods and services, to save, and—in the case of
States and localities—to hold down taxes or to make transfer payments.

A-10

THE BUDGET FOR FISCAL YEAR 1988

Major changes in composition—As can be seen in the chart on
the distribution of Federal sector expenditures since 1960, major
shifts in the composition of Federal sector expenditures occur over
time.

Distribution of Federal Sector Expenditures by Category
Percent

Percent

1960

Fiscal Years

88
Estimate

Over most of this period, defense purchases of goods and services
constituted a declining share of Federal spending. This trend was
temporarily reversed for 3 years during the Vietnam period, but by
1970 the defense share was well below the pre-Vietnam percentages and continued declining through 1978. The defense share rose
slightly in 1979 and 1980, and has increased significantly under
this administration, reflecting the President's commitment to
strengthen the Nation's defense capability while reducing total
Federal spending relative to the GNP. Defense purchases are expected to account for 27.4 percent of Federal sector expenditures in
1987 and 27.7 percent in 1988; they were 26.4 percent in 1985 and
26.8 percent in 1986.
Spending for domestic transfer payments contrasts sharply with
the general decline in the defense purchases share during previous
administrations. After remaining relatively stable at just below 24
percent of total expenditures for most of the 1960s, domestic trans-

A-ll

SPECIAL ANALYSIS A

fer payments began growing rapidly in the latter part of the
decade, and reached a share of nearly 41 percent in 1976. This
growth is largely explained by higher expenditures for retirement
and other social insurance programs, due to increases in the
number of beneficiaries and the automatic increases in benefit
levels enacted over a period of years beginning in 1962, and by the
creation and expansion of the medicare program. Domestic transfer
payments are now several percentage points below the 1976 share.
For the remaining categories, two patterns stand out. Grants-inaid to State and local governments grew rapidly in earlier years,
but their share of Federal sector expenditures has declined from 16
percent in 1978 to less than 10 percent in 1987. Conversely, the net
interest share doubled in the past decade—from about 6Y2 percent
throughout the 1960s and early 1970s to over 13 percent in 1985
and 1986. This increase was due to a combination of growth in
Federal debt and higher interest rates. By 1988, however, the increase in the net interest share is expected to have stopped, because of lower interest rates and lower deficits that are slowing the
growth of Federal debt.
Expenditures as a share of GNP\—The preceding section discussed the various categories of Federal sector expenditures relative to total expenditures. An alternative way to compare spending
trends is to look at changes in the share of the Nation's current
output represented by the major expenditure categories. Table B-3,
which shows 3-year averages of Federal sector expenditures by
category as a percent of GNP at 10-year intervals, presents this
alternative comparison.
Table B-3. FEDERAL SECTOR EXPENDITURES AS A PERCENT OF GNP
Description

Defense purchases
Nondefense purchases
Domestic transfer payments ("to persons")
Foreign transfer payments
Grants-in-aid to State and local governments
Net interest paid
Subsidies less current surplus of Government enterprises
Total expenditures

1955-57
average
actual

9.8
1.4
3.2
0.5
0.8
1.2

1965-67
average
actual

7.8
2.4
4.4
0.3
1.7
1.2

1975-77
average
actual

5.4
2.4
8.8
0.2
3.3
1.5

1985-87
average
estimate

6.5
2.2
9.1
0.3
2.5
3.2

11300
QQQ
pctimatp
GoUMI
ulG

6.4
2.0
8.7
0.3
2.1
3.0

0.4

0.6

0.4

0.5

0.6

17.3

18.6

22.0

24.4

23.0

Note—Total expenditures also include wage disbursements less accruals, which are less than 0.1 percent in most years.

In 1955-57, after the Korean war, defense purchases were nearly
10 percent of GNP. The years 1965-67 include the large military
build-up for the Vietnam war, yet the defense expenditures share

A-10

THE BUDGET FOR FISCAL YEAR 1988

of GNP (7.8 percent) was significantly lower than the post-Korean
war level. By the 1975-77 period after the Vietnam war, defense
purchases had declined to 5.4 percent of GNP. For 1985-87 defense
purchases are estimated to average 6.5 percent of GNP, which is
below the 1965-67 average, but above the 1975-77 average. In 1988
they are expected to be 6.4 percent of GNP.
Over the last 2 decades, spending on domestic transfer payments
and net interest rose dramatically relative to GNP, while grants-inaid spending relative to GNP increased rapidly before declining
significantly in recent years. Spending for everything except defense purchases averaged 7.5 percent of GNP in 1955-57. In 198587 such spending is estimated to average 17.8 percent of GNP; in
1988 its share is estimated to decline to 16.6 percent of GNP.
Defense purchases of goods and services.—Defense purchases consist of all purchases of goods and services under programs included
in the national defense function in the budget document. Also
included are purchases of goods and services by the military assistance programs that are classified in the international affairs function. Normally about 95 percent of defense purchases are made by
the Department of Defense-Military. Most of the remainder is for
international security assistance, defense stockpiles, civil defense,
and nuclear weapons programs carried out by other agencies. The
budget calls for an increase of $10.0 billion in defense purchases in
1988 over 1987.
Table B-4. PURCHASES OF GOODS AND SERVICES BY CHARACTER OF EXPENDITURE
(In billions of dollars)
1983
actual

Defense purchases:
Compensation of employees
Other
Total defense purchases
Nondefense purchases:
Compensation of employees
Other
Total nondefense purchases

1984
actual

1985
actual

1986 actual

1987
estimate

1988
estimate

88.6
121.8

93.4
135.7

99.2
154.3

103.5
171.3

107.0
184.0

113.2
187.8

210.4

229.1

253.6

274.8

291.0

301.0

34.7
42.2

36.6
32.0

39.1
48.4

40.0
52.4

41.8
52.0

44.9
48.9

77.0

68.7

87.5

92.3

93.8

Table B-4 displays defense and nondefense purchases of goods
and services, with a split by character of expenditures between
compensation of employees and all other purchases. Defense purchases have been growing much more rapidly than nondefense
purchases, with noncompensation defense purchases growing at a
significantly faster rate than all other categories. Spending for
noncompensation defense purchases is estimated to increase by

SPECIAL ANALYSIS A

A-ll

54.2 percent from 1983 to 1988, while other nondefense purchases
increase by only 15.8 percent.
Nondefense purchases of goods and services.—This category
covers the goods and services purchased by Federal nondefense
agencies. Included are such programs as the operation of national
forest, park, and recreation areas; space exploration; promotion of
commerce; acquisition and disposal of agricultural commodities;
construction of flood control and navigation projects; operation of
the Federal airway system; a wide variety of medical, energy,
space, and other scientific research; the capital outlays of Government enterprises; Federal law enforcement; and operation of veterans hospitals. Table B-5 shows these purchases by agency for the
years 1979 to 1988, reflecting the agency structure in the 1988
budget.
Nondefense purchases consist mainly of the cost of operating the
various nondefense agencies. In the case of Government enterprises, including the Commodity Credit Corporation (CCC) and the
Postal Service, the data also reflect capital formation net of sales of
assets and changes in inventories. The most volatile major segment
of nondefense purchases is CCC purchases, because the CCC buys,
sells, or otherwise disposes of agricultural commodities. On occasion—as in 1979 and in 1984—CCC sales and other disposals may
exceed new purchases. The negative in 1984 is largely due to disposition of commodities through the payments-in-kind (PIK) program.
The NIPA treat the reduction in CCC inventories due to PIK as a
reduction in net Federal purchases. However, PIK transactions
have no effect on total Federal expenditures since the reduction in
Federal purchases is offset by an equal increase in Federal subsidy
payments. The value of these subsidies is reflected in the estimates
in Table B-8.
The Department of Health and Human Services and the Veterans Administration are normally the two largest agencies in terms
of nondefense purchases. Their combined purchases for health care,
including medicare and research, are estimated at $18.6 billion in
1988, over 82 percent of the total purchases for the two agencies.
Most of their remaining purchases are for administering social
security and income security transfer programs. Both the National
Aeronautics and Space Administration, with $9.5 billion in 1988
nondefense purchases, and the Department of Energy, with $2.9
billion in 1988 nondefense purchases, conduct major research and
development programs. The Transportation Department's $7.4 billion of 1988 nondefense purchases are mainly for the Federal Aviation Administration and the Coast Guard. The Corps of Engineers
has an estimated $3.3 billion in 1988 nondefense purchases, which,
along with the Tennessee Valley Authority's $1.0 billion, is primarily used for natural resources public works projects and for power
activities.

A-10

THE BUDGET FOR FISCAL YEAR 1988

Table B-5.—NONDEFENSE PURCHASES OF GOODS AND SERVICES BY AGENCY AND ACTIVITY
(In billions of dollars)
Actual
1979

Legislative and judicial
branches
1.6
Department of
Agriculture
2.6
Commodity Credit
Corporation
(-1.0)
Forest Service
(1.5)
All other
(2.1)
Department of
Commerce
1.2
Corps of Engineers,
Civil
2.9
Department of
Education
0.5
Department of Energy....
5.1
Department of Health
and Human Services6.6
Health, including
medicare
(4.6)
Social security,
income security,
and other
(2.1)
Department of Housing
and Urban
Development
0.7
Department of the
Interior
3.3
Department of Justice....
1.9
Department of Labor
1.7
Department of State
0.9
Department of
Transportation
4.3
Coast Guard
(1.3)
Federal Aviation
Administration
(2.3)
Other
(0.8)
Department of the
Treasury
3.4
Internal Revenue
Service
(2.1)
Other
(1.4)
Environmental
Protection Agency ,
0.8
National Aeronautics
and Space
Administration , ,,
4.1
Veterans Administration.
6.2
Hospital and medical
care
(5.4)
Administration and
other
(0.7)
All other
7.6

Estimate

1980

1981

1982

1983

1985

1986

1987

1988

1.8

2.1

2.2

2.4

2.6

2.7

3.4

3.6

5.4

5.6

12.9

9.6

-2.0

12.1

15.7

10.7

6.2

(1.0)
(1.7)
(2.7)

(1.2)
(1.9)
(2.6)

(8.0)
(1.9)
(3.0)

(5.1)
(2.0)
(3.6)

(1.6)
(1.9)
(2.7)

1.9

1.5

1.6

1.7

1.9

2.0

2.2

3.2

3.0

2.8

3.1

3.3

0.7
2.6

0.8
7.8

0.8
5.2

0.7
5.1

0.9
4.8

0.8
4.9

0.8
3.7

1.1
3.3

0.8
2.9

7.5

8.3

8.7

8.6

9.2

9.8

10.0

10.9

11.0

(5.3)

(5.9)

(5.8)

(6.3)

(7.1)

(7.4)

(7.9)

(8.1)

(2.2)

(2.4)

(2.8)

(2.7)

(2.8)

(2.7)

(2.6)

(3.0)

(2.9)

0.5

0.4

0.5

0.7

1.0

1.1

0.8

0.5

0.4

3.9
2.1
1.9
1.0

4.0
2.3

3.9
2.4
1.9
1.1

4.2
2.7
1.5
1.3

4.3
3.0
1.5
1.4

4.5
3.4
1.4
1.6

4.5
3.5
1.5
1.9

4.6
4.4
1.6
2.3

4.3
5.3
1.7
2.5

4.8
(1.4)

5.1
(1.6)

5.3
(1.8)

5.7
(2.1)

6.0
(2.2)

6.3
(2.2)

6.5
(2.1)

6.7
(2.2)

7.4
(2.4)

(2.5)
(0.9)

(2.7)
(0.8)

(2.5)
(0.9)

(2.8)
(0.8)

(3.1)
(0.8)

(3.4)
(0.6)

(3.8)
(0.6)

(3.8)
(0.7)

(4.3)
(0.7)

4.0

4.2

4.6

4.7

5.4

5.7

6.6

7.3

(2.3)
(1.7)

(2.4)
(1.8)

(2.5)
(1.7)

(2.9)
(1.7)

(3.2)
(1.5)

(3.6)
(1.9)

(3.8)
(2.0)

(4.4)
(2.2)

(5.0)
(2.3)

0.9

1.0

1.1

1.3

1.4

1.5

1.9

7.8
11.1

9.5
11.5

0.9

1984

(4.3) ( - 7 . 6 )
(1.8)
(1.8)
(3.5)
(3.9)

(6.3) (10.7)
(2.0) (1.9)
(3.9) (3.1)

4.7
7.1

5.3
7.6

5.9
8.1

6.5
8.9

6.9
9.6

7.2
10.3

7.3
10.6

(6.3)

(6.8)

(7.3)

(8.1)

(8.7)

(9.3)

(9.7) (10.1) (10.5)

(0.8)
8.8

(0.8)
9.3

(0.8)
8.8

(0.8)
9.0

(0.9)
9.1

(1.0)
10.1

11.0

(0.9)

(1.0)
12.1

A-ll

SPECIAL ANALYSIS A

Table B-5 —NONDEFENSE PURCHASES OF GOODS AND SERVICES BY AGENCY AND ACTIVITY—
Continued
(In billions of dollars)
Estimate

Actual

National Science
Foundation
Nuclear Regulatory
Commission
Office of Personnel
Management:
Employee health
benefits and
imputed
employee
retirement
contributions
Postal Service
Tennessee Valley
Authority
United States
Information
Agency
Imputed bank
service charges
Other
Total nondefense
purchases..

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

(0.4)

(0.5)

(0.6)

(0.7)

(0.8)

(0.3)

(0.4)

(0.5)

(0.4)

(1.6)
(0.4)

(1.9)
(0.4)

(2.3)
(0.5)

(2.5)
(0.4)

(2.7)
(0.6)

(3.0)
(0.9)

(3.3)
(1.0)

(3.0)
(1.3)

(3.2)
(1.7)

(3.0)
(2.0)

(2.0)

(1.7)

(1.5)

(1.0)

(0.9)

(0.2)

(0.8)

(1.3)

(1.6)

(1.0)

(0.4)

(0.5)

(0.6)

(0.7)

(0.8)

(0.4)
(2.1)

(0.3)
(3.3)

(0.4)
(3.3)

(0.4)
(3.1)

(0.4)
(2.8)

(0.5)
(3.0)

(0.5)
(2.7)

(0.5)
(3.1)

(0.6)
(3.2)

(0.6)
(3.5)

55.5

62.8

71.1

77.1

77.0

68.7

87.5

92.3

93.8

Domestic transfer payments.—This is the largest category of Federal sector expenditures. Spending for domestic transfers has expanded rapidly in recent years, mainly as a result of more beneficiaries and higher benefit payments under social insurance programs. As Table B-6 shows, spending on human resources programs, especially social security and medicare, dominates domestic
transfer payments. This spending is expected to continue to rise in
1988, largely due to increases in the covered population and cost-ofliving adjustments. Social security is estimated to account for 52
percent of total domestic transfer payments in 1988, while medicare accounts for another 20 percent, unemployment assistance for
4 percent, Federal civilian and military employees' retirement and
disability for 11 percent, and veterans benefits for 4 percent of the
total. Program trends on a unified budget basis are discussed extensively in Part 5 of the Budget—Supplement and elsewhere in
the budget documents.
Most domestic transfer payments are for income support and are
characterized by automatic eligibility of coverage and automatic

A-10

THE BUDGET FOR FISCAL YEAR 1988

benefit increases to adjust for changes in the cost of living. For
these programs the demographic and economic conditions dominate
the growth patterns, and the rate of growth is quite substantial for
most years shown. However, due to the sharp decline in the unemployment rate, transfer payments for unemployment benefits are
estimated to decline by $13.3 billion between 1983 and 1988. This,
combined with legislative and administrative efforts to slow the
growth of Federal spending, is thereby significantly slowing the
rate of growth for transfer payments as a whole.

Table B-6. FUNCTIONAL COMPOSITION OF DOMESTIC TRANSFER PAYMENTS
(In billions of dollars)
Description

Actual
1977

1978

1979

1980

1981

Estimate
1982

1984

1983

1985

1986

1987

HUMAN RESOURCES PROGRAMS
Social security (OASDI)

81.1

89.3

99.4

113.7

134.1

149.6

163.3

170.9

181.2

190.9

199.6

Medicare (HI&SMI)

20.7

24.2

28.1

33.8

41.1

49.0

56.1

60.8

68.3

73.8

75.9

Income security:
Railroad retirement
Civil service retirement
Military retired pay
Unemployment benefits
Benefits for coal miners
Supplemental security income
Food and nutrition
Special payments, Treasury
Workers' compensation
Other

3.7
9.5
8.1
14.2
1.0
4.7
4.4
0.9
0.6

3.9
10.8
9.0
10.9
1.0
4.9
4.5
0.9
0.6

4.2
12.4
10.1
9.9
1.6
5.2
5.7
0.8
0.7
0.1

4.7
14.6
11.8
16.4
1.8
5.7
7.9
1.3
0.8
0.1

5.2
17.6
13.6
17.9
1.7
6.4
9.8
1.3
0.9
0.1

5.6
19.4
14.7

6.1
21.8
16.3
16.9
1.6
8.1
10.7
1.2
1.0
0.1

6.2

6.3
23.9
17.5

1.7
6.9
9.5
1.2
0.9
0.1

6.0
20.7
15.8
29.4
1.7
7.2
11.1
1.2
0.9
0.1

Subtotal, income security

22.0

0.1

0.4

6.5
26.4
17.8
16.5
1.6
9.8
10.6
1.5
1.1
0.6

23.0
15.6
16.0
1.6
8.7
10.7
1.1

1.1

16.2
1.6
9.4
10.6
1.4

1.1

47.1

46.7

50.6

65.0

74.5

81.9

94.2

83.9

84.1

88.4

92.4

Health

0.6

0.7

0.6

0.7

0.8

Education, training, employment, and
social services:
Education
Training, employment, and social services

2.4

2.8

3.4

4.5

5.7

5.3

5.9

6.1

6.3

6.1

6.3

0.6

0.8

0.9

1.5

1.1

0.9

0.8

1.0

Subtotal, education, training, employment, and social services....
Veterans benefits and services

2.9

3.5

4.3

6.0

6.8

6.2

6.7

7.1

7.3

7.1

7.3

13.3

13.5

14.0

14.4

15.5

16.2

16.5

16.3

16.5

16.6

16.5

Table B-6. FUNCTIONAL COMPOSITION OF DOMESTIC TRANSFER PAYMENTS—Continued
(In billions of dollars)
Description

Total human resources programs

Actual
1977

1980

1979

1978

1981

Estimate
1982

1984

1983

1985

1986

1987

1988

165.8

177.8

196.9

233.5

272.7

303.6

337.4

339.6

358.1

377.4

392.4

409.5

0.5
0.8

0.6
0.9

0.7
0.9

0.7
1.1

0.9
1.1

1.1
1.0

1.2
1.1

1.3
1.4

1.5
1.1

1.7
1.3

1.5
1.3

2.3
1.1

1.3

1.5

1.8

1.9

2.1

2.3

2.7

2.6

3.0

2.9

3.4

167.1

179.3

198.5

235.4

274.6

305.6

339.8

342.3

360.8

380.4

395.3

412.9

ALL OTHER FUNCTIONS
National defense: CHAMPUS 1
Other
Total functions not included in
human resources grouping....
Total domestic transfer payments

*$50 million or less.
1 Health care for dependents of active duty personnel and retired military personnel and their dependents.

SPECIAL ANALYSIS B

B-15

Grants-in-aid.—These expenditures help State and local governments provide general public services and finance programs for the
needy. Table B-7 shows grants-in-aid by budget function and major
activity. Grant expenditures are discussed in greater detail in Special Analysis H in this document. While the definition of Federal
aid used in that analysis differs somewhat from that used in the
NIPA, the two sets of data largely overlap. Special Analysis H
explains the relationship between the series.
Grants-in-aid may often substitute for domestic transfer payments and, to a lesser degree, nondefense purchases. For example,
low-income veterans could be eligible for free medical care under
medicaid (Federal grants to finance State and local transfer payments), in a veterans hospital (nondefense purchases), or perhaps
under medicare (transfer payments). Medicaid and most grants in
the income security function are grants to assist States to provide
income support; most other grants finance State and local services
to the public. (The income support may be aid-in-kind, as is the
case for medicaid, where much of the State and local spending is to
reimburse for the cost of providing medical care for the poor.)
The growth in most Federal grants-in-aid categories has been
constrained over the last 6 years as part of the administration's
efforts to curb the growth in overall spending. However, expenditures have increased significantly for two categories—medicaid and
transportation. Despite reforms to increase program efficiency and
effectiveness, medicaid grants rose by 53.5 percent from 1982 to
1987. The administration's proposals to contain medicaid costs
would keep expenditures in 1988 at about the 1987 level. Transportation grants rose by 54 percent from 1982 to 1987, largely due to
the enactment of the Surface Transportation Assistance Act of
1982. Reflecting the administration's proposals to restrain domestic
discretionary spending, they are expected to decline slightly in
1988. The administration also proposes to reduce expenditures for
most other grants-in-aid categories.

W
I1
hCi

Table B-7. FUNCTIONAL COMPOSITION OF FEDERAL GRANTS-IN-AID
(In billions of dollars)
Actual

Description

1977

1978

1979

1980

1981

Estimate
1982

1983

1984

1985

1986

1987

1988

HUMAN RESOURCES PROGRAMS
Income security:
Family support payments
Child nutrition and other food programsOther
Subtotal, income security
Health:
Medicaid
Other (includes research, construction,
services, and medical training)
Subtotal, health
Education, training, employment,
social services:
Education
Training and employment
Social services

6.3
2.7
1.6

6.6
2.8
1.6

6.5
3.3
1.7

7.2
3.9
2.2

8.4
4.4
4.5

7.9
4.2
4.7

8.3
4.7
4.9

8.7
5.4
4.9

9.1
5.8
4.9

9.8
6.2
5.7

10.5
6.8
6.1

9.7
6.3
5.3

10.6

11.0

11.5

13.3

17.2

16.7

17.9

19.0

19.8

21.7

23.4

21.3

9.8

10.6

12.4

13.9

16.8

17.3

18.9

20.0

22.6

24.9

26.6

26.8

2.7

3.0

3.1

2.8

3.0

3.2

3.3

3.6

3.5

12.5

13.4

15.1

16.9

19.9

20.5

21.8

23.0

25.7

28.2

30.2

30.3

4.9
5.5
4.4

5.4
8.9
5.0

6.6
8.5
5.3

7.3
7.7
6.3

7.5
6.7
5.4

7.0
3.3
5.0

6.6
3.3
5.4

6.6
2.6
6.2

7.9
2.9
5.8

8.3
3.1
6.3

7.9
2.8
6.6

7.2
3.1
6.6

H
W

and

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

14.8

19.3

20.3

21.3

19.6

15.3

15.5

16.6

17.7

17.3

16.9

Other (social security, medicare, and veterans benefits and services)

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Total human resources programs

38.3

44.1

47.4

52.0

57.2

53.2

55.7

58.2

62.9 |

68.5

71.8

69.4

W
oo

OTHER FUNCTIONS:
Natural resources and environment:
EPA
Other

3.7
0.4

3.4
0.4

3.9
0.6

4.6
0.7

4.1
0.7

4.0
0.7

3.2
0.6

2.9
0.8

3.2
0.8

3.4
0.8

2.9
0.8

2.7
0.6

4.1

3.8

4.5

5.2

4.8

4.7

3.9

3.7

4.0

4.2

3.8

3.4

0.6
2.0
1.8

2.9
2.4
1.5

1.6
3.1
1.7

0.4
3.8
2.0

0.1
3.9
1.9

3.7
1.5

3.4
1.3

3.7
1.2

3.7
1.3

3.2
1.2

3.2
1.1

3.0
0.8

4.4

6.8

6.4

6.2

5.9

5.2

4.8

4.9

4.5

4.3

3.8

Transportation

7.7

8.1

9.6

11.8

12.2

10.8

12.1

14.3

16.0

17.7

16.7

16.3

General purpose fiscal assistance:
General revenue sharing
Anti-recession fiscal assistance
Other

6.8
1.7
0.6

6.8
1.3
0.9

6.8

5.1

4.6

5.1

0.1

0.9

1.1

1.4

1.2

1.6

1.5

1.7

1.1

9.0

9.1

7.8

7.9

6.3

5.9

6.1

6.6

1.8

1.1

Subtotal, natural resources and
environment
Community and regional development:
Local public works
Block grants
Other
Subtotal, community and regional
development

Subtotal, general purpose fiscal assistance
All other functions

2.7

2.8

3.5

3.7

3.6

3.3

3.4

3.7

6.1

6.2

6.1

Total other functions

27.9

30.6

31.7

34.7

32.9

30.3

29.9

32.5

34.8

39.0

32.8

30.6

Total grants-in-aid

66.3

74.7

79.1

86.7

90.1

83.4

85.7

90.7

97.7

107.4

104.6

100.0

C
hZ
d3

>
>
r*
aO
C
w

*50 million or less.

w
I

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Foreign transfer payments.—There are three major types of foreign transfer payments: expenditures to assist foreign economic
development, grants of surplus agricultural products, and payments under social security and similar programs to individuals
living abroad. Although payments to individuals are gradually
rising, roughly in proportion to the rise in GNP, total foreign
transfer payments have declined to just 0.3 percent of GNP. The
peak year for foreign transfer payments was 1949; in that year
they were equal to 1.9 percent of GNP.
Net interest paid.—Net interest paid depends on the size of Federal debt, loans outstanding, and the interest rates on borrowing
and lending. As noted above, the steady increase in net interest
paid is being halted by lower interest rates and smaller deficits,
which are slowing the growth of Federal debt.
Subsidies less current surplus of Government enterprises.—This
category of expenditures consists of two elements: (1) subsidy payments to resident businesses (including farms); and (2) the "current
surplus" or "deficit" of Government enterprises. In this context, a
subsidy is a monetary grant to a unit engaged in commercial
activities. Examples are housing subsidies, railroad subsidies, and
the construction and operating differential subsidies paid to operators of U.S.-flag merchant ships. As Table B-8 shows, normally
about half of the subsidies are for housing programs (including
Department of Agriculture housing programs). These subsidies are
designed mainly to reduce the cost of housing to low- and moderate-income families. The large increase in Commodity Credit Corporation subsidies in 1984 was due to $8.6 billion of payment-in-kind
subsidies that year.
"Government enterprise" is the term used in the NIPA to designate certain business-type operations of the Government that usually appear in the budget as public enterprise revolving funds. The
operating costs of Government enterprises are, to a great extent,
covered by the sale of goods and services to the public rather than
from tax receipts. The difference between the sales and the current
operating expense of a Government enterprise constitutes its surplus or deficit. As noted above, the capital formation of Government enterprises net of sales of assets is classified as nondefense
purchases. The largest Government enterprises are the Commodity
Credit Corporation, the Postal Service, and the Tennessee Valley
Authority.

Table B-8. SUBSIDIES LESS CURRENT SURPLUS OF GOVERNMENT ENTERPRISES
(In billions of dollars)
Description

Subsidies:
Commodity Credit Corporation
Rural housing insurance fund
Other Department of Agriculture
Housing (HUD)
Maritime
Railroad and mass transit
Other1

Actual
1977

1979

1978

1980

Estimate
1982

1981

1984

1983

1985

0.6
0.4
0.3
2.9
0.5
1.3
0.3

2.3
0.4
0.4
3.5
0.5
1.4
0.3

2.0
0.6
0.3
4.3
0.5
1.5
0.6

0.5
0.6
0.3
5.1
0.6
2.0
0.5

1.4
0.8
0.3
6.3
0.5
2.2
0.2

1.6
1.4
0.2
7.6
0.6
1.9
0.2

4.9
1.7
0.3
9.2
0.4
1.7
0.1

10.6
1.7
0.3
9.7
0.4
1.7
0.1

11.0

6.4

8.9

9.9

9.5

11.7

13.5

18.2

24.4

0.2
1.6
-0.2
-0.6
-0.2
-0.2

0.8
1.5
-0.2
-0.6
-0.2
-0.3

1.4
0.6
-0.2
-0.8
-0.2
-0.3

1.5
1.6
-0.2
-1.1
-0.4
-0.2

1.8
1.1
-0.3
-1.0
-0.4
-0.4

2.3
-0.1
-0.2
-1.2
-0.5
-0.6

5.5
0.4
-0.4
-1.4
-0.5
-0.6

-0.2
0.1

-0.3

-0.3
-0.2

-0.3

-0.2

Subtotal

0.5

0.7

1.0

0.9

Total subsidies less current
surplus

6.9

9.7

10.4

12.5

Subtotal
Enterprise surpluses ( - ) or deficits:
Commodity Credit Corporation
Postal Service
Bonneville Power Administration
Tennessee Valley Authority
Federal Housing Administration
Federal Deposit Insurance Corporation
Federal Savings and Loan Insurance
Corporation
Allother 1

* $50 million or less.
1 Includes wage disbursements less accruals.

_ *

9.9

1987

1986

8.0
1.9
0.3

9.4
2.0
0.2

1988

11.0
0.3
1.3
0.1

11.6
1.9
0.3
10.6
0.3
1.3
0.1

12.0
1.6
1.5
11.3
0.2
0.8
0.1

23.2

24.2

26.1

27.6

2.5
0.6
-0.7
-1.5
-0.4
-1.2

2.0
1.1
-0.7
-2.0
-0.5
-1.3

3.6
0.3
-0.5
-2.3
-2.3
-1.5

6.9
0.8
-0.7
-2.6
-2.4
-1.7

6.2
1.2
-0.6
-2.8
-2.0
-1.7

-0.3

-0.4
0.2

-0.5
-0.4

-1.5
-0.1

-1.6
0.2

-1.7
0.1

-0.5

2.7

-0.9

-2.3

-4.3

-1.0

-1.4

13.0

20.9

23.5

20.9

19.9

25.1

26.1

0.3
1.6
0.1

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Wage disbursements less accruals.—This is an adjustment occasionally made in the NIPA to bridge between the sum of the
expenditure components and the totals. This is necessary when
wages and salaries are received in a time period that is different
from when they are earned. The unified budget records these payments on a cash basis (when they are paid). The NIPA treat such
payments on an accrual basis (when they are earned) for nondefense purchases and the current surplus of Government enterprises, but on a cash basis for total expenditures. Wage disbursements less accruals is the timing adjustment necessary to allow the
individual expenditure categories to sum to the total expenditures.
The net adjustment made is normally small since wage and salary
payments disbursed in one year but earned in another are approximately offset by payments disbursed in the next year but earned in
the current one.
QUARTERLY ESTIMATES

Table B-9 presents quarterly NIPA receipts and expenditures
estimates at seasonally adjusted annual rates for 1986 to 1988. The
translation of the budget into the NIPA categories is inexact.
When the annual NIPA estimates are converted into quarterly
distributions that are seasonally adjusted at annual rates, greater
imprecision must be expected. The data presented in Table B -9 are
the best available estimates of the quarterly NIPA receipts and
expenditures consistent with the 1988 budget, but should be used
with clear recognition of their limitations.

Table B-9. FEDERAL RECEIPTS AND EXPENDITURES IN THE NIPA, QUARTERLY, 1986-88
(In billions of dollars; seasonally adjusted at annual rates)
Estimate

Actual
Description

Oct.-Dec.
1985

Jan-Mar.
1986

Apr-June
1986

July-Sept.
1986

Oct-Dec.
1986

Jan-Mar.
1987

Apr-June
1987

July-Sept.
1987

Oct.-Dec.
1987

Jan-Mar.
1988

Apr.-June
1988

July-Sept.
1988

355.6
77.2
56.0
317.0

350.3
77.8
52.7
325.8

355.5
80.1
50.7
327.2

365.8
84.3
53.4
329.6

375.6
88.5
52.5
333.1

340.5
111.9
53.8
339.2

379.3
116.1
54.3
345.4

372.9
119.0
54.4
352.4

382.4
120.7
57.7
360.3

390.0
132.0
55.7
381.5

402.4
133.5
56.3
389.0

398.7
134.6
56.7
396.5

805.8

806.6

813.5

833.1

849.7

845.4

895.1

898.7

921.1

959.2

981.2

986.5

380.9
(268.0)
(112.9)
385.9
(370.4)
(15.4)

355.7
(266.4)
(89.3)
389.3
(378.8)
(10.5)

367.6
(278.4)
(89.2)
396.7
(381.6)
(15.0)

369.3
(286.8)
(82.6)
403.0
(387.5)
(15.5)

376.3
(281.9)
(94.4)
401.1
(387.4)
(13.6)

381.6
(287.5)
(94.1)
408.1
(394.5)
(13.6)

389.5
(296.4)
(93.1)
411.6
(397.1)
(14.5)

391.4
(298.0)
(93.4)
417.3
(402.2)
(15.1)

397.0
(301.6)
(95.4)
416.1
(400.9)
(15.2)

394.8
(301.7)
(93.1)
428.0
(414.0)
(14.0)

394.1
(300.7)
(93.4)
430.0
(416.0)
(14.0)

393.7
(300.2)
(93.5)
434.9
(420.9)
(14.0)

101.6
133.9

103.5
135.0

106.9
138.1

108.0
134.7

97.7
135.4

105.9
137.9

108.6
140.0

106.2
140.4

102.1
140.4

99.9
140.5

99.4
140.5

98.9
140.6

21.1

18.0

36.5

15.4

32.5

41.4

13.3

14.2
-8.0

27.0

35.3

21.0

21.3

Total expenditures

1,023.4

1,001.5

1,045.7

1,030.5

1,043.0

1,074.9

1,063.0

1,061.5

1,082.6

1,098.5

1,085.0

1,089.4

Deficit ( - )

-217.6

-195.0

-232.2

-197.4

-193.3

-229.5

-167.9

-162.8

-161.5

-139.3

-103.8

-102.8

RECEIPTS
Personal tax and nontax receipts
Corporate profits tax accruals
Indirect business tax and nontax accruals....
Contributions for social insurance
Total receipts
EXPENDITURES
Purchases of goods and services
Defense
Nondefense
Transfer payments
Domestic ("to persons")
Foreign
Grants-in-aid to State and local governments
Net interest paid
Subsidies less current surplus of Government enterprises
Wage disbursements less accruals

Note—Because of the methods normally used to seasonally adjust NIPA data, the average of seasonally adjusted data for the 4 quarters of a fiscal year may not be equal to the unadjusted fiscal year total.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

RELATIONSHIP OF THE BUDGET TO THE FEDERAL SECTOR,

NIPA

Table B-10 shows the major differences between the budget and
the Federal sector in the NIPA. Adjustments required to reconcile
the budget to the Federal sector in the NIPA are explained below.
Table B-10. RELATIONSHIP OF THE BUDGET TO THE FEDERAL SECTOR, NIPA
(In billions of dollars)
1984
actual

1985
actual

1986
actual

1987
estimate

Total budget receipts 1
Government contributions for employee retirement (grossing).
Other netting and grossing
Timing adjustments
Geographic exclusions
Other

666.5
29.7
13.0
5.1

734.1
32.3
14.7
-5.2
-1.3

769.1
33.8
12.3
0.8
-1.4

842.4
35.8
13.5
-15.6
-1.5

916.6
41.5
17.7

Federal sector, NIPA receipts..

712.6

774.6

814.7

874.6

968.1

Total budget outlays 1
851.8
Lending and financial transactions
-18.2
Government contributions for employee retirement (grossing)..
29.7
Other netting and grossing
13.0
Defense timing adjustment
1.0
3.4
Bonuses on Outer Continental Shelf land leases
-5.0
Geographic exclusions
-1.8
Other

946.3
-26.4
32.3
14.7
1.4
1.9
-5.4
-2.7

1,015.6
-6.3
35.8
13.5
6.5
1.3
2.0
-5.6
-5.4
2.0 - 0 . 4

1,024.3
4.5
41.5
17.7
3.9
0.8
-5.5
1.5

Description

RECEIPTS

-1.2

-6.1

-1.7

-0.3

EXPENDITURES

Federal sector, NIPA expenditures
1

873.9

962.1

-12.5
33.8
12.3
3.2

1,025.4

1,060.5

1,088.6

Includes off-budget amounts.

Lending and financial transactions.—The NIPA conceptually
measure the Nation's current income and production, and therefore do not include transactions, such as loans, that are an exchange of existing assets and liabilities rather than current income
or production. Loan transactions have a significant economic
impact, affecting the allocation and distribution of income and
output, but they are analyzed more appropriately within a financial market framework, such as that provided by the flow-of-funds
data of the Federal Reserve Board. Special Analysis E, "Borrowing
and Debt", and Special Analysis F, "Federal Credit Programs",
both contain information on the financial market implications of
the budget.
Most of the lending and financial transactions included in Table
B-10 are shown in Special Analysis F. However, this total differs
from the total for direct loans shown in Special Analysis F because:
(a) the NIPA record nonrecourse agricultural commodity loans as
purchases rather than loans; and (b) capital contributions to international financial institutions are not loans, but are financial
transactions excluded from the NIPA.
The sharp increase in lending and financial transactions in 1985
was largely due to lending for the Public and Indian Housing

SPECIAL ANALYSIS B

B-15

Authorities. Changes in tax law in the Deficit Reduction Act of
1984 raised questions about the tax-exempt status of these loans.
As a consequence, tax-exempt financing was suspended and replaced by direct Federal lending until the Internal Revenue Service
ruled that the tax-exempt status was not jeopardized by this act.
The exclusion for lending declines in 1987 and 1988, reflecting the
administration's commitment to reduce direct Federal lending.
Government contributions for employee retirement.—The contributions of Government agencies to the retirement trust funds of their
employees constitute the largest netting and grossing adjustment.
Since these contributions are made by Government accounts to
other Government accounts, they are not included in the unified
budget totals, which conceptually measure the Government's current transactions with the public. While the contributions are recorded as outlays of the agencies, they are offset by an intragovernmental deduction. However, the NIPA have long counted Government payments for civilian employee retirement as part of the
compensation paid to Government employees and, therefore, as
Government expenditures. This treatment maintains comparability
with the treatment of employee retirement contributions in the
rest of the economy. Contributions for employee retirement by
Government enterprises such as the Postal Service are recorded as
an increase in the current deficit of enterprises. Contributions by
other civilian accounts are recorded as purchases of goods and
services. The receipt of these retirement contributions is treated in
the NIPA as contributions for social insurance. Since receipts and
expenditures are increased by identical amounts, this treatment
has no net effect on the surplus or deficit. Around 80 percent of
these payments go to the civil service retirement and disability
trust fund, while most of the remainder is for social security and
medicare.
The NIPA treatment of Government contributions for military
retirement is similar to the treatment of contributions for civilian
employees. In 1985, the budget began financing military retirement
on an accrual basis akin to the financing of civil service retirement. A trust fund was created to pay retirement benefits to
current and future military retirees. Benefits are financed by payments to the retirement trust fund from three sources: employing
agencies, for services currently rendered (the "accrual charge"); the
general fund, to cover the unfunded liability that existed when the
new retirement trust fund was created; and the interest earned on
trust fund balances. These payments are not included in the budget
totals since they are offset by intragovernmental deductions. In the
NIPA, a social insurance fund and an employer contribution for
military retirement are imputed. The imputed contribution is equal
to benefits paid. Since an equal amount is added to both receipts

C-14

• THE BUDGET FOR FISCAL YEAR 1988

and expenditures, imputed accruals have no impact on the surplus
or deficit. However, the contributions imputed in the NIPA differ
significantly from the budget accruals in many years. The budget
estimates are based on benefits earned in the time period when
service was rendered, while the NIPA use the cash benefits paid in
one period as a proxy for the contributions required to fund benefits earned in that period but paid in a succeeding period.
Other netting and grossing.—The budget normally counts as receipts only income from taxation or similar sources that arises
from the exercise of Governmental power to compel payment.
Money received in the course of business-type transactions is normally shown as offsets against outlays. For instance, receipts from
social insurance programs operated by the Veterans Administration (such as the National Service Life Insurance and U.S. Government Life Insurance) are netted against outlays in the budget since
these programs are voluntary, commercial-type activities. However,
in the NIPA these insurance premiums are treated as social insurance receipts just as are receipts from compulsory Government
programs. Likewise, noncompulsory insurance premiums under the
supplementary medical insurance program and similar but much
smaller noncompulsory hospital insurance premiums are classified
as offsetting collections (negative outlays) in the budget, but are
classified as social insurance contributions in the NIPA.
Other netting and grossing includes some imputed contributions
for social insurance for Federal employees for unemployment compensation (which adds an equal amount to purchases of goods and
services) and workers' compensation (which adds an equal amount
to domestic transfer payments). Social insurance contributions are
imputed for medical care for military personnel and their dependents and for unemployment benefits for former military personnel.
One major element of netting and grossing in recent years has
been due to budgetary collections arising from the Outer Continental Shelf leases. All such collections are recorded in the budget as
negative outlays. The rents and royalties component—but not the
bonuses—are recorded in the NIPA as indirect business nontaxes;
this converts the collections from an offset to outlays in the budget
to a receipt in the NIPA.
All netting and grossing items, including Government contributions for employee retirement, have an equal impact on receipts
and expenditures, so they have no effect on the calculation of the
NIPA deficit.
Timing adjustments.—The budget records receipts at the time
the cash is collected regardless of when the liability is incurred. In
contrast, the NIPA attempt to record most receipts from the business sector in the time period in which the liability is incurred

SPECIAL ANALYSIS B

B-15

rather than when taxes are actually collected, while personal
income taxes and social insurance contributions are recorded at the
time of payment by the individual taxpayer rather than when the
liability is incurred or the cash is received by Treasury. Hence,
receipts recorded in the budget for one fiscal year are sometimes
recorded in the prior fiscal year in the NIPA due to the lags
between the time when liability is incurred or payment made and
time of collection. The timing adjustments made to budget receipts
attempt to account for these time lags.
The principal timing adjustment made to expenditures is for
defense purchases. The major defense timing adjustment normally
involves procurement items (such as missiles and airplanes) purchased under fixed-price contracts. The Federal Government normally makes progress payments for work in process for major
procurement programs. Progress payments are excluded from
NIPA Federal sector expenditures, because work in progress is
counted in the NIPA as part of private business inventories until
the goods are completed and delivered to the Government, when
they are recorded as defense purchases. An additional defense
timing adjustment is made to convert foreign military sales, which
are recorded on a cash basis in the unified budget, to a basis
consistent with net exports in the NIPA. In addition, some accounting adjustments are included with the defense timing adjustment
in this translation. Nondefense timing adjustments are normally
small and are included in the "other" category in Table B-10.
Bonuses on Outer Continental Shelf land leases.—In recent years
bonuses paid on the Outer Continental Shelf oil leases have become
a significant reconciliation item between the unified budget and
the NIPA. As already noted, the budget records these bonuses as
proprietary receipts and, therefore, deducts them from budget outlays. The NIPA exclude these transactions as being a transfer of
assets, because the payments are not included in calculating book
profits under current corporate accounting practice.
Geographic exclusions.—Geographic exclusions arise because
Puerto Rico, the Virgin Islands, and other U.S. territories are not
included in the United States for purposes of computing the GNP
and related data series (such as contributions for social insurance,
domestic transfer payments, and grants-in-aid). Nor are they treated as foreign for purposes of producing data on exports, imports,
and foreign transfer payments. Since the budget includes receipts
from and payments to persons and local governments in these
territories, and the NIPA exclude such transactions, this constitutes a major reconciliation item between the two data series.
Other.—This category contains miscellaneous adjustments, such
as foreign currency transactions that are included in the NIPA but
not in the budget.

Table B - l l . FEDERAL TRANSACTIONS IN THE NATIONAL INCOME AND PRODUCT ACCOUNTS, 1977-88
(In billions of dollars)

Description

Actual

Estimate

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

165.9
59.0
24.5
125.4

186.5
67.8
27.1
142.9

222.9
75.7
29.0
163.6

250.7
70.2
35.3
182.3

289.6
69.4
53.4
211.4

310.0
52.1
50.0
231.1

292.5
55.7
50.2
247.3

302.4
76.3
54.9
279.0

340.2
71.7
56.5
306.2

355.8
83.0
52.2
323.7

368.7
108.9
53.8
343.2

396.5
130.2
56.6
384.8

374.7

424.3

491.2

538.6

623.8

643.3

645.7

712.6

774.6

814.7

874.6

968.1

146.8
(99.2)
(47.6)
171.2
(167.1)
(4.1)

158.6
(106.3)
(52.2)
183.6
(179.3)
(4.4)

173.1
(117.7)
(55.5)
203.5
(198.5)
(5.1)

199.9
(137.2)
(62.8)
241.1
(235.4)
(5.8)

231.8
(160.7)
(71.1)
281.3
(274.6)
(6.7)

264.4
(187.3)
(77.1)
312.8
(305.6)
(7.2)

287.4
(210.4)
(77.0)
347.5
(339.8)
(7.7)

297.8
(229.1)
(68.7)
352.3
(342.3)
(9.9)

341.1
(253.6)
(87.5)
374.2
(360.8)
(13.4)

367.1
(274.8)
(92.3)
394.2
(380.4)
(13.8)

384.8
(291.0)
(93.8)
409.5
(395.3)
(14.2)

394.8
(301.0)
(93.8)
427.2
(412.9)
(14.3)

66.3
28.5

74.7
33.5

79.1
40.7

86.7
50.8

90.1
66.7

83.4
82.2

85.7
90.6

90.7
109.7

97.7
128.3

107.4
136.8

104.6
138.5

100.0
140.5

6.9
-0.1

9.7
-0.1

9.9

10.4

12.5
-0.1

13.0
*

20.9
0.4

23.5
-0.1

20.9
0.1

19.9

25.1
-2.0

26.1

419.6

459.9

506.4

589.0

682.4

755.9

832.4

873.9

962.1

1,025.4

1,060.5

1,088.6

-44.8

-35.6

-15.2

-50.4

-58.5

-112.6

-186.7

-161.3

-187.5

-210.7

-185.9

-120.5

*$50 million or less.
Note—The estimates for 1987 and 1988 are preliminary; revisions will be published in the February 1987 issue of the Survey of Current Business.

PART 2

ANALYSES OF THE TOTALS

INTRODUCTION
Part 2 provides analyses and tabulations of the totals that cover
the Federal Government's finances and operations as a whole and
reflects the ways in which Government finances affect the economy. The data include both on-budget and off-budget amounts (i.e.,
transactions of the Federal old-age, survivors, and disability insurance trust funds). These special analyses are designated C through J.
Special Analysis C (Funds in the Budget) classifies on-budget and
off-budget information by Federal fund and trust fund categories.
Special Analysis D (Federal Investment and Operating Outlays)
classifies outlays in terms of the duration and nature of the benefits provided, distinguishing those of an investment or developmental type from those that primarily yield current benefits.
Special Analysis E (Borrowing and Debt) describes current developments and past trends in Federal borrowing and debt. It also
considers interest on the Federal debt, investment by Government
accounts in Federal securities, the statutory debt limitation, and
the total of Federal and federally assisted borrowing from the
public.
Special Analysis F (Federal Credit Programs) analyzes direct
loan and loan guarantee programs from the perspective of the
credit budget. It presents detailed data on these programs, and
describes the activities of Government-sponsored enterprises and
the Federal Financing Bank. It also analyzes credit subsidies, loan
sales, defaults, and tax-exempt financing.
Special Analysis G (Tax Expenditures) provides a list and discussion of provisions of the Federal income tax laws that allow a
special exclusion, exemption, or deduction from gross income or
that provide a special credit, preferential rate of tax, or deferral of
tax liability.
Special Analysis H (Federal Aid to State and Local Governments)
contains information on Federal grants to State and local governments and assistance provided through loans and tax expenditures.
It shows Federal aid for past years and compares it to the finances
of both the Federal Government and State and local governments.
This analysis provides a profile of Federal grants by region, a
description of the State and local government sector of the national
income accounts, and an identification of other grant information
sources.
Special Analysis I (Civilian Employment in the Executive
Branch) deals with the levels of civilian employment in the executive branch and the systems used to control civilian employment. It
also contains data on total Federal personnel costs (including military personnel).
Special Analysis J (Research and Development) identifies Federal
programs for the conduct of research and development and for all
support facilities related to such activities.
2-2

SPECIAL ANALYSIS C
FUNDS IN THE BUDGET
This analysis provides information on transactions of the Federal
Government in terms of Federal funds and trust funds, the two
major fund groups. Data are provided on receipts, outlays, and
surpluses or deficits as well as net obligations and balances.
Federal funds are composed of the general fund, special funds,
public enterprise revolving funds, and intragovernmental management and revolving funds. Trust funds are composed of regular
(non-revolving) trust funds and trust revolving funds.
Total governmental receipts include only payments by the public
that result from exercise of the Government's sovereign powers
(i.e., taxes and similar payments). All income of a business-type
nature (interest, loan repayments, sale of property or services, etc.)
is offset against outlays (spending) rather than included in receipts.
Similarly, any income to any Federal Government account arising
from the spending by any Federal Government account is also
offset against Federal Government outlays. This approach means
that outlays measure the net payments to the public that must be
financed by taxes or borrowing.
When the budget is disaggregated by fund group, any payments
by accounts within a fund group to receipt accounts within the
same fund group ("intrafund transactions") continue to be deducted
before arriving at total receipts and outlays for the fund group.
However, when payments are made by Federal fund accounts to
on-budget trust fund receipt accounts, and from on-budget trust
fund accounts to Federal fund receipt accounts ("interfund transactions"), the income is normally included on the receipts side of the
collecting fund group. As a result of this treatment, when Federal
fund and on-budget trust fund receipts are aggregated to arrive at
total receipts, these interfund transactions must be deducted to
arrive at a figure of total budget (governmental) receipts from the
public. Likewise, when the Federal fund and on-budget trust fund
outlays are aggregated to arrive at total budget outlays, the interfund transactions must be deducted to avoid double-counting. These
deductions are shown in table C-1.
The Balanced Budget and Emergency Deficit Control Act of 1985
(Public Law 99-177) eliminated the off-budget status of formerly
off-budget Federal entities, but it also required that the receipts
and outlays of the two social security trust funds (the Federal old-

C-l

C-14

• THE BUDGET FOR FISCAL YEAR 1988

age and survivors insurance and the Federal disability insurance
trust funds) be moved off-budget. Beginning with the 1987 Budget,
these changes were made retroactively for all years presented to
make the data comparable over time. Data shown for 1986 also
reflect the effects of sequestration of budgetary resources in that
year.
The movement of the previously off-budget Federal entities onbudget means that all Federal funds are on-budget. However, the
movement of the two trust funds off-budget means that there are
now off-budget as well as on-budget trust funds. As a result, there
are:
—trust intrafund payments from off-budget to on-budget accounts;
—interfund payments from on-budget Federal funds to off-budget
trust funds; and
—interfund payments from off-budget trust funds to on-budget
Federal funds.
While all of these amounts are included in the gross receipts of
the receiving fund group, they are deducted from the receipts and
offset against the outlays of that group to arrive at net receipts and
outlays by fund group. This is done so that off-budget receipts can
be added to on-budget receipts without requiring further deductions to arrive at total Federal Government receipts. In the same
manner, off-budget outlays can be added directly to on-budget outlays to arrive at total outlays. These transactions, gross and net,
are shown in table C-l.

SPECIAL ANALYSIS

B-15

Table C - l . FEDERAL GOVERNMENT RECEIPTS AND OUTLAYS BY FUND GROUP
(In millions of dollars)
1986
actual

Description

1987
estimate

1988
estimate

RECEIPTS
On-budget:
Federal funds:
Total in fund accounts
Intrafund transactions
Interfund receipts from off-budget
Proprietary receipts from the public

512,621
-21,599
-516
-17,021

563,673
-18,446
-595
-18,541

609,209
-19,159
-615
-20,396

473,484

526,091

569,040

Trust funds:
Total in fund accounts
Intrafund receipts from on-budget
Intrafund receipts from off-budget
Proprietary receipts from the public

227,997
-2
-3,036
-18,027

235,741
-2
-2,746
-17,844

257,027
-2
-2,850
-21,638

Subtotal, trust fund receipts

206,933

215,149

232,537

-111,555

-112,868

-127,104

568,862

628,372

674,473

216,545
-159
-16,158

227,980

259,673

-13,962

-17,575

200,228

214,018

242,098

769,091

842,390

916,571

795,622
-21,599
-516
-17,021

806,679
-18,446
-595
-18,541

820,639
-19,159
-615
-20,396

756,486

769,097

780,469

Trust funds:
Total in fund accounts
Intrafund receipts from on-budget
Intrafund receipts from off-budget
Proprietary receipts from the public

182,451
-2
-3,036
-18,027

185,437
-2
-2,746
-17,844

193,024
-2
-2,850
-21,638

Subtotal trust fund outlays

161,387

164,845

168,534

-111,555

-112,868

-127,104

806,318

821,074

821,900

199,815
-159
-16,158

208,460

220,003

-13,962

-17,575

183,498

194,498

202,427

989,815

1,015,572

1,024,328

Subtotal, Federal fund receipts

Interfund transactions
Total on-budget receipts
Off-budget:
Trust funds:
Total in fund accounts
Intrafund transactions
Interfund receipts from on-budget
Total off-budget (trust fund) receipts

Total receipts
OUTLAYS
On-budget:
Federal funds:
Total in fund accounts
Intrafund transactions
Interfund receipts from off-budget
Proprietary receipts from the public
Subtotal, Federal fund outlays

Interfund transactions
Total on-budget outlays
Off-budget:
Trust funds:
Total in fund accounts
Intrafund transactions
Interfund receipts from on-budget
Total off-budget (trust fund) outlays
Total outlays

C-14

• THE BUDGET FOR FISCAL YEAR 1988
Table C-1. FEDERAL GOVERNMENT RECEIPTS AND OUTLAYS BY FUND GROUP—Continued
(In millions of dollars)
1986
actual

Description

Surplus or deficit ( - ) :
On-budget:
Federal funds
Trust funds
Total on-budget deficit
Off-budget (trust funds) surplus
Total deficit
1

1987
estimate

1988
estimate

-283,001
45,546

-243,006
50,304

-211,430
64,003

-237,455

-192,702

-147,427

16,731

19,520

39,671

-220,725

-173,182

-107,756

Net of $314 thousand of proprietary receipts from the public in 1986.

FEDERAL FUNDS

The Federal fund group is composed of the general fund, special
fund, public enterprise (revolving) fund, and intragovernmental
fund accounts. Intragovernmental funds include both revolving
funds and management funds. Collections received by the general
fund and special fund accounts are normally deposited in receipt
accounts and outlays are made from expenditure accounts. In the
case of revolving funds, collections are credited directly to the
revolving funds. Thus, revolving funds report outlays that are net
of receipts at the account level. The five types of appropriation
(expenditure or fund) accounts and two types of receipt accounts
associated with the Federal fund group are described as follows:
• General fund expenditure accounts—Appropriation accounts
established to record amounts appropriated by law for the
general support of Federal Government activities and the
subsequent outlay of these funds.
• General fund receipt accounts—Receipt accounts credited
with all collections not earmarked by law for a specific purpose. Receipt accounts, in turn, are categorized as being governmental or offsetting (i.e., proprietary receipts from the
public, intrafund receipts, and interfund receipts).
• Special fund expenditure accounts—Appropriation accounts
established to record special fund amounts appropriated by
law for specific programs and the subsequent outlay of the
fund. Special fund income is recorded in receipt accounts
rather than being credited to expenditure accounts.
• Special fund receipt accounts—Receipt accounts credited with
collections that are earmarked by law for a specific purpose.
Special fund receipts may be governmental or offsetting receipts.
• Public enterprise revolving fund accounts—Appropriation accounts authorized to be credited with collections, primarily

B-15

SPECIAL ANALYSIS B

from outside the Government, that are earmarked to finance
a continuing cycle of business-type operations.
• Intragovernmental revolving fund accounts—Appropriation
accounts authorized to be credited with collections, primarily
from other agencies and accounts, that are earmarked to
finance a continuing cycle of business-type operations, for
example: working capital funds, industrial funds, stock funds,
and supply funds.
• Management fund accounts—Appropriation accounts authorized by law to credit collections from two or more appropriations to carry a common purpose or project not involving a
continuing cycle of business-type operations. These accounts
facilitate the administration and accounting for intragovernmental activities.
Federal fund receipts and outlays.—In 1988, the Federal fund
receipts are estimated at $569 billion and outlays are estimated at
$780 billion. Table C-2 presents the distribution of receipts by
source and outlays by agency for the Federal fund group; all Federal funds are on-budget.
The Federal fund receipts shown in the table are composed of the
amounts collected by the general and special funds that are governmental in nature, plus interfund receipts from on-budget trust
funds. The interfund receipts included in the table are all in the
category entitled "miscellaneous receipts." Proprietary receipts
from the public of the general and special funds are offset against
outlays rather than being included in the receipts by source.
Table C-2. FEDERAL FUND RECEIPTS AND OUTLAYS
(In millions of dollars)
Description

1986
actual

1987
estimate

1988
estimate

RECEIPTS BY SOURCE
Individual income taxes
Corporation income taxes
Excise taxes
Estate and gifttaxes
Customs duties
Miscellaneous receipts
Total receipts, Federal funds

348,959
63,143
16,053
6,958
13,297
25,074

364,002
104,761
14,111
5,998
14,392
22,827

392,821
117,207
12,228
5,817
15,221
25,746

473,484

526,091

569,040

1,662
1,066
107
12,389
58,718
2,057
265,604
13,325
17,673

2,127
1,237
118
11,331
55,022
2,412
274,156
13,627
16,752

2,204
1,423
127
10,974
50,718
2,297
289,271
14,285
14,718

OUTLAYS BY AGENCY
Legislative branch
The Judiciary
Executive Office of the President
Funds appropriated to the President
Agriculture
Commerce
Defense—Military 1
Defense—Civil
Education

C-14

• THE BUDGET FOR FISCAL YEAR 1988
Table C-2. FEDERAL FUND RECEIPTS AND OUTLAYS—Continued
(In millions of dollars)
Description

Energy
Health and Human Services, except social security
Housing and Urban Development
Interior
Justice
Labor
State
Transportation
Treasury
Environmental Protection Agency
General Services Administration
National Aeronautics and Space Administration
Office of Personnel Management
Small Business Administration
Veterans' Administration
Other independent agencies
Allowances2
Undistributed offsetting receipts:
Other interest
Rents and royalties on the Outer Continental Shelf.
Sale of major assets
Total outlays, Federal fundsExcess of outlays ( — )
1
2

1987
estimate

actual

11,013
91,809
14,139
4,734
3,768
4,948
2,968
10,203
178,823
4,646
223
7,403
17,495
557
26,055
10,889

10,611
94,948
14,622
5,087
4,788
5,042
3,404
9,986
180,655
4,688
-73
7,876
17,515
125
26,208
13,538

-1,072
—4,716

-901
-3,903
-1,900

756,486

769,097

-283,001

-243,006

Includes allowances for civilian and military pay raises and other legislation for the Department of Defense.
Includes allowances for civilian agency pay raises and military pay raises for the Coast Guard.

Obligations.—The obligations (net) for Federal funds are estimated at $777 billion for 1988, as set forth in table C-3. These transactions flow largely from budget authority for Federal funds of $795
billion for the year, although some flow from prior years' budget
authority.
Table C-3. OBLIGATIONS INCURRED, NET, IN FEDERAL FUNDS
(In millions of dollars)
Department or other unit

Legislative branch
The Judiciary
Executive Office of the President
Funds appropriated to the President
Agriculture
Commerce
Defense—Military 1
Defense—Civil
Education
Energy
Health and Human Services, except social security.
Housing and Urban Development
Interior
Justice
Labor

1986
actual

1,700
1,056
107
16,702
55,548
1,939
282,509
13,228
18,215
10,617
91,771
16,293
4,633
3,911
4,746

1987
estimate

2,122
1,281
119
11,282
47,960
2,156
287,489
13,755
15,964
11,124
95,405
11,352
4,818
5,327
4,846

1988
estimate

2,210
1,439
127
10,585
41,697
2,126
303,879
14,471
14,329
10,484
99,161
6,576
4,080
5,545
7,105

B-15

SPECIAL ANALYSIS B
Table C-3. OBLIGATIONS INCURRED, NET, IN FEDERAL FUNDS—Continued
(In millions of dollars)
1986
actual

Department or other unit

State
Transportation
Treasury
Environmental Protection Agency
General Services Administration
National Aeronautics and Space Administration
Office of Personnel Management
Small Business Administration
Veterans Administration
Other independent agencies:
Export-Import Bank
Federal Home Loan Bank Board
U.S. Postal Service
Railroad Retirement Board
All other independent agencies
Allowances-.
Coast Guard military pay raises
Civilian agency pay raises
Savings from reform of Davis-Bacon and Service Contracts Acts
Credit reform initiative
Proposed change in Government contribution for employee health
benefits
Undistributed offsetting receipts.Other interest
Rents and royalties on the Outer Continental Shelf
Sale of major assets
Total..
1

1987
estimate

3,168
10,237
178,896
3,739
-296
7,420
17,390
719
26,167

3,731
9,439
180,633
4,104
336
8,582
17,649
102
26,789

-1,412
5,835
2,419
3,721
6,335

-2,150
886
3,047
2,942
7,731

-1,072
-4,716

-901
-3,903
-1,900

781,527

772,116

Includes allowances for civilian and military pay raises and other legislation for the Department of Defense.

Balances of Federal fund budget authority.—Table C-4 shows the
balances of budget authority carried forward in Federal funds at
the end of each fiscal year. To the extent that valid Government
obligations have been incurred and remain unpaid, amounts sufficient to pay them (obligated balances) may be carried over into the
next year. Unobligated balances may be carried forward in accordance with specific provisions of law, usually in order to permit
completion of major procurement or construction programs that
are fully funded, to provide for activities of a continuing nature
(such as research and development), for loan programs, for standby
emergency purposes or for reserves for losses and debt redemption.
Table C-4. FEDERAL FUND BALANCES OF BUDGET AUTHORITY
(In millions of dollars)
Department or other unit

Legislative branch
The Judiciary
Executive Office of the
President

Start 1986
Obligated

400
124
21

End 1986

Unobligated

387
40
*

Obligated

387
115
17

End 1988

End 1987

Unobligated

400
9
*

Obligated

382
159
18

Unobligated

181
4
#

Obligated

387
176
19

Unobligated

138
2
*

C-14

•

THE BUDGET FOR FISCAL YEAR 1988

Table C-4. FEDERAL FUND BALANCES OF BUDGET AUTHORITY—Continued
(In millions of dollars)
Department or other unit

Funds appropriated to the
President
Agriculture
Commerce
Defense—Military1
Defense—Civil
Education
Energy
Health and Human
Services, except social
security
Housing and Urban
Development
Interior
Justice
Labor
State
Transportation
Treasury
Environmental Protection
Agency
General Services
Administration
National Aeronautics and
Space Administration
Office of Personnel
Management
Small Business
Administration
Veterans Administration
Other independent
agencies:
Export-Import Bank
Federal Home Loan
Bank Board
All other independent
agencies
Allowances2
Total

Start 1986
Obligated

End 1986

Unobligated

Obligated

End 1987

Unobligated

Obligated

End 1988

Unobligated

Obligated

Unobligated

13,655
24,628
1,635
182,564
699
13,683
7,854

31,212
1,632
348
61,390
418
1,993
2,450

14,893
29,525
1,437
196,135
607
13,670
7,029

29,626
1,656
382
58,972
426
1,676
2,648

14,763
22,460
1,121
209,223
735
11,877
7,532

29,431
657
165
50,414
237
2,221
562

14,299
13,439
938
223,831
921
11,488
7,802

29,369
433
158
49,657
19
1,320
130

7,233

4,641

7,122

495

7,565

501

8,079

2,861

212,131
2,300
728
4,213
702
8,863
2,266

58,427
824
440
1,780
512
2,471
22,479

203,883
2,072
881
3,791
865
11,693
952

56,698
747
335
1,990
1,013
1,835
19,074

189,933
1,803
1,419
3,581
1,192
11,146
930

59,027
361
279
1,686
647
1,194
19,011

171,998
1,659
1,211
4,824
1,351
9,163
1,045

59,605
283
380
1,114
758
757
18,741

9,706

947

8,440

950

7,856

915

7,524

914

970

1,244

402

1,879

811

1,587

1,069

1,512

1,631

913

1,640

1,249

2,347

3,096

2,647

2,651

113

141

914

143

699

168

471

260
3,397

1,952
2,617

421
3,455

589
2,552

398
4,028

850
1,789

363
4,270

1,176
1,623

3,109

439

1,732

797

2,628

2,023

2,153

2,650

1,907

3,920

6,671

1,084

3,812

199

3,175

1,535

11,801

3,250

13,221

3,583

14,764

3,532

14,518
-113

3,991

516,596

206,866

531,068

191,579

522,625

181,271

508,407

182,248

* 500 thousand or less
1 Includes balances of allowances for civilian and military pay raises and other legislation for the Department of Defense.
2 Includes balances of allowances for civilian agency pay raises and savings from reform of Davis-Bacon and Service Contract Acts.

Public enterprise revolving funds.—The public enterprise funds
conduct a cycle of business-type operations, primarily with the
public, on behalf of the Government. These funds are usually supplied with capital from the general fund, directly or through the
Federal Financing Bank (FFB), and, in a few cases, borrowing from
the public.
Data on public enterprise funds are included net of collections in
tables C-l through C-4. Additional information on the gross outlays and applicable collections is shown in table C-5. Collections of

B-15

SPECIAL ANALYSIS B

public enterprise funds are estimated at $109 billion in 1988, and
gross outlays are planned to total $132 billion, resulting in net
outlays of $23 billion.
Table C-5. PUBLIC ENTERPRISE FUND TRANSACTIONS
(In millions of dollars)
Applicable collections
Description

Funds appropriated to the
President:
International Security
Assistance
Overseas Private Investment
Corporation
Military Sales Program
Agriculture:
Commodity Credit Corporation...
Farmers Home Administration:
Rural housing insurance
fund
Agricultural credit insurance
fund
Rural development
insurance fund
Federal Crop Insurance
Corporation
Rural Electrification
Administration
Commerce
Education:
College housing loans
Energy:
Bonneville Power
Administration fund
Colorado River Basins Power
Marketing fund
Health and Human Services,
except social security
Housing and Urban DevelopmentPublic and Indian Housing
programs.
Federal Housing Administration
fund
Housing for the elderly or
hanaicapped fund
Government National Mortgage
Association
Community Planning and
Development
Other
Interior:
Lower Colorado River Basin
development fund
Upper Colorado River Basin
fund
Other
Labor
Transportation
Treasury
General Services Administration
Small Business Administration:
Business loan and investment
fund
Disaster loan fund

1986
actual

1987 estimate

Gross outlays
1988 estimate

1986
actual

1987
estimate

1988
estimate

795

943

891

1,050

951

891

127
256

115
330

119
280

27
238

17
257

26
279

15,356

23,107

20,625

41,197

48,370

41,897

3,144

4,987

3,911

6,378

5,485

4,745

4,025

3,742

3,707

7,258

6,929

6,462

787

1,711

1,358

1,743

1,721

1,725

549

368

463

870

796

781

2,838
96

3,472
97

3,126
92

3,126
64

3,233
193

3,510
59

206

780

698

132

232

160

2,661

2,874

3,165

2,633

2,850

3,010

103

124

143

398

1,375

1,909

1,644

5,154

6,555

7,555

3,464

4,158

4,494

512

572

1,063

1,043

1,087

1,110

1,551

2,025

903

412

1,394

829

142
59

169
50

274
51

107
24

145
84

228

212

292

256

212

292

101
39
344
575
1,168
206

138
36
527
320
38
131

199
89
871
585
37
281

137
37
238
1,625
397
21

138
53
522
1,001
7
102

199
43
696
370
8
134

754
749

743
952

1,160
791

1,181
578

1,007
495

826
487

C-14

• THE BUDGET FOR FISCAL YEAR 1988
Table C-5. PUBLIC ENTERPRISE FUND TRANSACTIONS—Continued
(In millions of dollars)
Applicable collections
Description

Veterans Administration:
Loan guaranty revolving fund....
Other
Other independent agencies:
Export-Import Bank
Federal Emergency
Management Agency
Federal Savings and Loan
Insurance Corporation fund...
National Credit Union
Administration
Postal Service
Tennessee Valley Authority
All other not included above
Total
Offsetting collections from the
public
Offsetting collections from other
accounts

1986
actual

1987 estimate

Gross outlays
1988 estimate

1986
actual

1987
estimate

1988
estimate

2,502
510

2,516
529

2,761
532

2,665
508

2,703
473

2,625
488

3,944

4,635

3,943

2,778

2,246

2,380

428

467

577

587

460

584

2.909

3,644

5,604

3,970

7,401

4,904

724
31,312
4,858
233

516
33,263
5,623
210

659
35,982
5,766
698

354
31,354
5,763
269

312
34,315
6,547
289

331
38,956
6,182
817

90,393

106,610

109,377

123,956

138,243

132,152

(-82,620) (-99,745) (-102,190)
(-7,773)

(-6,865)

(-7,187)

*500 thousand or less.

TRUST FUNDS

The trust fund group is composed of the regular trust funds and
a few trust revolving funds. The regular trust funds collect certain
taxes, and other receipts for specified purposes, such as payment of
social security benefits, in accordance with the terms of a statute
or trust agreement. The two types of appropriation accounts and
one type of receipt account associated with the trust fund are as
follows:
• Trust fund expenditure accounts—Appropriation accounts established to record appropriated trust fund amounts that finance specific purposes or programs.
• Trust fund receipt accounts—Receipt accounts credited with
collections generated by statute or the terms of a trust agreement. These receipts may be classified as either governmental
or offsetting receipts.
• Trust revolving fund accounts—Appropriation accounts authorized to be credited with collections and used to carry out
a cycle of business-type operations in accordance with a statute.
Trust revolving funds are similar to intragovernmental revolving
funds and public enterprise revolving funds in that they conduct a
cycle of business-type operations and their outlays are normally
stated net of collections. Trust fund receipts, outlays, and balances
are presented in tables C-6 through C-9. Both on-budget and offbudget (social security) trust funds are shown.

B-15

SPECIAL ANALYSIS B

Cash operations.—Trust fund receipts are estimated at $475 billion in 1988, with outlays planned at $371 billion, as shown in
tables C-1 and C-6. This includes $242 billion in receipts and $202
billion in outlays for transactions of the Federal old-age and survivors insurance and disability insurance funds that are off-budget.
In fiscal years 1986-88, trust funds receipts exceeded outlays by
following amounts:
(In millions of dollars)
1987 estimate

1988 estimate

407,161
(206,933)
(200,228)
344,884
(161,387)
(183,498)

429,167
(215,149)
(214,018)
359,343
(164,845)
(194,498)

474,635
(232,537)
(242,098)
370,962
(168,534)
(202,427)

62,277
(45,546)
(16,731)

69,824
(50,304)
(19,520)

103,673
(64,003)
(39,671)

1986 actual

Total receipts, trust funds
On-budget
Off-budget
Total outlays, trust funds
On-budget
Off-budget
Excess of receipts or outlays ( — ) , trust funds
On-budget
Off-budget

Trust fund receipts.—Table C-7 presents information classifying
the trust fund receipts by major fund and by source for each such
fund.
Trust fund outlays.—Corresponding information on trust fund
outlays, classifying the data for the larger funds, is found in table
C-8.
Trust fund balances.—Total balances of the trust funds continue
to increase, as shown by the following figures:
Open book balances
On-budget
Off-budget
Investments in U.S. securities:
Public debt
On-budget
Off-budget
Agency debt
Total

1985
actual

1986
actual

1987
estimate

1988
estimate

28,755
(25,674)
(3,081)

19,689
(19,103)
(586)

8,083
(7,482)
(601)

5,246
(4,645)
(601)

285,961
(249,290)
(36,671)
765

357,828
(312,545)
(45,283)
765

438,843
(374,054)
(64,789)
715

545,855
(441,396)
(104,459)

315,481

378,282

447,641

551,101

A summary of the balances by fund is presented in table C-9.
Included are amounts on deposit with the Treasury (open-book
balances) and investments in U.S. securities. These balances include both obligated and unobligated balances. The balances on a
budget authority basis differ from the cash balances because, for a
few accounts, contract authority (a form of budget authority) has
been provided to a trust fund in advance of receiving moneys while
unappropriated receipts are included in the cash balances but are
not a part of the balances of budget authority. The note to table
C-9 lists these accounts and reconciles the balances on a budget
authority basis with the cash balances.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

For 1988, the largest net investments are expected to be those of
the Federal employees retirement funds. The investments reported
above differ from the amounts reported by the Treasury Department. Special Analysis E, "Borrowing and Debt", provides further
information.
Table C-6. OUTLAYS AND RECEIPTS OF TRUST FUNDS
(In millions of dollars)
Outlays
Description

On-budget:
Railroad retirement trust funds
Black lung disability trust fund
Veterans life insurance trust funds....
Federal employees retirement funds...
Military retirement fund
Unemployment trust fund
Health insurance trust funds
Highway trust funds
Airport and airway trust fund
State and local government fiscal
assistance trust fund
Foreign military sales trust fund
Other trust funds (nonrevolving) .
Trust revolving funds

1986
actual

1987
estimate

Receipts
1988
estimate

8,133
618
1,082
24,271
17,611
21,819
75,903
14,813
2,365

8,638
646
1,090
26,793
17,946
20,262
78,159
13,641
2,576

8,957
1,697
1,126
26,727
18,882
22,119
81,913
14,272
4,523

5,114
9,709
1,808
-795

76
9,414
2,519
3,677

9,096
3,127
586

Subtotal
182,451
Intrafund receipts from on-budget.
-2
Intrafund receipts from off-budget .
-3,036
Proprietary receipts from the public.. - 1 8 , 0 2 7

185,437
-2
-2,746
-17,844

161,387

199,815
-159
-16,158

Total on-budget
Off-budget:
Federal old-age, survivors, and disability insurance trust funds
Intrafund transactions
Interfund receipts from on-budget
Total

off-budget 1

Total
1

1986
actual

1987
estimate

1988
estimate

9,920
600
1,387
43,330
29,896
26,073
81,428
14,700
3,565

9,372
643
1,389
45,391
31,246
25,600
90,417
14,896
3,929

9,676
1,697
1,391
50,027
33,409
24,329
103,239
16,273
4,200

4,185
10,725
2,189

8,914
3,943

8,896
3,890

193,024
-2
-2,850
-21,638

227,997
-2
-3,036
-18,027

235,741
-2
-2,746
-17,844

257,027
-2
-2,850
-21,638

164,845

168,534

206,933

215,149

232,537

208,460

220,003

227,980

259,673

-13,962

-17,575

216,545
-159
-16,158

-13,962

-17,575

183,498

194,498

202,427

200,228

214,018

242,098

344,884

359,343

370,962

407,161

429,167

474,635

Net of $314 thousand of proprietary receipts from the public in 1986.

Trust revolving funds.—The activities of the trust revolving fund
subgroup are shown in table C-10. The largest of these funds are
those used by the Office of Personnel Management to buy health
and life insurance for Government employees.
Trust fund obligations.—The obligations (net) for trust funds are
estimated at $375 billion for 1988, as set forth in table ( M l . This
includes $215 billion in obligations (net) for transactions of the
Federal old-age, survivors, and disability insurance trust funds that
are off-budget.

B-15

SPECIAL ANALYSIS B
Table C-7. TRUST FUND RECEIPTS (in millions of dollars)
[Amounts under proposed legislation are shown separately]
Description

On-budget:
Railroad retirement trust funds.Social insurance taxes and contributions
Railroad debt repayment
Interest on Federal securities
Receipts from other trust funds
Other (mainly receipts of advances and
Federal payments)
Proposed legislation

1986
actual

1987
estimate

422
2,653

3,419
174
471
2,746

3,471
153
506
2,850

3,346

2,562

2,466
230

9,920

9,372

9,676

547
51
2

608
34
2

656
30
2
1,010

600

643

1,697

944
443

984
405

986
404

1,387

1,389

1,391

4,742
15,272

5,136
15,719

5,639
16,606

23,315
2

24,534
2

27,696
2
85

Subtotal Federal employees retirement
funds

43,330

45,391

50,027

Military retirement fund:
Federal payment as employer for employee
retirement
Federal contribution
Interest on Federal securities

17,429
10,500
1,967

18,193
10,524
2,529

18,782
11,200
3,427

29,896

31,246

33,409

24,098
1,683
292

23,607
1,655
338

21,964
1,903
333
129

26,073

25,600

24,329

51,335
5,739
4,037

55,811
6,545
5,098

59,962
8,311
5,759

Subtotal, railroad retirement trust funds....
Black lung disability trust fund:
Excise taxes
Advances from general fund
Other receipts
Proposed legislation
Subtotal, black lung disability trust fund....
Veterans life insurance trust funds:
Interest on Federal securities
Other receipts
Subtotal, veterans life insurance trust
funds
Federal employees retirement funds:
Social insurance taxes and contributions
Interest on Federal securities
Federal payment as employer for employee
retirement (including payment on prior
year liabilities)
Other receipts
Proposed legislation

Subtotal, military retirement fund
Unemployment trust fund:
Social insurance taxes and contributions
Interest on Federal securities
Advances from the general fund
Proposed legislation
Subtotal, unemployment trust fund
Health insurance trust funds:
Social insurance taxes and contributions
Premiums and other charges
Interest on Federal securities

3,498

1988
estimate

C-14

• THE BUDGET FOR FISCAL YEAR 1988
Table C-7. TRUST FUND RECEIPTS (in millions of do!lars)-~Continued
[Amounts under proposed legislation are shown separately]
1986
actual

Description

Federal payment as employer for employee
retirement
Other (mainly receipts of special Federal
payments)
Proposed legislation
Subtotal, health insurance trust funds
Highway trust funds:
Excise taxes
Interest on Federal securities
Proposed legislation
Subtotal, highway trust funds
Airport and airway trust fund:
Excise taxes
Interest on Federal securities
Subtotal, airport and airway trust fund
State and local government fiscal assistance
trust fund: Deposits for general revenue
sharing

1987
estimate

1988
estimate

1,604

1,685

1,872

18,713

21,273
5

26,120
1,215

81,428

90,417

103,239

13,363
1,337

13,651
1,245

14,241
1,210
822

14,700

14,896

16,273

2,736
829

3,126
803

3,450
750

3,565

3,929

4,200

4,185

Foreign military sales trust fund

10,725

8,914

8,896

Other trust funds (nonrevolving):
Current law
Proposed legislation

2,189

3,943

3,852
38

2,189

3,943

3,890

227,997
-2
-3,036
-18,027

235,741
-2
-2,746
-17,844

257,027
-2
-2,850
-21,638

206,933

215,149

232,537

200,228
4,329

214,018
5,084

241,708
6,586

2,857

3,275

5,367

9,131

5,603

5,497
515

216,545

227,980

259,673

-159
-16,158

-13,962

-17,575

200,228

214,018

242,098

407,161

429,167

474,635

Subtotal, other trust funds (nonrevolving)
Subtotal
Intrafund receipts from on-budget
Intrafund receipts from off-budget
Proprietary receipts from the public
Total on-budget receipts
Off-budget:
Federal old-age, survivors, and disability insurance trust funds:
Social insurance taxes and contributions
Interest on Federal securities
Federal payment as employer for employee
retirement
Other (mainly receipts of special Federal
payments)
Proposed legislation
Subtotal, Federal old-age, survivors, and
disability insurance trust funds
Intrafund transactions
Interfund receipts from on-budget
Total off-budget receipts
Total receipts

B-15

SPECIAL ANALYSIS B
Table C-7. TRUST FUND RECEIPTS (in millions of dollars)—Continued
[Amounts under proposed legislation are shown separately]
1986
actual

Description

On-budget
Off-budget
1

1987
estimate

(206,933)
(200,228)

1988
estimate

(215,149)
(214,018)

(232,537)
(242,098)

Net of $314 thousand of proprietary receipts from the public in 1986.

Table C-8. TRUST FUND OUTLAYS (in millions of dollars)
[Amounts under proposed legislation are shown separately]
Description

On-budget:
Railroad retirement trust funds:
Benefit payments and claims
Repayment of benefit advances
Administrative expenses and other
Proposed legislation
Subtotal, railroad retirement trust funds....
Black lung disability trust fund:
Benefit payments
Federal administrative expenses
Repayment of advances
Proposed legislation
Subtotal, black lung disability trust fund....
Veterans life insurance trust funds
Federal employees retirement:
Benefit payments and claims
Refunds to former employees
Investments and loans
Administrative expenses and other
Proposed legislation
Subtotal, Federal employees retirement
Military retirement fund
Unemployment trust fund:
Withdrawals for benefit payments
Repayment of advances from general fund
Administrative expenses and other
Proposed legislation
Supplemental now requested
Subtotal, unemployment trust fund
Health insurance trust funds-.
Benefit payments
Administrative expenses and other
Proposed legislation
Supplemental now requested
Subtotal, health insurance trust funds
Highway trust funds (mainly grants to
States):
Current

1986
actual

1987
estimate

1988
estimate

5,969
2,108
56

6,163
2,417
58

6,371
2,467
54
65

8,133

8,638

8,957

574
44

596
50

595
54
39
1,010

618

646

1,697

1,082

1,090

1,126

23,642
580

24,650
2,075

25,974
2,071
106
81
-1,505

24,271

26,793

26,727

17,611

17,946

18,882

16,217
2,963
2,639

16,432
1,203
2,645
-18

16,159
3,300
2,723
9
-72

21,819

20,262

22,119

74,033
1,870

76,215
1,934

84,562
2,038
-4,687

10
75,903

78,159

81,913

14,813

13,626

14,272

C-14

• THE BUDGET FOR FISCAL YEAR 1988
Table C-8. TRUST FUND OUTLAYS (in millions of dollars)—Continued
[Amounts under proposed legislation are shown separately]
1987
estimate

1986
actual

Description

Supplemental now requested

1988
estimate

15
14,813

13,641

14,272

2,365

2,534
42

4,523

2,365

2,576

4,523

State and local government fiscal assistance
trust fund: Payments for general revenue
sharing

5,114

Foreign military sales trust fund

9,709

9,414

9,096

1,808

2,440

3,103
23*

Subtotal, highway trust funds
Airport and airway trust fund:
Current
Supplemental now requested
Subtotal, airport and airway trust fund

Other trust funds (nonrevolving):
Current law
Proposed legislation
Supplemental now requested

Subtotal, other trust funds (nonrevolving)
Trust revolving funds
Subtotal
Intrafund receipts from on-budget
Intrafund receipts from off-budget
Proprietary receipts from the public
Total on-budget outlays
Off-budget:
Federal old-age, survivors, and disability insurance trust funds:
Benefit payments
Payments to other trust funds
Administrative expenses and other
Proposed legislation
Subtotal, Federal old-age, survivors, and
disability insurance trust funds
Intrafund transactions
Interfund receipts from on-budget
Total off-budget outlays

Total outlays
On-budget
Off-budget
*500 thousand or less.
1 Net of $314 thousand of proprietary receipts from the public in 1986.

1,808

2,519

3,127

-795

3,677

586

182,451
-2
-3,036
-18,027

185,437
-2
-2,746
-17,844

193,024
-2
-2,850
-21,638

161,387

164,845

168,534

193,890
3,195
2,730

202,703
2,746
3,011

214,010
2,850
3,147
-4

199,815

208,460

220,003

-159
-16,158

-13,962

-17,575

183,498

194,498

202,427

344,884
(161,387)
(183,498)

359,343
(164,845)
(194,498)

370,962
(168,534)
(202,427)

B-15

SPECIAL ANALYSIS B
Table C-9. TRUST FUND BALANCES
(In millions of dollars)
Description

Railroad retirement trust funds
Black lung disability trust fund
Veterans life insurance funds
Federal employees retirement funds
Military retirement fund
Unemployment trust fund
Health insurance trust funds
Highway trust funds
Airport and airway trust fund
State and local government fiscal assistance
trust fund
Foreign military sales trust fund
Other trust funds (nonrevolving)
Trust revolving funds
Federal old-age, survivors, and disability insurance trust funds (off-budget)
Total
On-budget
Off-budget

As of Sept. 30
1985 actual

1986 actual

1987 estimate

1988 estimate

4,240
2
9,718
143,483
11,393
18,688
31,967
12,886
7,426

6,027
3
10,022
162,543
23,679
22,942
48,105
12,773
8,625

6,761

7,710

10,322
181,141
36,979
28,280
60,363
14,029
9,978

10,587
204,441
51,506
30,259
81,689
16,030
9,656

1,188
5,491
3,904
25,342

259
6,507
4,790
26,137

3
6,007
5,929
22,460

3
5,807
6,478
21,874

39,753

45,870

65,390

105,060

315,481
(275,728)
(39,753)

378,282
(332,412)
(45,870)

447,641
(382,251)
(65,390)

551,101
(446,040)
(105,060)

e.—The following table reconciles balances on a budget authority basis with the cash balances shown above:
1985
Balance available on an authorization basis
Unfinanced contract authority:
Airport and airway trust fund
Highway trust funds
Foreign military sales trust fund
Other
Unappropriated receipts:
Available for appropriation by Congress.Soldiers' Home permanent fund
Airport and airway trust fund
Highway trust funds...
Hazardous substance response trust fund
Inland waterways trust fund
Aquatic resources trosl fund
Other
Balances lapsing
Retained as permanent endowment.
Balance available on a cash basis..

1987

1986

1988

345,578

405,276

473,167

576,234

-1,728
-29,726
-14,588
-80

-1,994
-30,659
-11,554
-61

-2,123
-30,774
-11,966
-42

-2,190
-30,982
-12,207
-25

162
4,596
10,941

163
5,883
10,797
9
240
153
24

162
7,314
11,173

175
6,618
12,702
35
342
187
207

172
128
21
5

295
186
64
180
5

315,481

378,282

447,641

5
551,101

C-14

• THE BUDGET FOR FISCAL YEAR 1988
Table C-10. TRUST REVOLVING FUND TRANSACTIONS
(In millions of dollars)
Offsetting collections
Description

1986
actual

Office of Personnel Management (employees' life insurance and health benefits)..
All other trust revolving funds
Total trust revolving funds

Receipts from the public
Receipts from other accounts
1

Gross outlays

1987
estimate

1988
estimate

8,532
5,789

8,933
6,837

10,222
6,802

7,533
5,992

8,592
10,855

9,312
8,298

14,321

15,770

17,024

13,525

19,448

17,610

(8,035)
(6,286)

(8,167)
(7,603)

(8,982)
(8,042)

1987
estimate

1986
actual

1988
estimate

Excludes right-of-way revolving fund which is a part of the highway trust funds.

Table C - l i . OBLIGATIONS INCURRED, NET, IN TRUST FUNDS
(In millions of dollars)
Department or other unit

Legislative Branch
The Judiciary
Funds appropriated to the President
Agriculture
Commerce
Defense—Military
Defense—Civil
Education
Energy
Health and Human Services, except social securityHealth and Human Services, social security
Housing and Urban Development
Interior
Justice
Labor
State
Transportation
Treasury
Environmental Protection Agency
General Services Administration
Office of Personnel Management
Veterans Administration
Federal Retirement Thrift Investment Board
Railroad Retirement Board
All Other Independent Agencies
Undistributed offsetting receipts
Total
On-budget..
Off-budget..
*500 thousand or less.

1986
actual

1987 estimate

2
3
-3,027

1988 estimate

17,710

5
5
419
69
35
30
18,255

3
3
241
45
35
16
19,327

69,893
191,782

74,268
203,868

74,970
214,508*

110
2
21,720
247
18,080
3,977
379

200

219

21,028

16,001
86
1,118

23,905
279
20,248
16
1,554*

-7,186

26,219
835
-644
5,960
3,217
-8,359

25,384
903
-1,827
6,202
1,111
-12,078

343,545
(151,763)
(191,782)

362,875
(159,007)
(203,868)

375,063
(160,555)
(214,508)

- 6

23,914
667
5,151

262

SPECIAL ANALYSIS D
FEDERAL INVESTMENT AND OPERATING OUTLAYS
This analysis classifies Federal spending into two categories: outlays for investment, which yield long-term benefits; and outlays for
operating and other purposes, which yield current benefits. For the
most part, the investment data presented herein are not shown net
of depreciation. However, an estimate of net Federal and federally
financed nondefense public physical capital investment (i.e., new
investment less estimated depreciation) is presented on pages D10-13. This special analysis focuses on gross Federal investmenttype outlays that reflect the President's budget proposals, for the
years 1986 through 1988. In addition, data on historical trends in
gross Federal physical capital investment are provided in this analysis and in section 9 of the separate volume entitled Historical
Tables, Budget of the United States Government, Fiscal Year 1988.
In accordance with the requirements of the Federal Capital Investment Program Information Act of 1984 (Title II of P.L. 98-501) a
supplement to this special analysis is being prepared for separate
transmittal to the Congress. This supplement will present 10-year
projections of Federal physical investment spending, in current and
constant dollars, and assessments of civilian investment needs for
selected purposes.1
Federal investment-type outlays take several forms and are
made for many purposes. They are in the form of grants or direct
outlays and they range from lending, which yields a monetary
return; to the acquisition of physical assets, which yields a stream
of services over a period of years; to expenditures for human capital in the form of the conduct of research, development, education,
and training, which provide less tangible long-term benefits.
While the data in this analysis are shown in considerable detail,
classification problems are so complex that these data often are
only approximate. There are several reasons for this imprecision:
• For some grants to State and local governments, the recipient
jurisdiction, not the Federal Government, ultimately determines whether the money is used to finance investment-type
or current account programs. This analysis classifies all of the
outlays in the category where the recipient jurisdictions are
expected to spend most of the money. Hence, shared revenues
1

The "Supplement to Special Analysis D" will be available at the Government Printing Office bookstores.

D-1

C-14

• THE BUDGET FOR FISCAL YEAR 1988

are classified as current spending although some may be
spent by recipient jurisdictions on physical capital investments. Community development block grants are classified as
investment although some may be spent for current purposes.
• Some spending could be classified into more than one subcategory. For example, grants for construction of education facilities finance the acquisition of physical assets, but they also
contribute to the provision of education and training. To
avoid double counting, the outlays are classified in the subcategory that is considered most capital-like. Consequently
the conduct of education and training does not include the
cost of education facilities, because these facilities are included in the category for construction and rehabilitation for
physical assets.
The order of presentation of outlays for investment begins with
outlays for loans and financial investments, followed by construction and rehabilitation, acquisition of major equipment, conduct of
research and development, conduct of education and training, and
other investments. Table D-1 summarizes Federal outlays that are
classified as being of an investment nature.
COMPOSITION OF FEDERAL INVESTMENT

Investment-type programs.—Investment-type outlays are estimated to decrease from $229.5 billion in 1986 to $220.3 billion in 1987
and decline further to $218.8 billion in 1988. A total of $2.0 billion
in 1988 outlays are for loans and financial investments, a dramatic
decline from the $32.5 billion level in 1985 and the $20.5 billion
level in 1986. In 1985, loan volume was enlarged by a one-time
changeover of financing for low-rent public housing that converted
large scale loan guarantees into direct loans. The decline projected
for 1987 and 1988 is due to proposed loan asset sales and to reductions in loans by the Commodity Credit Corporation, which were
$12.3 billion in 1986 but projected to drop to $5.6 billion in 1987
and decline further to $4.9 billion in 1988. Other decreases in
lending are projected in mortgage credit and deposit insurance loan
programs, and education loan programs. Acquisition, construction,
and rehabilitation of physical assets are projected to increase from
$120.7 billion in 1986 to $127.0 billion in 1987 and then to decline
to $126.3 billion in 1988. The conduct of education, training, research, and development and for other investment-type programs
remains roughly level at $88.2 billion in 1986, $88.1 billion in 1987
and $90.4 billion in 1988. Defense investment-type outlays, which
account for 60 percent of total investment-type outlays in 1988, are
primarily for the acquisition of major equipment and other physical
assets and for the conduct of research and development. Civil programs are primarily for construction and rehabilitation of physical

B-15

SPECIAL ANALYSIS B
Table D - l . SUMMARY OF TOTAL FEDERAL INVESTMENT-TYPE OUTLAYS, 1984-88
(In billions of dollars)
1984

Loans and financial investments
Construction and rehabilitation:
National defense
Nondefense:
Grants to State and local governments.
Other
Subtotal
Acquisition of major equipment:
National defense
Nondefense
Subtotal
Conduct of research and development:
National defense
Nondefense
Subtotal
Conduct of education and training:1
Grants to State and local governments
Other
Subtotal
Other (including commodity inventories):
National defense
Nondefense
Subtotal
Total
1

„

1985

1986

1987 estimate

1988 estimate

5.2

32.5

20.5

5.2

2.0

5.1

5.9

6.7

6.5

6.7

22.7
6.8

24.4
8.1

25.7
8.0

24.3
9.2

22.9
9.0

34.5

38.5

40.4

40.0

38.6

62.2
2.6

70.8
3.6

77.0
3.3

83.3
3.7

83.3
4.4

64.9

74.4

80.3

87.0

87.7

25.8
15.2

30.4
16.9

35.7
16.5

37.7
17.4

41.7
17.8

41.0

47.2

52.1

55.1

59.5

10.6
11.5

11.4
11.6

12.6
11.2

12.0
11.6

12.3
9.9

22.1

23.0

23.7

23.6

22.2

1.1
6.0

1.2
6.4

1.1
11.3

1.2
8.4

1.2
7.5

7.2

7.6

12.4

9.4

8.7

220.3

218.8

175.0

223.2

229.5

Virtually all nondefense.

assets, the conduct of education and training, and the conduct of
research and development
Loans and financial investments.—The Federal Government conducts a wide variety of credit activities including both direct loans
and loan guarantees. Federal direct loans are a form of investment
because the Government acquires an income-yielding asset. However, most Federal loans are not intended to be profitable; indeed,
they often result in substantial subsidies to loan recipients. The
large reduction in net lending proposed in the budget reflects the
administration's policy of reducing the role of Government in favor
of seeing more lending done—where it is done most efficiently—in
the private sector. This category includes amounts for direct loans
by the Government and, as an offset, principal repayments including the expected $5.3 billion of proceeds from the sale of loan assets
in 1988. Direct loans are discussed in detail in both Parts 3b and 5
of the Budget of the United States Government, Fiscal Year 1988—

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Supplement and in Special Analysis F, "Federal Credit Programs".
Other financial investment includes funding for such programs as
international financial institutions and acquisition of enterprise
capital stock. This category also includes the expected $1.9 billion
in 1987 proceeds from the sales of Conrail stock and $1.0 billion of
offsetting collections in 1988 from the sale of Amtrak assets.
Construction and rehabilitation of physical assets is one of the
largest components of Federal investment spending. As Table D-l
shows, the bulk of Federal outlays in this category is in the form of
grants to State and local governments to finance construction or
rehabilitation of physical assets, such as highways and mass transportation facilities, rather than for procurement of assets by the
Federal Government. Special Analysis H, "Federal Aid to State
and Local Governments" contains a detailed analysis of all Federal
grants. The administration proposes large scale sales of physical
assets beginning in 1988 as part of the privatization initiative. The
proceeds from these sales are recorded as offsets in the other investment category.
Acquisition of major equipment is composed almost entirely of
investment in national defense weapons systems. National defense
spending is discussed in greater detail in the national defense
section in Part 5 of the Budget of the United States Government,
Fiscal Year 1988—Supplement
Federal outlays for the conduct of research and development are
devoted to increasing our basic scientific knowledge and to meeting
related Federal needs. These outlays are designed to increase our
national security, to improve the marginal productivity of capital
and labor for both public and private purposes, and to improve the
quality of life. In recent years, the defense share of these outlays
has been increasing. The national defense component is estimated
to increase to 70 percent of the total by 1988.
From the early 1960's to the beginning of this decade, development of space-related technology had been the largest component
of nondefense outlays for the conduct of research and development,
but in 1982 it was overtaken by health research. The decline in
outlays for space research was largely due to concluding the major
research and development phase of the space shuttle. However,
outlays for nondefense research and development are projected to
increase by $0.9 billion in 1987, and $0.4 billion in 1988. Increases
in outlays for the conduct of research and development for general
science, space and technology reflect the administration's policies
of restoring America's economic competitiveness, and strengthening "leading edge" technologies to meet national needs. Major research and development programs are discussed in Part 5 of the
Budget of the United States Government, Fiscal Year 1988—Supple-

SPECIAL ANALYSIS B

B-15

ment while Special Analysis J, "Research and Development", discusses Federal research and development in its entirety.
Federal outlays for the conduct of education and training are
intended to increase the knowledge and skills of people. Most of
these outlays are either grants to State and local governments to
assist in the operation of education institutions or income transfers
to students under the student assistance and veterans readjustment benefits programs. Federal outlays for education and training
are discussed in Part 5 of the Budget of the United States Government, Fiscal Year 1988—Supplement
The other investment category is composed of an assortment of
activities, primarily related to the acquisition and disposition of
major commodity inventories such as agricultural products for the
farm price support program and oil for the strategic petroleum
reserve. As part of the privatization initiative, the administration
proposes the sale of the naval petroleum reserves, which is projected to produce $2.5 billion of offsetting collections in 1988. Other
investment programs include Census Bureau activities designed to
improve the nation's information base, and foreign assistance programs designed to promote international development.
INVESTMENT IN PUBLIC WORKS AND OTHER PUBLIC PHYSICAL
ASSETS

The budget documents traditionally contain a significant amount
of historical information that can be used to analyze major trends
in specialized segments of Federal investment-type spending. For
example, historical data for education and training outlays are
available as part of the functional tabulations, historical data on
credit are shown in Special Analysis F, historical data on grants
appear in Special Analysis H, and historical data on research and
development are published in Special Analysis J.
Table D-2 shows Federal outlay data for public physical investment at 5-year intervals from 1960 to 1980 and annually from 1983
to 1988; Table D-3 summarizes the same data in constant prices
and as a percent of the gross national product (GNP). The data
focus on public works; to the extent feasible, the investment in
private physical assets, major commodity inventories, and land
conservation are excluded from these tables.
The data in these tables indicate that:
• National defense physical capital investment is estimated to
increase in nominal terms through 1988, but in real terms
(adjusted for inflation) defense physical investment peaks in
1987. The constant dollar totals are well above the lowest
levels immediately before and after the Vietnam War and in
1987 surpass the levels d u r i n g the post-Korean War period.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

• Direct Federal investment in nondefense physical assets is at
relatively high historical levels and is expected to increase
through 1987. The decline in 1988 is due to the proposed sale
of the naval petroleum reserves, which produces and estimated $2.5 billion of offsetting collections.
• Grants for physical capital investment grew rapidly in real
terms and as a percent of GNP between 1950 and 1965. Between 1965 and 1980, grants for this purpose grew overall in
real terms, but remained roughly level as a percentage of
GNP. However, the composition shifted significantly. Transportation grants were roughly constant in real terms while
declining as a percent of GNP; in contrast, other grants grew
rapidly. From 1983 through 1986, there was a major increase
in transportation grants due to enactment of the Surface
Transportation Assistance Act of 1982. Grants for physical
capital investment are expected to decline through 1988.

Table D-2. FEDERAL OUTLAYS FOR MAJOR PUBLIC PHYSICAL CAPITAL INVESTMENT

(In billions of dollars)
I960

Assets acquired by the Federal
Government:
National defense:
Military procurement
Military construction and family
housing
Atomic energy defense

1965

1970

1975

1980

1981

1982

1983

1984

1985

1986

1987
estimate

1988
estimate

13.3

11.8

21.6

16.0

29.0

35.2

43.3

53.6

61.9

70.3

76.5

82.7

82.8

2.1
1.7

1.3
1.1

1.3
0.7

1.8
0.9

2.4
1.0

2.4
1.5

2.9
1.8

3.4
2.2

3.6
2.7

4.4
3.2

5.1
3.0

5.5
2.9

17.2

14.2

23.6

18.7

32.5

39.1

48.0

59.2

68.2

78.0

84.7

90.8

91.2

1.0
0.8
0.1

1.4
1.5
0.2

1.5
0.8
0.2

3.0
1.4
0.4

4.6
2.7
0.7

4.9
2.8
1.0

4.4
2.8
1.3

4.6
2.5
0.8

3.9
3.3
2.6

4.6
3.5
3.6

4.3
3.7
3.3

5.2
4.0
3.7

4.7
4.3
4.4
-2.5

Subtotal, nondefense

1.9

3.0

2.5

4.8

8.1

8.8

8.5

8.0

9.8

11.7

11.3

12.9

10.9

Total Federal assets

19.1

17.3

26.1

23.5

40.5

47.9

56.4

67.2

78.0

89.7

95.9

103.7

102.1

Grants to State and local governments for physical capital investment:
Transportation:
Highways
Urban mass transportation and
airports
Community and regional development

2.9

4.0

4.3

4.6

9.0

8.8

7.7

8.8

10.4

12.7

13.9

12.4

12.6

0.1

0.2

1.0

2.6

3.1

2.9

3.2

3.8

3.2

3.6

4.1

3.5

0.1

0.6

1.6

2.5

5.8

5.6

5.2

4.7

4.9

5.0

4.5

4.6

4.0

Subtotal, national defense...
Nondefense:
Construction and rehabilitation:
Water and power projects
Other
Acquisition of major equipment....
Sale of physical assets

o
00

Table D-2. FEDERAL OUTLAYS FOR MAJOR PUBLIC PHYSICAL CAPITAL INVESTMENT C o n t i n u e d
(In billions of dollars)
I960

Natural resources and environment:
Pollution control facilities
Other
All other 2
Total grants for physical
capital investment2 ....
Total public assets financed by the Federal
Government
Memorandum
National defense
Nondefense

*
*

1965

1970

1975

1980

1981

1982

1983

1984

1985

1986

1987
estimate

1988
estimate

0.1

0.1
0.1
0.2

0.2
0.2
0.6

1.9
0.3
0.5

4.3
0.6
0.2

3.9
0.6
0.2

3.8
0.3
0.2

3.0
0.6
0.2

2.6
0.7
0.3

2.9
0.7
0.4

3.2
0.7
0.4

2.7
0.6
0.5

2.5
0.5
0.3

3.3

5.0

7.1

10.9

22.5

22.1

20.2

20.5

22.7

24.9

26.3

24.9

23.4

M
H
22.4

22.3

33.2

34.4

63.0

70.0

76.6

87.7

100.7

114.6

122.2

128.6

125.5

17.2
5.2

14.2
8.0

23.6
9.6

18.7
15.7

32.5
30.5

39.1
30.9

48.0
28.6

59.2
28.5

68.2
32.5

78.0
36.6

84.7
37.5

90.8
37.8

91.2
36.6

Excludes outlays for private asset acquisition (such as ship construction subsidies) and major commodity inventories (agricultural commodities and the strategic petroleum reserve).
2 Includes National Guard shelters and civil defense grants classified in the national defense function.
*$50 million or less.
1

I960

1965

1970

1975

1980

1981

1982

1983

1984

1985

1986

1987
estimate

1988
estimate

80.3
12.8

77.7
10.5

In billions of constant (fiscal year 1982) dollars

51.7
5.9

40.4
8.7

55.8
6.1

33.1
8.2

39.6
9.1

42.8
9.3

48.0
8.5

56.9
8.0

63.5
9.7

W
w

tr1
M
>
W

Table D-3. SUMMARY COMPARISONS OF FEDERAL OUTLAYS FOR MAJOR PUBLIC PHYSICAL CAPITAL INVESTMENTS

Assets acquired by the Federal
Government:
National defense
Nondefense

3
M
133
C

71.9
11.6

77.4
11.5

00
0
0

57.6

49.1

61.9

41.3

48.7

52.1

56.4

64.9

73.2

83.5

88.9

93.1

88.4

11.0

14.2

12.4

9.4

12.7

12.2

10.7

11.9

13.7

14.7

15.7

14.4

13.5

0.4
0.3
0.5

2.0
0.6
0.5

4.5
1.0
1.5

4.2
3.8
0.9

6.3
5.4
0.3

5.7
4.6
0.2

5.2
4.1
0.2

4.7
3.5
0.2

4.7
3.2
0.2

4.6
3.3
0.4

4.1
3.4
0.4

4.0
2.9
0.4

3.4
2.5
0.3

Subtotal grants

12.2

17.3

19.4

18.3

24.8

22.7

20.2

20.3

22.0

22.9

23.5

21.6

19.7

Total

69.8

66.4

81.3

59.6

73.3

74.8

76.6

85.3

95.2

106.4

112.4

114.7

108.0

Subtotal
Grants to State and local governments for physical capital investment:
Transportation
Community and regional development
Natural resources and evironment....
All other

As a percent of Gross National Product
Assets acquired by the Federal
Government:
National defense
Nondefense
Subtotal

I
3.39
0.38

2.12
0.45

2.38
0.26

1.23
0.32

1.22
0.30

1.31
0.29

1.53
0.27

1.81
0.24

1.88
0.27

1.98
0.30

2.03
0.27

2.05
0.29

1.93
0.28

3.77

2.57

2.64

1.54

1.52

1.60

1.80

2.05

2.15

2.28

2.30

2.35

2.21

Grants to State and local governments for physical capital investment:
Transportation
Community and regional development
Natural resources and environment...
Allother

0.59

0.61

0.46

0.37

0.43

0.40

0.34

0.36

0.39

0.40

0.42

0.37

0.34

0.02
0.02
0.03

0.09
0.02
0.02

0.16
0.04
0.06

0.16
0.15
0.04

0.22
0.18
0.01

0.19
0.15
0.01

0.16
0.13
0.01

0.14
0.11
0.01

0.13
0.09
0.01

0.11
0.09
0.01

0.10
0.07
0.01

0.08
0.06
0.01

Subtotal grants

0.66

0.74

0.71

0.84

0.74

0.64

0.62

0.63

0.56

0.50

Total

4.42

3.31

3.35

2.26

2.36

2.34

2.44

2.64

2.73

2.91

2.93

2.91

2.71

C-14

• THE BUDGET FOR FISCAL YEAR 1988

CALCULATIONS OF N E T FEDERAL AND FEDERALLY

FINANCED

NONDEFENSE PUBLIC PHYSICAL CAPITAL INVESTMENT

Federal nondefense public investment spending falls into two
categories: direct Federal investment and investment financed by
grants to State and local governments. Investment made through
Federal grants is owned by the State or local governments receiving the grants.
For many years, current and constant-dollar data on the estimated value of most forms of both public and private physical capital—
e.g. roads, factories, housing—have been developed by the Department of Commerce and published in the Survey of Current Business. (See, for example, pp. 36-39 of the August 1986 issue.) However, the Commerce data on the net capital stock and net investment
are not directly linked to the Federal budget and do not include
estimates for the years covered by the budget. The OMB historical
data base for Federal nondefense physical capital investment and
grants to State and local governments for physical capital investment was extended back to 1915 by broad category. These data
were then converted to constant prices to approximate replacement
costs and depreciated. The product is a price-adjusted estimate of
nondefense federally financed public net investment.
The historical budget data were adjusted to constant fiscal year
1987 dollars using price deflators for Federal nondefense capital
purchases. The resulting constant dollar series is shown as new
investment in Table D-4. These constant dollar historical data
were then depreciated on a straight-line basis over the following
assumed useful lives: 40 years for investments financed by grants;
30 years for all other nondefense construction and rehabilitation;
and 16 years for major equipment. The difference between new
investment and depreciation is shown as net investment. Because
of space constraints, only net figures are shown for some of the
components.

Table D-4. COMPOSITION OF NEW AND NET FEDERAL AND FEDERALLY FINANCED INVESTMENT IN NONDEFENSE PUBLIC PHYSICAL CAPITAL IN CONSTANT (1987) PRICES
(In billions of dollars)
Total investment

Net direct Federal investment

Depreciation

Water and
power

Investment financed from Federal grants-in-aid
Composition of net investment

Year

New

Net

Total

1970
1971
1972
1973
1974

29.3
30.9
32.3
31.8
31.9

-15.6
-16.1
-16.8
-17.5
-18.1

13.8
14.8
15.5
14.3
13.8

0.8
1.5
2.5
2.1
1.6

0.9
1.5
1.7
1.0
1.1

1975
1976
TQ
1977
1978
1979

32.7
36.2
10.0
39.3
42.1
43.0

-18.7
-19.3
-5.0
-19.9
-20.5
-21.2

13.9
16.9
5.0
19.5
21.6
21.9

2.3
2.2
0.6
2.3
3.0
3.5

2.1
2.0
0.5
2.4
2.5
2.8

1980
1981
1982
1983
1984

42.6
39.1
33.7
32.3
35.5

-21.8
-22.6
-23.4
-24.0
-24.8

20.8
16.4
10.4
8.2
10.7

2.6
2.2
1.0

1985
1986
1987
1988

38.6
38.6
37.7
35.5

-25.7
-26.6
-27.3
-28.0

12.9
12.0
10.4
7.5

Other

*
*

New

Depreciation

Net

Transportation (mainly
highways)

Community
and regional
development

Natural
resources
and
environment

Other

21.5
22.4
22.6
22.4
22.7

-8.6
-9.1
-9.6
-10.1
-10.6

12.9
13.3
13.0
12.3
12.2

8.1
7.7
7.0
6.7
5.0

3.6
4.0
4.6
4.0
3.6

0.2
0.9
0.7
1.3
3.2

1.1
0.8
0.7
0.4
0.4

-11.0
-11.4
-2.9
-11.7
-12.2
-12.7

11.6
14.8
4.4
17.2
18.5
18.3

4.5
6.9
1.7
5.9
5.3
6.3

3.2
3.4
1.2
5.4
8.8
7.1

3.5
4.2
1.6
5.7
4.7
5.3

0.4
0.3

-0.1
0.5
0.8

22.6
26,1
7.4
29.0
30.8
31.0

0.2
-0.2
-0.3

1.4

1.7
1.3
0.2
0.2
-0.8

0.9
0.9
0.8
-0.3
2.3

31.3
28.0
23.7
23.2
24.8

-13.1
-13.8
-14.4
-14.9
-15.5

18.2
14.2
9.4
8.3
9.3

7.6
6.1
3.4
4.1
5.6

5.7
4.5
3.4
2.5
2.4

5.5
4.1
3.1
2.3
1.7

-0.5
-0.5
-0.5
-0.6
-0.5

2.8
1.7
2.9
2.8

-0.3
-0.8
0.2
-0.4

3.1
2.5
2.7
3.1

26.2
27.0
24.8
22.5

-16.1
-16.7
-17.3
-17.8

10.1
10.2
7.5
4.8

6.5
7.4
5.4
4.1

2.2
1.5
1.3
0.5

1.8
1.9
1.1
0.7

-0.5
-0.5
-0.4
-0.5

0.8
1.0
0.5
0.2
0.2
*

>
r>
HH

>
t-1
CO
HH
CO

C-14

• THE BUDGET FOR FISCAL YEAR 1988

These data should be viewed as approximations; they have substantial margins of estimating error. The sources of error include:
• The extended historical outlay series.—The historical data
series was extended back from 1940 to 1915 using data from
budget documents published during that period. There are no
specific outlay data on nondefense physical capital investment
for this period, and estimates were made on the basis of
program authorizations.
• Price adjustments.—The replacement cost of the Federal stock
of nondefense physical capital has increased through time.
Unfortunately, the rate of increase is not known exactly. For
this presentation, an estimate of replacement costs in 1987
prices was made through the application of a deflator series
for Federal purchases of durables and structures indexed to
1987 prices. There are no specific price indexes for Federal
purchases of durables and structures for 1915 through 1929,
and estimates were made on the basis of Census Bureau historical statistics on constant price public capital formation.
• Depreciation estimates.—The assumed useful lives for each of
the categories of nondefense capital investment are very uncertain. Since they are for broad classes of investment, they
do not apply to specific cases. Also, straight-line depreciation
may not be the most accurate method to apply to the different categories of Federal nondefense physical capital investment.
Hence, the data should be viewed as approximations only—not
precise estimates.
The data in Table D-4 show that net investment, adjusted for
inflation, rose between 1970 and 1979 due to the fact that new
investment exceeded depreciation by increasing amounts. During
the 1970's, depreciation was largely based on the relatively low
investments of the 1940's and 1950's. However, with the passage of
time, the capital stock became larger, and consequently depreciation continued to grow. The value of newer assets being depreciated was greater than the value of older assets being retired (and
thus no longer depreciated). After 1979, new investment declined
slightly and then leveled off while depreciation continued to rise
due largely to relatively high investment in the 1970's and early
1980's. As a result, net investment declined.
The composition of nondefense public physical capital investment—both on a gross and net basis—has changed substantially
over time. Before the mid-1950s, direct nondefense gross investment exceeded grants for investment, but by the end of the 1970's,
grants-in-aid for investment exceeded direct investment by a ratio
of 2% to 1. Due to the slower rate of direct investment from 1970
to 1986, net capital formation (new investments less depreciation)

B-15

SPECIAL ANALYSIS B

financed by grants-in-aid was about six times greater than net
capital formation for stocks directly owned by the Federal Government.
Federal grants for transportation facilities and equipment—predominantly highways but also mass transit and airport grants—
were the most prevalent form of Federal grants-in-aid for physical
capital. From 1970 to 1986, transportation grants contributed 39
percent to total new investment. Over this same timespan they
have added virtually the same percentage to the net stock of nondefense public physical capital.
Both new and net investments funded by grants for transportation increase substantially from 1982 to 1986 due largely to the
expansion financed by the Surface Transportation Assistance Act
of 1982, which expired at the end of 1986. Funding for programs
supported by the highway trust fund in 1988 is proposed, beginning
with the 1987 reauthorization, at the level of anticipated user fee
receipts so as to be deficit neutral.
DETAILED D A T A PRESENTATION

The remaining tables in this analysis provide detail on the composition of investment-type spending, and current outlays. They
provide two basic displays of Federal spending. Table D-5 is a
summary table showing the data split between national defense
spending and civil (i.e., nondefense) spending. Table D-7 provides
detailed data for the same categories. Table D-6 is a summary
table identifying the grants and loans to State and local governments separately from all other Federal outlays. Table D-8 provides details.
The classification structure used to compile this information is
designed primarily to focus on investment-type outlays; data on all
other current spending is a residual. The categories of expenditure
in current outlays cover only the noncapital portion of Federal
spending for such activities. For example, the category aids to
agriculture, commerce, and transportation includes current benefits,
such as some agricultural subsidies; but it does not include price
support lending or commodity inventories, both of which are investment-type outlays. Nor does it include assistance provided by
the Federal Government through loan guarantees, tax expenditures, other provisions of the Tax Code, or the privately owned,
Government-sponsored enterprises. Although they are not quantified in this analysis, loan guarantees, tax expenditures, and other
provisions of the Tax Code are methods by which the Federal
Government also affects the type and amount of public and private
investment. Federally guaranteed loans, for example, are substi2 For the remainder of the analysis, "investment" is more broadly defined to include loans, investment in
commodity inventories, research and development, and education and training.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

tutes for direct loans and can result in the creation of certain
assets in place of others.3 As another example, the investment tax
credit (repealed in the Tax Reform Act of 1986) for many years
provided a tax expenditure subsidy for private investment.
PROGRAM TRENDS

Loans and financial investments.—A loan involves an exchange
of cash for financial assets. If the loans are made at competitive
market rates, the value of the assets are equal to the outlays.
Federal loans are generally made at lower rates than comparable
private lending. A fundamental reform proposed in the budget is to
specifically identify and appropriate loan subsidies. To the extent
that borrowing is subsidized, the recorded loan outlays exceed the
value of the asset created. See Part 3b of the Budget of the United
States Government, Fiscal Year 1988—Supplement and Special
Analysis F, "Federal Credit Programs" for a discussion of the
credit reform proposals. Most Federal domestic loans finance the
acquisition or improvement of either physical assets or human
capital. Loans to foreign borrowers are intended to promote mutual
defense, economic development, or United States exports including
military equipment and farm commodities.
Nondefense loans and financial investments are estimated to
decline from $20.1 billion in 1986 to $5.3 billion in 1987, and
decline further to $2.2 billion in 1988. The decline is due, in large
part, to projected reductions in domestic agriculture lending used
to support farm prices by the Commodity Credit Corporation (CCC).
Farmers have access to price-support loans that enable them to
hold their crops for later sale. If market prices remain below the
price-support loan rate determined by law, the producer can default on the loan without penalty, forfeiting the loan collateral as
settlement for the loan. In 1986, outlays associated with CCC lending reached $12.3 billion, up $6.5 billion from 1985. The administration proposes to reduce high price-supports to market clearing
levels and thus to reduce outlays associated with CCC lending to
$5.6 billion in 1987, and $4.9 billion in 1988. See the discussion of
the agriculture function in Part 5 of the Budget of the United
States Government, Fiscal Year 1988—Supplement for details on
the administration's proposals for farm price-supports. Other reductions in this category reflect the sales of loan assets from the
rural housing insurance fund portfolio which account for $1.7 billion of offsetting collections in 1987, and $0.8 billion in 1988. See
Special Analysis F, "Federal Credit Programs" for details of loan
asset sales to the public.

See 1988 Budget, Special Analysis F, "Federal Credit Programs."

B-15

SPECIAL ANALYSIS B

Table D-5. SUMMARY OF FEDERAL INVESTMENT AND OPERATING OUTLAYS BY DEFENSE—
NONDEFENSE
(In millions of dollars)
1986 actual

1987 estimate

1988 estimate

6,723
77,853
35,656
657

6,494
84,355
37,676
19

6,710
84,394
41,696

120,889

128,544

132,800

101
79,735
72,931

126
81,059
72,777

135
86,038
78,803

152,767

154,396

165,530

-281

-260

-227

273,375

282,246

297,550

Civil:
Investment-type programs:
Loans and financial investments
Construction and rehabilitation
Acquisition of major equipment
Conduct of research and development
Conduct of education and training
Commodity inventories and other physical assets
Other investment-type programs

20,065
33,695
3,315
16,485
23,711
7,587
3,734

5,338
33,511
3,718
17,421
23,614
3,955
4,248

2,201
31,898
4,427
17,790
22,206
3,230
4,264

Subtotal, investment-type programs

108,592

91,805

86,017

242,936
194,432

252,844
202,703

261,567
214,006

437,368

455,547

475,573

10,855
2,207

11,492
2,391

10,195
2,508

13,063

13,884

12,704

9,615
19,075
3,940
7,191
13,682

10,550
28,537
3,594
2,439
21,820

10,630
26,040
4,429
1,720
15,382

140,298
-4,329

142,544
-5,084

145,626
-6,594

135,969

137,461

139,032

National Defense:
Investment-type programs:
Construction and rehabilitation
Acquisition of major equipment and other physical assets
Conduct of research and development
Other investment-type programs
Subtotal, investment-type programs
Current programs:
Provision of benefits
Repair, maintenance, and operation of physical assets
Other current programs
Subtotal, current programs
Unclassified
Total, national defense

Current programs-.
Provision of benefits:
On-budget
Off-budget
Subtotal, provision of benefits
Administrative expenses of benefit programs:
Oil-budget
Off-budget
Subtotal, administrative expenses of benefit programs
Social services and related programs
Aids to agriculture, commerce, and transportation
Repair, maintenance, and operation of physical assets
General purpose fiscal assistance
Regulation, control, and law enforcement
Net interest:
On-budget
Off-budget
Subtotal, net interest
Other current programs
Subtotal, current programs

- 1

9,205

12,386

13,318

649,108

686,217

698,827

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table D-5. SUMMARY OF FEDERAL INVESTMENT AND OPERATING OUTLAYS BY DEFENSE—
NON DEFENSE—Continued
(In millions of dollars)

Unclassified:
On-budget
Off-budget
Subtotal, unclassified
Total, civil
Outlay totals
On-budget
Off-budget

1986 actual

1987 estimate

1988 estimate

-40,513
-746

-44,167
-529

-55,432
-2,635

-41,260

-44,696

-58,066

716,440

733,326

726,777

989,815
(806,318)
(183,498)

1,015,572
(821,074)
(194,498)

1,024,328
(821,900)
(202,427)

Physical assets.—The benefits provided by the construction and
rehabilitation of physical assets and by the acquisition of major
equipment are of a long-term nature, while commodity inventories
are for reserves or stockpiles rather than direct current use.
Budget outlays designed specifically to purchase such assets are
treated as investment-type outlays regardless of whether the asset
is owned by the Federal Government, or by State, local, or in a few
cases, private entities (such as for land conservation). Total outlays
for physical assets—including acquisition of major commodity inventories—are estimated at $130.7 billion in 1988; of that amount
$91.1 billion are for national defense. Most national defense outlays
for physical assets are for the procurement of military equipment.
About 60 percent of Federal outlays for nondefense physical assets
are in the form of grants-in-aid to State and local governments,
especially for construction of highways, mass transit, and pollution
control facilities. Commodity inventories include crops acquired as
part of the farm price support program and also oil purchases for
the strategic petroleum reserve. As noted above, these inventories
were excluded from the major public physical capital investment
data in Tables D-2 and D-3. The other physical assets category
includes an estimated $2.5 billion of offsetting collections from the
sale of the naval petroleum reserves in 1988.
Conduct of research and development.—Research and development increases the Nation's base of information and knowledge.
Outlays are estimated at $59.5 billion in 1988. Most of the increase
in 1988 is for national defense, reflecting the Administration's
commitment to strengthening the Nation's defense. Nondefense
outlays for the conduct of research and development account for 30
percent of all research and development outlays in 1988. Within
the total spending for research and development, there is a continuing increase in 1987 and 1988 for basic research, with emphasis
on the support of research in the physical sciences. See Special
Analysis J, "Research and Development" for additional details.

B-15

SPECIAL ANALYSIS B

Table D-6. SUMMARY OF FEDERAL INVESTMENT AND OPERATING OUTLAYS BY GRANTS-IN-AID AND
DIRECT FEDERAL PROGRAMS
(In millions of dollars)
1987 estimate

1988 estimate

26,261
319
12,556*

24,871
313
11,996*

23,422
330
12,292

39,136

37,180

36,045

49,378
5,978
8,526
759
7,263
545
772

51,847
6,373
9,632
894
2,509
772
672

50,637
6,148
9,559
997
1,781
783
329

73,222

72,699

70,234

112,357

109,879

106,278

20,504
14,575
80,298
8,038
51,822
11,166
3,942

5,160
15,597
87,036
4,530
54,785
11,628
4,435

2,031
15,624
87,747
3,867
59,157
9,923
4,424

190,345

183,170

182,772

193,659
194,432

201,123
202,703

211,065
214,006

388,091

403,826

425,070

4,877
2,207

5,119
2,391

4,048
2,508

7,085

7,511

6,556

1,089
18,316
83,120
13,137

917
27,643
84,183
21,048

1,071
25,043
90,227
14,599

140,298
-4,329

142,544
-5,084

145,626
-6,594

135,969

137,461

139,032

1986 actual

Grants-in-aid:
Investment-type programs:
Construction, rehabilitation, and acquisition of physical assets
Conduct of research and development
Conduct of education and training
Other investment-type programs
Subtotal, investment-type programs
Current programs:
Provision of benefits
Administrative expenses of benefit programs
Social service and related programs
Aids to agriculture, commerce, and transportation
General purpose fiscal assistance
Regulation, control, and law enforcement
Other current programs
Subtotal, current programs
Total, grants-in-aid
Direct Federal Programs:
Investment-type programs:
Loans and other financial investments
Construction and rehabilitation of physical assets
Acquisition of major equipment
Acquisition of commodity inventories and other physical assets...
Conduct of research and development
Conduct of education and training
Other investment-type programs
Subtotal, investment-type programs
Current programs:
Provision of benefits:
On-budget
Off-budget
Subtotal, provision of benefits
Administrative expenses of benefit programs:
On-budget
Off-budget
Subtotal, administrative expenses of benefit programs
Social service and related programs
Aids to agriculture, commerce, and transportation
Repair, maintenance, and operation of physical assets
Regulation, control, and law enforcement
Net interest:
On-budget
Off-budget
Subtotal, net interest

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table D-6. SUMMARY OF FEDERAL INVESTMENT AND OPERATING OUTLAYS BY GRANTS-IN-AID AND
DIRECT FEDERAL PROGRAMS—Continued
(In millions of dollars)

Other current programs
Subtotal, current programs
Unclassified:
On-budget
Off-budget
Subtotal, unclassified
Total, direct Federal programs
Outlay totals

On-budget.
Off-budget

1986 actual

1987 estimate

1988 estimate

81,846

84,891

91,971

728,653

767,480

793,569

-40,794
-746

-44,427
-529

-55,658
-2,635

-41,541

-44,956

-58,293

877,458

905,693

918,049

989,815

1,015,572

1,024,328

(806,318)
(183,498)

(821,074)
(194,498)

(821,900)
(202,427)

*50 million or less.

Conduct of education and training.—Outlays classified in this
category are designed to add to the stock of human capital by
developing a more skilled and productive labor force. These outlays
are primarily grants to State and local governments to operate
educational institutions, but they include some direct payments to
individuals that are conditional upon participation in educational
or training programs. Outlays are estimated at $22.2 billion in
1988, of which $12.3 billion are grants to State and local governments.
Other investment-type programs.—This category includes collection of information, such as censuses and topographic surveys for
which outlays are estimated to be $2.0 billion in 1988, and foreign
assistance for international development for which outlays are estimated to be $2.3 billion in 1988.
Operating Outlays.—Programs that provide benefits in the current year are divided into several subcategories. Some outlays classified as current may be used in part by their recipients for investment-type purposes. However, the principal effect of these outlays—such as for unemployment compensation and retirement benefits—is to provide benefits that will be used for current purposes
such as for consumption and for operating expenses rather than for
future benefit purposes. Total outlays for current programs are 84
percent of 1988 estimated outlays. Of current outlays in 1988,
$165.5 billion is for defense programs and $698.8 billion for civil
programs.
Provision of benefits is the largest category of current outlays in
the budget. The total of these outlays is estimated to increase from
$437.5 billion in 1986 to $475.7 billion in 1988. Social security and

SPECIAL ANALYSIS B

B-15

other disability and retirement benefits constitute the largest element in this category; they are estimated to total $278.4 billion in
1988. Other major outlays in this category include medicaid, medicare, unemployment compensation, and food and nutrition programs.
Current outlays for social services and related programs are those
for human development and child welfare services and employment
programs. Outlays in 1988 are estimated to be $10.6 billion, of
which $9.6 billion are for grants to State and local governments.
Aids to agriculture, commerce, and transportation include price
support subsidies and small business and transportation programs.
Outlays for these programs are estimated to increase from $19.1
billion in 1986 to $28.5 billion in 1987 and then decline to $26.0
billion in 1988.
Other current outlays are largely for operation of the Federal
Government, including the repair, maintenance, and operation of
physical assets (primarily defense related); regulation and law enforcement; net interest; and other administrative or operating expenses. These outlays are $339.3 billion or an estimated 33 percent
of budget outlays in 1988. Because proprietary receipts from the
public—such as receipts from the sale of electric power, the sale of
publications and reproductions, and the sale of timber and other
natural land products—are offsets against the outlays to which
they most nearly apply, net outlays are negative in some cases.
Unclassified.—The unclassified category includes the undistributed offsetting receipts, most payments from the Government to
itself, and the associated offsetting collections. Outlays for this
category are estimated to be —$58.3 billion in 1988, of which —$0.2
billion is in the national defense category.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table D-7. DETAIL OF FEDERAL INVESTMENT AND OPERATING OUTLAYS BY DEFENSE—NONDEFENSE
(In millions of dollars)
1987 estimate

1988 estimate

4,888
343
1,493

4,792
435
1,267

5,026
555
1,129

6,723

6,494

6,710

76,500
483

82,696
623

82,798
523

76,983

83,319

83,320

870

1,036

1,074

33,396
2,260

35,346
2,330

39,252
2,445

35,656

37,676

41,696

1986 actual

National defense investment-type programs
Construction and rehabilitation of physical assets:
Military construction
Family housing
Atomic energy defense activities and other
Subtotal, construction and rehabilitation of physical
assets
Acquisition of major equipment:
Procurement
Atomic energy defense activities
Subtotal, acquisition of major equipment
Other physical assets
Conduct of research and development:
Defense military
Atomic energy and other
Subtotal, defense research and development
Other investment-type programs
Subtotal, investment-type programs

657

120,889

128,544

132,800

101

126

135

77,591
2,144

78,895
2,164

83,554
2,484

79,735

81,059

86,038

70,401
2,530

69,642
3,135

74,693
4,111

72,931

72,777

78,803

152,767

153,961

164,976

-281

-260

-227

273,375

282,246

297,550

4,601
12,600
437
128
1,151
-324
196
1,061
-7

2,691
4,748
-2,243
-135
609
-606
-684
-155
1,820

2,359
3,852
-2,009
-665
-104
-438
-979
-552
570

- 1

National defense current programs
Provision of benefits
Repair, maintenance, and operation of physical assets:
Department of Defense, Military
Other
Subtotal, repair, maintenance and operation of physical
assets
Other current programs:
Military personnel
Other national defense
Subtotal, other current programs
Subtotal, current programs
Unclassified
Total, national defense
Civil investment-type programs
Loans:
International affairs
Agriculture
Mortgage credit and deposit insurance
Aids to commerce
Transportation
Disaster relief
Other community and regional development
Education
Other

B-15

SPECIAL ANALYSIS B

Table D-7. DETAIL OF FEDERAL INVESTMENT AND OPERATING OUTLAYS BY DEFENSE—
NONDEFENSE—Continued
(In millions of dollars)
1986 actual

1987 estimate

1988 estimate

19,843

6,046

2,034

164
59

1,078
-1,786

1,639
-1,473

223

-708

166

13,949
2,729
141
918
238
3,326
461
870
3,292
2,132
917
2,288
749
1,685

12,441
3,208
172
938
226
3,292
428
950
2,874
2,458
933
2,858
825
1,909

12,649
2,512
94
1,001
197
3,047
355
695
2,825
2,669
890
2,107
811
2,047

33,695

33,511

31,898

Acquisition of major equipment:
Transportation
Space flight, control and data communications
General science and basic research
Postal Service
Other

1,065
1,050
120
146
933

1,113
1,292
126
181
1,006

1,194
1,985
147
172
930

Subtotal, acquisition of major equipment

3,315

3,718

4,427

Commodity inventories and other physical assets:
Commodity inventories:
Agriculture
Other

4,129
411

685
428

2,531
260

Subtotal, commodity inventories

4,540

1,113

2,791

3,047

2,841

439

7,586

3,954

3,230

2,863
1,399
510

3,160
1,395
582

3,638
1,609
639

4,772

5,137

5,886

2,622

2,557

2,080

489

436

355

Subtotal, loans
Other financial investments:
International development
Other
Subtotal, other financial investments
Construction and rehabilitation of physical assets:
Highways
Mass transportation
Rail transportation
Air transportation
Water transportation
Community development block grants
Urban development acton grants
Other community and regional development
Pollution control and abatement
Water resources
Other natural resources and environment
Energy
Veterans hospitals and other health
Other programs
Subtotal, construction and rehabilitation of physical
assets

Other physical assets
Subtotal, commodity inventories and other physical
assets
Conduct of research and development:
General science, space and technology-.
NASA
NSF
Other general science
Subtotal, general science, space and technology
Energy (Department of Energy)
Transportation:
Department of Transportation

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table D-7. DETAIL OF FEDERAL INVESTMENT AND OPERATING OUTLAYS BY DEFENSE—
NONDEFENSE—Continued
(In millions of dollars)
1986 actual

NASA
Subtotal, transportation
Health:
NIH
All other health
Subtotal, health
Agriculture
Natural resources and environment
All other research and development
Subtotal, conduct of research and development
Conduct of education and training:
Department of Education:
Higher education
Elementary, secondary, and vocational education
Other
Subtotal, Department of Education
Veterans readjustment benefits
Training and employment programs
Health training
Other education and training
Subtotal, conduct of education and training
Other investment-type programs:
Collection of information
International development
Subtotal, other investment-type programs
Subtotal, investment-type programs
Civil current programs
Provision of benefits:
Retirement, survivor, and disability benefits:
Social security (off-budget):
Retirement and survivor benefits
Disability benefits
Subtotal, social security (off-budget)
Civil service:
Retirement and survivor benefits
Disability benefits
Subtotal, civil service
Military retirement
Railroad retirement and disability benefits
Veterans disability benefits
Other retirement and disability benefits
Subtotal, retirement, survivor, and disability benefits....
Other provision of benefits:
Veterans pension benefits

1987 estimate

1988 estimate

568

539

587

1,057

975

942

4,837
738

5,211
916

5,457
893

5,574

6,127

6,351

798
924
738

825
944
856

867
874
791

16,485

17,421

17,790

7.349
7,518
238

7,628
7,168
322

5,994
7,420
207

15,104

15,118

13,622

888
3,707
981
3,031

727
3,611
913
3,246

617
3,968
844
3,156

23,711

23,615

22,207

1,736
1,998

1,865
2,382

1,992
2,272

3,734

4,248

4,264

108,592

91,805

86,017

174,906
19,526

182,718
19,985

193,291
20,715

194,432

202,703

214,006

19,003
4,321

19,805
4,503

20,681
4,744

23,323
17,621
5,125
10,588
1,736

24,309
17,953
6,120
10,670
1,790

25,425
18,887
6,434
10,774
2,834

252,826

263,545

278,360

3,874

3,830

3,840

B-15

SPECIAL ANALYSIS B

Table D-7. DETAIL OF FEDERAL INVESTMENT AND OPERATING OUTLAYS BY DEFENSE—
NONDEFENSE—Continued
(In millions of dollars)
1986 actual

1987 estimate

1988 estimate

74,033
23,606
1,119
16,263
11,285
18,320
9,315
8,236
9,217

76,225
25,259
1,138
16,564
10,841
18,990
9,863
8,836
10,719

81,076
25,692
1,129
16,218
11,626
18,196
11,210
8,001
9,969

175,269

182,265

186,956

8,040
1,169
65

8,365
1,222
149

8,808
1,243
206

9,274

9,737

10,256

Subtotal, provision of benefits
Administrative expenses of benefit programs-.
Social Security retirement and disability (off-budget)
Medicare and medicaid
Unemployment compensation, assistance payments, and other....

437,368

455,547

475,573

2,207
3,108
7,748

2,391
3,206
8,286

2,508
1,833
8,363

Subtotal, administrative expenses of benefit programs..

13,063

13,884

12,704

1,862
1,539
2,671
3,544

1,945
1,378
2,661
4,566

2,225
1,216
2,697
4,492

9,615

10,550

10,630

11,853
-182
699
-434
1,483
2,534
1,866
1,256

22,614
671
822
-371
1,517
2,525
2,163
-1,404

17,157
1,811
722
-438
1,020
2,934
1,758
1,075

19,075

28,537

26,040

794
-920
898

525
-1,006
552

497
-1,115
1,157

772

539

-2,420
5,587

-2,762
6,284

-3,035
6,924

Medicare
Medicaid
Other health benefits
Unemployment compensation
Housing programs
Food and nutrition programs
Supplemental security income
Family support payments to States
Other
Subtotal, other provision of benefits
Direct provision of services:
Hospital and medical care for veterans
Other health
Other
Subtotal, direct provision of services

Social service and related programs:
Human development services
Employment training programs
Social services block grant
Other
Subtotal, social service and related programs
Aids to agriculture, commerce, and transportation:
Agriculture
Postal service
Small business assistance
Mortgage credit and thrift insurance
Ground transportation
Air transportation
Water transportation and waterways
Other
Subtotal, aids to agriculture, commerce and transportation
Repair, maintenance and operation of physical assets:
Natural resources:
Water resources
Conservation and land management
Recreational resources and other
Subtotal, natural resources
Energy (net of offsetting receipts)
Other, net

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table D-7. DETAIL OF FEDERAL INVESTMENT AND OPERATING OUTLAYS BY DEFENSE—
NONDEFENSE—Continued
(In millions of dollars)
1987 estimate

1988 estimate

3,940

3,594

4,429

5,114
648
1,428

76
703
1,660

646
1,074

7,191

2,439

1,720

1,188
957
1,064
492
308
1,376
1,086
805

1,223
1,078
1,149
437
321
7,623
1,201
952

1,300
1,166
809
442
221
459
1,405
927

7,277

13,983

6,729

2,152
561
117

2,525
624
269

2,658
727
312

6,405

7,837

8,653

13,682

21,820

15,382

190,166
-26,570
-4,329
-23,298

191,749
-28,685
-5,084
-20,520

198,394
-31,608
-6,594
-21,159

135,969

137,461

139,032

1,451
1,418
3,649
366

3,961
1,685
3,799
1,187

3,965
1,863
4,304
643

6,884

10,633

10,775

5,433
-3,112

4,555
-2,801

4,679
-2,136

2,321

1,753

2,543

649,108

686,217

698,827

-25,434
-2,857

-28,013
-3,275

-32,128
-5,484

1986 actual

Subtotal, repair, maintenance and operation of physical
assets
General purpose fiscal assistance:
General revenue sharing
Other general purpose grants-in-aid
Shared revenues
Subtotal, general purpose fiscal assistance
Regulation, control and law enforcement:
Regulatory and inspection activities:
Natural resources and environment
Transportation
Health
Energy
Agriculture
Deposit insurance institutions
Tax collection
Other
Subtotal, regulatory and inspection activities
Law enforcement activities:
Federal litigative and judicial
Federal correctional activities
Other law enforcement assistance
Subtotal, law enforcement activities
Subtotal, regulation, control and law enforcement
Net interest:
Interest on the public debt
Interest received by on-budget trust funds
Interest received by off-budget trust funds
Other interest
Subtotal, net interest
General Administration:
International affairs
Legislative branch
Other general government
Other
Subtotal, general administration
Other current programs:
International security assistance
Other,
Subtotal, other current programs
Subtotal, current programs
Unclassified:
Employer share, employee retirement:
On-budget
Off-budget

B-15

SPECIAL ANALYSIS B

Table D-7. DETAIL OF FEDERAL INVESTMENT AND OPERATING OUTLAYS BY DEFENSE—
NONDEFENSE—Continued
(In millions of dollars)
1987 estimate

1988 estimate

-28,291

-31,288

-37,612

-10,363
2,111

-12,251
2,746

-19,617
2,849

-41,260

-44,696

-58,066

716,440

733,326

726,777

989,815
(806,318)
(183,498)

1,015,572
(821,074)
(194,498)

1,024,328
(821,900)
(202,427)

1986 actual

Subtotal, employer share, employee retirement
Other unclassified:
On-budget
Off-budget
Subtotal, Unclassified
Total, civil
Outlay total
On-budget
Off-budget.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table D-8. DETAIL OF FEDERAL INVESTMENT AND OPERATING OUTLAYS BY GRANTS-IN-AID AND
DIRECT FEDERAL PROGRAMS
(In millions of dollars)
1986 actual

1987 estimate

1988 estimate

Grants-in-aid
Investment-type programs:
Construction, rehabilitation, and acquisition of physical assets:
Highways
Mass transportation
Rail transportation
Air transportation
Pollution control and abatement
Other natural resources and environment
Community development block grants
Urban development action grants
Other community and regional development
Other construction

13,939
2,729
18
853
3,158
248
3,326
461
744
366

12,418
3,208
42
889
2,675
166
3,292
428
833
456

12,629
2,512
12
950
2,462
106
3,047
355
605
305

Subtotal, construction and rehabilitation of physical
assets

25,843

24,408

22,984

Equipment and other physical assets

418

463

438

Conduct of research and development

319

313

330

3,019
7,386
2,152

2,885
6,844
2,267

3,209
7,148
1,935

12,556

11,996

12,292

Conduct of education and training:
Employment and training assistance
Elementary and secondary education
Other
Subtotal, conduct of education and training
Collection of information

Subtotal, investment-type programs
Current programs:
Provision of benefits:
Medicaid
Nutrition and food programs
Family support payments to States
Other assistance payments
Housing payments and related activities
Other
Subtotal, provision of benefits
Administrative expenses of benefit programs:
Unemployment compensation
Medicaid
Nutrition and food programs
Assistance payments
Other administrative expenses
Subtotal, administrative expenses of benefit programs
Social service and related programs:
Employment programs
Human development services
Social service and child welfare services
Other

39,136

37,180

36,045

23,606
7,662
8,236
2,326
6,438
1,110

25,259
8,205
8,836
2,128
6,289
1,131

25,692
7,594
8,001
1,520
6,709
1,121

49,378

51,847

50,637

1,570
1,389
1,375
1,640
4

1,599
1,441
1,561
1,770
2

1,700
1,172
1,498
1,774
3

5,978

6,373

6,148

1,255
1,792
3,461
2,019

1,095
1,875
3,564
3,098

926
2,158
3,457
3,019

B-15

SPECIAL ANALYSIS B

Table D-8. DETAIL OF FEDERAL INVESTMENT AND OPERATING OUTLAYS BY GRANTS-IN-AID AND
DIRECT FEDERAL PROGRAMS—Continued
(In millions of dollars)
1986 actual

1987 estimate

1988 estimate

Subtotal, social service and related programs

8,526

9,632

9,559

Aids to agriculture, commerce, and transportation.Transportation
Other

758
2

886
8

996
1

759

894

997

Subtotal, aids to agriculture, commerce, and transportation
Repair, maintenance, and operation of physical assets
General purpose fiscal assistance-.
General revenue sharing
Shared revenues
Other

554

469

239

5,114
1,428
721

76
1,660
773

1,074
707

Subtotal, general purpose fiscal assistance

7,263

2,509

1,781

81
463

175
597

233
550

545

772

783

218

203

73,222

72,699

70,234

112,357

109,879

106,278

4,601
483
12,600
128
437
1,151
-324
1,061
40
-35
138

2,691
1,909
4,748
-135
-2,243
609
-606
-155
148
-37
-1,062

2,359
749
3,852
-665
-2,009
-104
-438
-552
61
-39
-1,349

20,282

5,868

1,865

223

-708

166

20,504

5,160

2,031

6,625
1,963
971
2,288
435
733
786

6,403
2,357
1,067
2,858
428
794
913

6,610
2,609
1,206
2,107
349
111
1,045

Regulation, control, and law enforcement:
Law enforcement assistance
Other
Subtotal, regulation, control, and law enforcement
Other current programs
Subtotal, current programs
Total, grants-in-aid
Direct Federal programs
Investment-type programs:
Loans and financial investments:
Loans:
International affairs
Energy supply
Agriculture
Commerce and housing credit
Mortgage credit and deposit insurance
Transportation
SBA disaster loan fund
Education
Veterans
Low-rent public housing
Other
Subtotal, loans
Financial investments
Subtotal, loans and financial investments
Construction and rehabilitation of physical assets:
National defense
Water resource projects
Other natural resources and environment
Energy
Transportation
Veterans hospitals and other health facilities
Postal service

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table D-8. DETAIL OF FEDERAL INVESTMENT AND OPERATING OUTLAYS BY GRANTS-IN-AID AND
DIRECT FEDERAL PROGRAMS—Continued
(In millions of dollars)
1987 estimate

1988 estimate

774

778

920

14,575

15,597

15,624

76,983
1,050
146
2,118

83,317
1,292
181
2,245

83,320
1,985
172
2,270

80,298

87,036

87,747

1,055
411
4,129
-185

1,066
428
685
-30

1,224
260
2,531
-149

Subtotal, commodity inventories

5,409

2,149

3,866

Other physical assets
Conduct of research and development

2,629
51,822

2,381
54,785

1
59,157

951
7,246
356
634
978
1,001

843
7,551
571
661
911
1,091

763
6,074
486
693
828
1,079

11,166

11,628

9,923

1,764
2,178

1,892
2,542

1,992
2,432

190,345

183,170

182,772

174,906
81,896
74,033
8,040
1,178
16,263
10,747
7,241
9,315
1,415
3,058

182,718
84,783
76,225
8,365
1,230
16,564
10,855
7,282
9,863
1,491
4,451

193,291
89,044
81,076
8,808
1,250
16,218
10,683
7,641
11,210
2,910
2,939

388,091

403,826

425,070

2,207
1,718

2,391
1,765

2,508
661

1986 actual

Other construction
Subtotal, construction and rehabilitation of physical
assets
Acquisition of major equipment:
National defense
NASA
Postal service
Other
Subtotal, acquisition of major equipment
Commodity inventories:
Atomic energy defense activities
Strategic petroleum reserve
Commodity credit corporation
Other commodity inventories

Conduct of education and training:
Assistance to veterans
Higher education
Elementary and secondary education
Employment and training assistance
Health training
Other
Subtotal, conduct of education and training
Collection of information
International development
Subtotal, investment-type programs
Current programs:
Provision of benefits:
Social security retirement and disability (off-budget)
Other retirement and disability benefits
Medicare
Medical care for veterans
Other health
Unemployment compensation
Food and nutrition programs
Housing payments and related activities
Supplemental security income
Earned income tax credit
Other
Subtotal, provision of benefits
Administrative expenses of benefit programs:
Social security retirement and disability (off-budget)
Medicare

SPECIAL ANALYSIS B

B-15

Table D-8. DETAIL OF FEDERAL INVESTMENT AND OPERATING OUTLAYS BY GRANTS-IN-AID AND
DIRECT FEDERAL PROGRAMS—Continued
(In millions of dollars)
1986 actual

1987 estimate

Unemployment compensation, assistance payments and
other

3,159

3,355

Subtotal, administrative expenses of benefit programs-

7,085

7,511

1,089

917

11,853
-182
699
-434
730
2,534
1,866
1,250

22,614
671
-371
635
2,525
2,163
-1,416

18,316

27,643

79,735
3,385

81,053
3,130

83,120

84,183

13,137

21,048

140,298
-4,329

142,544
-5,084

135,969

137,461

70,401

69,642

2,458

3*06*5

Social service and related programs
Aids to agriculture, commerce, and transportation:
Agriculture
Postal service
Small business assistance
Mortgage credit and deposit insurance
Ground transportation
Air transportation
Water transportation and waterways
Other
Subtotal, aids to agriculture, commerce, & transportation.,
Repair, maintenance, and operation of physical assets.National defense
Other (includes offsetting collections)
Subtotal, repair, maintenance, and operation of physical
assets
Regulation, control, and law enforcementNet interest:
On-budget
Off-budget
Subtotal, net interest..
Other current programs-.
Military personnel
Allowance for Department of Defense pay raises..
Other national defense
Allowance for civilian agency pay raises
Other

822

8,988

12,183

81,846

84,891

728,653

767,480

-25,434
-2,857

-28,013
-3,275

Subtotal, employer share, employee retirement.

-28,291

-31,288

Rents and royalties on the Outer Continental Shelf....
Other unclassified:
On-budget
Off-budget

-4,716

-3,903

-10,644

2,111

-12,511
2,746

Subtotal, other unclassified

-8,533

-9,765

Subtotal, unclassified

-41,541

-44,956

Subtotal, other current programsSubtotal, current programs
Unclassified:
Employer share, employee retirement:
On-budget
Off-budget

• THE BUDGET FOR FISCAL YEAR 1988

C-14

Table D-8. DETAIL OF FEDERAL INVESTMENT AND OPERATING OUTLAYS BY GRANTS-IN-AID AND
DIRECT FEDERAL PROGRAMS—Continued
(In millions of dollars)
1987 estimate

1988 estimate

877,458

905,693

918,049

989,815
(806,318)
(183,498)

1,015,572
(821,074)
(194,498)

1,024,328
(821,900)
(202,427)

1986 actual

Total, direct Federal programs
Outlay total
On-budget
Off-budget

SPECIAL ANALYSIS E
BORROWING AND DEBT
The major fiscal operations of the Federal Government include
not only taxation and expenditure but also:
• borrowing cash to meet outlays not covered by receipts and to
refinance maturing debt;
• investing balances that trust funds and other Government
accounts do not currently need for outlays; and
• providing guarantees and other types of assistance to certain
borrowing by the public.
This analysis summarizes current developments in Federal borrowing. It also discusses the size and growth of the Federal debt
and the interest on the Federal debt, the amount of U.S. Government debt held by foreign residents, agency borrowing, investment
in Federal securities by Government accounts, the statutory debt
limitation, Government-guaranteed borrowing, and borrowing by
Government-sponsored enterprises. The analysis concludes with a
brief discussion of the trend in Federal and federally assisted borrowing and the relationship of this trend to the total borrowing by
the nonfinancial sector of the economy. Excluded from this analysis are other types of Federal liabilities, which include accounts
payable, obligations for undelivered orders, long-term contracts,
insurance commitments, and the obligation for such future payments as social security and employee retirement.1 Supplementary
data on debt since 1940 are published in a separate volume, Historical Tables, Budget of the United States Government, Fiscal Year
1988.
The data for borrowing and debt in 1985 and 1986 have been
revised in several ways from the figures previously published in
the budget documents and by the Treasury. A separate section of
this special analysis on pages E-24 to E-30 discusses these revisions and a change in concept for certain transactions that takes
effect in 1987.
Special Analysis F, "Federal Credit Programs," examines the
related subject of Federal credit programs, which provide direct
loans, loan guarantees, and loans by Government-sponsored enter1 Data on many of these liabilities are contained in "Statement of Liabilities and Other Financial Commitments of the United States Government," an annual report prepared by the Financial Management Service of
the Department of the Treasury and published in the Treasury Bulletin. The 1985 data were published in the
winter (1st quarter) issue, 1986, pp. 196-207.

E-1

C-14

•

THE BUDGET FOR FISCAL YEAR 1988

prises. The factors discussed in both Special Analyses E and F are
significant in appraising the impact on financial markets and the
economy of the programs contained in the 1988 Federal budget.
BORROWING AND REPAYING DEBT

The Federal Government issues debt for two principal reasons.
First, it issues debt to the public, largely in order to finance the
Federal deficit. Second, it issues debt to Government accounts,
primarily trust funds, that accumulate surpluses required by law
to be invested in Federal securities. Nearly all of the Federal debt
has been issued by the Treasury and is called "public debt," but a
small portion has been issued by other Government agencies and is
called "agency debt." 2
Borrowing from the public—whether by the Treasury or by an
agency—has a significant impact on financial markets and the rest
of the economy, and is consequently an important concern of Federal fiscal policy. Borrowing from the public includes borrowing
from the Federal Reserve Banks as well as borrowing from commercial banks, foreign central banks, other financial institutions
and businesses, and individuals. The term "borrowing from the
Federal Reserve Banks" does not mean that the Treasury sells debt
securities directly to the Federal Reserve. In fact, the Federal
Reserve now buys securities only in the open market. The previous
authority for the Federal Reserve to buy limited amounts of securities directly from the Treasury under exceptional circumstances
expired in 1981.
For most purposes borrowing from the Federal Reserve Banks
should be distinguished from borrowing from the rest of the public.
Federal Reserve purchases of debt are undertaken to carry out
monetary policy, not to earn income, and affect the economy by
expanding bank reserves and the money stock. They thus have a
markedly different motivation and effect on financial markets than
do purchases by other sectors of the public. The debt held outside
the Federal Reserve Banks enters into investment portfolios of
businesses and individuals and by this means affects interest rates,
other financial conditions, and the size and composition of private
assets. Almost all interest received by the Federal Reserve Banks is
returned to the Treasury as receipts, called deposits of earnings, so
the Federal Reserve holdings of debt have only a small direct effect
on the budget surplus or deficit. The estimates in this analysis for
the current and future years do not divide the debt held by the
public between the Federal Reserve Banks and the rest of the
public, despite the significance of this distinction, because the Fed2 The term "agency debt" is defined more narrowly in the budget than in the securities market, where it may
include not only the debt of the Government agencies listed in table E-7 but also certain Governmentguaranteed securities and the debt of the Government-sponsored enterprises listed in table E-12.

B-15

SPECIAL ANALYSIS B

eral Reserve's open market operations depend on future economic
developments and on policy decisions not yet made.
Table E - l summarizes Federal borrowing from 1986 through
1992. In 1986, the total Federal borrowing (net of the refunding of
securities that matured)—i.e., the rise in gross Federal debt—was
$305.7 billion. The issue of debt to Government accounts was $69.4
billion, and the sale of debt to the public was $236.3 billion. The
Federal Reserve Banks increased their holdings of Federal debt by
$21.0 billion, so the increase in debt held by the rest of the public
was $215.2 billion. As a result of this borrowing, Federal debt held
by the public increased to $1,746.1 billion at the end of 1986. Gross
Federal debt was $2,132.9 billion. As noted previously, these data
reflect revisions beginning in 1985 that are discussed in a later
section of the special analysis.
Table E - l . FEDERAL BORROWING
(In billions of dollars)
Debt outstanding, end
Ul ) Cdl

Borrowing or repayment ( — ) of debt
Description

Gross Federal debt:
Treasury debt
Agency debt
Gross Federal debt
Less debt held by Gov.
accounts:
Treasury debt
Agency debt

1992
estimate

1986
actual

1987
estimate

1988
estimate

1989
estimate

1990
estimate

1991
estimate

305.3
0.4

236.5
3.1

215.7
-2.6

212.8
-1.5

195.9
-1.5

171.3

147.3 2,580.3 3,307.7
2.2
5.1
-0.1

305.7

239.5

213.0

211.4

194.4

171.3

147.3 2,585.5 3,309.8

69.4

77.3
-0.1

107.2
-0.9

NA
NA

570.3
0.1

NA
NA

150.4

160.0

570.4

1,135.2

_ *

Debt held by Gov.
accounts 1

69.4

77.3

106.3

119.0

135.4

Total, debt held by
public

236.3

162.2

106.7

92.3

59.1

Composed of:
Debt held by the Federal
Reserve Banks
Debt held by others

21.0
215.2

NA
NA

20.9 - 1 2 . 7

NA
NA

1988
estimate

1992
estimate

2,015.1 2,174.7

NA
NA

* $50 million or less.
1 Investment by Government accounts during 1989-92 is estimated as equal to the total trust fund surplus.
NA=Not available.

Borrowing from the public has usually fluctuated widely in the
past in response to fluctuations in the economy. Recently, from
1981 to 1983, it increased substantially from $79.3 billion to $212.3
billion. This was due to both the temporary effects of recession and
disinflation and a more lasting, structural imbalance between receipts and outlays. In the past three years the recovery has helped
to restrain the growth of borrowing, but the level of borrowing has
not diminished.

180-700 O - 87 - 5 QL 3

C-14

• THE BUDGET FOR FISCAL YEAR 1988

The decline in real gross national product (GNP) during the
recession of 1981-82 reduced money incomes, which decreased
income and social security tax receipts almost immediately; the
associated rise in unemployment raised outlays for unemployment
compensation and certain other programs. The decrease in the rate
of inflation, which was unusually sharp, reduced both receipts and
outlays, but receipts fell more quickly. Tax collections fell almost
immediately below what they otherwise would have been, because
the lower inflation reduced the money incomes on which most
taxes are based. In contrast, for example, cost-of-living adjustments
to benefit programs occur at fixed intervals and are not made until
some months after the price changes that determine them; and
lower interest rates in response to lower inflation do not reduce
interest outlays on existing debt securities. Therefore, the lower
real GNP and the disinflation both widened the Federal deficit.
These effects are an example of the sensitivity of the budget to
economic conditions, which is discussed in Part 3a of the Budget—
Supplement.
With strong economic recovery starting in early 1983 and with a
more stable rate of inflation, these factors ceased to widen the
Federal deficit and borrowing. Instead, the rapid expansion of real
GNP and the sharp decline in the unemployment rate increased
receipts, reduced outlays, and thus decreased the Federal deficit
and borrowing from what they would otherwise have been. However, the effects of the still remaining unemployed resources continue to keep the deficit and borrowing at greater levels than they
would be at high employment.
The present large deficit and borrowing are also due to causes
that do not go away during the forecast period, even with the
steady and strong economic expansion assumed in this budget.
Although the estimated total unemployment rate falls to 5.5% by
1992, a deficit of $77.9 billion nevertheless remains under these
conditions of high employment unless policy actions are taken to
diminish it. The effect is shown in table E-2 by the estimated
borrowing from the public based on the current services estimates
of the deficit. The current services estimates of the budget, as
explained in Special Analysis A, "Current Services Estimates/'
show the receipts, outlays, and deficit that would be realized under
existing policies with regard to spending programs and taxes (and
under the same economic assumptions as used for the budget). As
shown in table E-2, they imply large continued borrowing through
1992, though with a significant downward trend, despite the assumption of continual improvement in economic conditions.
In contrast, the policies proposed in this budget are estimated to
eliminate the deficit and borrowing from the public. As shown in
tables E - l and E-2, borrowing from the public under these policies

B-15

SPECIAL ANALYSIS B

Table E-2. COMPARISON OF CURRENT SERVICES AND POLICY ESTIMATES OF BORROWING AND DEBT
(Dollar amounts in billions)
Description

Borrowing from the public:
Current services
Policy
Debt held by the public:
Current services
Policy
Debt held by the public as percentage of GNP:
Current services
Policy

1987
estimate

1988
estimate

1989
estimate

163.6
162.2

149.1
106.7

146.5
92.3

1990
estimate

125.3
59.1

1991
estimate

1992
estimate

100.7
77.9
20.9 - 1 2 . 7

1,909.7 2,058.8 2,205.3 2,330.6 2,431.4 2,509.2
1,908.4 2,015.1 2,107.5 2,166.5 2,187.4 2,174.7
43.2
43.2

43.5
42.6

43.4
41.5

42.9
39.9

42.0
37.8

40.9
35.5

is estimated to decrease steadily from its 1986 level of $236.3 billion, falling to $106.7 billion in 1988 and turning into a $12.7 billion
repayment of debt in 1992. As a result, the debt held by the public
under the policies proposed by the Administration is $2,174.7 billion in 1992, which is $334.5 billion less (or 13.3% less) than the
debt under the current services estimates. The economic assumptions behind these estimates are presented and discussed in Part 2
of the Budget and in Part 3a of the Budget—Supplement.
BORROWING AND GOVERNMENT DEFICITS

Table E-3 shows the relationship between borrowing from the
public and the Federal deficit. The total deficit of the Federal
Government includes not only the budget deficit but also the surplus or deficit of the off-budget Federal entities, which have been
excluded from the budget by law. Under present law the off-budget
Federal entities are the old-age and survivors insurance trust fund
and the disability insurance trust fund. 3 Since they had a combined surplus in 1986 and are estimated to continue having surpluses during 1987-92, they currently reduce the requirements for
Treasury to borrow from the public.
The total Federal deficit is financed either by borrowing from the
public or by several other means. The other means of financing
are:
• a decrease in Treasury's operating cash balance;
• an increase in monetary liabilities for checks outstanding,
accrued interest payable on debt held by the public, etc.;
• an increase in deposit fund balances, which are discussed on
pages E-22 to E-24, together with their effect on the means of
financing; and
• seigniorage, which is the face value of minted coins less the
cost of their production.
3

Off-budget Federal entities are discussed in the Budget—Supplement, Fiscal Year 1988, Part 6a.

C-14

• THE BUDGET FOR FISCAL YEAR 1988
Table E-3. MEANS OF FINANCING THE DEFICIT 1
(In millions of dollars)

Description

Surplus or deficit ( - )

On-budget
Oft-budget2
Means of financing other
than borrowing from
the public:
Decrease or increase
( - ) in Treasury
operating cash
balance
Increase or decrease
( - ) in:
Checks outstanding,
etc.3
Deposit fund
balances4
Seigniorage on coins

1986 actual

1987 estimate

1988 estimate

1989 estimate

-220,725 -173,182 -107,756

-92,766

1990 estimate

1991
estimate

-59,501 -21,290

1992
estimate

12,267

-237,455 -192,702 -147,427 -144,491 -123,755 -95,701 -69,114
16,731
39,671
51,726
19,520
64,254 74,411 81,380

-14,324

11,384

1,854

1,889

1,769

-3,481
392

-2,769
430

-1,167
433

419

431

440

-15,559

10,934

1,035

419

431

440

Total,
requirements
for borrowing
from the public. -236,284 -162,248 -106,721

-92,347

-59,070 -20,859

12,707

Total, means of
financing other
than borrowing
from the public.

Change in debt
held by the
public

236,284

162,248

106,721

92,347

59,070

20,859 -12,707

Several amounts have been assumed to be zero during 1988-92 because they are usually small and cannot be estimated accurately.
The off-budget Federal entities consist of the old-age and survivors insurance trust fund and the disability insurance trust fund.
Besides checks outstanding, includes accrual of interest payable on Treasury debt, miscellaneous liability accounts, allocations of special
drawing rights, and, as an offset, cash and monetary assets other than the Treasury operating cash balance, miscellaneous asset accounts, profit
on sale of gold, and a technical error in recording FDIC outlays in 1986.
4 Does not include investment in Federal debt by deposit funds classified as part of the public.
1

All of these other means of financing except seigniorage are
changes in the Government's balance sheet—either its asset or its
liability accounts—and so may be either positive or negative. In
most years they add up to a positive total amount, in which case
they finance part of the deficit. Sometimes, however, they add up
to a negative total amount, in which case they, like the deficit,
must themselves be financed by borrowing from the public. In
1986, the Government borrowed $236.3 billion from the public.
Most of this amount, $220.7 billion, was used to finance the Government deficit. The remaining $15.6 billion was used to finance
the "other means of financing," which had a negative total
amount.
The other means of financing are normally small relative to
borrowing from the public. This is because they are limited by

B-15

SPECIAL ANALYSIS B

their own nature. Decreases in cash balances, for example, are
necessarily limited by past accumulations, which themselves required financing when they were built up. Thus, the extent to
which means other than borrowing can finance a deficit are limited in any single year and are still more limited over a longer
period of time. When the total Government deficit is sizable, it is
necessarily the principal determinant of borrowing from the public.
Nevertheless, as a whole, these other accounts did require a
significant amount of borrowing from the public in 1986 in order to
be financed. This was due mostly to the large increase in Treasury's operating cash balance. Because the $31.4 billion cash balance on September 30, 1986, was more than the $20 billion needed
for normal operations at that time of year, Treasury estimates an
$11.4 billion decrease in cash balance during 1987. Since a decrease
in cash balance is a means of financing the Government, this will
allow borrowing in 1987 to be appreciably less than the size of the
deficit rather than being appreciably more. As a result, the estimated borrowing from the public is $74.0 billion less in 1987 than
in 1986, whereas the estimated deficit is $47.5 billion less.
The structure of table E-3 demonstrates that the off-budget Federal entities affect borrowing from the public in exactly the same
way as the on-budget entities. Thus, balancing the budget as defined under current law is not enough to prevent an increase in
the Federal debt held by the public, if the off-budget entities have a
deficit. Likewise, a budget deficit does not require borrowing from
the public so long as the off-budget Federal entities have a surplus
that is as large as the budget deficit or larger. The outlays of the
entire Government must be in balance with receipts in order for
the Government not to have to borrow from the public, regardless
of whether particular Federal entities are defined as being included
in the budget totals (aside from the relatively small effect of the
other means of financing).
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 own over nine-tenths of the total Federal
debt held by Government accounts. Investment by these accounts
in Federal securities and the total trust fund surplus during 198588 are compared in the table below (in billions of dollars):
1985
actual

Investment by Government accounts in Federal debt
Total trust fund surplus

53.2
54.4

1986
actual

69.4
62.3

1987
estimate

77.3
69.8

1988
1988
estimate
estimate

106.3
103.7

Investment in Federal securities by Government accounts is
roughly similar in size to the total trust fund surplus throughout
this period. This relationship has historically been close, with the

C-14

• THE BUDGET FOR FISCAL YEAR 1988

small differences accounted for by two factors. Certain accounts
other than trust funds buy or sell Federal debt, as shown in table
E-8, and the trust funds may change the amount of their cash
assets not currently invested in debt.4
SIZE AND GROWTH OF FEDERAL DEBT

Gross Federal debt has risen substantially over the past half
century, from $16.9 billion in 1929 to $2,132.9 billion at the end of
1986. Table E-4 compares the trends since 1955 in gross Federal
debt and the amounts of debt held by Government accounts, the
public (including the Federal Reserve Banks), and the Federal Reserve Banks. During this period the gross Federal debt increased by
nearly eight times, and the amount of debt held in Federal Government accounts (primarily trust funds) rose by a similar proportion.
The average annual growth rates of gross Federal debt, debt held
by the public, and debt held by the public apart from the Federal
Reserve Banks were all about the same: around 6.8%. In the latter
part of the period, the growth of debt accelerated. Whereas the
debt held by the public increased at an average annual rate of
2.8% from 1955 to 1975, it grew at a rate of 11.9% from 1975 to
1980 and at a rate of 16.0% from 1980 to 1986.

4 These "open book balances" are very small relative to trust fund holdings of Federal debt, as shown in
Special Analysis C, "Funds in the Budget."

B-15

SPECIAL ANALYSIS B
Table E-4. TRENDS IN FEDERAL DEBT 1
(Dollar amounts in billions)
Debt outstanding, end of year
Held by
Fiscal year

Gross
Federal
debt

Federal
Government
accounts

The public
Total

Federal
Reserve
Banks

GNP
Other

Debt held
by public
as
percent of
GNP

1955
1956
1957
1958
1959

274.4
272.8
272.4
279.7
287.8

47.8
50.5
52.9
53.3
52.8

226.6
222.2
219.4
226.4
235.0

23.6
23.8
23.0
25.4
26.0

203.0
198.5
196.4
200.9
209.0

386.4
418.1
440.5
450.2
481.5

58.6
53.2
49.8
50.3
48.8

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969 2

290.9
292.9
303.3
310.8
316.8
323.2
329.5
341.3
369.8
367.1

53.7
54.3
54.9
56.3
59.2
61.5
64.8
73.8
79.1
87.7

237.2
238.6
248.4
254.5
257.6
261.6
264.7
267.5
290.6
279.5

26.5
27.3
29.7
32.0
34.8
39.1
42.2
46.7
52.2
54.1

210.7
211.4
218.7
222.4
222.8
222.5
222.5
220.8
238.4
225.4

506.7
518.2
557.7
587.8
629.2
672.6
739.0
794.6
849.4
929.5

46.8
46.0
44.5
43.3
40.9
38.9
35.8
33.7
34.2
30.1

1970 3
1971
1972
1973 4
1974
1975
1976 5
TQ
1977
1978
1979

382.6
409.5
437.3
468.4
486.2
544.1
631.9
646.4
709.1
780.4
833.8

97.7
105.1
113.6
125.4
140.2
147.2
151.6
148.1
157.3
169.5
189.2

284.9
304.3
323.8
343.0
346.1
396.9
480.3
498.3
551.8
610.9
644.6

57.7
65.5
71.4
75.2
80.6
85.0
94.7
96.7
105.0
115.5
115.6

227.2
238.8
252.3
267.9
265.4
311.9
385.6
401.6
446.8
495.5
529.0

990.2
1,055.9
1,153.1
1,281.4
1,416.5
1,522.5
1,698.2
1,794.7
1,933.0
2,171.8
2,447.8

28.8
28.8
28.1
26.8
24.4
26.1
28.3
27.8
28.5
28.1
26.3

1980
1981
1982
1983
1984
1985 6
1986
1987 estimate
1988 estimate
1989 estimate

914.3
1,003.9
1,147.0
1,381.9
1,576.7
1,827.2
2,132.9
2,372.4
2,585.5
2,796.9

199.2
209.5
217.6
240.1
264.2
317.4
386.8
464.0
570.4
689.4

715.1
794.4
929.4
1,141.8
1,312.6
1,509.9
1,746.1
1,908.4
2,015.1
2,107.5

120.8
594.3 2,670.6
124.5
670.0 2,986.4
134.5
794.9 3,139.1
986.2 3,321.9
155.5
155.1 1,157.5 3,686.8
169.8 1,340.1 3,937.2
190.9 1,555.3 4,163.3
NA 4,418.9
NA
NA
NA 4,731.2
NA
NA 5,076.0

26.8
26.6
29.6
34.4
35.6
38.4
41.9
43.2
42.6
41.5

1990 estimate
1991 estimate
1992 estimate

2,991.3
3,162.6
3,309.8

824.8 2,166.5
975.2 2,187.4
1,135.2 2,174.7

NA
NA
NA

NA 5,434.2
NA 5,789.9
NA 6,133.3

39.9
37.8
35.5

1 Data from 1940 to 1992 in millions of dollars are published in Historical Tables, Budget of the United States Government, Fiscal Year 1988,
section 7. Earlier historical data are presented on a different basis in Statistical Appendix to Annual Report of the Secretary of the Treasury on
the State of the Finances, Fiscal Year 1980, table 19.
2 During 1969, 3 Government-sponsored enterprises became completely privately owned, and their debt was removed from the totals for the
Federal Government. At the dates of their conversion, gross Federal debt was reduced $10.7 billion, debt held by Government accounts was
reduced $0.6 billion, and debt held by the public was reduced $10.1 billion.
3 Gross Federal debt and debt held by the public increased $1.6 billion due to a reclassification of the Commodity Credit Corporation certificates
of interest from loan assets to debt.
4 A procedural change in the recording of trust fund holdings of Treasury debt at the end of the month increased gross Federal debt and debt
held in Government accounts by about $4.5 billion.
5 Gross Federal debt and debt held by the public increased $0.5 billion due to a retroactive reclassification of the Export-Import Bank
certificates of beneficial interest from loan assets to debt.
6 Gross Federal debt and debt held by Government accounts decreased $0.3 billion due to a retroactive requantification of certain trust fund
investments.
NA=Not available.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

During the depression of the 1930's and during World War II,
Federal debt held by the public increased greatly, not only in
absolute amount but also, as shown in the chart below, as a proportion of the total credit market debt owed by nonfinancial sectors of
the economy: Federal, State and local, and private.5 Whereas Federal debt held by the public was only 13% of total debt at the end
of calendar year 1929, it had risen to 69% by the end of calendar
year 1945. Federal borrowing was large during these years, especially to finance World War II, and borrowing by other sectors was
restricted by low incomes and poor credit-worthiness during the
depression and by controls and scarcities during the war.

Percentage Distribution of Debt*
Percent

Percent

End of Year
•Federal Debt ts Debt Held by the Public (Including the Federal Reserve Banks)

From 1945 to 1974, however, in every single year but one, private
debt increased as a proportion of total credit market debt and
Federal debt held by the public decreased as a proportion. During
this period the average annual rate of growth was 1.1% for Federal
debt held by the public, 10.0% for State and local debt, and 9.7%
for private credit market debt. By 1974, Federal debt held by the
5 The estimates for 1946 to the present are from the Federal Reserve Board flow-of-funds accounts; the
estimates for earlier years are from the Bureau of Economic Analysis of the Department of Commerce and are
linked to the flow-of-funds estimates on the basis of their respective 1946 levels. The data are for calendar years
during 1929-51 and for fiscal years thereafter. The private sector debt includes debt of foreigners incurred in
U.S. credit markets.

SPECIAL ANALYSIS B

B-15

public had declined to 16.7% of total credit market debt, and
private debt had risen to 73.5% of the total. As a result of these
trends, Federal debt, though still important, became a relatively
much smaller part of the financial markets than it had been at the
end of World War II.
This trend ended in 1975. A recession caused large Federal deficits in 1975 and 1976, and as a result the Federal debt held by the
public rose as a percentage of total credit market debt in both
years. After a brief decline and a short period of stability, Federal
debt held by the public increased year-by-year from 17.9% of credit
market debt in 1980 to 22.9% in 1986. This is the highest percentage since 1968. The counterpart to a higher proportion of Federal
debt in the last six years has been a lower proportion of private
debt.
During the same period following World War II, Federal debt
decreased relative to GNP. Debt held by the public was 110.7% of
GNP at the end of 1945 but, as shown in table E-4, declined to
58.6% of GNP by the end of 1955 and 24.4% by the end of 1974.
For several years thereafter debt held by the public fluctuated as a
percentage of GNP in about the same way as it fluctuated as a
percentage of total credit market debt. In 1982, however, debt held
by the public rose sharply from 26.6% of GNP to 29.6%, and by
1986 it had risen to 41.9%. This percentage is higher than in any
other year since 1963.
Federal borrowing is estimated to remain large in 1987, despite a
sharp decline, and then to decrease by further significant amounts
in 1988 and later years. As a result, debt held by the public is
estimated to rise further to 43.2% of GNP in 1987 before decreasing to 42.6% of GNP in 1988 and then steadily declining to 35.5%
in 1992. This decline could not occur, however, without policy
measures to cut the deficit greatly. Under the current services
estimates for the budget, as shown in table E-2, Federal borrowing
from the public would be much larger. Debt held by the public as a
percentage of GNP would rise to 43.5% of GNP in 1988 and then
decline only moderately in the following years.
The interest cost of the debt is more significant than the amount
of the debt for some types of comparison designed to measure the
importance of Federal indebtedness. Interest payments on the debt
must be financed by either higher taxes or more borrowing, and
more borrowing raises still further the debt and therefore the
amount of interest that must be paid in the future. The interest on
the debt held by the public has generally risen much faster than
the debt itself, due to a strong upward trend for most of the period
since World War II in the interest rates that must be paid on new
borrowings and on refunded debt. The interest rate on 91-day
Treasury bills, for example, averaged 2.0% in the 1950's, 4.0% in

C-14

• THE BUDGET FOR FISCAL YEAR 1988

the 1960's, and 6.3% in the 1970's. It then averaged 12.1% in
calendar years 1980-82 before falling to 7.5% in 1985 and 6.0% in
1986. Consequently, whereas the Federal debt held by the public
increased by nearly eight times between 1955 and 1986, table E-5
shows that the interest paid on this debt increased by thirty times.
Table E-5. TRENDS IN INTEREST ON FEDERAL DEBT
(Dollar amounts in billions)
Interest on the gross Federal debt

Interest on debt
held by the public
as a percent of

Paid to
Fiscal year
Total 1

Federal
Government
accounts

The public
Total

Federal
Reserve
Banks 2

GNP
Other

Outlays 3

1955
1956
1957
1958
1959

6.4
6.8
7.3
7.8
7.8

1.2
1.3
1.4
1.4
1.4

5.2
5.6
5.9
6.3
6.4

4.8
5.1
5.3
5.6
5.6

1.34
1.33
1.35
1.41
1.33

7.56
7.90
7.73
7.68
6.96

1960
1961
1962
1963
1964
1965
1966
1967
1968
1969

9.5
9.3
9.5
10.3
11.0
11.8
12.6
14.2
15.6
17.6

1.5
1.5
1.6
1.6
1.8
2.0
2.1
2.6
3.0
3.5

8.1
7.8
7.9
8.7
9.2
9.8
10.4
11.6
12.6
14.1

1.0
1.0
1.0
1.1
1.2
1.4
1.7
2.0
2.4

7.1
6.8
6.9
7.6
8.0
8.4
8.7
9.6
10.2
11.2

1.59
1.50
1.42
1.47
1.47
1.46
1.41
1.47
1.49
1.52

8.73
7.96
7.40
7.78
7.80
8.29
7.75
7.39
7.09
7.70

1970
1971
1972
1973
1974
1975
1976
TQ
1977
1978
1979

20.0
21.6
22.5
24.8
30.0
33.5
37.7
8.3
42.6
49.3
60.3

4.4
5.3
5.8
6.3
7.7
8.8
9.0
.6
9.6
10.2
12.1

15.6
16.3
16.6
18.5
22.4
24.7
28.7
7.6
33.0
39.2
48.3

3.5
3.7
3.7
4.3
5.5
6.1
6.3
NA
6.8
8.0
9.6

12.2
12.6
12.9
14.2
16.9
18.6
22.5
NA
26.2
31.2
38.6

1.58
1.55
1.44
1.44
1.58
1.62
1.69
1.70
1.71
1.80
1.97

7.99
7.78
7.20
7.53
8.30
7.42
7.73
7.96
8.07
8.54
9.59

1980
1981
1982
1983
1984
1985
1986
1987 estimate
1988 estimate

75.2
96.0
117.5
128.9
154.1
179.4
191.5
193.7
200.0

14.8
17.1
19.9
21.3
25.2
31.2
36.2
38.9
42.8

60.4
78.9
97.7
107.7
129.0
148.2
155.4
154.8
157.2

12.5
13.4
15.4
15.3
16.3
16.8
18.1
NA
NA

47.9
65.5
82.4
92.3
112.7
131.4
137.3
NA
NA

2.26
2.64
3.11
3.24
3.50
3.76
3.73
3.50
3.32

10.22
11.63
13.10
13.32
15.14
15.66
15.70
15.24
15.35

1 Total interest on gross Federal debt is significantly larger than
interest function includes as deductions the interest paid to trust funds
2 These figures are approximate. They are estimated as the average
1986 estimate is preliminary.
3 Includes off-budget outlays.
Historical series of outlays are
NA=Not available.

the outlays for the net interest function in the budget, because the net
and Government collections of interest.
of calendar year amounts or as an adjustment to deposits of earnings. The

published in the Budget—Supplement,

Part 6c, tables 22 and

23.

SPECIAL ANALYSIS B

B-15

As a result, interest payments to the public have tended to grow
faster than GNP over this entire period, despite the decline of debt
as a percentage of GNP until the middle 1970's. In the latter half
of the 1950's, interest paid to the public was equal to about 1.4% of
GNP, whereas by 1970 it had risen to 1.6% and by 1980 to 2.3%. In
1985, interest paid on debt held by the public reached a peak of
3.8% of GNP, which was more than twice as high a proportion as
ten years earlier. This was due in very large part to the rapid
expansion of debt, which increased sharply the ratio of debt to
GNP. Interest as a percentage of GNP declined slightly to 3.7% in
1986 and is estimated to fall moderately more in 1987 and 1988,
despite large Federal borrowing, because of a decrease in market
interest rates.
Interest paid to the public as a percentage of total Federal outlays does not show the same sustained trend over the period as a
whole. From 1955 to the middle 1970's, interest averaged 7.7% of
total outlays and tended neither to increase nor to decrease. The
percentage of outlays paid in interest then began to increase, however, both steadily and substantially. It rose rapidly to 10.2% in
1980, 13.3% in 1983, and 15.7% in 1986, although it is estimated to
be a little lower in 1987 and 1988. The importance of interest on
the debt [relative to either GNP or Federal outlays is this much
more now than in earlier years, although it is estimated to be less
in 1987 and 1988 than it was in 1986. Under the current services
estimates of the budget, as defined on page E-4, it would be greater
than shown in this table for 1987 and 1988 because of the larger
debt.
Since the end of World War II the composition of the Federal
debt has changed. Until some years ago an increasingly large proportion of marketable securities had a short maturity. One contributing factor was the statutory ceiling of
that has been maintained since 1918 on the interest rate for Treasury bonds. Longterm market rates exceeded 4 V±% after 1965, so after that year the
ceiling prevented the Treasury from selling long-term obligations.
This restriction on Treasury borrowing has been relaxed in two
ways. One method has been to increase the maximum maturity of
notes, which are not subject to the interest rate ceiling. The maximum maturity was raised by law from 5 to 7 years in 1967 and to
10 years in 1976. As of December 31, 1986, the amount of notes
outstanding with an original maturity over 5 years was $435.3
billion, of which $274.2 billion had an original maturity over 7
years.
The other method of relaxing the restriction has been to allow
limited amounts of bonds to be sold at interest rates above the
ceiling. In 1971, the Treasury was allowed by law to issue up to $10
billion of bonds at interest rates above 4V4%. In 1973, the bonds

C-14

• THE BUDGET FOR FISCAL YEAR 1988

held by Government accounts and the Federal Reserve Banks were
exempted from the interest rate limit, and since 1976 the amount
of the exemption for other bonds has been raised in 10 steps. The
last increase to the exemption was from $150 to $250 billion, enacted in April 1986. As of December 31, 1986, $246.8 billion of the
bonds outstanding had been sold since the change of law in 1971,
whereas only $3.0 billion of bonds issued in earlier years were still
outstanding. The public exclusive of the Federal Reserve Banks
held $219.0 billion of the bonds issued since 1971. The effective
interest rate on bonds issued since 1971 has ranged from 6.1% to
15.8%.
Notwithstanding the initial relaxations of the interest rate ceiling, the average maturity of privately held, marketable Treasury
debt decreased steadily from about 5 years at the end of 1967 to
about 2V2 years at the end of 1975. Since then, however, as the
restriction has been relaxed further, the average maturity has
gradually lengthened to almost 5Vz years.
DEBT HELD BY FOREIGN RESIDENTS

During most of American history the debt of the Federal Government was held almost entirely by individuals and institutions
within the United States. In 1946, just after World War II, the debt
held in foreign official balances and international accounts was
about $2 billion, less than 1.0% of the total debt held by the public.
In the following years the debt held by foreign residents tended to
grow gradually, and, as shown in table E-6, rose to just over $10.0
billion by the late 1960's. This was still less than 5% of the total
Federal debt held by the public. Interest paid to foreign residents
was a correspondingly small proportion of the total interest paid on
debt held by the public.
Foreign holdings began to grow much faster starting in 1970.
This change arose in part out of decisions by foreign monetary
institutions to intervene in foreign exchange markets. Because of
the role of the dollar as an international currency, large amounts
of the official reserves and other financial assets of foreign nations
are held in dollar-denominated form. Thus, the exchange market
intervention by foreign monetary institutions often acted to increase their official reserves of dollars. U.S. Government securities
are the safest and one of the most liquid forms of holding dollar
assets. Consequently, as foreign countries acquired more dollardenominated official reserves, they purchased a large amount of
U.S. Government securities.
The second principal reason for the growth of foreign holdings
was the massive current account surpluses of some countries, particularly the OPEC nations, beginning in 1974. The counterpart to
their surpluses was their acquisition of financial assets, and the

B-15

SPECIAL ANALYSIS B
Table E-6. FOREIGN HOLDINGS OF FEDERAL DEBT
(In billions of dollars)
Debt held by the public
Fiscal year
Total

Foreign1

Borrowing from the
public
Total 2

Foreign

Interest on debt held
by the public
Total

Foreign 3

1965
1966
1967
1968
1969

261.6
264.7
267.5
290.6
279.5

12.3
11.6
11.4
10.7
10.3

4.1
3.1
2.8
23.1
-1.0

0.3
-.7
-.2
-.7
-.4

9.8
10.4
11.6
12.6
14.1

0.5
.5
.6
.7
.7

1970
1971
1972
1973
1974

284.9
304.3
323.8
343.0
346.1

14.0
31.8
49.2
59.4
56.8

3.8
19.4
19.4
19.3
3.0

3.8
17.8
17.3
10.3
-2.6

15.6
16.3
16.6
18.5
22.4

.8
1.3
2.4
3.2
4.1

1975
1976
TQ
1977
1978
1979 4

396.9
480.3
498.3
551.8
610.9
644.6

66.0
69.8
74.6
95.5
121.0
120.3

50.9
82.9
18.0
53.5
59.1
33.6

9.2
3.8
4.9
20.9
25.5
-.7

24.7
28.7
7.6
33.0
39.2
48.3

4.5
4.4
1.2
5.1
7.9
10.7

1980
1981
1982
1983
1984

715.1
794.4
929.4
1,141.8
1,312.6

121.7
130.7
140.6
160.1
175.5

70.5
79.3
135.0
212.3
170.8

1.4
9.0
9.9
19.5
15.4

60.4
78.9
97.7
107.7
129.0

12.0
16.1
17.9
18.0
19.0

1985
1986

1,509.9
1,746.1

209.8
256.3

197.3
236.3

34.3
46.5

148.2
155.4

21.2
22.3

Estimated by Treasury Department. These estimates exclude agency debt, the holdings of which are believed to be small.
Borrowing from the public is defined as equal to the change in debt field by the public from the beginning of the year to the end, except to
extent that the amount of debt is changed by reclassification. Reclassifications are identified in the footnotes to table E-4.
3 Estimated by Bureau of Economic Analysis, Department of Commerce. These estimates include small amounts of interest from other sources,
including the debt of Government-sponsored enterprises, which are not part of the Federal Government.
4 A benchmark revision as of December 1978 reduced the estimated foreign holdings of Federal debt. As a result, the data on foreign holdings
for 1965-78 are not strictly comparable with the data for later years, and the estimated "borrowing" from foreign residents in 1979 reflects tne
benchmark revision as well as transactions in Federal debt securities.
1

the

financial assets acquired in the United States largely took the form
of U.S. Government securities.
Both of these factors were subsequently reversed. Many foreign
countries have drawn down their dollar reserves from time to time
to finance intervention in the foreign exchange market, and the
aggregate OPEC current account surplus shifted to a deficit. However, these reversals have been more than offset by the large
amount of private capital inflow that has accompanied the growing
deficit in the U.S. current account. The net result has been a large
increase in holdings of dollar assets by foreigners, and this is
reflected in the further increase in the Federal debt held by foreigners.
In the late 1970,s, almost all of the Federal debt held by foreign
residents was owned by foreign central banks or official international financial institutions. Since then, however, the holdings by

C-14

• THE BUDGET FOR FISCAL YEAR 1988

private foreign investors have generally grown much faster. During
fiscal year 1985, private investors made about two-thirds of the net
purchases by foreign residents, and during fiscal year 1986 they
made nearly two-fifths. By the end of 1986 they owned nearly onethird of the Federal debt held by foreign residents. The growth in
holdings of private foreign investors has been encouraged by several actions taken by the Federal Government, including the repeal
in 1984 of the 30% withholding tax on interest paid to non-resident
aliens on portfolio debt (including corporate as well as Treasury
securities). All of the Federal debt held by foreign residents is
currently denominated in dollars.
The increase in foreign holdings of U.S. Government securities
since 1970 has therefore been primarily the product of foreign
decisions, both official and private, rather than the direct marketing of these securities to foreign residents. By the end of fiscal year
1986 foreign holdings of Treasury debt had reached $256.3 billion,
which was 15% of the total debt held by the public. This was a
somewhat smaller proportion of total debt held by the public than
during most of the 1970's and the very early 1980's, due to the
rapid growth recently in total Federal debt. Because of the rising
interest rates until 1982, the interest paid on foreign holdings of
debt grew faster than did the foreign holdings themselves over the
period as a whole.
In the years before 1970, when debt held by foreign residents was
relatively small, borrowing from the public was approximately the
same as borrowing from the domestic public. Since 1970, though,
borrowing from the domestic public has in some years been quite
different from total borrowing. As table E-6 shows, borrowing from
foreign residents was nearly all or a major part of total borrowing
from the public during some years of the 1970's. For the period
since 1970 as a whole, borrowing from foreign residents has been
17% of borrowing from the public. This percentage was higher
during the 1970's than the 1980's, however, being 30% in the
earlier period compared to 12% later. In 1986, despite the $46.5
billion of Federal securities purchased by foreign residents, the
largest amount in any year, the total Federal borrowing was so
large that foreign purchases equalled only 20% of borrowing from
the public. This does not measure the full impact of the capital
inflow on the market for Federal debt securities, however, since the
capital inflow supplied additional funds to the securities market
generally and included deposits in U.S. financial intermediaries
that themselves buy Federal debt.
BORROWING BY FEDERAL AGENCIES

A few Government agencies are authorized to sell their own debt
instruments to the public and to other Government accounts. This

B-15

SPECIAL ANALYSIS B
Table l-l. AGENCY BORROWING
(In millions of dollars)
Borrowing or repayment ( — ) of debt
Description

Borrowing from the public:
Agriculture: Farmers Home Administration1
Defense
Education:
College housing loans1
Higher education facilities 1
Health and Human Services1
Housing and Urban Development:
Federal Housing Administration
Housing for elderly or handicapped1
Government National Mortgage Association:
Participation certificates1
Management and liquidation functions fund: Other
Revolving fund (liquidating programs) 1
Interior
Small Business Administration:
Participation certificates: SBIC and section 505 development company
Participation certificates: Other 1
Veterans Administration1
Export-Import Bank
Federal Deposit Insurance Corporation
Postal Service
Tennessee Valley Authority
Total, borrowing from the public-

1987
estimate

1986
actual

-32

85
-52

-39

-202
301
-32
-3

- 2

-25
-309
- 6

3,482

-100

-245

396

3,084

Borrowing from other funds:
Agriculture: Farmers Home Administration1
Defense
Education:
College housing loans1
Higher education facilities1
Health and Human Services1
Housing and Urban Development:
Federal Housing Administration
Housing for elderly or handicapped1
Government National Mortgage Assoc.1.
Revolving fund (liquidating programs) 1
Small Business Administration1
Veterans Administration1

-1,051

-1,725
-118

- 2

-7

-208

-41
-5

-45
-170
- 2 8

-31
-269

Total, borrowing from other funds..
Total, agency borrowing included in gross Federal
debt

-239
-47
-5

67
-3
472

-141
-5

-3
-14

-11
- 2

estimate

-66

-913

390

3,018

-2,638

-1,141
-118
1,164
696

-2,401
25
1,499
1,396
-39

-1,815
25
1,499
314

601

480

ADDENDUM
Borrowing from Federal Financing Bank:
Export-Import Bank
National Credit Union Central Liquidity FacilityPostal Service
Tennessee Valley Authority
United States Railway Association
Total, agency borrowing from Federal Financing
Bank
* $500 thousand or less.

Certificates of participation in loans issued by GNMA on behalf of several agencies.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

agency debt is part of the gross Federal debt, and the disbursement
of the proceeds from borrowing is an outlay.
Agency borrowing was shown in total in table E-1 and is shown
by agency in table E-7 for 1986-88. In 1986 and 1987, more debt is
newly issued than is repaid, due to the new notes issued by the
Federal Deposit Insurance Corporation. Over the period as a whole
total agency debt increases by $0.8 billion. The agency debt outstanding is less than 1.0% of gross Federal debt.
As implied by the addendum to table E-7, the amount of agency
borrowing has been profoundly affected by the Federal Financing
Bank (FFB).6 The FFB was created in December 1973 under the
Treasury Department and began financial operations in May 1974.
Its purposes are to assist and coordinate agency borrowing and
guaranteed borrowing and to reduce the cost to the Government of
some of its borrowing operations. It has the authority to purchase
agency debt, to purchase agency loan assets, and, with an agency
guarantee, to make direct loans to the public; in turn, it finances
these transactions by borrowing from the Treasury. With the approval of the Secretary of the Treasury, the FFB is authorized to
borrow from the Treasury without a statutory limit on the amount.
Since the FFB can borrow from the Treasury at lower interest
rates than other agencies would have to pay in the market, this
practice reduces the cost of borrowing by those agencies that would
otherwise borrow from the public. The FFB thus serves as a conduit for agency borrowing, and Treasury securities replace the
securities of other agencies in the market. Agency borrowing from
the FFB is not included in gross Federal debt. It would be triple
counting to add together the agency borrowing from the FFB, the
FFB borrowing from Treasury, and the Treasury borrowing from
the public that was necessary to provide the FFB with funds to
lend to the agencies.
As a result of the FFB, several agencies that would otherwise
borrow mostly in the investment securities market borrowed $601
million from the FFB in 1986 and are estimated to borrow $480
million in 1987 and $23 million in 1988. Since these agencies now
borrow almost exclusively from the FFB instead of the public,
almost no new agency borrowing in the market took place in the
last 13 years or is scheduled to take place in the future except for
borrowing that is inherent in the operation of certain programs.
6

The operations of the FFB are discussed in some detail in Special Analysis F.

SPECIAL ANALYSIS B

B-15

Because the latter reason for borrowing was not relatively important until 1986, the change in agency debt since the establishment
of the FFB has generally been determined almost entirely by the
repayment of maturing debt. Consequently, until 1986, agency debt
outstanding normally declined each year. If the FFB had not been
created, the agency component of gross Federal debt would be
much greater than it is now. The Treasury component would be
correspondingly less.
By the end of 1988, $1.6 billion of agency debt, or nearly onethird of the total, will be obligations of two of the five agencies
listed in table E-7 that in recent years have borrowed almost
exclusively from the FFB: the Postal Service and Tennessee Valley
Authority. In contrast, $32.7 billion in debt will be owed to the FFB
by these two agencies together with the Export-Import Bank,
which is estimated to have repaid all its borrowings from the
public before that date. The Small Business Administration issued
$74 million of participation certificates in 1986 and 1987 but does
not plan to issue any more. A further $15 million of agency debt
will be family housing mortgages assumed by the Department of
Defense under two programs, much the larger of which was terminated about two decades ago. A total of $2.2 billion of agency debt
at the end of 1986 consisted of certificates of participation in pools
of loans issued by the Government National Mortgage Association
as trustee on behalf of several agencies, which are identified in
table E-7. These certificates have not been issued since 1968, and
those still outstanding will all mature during 1987 and 1988.
The remaining agency debt at the end of 1988—three-fifths of the
total—will have been issued by three agencies whose borrowing
from the public is inherent in the way they operate certain programs. These agencies may issue special instruments in lieu of cash
as a means of paying specified bills. As a rule, budget outlays are
recorded when cash is used to pay the Government's bills for wages
and salaries, equipment, social security benefits, etc. In these three
cases, where the payments are instead in the form of special instruments, budget outlays are likewise recorded because the payments likewise pay the Government's bills. The instruments themselves are classified as agency debt. None of these agencies have
any occasion to sell these debt instruments to the FFB.
One of these agencies, the Federal Housing Administration
(FHA), may issue either checks or debentures in paying claims to
the public that arise from defaults on FHA-insured mortgages. The
FHA is estimated to have $216 million of debentures outstanding
at the end of 1988 (4% of total agency debt). A second agency, the
Interior Department, is authorized to acquire certain lands and
mineral rights from the public in exchange for a type of instrument generically termed "monetary credits." The recipients of

C-14

• THE BUDGET FOR FISCAL YEAR 1988

monetary credits can use them for specified purposes such as payments for Federal coal or mineral leases. An estimated $10 million
of monetary credits will be outstanding at the end of 1988.
Finally, the Federal Deposit Insurance Corporation (FDIC) began
to issue notes in June 1986 as part of some agreements with
prospective purchasers to buy failing banks. This is discussed further in a subsequent section. The FDIC notes comprise almost all
the new agency borrowing during 1986-88. An estimated $2.9 billion of these notes will be outstanding at the end of 1988 (over half
of total agency debt). Because these notes have a one-year maturity, the amount outstanding at the end of 1988 is the amount of new
notes issued during that year.
The Treasury supplies capital to business-type Government enterprises in return for both capital stock and debt. The debt is
shown as "borrowing from Treasury" on the statements of financial condition for enterprises in the Budget Appendix. However, the
equity and the debt instruments are the same in substance; and it
would be double counting to add together the agency borrowing
from the Treasury and the Treasury borrowing from the public
that was necessary to provide the agencies with this capital. Therefore, agency borrowing from Treasury is excluded from the figures
on agency borrowing and debt and from the discussion of this
subject both in this special analysis and in all other parts of the
budget documents.
INVESTMENT BY GOVERNMENT ACCOUNTS IN FEDERAL SECURITIES

Trust funds and some public enterprise funds (revolving funds)
accumulate cash in excess of current requirements in order to meet
future claims and demands. These cash surpluses are invested
mostly in Treasury debt and, to a very small extent, in agency
debt. Since this investment is a debt transaction, purchases are not
counted as outlays for the account or for the budget, and redemptions are not counted as receipts.
Investment by trust funds and other Federal accounts declined
from $17.9 billion in 1979 to a range of $8 to $10 billion per year
during 1980-82, due to recessions and to structural problems in
social security financing. In 1983, as the result of the Social Security Amendments of 1983, investment by Government accounts increased to $22.6 billion, the largest amount ever reached as of that
time. Since then it has risen much further. It rose to $69.4 billion
in 1986 and, as shown in table E-8, it is estimated to reach $106.3
billion in 1988.
This extraordinary rise of investment by Government accounts is
concentrated among a few trust funds. The three trust funds financed by the social security payroll tax—old-age and survivors
insurance (OASI), disability insurance (DI), and hospital insurance

B-15

SPECIAL ANALYSIS B
Table E-8. INVESTMENT BY GOVERNMENT ACCOUNTS IN FEDERAL SECURITIES
(In millions of dollars)
Investment or disinvestment
Description

1986
actual

Investment in Treasury debt:
Overseas Private Investment Corporation
Defense—Civil: Military retirement trust fund
Energy-. Nuclear waste fund
HHS: Federal old-age and survivors insurance trust fund 1
Federal disability insurance trust fund 1
Federal hospital insurance trust fund
Federal supplementary medical insurance trust fund
Housing and Urban Development:
Federal Housing Administration
Government National Mortgage Association
Other
Interior: Outer Continental Shelf deposit funds
Labor: Unemployment trust fund
State: Foreign Service retirement and disability trust fund
Transportation:
Highway trust fund
Airport and airway trust fund
Treasury: Exchange stabilization fund
Environmental Protection Agency
OPM: Civil Service retirement and disability trust fund
Other trust funds
Veterans Administration:
National service life insurance trust fund
Other trust funds
Federal funds
Federal Deposit Insurance Corp.: Trust fund
Federal Home Loan Bank Board: FSLIC
Federal Retirement Thrift Investment: Trust fund
National Credit Union Adm.: Share insurance fund
Postal Service fund
Railroad Retirement Board trust funds
Other Federal funds
Other trust funds
Other deposit funds 2
Total, investment in Treasury debt..

Total, investment in agency debt..

Investment
Investment
Investment
Investment

MEMORANDUM
by Federal funds
by trust funds (on-budget)
by off-budget Federal entities (trust funds).
by deposit funds 2

* $500 thousand or less.

Off-budget Federal entity.

estimate

96
13,299
96
20,017
-511
14,686
-2,091

95
14,527
114
38,411
1,260
21,040
742

1,742
155
-63
-3,415
4,231
478

2,323
-85
-2,825
5,060
492

3,022
-2,163
393
-1,167
1,656
459

-443
1,186
-1,592
-408
26,767
1,004

2,529
1,372
32
1,049
22,068
340

2,001
-322
31
350
19,662
910

337
51
-27
-274
-1,040

375
38
17
-120
-3,777
1,207
223
217
753
83
452

374
37
15
1,343
766
3,257
350
-1,370
948
130
358

77,334

107,229

250
1,441
1,766
-80

421
7

-80

-455
- 1

-5

-15
- 1

-50

-119
-13
-175
-85
-67

-66

-913

69,396

77,268

106,316

937
63,255
8,612
-3,408

-872
61,459
19,505
-2,825

1,186
66,627
39,671
-1,167

- 6

Total, investment in Federal debt.

(-)

100
12,286
56
5,980
2,632
17,164
-1,312

69,402

Investment in agency debt:
HHS: Federal hospital insurance trust fund
Housing and Urban Development:
Federal Housing Administration
Government National Mortgage Association
OPM: Civil Service retirement and disability trust fund
Veterans Adm.: National service life insurance trust fund..
Federal Home Loan Bank Board: FSLIC

1987
estimate

Only those deposit funds classified as Government accounts.

(HI)—had positive net investment as a whole in 1983 for the first
time since 1975. This was due to the cash resources provided by the

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Social Security Amendments of 1983. As a result of this act and the
improving economy, these trust funds as a whole now have large
surpluses and invest increasing amounts each year—a cumulative
total of $120.7 billion during 1986-88, which constitutes 48% of the
total estimated investment by Government accounts. During 1986
OASI repaid the final $13.2 billion that it had borrowed from HI
and DI in 1983, so the amounts of investment displayed in table E 8 for these individual funds in 1986 do not reflect their respective
underlying financial conditions.
In addition to these three funds, the largest investors in Federal
securities are the civil service retirement and disability trust fund
and the military retirement trust fund. The former accounts for
27% of the total investment by Government accounts during 198688, and the latter accounts for 16%. Altogether, these two retirement funds and the three funds financed by the social security
payroll tax account for 91% of the estimated investment by Government accounts during 1986-88.
As a result of the large investment by these trust funds and the
net investment of other funds as well, the total holdings of Federal
securities by Government accounts will reach an estimated $570.4
billion at the end of 1988. This will comprise 22% of the gross
Federal debt. One major trust fund—the civil service retirement
and disability trust fund—will account for one-third of total holdings, and the three trust funds financed by the social security tax
will account for nearly as much. All the trust funds together will
account for 96% of the holdings. Nearly all of the holdings in
Government accounts are Treasury debt, and the present holdings
of agency debt will mostly be redeemed when the remaining participation certificates mature in 1988.
A comparatively small amount of Federal debt is held by deposit
funds. Deposit funds are amounts held by the Federal Government
as an agent for others (such as State income taxes withheld from
Federal employees' salaries and not yet paid to the States); cash
collections awaiting determination as to their final disposition; and
other sums held temporarily before being refunded or paid into
some other fund. Deposit fund balances are thus not the property
of the Federal Government. Therefore, changes in deposit fund
balances are not included in the budget totals and do not affect the
Federal deficit.
Most deposit funds consist of uninvested balances, but a few
funds are invested in Treasury debt and collect interest on their
investments. Since a deposit fund is not Federal property, its holding of Federal debt is normally treated as debt held by the public
rather than as debt held by a Government account.
However, the investments of three deposit funds are treated as
debt held by Government accounts rather than as debt held by the

SPECIAL ANALYSIS B

B-15

public. One of these is a relatively small account. The other two
deposit funds contain receipts from rents and royalties on the
Outer Continental Shelf, the title to which has been in dispute
between the Federal Government and the States. Until title is
settled and the funds distributed, the amounts are held in deposit
funds. The balances of these funds were first invested in Federal
debt in 1980 and rose to $7.4 billion by the end of 1985. The
Treasury concluded that the Federal claim on these receipts was
sufficiently strong that it would be more accurate to classify the
balances as Government holdings of Federal debt rather than as
debt held by the public. Under legislation enacted in 1986 one
major dispute was settled, with the respective amounts distributed
to the Federal Government and the States in 1986 and 1987. It is
assumed that the remaining disputes will be settled and the
amounts distributed by the end of 1988.
Since increases in deposit funds raise Treasury cash balances,
they are a means of financing the Government deficit. When the
deposit funds are not invested in Federal debt, an increase in
deposit fund balances appears as one of the "means of financing
other than borrowing from the public" in table E-3. The increase
in deposit fund balances thus enables Treasury to reduce its borrowing from the public.
When the deposit funds are invested in Federal debt, their treatment depends on whether they are classified as part of the public
or as Government accounts. Under the normal rule, according to
which they are treated as part of the public, deposit fund investment in Federal debt is defined to be borrowing from the public.
The counterpart to the increase in Federal debt held by the public
is a decrease in the deposit fund balances available to finance the
deficit by means other than borrowing from the public. This is
shown as a decrease in the liabilities of the Government for deposit
fund balances in table E-3. The ultimate effect of the increase in
the deposit funds is thus for the Treasury borrowing from the
public to come from the deposit funds rather than from some other
sector of the public, with no net change in the means of financing
other than borrowing from the public.
On the other hand, when deposit funds are classified as Government accounts, the investment of deposit fund balances in Federal
debt is defined to be an increase in debt held by Government
accounts rather than an increase in debt held by the public. Since
the debt held by the public does not increase, this investment does
not reduce the amount of deposit fund balances (as shown in table
E-3) that are available to finance the deficit by means other than
borrowing from the public. This investment does, however, increase
the gross Federal debt and the debt subject to statutory limit (as
shown in table E-ll).

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• THE BUDGET FOR FISCAL YEAR 1988
MEASUREMENT OF BORROWING AND DEBT

As stated previously in this special analysis, the actual data for
gross Federal debt and debt held by Government accounts at the
end of 1985 have been revised from the figures previously published in the budget documents and by Treasury. Likewise, the
actual data for these debt concepts and for debt held by the public
at the end of 1986 have been revised from the figures published by
Treasury. Table E-9 shows the differences, which raise gross Federal debt by $3.4 billion at the end of 1986 and raise debt held by the
public by $0.5 billion.
These differences are of three kinds: measurement of the debt
held by two Government accounts in the Department of Defense,
notes issued by the Federal Deposit Insurance Corporation (FDIC),
and participation certificates issued by the Small Business Administration (SBA). This section explains these differences. It also explains a fourth matter, the classification of loan asset sales with
recourse as borrowing, which affects the definition of debt beginning in 1987. The discussion in this section is more technical than
in most of this special analysis.
Measurement of Debt Held by Government Accounts.—Investment
by trust funds and other Government accounts in Federal securities is an exchange of assets, where the Government account exchanges cash for Federal securities in order to earn interest
income. If a trust fund buys $1 billion of Federal debt securities,
for example, the composition of the trust fund balances changes
but the size of the balances should be the same. Cash holdings
should decrease by $1 billion, and debt holdings should increase by
$1 billion.
A complication occurs if the trust fund buys securities at a price
other than the par (or face) value. Under normal business accounting practices, the buyer records an investment at its purchase
price. Cash holdings are reduced by $1 billion, in the previous
example, and debt holdings are increased by $1 billion, regardless
of whether the debt is purchased at par, at a premium, or at a
discount. The difference between the purchase price and par value
is thus included as part of the investor's initial holding of debt. The
difference is then amortized over the life of the security, with the
periodic amortization treated as an adjustment to the value of the
security (and as a simultaneous adjustment to interest earnings). In
the case of a security bought at a premium, the amortization of the
premium periodically reduces the book value of the security (and
simultaneously reduces the amount of recorded interest received).
That is, part of the nominal interest received is really a repayment
of the principal. In the case of a security bought at a discount, the
amortization of the discount periodically increases the book value
of the security (and simultaneously increases the amount of record-

B-15

SPECIAL ANALYSIS B

Table E-9—BRIDGE FROM PREVIOUSLY REPORTED DEBT TO DEBT ON A BUDGET ACCOUNTING
BASIS 1
(In millions of dollars)

Gross Federal debt:
Amounts previously reported
Requantification of investments by the Defense military retirement and education benefits trust funds:
Interest purchased
Unamortized premiums or discounts, net
Agency debt issued in 1986 but not reported to Treasury as
debt:
FDIC notes
SBA participation certificates
Total, increase in amount
Amounts reported on a budget accounting basis
Debt held by Government accounts:
Amounts previously reported
Requantification of investments by the Defense military retirement and education benefits trust funds:
Interest purchased
Unamortized premiums or discounts, net
Total, increase in amount
Amounts reported on a budget accounting basis
Debt held by the public:
Amounts previously reported
Agency debt issued in 1986 but not reported to Treasury as
debt:
FDIC notes
SBA participation certificates
Total, increase in amount
Amounts reported on a budget accounting basis..
1

Outstanding, end
of 1985

Change in 1986

Outstanding, end
of 1986

1,827,470

302,052

2,129,522

39
3,049

46
2,807

472
67

—236
1,827,234

3,628
305,680

3,392
2,132,913

317,612

66,307

383,919

-242

39
3,049

46
2,807

-236
317,377

3,088
69,396

2,853
386,772

1,509,857

235,745

1,745,602

472
67

539
236,284

539
1,746,141

-242

1,509,857

These differences do not affect the amount of debt recorded under the statutory debt limitation.

ed interest received). As a result of this type of treatment, the
purchase of the security does not change the size of the investor's
balances; and the investor's subsequent interest income reflects the
actual rate of return that the investor receives on the amount of
cash that it had actually invested.
However, Federal debt securities (except savings bonds) are conventionally recorded at par even when their sales price is higher or
lower. The Treasury data have consistently followed this convention in recording debt held by Government accounts, and previous
budget documents have followed Treasury's practice for past periods. Under this convention, if a Government account pays more
than the par value for a security, only the par value is recorded as
an investment by the account. The premium paid by the Government account—i.e., the purchase price less the par value—is not
counted as part of the debt held by Government accounts or as part
of gross Federal debt. The premium is counted as a reduction to
the interest received by the Government account (and as a simultaneous reduction to the interest paid on the public debt) at the time

C-14

• THE BUDGET FOR FISCAL YEAR 1988

when the investment occurs rather than as a reduction to interest
that is spread over the full life of the security. If a Government
account pays less than the par value for a security, the entire par
value is nonetheless recorded as an investment by the account and
as an addition to gross Federal debt. The discount is recorded as
interest income to the Government account when the security matures.
The difference in treatment between normal business accounting
practice and the Treasury convention nets to zero for any particular security by the end of the security's full life. However, an effect
on the recorded size of the Government accounts balances and
debt holdings (and on gross Federal debt) persists throughout the
life of the security, though the size of the effect diminishes over
time; and in a Government account with continuing investment,
which is common, overall effects on the balances and the debt of
the account as a whole persist indefinitely (as do effects on gross
Federal debt). Effects persist in a similar way on the recorded
interest received by the Government account and the recorded
interest paid on the public debt.
The purchase price and par value of securities bought by Government accounts are usually very close, so the purchase of securities
at a premium or discount has normally had only a small effect on
the recorded size of an account's balances, on its interest, and on
the level of debt. Moreover, the convention of recording debt at par
value was simple and, for the purpose of the statutory debt limitation, was required by law.
However, during 1985 two newly established accounts in the
Department of Defense—the military retirement trust fund and
the education benefits trust fund—began to buy significant
amounts of market-based Treasury securities at relatively large
premiums or discounts. Most of these purchases were made by the
military retirement trust fund, and most of these purchases were
at a premium. When Treasury securities were bought at a large
premium, the convention of recording these investments at par
caused the amount of recorded investment to be significantly less
than the amount of cash paid for the debt securities. Therefore,
this convention significantly understated the amount of debt held
by these trust funds in particular, the debt held by Government
accounts as a whole, and gross Federal debt. The understatement
at the end of 1986 was $2.9 billion. This convention likewise understated the interest received by trust funds and the interest on the
public debt, because the entire premium was deducted from interest at the time of purchase. Since this understatement is connected
to trust fund investment and interest, it has no net long-term effect

SPECIAL ANALYSIS B

B-15

on transactions with the public, the debt held by the public, net
interest outlays, or the deficit.7
When the 1987 budget was transmitted in February 1986, the
data for debt at the end of 1985 were based on the convention of
recording debt at par. However, the estimates assumed that a
change in accounting practice would be made to record investment
at purchase price for the two Defense Department trust funds
where the difference in treatment had a relatively large effect. It
was also assumed that this change would be retroactive for all of
fiscal year 1986. Treasury did not make the change, however, and
the Treasury data reported for 1986 are based on the convention of
recording all investment by Government accounts at par.
The 1988 budget records estimated investment at purchase price
for the military retirement and education benefits trust funds.
Consistent with this treatment, it records interest paid by Treasury
and received by these funds on the basis of amortizing the difference between the purchase price and par value over the life of the
securities. The 1985 and 1986 data for actual Federal borrowing,
debt, and investment have been revised from the amounts previously published in budget documents and Treasury statements in
order to reflect the change in accounting treatment consistently
over time. The amounts of these revisions are shown in Table E-9
for debt held by Government accounts and gross Federal debt. No
attempt has been made to differ from the Treasury convention for
other accounts, because the differences between purchase price and
par value are small.
FDIC Notes.—The Government usually liquidates its obligations
(i.e., pays its bills) by disbursing cash or issuing checks. Cash or
checks are used, for example, when the Government pays wages
and salaries to its employees, buys equipment from a manufacturer, or pays social security benefits. On occasion, however, Government agencies pay specified bills by issuing bonds, notes, debentures, monetary credits, or other special instruments. This practice
combines two transactions into one. Instead of separately borrowing from the public and then paying its bills by disbursing cash or
issuing checks, the Government pays its bills by issuing the special
instruments directly. Combining these two transactions into one
does not change the nature of the transactions. Because these two
methods of payment are equivalent, the issuance of such special
instruments is recorded under standard budget concepts as being

7 The difference between purchase price and par value has two components: the unamortized premium or
discount, and the interest purchased (i.e., the amount of interest that would have been accrued up to the date of
issue, if the security had been outstanding, and for which Treasury will make payment at the next payment
date). Trust fund interest received is adjusted for the interest purchased at the time of the investment, but the
interest paid on that investment is not adjusted until the next payment date. Thus, a limited impact on outlays
and the deficit may occur, but only during the time between the investment and the next interest payment
(which is always a period of less than six months).

C-14

• THE BUDGET FOR FISCAL YEAR 1988

simultaneously outlays and borrowing. The debentures or other
special instruments are accordingly classified as debt.8
The Federal Housing Administration (FHA) has for many years
issued both checks and debentures in paying claims to the public
that arise from defaults on FHA-insured mortgages. The Department of the Interior has more recently acquired certain lands and
mineral rights from the public in exchange for a type of special
instrument generically termed "monetary credits." The issuances
of both FHA debentures and Interior Department monetary credits
serve to pay the Government's bills and are thus equivalent to cash
transactions. These transactions are therefore classified as outlays
and borrowing, and the instruments are classified as agency debt.
The Federal Deposit Insurance Corporation (FDIC) began to issue
notes in June 1986 as part of some agreements with prospective
purchasers to buy failing banks. The FDIC ordinarily tries to arrange for the private purchase and assumption of failing banks
rather than liquidate them and pay off the depositors, in part
because purchase and assumption agreements are usually less expensive to the Government. Under purchase and assumption agreements, the FDIC normally pays cash to the buyer in order to bring
the value of the assets of the failing bank up to the value of the
liabilities assumed by the buyer. The FDIC has, however, in some
cases issued notes in place of cash to the buyer of a failing bank.
These are one-year, interest-bearing notes, redeemable for cash
upon demand.
The issuance of these notes is thus a method of paying the
Government's bills, just as is the disbursement of cash. Accordingly, under standard budget concepts, the issuance of these notes
should be treated as outlays and borrowing. The FDIC transactions
were not, however, reported in this manner to Treasury and consequently were not recorded in Treasury's published reports as outlays or borrowing. The budget has adjusted the data to record
outlays and borrowing at the time when the notes are issued.9 As
shown in table E-9, this increases the debt held by the public and
gross Federal debt by $472 million at the end of 1986. As shown
previously in table E-7, estimated FDIC borrowing by means of
these notes is substantially higher in 1987.
SBA Participation Certificates.—Agencies have at times financed
outlays by selling certificates of participation that represent pools
of loans that the agency has made and continues to service. The
budgetary treatment of these sales was studied in 1967 by the

8 The definition of outlays and the relationship of outlays to obligations, budget authority, and borrowing are
discussed in Part 6b of the Budget—Supplement.
9 Due to a technical error, the outlays for 1986 that were published in the 1988 Budget were not corrected to
reflect this treatment. The outlays for all other years and the borrowing and debt for all years are recorded
consistently with standard budget concepts. The correct data are published in the 1988 Budget Appendix. The
budget historical data will show the correct data in the future.

SPECIAL ANALYSIS B

B-15

President's Commission on Budget Concepts, whose report led to
the adoption of the unified budget and forms the foundation for the
Government's present concepts of budgetary analysis and presentation. The Commission concluded that, as a means of financing
outlays, there was no difference between an agency selling securities labeled "certificates of participation," the same agency selling
securities labeled "debt," and the Treasury selling securities labeled "debt." The Commission therefore recommended that the
sale of participation certificates be classified as borrowing by the
agency that issues them instead of classified as an offset to the
outlays of the agency. 10 Following this recommendation, the existing participation certificates were reclassified as debt. This classification has been applied to subsequent participation certificates as
well, except where prohibited by law.
In September 1986, the Small Business Administration (SBA)
issued $67 million of participation certificates representing a pool
of SBA-guaranteed Small Business Investment Company (SBIC) debentures. This sale was not reported to Treasury as an outlay and
borrowing, however, and consequently Treasury's published reports
do not record the outlay and borrowing that took place. In November 1986 the SBA issued $7 million of participation certificates
representing a pool of SBA-guaranteed section 505 Certified Development Company debentures. This sale was also not reported to
Treasury as outlays and borrowing. Consistent with standard
budget concepts, the 1986 data in the budget for outlays, borrowing, and debt have been revised to show the September 1986 transaction as outlays and borrowing. The same principle was applied to
the November 1986 transaction in deriving the 1987 estimates for
the budget. SBA has restructured these transactions so they will
not give rise to further Federal outlays and borrowing.
Sales of Loan Assets with Recourse.—Loan assets are loans that
an agency has made to the public and for which repayments are
still owed. In contrast to participation certificates, the sale of individual loans has traditionally been treated as an offset to the
outlays of the agency that makes them. This is analogous to the
way in which loan repayments are treated as an offset to the
outlays of the agency that makes them. Sales of loan assets thus
reduce the size of the Government's outlays immediately rather
than over the normal course of time during which the loans that
are sold would be repaid.
The sale of individual loans with recourse—i.e., with a Government guarantee attached—is functionally equivalent to borrow-

10 Report of the President's Commission on Budget Concepts (Washington: U.S. Government Printing Office,
1967), pp. 8, 47-48, and 54-55.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

ing.11 It is a method whereby the Government finances current
outlays while bearing the same risk of loss from borrower default
as it would have borne if it had not sold the loan but instead had
financed the outlays by Treasury borrowing. Thus, by guaranteeing
the loan, the Government retains a crucial incident of its ownership, and as a result the loan is not truly sold. The guarantee turns
the loan asset sale into a form of borrowing. In contrast, the sale of
a loan without any recourse or any Government servicing divests
the Government of any future responsibility for the loan and therefore of any material incidents of its ownership.
Based on this reasoning, the classification of loan asset sales with
recourse as Federal borrowing is a logical extension of the longstanding budget concepts regarding participation certificates. Beginning in 1987, all new loan asset sales with recourse are classified as agency borrowing with the exception of sales made by two
programs already in existence—the Veterans Administration
vendee loans and the sales made under the Government National
Mortgage Association (GNMA) tandem plan. These two programs
were exempted for 1987 in order to give them time to adjust to the
new budget accounting rules, but they are not exempted for 1988
or later years. The accounting treatment of sales made in previous
years has not been revised retroactively.
The budget does not include any loan asset sales with recourse in
1987 except for these two programs, and it does not include any
loan asset sales with recourse in 1988 except under the GNMA
tandem plan. Under the tandem plan, GNMA bought FHA-insured
mortgages from private lenders that they had made at belowmarket interest rates, and then GNMA sold the loans to the public.
Congress repealed the authorization for further purchases in 1983,
and GNMA's final sales are scheduled for 1987 and 1988. The
estimated $301 million of sales in 1988 are thus classified as agency
borrowing, as shown previously in table E-7. No loan asset sales
with recourse are planned after 1988.
LIMITATIONS ON FEDERAL DEBT

Statutory limitations have normally been placed on Federal debt.
Until World War I, the Congress ordinarily authorized a specific
amount of debt for each separate issue. Beginning with the Second
Liberty Bond Act of 1917, however, the nature of the limitation
was modified in several steps until it developed into a ceiling on
the total amount of most Federal debt outstanding. The latter type

11 Technically, the functional equivalent of borrowing is the difference between the amount received from a
sale of loans with recourse and the amount received from a sale of loans without recourse. However, because
this difference cannot be known with any accuracy, the rule has been adopted that the entire amount received
from a sale with recourse will be treated as borrowing.

SPECIAL ANALYSIS B

B-15

of limitation has been in effect since 1941.12 The limit currently
applies to the total of:
• most public debt issued by the Treasury since September
1917, whether held by the public or by the Government;
• agency debt in the form of participation certificates issued
during fiscal year 1968 under the Participation Sales Act of
1966; and
• other debt issued by Federal agencies that, according to explicit statute, is guaranteed as to principal and interest by the
United States.
The debt subject to statutory limit 1 3 includes most Treasury
debt but not all, as shown in table E-10. The largest part of the
Treasury debt not subject to the statutory limit is debt issued by
the Federal Financing Bank (FFB), which is established within the
Treasury Department. The FFB is authorized to have outstanding
up to $15 billion of publicly issued debt, and this debt is not subject
to the general statutory limitation under the Second Liberty Bond
Act. The FFB borrowed $1.5 billion in 8-month bills from the public
in July 1974, but all of its subsequent borrowing until 1985 was
from the Treasury because Treasury can borrow from the public at
slightly lower interest rates than the FFB would have to pay. As
explained previously, such "borrowing from Treasury" is not part
of the Federal debt. In October and November 1985, however, as
discussed below, the debt limit problem led Treasury to issue FFB
securities to the civil service retirement and disability trust fund
(in place of regular Treasury securities that were subject to the
debt limit). These securities matured on June 30, 1986. In August
and September 1986, because of a new debt limit problem, the
Treasury issued $15.0 billion of FFB securities to the civil service
retirement and disability trust fund. Of the new FFB debt securities, $5.0 billion mature on June 30th of each year, 1987, 1988, and
1989.
The next largest part of Treasury debt not subject to the statutory limit is the unamortized difference between the purchase price
and par value of certain securities issued to the Defense Department military retirement and education benefits trust funds. As
explained in the previous section, this is recorded as Treasury debt
under budget accounting rules but has not been so recorded in
Treasury reports and past budget documents. Most Treasury debt,
including these securities, is recorded at par for the purpose of the
statutory debt limitation. The final portion of Treasury debt not
1 2 The legislation on the level of the statutory limit since 1940 and the amount of debt subject to statutory
limitation are shown in Historical Tables, Budget of the United States Government, Fiscal Year 1988, section 7.
The legislation beginning in 1917 is shown in Statistical Appendix to Annual Report of the Secretary of the
Treasury on the State of the Finances, Fiscal Year 1980, table 32.
1 3 The statutory debt limit is sometimes called the public debt limit. However, as explained in the text, the
limit does not apply to all public debt and does apply to some debt other than public debt.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

subject to limit is a grouping that consists almost entirely of currencies no longer being issued, such as silver certificates and national bank notes, which were generally reclassified as Federal
debt some time after being discontinued.
Table E-10. DEBT SUBJECT TO STATUTORY LIMIT
(In millions of dollars)
End of year
Descriptions

Federal debt held by the public
Federal debt held by Government accounts
Total, gross Federal debt
Deduct:
Treasury debt not subject to limit:
Federal Financing Bank
Unamortized difference between purchase
price and par value of certain securities
held by trust funds
Other
Agency debt not subject to limit:
Department of Defense
Department of Interior
Export-Import Bank
Small Business Administration
Postal Service
Federal Deposit insurance Com
Government National Mortgage Assoc
Tennessee Valley Authority
Participation certificates1
Coast Guard
Total, Federal debt not subject to
limit
Gross Federal debt subject to statutory limit
Other debt subject to limit, and adjustments
Total, debt subject to statutory limit..

1985
actual

1986
actual

1987
estimate

1988
estimate

1,509,857
317,377

1,746,141
386,772

1,908,389
464,040

2,015,110
570,356

1,827,234

2,132,913

2,372,429

2,585,466

15,000

10,000

5,000

-236
602

2,853
601

2,083
600

2,000
600

83
17
9

40
15
6
67
250
472

8
13

3
10

74
250
3,954

1,625
1,030

1,380
830

74
250
2,903
301
1,380

250
1,725
1,030*

3,480

21,958

19,192

12,521

1,823,754
22

2,110,954
22

2,353,237
22

2,572,945
22

1,823,775

2,110,975

2,353,258

2,572,967

* $500 thousand or less.
1 Certificates of participation in loans issued by the Government National Mortgage Association on behalf of several agencies (these amounts
exclude the certificates issued during 1968, which are subject to the debt limitation).

The major part of agency debt is not subject to the general
statutory limit under the Second Liberty Bond Act. The only categories now included are the debentures issued by the Federal Housing Administration and the participation certificates sold in 1968.
These securities comprised one-quarter of all agency debt at the
end of 1986. However, because these participation certificates will
mature during 1988 and because the Federal Deposit Insurance
Corporation has begun to issue notes, the agency securities subject
to statutory limit are estimated to comprise only 4% of total
agency debt at the end of 1988.
Most of the agency debt not subject to the general statutory limit
is, however, subject to separate statutory limits. For example, the

SPECIAL ANALYSIS B

B-15

Tennessee Valley Authority was first authorized to issue revenue
bonds to finance power facilities in 1959. The limit was $750 million. Subsequently, in order to enable TVA to finance additional
facilities, Congress raised the limit several times. It is now $30
billion. The Postal Service is limited to $10 billion of securities
outstanding and $2 billion of annual borrowing.
The only other debt subject to the general statutory limit is a
very small amount of matured principal and interest. This is not
classified as part of gross Federal debt. To derive the debt subject
to limit from the gross Federal debt also requires a very small
accounting adjustment.
The amount of debt subject to limit is compared in table E-10
with the gross Federal debt and the Federal debt held by the
public. The debt subject to limit was $2,111.0 billion at the end of
1986 and is estimated to rise to $2,573.0 billion by the end of 1988.
As shown in table E-10, the debt subject to limit is much larger
than the debt held by the public and is almost as large as the gross
Federal debt. The debt subject to limit is so much larger than the
debt held by the public because it includes Federal debt held by
Government accounts. The small difference between debt subject to
limit and gross Federal debt is mostly accounted for by the Treasury debt not subject to the general limitation.
The level of the statutory limit on the Federal debt has frequently been changed by Congress. During the 1960's Congress passed 13
separate acts to raise the limit or to extend the duration of a
temporary increase in the limit, and during the 1970's Congress
passed 18 such acts. During 1980-86 Congress passed two to four
such acts each year.
These frequent changes have come about both because the Federal debt has grown steadily and substantially and because of the
nature of the debt limit legislation. From 1971 to 1983, the statutory debt limit consisted of a permanent limit of $400 billion plus a
temporary increment that was usually scheduled to expire in a
year or less. Because the debt subject to limit was more than $400
billion, new legislation was required no later than the date when
each temporary increment expired. Several times the temporary
increment expired without having been extended, so for a few days
on each occasion the Federal debt exceeded the statutory limit. The
validity of debt issued prior to the expiration of the temporary
ceiling was not affected, but the Treasury Department had to suspend all auctions of new securities and all sales of savings bonds.
Such a situation created uncertainty in the securities market and
forced the Treasury to take costly administrative actions.
In May 1983, Congress changed the nature of the debt limitation.
The permanent limit of $400 billion and the temporary increment
to that limit were combined into a single, higher limit without an

C-14

• THE BUDGET FOR FISCAL YEAR 1988

expiration date. This prevents the Federal debt from exceeding the
statutory limit, since Treasury would stop issuing new securities
before that event would occur. The new type of limitation does not,
however, avoid the costs of market uncertainty and administrative
actions that formerly arose whenever the debt limit fell below the
actual level of debt. The same costs arise when the amount of debt
approaches close to the limit and the timing of congressional action
to raise the limit is uncertain. Treasury then has to take steps to
avoid exceeding the limit, and the market is uncertain what will
happen. The principal difference arises from the fact that under
the new type of limitation Treasury can ordinarily refund maturing securities from the proceeds of selling new securities, because
this does not increase the amount of debt outstanding. In contrast,
under the former type of limitation Treasury had to use up its
existing cash balances to pay off maturing securities once the
temporary increment to the debt limit had expired, because it
could not sell new securities at all. In the short time that the new
procedure has operated the debt limit has usually been set at
amounts expected to be reached within a few months, so frequent
increases in the limit still have been needed. Moreover, on two
occasions temporary increments have been enacted.
The statutory debt limit at one time was raised only by normal
legislative procedures. In September 1979, however, an alternative
method of changing the debt limit was established by statute. The
purpose of the new method was for the House of Representatives to
vote on the debt limit as a part of the congressional budget process.
The congressional budget resolutions establish targets for outlays,
receipts, and the deficit and also recommend an appropriate level
for the debt subject to limit. The recommendation as to the appropriate level of debt had not previously had the effect of law, nor
had it been part of the direct process whereby the debt limit was
established.
However, beginning with the resolutions adopted in calendar
year 1980, the budget resolution that is adopted by the Congress
may be part of the process that establishes a debt limit. The vote in
the House of Representatives is deemed to have been a vote in
favor of a joint resolution setting the statutory limit. The joint
resolution, having been deemed to have passed the House, is transmitted to the Senate for further legislative action.14 Upon final
passage, it is sent to the President for his signature. This new
procedure relates the decision on the debt limit to the congressional decision on the Federal deficit and the other factors, explained
in the following section, that determine the change in the debt
subject to limit. The debt limit may still be changed by ordinary
1 4 The Senate has not adopted the same procedure as the House, so the Senate must approve changes in the
debt limit separately from its approval of the congressional budget resolution.

SPECIAL ANALYSIS B

B-15

legislation, with one exception recently imposed by the Balanced
Budget and Emergency Deficit Control Act of 1985 (the GrammRudman-Hollings Act). It is not in order for either House to consider a change in the debt limit for a fiscal year until after the
congressional budget resolution for that year has been adopted.
Both methods of changing the debt limit have been used about half
the time since the new procedure went into effect.
The statutory debt limit was $1,823.8 billion through most of
fiscal year 1985. Near the end of that year, on August 1, 1985, the
Congress adopted a congressional budget resolution for fiscal year
1986 containing a provision that declared the appropriate level of
debt to be $1,847.8 billion or, as of October 1, $2,078.7 billion. This
provision was deemed to have passed the House, but no further
action was immediately taken.
At the beginning of September 1985, Treasury could not fully
invest the receipts of the social security trust funds that are normally transferred at the beginning of the month, because that
would have raised the amount of debt over the limit. By the end of
the month the debt was still at the limit, social security was still
only partially invested, Treasury had postponed or limited the
normal auctions for some of its securities, and Treasury had not
been able to keep the Exchange Stabilization Fund fully invested.
On the last day of September, $17.4 billion was supposed to have
been invested for the civil service retirement and disability trust
fund; during the first days of October investment was supposed to
have been made for the social security trust funds, the military
retirement trust fund, and the supplementary medical insurance
trust fund. The total of these amounts was $42.5 billion, but because of the debt limit most of the investment had to be delayed, as
it had been the year before.
By this time the debt limit bill had become the vehicle for the
Gramm-Rudman-Hollings proposal to eliminate the deficit in a
series of steps over several years. This proposal, which set deficit
targets and created a mechanism to enforce them, was offered as
an amendment to the debt limit bill. This amendment became the
principal issue before the Congress until December 12, 1985, when
the debt limit bill was enacted incorporating a revised version of
the amendment designated the Balanced Budget and Emergency
Deficit Control Act of 1985.
As a result of this delay, the amount of debt remained at the
limit, and several extraordinary steps were taken to prevent a
default on the Government's various obligations. The first such
step was taken on October 9, the day after Treasury's cash balance
became virtually exhausted, when use was made of the Federal
Financing Bank (FFB). As explained above, FFB debt is not subject
to the general statutory debt limit, so Treasury reduced the

C-14

• THE BUDGET FOR FISCAL YEAR 1988

amount of debt subject to limit by issuing $5 billion of FFB securities to the civil service retirement and disability trust fund in place
of regular Treasury securities. This enabled Treasury to raise $5
billion of cash by selling securities to the public that were subject
to the debt limit. A total of $14.2 billion of FFB securities was
eventually issued to the civil service retirement and disability trust
fund, nearly reaching the FFB's own $15 billion special limit. The
FFB securities had the same interest rates and date of maturity
(June 30, 1986) as the regular Treasury securities that they replaced.
By the beginning of November, further steps were needed in
order for Treasury to finance the outlays for social security and
other purposes that are always very large at the start of the
month. Treasury temporarily reduced the debt held in Government
accounts by disinvesting the social security trust funds, the civil
service retirement and disability trust fund, and the railroad retirement account (i.e., by accelerating the redemption of certain
securities they held by up to seven days earlier than normal). This
decreased the debt subject to limit, which enabled Treasury to
obtain cash by selling debt securities to the public that were subject to the limit.
The next critical problem was large payments due on November
15. Treasury was scheduled to pay $16 billion of cash interest on its
debt but did not have enough cash to do this (on November 14 it
had a cash balance of only $7.3 billion). Inability to meet its obligations would have caused an unprecedented default on the interest
and principal of U.S. Government securities. To avoid this, on
November 14 the Congress temporarily raised the debt limit to
$1,903.8 billion for the period ending December 6. Treasury immediately sold sufficient securities to meet its obligations and fully
invested all the trust funds.
By December 5 the debt was at the level of the temporary limit,
so when the limit returned to $1,823.8 billion on December 7 the
amount of debt exceeded the limit. For the next several days
Treasury was forced to postpone its normal auction of bills, to
suspend sales of savings bonds and State and local government
special issues, and to cease investing trust funds. On December 12,
1985, however, the debt bill was enacted, raising the limit to
$2,078.7 billion and including as a separate title the Balanced
Budget and Emergency Deficit Control Act of 1985. Treasury immediately sold securities to the public and fully invested the trust
funds.
The trust funds had lost interest during this period for several
reasons stemming from Treasury's inability to keep them fully
invested. As part of the Balanced Budget and Emergency Deficit
Control Act, the Congress provided that the trust funds be made

SPECIAL ANALYSIS B

B-15

whole. The debt securities they held were changed so that they
would be the same as if the new debt limit had been enacted before
September, and funds were appropriated to pay the interest they
had lost. The Act also made the social security trust funds whole
for the losses they had incurred as a result of similar circumstances in September and October 1984. Other trust funds were not
made whole for their losses in 1984, however, and no trust fund
was made whole for losses in earlier years.
Treasury completed the required transactions as of December 31,
1985 (except for adjustments later in 1986 that depended on the
course of interest rates in 1986). A total of $494 million was paid to
the trust funds, of which $382 million was paid to social security
(old-age and survivors insurance and disability insurance) and $78
million was paid to the civil service retirement and disability trust
fund. The payment to the social security trust funds consisted of
$373 million to make them whole for the disruption in calendar
year 1984 and $9 million for calendar year 1985. Subsequently a
further $7 million was paid to the social security trust funds, and
Congress enacted legislation to make the civil service retirement
and disability trust fund whole for the interest lost in 1984. This
latter payment came to $82 million.
The limit of $2,078.7 billion was adequate through most of the
rest of fiscal year 1986. Congress enacted a budget resolution for
fiscal year 1987 on June 26, 1986. The resolution contained a provision stating that the appropriate level of debt was $2,322.8 billion.
A joint resolution specifying this as the debt limit effective upon
enactment was deemed to have passed the House, and it was
considered by the Senate. The Senate added numerous amendments to the resolution, and although the amended resolution
passed the Senate it was not adopted by the Congress.
Treasury had to take steps beginning on August 1 to maintain
enough cash balances to meet the Government's obligations and
also to keep the trust funds fully invested. Once again, FFB securities were issued to the civil service retirement and disability trust
fund in place of regular Treasury securities, with the FFB securities having the same interest rates and dates of maturity as the
securities they replaced; the Treasury bill auction for one week was
reduced below the previously prevailing level; and the Exchange
Stabilization Fund was not always kept fully invested. On August
16 the Congress passed a law raising the debt limit to $2,111
billion, and the President signed it on August 21. This was sufficient for the Treasury to keep the trust funds fully invested at the
beginning of September.
At the end of September 1986, however, as at the same time in
the previous two years, Treasury was not able to invest the trust
funds fully. In anticipation of the problem, Treasury had postponed

C-14

• THE BUDGET FOR FISCAL YEAR 1988

or reduced the auctions of some securities and had issued FFB debt
up to the $15 billion statutory maximum. On the last day of September, $17.9 billion was available to be invested for the civil
service retirement and disability trust fund; during the first three
days of October additional funds were available to be invested for
the social security trust funds, the military retirement trust fund,
and the supplementary medical insurance trust fund. The total of
all these amounts was $43.8 billion, but because of the debt limit
only about a third could be immediately invested. The rest was
either used for benefit payments within the following few days or
temporarily left uninvested.
Later in October, just before adjournment, Congress passed the
Omnibus Reconciliation Act of 1986, and the President signed it on
October 21. This Act raised the debt limit to $2,300 billion through
May 15, 1987. Treasury immediately invested the remaining trust
fund balances it had not been able to invest, which were relatively
small by that date. The Act also provided that the trust funds be
made whole for the losses they had incurred because of Treasury's
inability to keep them fully invested. As a result, Treasury paid
the trust funds $41 million.
Because the new limit expires on May 15, 1987, and then reverts
to $2,111 billion, further debt limit legislation will be needed at
that time in order to permit the Federal Government to meet its
obligations.
FEDERAL FUNDS FINANCING AND THE CHANGE IN DEBT SUBJECT
TO STATUTORY LIMIT

The year-to-year change in debt subject to limit, unlike the
change in debt held by the public, is not determined principally by
the size of the total deficit of the Federal Government. This is
because the trust fund surplus or deficit, which makes up part of
the total surplus or deficit of the Federal Government, has no
essential effect on the amount of debt that is subject to limit. The
reason is explained below in a discussion that is more technical
than in most of this special analysis.
The budget consists of two major groups of funds: Federal funds
and trust funds.15 The Federal funds are derived mainly from tax
receipts and borrowing and are used for the general purposes of
the Government. The trust funds, on the other hand, collect certain
taxes and other receipts to be used for specified purposes, such as
paying social security or unemployment insurance benefits. The
social security trust funds (old-age and survivors insurance and
disability insurance) are now excluded from the budget by law and
consequently classified as off-budget Federal entities. However, the
15

Data for Federal funds and trust funds are presented in Special Analysis C, "Funds in the Budget."

SPECIAL ANALYSIS B

B-15

budgetary classification of these trust funds does not affect the
following discussion.
When the Federal funds have a deficit, it must generally be
financed by borrowing, regardless of whether the trust funds have
a surplus. The trust fund surpluses are mostly invested in securities issued by Federal funds, and these securities are classified as
Federal debt. For instance, if the trust funds receive $1 billion
more of tax receipts, the Treasury needs to sell $1 billion less of
debt to the public in order to obtain cash to finance the Government's outlays; but Treasury also needs to issue $1 billion more of
debt to the trust funds in order to keep the trust funds fully
invested. Therefore, total Federal debt is unchanged. The trust
fund surplus thus does not reduce the need for the Federal funds to
issue debt in order to finance the Federal funds deficit (even
though it does reduce the need to borrow from the public).
Federal funds borrowing consists almost exclusively of the Treasury selling debt securities that are subject to the statutory limit.
As a result, almost all of the debt that is used to finance the
Federal funds deficit is subject to the statutory limit. While most of
this debt is sold to the public or issued to trust funds, a comparatively small amount is issued to certain Federal revolving funds
and deposit funds.
Table E - l l shows in detail the relationship of the change in debt
subject to limit to the Federal funds deficit. This deficit is an
amount that has to be financed. Some relatively small portion may
be financed by means other than borrowing, such as seigniorage
and a decrease in cash held by Federal funds (however, if the sum
of these other means of financing is negative, then these other
means are a further amount that has to be financed). 16 A small
portion may be financed by certain Federal funds (or certain deposit funds 17 ) selling their holdings of Federal debt. Another small
portion may be financed by certain Federal funds issuing debt that
is not subject to the statutory limit. The remainder of the amount
to be financed can only be financed by selling debt subject to the
statutory limit. This ordinarily comprises most of the total. Thus,
the Federal funds deficit approximately determines the increase in
debt subject to statutory limit.
In 1986, for example, the total Federal funds deficit to be financed was $283.0 billion. The "means of financing other than
borrowing" required an additional $25.1 billion of financing, in
large part, as noted earlier, because of the decrease in Treasury
cash balances. Certain Federal funds and deposit funds decreased
1 6 The amounts for means of financing other than borrowing exclude the amounts attributable to trust funds.
It is not known how the trust fund open book balances (cash assets not currently invested) are divided between
cash and the grouping labeled "checks outstanding, etc." In table E - l l they are all assumed to be in checks
outstanding, etc.
17 Only those deposit funds classified as Government accounts.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table E - l l . FEDERAL FUNDS FINANCING AND CHANGE IN DEBT SUBJECT TO STATUTORY LIMIT 1
(In millions of dollars)
Description

Federal funds surplus
or deficit (—)

1987 estimate 1988 estimate 1989 estimate 1990 estimate 1991 estimate 1992 estimate

1986 actual

-283,001 -243,006 -211,430 -211,811 -194,858 -171,724 -147,703

Means of financing other
than borrowing:
Decrease or increase
( - ) in Treasury
operating cash balance.. -14,324
Increase or decrease
( - ) in:
Checks outstanding,
etc 2
-7,736
Deposit fund
-3,481
balances3
Seigniorage on coins
392

-9,252

-855

-2,769
430

-1,167
433

419

431

440

Total, means of
financing other
than borrowing.. -25,149

-207

-1,588

-419

431

440

3,697

_ *

-6,453

-1,453

11,384

Decrease or increase ( - )
in Federal debt held by
Federal funds and deposit
funds 4
Increase or decrease ( - )
in Federal funds debt not
subject to limit

18,478

-2,766

Total,
requirements
for borrowing
subject to debt
limit

287,200

242,283

219,709

217,846

195,880

171,294

147,334

242,283

219,709

217,846

195,880

171,294

147,334

Increase in debt subject to
limit but not part of
Federal debt, and in
adjustment
Increase in debt subject
to limit
ADDENDUM
Debt subject to statutory
limit

2,471

-6,671
- 1

-71

287,200

2,110,975 2,353,258 2,572,967 2,790,813 2,986,693 3,157,987 3,305,321

* $50 million or less.
1 Several amounts have been assumed to be zero during 1988-92 because they are usually small and cannot be estimated accurately.
2 Besides checks outstanding, includes accrual of interest payable on Treasury debt, miscellaneous liability accounts, allocations of special
drawing rights, and, as an offset, cash and monetary assets other than the Treasury operating cash balance, miscellaneous asset accounts, profit
cn sale of gold, and a technical error in recording FDIC outlays in 1986.
3 Does not include investment in Federal debt securities by deposit funds classified as part of the public.
4 Only those deposit funds classified as Government accounts.

their holdings of Federal debt by $2.5 billion, which reduced the
need for still further borrowing; and certain Federal funds increased their debt outstanding that was not subject to limit by
$18.5 billion, which replaced an equal amount of debt that was
subject to limit. Therefore, a total of $287.2 billion had to be
borrowed subject to the debt limit.

SPECIAL ANALYSIS B

B-15

The increase in debt subject to limit in 1986 was thus approximately equal to the Federal funds deficit. However, unlike normal
years, the closeness in size was partially the result of offsetting
factors. On the one hand, the requirement for borrowing subject to
the debt limit was reduced by $18.5 billion due to an extraordinary
increase in Federal debt not subject to limit. Most of this, as
explained in the previous section, was the $15.0 billion increase in
FFB debt.
On the other hand, the requirement for borrowing subject to debt
limit was increased $14.3 billion by the unusual increase in the
Treasury operating cash balance. It was also increased $8.2 billion
by Treasury's inability to fully invest the civil service retirement
and disability trust fund surplus at the ends of 1985 and 1986.
The trust fund surplus, whether on-budget or off-budget, does not
have an explicit effect in table E - l l . If the trust fund surplus were
always exactly invested in Federal debt securities subject to the
statutory limit, it would have no effect at all on the amount of debt
subject to limit. However, to the extent that trust fund surpluses
are uninvested—i.e., used to increase the trust fund holdings of
cash assets—the debt subject to limit is reduced. This is because an
increase in uninvested balances provides cash that can be used to
finance Federal funds outlays without recording an increase in
Federal debt. The increase in uninvested cash assets of the trust
funds is recorded in table E - l l as an increase in the liabilities of
the Federal funds for checks outstanding, etc. (i.e., an increase in
the liabilities of Federal funds to trust funds). This increases the
"means of financing other than borrowing" for the Federal funds,
which in turn reduces the requirement for borrowing subject to the
statutory limit. The uninvested cash assets of the trust funds do
not usually change a great deal from year to year, and by law the
trust fund surpluses must generally be invested in Federal debt.
Consequently, the effect of the trust fund surplus on debt subject to
limit is normally minor.
As discussed previously, however, the investment of the civil
service retirement and disability trust fund was not normal at the
end of 1985. The statutory debt limit prevented Treasury from fully
investing this trust fund on the last day of 1985 for the payment
that it received that day from the general fund (part of the Federal
funds). As a result, the trust fund's cash balance was abnormally
high by about $13.4 billion at the end of 1985. Consequently, the
debt subject to limit at the end of 1985 was $13.4 billion lower than
it would have been under normal circumstances, and the Federal
funds deficit was larger than the increase in debt subject to limit
by an additional $13.4 billion. In terms of table E - l l , the uninvested trust fund surplus raised checks outstanding, etc., by $13.4

C-14

• THE BUDGET FOR FISCAL YEAR 1988

billion, which provided $13.4 billion to finance the Federal deficit
by means other than borrowing.
The full investment of the trust fund occurred by mid-November
1985 and required financing by the issuance of securities subject to
the debt limit. This caused a decrease in checks outstanding, etc.,
by $13.4 billion during fiscal year 1986 compared to the amount it
would have been under normal circumstances. However, Treasury
was again unable to fully invest the trust fund on the last day of
1986. As a result, the trust fund's cash balance was abnormally
high by about $5.2 billion. This provided $5.2 billion to finance the
Federal funds deficit by an increase in checks outstanding, etc.,
instead of borrowing. Because of this offset, the net effect of these
trust fund transactions was to reduce checks outstanding, etc. (and
consequently the means of financing other than borrowing), by
$8.2 billion in 1986 instead of a full $13.4 billion. This meant that
an additional $8.2 billion had to be borrowed in 1986 subject to the
debt limit. The inability to fully invest the trust fund at the end of
1986 also meant that the amount of debt subject to limit at the end
of 1986 was $5.2 billion less than it would have been under normal
circumstances.
The full investment of this $5.2 billion occurred in October 1986
and required financing by the issuance of securities subject to the
debt limit. For fiscal year 1987 this causes a decrease in checks
outstanding, etc., by $5.2 billion from the amount it would otherwise have been. The estimated amount of debt subject to limit at
the end of 1987 is not affected by the delays in fully investing the
civil service retirement trust fund at the ends of the two previous
years.
Since the trust fund holdings of Federal debt are included almost
entirely in debt subject to limit, but not in debt held by the public,
the amount of debt held by the public is much less than the
amount of debt subject to limit. Since the trust funds as a group
almost always have a surplus, the change in debt held by the
public from one year to the next is almost always less than the
change in debt subject to limit. As can be calculated from table
E - l l , during 1987 and 1988 the debt subject to limit is estimated to
increase by $462.0 billion, whereas the debt held by the public is
estimated to increase by $269.0 billion.
The present analysis helps to demonstrate the difficulty in preventing a continual rise in the Federal debt subject to statutory
limit. Table E - l l shows that the debt subject to statutory limit
may continue to rise even if the total Federal Government deficit
(including both on-budget and off-budget accounts) is exactly zero
and, as a result, the debt held by the public remains constant (as
an approximation, aside from the relatively small effect of the
means of financing other than borrowing). In order for the debt

SPECIAL ANALYSIS B

B-15

subject to limit to be held constant, table E - l l shows that (as an
approximation) the Federal funds portion of the budget must be in
balance. If this condition is met, the amount to be financed in table
E - l l is zero, and (as an approximation) the requirements for borrowing subject to the debt limit are zero.
However, the trust funds almost always have a surplus. Therefore, a zero Federal Government deficit would imply that there
would still be a deficit in the Federal funds and, as a result, that
the debt subject to statutory limit would still increase. As a result,
it is more difficult to have a balance in the Federal funds alone
than it is to have a balance for the Government as a whole; and, in
consequence, it is more difficult to prevent a rise in the debt
subject to statutory limit than in the debt held by the public.
This is demonstrated by comparing the estimated financing requirements for 1992 that are shown in tables E-3 and E - l l . In 1992
the Federal Government as a whole is estimated to have a $12.3
billion surplus, which allows it to repay $12.7 billion of debt held
by the public. Nevertheless, the debt subject to limit increases by
$147.3 billion. The reason is that the Federal funds have a deficit of
$147.7 billion. The Federal Government as a whole is able to have
a small surplus despite the large Federal funds deficit, because the
trust funds have a surplus of $160.0 billion, which is even larger.
The same conclusion can alternatively be illustrated by comparing the trends in borrowing from the public and borrowing subject
to the debt limit. From 1986 to 1992, Table E-3 shows that annual
borrowing from the public decreases by $249.0 billion, in line with
the movement from a large total Government deficit to a small
surplus. Table E - l l shows, however, that borrowing subject to the
debt limit decreases only by $139.9 billion. This difference of $109.1
billion is mostly because of an $97.7 billion increase in the trust
fund surplus. The rise in the trust fund surplus reduces borrowing
from the public by an equal amount but does not reduce the need
to issue debt subject to the statutory limit.
This analysis also applies to the difficulty in preventing a continual rise in the gross Federal debt. Gross Federal debt is nearly the
same as debt subject to statutory limit, as explained in the previous section. Therefore, in order to prevent a continual rise in gross
Federal debt, the Federal funds portion of the budget must be in
balance (as an approximation).
FEDERALLY ASSISTED BORROWING

The effect of the Government on borrowing in the credit market
arises not only from its own borrowing to finance Federal operations but also from its assistance to certain borrowing by the
public. Federally assisted borrowing is of two principal types: Gov-

C-14

• THE BUDGET FOR FISCAL YEAR 1988

ernment-guaranteed borrowing, and borrowing by Governmentsponsored enterprises.
Guaranteed borrowing is another term for guaranteed lending. It
consists of loans for which the Federal Government guarantees (or
insures) the payment of the principal and/or interest in whole or
in part. Guaranteed loans have diverse characteristics. The loans
may be made to individuals, businesses, State and local governments, or foreign governments. The guaranteed obligation may be
a loan made by a bank or other institutional lender or it may be a
security sold in the capital market.
Loan guarantees are designed to allocate economic resources
toward particular uses by providing credit at more favorable terms
than would otherwise be available in the private market. The
major use of loan guarantees is to support housing, but they are
also used for many other purposes. As shown subsequently in table
E-13, primary guaranteed borrowing (which excludes double counting) was $34.6 billion in 1986 and is estimated to be $76.4 billion in
1987 and $54.1 billion in 1988. Special Analysis F, "Federal Credit
Programs," presents detailed data on guaranteed loans and estimates the subsidies that are provided by loan guarantees. Part 3b
of the Budget—Supplement also discusses Federal credit and outlines the Administration's forthcoming reform proposal for the control of Federal credit.
The other type of federally assisted borrowing is borrowing by
Government-sponsored enterprises, which are discussed in more
detail in Special Analysis F. These enterprises were established
and chartered by the Federal Government to perform specific
credit functions but are now entirely privately owned. The rule
governing the budget treatment of these enterprises was established in 1967 in accordance with a recommendation by the President's Commission on Budget Concepts. The Commission, whose
report led to the adoption of the unified budget, recommended that
the budget exclude those Government-sponsored enterprises that
are entirely privately owned. 18 Therefore the transactions of these
enterprises are not included within the Federal budget, and their
debt is not part of gross Federal debt.
The seven Government-sponsored credit enterprises are financial
intermediaries. They borrow in the securities market and lend
their borrowed funds for specifically authorized purposes either
directly or by purchasing loans originated by the private groups
that they were established to assist. The borrowing programs of
these enterprises are subject to Federal supervision. In addition,
they all consult the Treasury Department, either by law or by
custom, in planning their market offerings. The Federal National
18 Report of the President's Commission on Budget Concepts (Washington: U.S. Government Printing Office,
1967), pp. 29-30.

SPECIAL ANALYSIS B

B-15

Mortgage Association, the Federal Home Loan Banks, and the
Student Loan Marketing Association (SLMA) are required to obtain
Treasury approval of the terms and timing of specific offerings.
SLMA borrowed exclusively from the Federal Financing Bank from
the time of FFB's establishment until May 1981.19 SLMA now
borrows new funds from the public, without any guarantee. The
three enterprises regulated by the Farm Credit Administration—
the Banks for Cooperatives, Federal Intermediate Credit Banks,
and Federal Land Banks—borrow by issuing consolidated Farm
Credit bonds and notes rather than securities under their separate
names.
Government sponsorship of these enterprises has given them
various direct benefits. These benefits differ from one enterprise to
another and from one type of debt security to another. In most
cases, but not all, they include such advantages as the following:
their debt securities can be held by federally regulated financial
institutions under a number of circumstances where other private
securities or State and local securities are not eligible; they are
exempt from Federal, State, and local income taxation; the interest
on their debt securities is exempt from State and local income
taxation; and they have lines of credit with the Federal Government that range up to $4 billion. Because of these specific advantages and the overall Federal sponsorship, the enterprises are perceived by the securities market to have a special relationship with
the Federal Government. As a result, and despite the absence of
Federal guarantees, the Government-sponsored enterprises borrow
at lower interest rates than they would otherwise have to pay.
The operations of the Government-sponsored enterprises are not
subject to the Federal budget review process; and the economic
assumptions on which their borrowing estimates are based for
1987-88 are not necessarily the same as the Administration's economic forecast, which is used for the budget. In order to show the
borrowing by this sector as a whole from the rest of the market,
the total borrov/ing figures in table E-12 are calculated net of the
borrowing by one Government-sponsored enterprise from another.
Most of this adjustment is accounted for by the Federal Home Loan
Mortgage Corporation repaying its debt to the Federal Home Loan
Banks.
Borrowing by Government-sponsored enterprises has risen to
much higher levels in the last few years than it was before. Until
1978 the largest amount of borrowing by this sector as a whole had
been $14.9 billion in 1974. Borrowing increased sharply to a range
of $24-$27 billion during 1978-80, however, and then expanded
1 9 SLMA was the only Government-sponsored enterprise whose new securities could be guaranteed by the
Government and therefore bought by the FFB. The Secretary of Education had authority to guarantee SLMA
securities issued prior to October 1, 1984.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

with only one interruption to $64.1 billion in 1985. Borrowing
increased significantly again in 1986, reaching $107.3 billion. The
Government-sponsored enterprises estimate that it will be almost
as large in 1987 and 1988.
Table E-12. BORROWING BY GOVERNMENT-SPONSORED ENTERPRISES
(In millions of dollars)
Borrowing or repayment
Description

1985
actual

1986
actual

(-)

1987
estimate

1988
estimate

Debt
outstanding
end 1988
estimate

2,671

2,856

2,989

3,410

21,925

27,451

39,526

34,108

38,284

252,380

-258
-2,745
-1,382

422
-2,561
-3,595

-858
-3,315
-9,222

-373
-257
-1,204

7,258
9,389
32,228

6,168
31,581

14,509
55,952

6,917
59,159

9,000
50,692

104,000
271,618

63,486

107,109

89,777

99,552

698,798

Less increase in holdings of debt issued by Government-sponsored enterprises

-626

-203

-325

919

Total, borrowing by Govemment-sponsored enterprises

64,112

107,312

90,102

99,538

697,879

Education: Student Loan Marketing Association
Housing and Urban Development: Federal National
Mortgage Association
Farm Credit Administration:1
Banks for cooperatives
Federal intermediate credit banks
Federal land banks
Federal Home Loan Bank Board:
Federal home loan banks
Federal Home Loan Mortgage Corporation
Total

The debt represented by consolidated notes and bonds is attributed to the respective Farm Credit banks.

The major Government-sponsored borrowers during 1985-88 are
the two enterprises that borrow in order to support housing
through the purchase of mortgages, the Federal Home Loan Mortgage Corporation (FHLMC) and the Federal National Mortgage
Association (FNMA). In 1985 they borrowed $59.0 billion altogether; during 1986-88 they borrowed or are estimated to borrow $89$95 billion each year, which is 93% of total Government-sponsored
borrowing for these years. This high level of borrowing is almost
entirely being carried out through FHLMC's and FNMA's programs of mortgage-backed securities. Under both of these programs
the enterprises purchase conventional mortgages and finances the
purchases by packaging the mortgages into pools and selling participation certificates in the pools to the public. By the end of 1988,
FHLMC and FNMA are estimated to have raised their combined
share of total Government-sponsored debt from 42% in 1980 to
75%.
Although the borrowing by FHLMC and FNMA currently dominates the Government-sponsored sector, the borrowing by the Federal Home Loan Banks is also large. They are estimated to continue increasing their debt in order to finance loans to savings and
loan associations and other thrift institutions. Their operations also
support the housing sector. In contrast, the three Government-

SPECIAL ANALYSIS B

B-15

sponsored enterprises that comprise the Farm Credit System—the
Banks for Cooperatives, the Federal Intermediate Credit Banks,
and the Federal Land Banks—contracted their net lending and
borrowing in 1985 and 1986 and, as a group, are estimated to
contract it further in 1987 and 1988. This reflects in part the
current economic difficulties of the farm sector.
The Federal Government provides a different kind of assistance
to State and local government borrowing than it does to other
borrowing. It exempts the interest on State and local debt from
Federal income tax. This reduces the interest rate these governments have to pay and thereby encourages them to borrow larger
amounts.
Tax exemption has also been extended to certain bonds nominally issued by a State or local government to raise funds for private
purposes. These private purpose bonds, such as industrial development bonds, now comprise over half of all new long-term, taxexempt issues. In 1986 the total tax-exempt borrowing (net of repayments) estimated in the Federal Reserve flow-of-funds accounts
was $143.5 billion. The Tax Reform Act of 1986 limited to some
degree the issuance of private purpose tax-exempt bonds and reduced the ability of issuers to earn arbitrage by investing the
proceeds of tax-exempt bonds in taxable instruments. Tax-exempt
borrowing is discussed further in Special Analysis F, "Federal
Credit Programs," and, from a different perspective, in Special
Analysis G, "Tax Expenditures."
TOTAL FEDERAL AND FEDERALLY ASSISTED BORROWING

Table E-13 summarizes Federal and federally assisted borrowing.
Federal borrowing from the public is presented in total. Guaranteed borrowing and borrowing by Government-sponsored enterprises are presented both as total amounts for the sector as a whole
and as net amounts. The net amounts contain adjustments that
were made in order to remove double counting in the aggregation
of total Federal and federally assisted borrowing. Double counting
would otherwise occur when a Federal agency or a Governmentsponsored enterprise bought (or sold) a Federal or federally assisted
debt security. This is because borrowing would occur both when the
security was initially sold and when the Federal agency or Government-sponsored enterprise borrowed in order to finance its purchase.
Federal borrowing from the public to finance the deficit is the
largest part of Federal and federally assisted borrowing each year
during 1986-88. However, while Federal borrowing comprised 63%
of the total for 1986, it falls to an estimated 50% in 1987 and 42%
in 1988. This decline is the result of two factors. Federal borrowing
is estimated to decrease sharply, in line with the deficit target for

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table E-13. NET BORROWING BY GOVERNMENT, GOVERNMENT-GUARANTEED BORROWERS, AND
GOVERNMENT-SPONSORED ENTERPRISES
(In billions of dollars)
Borrowing or repayment ( — )
Description

1986
actual

Federal borrowing from the public1
Guaranteed borrowing (net) 2 3
Less increase in guaranteed loans held by Federal agencies: 3
Government National Mortgage Association
Primary guaranteed

borrowing4
enterprises5

Borrowing by Government-sponsored
Less increase in holdings of Federal debt
Less increase in Government-sponsored debt held by Federal
agencies:
Federal Financing Bank
Tennessee Valley Authority
Less increase in holdings of guaranteed loans:
Student Loan Marketing Association6
Federal National Mortgage Association
Farm Credit Banks
Federal Home Loan Banks
Federal Home Loan Mortgage Corporation
Net Government-sponsored borrowing
Total, Federal and federally assisted borrowing

1987
estimate

236.3
33.8

Debt
outstanding
end 1988
estimate

1988
estimate

162.2

106.7

2,015.1

75.8

54.1

580.6

*
-.8

-.5

34.6

76.4

54.1

580.3

107.3
-.8

90.1
_ *

99.5
.2

697.9
2.2

_ *

4.9
.1

2.6
- 3 . 4*

2.9

3.2

.5
1.3

*
.3

15.3
27.7*

107.1

87.2

95.8

641.2

378.0

325.8

256.7

3,236.6

3.4
3.1

* $50 million or less.
1 See table E - l .
2 "Guaranteed borrowing (net)" is the same as "guaranteed loans (net)" in table F—19 of Special Analysis F. To avoid double counting, it is
calculated net of guarantees of loans previously guaranteed and guarantees of Federal agency debt.
3 The increase in guaranteed loans held by the FFB is netted out in deriving guaranteed borrowing (net).
4 "Primary guaranteed borrowing" in this table is the same as "primary guaranteed loans" in table F—19.
5 From table E-12.
6 The increase in holdings of guaranteed loans by the Student Loan Marketing Association is subtracted out on this line only to the extent that
SLMA borrows from the public. To the extent that SLMA borrows from the FFB, the increase in holdings of guaranteed loans is ultimately
financed by Federal borrowing and the loans are therefore classified as direct loans rather than guaranteed loans. This amount is subtracted out
above as an increase in Government-sponsored debt held by Federal agencies.

1988; and federally assisted borrowing rises by a small amount,
with the increase in primary guaranteed borrowing larger than the
small decrease in net Government-sponsored borrowing. At the end
of 1988 Federal debt held by the public is 62% of the total Federal
and federally assisted debt outstanding.
The following chart depicts the trends in Federal and federally
assisted borrowing from 1968 to 1988. The series are volatile, and
the fluctuations are usually dominated by Federal borrowing,
which is driven primarily by the Federal deficit. The fluctuations
in the Federal deficit, in turn, are at most times strongly related to
the pattern of recession and recovery. Total Federal and federally
assisted borrowing increased steadily and substantially from $80.8
billion in 1979 to $280.5 billion in 1983. With a subsequent lower
deficit and with federally assisted borrowing not rising very much,
the total was lower in 1984 and 1985. However, in 1986 net Govern-

B-15

SPECIAL ANALYSIS B

ment-sponsored borrowing rose by $49.3 billion, Federal borrowing
by $39.0 billion, and guaranteed borrowing by $13.0 billion, for a
combined increase of $101.3 billion. This produced a record $378.0
billion of Federal and federally assisted borrowing in 1986. In 1987
and 1988, though, sharp decreases in Federal borrowing are estimated to reduce the total by $121.3 billion or 32%.

Federal and Federally Assisted Borrowing

Fiscal Years

Estimate

As the chart shows, Federal and federally assisted borrowing is
now a great deal higher than a decade ago. Much of the increase
parallels the growth in the economy and in the total funds borrowed by the non-financial sector in the credit market. However,
total Federal and federally assisted borrowing has increased as a
proportion of the total funds borrowed. This proportion increased
from 17% during 1960-69 to 22% during the first half of the 1970's
and 27% during the second half. During 1980-86 the proportion
was higher still, averaging 41%. Thus, Government programs have
recently been a larger proportion of funds borrowed in credit markets than they were in the preceding years. However, the proportions during 1984-86 were lower than during 1982-83, and the total
of Federal and federally assisted borrowing is estimated to decline
considerably in 1987 and 1988. This suggests that the upward trend
of relative Federal participation in the credit market may no
longer be continuing.

C-14

• THE BUDGET FOR FISCAL YEAR 1988
Table 6. FEDERAL GOVERNMENT FINANCING AND DEBT
(In billions of dollars)

FINANCING
Estimate
1986 actual
1987

Surplus or deficit ( - ) . . .
On-budget
Off-budget
Means of financing other
than borrowing from the
public:
Decrease or increase
( - ) in Treasury
operating cash balance..
Increase or decrease
( - ) in:
Checks outstanding,
etc.1
Deposit fund balances....
Seigniorage on coins

1988

1989

1990

1991

-220.7
-173.2
-92.8
-107.8
-59.5
(-237.5) (-192.7) (-147.4) (-144.5) (-123.8)
(16.7)
(64.3)
(19.5)
(51.7)
(39.7)

1992

-21.3
(-95.7)
(74.4)

12.3
(-69.1)
(81.4)

-14.3

11.4

1.9
-3.5
0.4

1.9
-2.8
0.4

1.8
-1.2
0.4

0.4

Total, means of
financing other
than borrowing
from the public

-15.6

10.9

1.0

0.4

Total, requirements
for borrowing
from the public

-236.3

-162.2

-106.7

-92.3

-59.1

-20.9

12.7

236.3

162.2

106.7

92.3

59.1

20.9

-12.7

Change in debt held by
the public

DEBT, END OF YEAR
Gross Federal debt:
Debt issued by Treasury
Debt issued by other
agencies
Total, gross Federal
debt
Held by:
Government accounts
The public
Federal Reserve
Banks
Others

2,128.2

2,364.7

2,580.3

2,793.2

2,989.1

3,160.3

3,307.7

4.8

7.8

5.1

3.7

2.2

2,132.9

2,372.4

2,585.5

2,796.9

2,991.3

3,162.6

3,309.8

386.8
1,746.1

464.0
1,908.4

570.4
2,015.1

689.4
2,107.5

824.8
2,166.5

975.2
2,187.4

1,135.2
2,174.7

190.9
1,555.3

DEBT SUBJECT TO STATUTORY LIMITATION, END OF YEAR
Debt issued by Treasury
Treasury debt not subject to
limitation ( - ) 2
Agency debt subject to
limitation
Total, debt subject to
statutory limitation 3 .

2,128.2

2,364.7

2,580.3

2,793.2

2,989.1

3,160.3

3,307.7

-18.5

-12.7

-7.6

-2.6

1.3

0.2

2,111.0

2,353.3

2,573.0

2,790.8

2,986.7

3,158.0

3,305.3

1 Besides checks outstanding, includes accrued interest payable on Treasury debt, miscellaneous liability accounts, allocations of special drawing
rights, and, as an offset, cash and monetary assets other than the Treasury operating cash balance, miscellaneous asset accounts, profit on sale
of gold, and a technical error in recording FDIC outlays in 1986.
2 Consists of Federal Financing Bank debt, the unamortized difference between the purchase price and par value of certain Treasury securities
held by Government accounts, and other Treasury debt not subject to statutory limitation.
3 The permanent statutory debt limit is $2,111 billion. Public Law 9 9 - 5 0 9 temporarily increased the limit to $2,300 billion through May 15,
1987.

SPECIAL ANALYSIS F
TABLE OF CONTENTS

Page

I. Introduction

F-3

II. Controlling Federal Credit Programs

F-4

III. The Credit Budget

F-8

A. Credit Budget Principles

F-8

B. Appropriations Acts Limitations

F-10

C. Direct Loans

F-14

D. Loan Guarantees

F-18

IV. Government-Sponsored Enterprises

F-22

V. Changes in the Quantity and Price of Federal Credit

F-29

VI. Federal Credit Subsidies

F-32

VII. Defaults

F-38

VIII. Federal Financing Bank

F-41

IX. Loan Asset Sales to the Public

F-43

X. Federal Deposit Insurance and Contingent Liabilities

F-44

XI. Leasing

F-47

XII. Tax-Exempt Credit

F-48

XIII. Summary

F-53

XIV. Appendix

F-54

F-l

TABLES

Page

Table F - l Contingent Liability for Guaranteed Loans Outstanding
Table F-2 Credit Budget Totals
Table F-3 Credit Budget Programs Subject to and Exempt from Appropriations Acts Limitations
Table F-4 Credit Appropriations Acts Limitations
Table F-5 Comparison of Enacted Limitations with Actual Loan Levels for
Selected Programs in 1986
Table F-6 Summary of Direct Loan Transactions
Table F-7 Summary of Primary Guaranteed Loan Transactions
Table F-8 Summary of Lending and Borrowing by Government-Sponsored
Enterprises
Table F-9 Some Benefits Enjoyed by Government-Sponsored Enterprises
Table F-10 Summary of Outstanding Federal and Federally Assisted Credit..
Table F - l l Estimated Subsidy Costs for 1986 Direct Loan Obligations
Table F-12 Estimated Subsidy Costs for 1986 Guaranteed Loan Commitments
Table F - l 3 Direct Loan Write-offs and Guaranteed Loan Terminations for
Defaults
Table F-14 Summary of Federal Financing Bank Activities
Table F-15 Loan Asset Sales to the Public
Table F-16 Contingent Liability of the Federal Government
Table F-17 Tax-Exempt Financing
Table F-18 Direct Loan Transactions of the Federal Government
Table F-19 Guaranteed Loan Transactions of the Federal Government
Table F-20 Lending and Borrowing by Government-Sponsored Enterprises....
Table F-21 Federal Financing Bank Activities
Table F-22 Federal Participation in Domestic Credit Markets

F-9
F-9
F-10
F-l2
F-14
F-l5
F-20
F-23
F-24
F-32
F-35
F-37
F-39
F-42
F-44
F-45
F-52
F-56
F-66
F-72
F-75
F-79

CHARTS
Page

Chart F - l
Chart F-2
Chart F-3
Above
Chart F-4

Total Federal Credit Budget
F-4
Used and Unused Balance of Enacted Limitations—Eximbank
F-l3
Government-Sponsored Enterprises and A-Rated Bonds: Spread
Treasuries
F-24
Federal Participation in Domestic Credit Markets
F-31

F-2

SPECIAL ANALYSIS E
FEDERAL CREDIT PROGRAMS
I. INTRODUCTION

The Federal Government is the Nation's largest financial intermediary. At the end of 1986, it held loans with a face value of $252
billion in its direct loan portfolio, which was 26 percent larger than
the loan assets of the two largest U.S. commercial banks combined.
The Federal Government also had guaranteed loans with an outstanding balance of $450 billion at the end of 1986. Through direct
loans and loan guarantees, the Federal Government allocates or
influences the allocation of credit and credit subsidies to farmers,
homeowners, small businesses, exporters, utilities, shipbuilders,
and State, local, and foreign governments. The following chart
compares the pattern of growth over the last two decades with the
most recent patterns and with estimates of future trends through
1992.
Federal credit is designed to meet various social or economic
goals that, for whatever reason, the private sector does not meet.
Meeting these goals may entail the provision of a subsidy to a
favored borrower or the correction of a perceived capital market
imperfection.
The problems in directing or controlling Federal credit are enormous and systemic. The discipline that the private market imposes
on private financial intermediaries is absent. The discipline that
the current budget process imposes is not fully effective in controlling Federal credit programs. The Federal credit budget, while an
improvement over the previous control and display mechanisms of
the unified budget, does not take into account explicitly the most
important aspect of Federal credit—the economic subsidy offered to
borrowers. The subsidy, as used here, measures the value to the
borrower by comparing the terms and conditions associated with a
Government loan to the alternative terms and conditions of financing for a similar loan from a private lender. This special analysis
shows estimates of the subsidies provided by direct loan and loan
guarantee programs in Tables F - l l and F-12.
In order to focus on that subsidy, the administration is proposing
a reform of budgeting for credit programs that would remedy the
shortcomings of existing practices by incorporating into the unified
budget the subsidies provided by credit programs. The credit

F-3

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Total Federal Credit Budget

reform proposal is outlined in Part 3, "Federal Credit," of the
Budget of the United States Government, FY 1988—Supplement
Details of this proposal and specific legislative language will be
transmitted to the Congress in March 1987.
This special analysis presents basic information on the broad
spectrum of Government credit programs and policies from 1986
through 1992. It describes recent credit policy, summarizes the
credit reform initiative, and explains the credit budget and its
relationship to appropriations act limitations on direct loan obligations and guaranteed loan commitments. It outlines the credit
activity of Government-sponsored enterprises (GSEs), and presents
in detail the direct loans and guaranteed loans of the Federal
Government. It also discusses trends in Federal credit, Federal
credit subsidies, and other special topics. This special analysis supplements the credit data and discussions found elsewhere in the
budget. See the Appendix of this special analysis for more details.
II. CONTROLLING FEDERAL CREDIT PROGRAMS

Comparisons with Private Financial Intermediaries.—The objectives of Federal credit programs are different from those of private
financial institutions. While private financial institutions seek to

SPECIAL ANALYSIS B

B-15

make a profit on their lending, Federal credit programs normally
exist to offer credit to selected borrowers on terms and conditions
that are more favorable than those available from private lenders.
In some cases, the Government offers credit to borrowers for whom
no private source of credit is available. Compared to fully private
loans, these terms and conditions may include lower interest rates
or loan guarantee fees, less stringent credit risk thresholds in
making credit available, or more generous grace periods or repayment schedules. Legislation frequently defines the eligible pool of
applicants, specifies the lending terms that an agency or program
may offer, and otherwise restricts the discretion of Federal program managers in a manner that never occurs for private lenders.
In addition to these differences in purpose, there are also differences in procedures between public and private financial intermediaries. Unlike a private financial intermediary, a Federal direct
loan or loan guarantee program has no standard measure of performance, such as profit, for assessing its success. Federal credit
programs were created to subsidize favored borrowers to varying
degrees. Therefore, net income does not measure success. In many
cases, income is not even measured correctly since there is no welldefined cost of capital for credit programs. The lack of a measurement tool creates difficulties in efficiently allocating resources to
Federal credit (and noncredit) programs.
Moreover, the standards of the marketplace that restrict the
growth and size of private lenders do not apply to Federal credit
programs. Unlike commercial banks, Federal agencies need not
worry about constraints on the volume or quality of new lending
imposed by the inadequacy of primary capital. Federal agencies
can continue to lend even if they have little or no equity. Federal
lending agencies need not be concerned with the standards imposed
on private banks by Federal regulatory agencies for assessing and
reporting on the quality of loan portfolios. This makes alternative
forms of discipline all the more important if Federal credit is to be
directed in the most efficient manner.
The Unified Budget and the Appropriations Process.—The unified
budget, with its focus on budget authority, outlays, and receipts,
provides a comprehensive system for recording and controlling
most receipts and outlays, but it is an incomplete mechanism for
recording and controlling Federal credit programs. The unified
budget measures net outlays, not the full volume of new credit
extended for direct loans. The appropriations process also treats
credit in a limited way. The largest direct loan programs are
currently financed by revolving funds in which disbursements for
new direct loans are offset by repayments on existing loans. Congressional appropriations of budget authority for these revolving
funds are generally necessary only when new disbursements exceed

C-14

• THE BUDGET FOR FISCAL YEAR 1988

available fund balances, which can be augmented by loan repayments and asset sales. Consequently, the appropriations process
does not normally control directly the amount of new direct loans
extended.
Second, guaranteed loan commitments, an important form of
credit, do not constitute outlays and are not reflected in the unified
budget. While, in principle, they could be included under budget
authority, commitments were excluded from the definition of
budget authority by the Congressional Budget Act of 1974. The
reason for the exclusion was that the loan guarantee, by itself, does
not affect budget outlays and the deficit. The loan guarantee is
only a contingent liability of the Government. However, by assuming that contingent liability, the Government induces lenders to
invest in particular loans by making them "riskless" from the
lender's standpoint, and thereby allocates capital for federally determined purposes. In this manner, a guaranteed loan commitment
may provide as large a subsidy and redirect capital as effectively as
a direct loan obligation.
A third important shortcoming of the regular budget process for
credit programs is that it neither measures nor controls the most
salient aspect of Federal credit—the size of the subsidy offered the
borrower. Since a primary purpose of Federal credit programs is to
provide borrowers with a subsidy, this is a serious omission in
effective budgetary control. Without some means of measuring and
controlling this subsidy, neither the executive branch nor the Congress can make informed decisions about Federal credit programs,
either in comparing one with another, or in comparing them with
noncredit expenditure programs.
The Federal Credit Budget.—In January 1980, a significant step
in redressing some of the inadequacies of the existing budget process was made with the introduction of the Federal credit budget.
The Federal credit budget measures the direct loan obligations and
guaranteed loan commitments, and, through the use of language in
appropriation acts, limits these credit activities. Although it is a
step forward, the credit budget has significant limitations—it does
not measure subsidy costs, nor does it place any direct restriction
on the level of subsidy that a program offers the borrower.
The Balanced Budget and Emergency Deficit Control Act of 1985,
also known as Gramrn-Rudman-Hollings, has led to a change in the
way transactions of the Federal Financing Bank (FFB) are treated
in the credit budget. As discussed further in the section below
entitled 4'Federal Financing Bank," FFB transactions formerly presented as a separate line item in this special analysis and elsewhere in the budget have now been incorporated into the account
of the agency originating the transaction.

SPECIAL ANALYSIS B

B-15

OMB Circular No. A-70.—One means of controlling Federal
credit more effectively is to control the price at which it is offered
to the public. As a step toward this goal, the Office of Management
and Budget (OMB) reissued Circular No. A-70, "Policies and Guidelines for Federal Credit Programs," on August 24, 1984. OMB circulars are directives that are binding upon the executive agencies as
a matter of Presidential policy and are generally enforceable
through administrative procedures. Circular A-70 was approved by
the President prior to its release.
The A-70 guidelines apply to both existing and proposed Federal
direct loan and loan guarantee programs. The guidelines place two
sets of requirements on agencies. The first is to provide information on the costs and benefits of Federal credit programs. This
includes estimates of the alternative credit available from relevant
private financial institutions, Federal subsidies, and net default
costs.
The second requirement is that new legislation or policies for
credit programs be consistent with sound credit policies set out in
the circular. If current legislation does not conform to those policies, agencies are generally required to prepare proposals to change
that legislation so the programs will conform to A-70 guidelines.
A second OMB circular, No. A-129, "Managing Federal Credit
Programs/' expands on many of A-70's principles. It contains comprehensive guidance on servicing and collecting all Government
receivables, including those arising from direct and guaranteed
loans, grants and contracts. It requires agencies to develop annual
credit management improvement plans describing their strategies
for meeting performance goals and implementing the "nine-point
program," which is discussed in the "Defaults" section of this special analysis.
Credit Reform Initiative.—Part 3 of the Budget Supplement contains an outline of an administration proposal to change the way
Federal credit programs are treated in the budget. Under this
reform, Federal agencies would obtain appropriations equal to the
estimated subsidy component of the direct loans and loan guarantees they propose to make each year. A new Federal credit revolving fund (referred to as "the fund") would be established within the
Department of the Treasury. As agencies make obligations for new
direct loans, they would pay the estimated subsidy value of these
loans into the fund, which would be recorded in the budget account
of the originating agency. The fund would provide the balance, or
financing portion, of the loan. As commitments for new loan guarantees are made, their estimated subsidy value would be paid into
the fund and recorded in the budget account of the originating
agency.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

The fund would oversee the sale to the public of all new direct
loans for which there are no policy or programmatic constraints to
such asset sales, and it would oversee the purchase of private
sector reinsurance for new guaranteed loans insofar as it is available. The subsidy cost of direct loans sold and loan guarantees
reinsured would be determined by the actual price established by
the market. Loan subsidies for direct loans not sold and guaranteed
loans not reinsured would be calculated by the fund.
III. THE CREDIT BUDGET
A . CREDIT BUDGET PRINCIPLES

The credit budget measures direct loan obligations and guaranteed loan commitments. It is the sum of the credit authority offered by the Federal Government. The credit budget is based on
three principles. First, it is intended to measure new credit at the
point that the Government legally contracts to provide a loan or a
loan guarantee. Usually, this is when a loan agreement or loan
guarantee agreement is signed.
Second, the credit budget is based on credit authority—the authority to make new offers of credit. Credit authority is measured
on a gross basis and does not reflect repayments of loans. This
concept differs from the unified budget where budget authority is
required only when collections are insufficient to finance new
budgetary obligations. The concept of credit authority is necessary
because subsidies are provided to all new recipients of direct loans
and loan guarantees, regardless of the extent to which borrowers
are repaying other loans previously made.
Third, guaranteed loan commitments are measured as the full
principal of the loan, even if the Government's contingent liability
is less than the full loan principal. The full principal is included in
the commitment because the entire loan, even if only partially
guaranteed, is assisted by the guarantee. Moreover, in some programs that offer partial guarantees, the private lender is at risk
only when the value of the collateral and the guarantee combined
are less than the full loan principal.
There are a number of programs in which less than the full
principal of the loan is guaranteed. The major agency that nominally offers guarantees significantly below full loan principal is the
Veterans Administration (VA).1 In the aggregate, of the $450 billion of guaranteed loans outstanding in 1986, the Government's
contingent liability was $363 billion or 81 percent. Excluding the

1 The contingent liability for VA mortgage guarantees is up to 60 percent of the mortgage amount or a
maximum of $27,500. The guarantee frequently acts as a 100 percent guarantee because, in 85 percent of the
foreclosures involving VA guaranteed property, the VA acquires the property from the lender, who is made
whole, rather than paying the guaranteed portion of the loan.

B-15

SPECIAL ANALYSIS B

VA, the contingent liability was $300 billion for $307 billion of
guaranteed loans outstanding, or 98 percent.
The contingent liability and full principal of all guaranteed loans
outstanding are shown in Table F-l.
Table F - l . CONTINGENT LIABILITY FOR GUARANTEED LOANS OUTSTANDING
(In billions of dollars)
1986 actual

1987 estimate

1988 estimate

Veterans Administration mortgage guarantees.Contingent liability
Full principal

62.8
142.6

67.7
153.8

71.4
162.2

All other loan guarantee programs.Contingent liability
Full principal

300.2
307.2

364.4
372.4

407.9
418.1

Total outstanding:
Contingent liability
Full principal

363.0
449.8

432.1
526.2

479.3
580.3

Table F-2 provides the credit budget totals for 1984 through
1989. It also shows the major direct loan programs and loan guarantee programs.
Table F-2. CREDIT BUDGET TOTALS
(In billions of dollars)
estimate

actual
1984

Direct loan obligations:
Farmers Home Administration
Foreign military sales
Commodity Credit Corporation
Rural Electrification Administration
Export-Import Bank
Low-rent public housing
All other

1985

1986

1987

1988

1989

7.2
5.7
5.5
2.1
1.5
1.4
15.7

7.9
4.9
10.4
4.0
0.7
14.1
10.8

5.0
5.0
17.7
3.1
0.6

2.4
4.0
17.8
1.5
0.9

1.3
4.4
13.5
0.4
1.0

0.5
4.5
11.2
0.2
0.9

9.9

8.3

6.5

5.8

obligations1

39.1

52.8

41.3

34.9

27.1

23.1

Guaranteed loan commitments:
Federal Housing Administration
Veterans Administration housing
Low-rent public housing
Guaranteed student loans
Export-Import Bank
Commodity Credit Corporation
All other

17.1
16.5
13.7
7.6
7.1
4.2
4.6

47.4
12.1

102.6
34.3

87.0
35.0

70.0
27.9

69.0
27.7

8.9
7.8
2.7
5.8

8.6
5.5
2.5
5.7

9.6
11.4
5.5
7.2

9.4
10.0
3.5
7.2

10.7
10.0
3.5
8.6

70.8

84.7

159.2

155.7

128.4

129.5

109.9

137.6

200.6

190.6

155.5

152.6

39.7

54.6

138.0

132.5

100.0

Total

Total commitments2
Total credit budget
MEMORANDUM
Secondary guaranteed loan commitments....

Includes loans with an agency guarantee disbursed by the Federal Financing Bank.
2 Excludes commitments for guarantees of loans previously guaranteed
(secondary guarantees) and commitments for guarantees by one
Government account of direct loans made by another Government account. Totals for the former are shown in the memorandum. Totals for the
latter are included as direct loans.
1

C-14

• THE BUDGET FOR FISCAL YEAR 1988

For 1988, the administration proposes that the credit budget
decrease by $35 billion, or 18 percent below the 1987 totals. The
programmatic reasons for the changes in the credit budget totals
since 1986 are discussed below in the sections on direct loans and
guaranteed loans.
B . APPROPRIATIONS ACTS LIMITATIONS

The credit budget is included in the budget resolution and limitations for many programs are subsequently enacted in annual appropriations acts. The administration proposes limitations annually
on direct loan obligations and guaranteed loan commitments for
most credit programs. The limitations serve as ceilings on the
volume of new credit that may be offered by the account. The
limitation is specified in the appropriation language for individual
budget accounts that include credit activity.
The President's 1988 Budget proposes limitations for programs
whose funding amounts to 61 percent of the credit budget totals.
Approximately 32 percent of direct loan obligations (excluding obligations for defaulted loans) and 68 percent of guaranteed loans are
proposed for limitation. The relatively low percentage for direct
loans results because the largest direct loan program—CCC commodity loans—is exempt from limitation. Table F-3 indicates the
breakdown of loans subject to, and exempt from, appropriations act
limitation.
Table F-3. CREDIT BUDGET PROGRAMS SUBJECT TO AND EXEMPT FROM APPROPRIATIONS ACTS
LIMITATIONS
(In millions of dollars)
Guaranteed loan commitments

Direct loan obligations
1986

Limitations enacted
Less.- Unused balance of limitation,
expiring
Loan subject to limitation
Loans subject to limitation under P. L.
99-177 1
Loans exempt from limitation 2
Total

1987

1988

1986

1987

1988

87,234

15,664

10,259

8,055

193,915

114,535

-2,200

-579

-529

-49,520

-13,025

13,464

9,680

7,526

144,395

101,510

87,234

7,945
19,920

25,248

19,610

9,462
5,386

54,196

41,129

41,329

34,927

27,136

159,243

155,705

128,362

137,962

132,500

100,000

ADDENDUM
Secondary guarantees subject to limitation

1 Baianced Budget and Emergency Deficit Control Act of 1985 (Gramm-Rudman-Hollings).
2 Includes direct loan obligations for defaulted guaranteed loan claims, as follows: 1986, $5,927 million; 1987, $4,454 million; and, 1988,
$3,960 million.

The first stage of congressional action on the credit budget is the
budget resolution. The Congressional Budget Act, as amended by
Gramm-Rudman-Hollings, requires functional allocations for direct

SPECIAL ANALYSIS B

B-15

loan obligations, primary loan guarantee commitments, and secondary loan guarantee commitments in the budget resolution. The
functional targets are then allocated to the Appropriations Committee and other committees. In the event of a sequestration under
Gramm-Rudman-Hollings, credit authority—direct loan obligations
and guaranteed loan commitments—is reduced by the general nondefense sequestration percentage.
After the budget is submitted to the Congress, the House and
Senate Appropriations Committees begin working on the 13 appropriation bills. Three bills contain 19 of the 27 requested limitations:
Agriculture, Foreign Assistance, and Housing and Urban Development/Independent Agencies. Over the past several years, Congress
has enacted limitations in most of the programs for which limitations were requested. The administration continues to urge the
Congress to enact limitations on guaranteed loans on the basis of
the full principal amount of the loan rather than the contingent
liability.
In general, limitation language in appropriation acts:
• is a one-year limitation;
• sets a ceiling on direct loan obligations and/or guaranteed
loan commitments; and
• applies to an individual account, although limitations on specific programs within an account may also be provided.
Table F-4 identifies the enacted limitations in 1986 and 1987 and
proposed limitations in 1988 for credit programs.
While the appropriations act limitation is an effective control
mechanism for new lending for some programs, there are many
programs in which the actual demand for Federal credit assistance
has been consistently less than the level enacted in annual appropriation bills. For example, the enacted limitations on direct and
guaranteed loans for the Export-Import Bank (Eximbank) have
consistently exceeded the actual demand for loans since 1982. The
accompanying chart illustrates the used and unused portions of the
enacted limitations for 1982-1986.
There are a variety of programs, in addition to Eximbank, for
which demand is often below the enacted limitation. Table F-5
compares the proposed and enacted limitations to the actual level
of direct loan obligations and guaranteed loan commitments in
1986 for several credit programs with shortfalls from limitations.
After enactment of appropriations bills, direct and guaranteed
loan activity subject to limitation is controlled through the apportionment process. This is the mechanism by which the executive
branch controls the rate at which new loans are obligated or guaranteed. While limitations are generally apportioned quarterly, a
few are apportioned on an annual or project basis.

C-14

• THE BUDGET FOR FISCAL YEAR 1988
Table F-4. CREDIT APPROPRIATIONS ACTS LIMITATIONS
(In millions of dollars)
1987
estimate1

1986
actual

Limitations on direct loan obligations:
Foreign military sales credit
AID, Private sector revolving fund
Overseas Private Investment Corporation
Agricultural credit insurance fund
Rural housing insurance fund
Rural development insurance fund
Rural electrification and telephone revolving fund 2
Rural telephone bank
Self-help housing land development fund
International Trade Administration, Operations and administration.
College housing loans
Bonneville Power Administration fund
Health resources and services
Nonprofit sponsor assistance
Federal Housing Administration fund
Housing for the elderly or handicapped
Community development grants 2
Bureau of Reclamation, Loan program
National Park Service, Construction
Bureau of Indian Affairs, Revolving fund for loans
Federal Highway Administration, Right-of-way revolving fund
Railroad rehabilitation fund 2
VA, Direct loan revolving fund
Export-Import Bank
SBA, Business loan and investment fund
National Credit Union Administration, Central liquidity fund
Total, limitations on direct loan obligations..
Limitations on guaranteed loan commitments:
AID, Housing and other credit guaranty programs
Overseas Private Investment Corporation
Agricultural credit insurance fund
Rural development insurance fund
Rural electrification and telephone revolving fund
Economic development assistance3
International Trade Administration, Operations & administration3....
NOAA, Federal ship financing
Health professions graduate student loan insurance fund
Federal Housing Administration fund
Community development grants
Bureau of Indian Affairs, Indian loan guaranty and insurance fund.
VA, loan guaranty revolving fund
Export-Import Bank
SBA, Business loan and investment fund
Total, limitations on guaranteed loan commitments..
ADDENDUM
Secondary guaranteed loan commitments:
GNMA, Guarantees of mortgage-backed securities
* $500,000 or less
1 Includes President's budget proposals for changes in enacted limitations.
2 Includes limitations on agency guarantees of direct loans disbursed by the Federal Financing Bank.
3 Enacted on the basis of contingent liability; the full principal amount is reflected here.

4,967
15
14
3,176
2,033
421
2,129
177

4,040
16

23
1,817
508
107
1,305
149

8
57
20

84
604
50
48

74
502

1
1

16
48
4

1
1

""44"
.........

1,059
160
568

900
97

15,664

10,259

145
136
1,916
96
188
7

600

145
200

2,498
115
22
50

141,500
163

100,000
150

38,280
11,484

11,355

193,915

114,535

175,000

150,000

B-15

SPECIAL ANALYSIS B

Limitations vs. Actual Use
Export-Import Bank, 1983 - 1986

•

Unused Limitation

Actual Use

$ Billions
12 -

Direct Loans

Guaranteed Loans
10

4 -

Fiscal Years

For some programs, an appropriations act limitation on annual
activity is deemed unsuitable for any of several reasons, and control is provided through other mechanisms. First, limitations are
not proposed for programs in which the authorizing legislation
provides a clear entitlement to qualified applicants, such as farm
price support loans, credit assistance to veterans, and guaranteed
student loans. These programs are similar to those expenditure
programs considered relatively uncontrollable, and the levels of
new credit are restricted solely by substantive law.
Second, direct loans that arise from payment of claims on defaulted guaranteed loans are exempt from appropriations act limitation. Payment of these default claims is mandatory, as in the
FHA mortgage insurance and the guaranteed student loan program. Therefore, the effective point of control is earlier, at the
time of the original guaranteed loan commitment.
Third, some programs are exempt from appropriations act limitation when additional control through such limitations is unnecessary or counterproductive. For example, in several foreign assistance programs, such as the economic support fund, AID development assistance, and P.L. 480 food assistance, appropriated budget
authority governs both the loan and the grant activity. The alter-

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table F-5. COMPARISON OF ENACTED LIMITATIONS WITH ACTUAL LOAN LEVELS FOR SELECTED
PROGRAMS IN 1986
(In millions of dollars)
Enacted
limitation

Acutal loan
level

Unused
balance of
limitation

Direct loan obligations:
Agricultural credit insurance fund
Rural housing insurance fund
Bonneville power administration fund
Housing for the elderly or handicapped fund
Export-Import Bank
National Credit Union Administration, Central liquidity fund

3,176
2,033
20
604
1,059
568

2,799
1,825
556
578
31

378
208
20
48
480
537

1,916
96
141,500
175,000
38,280
11,484

1,560
55
102,592
137,962
34,297
5,508

356
41
38,908
37,038
3,983
5,976

Guaranteed loan commitments:
Agricultural credit insurance fund
Rural development insurance fund
Federal Housing Administration fund
GNMA, Guarantees of mortgage-backed securities
VA loan guaranty revolving fund
Export-Import Bank

native to a direct loan in those programs is a grant, or 100 percent
subsidy. A specific direct loan limitation might lead to a greater
use of grants—an increase in effective subsidies.
C . DIRECT LOANS

Direct loans are financed from a variety of sources, including
appropriations, borrowing, and repayments of previous loans.
Direct loan programs are designed to redirect economic resources
to particular uses by providing credit on more favorable terms than
would otherwise be available from private sources. A direct loan is
best justified when the Federal objective could not be met with
financing from private sources, even with a Government guarantee. The objectives of a direct loan program, for example, may
require financing at interest rates that are lower than those available from private lenders, or loan maturities that are longer than
otherwise available. Direct loans are made to individuals, businesses, and State, local, and foreign governments.
As discussed below in the section entitled "Federal Financing
Bank," FFB transactions formerly presented as a separate line
item in Table F-6 of this special analysis and elsewhere in the
budget have now been incorporated into the account of the agency
originating the transaction.
Direct loan obligations in a given year do not result in an equal
volume of new direct loan disbursements in the same year for
several reasons. First, there is often a lag between the time of
obligation and the actual disbursement of the loan. For example,
prospective borrowers may seek financing for a project when it is

C-14

• THE BUDGET FOR FISCAL YEAR 1988

production levels and the demand for the nonrecourse loans that
finance production.
The Food Security Act of 1985 gave the Secretary of Agriculture
the discretion to set commodity prices implicit in CCC loans more
closely to market prices. This provision was intended to reduce
eventually the need for Government price supports; however, overall spending on farm programs has continued to grow. Moreover,
despite the enormous commitment of resources, economic conditions in agriculture are depressed. Accordingly, the administration
will be proposing legislation to modify farm commodity price support programs. The proposed legislation is discussed in more detail
in Part 5 of the Budget.
The Farmers Home Administration (FmHA) makes loans for
purchasing and operating farms, improving rural housing, and developing rural community facilities. In 1988, FmHA direct loan
obligations are proposed to total $1.3 billion, which is significantly
below the 1986 total of $5.0 billion. This reduction reflects a shift in
Federal loan activity from heavily subsidized direct loans to guarantees of private market rate loans in the agricultural credit insurance fund. The administration proposes to terminate both FmHA
housing and rural development programs. Housing assistance
would be provided through a voucher program similar to the program now administered by the Department of Housing and Urban
Development.
Rural Electrification Administration (REA) direct loan activity is
proposed to decline from $1.5 billion in 1987 to $383 million in
1988, to $191 million in 1989, and to be terminated in 1990. To
ensure continued credit availablity, most borrowers will be eligible
for a new program of privately originated loans with an REA
guarantee of 70 percent of the loan principal. The decrease is
proposed because REA's mission is complete—current programs
have gone far beyond their original goal of providing electricity
and telephone service to rural areas. When the REA was established in 1935, only 12 percent of the farms in the country received
electricity; today over 99 percent of farms have electric service. In
1949 the REA act was amended to bring telephone service to rural
areas; today over 95 percent of farms have telephones. Current
REA programs have expanded to include subsidized lending to
electric cooperatives serving prosperous urban or suburban areas of
cities such as Washington, Atlanta, Dallas, Minneapolis, and
Denver. Loans are also used to provide electric service to exclusive
recreation communities, such as ski resorts in Vail, Aspen, and
Steamboat Springs, Colorado, as well as other resorts in Myrtle
Beach, Kiawah Island, and Hilton Head Island in South Carolina.
In addition, REA has provided loans to telephone companies that

B-15

SPECIAL ANALYSIS B

in the design stage, but the financing will not be needed until the
next year or even the next several years. As a result, some agencies, such as the Export-Import Bank and the Rural Electrification
Administration, disburse loans 4-7 years after the time of the
direct loan obligation. Second, some prospective borrowers will
never convert the direct loan obligations into borrowing because
the projects for which financing had been sought are subsequently
cancelled.
As shown in Table F-6, direct loan obligations are proposed to
decline between 1986 and 1988 from $41.3 billion to $27.1 billion.
Overall, the agricultural and business sectors will receive 57 percent and 31 percent, respectively, of the 1988 credit budget.
Table F-18 presents data for Federal direct loan programs from
1986 through 1992. The major credit programs and program
changes in direct loan obligations are discussed below.
Table F-6. SUMMARY OF DIRECT LOAN TRANSACTIONS
(In billions of dollars)
Actual

Obligations
Loan disbursements
Change in outstandings
Outstandings

Estimated

1985

1986

1987

52.8
64.4
28.0
257.4

41.3
27.1
34.9
42.2
32.1
39.5
11.2 - 1 5 . 2 - 1 5 . 3
251.6 236.4 221.0

1988

1989

1990

1991

1992

23.1
27.8
-9.1
212.0

22.1
25.3
-8.2
203.8

21.9
24.0
-7.4
196.3

21.0
22.5
-8.9
187.5

The Commodity Credit Corporation (CCC) provides short-term
nonrecourse loans to producers of agricultural commodities. The
loans provide subsidized financing for production costs and set a
minimum price for individual commodities at which the farmer
may turn his crop over to the Government rather than repay the
loan. The demand for CCC price support loans, therefore, depends
on the market price of the crop compared to the price in the loan
rate. When market prices are below the threshold price in the loan
rate, farmers borrow large amounts from the CCC, forfeiting the
crop as repayment to the Government if market prices have not
risen above the price support loan rate by the time the loan comes
due.
Although demand for CCC price support loans decreased slightly
from $17.4 billion in 1986 to an estimated $17.1 billion in 1987, loan
obligations remain at high levels following sustained increases in
agricultural production that resulted in lower crop prices and
higher Federal outlays. Between 1987 and 1988, commodity loan
obligations are estimated to decrease from $17.1 billion to $12.8
billion. The decrease is projected to result from the administration's plan to set support prices closer to market clearing levels.
The elimination of artificially high price supports should reduce

SPECIAL ANALYSIS B

B-15

are subsidiaries of large multimillion dollar holding companies
with excellent credit ratings.
Foreign military sales (FMS) credit provides financing to foreign
governments and international organizations so that they can procure U.S. military equipment and services. The proposed increase
from $4.0 billion in 1987 to $4.4 billion in 1988 reflects a slight
increase in U.S. exports. The increase will permit the Government
to finance the procurement of additional military equipment and
services by countries whose security is threatened by military
forces hostile to U.S. interests. The bulk of the funds will be
provided to Egypt, Israel, Turkey, Greece, and Spain.
Proposed direct loan obligations for elderly or handicapped housing decrease from $0.5 billion in 1987 to $0.1 billion in 1988. This
decrease reflects the administration's commitment to substitute
housing vouchers for direct loans. Housing vouchers benefit tenants by giving them more freedom of choice in where to live and
are projected to be less expensive than new construction subsidies.
The Small Business Administration (SBA) provides direct loans
to small businesses and to businesses and homeowners that suffer
uninsured losses as a result of physical disasters. The 1988 budget
proposes to rely on SBA's guaranteed loan programs to assist small
businesses for business credit needs. Therefore, except for $20 million for the purchase of debentures from Minority Enterprise Small
Business Investment Companies (MESBICs), the budget proposes to
terminate new direct business lending in 1988. The balance of the
direct loan obligations made by SBA are to honor defaulted guaranteed loan claims.
Consistent with the General Accounting Office's finding that
insurance is a better form of disaster assistance than loans, the
budget proposes to restrict eligibility for direct loans to those least
likely to be able to afford increased insurance coverage and who
cannot qualify for commerical credit. In order to provide businesses
and homeowners who are more likely to be able to afford additional insurance coverage time to obtain such coverage (or make other
arrangements to protect themselves against possible losses), the
change in eligibility would not be effective until 1989. As a result
of this change, the level of direct disaster loans is expected to
decrease from $350 million in 1988 to $310 million in 1989.
Low rent public housing and Veterans Administration life insurance policy credit programs were deleted from this year's credit
budget. Low rent public housing loans are not true loans since they
are forgiven during the fiscal year in which they are made and
therefore are, in fact, grants to the recipient. Similarly, VA life
insurance policy loans are not loans of the Government, but advances against the cash value of the insured veteran's deposits.
Furthermore, the veteran is not under a contractual obligation to

C-14

• THE BUDGET FOR FISCAL YEAR 1988

repay the loan; the cash value of the deposits can be used to offset
the loan.
D . LOAN

GUARANTEES

A guaranteed loan is an agreement by the Government to pay
the principal and, in some cases, interest on a loan should the
borrower default. The guarantee can cover all or part of the loan,
and therefore transfers all or some of the risk of default from the
lender to the Government. Guaranteed loans include insured loans,
where the Government collects insurance premiums from lenders,
and then pledges the use of the accumulated premiums to cover
defaults.
When the Government guarantees 100 percent of the loan, the
private loan is transformed into a near-Government direct loan
financed by a Government security. Although the economic effects
of such a loan are essentially the same as a direct Government
loan, the guaranteed loan may not have all the attributes of a
direct loan. This is because a private lender may negotiate different terms and conditions for the loan than would a Government
agency.
The guaranteed loan will also not have all of the attributes of a
U.S. Treasury security, since it will be less liquid and will involve
higher transaction costs. The great volume of Treasury securities,
their regular issuance in a range of maturities, and the specialized
institutions and trading facilities that deal in those securities, all
produce an efficient market that cannot be matched by the market
for guaranteed loans. The Government guarantee, for example,
may not be transferred from one lender to another as readily as a
U.S. Treasury security may be traded. In addition, legal counsel
may be required to determine the extent to which a lender is
assured of repayment and under what circumstances. This requirement is a transaction cost not associated with a U.S. Treasury
security. For these and other reasons, guaranteed loans bear interest rates above the yields on otherwise comparable U.S. Treasury
securities.
Loan guarantees, like direct loans, redirect economic resources
by providing credit to borrowers at more favorable terms than
would otherwise be available in the private market, and therefore
contain a subsidy. The degree to which the guarantee reallocates
credit will depend on the degree of the subsidy.2 At one extreme,
the potential transaction being financed may be considered so risky
that no financing would be available without the guarantee. For
example, it is unlikely that private lenders would make student
2 The degree of credit reallocation will also depend on the price elasticity of demand of the good being
financed. A small change in the price (i.e., the subsidy) of the good being financed may result in a considerable
change in the amount of good actually bought and sold. This special analysis does not consider demand and
supply elasticity effects.

SPECIAL ANALYSIS B

B-15

loans generally available without guarantees because of the inherent, and significant, uncertainty about any particular borrower's
future income stream. In this case, the subsidy will be quite large
and will have a dramatic effect on the reallocation of credit.
At the other extreme, the guarantee may result in only a small
subsidy and, other conditions being equal, may not significantly
change the allocation of credit. Some beneficiaries of loan guarantee programs would have been able to secure the funds privately—
without Government support—albeit at a higher cost. For example,
guaranteed mortgage credit might be used to finance, at a lower
cost, a house that would have been purchased even in the absence
of a Federal guarantee. In such a case, the borrower benefits from
a small subsidy and the guarantee does not significantly alter the
allocation of credit resources.
In both cases, although to different degrees, the guarantee reallocates credit toward federally selected uses, increasing the total
volume of credit channeled into these uses. This leaves a smaller
supply of credit available to those potential borrowers who do not
receive assistance, and increases the interest rates on financing
available to these borrowers.
Loan guarantees are used in a wide variety of programs. Guaranteed loans may be made to individuals, to businesses, and to State,
local, and foreign governments. The guaranteed loan commitment
may be used for a loan made by a bank or other institutional
lender or an investment security sold in the capital market. Guaranteed loans, for the purposes of the credit budget, do not include
other contractual agreements, such as guarantees of private leases,
contracts to make subsidy payments over extended periods, or debt
service grants that the recipients may use as collateral for borrowing.
Data for guaranteed loans for 1986 through 1992 are summarized
in Table F-7. As with direct loans, guaranteed loan commitments
in a given year do not always result in new guaranteed loans in
that year due to lags between the time of commitment and the
actual disbursement of the loan, and because some prospective
borrowers will never convert the loan commitment into actual
borrowing. Table F-19 provides data for guaranteed loan programs
for 1986 through 1992.
As noted in the previous section, direct loans guaranteed by a
Federal agency, but which are disbursed by the Federal Financing
Bank (FFB), are recorded as direct loans of the originating agency
in Table F-6.
The composition of the guaranteed loan portion of the credit
budget is proposed to change. Housing programs accounted for 86
percent of guaranteed loan commitments in 1986, and are expected

C-14

• THE BUDGET FOR FISCAL YEAR 1988
Table F-7. SUMMARY OF PRIMARY GUARANTEED LOAN TRANSACTIONS
(In billions of dollars)
Actual

Commitments
New guaranteed loans
Change in outstandings
Outstandings

Estimated

1985

1986

1987

1988

1989

1990

1991

1992

84.7
55.5
21.6
410.4

159.2
89.6
34.6
449.8

155.7
124.8
76.4
526.2

128.4
109.4
54.1
580.3

129.5
102.1
43.5
623.8

130.5
103.2
40.0
663.8

129.6
103.1
36.8
700.6

129.5
103.1
34.2
734.8

to drop to 76 percent by 1988. The major programmatic changes
are discussed below.
Guaranteed loan commitments in 1986 for the Federal Housing
Administration (FHA) increased by nearly 120 percent over 1985 as
a result of falling interest rates and a healthy housing environment. Commitments, which were $103 billion in 1986 compared to
$47 billion in 1985, are expected to decline in 1987 and 1988. A
large share of the increase in commitments in 1986 was due to the
refinancing of existing loans, rather than to the financing of newly
purchased homes.
The Veterans Administration (VA) offers a mortgage guarantee
that is similar in effect to the FHA mortgage insurance program,
but does not require veterans to make downpayments on their
housing purchases. Guaranteed loan commitments by VA in 1985
were $12 billion; in 1986 they increased to $34 billion and are
expected to be $35 billion in 1987. As with the FHA loans, most of
the increase in VA loan activity is due to the refinancing of outstanding loans rather than the financing of new home purchases.
In 1988, new commitments are estimated to fall to about $28 billion.
The Commodity Credit Corporation (CCC) provides loan guarantees for export sales that would not otherwise occur without Federal credit assistance. CCC guaranteed loan commitments for U.S.
exports are estimated to rise from $2.5 billion in 1986 to $5.5 billion
in 1987. The increase is a result of the Food Security Act of 1985
which established the CCC loan program level at $5.5 billion in
1987 and beyond. For 1988, the amount requested has been lowered
to $3.5 billion reflecting a general weakness in demand for those
loans.
The guaranteed student loan program (GSL) provides guarantees
of education loans to graduate and undergraduate students, and to
parents of dependent undergraduates. Commitments for the program fell by $313 million from 1985 to 1986 due to unanticipated
administrative problems involving validation of student aid applications. A significant amount of commitments that would otherwise have occurred in 1986 is expected to shift to 1987. The level of
GSL commitments is estimated at $9.6 billion in 1987, an increase

SPECIAL ANALYSIS B

B-15

of $1 billion from 1986. In addition to the one-time shift of commitments, the increase reflects the administration's proposals for increased reliance on student aid in the form of loans.
Commitments for GSL in 1988 are somewhat lower than in 1987,
partly because the shifting of 1986 commitments discussed above
made the 1987 level higher than it would have been otherwise. In
addition, the demand for these loans is expected to decline due to
the elimination of Federal payment of borrower interest during inschool, grace, and deferment periods.
Even though the cost of a student's education should ultimately
be borne primarily by the student, the Government has always
paid virtually all the costs of borrower defaults on GSLs, which
now exceed $1 billion per year. The administration is proposing to
charge borrowers new insurance fees on regular and supplemental
GSLs of 9 percent and 2 percent, respectively. These upfront fees
are intended to generate revenues equal to the estimated present
value of the costs of defaults arising from new loans.
The Export-Import Bank (Eximbank) provides guarantees to facilitate U.S. exports. Guaranteed loan commitments fell from $7.8
billion to $5.5 billion between 1985 and 1986. In 1987, Eximbank
estimates that commitments will be $11.4 billion, as risk protection
continues to be important to U.S. exporters. The proposed level in
1988 and beyond is $10.0 billion.
Prior to 1987, the Maritime Administration provided guarantees
for construction mortgage loans to build U.S.-flag vessels in the
United States. However, no new loan guarantee commitments have
been made since 1986. The termination of this loan guarantee
program reflects the administration's position that the maritime
industry should be encouraged to rely on the private credit market,
without Federal intervention, as the source for capital.
The Small Business Administration (SBA) provides credit assistance to small businesses through a variety of guaranteed loan
programs. Beginning in 1988, the budget proposes to gradually
reduce the amount of subsidy provided to borrowers by increasing
guarantee fees and lowering levels of Federal contingent liability.
The budget proposes a total of $3.5 billion in SBA guaranteed loans
in 1988, including $2.9 billion in guaranteed general business loans,
$373 million for development company loans, and $247 million for
Small Business Investment Companies (SBIC) obligations. Except
for $17 million in new authority for MESBICs, these levels are
consistent with expected 1987 activity.
About 90 percent of all single-family mortgages insured by FHA
or VA are sold subsequently in the secondary mortgage market
using the Government National Mortgage Association (GNMA)
mortgage-backed securities program. This program provides guarantees for securities issued by private mortgage originators and

C-14

• THE BUDGET FOR FISCAL YEAR 1988

backed by pools of FHA-insured and VA-guaranteed mortgages.
The GNMA guarantees enhance the liquidity of trading these securities. GNMA's issuance of new securities is closely tied to the
amount of FHA insurance and VA mortgage guarantees. Commitments for GNMA mortgage-backed securities therefore rose from
$54.6 billion in 1985 to $138.0 billion in 1986. A slight decrease to
$132.5 billion is estimated in 1987. In 1988 and thereafter, the
program level is set at $100 billion.
The administration is adopting a Grace Commission recommendation to increase from 6 to 10 basis points the guarantee fee that
GNMA currently charges issuers of mortgage-backed securities.
This fee is closer to that charged by other issuers of mortgagebacked securities and is a part of a comprehensive effort to increase opportunities for private sector activity in the secondary
market for home mortgages.
I V . GOVERNMENT-SPONSORED

ENTERPRISES

Over the last 70 years, the Federal Government established five
financial intermediaries, whose purpose is to direct funds to particular sectors of the economy. These entities, known as Government-sponsored enterprises (GSEs), are:
• Federal Home Loan Banks;
• Federal Home Loan Mortgage Association;
• Federal National Mortgage Association;
• Student Loan Marketing Association;
• Farm Credit System, composed of Banks for Cooperatives,
Federal Intermediate Credit Banks, and Federal Land Banks.
While most of the GSEs were created as Government institutions, all have been privately owned since 1969 and are not included in either the unified budget or the credit budget. However, since
they were designed to further Government objectives and since
they continue to enjoy special benefits not received by other private financial intermediaries, their financial statements are shown
in the Budget Appendix (Part IV). Table F-8 summarizes the lending and borrowing of the GSEs for 1986-1988; Table F-20 in the
back of this special analysis presents details of their activity.
GSEs make capital available for housing, agriculture, and education. They seek to direct credit to these favored sectors of the
economy by acting as financial intermediaries that stimulate greater amounts of lending to these sectors. Their goals are accomplished by creating a secondary market that increases the liquidity
of direct lenders in housing and education, and by direct lending in
agriculture. Over the last 5 years, outstanding GSE lending grew
by 143 percent, from $187 billion in 1981 to $453 billion in 1986. In
general, sectors that do not benefit from the presence of a GSE will

B-15

SPECIAL ANALYSIS B

Table F-8. SUMMARY OF LENDING AND BORROWING BY GOVERNMENT-SPONSORED ENTERPRISES
(In billions of dollars)
Actual
1986

Estimate
1987

1988

Total net lending:
Obligations
New transactions
Net change
Outstandings

391.0
375.9
83.3
453.3

386.9
380.1
95.2
548.5

384.9
372.9
95.6
644.1

Total borrowing:
Net change
Outstandings

107.1
458.1

87.2
545.3

95.9
641.2

have less financing allocated to them, and the financing that is
available will be more expensive because there is less of it.
Securities offered by GSEs in the financial market are not guaranteed by the U.S. Government. Nonetheless, these securities usually have yields of 50 to 300 basis points below medium-rated
corporate debt. In fact, GSE instruments historically carried only
slight premiums above the yields of Treasury securities of comparable maturity. As shown in the accompanying chart, the premium
for the Federal National Mortgage Association (FNMA) bonds
ranged from 21 to 69 basis points during 1986, while the premium
for Farm Credit Bank (FCB) bonds ranged from 62 to 110 basis
points.
The relatively small premiums above Treasuries are explained
by the perception of a "special relationship" between the GSEs and
the Federal Government. While the special relationship arises in
part from the intangible nature of Government sponsorship, it also
reflects real benefits enjoyed by these enterprises. Table F-9 lists
some of the benefits available to GSEs.
In the past, the administration has proposed annual user fees on
new borrowings by GSEs. One purpose of the proposed fees was to
reimburse the Federal Government for some of the benefits of
Government sponsorship that GSEs enjoy. However, perhaps a
more important goal of the proposed user fees was to put GSEs on
a more equal plane with private financial intermediaries. Along
those lines, the administration is studying ways of privatizing the
Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Association (Freddie Mac)—the major
Government-sponsored enterprises involved in the secondary mortgage market. While moving toward the goal of privatization, the
administration plans to propose legislation that will limit permanently the maximum amount of a mortgage these Governmentsponsored enterprises can purchase. This will limit their continued
encroachment on the market served by private firms for as long as

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Government-Sponsored Enterprises and A-Rated Bonds
Spread above Treasuries
Basis Points

Basis Points

Calendar Year 1986

these entities enjoy the advantages conferred by their association
with the Federal Government. The administration will also resubmit last year's proposal to charge a fee to the Student Loan Marketing Association (Sallie Mae) for the new debt it issues in the
marketplace. The fee would partly eliminate the borrowing advantage enjoyed by Sallie Mae as a Government-sponsored enterprise.
Table F-9. SOME BENEFITS ENJOYED BY GOVERNMENT-SPONSORED ENTERPRISES
Type of Benefit

Line of credit at Treasury
Exemption of corporate earnings from Federal income
Exemption of interest income of investors from State and local
income taxes.
Eligibility for Federal Reserve open market purchases
Equal standing with Treasury debt as investments for most banks...
Exemption from SEC registration and various State banking laws
Eligibility as collateral for public deposits
1
2

FHLB

FNMA

FCS

SLMA

Yes
Yes
Yes

Yes 1
No
No

Yes
No
No

Yes
Yes 2
Yes

Yes
No
Yes

Yes
Yes
Yes
Yes

Indirect line of credit through the FHLBs.
Federal Land Banks, Federal Intermediate Credit Banks, and Federal Land Bank Associations.

FHLMC

SPECIAL ANALYSIS B

B-15

The operations of the five GSEs are discussed individually
below.3
Federal Home Loan Bank System— The Federal Home Loan
Bank System was established in 1932 as the first permanent Government-sponsored intermediary for housing. Its original charter
was to supervise federally chartered savings and loan associations
and to promote home ownership through the extension of credit to
savings and other home financing institutions. The Federal Home
Loan Bank Board (FHLBB), which serves primarily as a regulatory
agency, and 12 regional Federal Home Loan Banks (FHLBs) comprised the original system. Subsequently, the Federal Savings and
Loan Insurance Corporation (FSLIC) and the Federal Home Loan
Mortgage Corporation (Freddie Mac) were added to the system in
1934 and 1970, respectively.
The Federal Home Loan Banks support the residential mortgage
market by providing a central source of housing credit to thrift
institutions through loans or "advances" to members. The FHL
banks provide member thrifts with access to national capital markets and eliminate regional barriers to the flow of mortgage funds.
Advances are an attractive source of funds for members largely
because they are the cheapest funds available after savings deposits. Each of the 12 FHL banks is regulated by the FHLBB but
establishes its own policies within FHLBB guidelines. FHL banks
finance their advances primarily by selling debt securities in the
money and capital markets and, to a lesser extent, by accepting
both demand and time deposits from member institutions.
Federal Home Loan Mortyage Corporation.—FHLMC (Freddie
Mac) is owned by savings institutions. It was created in 1970 to
increase the availability of mortgage credit and liquidity in the
residential mortgage market. Freddie Mac provides a secondary
market for conventional mortgage loans, which are not insured by
the Federal Housing Administration or guaranteed by the Veterans Administration. Typically, Freddie Mac purchases mortgages
originating from mortgage bankers, savings institutions, commercial banks, and other primary lenders. These institutions sell mortgages to enhance the liquidity of their assets.
Freddie Mac finances its purchases of mortgage loans by issuing
debt or by pooling the mortgages together and issuing pass-through
certificates backed by these loans. By issuing pass-through certificates, the ownership of the underlying mortgage pool is transferred
to a trustee, thereby removing the loans from Freddie Mac's balance sheet. Thus, generally accepted accounting principles for pri3 For additional information on GSEs, see also: Michael J. Moran, "The Federally Sponsored Credit Agencies:
An Overview," Federal Reserve Bulletin, June 1985; and the Congressional Budget Office, "GovernmentSponsored Enterprises and Their Implicit Federal Subsidy: The Case of Sallie Mae," December 1985.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

vate businesses greatly understate Freddie Mac's participation in
the secondary market.
As a financial intermediary, Freddie Mac is vulnerable to interest rate fluctuations but has developed innovative financing transactions in an effort to guard against unforeseen interest rate
swings. The company's most recent financing innovation is the
collateralized mortgage obligation (CMO). This debt instrument is
backed by mortgages or mortgage-backed securities, and is designed
to reduce the major disadvantage of uncertainty about maturity
that is associated with mortgage pass-through certificates.
Federal National Mortgage Association.—FNMA (Fannie Mae)
was established by Congress in 1938 to provide a secondary market
for federally underwritten mortgages. In 1968, it became a privately owned corporation, and its stock is now traded on the New York
Stock Exchange.
Fannie Mae is the largest single investor in home loans in the
United States. The company increases the liquidity of mortgage
bankers, savings institutions and commercial banks by purchasing
from them both conventional loans and loans insured by the Federal Housing Administration and guaranteed by the Veterans Administration. Fannie Mae finances its purchases by issuing debt
and mortgage-backed pass-through securities similar to those
issued by Freddie Mac. As a financial intermediary, Fannie Mae's
profitability is sensitive to movements in interest rates. In recent
years, the company has attempted to decrease its sensitivity to
interest rate fluctuations by increasing fee income, issuing zerocoupon bonds and other debt in the Eurobond market, issuing yendenominated securities abroad, and by participating in currency
swaps.
Fannie Mae, Freddie Mac, and the Government National Mortgage Association (Ginnie Mae) have long dominated the secondary
market for mortgages, particularly the mortgage-backed securities
portion of the market. Recently, however, totally private institutions have begun to issue mortgage-backed securities, in part because regulatory changes and recent legislation have enabled private firms to compete more effectively with Fannie Mae and Freddie Mac. Privatization of Fannie Mae and Freddie Mac would
eliminate the major hurdle private mortgage insurers face in playing a significant role in the nation's housing credit markets. As
long as those two GSEs continue to enjoy their special status,
private insurers will have difficulty in competing with them. To
mitigate the effects of this unfair competition, the administration
is proposing legislation to prohibit Fannie Mae and Freddie Mac
from purchasing mortgages in the top quartile (but not to exceed
$153,100) of the home price distribution in any housing market.

SPECIAL ANALYSIS B

B-15

Student Loan Marketing Association.—SLMA (Sallie Mae) was
created in 1972 to expand the amount of funds available for insured student loans. It does so by providing liquidity to lenders,
which include savings and loan associations, commercial banks,
mutual savings banks, educational institutions, and State and nonprofit agencies.
One method that Sallie Mae uses to provide liquidity is the
operation of a secondary market for student loans. Sallie Mae's
secondary market involves the purchase of existing insured student
loans from lenders. When this occurs, Sallie Mae gets title to the
loans and is repaid directly by the borrowers. Another method is
the provision of "warehousing" advances. Warehousing advances
are Sallie Mae loans to lenders that are secured by student loans
or certain types of obligations guaranteed by the Government. In
such cases, the lenders continue to hold title to the loans and pay
Sallie Mae interest on the funds borrowed. Advances are also available to State student loan agencies as a taxable source of funds for
their operations.
Sallie Mae borrowing was carried out entirely through borrowing
from the FFB until January 1982; since then, it has done all its
new borrowing in private credit markets. It will borrow an estimated $3.0 billion in 1987. Sallie Mae is able to borrow at rates
only slightly higher than Treasury bills, and virtually all of the
student loans that it holds as assets are 100 percent federally
insured. Sallie Mae's overall cost of funds in 1986 ranged from 5 to
17 basis points over Treasury bills of comparable maturity, while
student loans in that year were guaranteed to yield the holder of
the loan 350 basis points over the 91-day Treasury bill rate. As a
result, Sallie Mae has maintained a profitable interest rate spread
on its student loan portfolio even after its expenses in servicing
student loans are taken into account. Sallie Mae's profit margins
on its warehousing advances are considerably lower.
The continued profitability of Sallie Mae's operations ought to
attract competitors to Sallie Mae's market and eventually drive
down the yield associated with guaranteed student loans. However,
such competition has not developed. The dominance of Sallie Mae
in the secondary market for guaranteed student loans can apparently be attributed to the low-cost source of funds it enjoys as a
GSE.
Farm Credit System.—The FCS, the forerunner of which was
founded in 1916, is a system of cooperatives that provide credit to
farmers and ranchers, their cooperatives, farm-related businesses,
commercial fishermen, and rural homeowners. The FCS is supervised by the Farm Credit Administration (FCA), an independent
Federal agency. The FCS obtains funds through the sale of securities to investors in the private credit markets. These securities are

C-14

• THE BUDGET FOR FISCAL YEAR 1988

"joint and several," which means that default by one FCS institution requires all others to honor the obligations of the security.
The goals of the FCS are accomplished through its component
parts: Federal Land Banks (FLBs) and Federal Land Bank Associations (FLBAs); Federal Intermediate Credit Banks (FICBs) and Production Credit Associations (PCAs); and the Banks for Cooperatives
(BCs).
The past few years have been difficult for farmers and all financial institutions that serve them. The cash flow of many farmers
has been reduced due to depressed commodity prices, and large
numbers of borrowers have defaulted on their loans. Land prices
have declined in many areas of the country, reducing the value of
collateral pledged for loans. These factors combined to make 1985
the worst year in the history of the FCS since the Great Depression. In 1985, the system's net loss was $2.7 billion. During the first
9 months of calendar year 1986, the FCS reported a net loss of $1.5
billion.
Published accounts of FCS woes inevitably affected the yields of
FCS bonds. Prior to 1985, system securities were priced at only 5 to
10 basis points above Treasury instruments of comparable maturity; that spread grew to 17 to 31 basis points by April 1985, and 35
to 114 basis points by September 1985. In December 1986, Farm
Credit Bank issues maturing in 1997 averaged 89 basis points above
similar Treasury bonds.
The financial crisis of the Nation's farmers and its impact on
FCS led the administration and the Congress to seek changes in
the structure and operations of the system. The Farm Credit
Amendments Act of 1985 was signed into law by the President on
December 23, 1985, and a subsequent law, the Farm Credit Amendments Act of 1986, was passed in October 1986. The new laws
provide the basis for reestablishing FCS as a reliable source of
financing for American agriculture.
The 1985 Act had 3 main parts: it created the Capital Corporation (CC); it gave the FCA stronger regulatory powers; and it gave
the Secretary of the Treasury the discretion to provide financial
assistance to the FCS in certain circumstances.
One function of the CC created by the 1985 Act was to reallocate
resources within the system by transferring funds from stronger
system institutions to weaker ones. However, a number of legal
actions have been filed against the CC questioning whether the
reallocations proposed are constitutional. In 3 out of 9 cases, preliminary injunctions have been issued against the FCA, while in
the remaining 6 cases such injunctions have been denied. The
outcome of these lawsuits could have a significant impact on the
role and authority of the CC and its ability to carry out its responsibilities, and could further threaten the stability of the FCS.

SPECIAL ANALYSIS B

B-15

Nevertheless, in spite of lawsuits filed against the CC questioning
the constitutionality of resource allocations with the system, the
1986 law will initiate a mandatory stock purchase and assessment
program ("assessment program") by the CC pursuant to its authority under the Farm Credit Amendments Act of 1985. The assessment program requires financially stronger institutions within the
system to invest funds totaling $297 million in the CC, and is being
used to facilitate the transfer of resources between system institution.
The 1985 Act sought to strengthen the regulatory powers of the
FCA, and the 1986 amendments have the same goals. The 1986
Amendments allow system institutions, with the approval of FCA,
to capitalize certain interest costs and a portion of their provisions
for loan losses during the period July 1, 1986, through December
31, 1988. Institutions may also amortize such capitalized amounts
over periods not to exceed 20 years.
The 1986 amendments are intended to provide the system with
an opportunity to work through its current financial difficulties
without the immediate need for direct Government financial assistance. The system hopes that implementation of the 1986 amendments will enable system institutions to report reduced operating
losses for regulatory accounting purposes and thereby minimize the
need for transfers of financial assistance within the system to avoid
impairments of capital stock in stronger system institutions.
V . CHANGES IN THE QUANTITY AND PRICE OF FEDERAL CREDIT

This section discusses some of the trends and policy initiatives in
Federal credit activity that cut across programs. After a brief
introduction to administration credit initiatives, the general quantity of new Federal and federally assisted credit, including that of
GSEs, is discussed. The last section summarizes an administration
proposal to raise the price of Federal and federally assisted credit
by charging higher interest rates and fees.
The major trend in Federal credit activity relates to the administration's success in cutting and in some instances reversing the
rate of growth in new direct loans. The administration has been
less successful in reducing new loan guarantees. The reduction in
the rate of growth in Federal credit activity results from measures
taken by the administration to reduce Federal intervention in domestic credit markets. Reduced intervention has been accomplished
through:
• across-the-board cuts in the volume of new credit authority;
• specific credit program eliminations or drastic reductions; and
• increases in interest rates and loan guarantee fees.
In addition, the administration has worked to improve the management of existing credit programs. By implementing modern

C-14

• THE BUDGET FOR FISCAL YEAR 1988

business practices, the Government seeks to extend loans more
prudently, service accounts more effectively, and collect payments
more aggressively and in a more timely fashion. The goal of improved credit management is further enhanced by loan asset sales
and the privatization of collection activites. The policies related to
the better management of Federal credit programs are detailed in
OMB Circular A-70, "Policies and Guidelines for Federal Credit
Programs," and OMB Circular A-129, "Managing Federal Credit
Programs."
Changes in the Quantity.—Changes in the quantity of credit activity in the economy are measured through the Federal Reserve
Board's flow-of-funds accounts. Flow-of-funds accounts measure
total net lending and borrowing between various sectors of the U.S.
economy. Accordingly, comparing net Federal and federally assisted lending to total net lending in the U.S. economy provides a
means for quantifying the amount of net lending directly influenced by Federal programs. The flow-of-funds accounts allow a
comparison of changes in the degree of Federal influence over
time.
The accompanying chart summarizes these relationships during
the last decade. Federal and federally assisted lending in a given
year is the difference between the amount of direct, guaranteed
and GSE loans outstanding at the beginning and end of year. The
net amount of Federal and federally assisted lending was $129.1
billion in 1986. The supply of credit is the net increase in the
holdings of various investor groups. In 1986, this was $889.1 billion.
The participation ratio of Federal and federally assisted lending to
total lending, therefore, was 14.5 percent in 1986. This is below the
peak for this decade of 22.6 percent in 1980.
These ratios should be used with caution for two reasons. First,
and most importantly, the participation ratios measure volume and
therefore do not indicate the full extent of Federal influence in
allocating credit to favored borrowers. That influence is reflected
in a more meaningful way by the degree of subsidy. A loan guarantee with a small degree of subsidy does not allocate capital to the
same degree as a direct loan with a high degree of subsidy. Yet, the
lending participation ratios do not distinguish between a dollar of
guaranteed loans and a dollar of direct loans; they weigh both
dollars equally.
Second, the participation ratios are shown on an aggregate basis
for the entire economy and so do not reveal the Federal influence
on borrowing by particular sectors, such as households, corporate
businesses, or farms. This means that some sectors may be more
affected by changes in Federal credit program levels than others,
even when the overall lending participation ratio remains the
same.

B-15

SPECIAL ANALYSIS B

The Federal Government not only lends to various sectors of the
economy, but it also borrows. The scope and details of Federal
borrowing are discussed in Special Analysis E ("Borrowing and
Debt"). The net annual amount of Federal and federally assisted
borrowing in 1986 was $378.0 billion. The borrowing participation
ratio, therefore, was 42.5 percent in 1986. As shown in the accompanying chart, the borrowing participation ratio is more volatile
than the lending participation ratio, ranging from 19 percent to 55
percent of total borrowing between 1977 and 1986. The volatility is
due primarily to swings in the budget deficit. Again, a cautionary
note is in order. The full impact of Federal borrowing on the U.S.
economy and the credit markets depends on competing demands
from other borrowing sectors, as well as changes in the supply of
credit available for borrowing. Table F-22 at the back of this
special analysis provides additional details on participation ratios.

Federal Participation in Domestic Credit Markets
Percent

Percent
60 n

1977

r 60

Table F-10 summarizes outstanding Federal and federally assisted loans from 1985 to 1988. Total direct loans outstanding at the
end of 1986 were $251.6 billion and total guaranteed loans outstanding were $449.8 billion. In 1986, Federal and federally assisted
loans outstanding increased by 11 percent over 1985. Increases of
14 percent in 1987 and 10 percent in 1988 are estimated.

C-14

• THE BUDGET FOR FISCAL YEAR 1988
Table F-10. SUMMARY OF OUTSTANDING FEDERAL AND FEDERALLY ASSISTED CREDIT
(In billions of dollars)
Actual
1985

Estimate
1986

1987

1988

257.4
410.4
370.0

251.6
449.8
453.3

236.4
526.2
548.5

221.0
580.3
644.1

1,037.8

1,154.7

1,311.1

1,445.4

Federal debt held by the public
Primary guaranteed debt (same as guaranteed
loans above)
Debt of Government-sponsored enterprises

1,509.9

1,746.1

1,908.4

2,015.1

410.4
351.6

449.8
458.1

526.2
545.3

580.3
641.2

Total, Federal and federally assisted debt

2,271.9

2,654.0

2,979.9

3,236.6

Direct loans
Primary guaranteed loans
Loans by Government-sponsored enterprises
Total, Federal and federally assisted loans,

Changes in the Price.—As part of the administration goal of
reducing Federal intervention in credit markets, interest rates and
fees have been increased where possible. Interest rates and guarantee fees typically do not cover all the costs to the Federal Government of many credit programs. These costs include default risks for
both direct and guaranteed loans, as well as servicing and administrative costs.
The administration therefore proposes to charge borrowers from
several loan programs interest rates and loan guarantee fees that
compensate the Government more adequately for the risks and
costs it bears. The specific interest rates and fees will differ by
program depending on the credit risks specific to that program as
well as whether the interest rate and guarantee fees are set in
legislation. As the interest rates and fees are increased, the level of
subsidy is reduced.
V I . FEDERAL CREDIT SUBSIDIES

Federal credit programs provide more favorable terms than those
otherwise obtained in the private market and thus result in a
subsidy to the borrower. For direct loans, a subsidy results when
one or all of the following terms of Federal credit are in place:
• Interest rates below commercial levels.
• Longer maturities than fully private loans.
• Deferral of interest.
• Allowance of grace periods.
• Waiver or reduction of loan fees.
• Higher loan amount in relation to the value of the underlying
enterprise than a fully private loan.
• Availability of funds to borrowers for purposes for which the
private sector would not lend—at virtually any interest rate
under virtually any repayment terms.

SPECIAL ANALYSIS B

B-15

For guaranteed loans, an interest rate subsidy occurs because the
Government guarantee removes some or all risk of default or loss
facing the lender and because the Government does not charge
what a private insurer would charge for the same degree of guarantee. In a few cases, notably guaranteed student loans, there is an
additional, explicit payment by the Government of a portion of the
borrower's interest. The lender is therefore willing to lend to the
guaranteed borrower at rates lower than the market rate since no
premium for default risk is required.
In many cases, large interest rate subsidies may be intended, for
a direct loan program may be established with an objective that
explicitly requires a below-market interest rate. The Economic Support Fund, for example, extends loans at interest rates of about 3
percent per annum in order to meet its objective of aiding foreign
countries. In other cases, the extent of the subsidy may be unintentional, as when a direct loan program's interest rate is initially set
at a level comparable to a market interest rate but is never
changed to keep pace with changes in market interest rates over
time. For example, in 1944 Congress set the interest rate on some
loans of the Rural Electrification Administration at 2 percent,
which was slightly higher than the cost of Treasury borrowing at
that time. Last year, the cost of long-term Treasury borrowing was
about 8.4 percent, but REA's lending rate had been increased only
to 5 percent.
Neither the unified budget nor the credit budget adequately
takes into account the subsidy that results from interest rate
spreads and other loan terms characteristic of Government credit.
However, the cash outlays of the direct loan or loan guarantee
program are reflected in the unified budget, while the new levels of
annual loan activity (both direct loan obligations and guaranteed
loan commitments) are summarized in the credit budget.
The administration's credit reform proposal, summarized above
and in Part 3 of the Budget Supplement, evaluates the subsidy cost
of Federal credit programs and incorporates them in the unified
budget. Under the proposal, subsidies provided by loan programs
would be evaluated by selling some direct loans to the public and
reinsuring some guaranteed loans with private sector insurance
companies. The subsidy for a direct loan would be the difference
between the face value of the loan and the price offered by the
market. The subsidy for a guaranteed loan would be reflected by
the premium charged by the insurance company, in addition to the
value of any explict interest subsidy. For direct loans not sold to
the public and guarantees not reinsured with private companies,
subsidies would be evaluated using a method similar to that described below.

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• THE BUDGET FOR FISCAL YEAR 1988

This section presents estimates of the subsidies that will be provided by most Federal direct loan and loan guarantee programs in
1986. The direct loan subsidy is calculated as the discounted or
present value of the additional payments that the borrower would
have been required to pay for the loan if it had been a purely
private loan. This method requires an estimation of the interest
rate and other costs a representative borrower would have had to
pay to a private lender absent the Government loan. It is not
possible to determine this rate of return with precision, since the
terms of a loan depend on such conditions as the purpose of the
loan, the creditworthiness of the borrower, the competition among
lenders, and specific circumstances facing the borrower and lender
at the time the loan agreement is negotiated. These conditions
differ greatly among loans. Therefore, estimated representative private loans have been used for comparison.
To derive the rate of return on a representative private loan,
estimates have been made of the private loan terms according to
the purpose of the loan (e.g., to buy a house or to provide a small
business with working capital) and the type of borrower (e.g., a
high-risk company versus a low-risk company) typically associated
with the particular direct loan program. The estimates take into
account not only the differences in interest rates, but also the
differences in loan fees, maturities, and repayment schedules that
would normally be expected for the type of loan being compared.
The subsidy estimates do not take into account several nonquantiflable variables such as different legal covenants in loan contracts. A simplifying assumption used in these calculations is that
all loans in a given program bear a similar degree of risk. This
assumption is not always true. Several programs (e.g., the ExportImport Bank or the Small Business Adminstration) make loans to a
variety of borrowers with widely dissimilar risk characteristics.
The discount rate used to evaluate the present values of the
Government and private loan is the internal rate of return on the
private loan. This rate is a more appropriate discount rate than the
simple interest rate on the private loan, because that interest rate
does not reflect the return that lenders receive from commitment
commissions and other loan fees, nor does it reflect the maturity
and repayment schedule.
Table F - l l shows subsidy values for 89 percent of the obligations
that direct loan programs made in 1986. The present value of the
total subsidy is $7.7 billion. Comparable estimates for 1987 and
1988 are $6.9 billion and $6.7 billion.
The method of calculation used in Table F - l l measures the
value to the borrower of Federal credit by comparing the terms
and conditions associated with a Government loan to the alternative terms and conditions of financing for a similar loan from a

B-15

SPECIAL ANALYSIS B
Table F - l l . ESTIMATED SUBSIDY COSTS FOR 1986 DIRECT LOAN OBLIGATIONS

Present value of subsidy
Agency and program

Funds Appropriated to the President:
Foreign military sales credit:
Grants
Concessional
Treasury rates
Economic support fund
Guarantee reserve fund
AID functional development assistance..
AID housing
AID private sector revolving fund
OPIC
Agriculture:
ACIF:
Emergency disaster
Farm operating
CCC commodity loans
Public Law 480 export credits
REA:
Revolving fund
Rural Telephone Bank
Education:
Guaranteed student loan defaults
Housing and Urban Development:
Housing for the elderly and handicapped..
Interior:
Bureau of Reclamation
Bureau of Indian Affairs
Transportation:
MarAd federal ship financing fund..
Highway right-of-way loans
Veterans Administration:
Vendee loans and loans acquired....
Export-Import Bank
FSLIC
National Credit Union Adminstration:
Central liquidity facility
Small Business Administration:
Disaster
Business loans
Development companies
Investment companies
Minority business assistance
Tennessee Valley Authority:
Seven States Energy Corporation...
Home weatherization

Percent of direct
loan obligations

100.0
18.0
10.3
65.1
10.0
66.7
24.0
15.9
9.4

12.5
12.3
2.4
95.1
23.2
16.2
85.0
17.4
57.0
22.4
8.0

37.2
6.3

11.0
3.2
3.0
44.4
20.1

18.2

30.7
67.0
4.7
26.0

Total, direct loan subsidies..

private lender. An alternative measure of subsidy calculates the
direct cash costs to the Government, which are always less than
the benefit to the borrower for two reasons. First, the Govern-

C-14

• THE BUDGET FOR FISCAL YEAR 1988

ment's cost of borrowing is always lower than that of the private
sector due to the Government's sovereign power to tax and to print
money, and to the safety and liquidity of Treasury securities.
Second, the Government does not need to hold any reserves against
its loan guarantees, which makes the Government less risk averse
than is the private sector to the level and variance of risk inherent
in the credit it grants.
If the cost to the Government were used instead of the benefit to
the borrower as the basis for measuring subsidies, distortions
would be created. The budget would continue to favor credit programs over direct spending programs; it would not give policymakers and the public the information they need to compare fairly
those two kinds of programs and to determine what form of assistance is most cost effective. Furthermore, using cost to the Government would not take full account of the borrower's riskiness, which
would skew the allocation of resources among borrowers, among
credit programs, and between credit and other spending.
Guaranteed loan subsidies are calculated by the same method as
direct loan subsidies. The guaranteed loan subsidy is the present
value of the additional payments that borrowers would have paid if
the loan had not been guaranteed by a Federal agency, and, in
some cases, if the agency had not made explicit interest payments.
In some cases, private insurance or guarantee coverage of a type
offered by Federal programs is available from private insurers. An
example is private mortgage insurance, which is comparable to the
mortgage insurance or guarantees offered by the FHA and VA. In
these cases, one means of estimating the subsidy is to calculate the
present value of the difference in fees charged by the Federal
Government and what a private insurer would have to charge to
provide an identical guarantee. In other cases, private insurers
simply do not offer insurance or guarantee coverage similar to that
offered by Federal programs. The absence of private insurance may
be because the credit risks of the guaranteed loans are so large or
so immeasurable that private insurers will not undertake to offer
guarantees or it may be because potential private insurance has
been preempted by a Federal guarantee program, which inherently
has an immensely larger capacity to bear risk and to charge guarantee fees below what the private insurer would charge. In these
cases, the subsidy is calculated in terms of the interest rate and
fees a private lender might have charged the borrower in the
absence of a Federal guarantee.
Table F-12 presents these subsidy calculations for nearly all of
the gross commitments that loan guarantee programs made in
1986. The present value of the total estimated subsidies is $10.2
billion. Comparable estimates for 1987 and 1988 are $10.6 billion
and $9.2 billion.

B-15

SPECIAL ANALYSIS B
Table F-12. ESTIMATED SUBSIDY COSTS FOR 1986 GUARANTEED LOAN COMMITMENTS

Present value of subsidy
Agency and program

Funds Appropriated to the President:
AID housing and other credit
Overseas Private Investment Corporation.
Agriculture:
ACIF
CCC export credits
Education:
Guaranteed student loans
Health:
Health education assistance loans
Housing and Urban Development:
FHA fund
GNMA secondary mortgage guaranteesTransportation:
MarAd federal ship financing fund
Veterans Administration:
Loan guaranty revolving fund
Export-Import Bank:
Financial guarantees
Small Business Administration:
Business assistance

Percent of
guaranteed loan
commitments

Millions of dollars

22.4
12.6

5.5
2.6
41.2
10.0
1.2
1.9
10.0
6.3
2.0
12.2

Total, guaranteed loan subsidies..

Table F-12, like Table F-ll, measures the value of the subsidy to
the borrower, not the cost of the subsidy to the Government. It
would be inappropriate to use such a cost to Government basis for
calculating economic subsidies, since it would not measure the cost
of the loan guarantee to the economy. This could lead to the
mistaken perception that a program was economically self-sustaining when, in fact, it was not. For example, the Federal Government
is not required to set aside reserves in order to minimize the risk
that it will be forced out of business should it miscalculate the
credit risks of guaranteeing a large number of loans.
Some qualifications should be kept in mind when reviewing the
estimates of Federal credit subsidies. First, there are theoretical
difficulties in estimating subsidies. For example, private investors
might wish to have more detailed financial information about the
borrower than the Federal Government might request. The private
sector would therefore reflect these higher transaction costs in its
charges for loans and loan guarantees. The subsidy estimates do
not take account of such transaction costs.
Second, the subsidies shown are almost certainly underestimated
because they are calculated on a marginal price basis. The implicit
assumption is that the Federal program is not large enough to

C-14

• THE BUDGET FOR FISCAL YEAR 1988

affect the price of similar unguaranteed loans. This is not true for
some programs. The large size and pervasive nature of some Federal programs, especially in the housing sector, means that the Federal supply of credit is so large that the market clearing price of
credit in that sector is probably lower than it would otherwise be.
This means that the private lenders in that sector may charge less
than they otherwise would, thereby lowering the subsidy estimate.
VII.

DEFAULTS

Federal credit programs have markedly different objectives than
private lending institutions, which seek profits. Several Government credit programs, such as the Small Business Administration,
are designed to play the role of "lender of last resort." Federal
loans, therefore, often bear more risk than private lenders are
willing to bear. Partially as a result, some Government loan programs have high default rates. The diverse characteristics of Federal credit programs, each with its own legislative mandate and a
variety of different borrowers, make it difficult to compare default
rates among Federal programs.
Table F-l3 shows the amount of direct loans written off and the
amount of guaranteed loans terminated for defaults. Of all direct
loans outstanding, only 0.4 percent are recorded as write-offs in
1986. Of total guaranteed loans outstanding, 1.9 percent are reported to be terminated in 1986.
The agricultural and maritime programs have the highest estimated default or termination rates in 1987. In both instances the
high delinquency and default rates can be traced to depressed
market conditions. Starting in the early 1980's, the U.S. farm economy was characterized by declining income and asset values. As a
result of the depressed conditions, delinquency, liquidation, and
bankruptcy rates continue to rise.
An examination of world shipping markets reveals freight rates
at a 5-year low and an enormous excess in shipping capacity. The
sustained slump in world shipping has resulted in bleak shipping
profits, forced many shipowners out of business, and motivated
many usually accommodating private creditors to seek to liquidate
their holdings at tremendous losses, rather than wait for further
improvements.
The dramatic increase in terminations of defaulted loan guarantees in the economic development revolving fund in 1987 is the
result of loans to failed steel companies. Losses from direct loan
write-offs appear to have been a miniscule amount of loans outstanding over the last 2 years, according to the present system of
Government reporting. To a large extent, however, this reflects the
absence of Government-wide standards for writing off direct loans
held in the Government's portfolio. Direct loans are frequently

B-15

SPECIAL ANALYSIS B

Table F-13. DIRECT LOAN WRITE-OFFS AND GUARANTEED LOAN TERMINATIONS FOR DEFAULTS
In millions of dollars
Actual
1986

Direct loans:
Commodity Credit Corporation
FmHA agricultural credit insurance
Rural housing insurance fund
Guaranteed student loans
Other education loans
Federal Housing Administration
Small business assistance:
Business loans
Disaster loan fund
Other
Total write-offs
Guaranteed loans:
Commodity Credit Corporation
FmHA agricultural credit insurance
Rural development insurance fund
Economic development revolving fund
Guaranteed student loans
Medical facilities
Health education assistance loans
Federal Housing Administration fund
MARAD ship financing fund
VA loan guarantee revolving fund
SBA business loans
Other
Total terminations
1

As percentages of outstanding loans1

Estimated
1987

Actual

1988

1986

Estimated
1987

1988

1
205
16
7
15
82

63
500
17
222
16
173

63
400
16
482
35
299

0.01
0.72
0.06
0.08
0.19
1.94

0.35
1.77
0.06
2.37
0.32
4.27

0.42
1.47
0.06
5.01
3.21
8.27

393
161
66

372
138
51

349
105
23

8.00
3.67
0.05

7.66
3.68
0.04

9.03
3.68
0.02

946

1,552

1,772

0.38

0.64

0.77

317
61
82
5
1,475
5
18
2,906
1,243
1,541
457
25

518
107
60
152
1,380
23
23
3,009
600
1,562
475
33

600
174
50
8
1,724
2
30
3,141
100
1,591
465
21

7.28
3.44
2.96
1.92
3.97
0.53
1.86
1.39
21.73
1.11
5.32

0.11

10.91
3.95
2.42
71.87
3.57
2.86
1.82
1.19
12.99
1.05
5.45
0.14

8.10
4.52
2.38
6.23
4.26
0.30
2.08
1.04
2.44
1.01
4.79
0.09

8,135

8,005

7,906

1.88

1.64

1.43

Average of loans outstanding over year

carried in the Government's portfolio at their nominal value regardless of their true value. The Eximbank, for example, still holds
in its portfolio $89 million in principal and overdue interest on
loans made to Cuba between 1951 and 1958. The FmHA holds in its
portfolio, at their full nominal value, several billion dollars of loans
that are delinquent by more than a year.
In the past, losses from loan guarantee programs were considered relatively small for two reasons. First, many of the guaranteed loans involved liens on marketable property, particularly
houses. Second, due to the absence of Government-wide standards,
many loans acquired as a result of defaults on guaranteed loans
were never written off. This makes the losses due to Government
guarantee programs look smaller than they are.
There has been a growing awareness that losses in both direct
and loan guarantee programs are higher than reported. In recognition of this problem, the Treasury Department and the Office of
Management and Budget are studying means to improve the Government's reporting of and control over defaults.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

In addition, the administration has been working to reduce delinquency levels, recapture revenues, and improve overall credit management. Specifically, agencies will be held accountable for appropriate performance goals related to delinquency reductions. They
have also been required to adopt the administration's nine-point
program announced on August 18, 1986. The nine-point program
includes:
• Prescreening—Avoid bad loans by using commercial credit reporting agencies to establish the creditworthiness of loan applicants (this measure is mandatory for all agency programs
where creditworthiness is a criteria for receiving a loan).
• Private sector credit bureau reporting—Agencies are now referring credit information on Federal debtors to private sector
credit bureaus where it can be accessed by both private and
Federal loan officers.
• Loan servicing—Agencies have been required to use private
sector contractors whenever possible; in cases where it is not
possible, agencies are upgrading their loan servicing capabilities. Loan servicing will be part of all sales of direct loans and
become the responsibility of the purchaser.
• Private collection agencies—A new policy is to turn over all
debt more than six months delinquent that is held by the
Government to private collection agencies that have the incentives, resources, and expertise to collect delinquent loan
payments.
• Income tax refund offset—The Deficit Reduction Act of 1984
authorized the Internal Revenue Service to offset income tax
refunds of taxpayers whom lending agencies have certified
are delinquent on debt payments and who have failed to
respond to agency debt collection efforts.
• Offset Federal employees9 salaries—Agencies were given the
authority in the Debt Collection Act of 1982 to offset the
salaries of Federal employees who are delinquent on debt
owed to Federal agencies.
• Litigation—Private sector attorneys will be used to assist the
Justice Department in litigating cases, which will allow more
timely litigation of uncollectible debt.
• Write-offs—Policies, procedures, and implementation plans to
assure that uncollectible accounts are written-off are being
developed.
• Loan asset sales—A number of loan portfolios will be sold in
their entirety in 1988 and 1989. Larger portfolios will take
longer to sell. There should be substantial credit management
gains from selling loans, ranging from better loan origination
and documentation, to more efficient servicing and collection.

SPECIAL ANALYSIS B

B-15

Sale of existing loans will also provide insight into the subsidies implicit in these loans.
More information on the nine-point program can be found in the
credit management and debt collection section of the document,
"Management of the United States Government, FY 1988."
V I I I . FEDERAL FINANCING B A N K

The Federal Financing Bank (FFB) began operation in May 1974
and has been a significant factor in financing Federal credit activities since then. The Bank is administered by the Treasury Department.
The FFB was designed to serve as a financial intermediary for
the efficient financing of obligations issued, sold, or guaranteed by
Federal agencies. Use of the FFB by Federal agencies leads to
lower debt financing costs than if the agencies or the guaranteed
borrowers were to sell their obligations individually in the credit
market. Agency obligations trade at premiums above Treasury securities due to their relative illiquidity, smaller size of issue, and
unique financial terms that distinguish them from Treasury securities and each other. This budget proposes to allow the Secretary of
the Treasury to recapture for the U.S. Government the costs that
use of the FFB allows agencies to avoid by charging borrowers a
special premium.
The FFB performs three functions: (1) it purchases guaranteed
loan assets from Federal agencies; (2) it disburses loans directly to
borrowers when the loans are guaranteed by a Federal agency; and
(3) it buys debt of Federal agencies that are otherwise authorized to
borrow from the public. In all cases, the operation of the programs
remain with the agencies that use the FFB. Prior to passage of the
Balanced Budget and Emergency Deficit Control Act of 1985, the
outlays of the first two types of transactions were considered to be
outlays of the FFB and were "off-budget." The third type of FFB
transaction was considered to be a means of financing agency
outlays. Under Section 214 of the Act, all transactions by the FFB
on behalf of a Federal agency are now considered to be a means of
financing for the agency. As a result, FFB transactions formerly
presented as a separate line item in this special analysis and
elsewhere in the budget have been incorporated into the account of
the agency originating the transaction.
The following provides a brief description of each of the functions
of the FFB, all considered to be forms of lending to Federal agencies:
(1) Loan asset sales.—Agencies may sell loan assets to the FFB as
a means of financing their direct loan programs. The largest
volume of loan assets sold were certificates of beneficial ownership

C-14

• THE BUDGET FOR FISCAL YEAR 1988

(CBOs) issued by the Farmers Home Administration and the Rural
Electrification Administration (REA). In 1988, neither agency plans
any new net sales of loan assets to the FFB. Loan assets sold to the
FFB are repurchased by the agency at scheduled intervals.
(2) Guaranteed loan originations.—The FFB disburses loans directly to borrowers when the loan is guaranteed by a Federal
agency. The agency's guarantee program thus becomes a program
that effectively makes direct loans. The only program that proposes
to use the FFB in this manner in 1988 is the Tennessee Valley
Authority's Seven States Energy Corporation.
(3) Agency debt—Agencies authorized to borrow from the public,
such as Eximbank, almost always borrow from the FFB (or the
Treasury) instead, since it is less expensive than issuing their own
securities and borrowing directly from financial markets. Other
agencies that are not authorized to borrow from the public also
borrow from the FFB. This borrowing itself has no effect on outlays; instead, outlays are recorded when the proceeds of borrowing
are spent by the agencies.
Table F-14 summarizes the activities of the FFB for 1986
through 1992. Table F-21 at the end of this document shows the
activities of the FFB over the same period by agency and account.
Table F-14. SUMMARY OF FEDERAL FINANCING BANK ACTIVITIES
(In billions of dollars)

Actual
1986

Estimated
1987

1988

1989

1990

1991

1992

Assets purchased from Federal agencies:
New acquisitions
Net lending
Loans outstanding

3.1
1.7
69.9

0.4
-4.6
65.2

0.2
-3.9
61.3

0.9
-6.4
54.9

1.7
-5.5
49.4

0.5
-5.3
44.1

4.1
-5.1
39.1

Loans originated on behalf of Federal
agencies:
New acquisitions
Net lending
Loans outstanding

4.0
1.1
54.6

3.5
-1.2
53.4

3.1
-1.5
52.0

2.1
-0.7
51.3

1.6
-0.6
50.6

1.0
-1.4
49.3

0.7
-1.7
47.6

Debt securities acquired from Federal
agencies:
New acquisitions
Net lending
Loans outstanding

4.5
0.6
32.4

4.3
0.5
32.9

2.7
32.9

2.9
1.1
34.0

2.6
1.2
35.2

2.3
0.9
36.1

36.1

11.6
3.4
156.9

8.2
-5.3
151.5

6.0
-5.4
146.2

5.9
-6.0
140.2

5.9
-4.9
135.2

3.8
-5.7
129.5

6.1
-6.8
122.7

Total, all FFB acquisitions:
New acquisitions
Net lending
Loans outstanding
*$50 million or less.

1.3

SPECIAL ANALYSIS B

B-15

I X . L O A N ASSET SALES TO THE PUBLIC

In this budget, the administration proposes to continue and
expand its pilot program of selling existing loan assets to the
public without recourse—a program first proposed in the 1987
Budget. Certain additional loan asset sales were required by Omnibus Budget Reconciliation Act of 1986. These sales are designed to
achieve 4 major goals: reduce the Government's cost of administering credit programs; provide an incentive for agencies to improve
loan origination and documentation; assist in determining the subsidies of Federal credit programs; and increase budgetary offsetting
receipts in the year of sale.
The nominal value of loans to be sold under the pilot program in
1988 is $11.2 billion; other loans with a nominal value of $1.4
billion will also be sold in that year for programmatic reasons.
Table F-15 presents the composition of the face value sales. Sales
in 1988 of pilot program loans are estimated to have a market
value of $6.9 billion. These sales are estimated to reduce the budget
deficit by $5.3 billion in 1988, after taking into account the loss of
principal repayments and interest income from these loans that
were incorporated in previous budget estimates.
Although loan asset sales reduce current budget deficits, they
increase future deficits because they move to the present the anticipated future streams of principal and interest payments from
the loans. However, this effect is mitigated by several factors. First,
revenues from asset sales reduce Treasury borrowing and, therefore, lower interest outlays in subsequent years. Second, the savings from improved management of credit programs that occur as a
consequence of asset sales are not explicitly reflected in the budget.
Finally, the discount at which the loans are sold measure the
present value of the subsidies implicit in the loans. The "loss"
recognized at the time of sale merely makes that subsidy explicit.
Selling loan assets to the public with a Government guarantee is
a form of federal borrowing from the public. The Government
incurs a contingent liability in the amount of the loan guarantee.
Guaranteed loan asset sales are a more costly means of borrowing
for the Government than selling Treasury securities, since purchasers of the guaranteed loan assets frequently will offer prices well
below the face value of the loans, despite the Government guarantee. The lower price is offered because the loan assets may be
relatively illiquid or have unique characteristics that reduce their
value to the purchaser. Yet, because of the Government guarantee,
such sales tend to reduce the investment demand for Treasury
securities. It is more efficient for the Government to meet its
borrowing needs by issuing Treasury securities. For this reason,
administration policy is to sell loan assets to the public without a
Government guarantee.

C-14

•

THE BUDGET FOR FISCAL YEAR 1988
Table F-15. LOAN ASSET SALES TO THE PUBLIC
(In millions of dollars)

Agency and program

1987

1988

1989

1990

1991

1992

Total
1987-92

PILOT
Agriculture:
Rural housing insurance fund
Rural development insurance fund ...
Rural Electrification Administration ....
Rural telephone bank
SBA:
Business loan investment fund
Disaster loans
Development companies
HUD:
FHA fund
Rehabilitation loans
Community development
Housing for the elderly and handicapped
Education:
College housing loans
Higher education facilities

2,200
1,870

600

300
35

1,000
1,000
1,000
500

1,000
1,000
1,000
250

1,000
1,000
1,000

1,000
670
500

1,000
670
397

670

350
350
200

308
94

662

2,000
3,942
897
650
658
329
500

34
33

983

931
142
300

300

2,018

1,200

1,000

Interior:
Bureau of Reclamation
HHS:
Medical facilities
Health maintenance organizations
Transportation:
Railroad rehabilitation

59
51

2,007
226
900
1,000

1,000

7,218

358

132
97

132
97
583

583

256

Tennessee Valley Authority
Subtotal, pilot

1,000 * 7,400
380
6,450
1,000
5,000
1,250

500

Veterans Administration:
Vendee loans
Export-Import Bank

1,200
1,200
1,000
500

8,006

11,213

650

329

7,635

5,287

4,670

4,042

40,853

PROGRAMMATIC
HUD:
GNMA tandem plan
Education:
Guaranteed student loans
Perkins (NDSL) loans
Veterans Administration:
Vendee loans

250
33

979
300
33

350
33

400
33

450
33

1,750
165

690

745

779

832

670

685

4,401

Subtotal, programmatic

1,340

1,357

1,112

1,215

1,103

1,168

7,295

Total, sales to the public

9,346

12,570

8,747

6,502

5,773

5, 210

48,148

X . FEDERAL DEPOSIT INSURANCE AND CONTINGENT LIABILITIES

The Federal Government provides guarantees and insurance
against several types of risk for many sectors of the economy. One
kind of insurance the Government provides is the insurance

B-15

SPECIAL ANALYSIS B

against uncertain situations, or contingencies. Under this type of
insurance, if a given situation occurs, such as borrower default or
natural disaster, the Government assumes a liability and makes
payment to the insured party. However, if the specified situation
does not occur, the Government is not liable for any loss. When the
Government makes an agreement such as that described above, it
becomes exposed to the possibility of loss sometime in the future.
Table F-16 shows the current contingent liability of the Federal
Government. Unlike an annual corporate financial statement, the
data presented in Table F-16 do not represent the Government's
expected loss contingency for 1987 alone, but rather the overall
contingent liability or exposure of the Government resulting from
all potential insurance claims and guaranteed loan defaults. As can
be seen in the table, the Government bears risk from a variety of
sources, including deposit insurance, loan guarantee programs, foreign political risk, flood and crop insurance, and pension insurance.
Table F-16. CONTINGENT LIABILITY OF THE FEDERAL GOVERNMENT
(In billions of dollars)
Program or activity

Deposit insurance:
Federal Deposit Insurance Corporation
Federal Savings and Loan Insurance Corporation
National Credit Union Administration
Subtotal, deposit insurance
Other:
Loan guarantee programs1
National flood insurance
Overseas Private Insurance Corporation
Federal crop insurance
Pension Benefit Guaranty Corporation
Subtotal, other
Total, contingent liabilities
1

1985 actual

1986 actual

1,268.4
769.0
104.0

1,368.5
817.2
130.0

2,141.4

2,315.7

613.1
133.8
3.0
6.7
2.0

691.9
133.8
3.1
7.2
3.5

758.6

839.5

2,900.0

3,155.2

Gross basis.

The credit budget encompasses all loan guarantee programs, but
only a small part of the transactions of Federal deposit insurance
programs, and only the lending activity of the Pension Benefit
Guaranty Corporation and Overseas Private Investment Corporation. Table F-16 also shows these and other programs that expose
the Government to significant risk that are outside the scope of the
credit budget; furthermore, there are additional, but smaller insurance programs not in the table that increase the Federal contingent liability.
Although only a small part of the transactions of Federal deposit
insurance programs are included in the credit budget, these programs make up the largest portion of the Government's contingent
liability. The Federal Government insures depositors through the

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Federal Deposit Insurance Corporation (FDIC), the Federal Savings
and Loan Corporation (FSLIC), and the National Credit Union
Administration. Deposit insurance offered by these programs
serves two purposes: it helps stabilize the Nation's monetary and
financial system and thereby the economy as a whole; and it protects depositors in the insured financial intermediaries. As seen in
Table F-16, the value of insured deposits at the end of 1986 was
over $2.3 trillion.
Federal deposit insurance programs may assist insured depositors in a variety of ways. When an insured financial institution
becomes troubled, deposit insurance programs may: (1) liquidate
the institution and pay depositors directly; (2) merge the troubled
institution with a healthier institution, in some cases providing
financial assistance to the acquiring partner in the merger; or (3)
provide financial assistance directly to the troubled institution in
the expectation that it will recover. Financial assistance to private
financial intermediaries has consisted of equity purchases, purchases of physical assets, and direct loans and loan guarantees.
Although similar to a guarantee, Federal deposit insurance is not
included in the guaranteed loan portion of the credit budget, principally because it does not directly allocate credit to the ultimate
borrowers of that credit. Deposit insurance directly affects the
liabilities (deposits) of financial intermediaries but only indirectly
their assets (loans). All other Federal guarantee programs are
structured to influence the assets or loans of financial intermediaries directly. Nonetheless, it is argued that Federal deposit insurance gives insured institutions an incentive to take on more risk
than they would otherwise, either by making riskier loans or by
increasing leverage. To this degree, deposit insurance indirectly
allocates credit. It also indirectly affects the allocation and amount
of credit by changing depositor behavior as a result of its protection, and by insuring the stability of the financial system and the
economy. Direct loan obligations of FDIC and FSLIC include two
types of transactions: cash advances to troubled institutions, and
purchases of loans to the public held in the failing financial institution's portfolio. Both of these transactions increase Federal outlays,
and are included in the credit budget.
For 1987 and beyond, the FDIC does not plan to incur new direct
loan obligations. Assistance to troubled institutions or purchases of
failing banks will be in the form of cash grants or interest-bearing
demand notes issued by FDIC. In the event of a liquidation, assets
of the failed bank are held in receivership, rather than on the
FDIC's books. These transactions increase outlays (and in the case
of FDIC notes, agency debt), but would not affect the credit budget.
FSLIC anticipates new direct loan obligations of $25 million in both

SPECIAL ANALYSIS B

B-15

1987 and 1988. Direct loan obligations made by deposit insurance
programs amounted to $183 million in 1986.
XI.

LEASING

The Federal Government is both a lessor and a lessee in hundreds of leases involving billions of dollars every year. As a lessor,
the Government allows private entities to contract for the use of
on-shore and off-shore acreage for oil and gas exploration and lands
for grazing and timber harvesting. Federal leases raise about $6
billion annually in proprietary receipts, primarily from rents and
royalties on the Outer Continental Shelf.
As a lessee, the Federal Government uses both operating and
capital leases to contract with private entities to use office facilities, computers, telecommunications equipment, satellites, ships,
cars, planes, and other equipment. Operating leases are normally
short term and do not involve a transfer of title to the asset. That
is, the lessor holds title to, performs maintenance on, and regains
the asset after the lease period.
Operating leases can be used to overcome peak load problems
when the use of the asset is not needed indefinitely. Also, the
lessee may not wish to take on the ownership risks of upkeep or
may find that the lessor can provide more efficient maintenance
services. Finally, the lessee may wish to avoid the purchase of an
asset likely to be obsolete in a relatively short period of time.
In contrast, a capital lease arrangement is long term and involves a change in the basic ownership of an asset. In essence,
capital leases are a means by which lessees can purchase an asset
by borrowing from the lessor. This is obviously true in the case of
lease-purchases, where the Government ends up holding title to the
property at the end of the lease period. But even when this does
not occur, if the lease covers a large part of the operating life of
the asset, it has much the same economic impact as a front-end
purchase that is eventually resold.
From a budgetary standpoint, capital leases can be more attractive than purchasing assets. Leasing entails lower outlays in the
short-term and, under some circumstances, less budget authority.
When capital assets are purchased, their entire purchase price
requires obligational authority and is recorded as an outlay in the
year of purchase. When capital assets are leased, only the annual
lease payment is recorded as an outlay and, under certain lease
contracts, there is no recognition of obligations to make payments
in future years.
Yet, lease-purchase arrangements are inefficient borrowing
mechanisms for the Government because the lessor (a private
entity) will be charging rent based on an effective interest rate
significantly above the Treasury's cost of money. Over the full

C-14

• THE BUDGET FOR FISCAL YEAR 1988

period of the lease, the Government will be paying more for the
asset than if it bought it outright and financed the purchase with
Treasury bonds.
The Office of Management and Budget issued Circular No. A104, "Comparable Cost Analysis for Decisions to Lease or Purchase
General Purpose Real Property/' in 1972 to provide Governmentwide guidelines on leasing. The circular requires economic analysis
to justify major lease-buy decisions. Yet, the circular did not apply
to all lease-buy decisions.
Owing to the recognition that the budget scorekeeping system
should treat capital leases and capital purchases similarly in decisions on whether to buy or lease, the administration released a
revision of A-104 on June 1, 1986. The revised A-104 prescribes a
uniform method for the economic analysis to be conducted when
considering whether to use leasing in place of direct Government
purchase and ownership as a means of acquiring the use of assets.
The budgetary treatment of leases with options to purchase is
being reviewed.
X I I . T A X - E X E M P T CREDIT

Interest on State and local government obligations generally has
been exempted from the Federal income tax since its adoption in
1913.4 Federal tax exemption increases the demand for these obligations, since it results in higher after-tax interest rates for the
lenders and investors. This increase in demand reduces the pretax
interest rates of these obligations relative to the pretax interest
rates of taxable securities. Consequently, tax-exempt interest rates
in recent years have historically been about 75 percent of taxable
interest rates on long-term obligations with similar credit risk. In
contrast, because of a record supply of tax-exempt bonds and uncertainty generated by the pending tax bill in 1986, the spread between tax-exempt and taxable bonds was unusally low, and taxexempt yields averaged 94 percent of 20-year Treasury bond yields.
Tax exemption reallocates scarce credit resources, just as do
Federal direct loans and loan guarantees. Borrowers aided by Federal tax-exempt status have access to credit resources at preferential interest rates over competing borrowers without the taxexempt status. Borrowers who benefit both from tax exemption and
Federal guarantees have an advantage over all other borrowers,
including the Federal Government, since the interest on Federal
Government debt is taxable.
Although tax-exempt financing alters the allocation of credit and
has costs similar to other Government financing programs, it is not
4 Tax exemption is a tax expenditure. (See Special Analysis G, "Tax Expenditures.") Special Analysis G
includes a discussion of revenue losses attributable to special provisions of the tax code, including various types
of tax-exempt bonds.

SPECIAL ANALYSIS B

B-15

included in the credit budget for several reasons. First, unlike
other credit assistance, the statutory authority for tax-exempt
credit generally allows unlimited access that is unilaterally elected
by eligible borrowers. Second, tax-exempt credit is not controlled by
the budget process in the same manner as direct loans or guaranteed loans; effective control of tax-exempt financing can only be
achieved through legislated changes to the tax code.
A relatively small portion of tax-exempt financing is guaranteed
by the Federal Government, and is therefore included in the credit
budget as guaranteed loan commitments. This occurs when the
Federal Government guarantees the financial assets that underlie
the tax-exempt obligation. Examples include State and local government bonds that finance home mortgages guaranteed by the
Federal Housing Administration or the Veterans Administration,
or bonds that finance student loans guaranteed by the Department
of Education.
Another example of a tax-exempt bond that is indirectly guaranteed by the Federal government is tax-exempt bond issues backed
by special Treasury obligations, the State and local government
series (SLGS). The bulk of these tax-exempt bonds have originated
in connection with advance refundings. In an advance refunding,
an institution purchases SLGS bonds, and the Treasury uses the
proceeds of the sale as collateral for an outstanding bond issue of
the institution. The original issue is now "guaranteed" by the
Federal government.
Advance refundings generally occur so that issuers of tax-exempt
bonds can get out of restrictive covenants or realize debt service
savings. An example of a restrictive covenant might be a limit on
the dollar volume of bonds that an institution can issue. By using
an advance refunding, the institution can issue a new series of
bonds and exceed the limit originally agreed upon.
In recent years, tax-exempt bonds collateralized by SLGS bonds
have been growing in importance. At the end of 1986, over $100
billion of these bonds were outstanding, which represents approximately 14 percent of all outstanding tax-exempt issues.
This administration and previous ones have believed for several
reasons that Federal agencies should not offer direct or indirect
guarantees for securities that benefit from tax-exempt status. First,
tax-exempt financing is an inefficient means of financing, since the
tax loss to the Treasury is greater than the savings from the lower
financing costs available to the borrower. Therefore, it should not
be stimulated by benefitting from a Government guarantee.
Second, the guarantee of tax-exempt financing confers double benefits on investors in those securities: they pay no Federal income tax
and they bear no risk. This class of debt obligation is therefore
superior to Treasury securities.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

During the first half-century of the income tax, tax-exempt borrowing was mainly for public purposes such as financing roads and
schools. From the 1960s on, however, the benefits of tax-exempt
financing have increasingly been made available to private businesses. State or local governments typically establish authorities
that function as financial institutions in providing tax-exempt financing to private borrowers. They use their tax-exempt financing
to purchase an asset, which in turn, is purchased from them by the
borrower, or to lend the proceeds of an issue to a private borrower.
In general, the private borrower is solely responsible for the payment of interest and principal even in the event of default. The
State or local government, in some cases, can benefit from investment earnings on funds held for temporary periods and from fees
paid by borrowers.
Industrial development bonds (IDBs) issued for use by private
business were made taxable in the 1968 and 1969 tax acts, but a
number of major exceptions were permitted. Tax-exempt IDBs were
permitted for pollution control, prior to the 1986 tax act. Taxexempt IDBs are still permitted for sewage and waste facilities,
multifamily rental housing, facilities financed with "small issues''
of under $10 million in face amount, and certain other private
business projects. In recent years, tax-exempt bonds have also
become a common means of financing owner-occupied housing, student loans, and private nonprofit hospitals and educational facilities.
Concerned by the rapid growth of private purpose tax-exempt
bonds, Congress has placed further restrictions on their use in
recent years. The Omnibus Reconciliation Act of 1980 imposed a
number of restrictions on tax-exempt mortgage subsidy bonds for
owner-occupied housing, including limitations on the volume issued
in each State. The Tax Equity and Fiscal Responsibility Act of 1982
required that IDBs be approved by an elected public official after a
public hearing, and that assets of certain IDB-financed projects
placed in service after 1982 be depreciated using the straight-line
method rather than accelerated depreciation. The 1982 tax act also
eliminated the tax exemption for "small issue" IDBs issued after
1986.
The Deficit Reduction Act of 1984 (DEFRA) restricted the annual
volume of student loan bonds and most IDBs issued in each State
to the greater of $150 per capita or $200 million, approximately $37
billion in 1984. The per capita limitation will be reduced to $100 in
1987 to reflect the termination of the small-issue exception for nonmanufacturing facilities; authority for small-issue IDBs for manufacturing facilities was extended through 1988. DEFRA also required IDB issuers to rebate any excess arbitrage earnings to the
Federal Government, and prohibited the use of consumer loan

SPECIAL ANALYSIS B

B-15

bonds. Although the Act extended the use of mortgage subsidy
bonds for 4 years, an optional program for issuers to provide mortgage credits to eligible homebuyers in lieu of tax-exempt bonds was
enacted. Finally, volume limits on the use of veterans' housing
bonds restricted their use to five States.
Even with these restrictions, the volume of private purpose taxexempt bonds continued to increase. Table F-17 shows the growth
in the volume of long-term, tax-exempt bonds. Total issues nearly
quadrupled between 1981 and 1985, increasing from $55 billion to
$218 billion. Over the same time period, the volume of private
purpose tax-exempt bonds rose from $31 billion in 1981 to $116
billion in 1985. In 1976, private purpose tax-exempt bonds accounted for one-third of total tax-exempt, long-term issues. This percentage rose to 60 percent by 1980, and has remained fairly constant
since then.

Table F-17. TAX-EXEMPT FINANCING
(In billions of dollars)
Actual
1978

1979

1980

1981

1982

Estimated
1983

1984

1985

1986

1987

1988

19.7

28.1

32.5

30.9

49.6

57.1

74.0

116.4

41.5

36.7

31.7

Housing bonds
Single-family mortgage subsidy bonds
Multi-family rental housing bonds
Veterans general obligation bonds

6.9
3.4
2.5
1.2

12.1
7.8
2.7
1.6

14.0
10.5
2.2
1.3

4.8
2.8
1.1
0.9

14.6
9.0
5.1
0.5

17.0
11.0
5.3
0.7

20.5
12.8
5.5
2.2

38.1
12.0
23.9
2.2

8.3
6.0
1.3
1.0

10.3
7.0
2.3
1.0

6.6
3.3
2.3
1.0

Private exempt bonds1
Student loan bonds
Pollution control industrial bonds
Small-issue industrial development bonds
Other industrial development bonds2

2.9
0.3
2.8
3.6
3.2

3.2
0.6
2.5
7.5
2.2

3.3
0.5
2.5
9.7
2.5

4.7
1.1
4.3
13.3
2.7

8.5
1.8
5.9
14.7
4.1

11.7
3.3
4.5
14.7
6.0

11.7
1.2
8.1
18.3
14.1

37.3
4.0
7.4
17.5
12.1

8.2
2.0
1.2
11.7
10.1

6.3
1.9
0.6
3.5
14.1

9.1
1.8
0.0
3.2
11.0

29.3

20.3

22.0

24.2

35.3

36.2

41.7

101.8

103.0

53.0

56.0

49.1

48.4

54.5

55.1

84.9

93.3

115.7

218.2

144.5

89.7

87.7

Private purpose tax-exempts

Public purpose tax-exempts3
Total new issues, long-term tax

exempts4

Private exempt entity bonds are obligations of the Internal Revenue Code Section 501(c)(3) organizations, such as private non-profit hospitals and educational facilities
2 Other IDBs include obligations for private businesses that qualify for tax-exempt activities, such as sewage disposal, airports and docks.
3 While most of these are commonly referred to as governmental bonds, some may be nongovernmental.
4 Includes long-term refunding bonds including advance refundings.
Source: Office of Tax Analysis, Department of Treasury.
1

SPECIAL ANALYSIS B

B-15

The Tax Reform Act of 1986 has the potential to reverse the
trend of rapid growth in the issuance of tax-exempt securities. In
particular, the Act is expected to reduce the volume of private
activity bonds (those financing loans to industry or to individuals
for mortgages or student loans).
The 1986 Tax Act combines the two existing State-by-State
volume caps on mortgage revenue bonds and on student loan bonds
and IDBs into a single tighter volume cap. The cap is initially set
at the greater of $75 per capita or $250 million for each State, and
is lowered to the greater of $50 per capita or $150 million beginning in 1988. Tax-exempt bonds can no longer be issued for certain
purposes, such as pollution control and sports facilities. On the
other hand, terminations required by prior law for both singlefamily mortgage revenue bonds and certain industrial development
bonds were each extended by one year. The number of advance
refundings of tax-exempt bonds was limited and the ability to earn
arbitrage by investing proceeds of tax-exempt bonds in taxable
instruments was reduced.
The effect of the new tax law on the demand side of the market
for tax-exempt securities is uncertain. One important change made
by the Tax Act that will tend to reduce the demand for tax-exempt
bonds is the across-the-board reduction in marginal tax rates for
both individuals and corporations. Another important change that
will tend to reduce demand for tax-exempts is the disallowance for
financial institutions of the deduction for the cost of carrying most
tax-exempt debt.
The Tax Act also includes provisions that will tend to increase
the demand for tax-exempt bonds. Individuals who have not previously purchased tax-exempt bonds may turn to the municipal
market as other avenues for sheltering income from the Federal
income tax are sharply curtailed. On the business side, because
base-broadening measures will tend to increase taxable income for
certain sectors of the economy, the demand for tax-exempt bonds
will increase as a means of sheltering otherwise taxable income.
The net effect of all the changes made by the Tax Act upon the
yield of tax-exempt securities is uncertain.
XIII.

SUMMARY

The need for better control over Federal credit is widely recognized within the executive branch and the Congress. With $252
billion in direct loans outstanding and $450 billion in primary
guaranteed loans outstanding in 1986, the Federal Government is
the single largest financial intermediary in the United States. Its
credit policy and practices affect all major sectors of the economy.
To gain better control over Federal credit, the Budget has included since January 1980 a credit control system, composed of the

C-14

• THE BUDGET FOR FISCAL YEAR 1988

credit budget and credit limitations proposed in individual appropriations bills. This system has been strengthened by GrammRudman-Hollings, which requires Congress to establish aggregate
limits on new direct loan obligations and guaranteed loan commitments in the budget resolution process and incorporates credit in
the budget reconciliation process. The management of Federal
credit programs should be improved through the application of the
administration's nine-point program.
Control over credit programs would be further improved by adoption of the administration's credit reform initiative. Under this
reform, Federal agencies would obtain appropriations equal to the
subsidy component of direct loans and loan guarantees they make
each year. Details of this proposal and specific legislative language
will be prepared and sent to the Congress in March 1987. The
subsidy costs of operating these programs could then be compared
to the cost of other Federal spending programs and to the economic
and social benefits realized in achieving credit program objectives.
XIV.

APPENDIX

ADDITIONAL DISCUSSION OF FEDERAL CREDIT PROGRAMS AND
RELATED ISSUES IN THE 1 9 8 8 BUDGET DOCUMENTS

• Special Analysis E ("Borrowing and Debt") contains information on Federal borrowing, borrowing by Government-sponsored enterprises, and the Federal Financing Bank.
• Special Analysis G ("Tax Expenditures") contains information
on tax-exempt borrowing.
• Special Analysis H ("Federal Aid to State and Local Governments") contains information on Federal loans to State and
local governments.
• Part 5 of the Budget Supplement ("Meeting National Needs:
The Federal Program by Function") contains a discussion of
major credit programs by budget function (e.g., Agriculture,
Commerce and Housing, International Affairs).
• Part 3 of the Budget Supplement ("Federal Credit") presents
an outline of the credit reform initiative and a summary of
much of the material in this special analysis.
• Part 6 of the Budget Supplement ("Summary Tables") contains summary tables of the credit budget totals (Table 1) and
summaries by agency of direct loan obligations and guaranteed loan commitments (Table 5).
• The Budget Appendix contains detailed information for each
credit program by budget account. Part I of the Appendix
("Detailed Budget Estimates") provides credit program information for Federal agencies. Part IV ("Government-Sponsored
Enterprises") provides information on these enterprises.

SPECIAL ANALYSIS B

B-15

• The Historical Tables contains total direct loan obligations by
sector—agriculture, business, education, and housing—and by
agency or program for the period 1951-1992.
• Management of the United States Government, contains discussions of credit program management issues, the debt collection report, and agency credit management goals.

Table F-19.GUARANTEEDLOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions ofdollars)—Continuedr
Actual 1986

Agency or program

Funds Appropriated to the President:
Economic support fund

Estimate
1987

1989

Obligations
Loan disbursements..
Change in t
Outstandings..

104
90
83
6,305

176
176
77
6,381

176
176
54
6,436

Foreign military sales

Obligations
Loan disbursements..
Change in c
Outstandings.

4,967
5,536
2,979
22,124

4,040
5,190
568
22,692

Guarantee reserve fund (foreign military sales defaults)

Obligations
Loan disbursements..

1,050
1,050
255
1,420

Outstandings.
Overseas Private Investment Corporation

AID functional development assistance

AID development loans revolving fund

AID private sector revolving fund

14
10

1990

240
240

1991

6,556

120

240
240
114
6,670

240
240
87
6,756

4,421
5,352
-163
22,529

4,499
5,034
1,396
23,925

4,573
4,676
907
24,832

4,639
4,635
617
25,449

951
951

891
891

900
900

1,429

15
9
3
46

3
49

15
6

150
175

Obligations
Loan disbursements..
Change in i
Outstandings.

-1

23
7
2
43

Obligations
Loan disbursements.,
Change in l
Outstandings.

254
309
308
3,425

150
255
232
3,657

150
225
197
3,854

150
200
154
4,008

4,120

112

150
150
70
4,191

Obligations
Loan disbursements..
Change in t
Outstandings..

-244
8,494

-334

8,160

-328
7,833

-381
7,452

—387
7,065

—377
6,688

16
14

16
18

12
12

15
11

16
10

Obligations
Loan disbursements..

Change in outstandings..
Outstandings

8
11

14
25

14
39

3
42

AID housing and other credit guarantees..

Obligations
Loan disbursements
Change in outstandings..
Outstandings

39
39
21
69

49
49
13
82

51
51
20
101

AID miscellaneous appropriations..

Obligations
Loan disbursements
Change in outstandings..
Outstandings

10
234

-7
227

-5
221

215

Obligations
Loan disbursements
Change in outstandings..
Outstandings

2,799
2,897
136
28,698

1,8 17
1,907
-924

1,295
1,424
-1,135
26,639

Obligations
Loan disbursements
Change in outstandings..
Outstandings

1,825
2,347
615
29,295

-2,594
26,701

Obligations
Loan disbursements
Change in outstandings.
Outstandings

421
463
249
7,957

Obligations
Loan disbursements
Change in outstandings..
Outstandings

24
827

Agriculture:
Farmers Home Administration:
Agricultural credit insurance fund.

Rural housing insurance fund..

Rural development insurance fund..

Commodity Credit Corporation:
Short and medium term export loans.

Commodity loans.

Obligations
Loan disbursements
Change in outstandings.
Outstandings

- 2

-5
34

51
51
3
105

51
51
7
112

51
51
8
120

- 6

210

204

500
813
-1,596
25,043

400
428
-1,731
23,312

300
328
-1,531
21,781

706
-2,020
24,680

316
-2,138
22,542

92
-2,269
20,273

-2,253

107
389
-1,519
6,438

610
—766
5,672

295
-858
4,814

126
-1,033
3,781

87
-1,047
2,734

— 14
813

21
834

40
874

32
906

10
916

17,130
17,391
17,130
17,391
6,261 -2,627
18,494
15,867

12,785
12,785
-3,197
12,670

10,460
10,460
-2,112
10,557

9,485
9,485
-2,324
8,233

9,189
9,189
-499
7,734

n;775
508

1,216

18,020

Table F-19.GUARANTEEDLOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued r
Estimate

Actual 1986

Agency or program

1
1

1989

1990

1991

Obligations
Loan disbursements
Change in outstandings.
Outstandings

-223
174

-141
33

-32

Obligations
Loan disbursements
Change in outstandings..
Outstandings

328
328
442
2,113

673
673
765
2,878

703
703
789
3,668

743
743
827
4,494

751
751
780
5,274

541
541
468
5,742

Obligations
Loan disbursements
Change in outstandings..
Outstandings

813
773
577
10,622

819
819
628
11,251

749
749
619
11,869

771
771
637
12,507

665
13,172

615
13,787

Rural electrification and telephone revolving fund

Obligations
Loan disbursements..
Change in i
Outstandings.

2,953
2,321
304
35,941

1,305
3,177
2,045
37,986

290
2,601
276
38,262

145
1,960
-320
37,942

1,565
-720
37,222

999
-1,254
35,967

Rural telephone bank

Obligations
Loan disbursements.,
Change in t
Outstandings..

128

149
83
64
1,498

93
78
-493
1,005

46
74
-490
515

152
152
99
668

7
7

Storage facility loans

Rescheduled guaranteed loans

Public Law 480 long-term export credits

Commerce:
Economic development revolving fund

EDA miscellaneous appropriations

Obligations
Loan disbursements
Change in outstandings..
Outstandings
Obligations
Loan disbursements..
Change in t
Outstandings.

72
51
1,434

-62

568

-7
91

-2

-41
626

- 2

806

-211

304

15
320

6
6

5
5

-40
587

-37
550

-36
514

ITA operations and administration

Obligations
Loan disbursements..

6
9
6
14

7
8
-3
12

1
—5
7

-1

Outstandings.

5
2
96

8
4
100

-3
97

—3
94

Obligations
Loan disbursements..
Change in c
Outstandings..

4
4
2
17

2
2

Obligations
Loan disbursements..
Change in t
Outstandings..

568
568
435
1,748

Obligations
Loan disbursements..
Change in t
Outstandings.

Outstandings.
NOAA coastal energy impact fund

NOAA Federal ship financing (fishing)

Defense:

Navy industrial fund

Defense stock fund

Obligations
Loan disbursements..

Obligations
Loan disbursements.
Production guarantees
Education:
Guaranteed student loans
National direct student loans

Outstandings.

-1

3
3
10

—167
1,582

-169
1,412

-1

—1
4

—3
91

-3
88

—3
85

2
2

-178
1,234

-178
1,056

-178
878

8
t>
-H
-178
700

f
>

C
—
tOI
w

-1

-10

Obligations
Loan disbursements..
Change in c
Outstandings..

1,334
1,366
944
9,146

1,232
1,249
441
9,587

1,404
1,369
80
9,667

1,811
1,729
275
9,943

1,840
1,834
82
10,025

1,795
1,804
-128
9,897

1,663
1,689
-440
9,457

Obligations
Loan disbursements..
Change in t
Outstandings..

191
205
139
5,272

-4J39
532

-14
519

-19
500

-25
475

-30
445

-36
409

i
cn
to

Table F-19.GUARANTEEDLOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued r
Actual 1986

Agency or program

College housing loans

Higher education

Higher education facilities loans and insurance

Energy:
Geothermal resources

Bonneville Power Administration

Health and Human Services:
Medical facilities guarantees and loan fund

Health maintenance organization loan fund

Estimate
1987

1988

1989

1990

1991

1992

Obligations
Loan disbursements
Change in outstandings
Outstandings

57
21
-72
2,229

64
-1,002
1,226

63
-911
316

4
-65
251

-18
-60
191

-7
184

-7
177

Obligations
Loan disbursements
Change in outstandings
Outstandings

-16
61

-17
44

-9
35

-8
26

-6
20

-6
14

-5

Obligations
Loan disbursements
Change in outstandings
Outstandings

-17
339

-18
320

-158
163

-58
104

-37
67

-4
64

-4
60

Obligations
Loan disbursements
Change in outstandings
Outstandings

4
4
4
16

Obligations
Loan disbursements
Change in outstandings.
Outstandings

-1

5
5

23
23
-5
132

2
2

2
2
2
2

2
2
2
3

2
2
2
4

2
2
2
6

Obligations
Loan disbursements
Change in outstandings
Outstandings

-10
137

Obligations
Loan disbursements
Change in outstandings
Outstandings

-7
105

-8
97

-132

-97

Obligations
Loan disbursements
Change in outstandings
Outstandings

-16
495

-8
486

-8
479

-10
468

-6
462

-6
456

-5
451

Obligations
Loan disbursements
Change in outstandings
Outstandings

16
17
17
30

22
22
22
52

29
29
28
81

33
33
32
113

35
35
34
146

33
33
32
178

31
31
29
207

Obligations
Loan disbursements
Change in outstandings
Outstandings

-35
2,111

-37
2,074

-39
2,035

-42
1,993

-44
1,949

-47
1,902

—50
1,852

Housing for the elderly or handicapped...

Obligations
Loan disbursements
Change in outstandings ..
Outstandings

556
55 3
523
6,189

502
553
521
6,710

131
538
3
6,713

24
501
464
7,177

14
323
284
7,460

8
53
12
7,472

4
18
-25
7,447

GNMA emergency mortgage purchases....

Obligations
Loan disbursements
Change in outstandings
Outstandings

180
-750
884

204
-522
361

-45
316

-1
315

-1
314

-1
313

Obligations
Loan disbursements
Change in outstandings
Outstandings

8
8
7
10

802
802

306
306

196
196
-2
8

128
128
-2
6

266
266
-1
5

86
86
-1
4

Federal Housing Administration fund

Obligations
Loan disbursements
Change in outstandings
Outstandings

423
423
42
4,246

321
299
-393
3,853

395
372
-476
3,377

443
412
6
3,382

573
573
-109
3,273

807
807
-114
3,159

811
810
-66
3,092

Rehabilitation loan fund

Obligations
Loan disbursements
Change in outstandings
Outstandings

40
59

85
100
20
730

38
-387
343

-343

Health resources and services

Health education assistance loans

Housing and Urban Development:
Low-rent public housing

Payments on mortgage-backed securities

- 8

710

1
1

Table F-19.GUARANTEEDLOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued r
Actual 1986

Agency or program

Revolving fund for liquidating programs..

Interior:
Bureau of Reclamation loans..

BIA revolving fund..

Indian loan guaranty and insurance fund..

Transportation:
Railroad rehabilitation and improvement financing..

Estimate
1987

1989

1990

1991

Obligations
Loan disbursements
Change in outstandings..
Outstandings

—27
392

-56
336

-212
124

-96
28

Obligations
Loan disbursements
Change in outstandings..
Outstandings

45
47
38
480

44
38

507

27
32
-326
181

27
27
209

15
33
33
241

259

Obligations
Loan disbursements
Change in outstandings.
Outstandings

14
11

106

118

13
13
4
122

13
13
4
125

13
13
4
129

13
13
4
132

Obligations
Loan disbursements
Change in outstandings..
Outstandings

6
6
6
12

7
7*

5
5

4
4

Obligations
Loan disbursements..
Change in t
Outstandings.

-86

634

28
16

9
;
635

5
-585
50

- 2

-2

- 2

-9
41

-7
34

-5
29

Federal-aid highways trust fund-

Obligations
Loan disbursements..
Change in t
Outstandings..

Right-of-way revolving fund-

Obligations
Loan disbursements..

48
38

48
48

1
1

Change in outstandings
Outstandings
Miscellaneous expired accounts

Aircraft purchase loan guarantees....

MarAd Federal ship financing fund...

Environmental Protection Agency:
Abatement, control, and compliance.

NASA

Veterans Administration:
Vendee loans and loans repurchased

Direct loan revolving fund

Other veterans programs

. Obligations
Loan disbursements
Change in outstandings
Outstandings

16
131

1
2
2

131

-1

. Obligations
Loan disbursements
Change in outstandings
Outstandings

-21
48

-6
42

-5
37

-5
32

-4
27

-4
23

-4
20

. Obligations
Loan disbursements
Change in outstandings
Outstandings

1,260
1,260
878
1,475

610
610
608
2,082

105
105
103
2,185

105
105
103
2,288

105
105
103
2,390

105
105
103
2,493

105
105
103
2,595

.. Obligations
Loan disbursements
Change in outstandings
Outstandings

32
22
22
24

49
48
72

—5
-8
64

-4
-6
58

-2
-5
53

-1
-4
49

—3
46

.. Obligations
Loan disbursements
Change in outstandings
Outstandings

888

—79
809

-91
717

-105
612

-121
491

-138
354

-157
197

.. Obligations
Loan disbursements
Change in outstandings
Outstandings

970
970
-34
1,188

930
930
70
1,258

826
826
-275
983

914
914
- 266
717

963
963
—277
440

988
988
-6
433

990
990
-35
398

.. Obligations
Loan disbursements
Change in outstandings
Outstandings

1
1

2
2

3
2

.. Obligations
Loan disbursements

-29
125

-23
102

-18
84

-21
63

-19
44

-17
27

-15
13

1
1

Table F-19.GUARANTEEDLOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued r
Actual 1986

Agency or program

District of Columbia:
Loans to the District of Columbia

Change in outstandings..
Outstandings

-5
47

Estimate
1987

1990

1991

-6

-7
28

-7
21

-7
14

Obligations
Loan disbursements..
Change in c
Outstandings.

-564

1,008

-293
715

-30
685

-31
654

-33
621

-35
586

Export-Import Bank 1

Obligations
Loan disbursements..
Change in t
Outstandings.

578
906
-1,525
14,351

900
771
-3,681
10,670

1,000
693
-2,714
7,956

900
700
-975
6,981

900
700
-1,025
5,956

900
700
-1,075
4,881

Federal Deposit Insurance Corporation2

Obligations
Loan disbursements.,
Change in t
Outstandings..

128
128
-194
3,423

-53
3,370

3,369

-50
3,319

-50
3,269

-50
3,219

Obligations
Loan disbursements.,
Change in t
Outstandings..

21
21
—73

25
25
15
1,733

25
25
15
1,748

25
25
15
1,763

5
5

Federal Savings and Loan Insurance Corporation2

National Credit Union Administration:
Share insurance fund

Central liquidity facility

Small business:
Business and investment loans

Obligations
Loan disbursements.,
Change in i
Outstandings..

25
25

1,686

1,694

25
25
25
1,718

3
3

5
5

-25
24

-15

Obligations
Loan disbursements..
Change in t
Outstandings..

—117
106

56
56
24
129

Obligations..

1,027

591

31
31

-1

- 2

-2

72
72
25
154

150
150
25
179

150
150
25
204

150
150
25
229

454

448

428

405

- 2

Loan disbursements
Change in out standings
Outstandings

982
77
4,950

698
-181
4,769

528
-1,814
2.956

448
-1,486
1,470

428
152
1,622

405
89
1,711

381
43
1,754

Disaster loans1..

. Obligations
Loan disbursements
Change in outstandings
Outstandings

516
361
-334
4,222

325
296
-939
3,283

350
304
-864
2,419

310
297
-744
1,675

310
279
-652
1,023

310
279
-557
466

310
279
-466

Tennessee Valley Authority.

.. Obligations
Loan disbursements
Change in outstandings
Outstandings

268
268
180
2,094

301
301
-211
1,882

280
280
74
1.957

343
343
-634
1,322

346
346
-66
1,256

330
330
-109
1,147

405
405
;/
1,163

Payments for Conrail securities-

.. Obligations
Loan disbursements
Change in outstandings
Outstandings

851

.. Obligations
Loan disbursements
Change in outstandings
Outstandings

6
84

-34
50

.. Obligations
Loan disbursements
Change in outstandings
Outstandings

38
99
-6
966

5
77

United States Railway Association.

Other agencies and programs.,

Grand total, net direct loans..

.. Obligations
Loan disbursements
Change in outstandings ,
Outstandings

}

3
55

3
58

3
62

3
65

4
5

4
4

4
35
-75
853

-98
755

-85
670

-74
595

-54
541

34,927
41,329
27,136
42,232
39,467
32,087
11,155 -15,231 -15,321
251,594 236,363 221,041

23,134
27,848
-9,076
211,965

22,089
25,341
-8,195
203,770

21,852
24,016
-7,429
196,341

20,979
22,531
-8,885
187,456

* $500,000 or less.
1 Obligations for 1989-1992 are not included in totals.
2 Direct loan obligations and disbursements for these programs represent increases in their holdings of loan assets rather than cash disbursements.

-851

-38
928

CZ)
t-H
CO

C71

Table F-19. GUARANTEED LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions ofdollars)—Continuedr
Actual 1986

Agency or Program

Funds Appropriated to the President:
Foreign military sales

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings

-20

160

Estimate
1987

1989

-20

140

-20

120

-20

100

1990

1991

-20

Overseas Private Investment Corporation..

Commitments..
New guaranteed loans..
Change in t
Outstandings..

136
81
45
268

200
80
45
313

150
80
45
358

150
80
45
403

150
80
45
448

150
80
45
493

AID housing and other credit guarantees..

Commitments
New guaranteed loans..

145

145
75
47
1,263

100
75
44
1,306

100
75
41
1,347

100
75
38
1,386

100
75
36
1,422

100

1,115
836
824
2,260

1,388
1,318
1,306
3,565

1,388
1,759
1,747
5,312

Agriculture:
Rural Electrification Administration..

Farmers Home Administration:
Agricultural credit insurance fund.,

Rural housing insurance fund..

Rural development insurance fund-

Outstandings..
Commitments
New guaranteed loans.,

40
1,216

Outstandings.

-15
1,030

1,118

840
329
317
1,435

Commitments
New guaranteed loans...
Change in outstandings.,
Outstandings

1,560
1,160
776
2,161

2,498
1,794
1,098
3,258

2,500
2,381
1,175
4,434

3,500
2,849
957
5,391

3,600
3,418
1,284
6,675

3,700
3,8
1,193
7,868

Commitments..
New guaranteed loans..
Change in c ' ' "
Outstandings..

-138
617

-15
602

-291
311

-184
127

-3

-4
120

Commitments..
New guaranteed loans..
Change in t
Outstandings.

55
127
-285
2,626

115
70
-290
2,337

81
-465
1,871

39
-316
1,555

11
-220
1,335

124

-186

1,150

Commodity Credit Corporation export credits

Commerce:

Economic development programs

ITA operations and administration

National Oceanic and Atmospheric Administration

Education: Guaranteed student loans
Energy:
Geothermal resources development fund

Health and Human Services:
Medical facilities guarantees and loan fund

Health education assistance loans

Commitments
New guaranteed loans..
Change in l
Outstandings.

2,503
1,595
-1485
3,609

5,500
5,500
3,428
7,038

3,500
3,500
745
7,782

3,500
3,500
322
8,104

3,500
3,500
-317
7,788

3,500
3,500
300

22 .
22 .
-149
137

-17
120

-16

-14
90

-13
77

-8

-12

9,591
9,075
2,450
39,931

9,398
9,061
1,131
41,063

10,715
10,050
1,025
42,088

11,857
11,294
1,643
43,731

12,498
11,973
45,594

-119
876

-143
732

-132
601

-132
469

-132
338

-132
206

374
321
275

343
343
310
1,416

100
100
58
1,474

100
100
52
1,527

100
100
48
1,575

100
100
48
1,623

22
22

Commitments
New guaranteed loans...,
Change in outstandings.,
Outstandings

51
286

Commitments..
New guaranteed loans.
Change in outstr"' '
Outstandings..

-5
20

- 8

Commitments
New guaranteed loans..
Changeini '' "
Outstandings.

19
19
35
193

50 .
50 .
38
231

Commitments
New guaranteed loans..
Change in i
Outstandings..

8,575
6,320
657
37,482

Commitments
New guaranteed loans.,
Change in i
Outstandings.
Commitments
New guaranteed loans.,
Change in t
Outstandings.
Commitments
New guaranteed loans..
Change in t
Outstandings..

1,106

104

219

207

195

183

1,862

Table F-19. GUARANTEED LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued
Actual 1986

Agency or Program

Housing and Urban Development:
Low-rent public housing

Revolving fund (liquidating)..

Federal Housing Administration..

GNMA mortgage-backed securities..

Interior:
Indian loan guaranty and insurance fund..

Transportation:
MarAd Federal ship financing fund..

Aircraft purchase loan guarantees.

Commitments
New guaranteed loans..
Change in outst—1'—
Outstandings.

-275
8,612

Estimate
1987

-312
8,300

1990

1991

1992

-394
7,200

-422
6,777

-450
6,327

-11

-15
14

-13

-339
7,961

—367
7,594

-9
40

Outstandings.

102,592
52,220
28,041
223,520

86,975
73,203
57,030
280,550

70,000
59,663
41,952
322,502

68,999
55,158
34,628
357,129

71,347
56,445
33,058
390,188

73, 500
58,234
32,853
423,041

75,220
59,674
32,306
455,347

Commitments
New guaranteed loans..
Change in l
Outstandings.

137,962
81,779
40,204
241,230

132,500
87,700
50,817
292,047

100,000
67,000
34,246
326,292

100,000
67,000
29,397
355,689

100,000
67,000
28,800 27,996
384,489 412,485

100,000
67,000
27,788
440,272

Commitments..
New guaranteed loans.
Change in c
Outstandings.

37
37
24
142

40
40
28
170

34
34

20
20

192

28
28
8

200

48
82
-1,448
4,995

50
—750
4,245

-300
3,945

-300
3,645

-300
3,345

-300
3,045

-300
2,745

CommitmentsNew guaranteed loans.
Change in c
Outstandings.
Commitments..
New guaranteed loans.

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings
Commitments
New guaranteed loans.

—3
54

-1

100,000
67,000

3H
§

I
C
0O
0
00

Change in outstandings...
Outstandings

Miscellaneous expired accounts

Commitments
New guaranteed loans...,
Change in outstandings.
Outstandings

-131

276

997

—76
200

-37

163

-31

132

-30

102

-29

-25

997

294
283
796

283
273
1,069

1,069

34,297
21,966
8,254
142,562

35,000
26,198
11,194
153,756

27,930
25,367
8,483
162,239

27,700
24,996
6,911
169,150

24,800
22,508
3,486
172,636

21,000
19,094
-432
172,204

18,900
17,175
-2,336

Commitments
New guaranteed loans..
Change in l
Outstandings..

5,508
3,167
—341
4,785

11,355
4,894
703
5,488

10,000
5,289
678
6,166

10,000
1,300
-500
5,666

10,000
1,300

5,666

Federal Savings and Loan Insurance Corporation,

Commitments
New guaranteed loans..
Change in c
Outstandings..

506
506
438
2,952

103
103
53
3,005

300
300
294
3,299

100
100
50
3,349

100
100
50
3,399

100
100
50
3,449

100
100
50
3,499

National Credit Union Administration

Commitments
New guaranteed loans..
Change in t
Outstandings..

2
2

1
1

Commitments
New guaranteed loans..

2,754
1,754

3,510
3,000

Treasury:
Guarantees of New York City notes

Biomass energy development

Veterans Administration:
Loan guarantee revolving fund

Export-Import Bank

Small business.Business and investment loan guarantees

Commitments
New guaranteed loans...,
Change in outstandings.,
Outstandings
Commitments
New guaranteed loans..
Change in i
Outstandings.
Commitments
New guaranteed loans...,
Change in outstandings.,
Outstandings

-190

-2

3,567
2,900

-2

3,510
3,010

-1
3,510
3,000

Table F-19. GUARANTEED LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued
Actual 1986

Agency or Program

Pollution control equipment guarantees

Disaster loans

Tennessee Valley Authority

Synthetic Fuels Corporation

Other agencies and programs

Subtotal, guaranteed loans (gross)

Less secondary guaranteed loans.1
GNMA guarantees of FHA/VA/FmHA pools

Estimate
1987

Change in outstandings
Outstandings

-461
8,362

705
9,067

Commitments
New guaranteed loans
Change in outstandings
Outstandings

25
16
-51
276

50
25
5
281

1988

1989

1990

1991

1992

715
10,063

610
10,673

530
11,203

340
11,543

260
11,803

«
a
a

Commitments
New guaranteed loans
Change in outstandings
Outstandings

*
3

*
2

*
1

Commitments
New guaranteed loans
Change in outstandings
Outstandings

-1

Commitments
New guaranteed loans
Change in outstandings
Outstandings

-4

Commitments
New guaranteed loans
Change in outstandings
Outstandings

81
1
-132
651

150
148
122
m

85
38
810

Commitments
New guaranteed loans
Change in outstandings
Outstandings

297,205
171,538
74,017
691,921

288,205
212,655
126,666
818,587

228,362
176,355
88,313
906,900

229,517 230,472 229,566 229,539
169,111 170,169 170,085 170,111
72,921
64,835
68,770
61,995
979,821 1,048,591 1,113,425 1,175,420

Commitments

137,962

132,500

100,000

>
r

E<0
00
0
0

-61
749

-65
684

100,000

—70
613

100,000

-75
539

100,000

Subtotal, guaranteed loans (net)

Less guaranteed loans held as direct loans-.2
By GNMA

Total, primary guaranteed loans

New guaranteed loans
Change in outstandings ,
Outstandings

81,779
40,204
241,230

87,700
50,817
292,047

67,000
34,246
326,292

67,000
29,397
355,689

67,000
28,800
384,489

67,000
27,996
412,485

67,000
27,788
440,272

Commitments
New guaranteed loans
Change in outstandings
Outstandings

159,243
89,759
33,814
450,691

155,705
124,955
75,849
526,540

128,362
109,355
54,067
580,608

129,517
102,111
43,524
624,132

130,472
103,169
39,970
664,102

129,566
103,085
36,839
700,941

129,539
103,111
34,207
735,148

Commitments
New guaranteed loans
Change in outstandings
Outstandings

180
— 750
884

204
-522
361

-45
316

-1
315

-1
314

-1
313

159,243
89,580
34,564
449,808

155,705
124,751
76,371
526,179

128,362
109,355
54,113
580,292

129,517
102,111
43,525
623,816

130,472
103,169
39,971
663,787

129,566
103,085
36,840
700,627

129,539
103,111
34,207
734,834

Commitments
New guaranteed loans
Change in outstandings.,
Outstandings

* $500,000 or less.
1 Loans guaranteed by the Federal Housing Administration, the Veterans Administration, or the Farmers Home Administration are included above. GNMA places a secondary guarantee on these loans, so they are deducted here to avoid double
counting.
2 Wnen guaranteed loans are acquired by a budget account,they are counted as direct loans and shown in the direct loan table. Consequently, they are deducted from thetotals in this table.

C-14

• THE BUDGET FOR FISCAL YEAR 1988
Table F-20. LENDING AND BORROWING BY GOVERNMENT-SPONSORED ENTERPRISES
(In millions of dollars)
Estimate

Actual
1986

1987

Obligations
New transactionsNet change
Outstandings

4,238
4,238
2,613
14,189

4,662
4,662
2,874
17,063

Obligations
New transactionsNet change
Outstandings

32,102
948
97,717

27,386
28,804
4,319
102,036

Obligations
New transactions..
Net change
Outstandings

61,824
51,963
37,590
86,359

55,600
46,732
31,878
118,237

Obligations
New transactions..
Net change
Outstandings

28,988
28,988
-356
7,177

39,565
39,561
-14
7,163

Federal intermediate credit banks..

Obligations
New transactions..
Net change
Outstandings

12,716
12,716
-6,924
8,701

6,563
6,563
-630
8,070

Federal land banks..

Obligations
New transactions..
Net change
Outstandings

1,660
1,660
-18,578
27.358

1,239
1,876
-3,241
24,117

Obligations
New transactions..
Net change
Outstandings

165,574
165,574
13,048
100,064

165,000
165,000
6,711
106,775

Obligations
New transactions..
Net change
Outstandings

5,054
5,054
271
13.359

5,275
5,275
1,839
15,198

Participation certificate pools:

Obligations
New transactions..
Net change
Outstandings

78,867
78,867
54,882
146,871

81,653
81,653
55,265
202,136

Subtotal, lending (gross).

Obligations
New transactions..
Net change
Outstandings

391,024
375,867
83,494
501,794

386,943
380,127
99,001
600,795

Obligations
New transactionsNet change
Outstandings

-240
950

-250
700

Enterprise

LENDING
Student Loan Marketing Association.

Federal National Mortgage Association:
Corporation Accounts

Mortgage-backed securities.

Farm Credit Banks:
Banks for cooperatives-

Federal Home Loan Bank system.Federal home loan banks

Federal Home Loan Mortgage Corporation:
Corporation accounts

Less loans between sponsored enterprises..

26,806

SPECIAL ANALYSIS B

B-15

Table F-20. LENDING AND BORROWING BY GOVERNMENT-SPONSORED ENTERPRISES—Continued
(In millions of dollars)
Actual
1986

Enterprise

Less secondary funds advanced from Federal sources.Obligations
SLMA from FFB 2
New transactionsNet change
Outstandings

Estimate
1987

-30
4,970

-30
4,940

Obligations
New transactions..
Net change
Outstandings

-3,385
27,679

27,679

Obligations
New transactions..
Net change
Outstandings

491
3,005

99
3,104

Obligations
New transactions..
Net change
Outstandings

1,254
3,129

3,129

Obligations
New transactions..
Net change
Outstandings

TVA to FNMA.

Less guaranteed loans held as direct loans by:
Federal National Mortgage Association3

Federal home loan banks..

Federal Home Loan Mortgage Corporation3..

Farm Credit Banks.

Student Loan Marketing Association3

Total lending..

Obligations
New transactions..
Net change
Outstandings

-13

Obligations
New transactions..
Net change
Outstandings

2,643
9,219

2,904
12,123

Obligations
New transactions..
Net change
Outstandings

391,023
375,866
83,330
453,272

386,943
380,126
95,212
548,483

BORROWING
Student Loan Marketing Association.

Net change
Outstandings...

2,856
15,526

2,988
18,515

Federal National Mortgage Association'

Net change
Outstandings..

39,526
179,988

34,108
214,096

Net change
Outstandings..

422
8,489

-858
7,631

Net change....
Outstandings..

-2,561
12,961

-3,315
9,646

Farm Credit System:
Banks for cooperatives
Federal intermediate credit banks-

• THE BUDGET FOR FISCAL YEAR 1988

C-14

Table F-20. LENDING AND BORROWING BY GOVERNMENT-SPONSORED ENTERPRISES—Continued
(In millions of dollars)
Estimate

Actual
1986

1987

Net change....
Outstandings..

-3,595
42,653

-9,221
33,431

Net change....
Outstandings..

14,509
88,083

6,917
95,000

Net change
Outstandings..

55,952
161,767

59,159
220,926

Net change
Outstandings..

107,109
509,467

89,778
599,245

Net change
Outstandings..

-203
1,230

-325
905

Net change
Outstandings..

-30
4,970

-30
4,940

Net change....
Outstandings..

Total borrowing from the public..

Net change
Outstandings..

107,342
503,187

90,133
593,320

Less investments in Federal securities..

Net change....
Outstandings..

-756
1,986

-39
1,947

Net change
Outstandings..

-3,385
27,679

27,679

Federal home loan banks..

Net change....
Outstandings..

491
3,005

99
3,104

Federal Home Loan Mortgage Corporation..

Net change
Outstandings..

1,254
3,129

3,129

Net change....
Outstandings..

-39

-13

Net change-

2,643
9,219

2,904
12,123

Net change..

107,134
458,148

87,182
545,330

Enterprise

Federal land banks..
Federal Home Loan Bank system:
Federal home loan banks

Federal Home Loan Mortgage Corporation..
Subtotal, borrowing (gross)...

Less borrowing from other sponsored enterprises..
Less borrowing from Federal sources:
SLMA from FFB 2

TVA to FNMA.

Less borrowing for guaranteed loans held as
direct loans by:
Federal National Mortgage Association

Farm Credit Banks.

Student Loan Marketing Association'

Total borrowed..

All new transactions are loans purchased from FHLMC corporation accounts.
All SLMA lending financed through the FFB has been counted in Table F0918 as direct loans, All SLMA loans are student loans guaranteed
by the Federal Government and, therefore, counted in Table F0919 as guaranteed loans The first deduction eliminates the overlap of this table
with the direct loan table; the second deduction removes the non-FFB financed remainder of SLMA to eliminate overlap with the guaranteed loan
table.
' The estimates for 1987 and 1988 are made by OMB.
4 Loans purchased at discount are recorded at their acquisition cost.
1

SPECIAL ANALYSIS

B-15

Table F-21. FEDERAL FINANCING BANK ACTIVITIES
(In millions of dollars)
Agency and program

Estimated

Actual
1986

1987

1988

1989

1990

1991

1992

Assets purchased from:
Overseas Private Investment Corporation:
New acquisitions
Net lending
Loans outstanding
Farmers Home Administration:
Agricultural credit insurance fund:
New acquisitions
Net lending
Loans outstanding
Rural housing insurance fund:
New acquisitions
Net lending
Loans outstanding
Rural development insurance fund:
New acquisitions
Net lending
Loans outstanding

-5
1

1,470
220
28,395

- 1

-385
28,010

654
244
1,398
3,831
- 3 8 5 -3,306 -1,931 -1,731 -1,679
27,625 24,319 22,388 20,657 18,978

750
750 - 1 , 8 6 0 - 1 , 3 6 5 - 1 , 9 1 9 - 2 , 2 4 0 - 2 , 2 7 0 - 2 , 1 3 5
29,101 27,241 25,876 23,957 21,717 19,447 17,312
265
235 - 1 , 6 4 5
7,878
6,233

Rural Electrification Administration:
New acquisitions
Net lending
Loans outstanding

617
517
4,241

Medical facilities guarantees-.
New acquisitions
Net lending
Loans outstanding

-15
108

-720
5,513

-720
4,793

- 9 2 0 -1,000 -1,020
3,873
1,853
2,873

388
211
- 7 0 4 -1,405
3,538
2,132

207
-465
1,668

255
-369
1,298

249
-290
1,008

233
-222
786

-6
102

-35
67

Health maintenance organizations:
New acquisitions
Net lending
Loans outstanding

-7
102

-8
95

-24
71

Small business development companies:
New acquisitions
Net lending
Loans outstanding

-7
26

-7
19

-7
12

-6
6

Subtotal, assets purchased:
New acquisitions
Net lending
Loans outstanding

-6

388
211
4,064
3,103
861
1,653
493
1,688 -4,614 - 3 , 9 4 2 - 6 , 4 1 6 - 5 , 4 6 6 - 5 , 2 9 1 -5,055
69,852 65,238 61,297 54,880 49,414 44,122 39,067

Loans originated on behalf of:
Foreign military sales credit:
New acquisitions
Net lending
Loans outstanding

1,484
708
18,797

754
799
- 5 3 9 -1,611
18,258 16,647

359
-43
16,604

139
-332
16,272

30
-575
15,697

-661
15,036

C-14

• THE BUDGET FOR FISCAL YEAR 1988
Table F-21. FEDERAL FINANCING BANK ACTIVITIES—Continued
(In millions of dollars)
Agency and program

Actual
1986

Estimated
1987

1988

1989

1990

-167
1,582

-169
1,412

-178
1,234

-178
1,056

21,460

2,348
-69
21,390

1,975
1,096
22,486

1,492
641
23,127

1,196
372
23,499

-35
2,111

-37
2,074

-39
2,035

-42
1,993

-44
1,949

Defense production guarantees:
New acquisitions
Net lending
Loans outstanding
Navy industrial fund:
New acquisitions....
Net lending
Loans outstanding..
Rural Electrification Administration:
New acquisitions
Net lending
Loans outstanding
Low-rent public housing:
New acquisitions
Net lending
Loans outstanding

568
435
1,748
1,318
-216

Revolving fund, liquidating programs
(HUD):
New acquisitions
Net lending
Loans outstanding

-1
32

Community development grants:
New acquisitions
Net lending
Loans outstanding

89
11
300

Loans to territories:
New acquisitions....
Net lending
Loans outstanding..

-1
62

Railroad programs:
New acquisitions....
Net lending
Loans outstanding..
Guarantees of SLMA obligations:
New acquisitions
Net lending
Loans outstanding
Federal buildings fund:
New acquisitions
Net lending
Loans outstanding....
NASA:
New acquisitions
Net lending
Loans outstanding....

- 2

31
66
- 8

292

29
-51
241

-78
163

-65
98

- 2

60
2
-5
55

1
-5
50

-9
41

-7
34

-30
4,970

-30
4,940

-30
4,910

4,910

-30
4,880

- 6

402

396

-7
389

381

373

-79
809

-91
717

-105
612

-121
491

SPECIAL ANALYSIS B

B-15

Table F-21. FEDERAL FINANCING BANK ACTIVITIES—Continued
(In milUons of dollars)
Agency and program

Small Business Administration:
New acquisitions
Net lending
Loans outstanding
Oregon veterans housing:
New acquisitions
Net lending
Loans outstanding

Estimated

Actual
1986

1987

163
1,783

138
-17
1,766

1988

1989

1990

1991

1992

43
-617
1,149

-527

622

-90
532

452

-65
387

-60

Washington Metro Area Transportation
Authority:
New acquisitions
Net lending
Loans outstanding

177

Seven States Energy Corporation (TVA):
New acquisitions
Net lending
Loans outstanding

203
188
1,840

196
-244
1,595

209
78
1,673

272
-354
1,319

277
-135
1,184

261
-178
1,007

337
-51
956

3,504
3,975
3,056
1,068 - 1 , 2 1 5 -1,451
54,641 53,426 51,975

2,123
-706
51,269

1,611
711
1,030
- 6 4 3 - 1 , 3 6 6 -1,666
50,626 49,260 47,594

700
400
801
-1,141 -2,401 -1,815
14,268 11,868 10,052

300
-700
9,352

300

-600

8,752

8,152

7,552

Subtotal, loans originated:
New acquisitions
Net lending
Loans outstanding
Debt securities acquired from:
Export-Import Bank:
New acquisitions....
Net lending
Loans outstanding..
Tennessee Valley Authority*.
New acquisitions
Net lending
Loans outstanding
Central liquidity facility (NCUA):
New acquisitions
Net lending
Loans outstanding
Department of Transportation:
New acquisitions
Net lending
Loans outstanding
Postal Service:
New acquisitions....
Net lending
Loans outstanding..

2,425
696
15,077

1,896
1,396
16,473

514
314
16,788

817
317
17,104

451
251
17,355

374
374
17,729

484
484
18,213

59
25
129

74
25
154

50
25
179

50
25
204

50
25
229

50
25
254

1,700
1,499
5,852

1,769
1,500
7,352

1,840
1,500
8,852

1,562
1,148
10,000

476*

-118

104

1,250
1,164
2,854

1,635
1,499
4,353

10,000

C-14

• THE BUDGET FOR FISCAL YEAR 1988
Table F-21. FEDERAL FINANCING BANK ACTIVITIES—Continued
(In millions of dollars)
Agency and program

Subtotal, debt securities:
New acquisitions
Net lending
Loans outstanding
Total, all FFB acquisitions:
New acquisitions
Net lending
Loans outstanding
•$500,000 or less.

....

Estimated

Actual
1986

1987

1988

1989

1990

1991

1992

4,510
601
32,377

4,290
480
32,858

2,689
23
32,881

2,936
1,141
34,022

2,641
1,176
35,198

2,286
947
36,146

1,310
-91
36,054

8,182
5,955
5,920
11,588
5,905
3,808
6,085
3,357 - 5 , 3 4 9 - 5 , 3 6 9 - 5 , 9 8 1 - 4 , 9 3 3 - 5 , 7 1 0 - 6 , 8 1 3
156,871 151,522 146,152 140,171 135,238 129,528 122,716

SPECIAL ANALYSIS B

B-15

Table F-22. FEDERAL PARTICIPATION IN DOMESTIC CREDIT MARKETS
(In billions of dollars)
Actual
1977

Total funds loaned in U.S. credit
markets1
Direct loans
Guaranteed loans
Government-sponsored
enterprise loans2
Federal and federally assisted
lending
Federal lending participation
ratio (percent)
Total funds borrowed in U.S.
credit markets1
Federal borrowing from
public
Borrowing for guaranteed
loans
Government-sponsored
enterprise borrowing2
Federal and federally assisted
borrowing
Federal borrowing
participation ratio
(percent)

1978

1979

1980

1981

1982

1983

1984

1985

1986

307.9 379.0 418.7 352.9 410.1 392.3 511.3 703.4 765.0 889.1
11.6 19.8 19.6 24.2 26.1 23.4 15.3
6.3 28.0 11.2
13.5 13.4 25.2 31.6 28.0 20.9 34.1 20.1 21.6 34.6
11.7

25.2

28.1

24.1

32.4

43.3

37.1

53.1

36.8

58.4

72.9

79.9

86.5

87.6

86.5

79.5 110.3 129.1

12.0

15.4

17.4

22.6

21.1

22.3

16.9

11.3

60.7

14.4

83.3

14.5

307.9 379.0 418.7 352.9 410.1 392.3 511.3 703.4 765.0 889.1
53.5

59.1

33.6

70.5

79.3 135.0 212.3 170.8 197.3 236.3

13.5

13.4

25.2

31.6

28.0

20.9

34.1

20.1

21.6

12.0

21.4

21.9

21.4

34.8

43.8

34.6

55.5

57.9 107.1

79.0

93.9

80.7 123.5 142.1 199.7 281.0 246.4 276.8 378.0

25.7

24.8

19.3

35.0

34.7

50.9

55.0

35.0

36.2

34.6

42.5

Funds loaned to and borrowed by nonfinancial sectors, excluding equities.
2 The data in Table F-22 for total funds loaned are defined as excluding financial sectors. Nonetheless, the Government-sponsored enterprises,
as well as Federal assisted lending, are properly compared with total funds loaned. Government-sponsored enterprises lending is a proxy for the
lending by non-financial sectors that is intermediated by the sponsored enterprises. It assists the ultimate non-financial borrowers whose loans are
purchased or otherwise financed by the sponsored enterprise.
Source: Federal Reserve Board Flow-of-Funds Accounts for total funds loaned and borrowed.
1

SPECIAL ANALYSIS G
TAX EXPENDITURES
The Congressional Budget Act of 1974 (Public Law 93-344) requires a listing of tax expenditures in the Budget. The act defines
tax expenditures as "revenue losses attributable to provisions of
the Federal tax laws which allow a special exclusion, exemption, or
deduction from gross income or which provide a special credit, a
preferential rate of tax, or a deferral of liability."
The definition of tax expenditures requires a distinction between
the baseline provisions of the tax structure and special or preferential provisions that are exceptions to the baseline structure. Because Public Law 93-344 does not provide an exact specification of
the baseline provisions of the tax law, determination of what provisions constitute special or preferential provisions, and therefore
should be listed as tax expenditures, is necessarily a matter of
judgment.
Prior to 1983, the listing of tax expenditures in Special Analysis
G generally matched those published by the Congressional Budget
Office and the Joint Committee on Taxation. Both the executive
branch and congressional staffs used the concept of a "normal tax"
as the baseline, or standard, by which to identify exceptions to the
Internal Revenue Code. The normal tax standard is a variant of a
comprehensive income tax, albeit with several major exceptions. It
does not deviate significantly from the concept used in deriving the
original tax expenditure listing published by the Treasury Department in 1968.
After 1982, tax expenditures in Special Analysis G were measured against an alternative baseline which is referred to as the
"reference tax law." This year's Special Analysis G displays tax
expenditures as compared to both the reference tax baseline used
since 1983 and the normal tax baseline used prior to 1983. In the
following sections both baselines are described in general terms,
then the conceptual and practical differences between them are
discussed, and finally the major categories of tax expenditures are
reviewed.
The Tax Reform Act of 1986 (Public Law 99-514) has affected the
fiscal year 1988 tax expenditure budget in three ways. First, specific items were repealed outright, or restricted in scope, while some
new tax expenditures were enacted. Second, the act significantly
affected the reference tax law and thereby changed the listing

G-l

C-14

• THE BUDGET FOR FISCAL YEAR 1988

identified by this standard. These two kinds of changes will be
discussed in the text below. Finally, the significant reductions in
individual and corporate tax rates have correspondingly reduced
the values of almost all tax expenditures. The act reduced the top
individual marginal tax rate from 50 percent to 38.5 percent in
1987 and to 28 percent in 1988. The maximum corporate tax rate of
46 percent was reduced to 40 percent in 1987 and to 34 percent in
1988. Thus the value of preferential deductions taken by individuals in the top income bracket has been reduced by 23 percent in
1987 and will be reduced by another 21 percent in 1988, a total of
44 percent as compared with 1986. For corporations, the respective
reductions in value of preferential deductions are 13 percent for
each of the two years, for a total of 26 percent.
In preparing the President's tax reform proposals of May 1985
and through the course of the 15-month legislative process culminating in the Tax Reform Act of 1986, a number of questions have
been raised concerning the definitions of the normal tax and reference tax law standards for identifying tax expenditures. Furthermore, a number of tax law provisions came to light that might
have been included in previous tax expenditure budgets under
either standard. Utilizing the knowledge and experience gained
from the tax reform process, a comprehensive review is expected to
be completed this year of the concepts on which the tax expenditure budget is based, its content, and the format in which it is
displayed.
P R E - 1 9 8 3 BUDGET CONCEPTS

The "normal tax" structure used as a departure point for identifying and measuring tax expenditures has many features in
common with a comprehensive income tax. Taxable income, under
such a comprehensive tax, is defined as the sum of consumption,
including all taxes, and the change in net wealth in a given period
of time. The concept of a normal income tax does not specify any
particular structure of tax rates, nor the definition of the taxpaying unit (as between families and individuals). It also allows for
personal exemptions and a standard deduction. In addition, the
concept of a normal tax, as would a comprehensive income tax,
allows for deductions from gross income needed to measure net
taxable income. Examples are the deductions for interest incurred
to finance the holding of income-producing assets and for employee
business expenses. The normal tax structure does allow, however,
for several major departures from what is commonly understood to
be the base of a truly comprehensive income tax. For example:
• Under the normal tax structure, income is taxed only when
realized, not as accrued. Thus, for example, the benefit, relative to strict accrual accounting of income, from deferring tax

SPECIAL ANALYSIS B

B-15

on accrued, but unrealized, capital gains is not regarded as a
tax expenditure.
• The fact that the current tax system taxes only cash income.
No income derived in the form of consumption benefits from
capital owned and used directly by households, or their consumption of goods they themselves produce, is regarded as
part of the normal tax structure. Thus, the exclusions from
tax of imputed income from owner-occupied homes and consumer durables as well as tax-free consumption by farmers of
products grown on their farms are not regarded as tax expenditures.
• The normal tax structure includes a separate tax on corporation income, although neither economic theory nor common
international practice justifies a totally separate corporation
income tax. At the same time, the normal tax structure
allows for provisions such as subchapter S corporations, that
eliminate the separate corporate tax by attributing income to
shareholders. The additional revenue resulting from the
maintenance of a separate, unintegrated corporation tax
could well be considered a "negative" tax expenditure if the
normal tax base were defined as the comprehensive income of
individuals, with corporate retained earnings attributed to
individual shareholders.
• The normal tax structure does not adjust the basis of capital
assets or debt for changes in the price level over the time
assets are held. Thus it overstates real capital gains, interest
income, as well as interest costs, and understates depreciation
during a period of inflation. If the normal tax were a true
comprehensive income tax, failure to take account of inflation
in measuring depreciation, capital gains, and interest income
of lenders would be regarded as a negative tax expenditure.
In turn, failure to take account of inflation in measuring the
interest costs of borrowers would be regarded as a positive tax
expenditure, or subsidy for borrowing.
Notwithstanding these major differences from a fully comprehensive income tax, the normal tax concept can be thought of as a
base for a practical income tax intended to avoid these complexities. Moreover, these departures from a comprehensive tax that
define the normal tax had essentially remained unchanged until
1982.
The normal tax as described above is, of course, not the only
broad-based or normative tax system that can be used as a standard for identifying tax expenditures. One could, for example, use as
the standard a truly comprehensive income tax in which the tax
base is equal to consumption plus the change in net wealth of
individuals and families. Under such a standard, as indicated in

C-14

• THE BUDGET FOR FISCAL YEAR 1988

the previous discussion, the failure to include accrued but unrealized income in the tax base would be regarded as a tax expenditure, while the double taxation of corporate dividends would be
regarded as negative tax expenditure, or tax penalty.
P O S T - 1 9 8 2 BUDGET CONCEPTS

Both definition and measurement of tax expenditures have undergone major changes in recent years, in part reflecting a changed
perception of what constitutes the major structural features of the
current tax system.
In the budgetary context implied by the Congressional Budget
Act of 1974, it is useful to distinguish two categories of items that
had been labeled tax expenditures in previous budgets. The first
category consists of deviations from general rules of the existing
tax system that could be measured and evaluated similarly to that
of subsidy and transfer programs on the outlay side of the budget.
The second category consists of more general deviations of the
current tax structure from some normative, comprehensive income
or other broad-based tax. The items in the second group are no
longer labeled tax expenditures as such. Rather, they are items to
be considered in a more general reform of the existing income tax.
To distinguish the "special" provisions that substitute for outlay
expenditures from provisions that might be considered deviations
from desirable norms, tax expenditure budgets since fiscal year
1983 were constructed on the basis of a revised baseline with an
added selection criterion. Under this procedure, a provision in the
tax laws is listed as a tax expenditure if: (a) absent the provision,
the remaining body of tax law enables a taxpayer to determine his
tax liability, i.e., there is already an enacted general tax rule, the
"reference tax law," to which the particular provision is an exception; and (b) the particular provision applies to a distinctive class of
transactions sufficiently narrow in scope that it could be replaced
by an expenditure program administrable by a Federal agency
other than the Internal Revenue Service.
Beginning with the fiscal year 1983 budget, tax expenditures also
have been estimated in terms of "outlay equivalents." This ensures
that the resource cost of tax expenditure programs will be comparable, or additive to, Federal Government expenditures, the
amounts of which are pretax market magnitudes. For example, the
objective of encouraging the substitution of alcohol for gasoline in
motor fuels could be accomplished by allowing, say, a government
subsidy of 60 cents per gallon for alcohol paid to either purchasers
or producers of alcohol who blend this with gasoline for sale as a
motor fuel ("gasohol"). In this event, the government pays 60 cents
of the cost of alcohol, an amount that enters the gross income of
the blender, along with the sale price of the gasohol. In determin-

SPECIAL ANALYSIS B

B-15

ing the blender's net income, the cost of the alcohol (along with his
other expenses) is deducted from his cash-subsidy-augmented gross
income, and he pays tax accordingly. Currently, a 60-cent per
gallon of alcohol subsidy is provided blenders as a credit against
their income tax otherwise due. If this subsidy, cleared through a
gasohol blender's income tax account, is to cost the government
and be worth to a blender no more than a 60-cent cash payment,
the blender should be required to include the 60 cents in his gross
income by reducing his deduction for alcohol purchased by the 60
cents paid by the government. However, the gasohol income tax
credit is not so structured. The gasohol blender is not required to
include the 60 cent credit against tax otherwise due in his taxable
income. This increases the subsidy by an amount equal to the
additional "tax saving" resulting from the tax exemption of the 60
cents. The outlay equivalent of the current gasohol tax subsidy is
therefore larger than the 60 cents per gallon revenue loss from the
gasohol credit.
Neither the Congressional Budget Office nor the Joint Committee on Taxation has adopted any of these revisions. Both continued
to use a modified income tax norm, described above, as their basis
for identifying tax expenditures. As a consequence, Special Analysis G did not fully correspond in the 1983 and 1984 budgets to these
other tax expenditure listings, a condition some have found confusing. Beginning with the 1985 budget, therefore, tax provisions
qualifying as tax expenditures under the broader income tax norm
have been listed in Special Analysis G in addition to those that
meet the more restrictive tests used since 1983. The discussion
below sets out in greater detail the reference tax law used to
identify tax expenditures and identifies some of the departures of
this reference tax law from the normal income tax standard used
prior to 1983.
REFERENCE T A X RULES AND COMPARISON TO N O R M A L

TAX

STANDARD

The reference tax rules from which departures represent expenditure-like government programs include:
1. Definition of the taxpaying unit Taxpaying units are individuals (single, married, head of household), corporations (except those
electing subchapter S treatment, cooperatives, real estate investment trusts, and other financial organizations that attribute their
income to members in whose hands it is taxable), as well as trusts
and estates (to the extent income is not distributed to beneficiaries). Certain otherwise taxable corporations and associations
whose activities and ownership meet the requirements of section
501 are exempt from income tax, as are government-owned enterprises encompassed by section 115.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

The taxpaying units are the same in the normal and reference
tax structures with one major exception. In the normal tax, controlled foreign corporations are not regarded as entities separate
from their controlling U.S. shareholders. Therefore, the deferral of
tax on income accumulated within controlled foreign corporations
is regarded as a tax expenditure. In contrast, except for tax haven
activities, the reference tax rules follow the current tax system in
treating controlled foreign corporations as separate taxable entities
whose income is not subject to U.S. tax until distributed to U.S.
taxpayers. Under that definition of the tax unit, deferral of tax on
controlled foreign corporation income is not a tax expenditure
because U.S. taxpayers generally are not taxed on accrued, but
unrealized income. Since the Tax Reform Act of 1986 generally did
not change these provisions, the reference tax law is not changed.
2. Tax rate schedules. Separate schedules for single individuals,
heads of household, married persons filing jointly, married persons
filing separately, and corporations are all regarded as part of the
reference tax system. The rate structures imposed on the tax base
of these entities are whatever current law provides. The Tax
Reform Act of 1986 reduced the number of personal income tax
brackets and reduced the marginal tax rates in two stages, as
noted above. Corporate tax rates were also reduced, and one bracket eliminated. The normal tax system is similar, except that it
specifies a single rate (the current maximum rate) on corporate
income. The lower tax rates applied to the first $75,000 of corporate
income ($100,000 before 1987) are thus regarded as a tax expenditure relative to the normal tax standard.
3. General accounting rules for determining income subject to tax.
Income subject to tax is gross income less costs of earning that
income. Since its inception, the Federal income tax has defined
gross income to include payments (or obligations to receive payment) from all sources, foreign and domestic, that are: (1) consideration received in the exchange of goods and services (including
one's labor services), or of property; and (2) the taxpayer's share of
gross, or net income earned and/or reported by another entity,
such as interest, dividends, rents, royalties, and profits of partnerships, subchapter S corporations, and cooperatives. Under the reference tax law rules, therefore, gross income does not include gifts,
defined as receipts of money or property that are not consideration
in an exchange, or most transfer payments (gifts from the Federal
Government). Gross income does, however, include transfer payments associated with past employment, such as social security
benefits. The normal tax baseline also does not include gifts between individuals as gross income; however, under the normal tax
baseline used prior to 1983, all cash transfer payments (gifts from
government to private individuals) are regarded as gross income,

SPECIAL ANALYSIS B

B-15

and exemptions of such gifts from tax under current law are identified as tax expenditures.
Costs of earning gross income are deductible in determining taxable income under the reference tax rules. These costs include: (1)
expenses incurred in earning gross personal service income (not
including expenditures on goods and services for personal use); (2)
costs of earning income incurred by a taxpayer's trade or business
including costs of goods sold (compensation of employees, goods and
services purchased from other firms, royalties paid), an allowance
for physical capital used up in producing the output that generates
the gross income of the business (depreciation in the case of machinery, equipment, and structures; depletion in the case of mineral deposits); and (3) interest paid creditors who have advanced
funds to help finance the ownership and use of assets by the trade
or business.
With one exception, both the reference and normal tax law
standards have used as the baseline the general statutory provisions governing these allowable deductions. The exception relates
to the rules for determining tax depreciation allowances. Under
the reference tax law standard, accelerated cost recovery system
(ACRS) allowances, available for property placed in service before
January 1, 1987, serve as the baseline. The system of depreciation
allowances provided by the Tax Reform Act of 1986 (see below) will
be the reference tax law baseline for investments placed in service
after 1986. Thus, under the reference tax law standard, there are
no tax expenditures from "accelerated depreciation".
Under the normal tax baseline, however, the depreciation norm
for depreciable personal property equals the allowances that would
be determined by using statutory accelerated methods (declining
balance at double the straight-line rate or sum-of-years digits) over
tax lives equal to mid-values of the asset depreciation range (ADR,
a statutory system in effect from 1971 through 1980), and 40-year
straight line depreciation for depreciable real property. Consequently, from 1981 through 1986, ACRS depreciation provisions
generated tax expenditures under the normal tax baseline. Since
the Tax Reform Act of 1986 provides depreciation allowances approximately equal to the norms specified in the normal tax baseline for machinery and equipment, such post-1986 investment will
no longer generate tax expenditures under this standard.
In addition to rules for determining what is includable in gross
income and the deductions that are to be allowed, an operational
income tax system also requires the stipulation of rules (income tax
accounting) valuing goods and services exchanged and rules for
determining when gross income is reportable and when deductions
may be taken. On these matters, both the reference and normal
tax law approaches use the provisions of enacted law as baselines

C-14

• THE BUDGET FOR FISCAL YEAR 1988

for identifying tax expenditures. These include: (1) reliance on
valuations determined at the time transactions occur (realization
as opposed to accrual accounting); (2) exclusion from gross income
of the market value of services from durable goods or other selfproduced income, such as do-it-yourself repairs and maintenance;
(3) reliance on historical cost to determine allowable deductions for
capital cost recovery and in the computation of gain on the sale of
an asset (no inflation adjustments); (4) distinguishing current expense from capital expenditures, with the former deductible from
gross income in the period when the transaction is completed,
while the latter is recovered by depreciation or depletion deductions over the asset's productive life; and (5) specification of the
accounting period for summarizing transactions to determine
income subject to tax, computing tax due and payable, as well as a
stipulation of when tax must be paid.
As part of the computation of tax liability, both the reference
and normal tax law standards accept, without classifying it as a
tax expenditure, a tax credit for foreign income taxes paid up to
the amount of U.S. income taxes that would otherwise be due. This
prevents the double taxation of income earned abroad.
M A J O R DEPARTURES FROM THE REFERENCE RULES

Beginning with the 1983 budget, the reference tax law standard
has been used to identify provisions that substitute for budget
outlays. For example, compared to the general rules described as
the reference tax law:
• Not all consideration received in exchange for goods and services is reportable as gross income. Some forms of employee
compensation, such as certain military housing and food allowances or employer-paid fringe benefits, are specifically excluded from employees' reportable gross income although it is
clearly a consideration received in exchange for labor services
and is properly deductible from the gross income of the trade
or business of employers who are taxable entities.
• Holders of State and local tax-exempt government bonds are
specifically exempt from reporting interest payments on those
obligations as gross income, although these payments are no
less income than interest, dividends, rents, and royalties received from other payees.
• Dividend and interest receipts of pension funds, the value of
which accrues to taxable beneficiaries, are not reportable as
gross income when received, either by the qualified pension
trusts or by the beneficiaries; they become reportable, after
compounding at pretax rates of interest, only when they are
paid out as retirement benefits.

SPECIAL ANALYSIS B

B-15

Defense Department outlays reported in the budget for military
personnel are lower because part of military compensation is paid
in tax-free housing and food allowance dollars. Exclusion of this
compensation from tax substitutes for higher direct outlays to
obtain the same quality and quantity of military personnel whose
compensation in this form, if received from another employer,
would be subject to tax. Similarly, the nontaxability of interest
paid by State and local government borrowers enables them to
obtain funds at lower rates with a saving to their taxpayers. This
particular exclusion is, therefore, a substitute for interest subsidies
or capital grants to State and local governments on the outlay side
of the budget. The exclusion of employer-paid pension, health, and
other insurance benefits for employees and the preferred treatment
of pension trust income substitute for Federal Government outlays
that would pay part of the costs of private retirement, health, and
insurance plans.
The tax laws also provide many deductions from gross income in
the derivation of taxable income that have no apparent relation to
the cost of earning the reported gross income, as the general rule
requires. For example:
• Individuals may deduct amounts paid to charitable, educational, scientific, or religious organizations, although these
are not costs of earning reportable gross income.
• Some oil, gas, and mineral producers are allowed deductions
for percentage depletion that are not limited to recovery of
the cost of acquiring the mineral deposit. In addition, some
investments in the acquisition of depletable and depreciable
property may be deducted in the year incurred, rather than
capitalized and recovered as production ensues. These special
rules for cost recovery of oil and gas, as well as mineral
deposits, permit investment costs in these activities to be
recovered more rapidly than the reference tax rules allow in
activities generally. Furthermore, they often permit more
than the full investment to be recovered tax free, contrary to
the income accounting rules applied to taxpayers using other
forms of capital.
• Individuals are allowed to deduct mortgage interest paid from
their pretax incomes, although under the reference tax rules
applicable to housing they have not reported the (imputed)
gross income received from the housing they own with the aid
of the debt they are servicing.
These particular exceptions to the general reference tax rules
governing the use of deductions for computing taxable income have
direct incentive effects that could just as well be obtained with
outlay programs. Deductibility of qualified contributions lowers the
private price of giving, as would matching grants to qualified orga-

C-14

• THE BUDGET FOR FISCAL YEAR 1988

nizations based on contributors' support. The preferential treatment of minerals investment and production expands mineral
output as would direct subsidies paid to mineral producers. The
deductibility of mortgage interest encourages home ownership
much the same as Federal mortgage interest subsidy programs do.
Finally, there are special exceptions to the general rules for
determining net income tax due and payable. After a taxpayer has
determined his pretax income, taking into account all preferential
exclusions for gross income and all the special deductions, and has
applied the appropriate tax rate schedule, the tax liability thus
derived is not necessarily the amount he must pay. For example,
the taxpayer may take as credits against his tax otherwise due and
payable amounts determined by expenditures during the tax year
on:
• Child and dependent care.
• Newly constructed or substantially rehabilitated low-income
housing.
• Incremental research and experimentation.
• Rehabilitating old and historic structures.
It is not difficult to visualize equivalent outlay programs designed to subsidize these particular classes of transactions directly.
All of these departures from the reference tax rules are also
departures from the normal tax rules and appear in the tax expenditure budgets constructed from both baselines. The major
items that are tax expenditures relative to the normal tax baseline
(pre-1983 budget method), but that are not items of tax expenditure
relative to the reference tax law rules used beginning with the
1983 budget are: deferral of income of controlled foreign corporations, expensing of research and development expenditures, progressive corporation income tax rates, "gifts" or unilateral transfers from governments, and the difference between statutory depreciation rules (ACRS) for investments made between 1981 and 1986
and alternative rules designed to provide a more accurate measure
of economic income from capital investments.
MEASURING T A X

EXPENDITURES

Accounting for budget outlays on a functional or programmatic
basis, as in Part 5 of the Budget, provides a measure of Federal
Government influence on the allocation of resources in the economy. The functional purposes may be broadly divided into: (1) the
provision of public goods and services; (2) the provision of subsidies;
and (3) the payment of transfers. Budget outlays for public goods
and services such as national defense, are used to acquire labor and
capital services directly used in the production of such goods. Subsidies, such as those for school lunches, are intended to reduce
market prices below the cost of resources used to produce them.

SPECIAL ANALYSIS B

B-15

Transfers, such as aid to families with dependent children, are
intended to provide a level of income to recipients they otherwise
would not achieve.
Government receipts and outlays reallocate resources because
they change the composition of GNP from what it would be in
their absence. The decisions to provide public goods and services, to
subsidize certain prices (and hence outputs), and to make transfers
result in producing a slate of goods and services that otherwise
would not be produced. This occurs because control over resources
is removed from the private sector either by taxation or by borrowing and made available for public use. Functional budget outlay
figures, then, provide a basis for evaluating programs. The amount
of an outlay measures the resource cost to the Federal Government
of accomplishing the program objective. Because GNP is a (gross)
measure of the market value of goods and services, the ratio of
total budget outlays to GNP is commonly used as an indicator of
the size of Government relative to the private economy.
When functional budget outlay figures are used to evaluate specific programs, it is essential that the outlay figures be both consistent and comprehensive measures of resource costs. In this
regard, it is important that resource costs represent the pretax
price of resources. The market value of all goods and services
summarized in GNP not only includes the effects of indirect taxes
(sales and property taxes) on market prices, but also the before tax
incomes of suppliers of labor (wages) and capital (rent, interest, and
profit). Consistency of budget outlay figures requires that all such
amounts also be stated in pretax magnitudes. Generally, budget
outlays for the purchase of goods and services are gross of taxes;
the payments to vendors and Government employees are gross
income to the sellers out of which taxes will be paid as determined
by the reference tax law in effect. Similarly, subsidy outlays in the
budget generally enter the gross incomes of sellers of subsidized
goods and services, along with the remainder of the sales proceeds
realized by sellers as payment by private purchasers of the subsidized goods.
In some instances budget outlays for goods and services or subsidies are exempted from tax by a special tax provision. When this
occurs, the outlay figure understates the resource cost of the program of which it is a part and is, therefore, not comparable with
other outlay amounts. For example, as noted above, the budget
outlays for certain housing and meal allowances of military personnel are not includable in their incomes and therefore understate
the cost of this National Defense budget element. If this form of
compensation were treated under the generally applicable reference or normal tax rule as income taxable to the employee, the
Defense Department would have to make larger cash payments to

C-14

• THE BUDGET FOR FISCAL YEAR 1988

its military personnel to leave them as well off after tax as they
are now with nontaxable allowances. Only when the existing tax
subsidy is added to the tax-exempt budget outlay is this element of
National Defense expenditure comparable with other defense outlays.
The estimates of tax expenditures in table G - l have been prepared to conform to the objectives of functional budget accounting
for outlays. Thus, table G - l figures are estimated as outlay equivalents, the magnitudes of which are consistent with direct budget
outlays. The entries should be viewed as amounts that should be
added to functional budget outlays and restored to budget receipts
to provide a more consistent and comprehensive display of the
resource reallocations produced by Federal fiscal measures.
All tax expenditure estimates reported were prepared by the
Treasury Department and are based upon income tax law enacted
as of December 31, 1986. In table G - l the estimates show the
expenditure equivalent of each special tax provision by fiscal year.
The estimating procedure for tax expenditures uses the implicit
assumption—the same that governs estimates of out-year budget
outlays—that the existing tax structure and all other institutional
resource cost determinants are given. It is also assumed that aggregate output and incomes remain at the levels that underlie the
1988 budget estimates. In table G-2 the estimates show the revenue
loss of each special tax provision by fiscal year. They do not account for the nontaxability of certain of the items and therefore,
are not comparable to outlay figures in the budget.
The tax expenditure estimates presented in this Special Analysis,
including those computed on a revenue loss basis shown in Table
G-2 should not be interpreted as estimates of the increase in
Federal receipts (or reductions in budget deficit) that would accompany the repeal of the special provisions. There are four reasons
why such an interpretation is not possible.
First, repeal of some provisions could affect the aggregate level
of income and economic growth. All receipts and expenditures in
the budget are based on projections of income and growth that
assume all existing laws, amended only as proposed in the budget,
will continue. Consequently, large changes in outlays or tax expenditures could be expected to alter projected growth rates, aggregate national income and product, and, thus, the tax base over the
forecast period.
Second, many individual tax expenditures, like some subsidy programs financed by outlays, are not independent of each other. If
one subsidy program is repealed or severely curtailed, it is frequently the case that demand for, and budget cost of, another
Federal subsidy program will be increased. For example, if the
exclusion of employer-paid medical insurance from the gross

SPECIAL ANALYSIS B

B-15

income of employees were repealed, this form of employee compensation would become more costly from the employees' point of view
and would likely be substituted for, in part, by other forms of
compensation such as employer-paid pensions and other tax-favored fringes. Thus, the budget impact of repealing the exclusion of
employer-paid medical insurance would not be an increase in revenues equal to the estimated cost of that tax expenditure, but a
smaller amount due to some increase in tax expenditures for pensions or other fringes. Similarly, a cut in support prices for one
commodity might very well result in an increase in outlays for
other price-supported commodities.
Third, an inherent characteristic of tax expenditures is that they
are all cleared through individual and corporation tax accounts
and, for this reason, their values become interdependent. For example, the exclusion of interest received from State and local governments has the effect of lowering a taxpayer's taxable income,
and in a tax system with progressive tax rates, this reduces the
value to the taxpayer of other tax expenditures in the form of
deductions, such as charitable contributions. If the interest exclusion alone were repealed, this taxpayer could be thrust into a
higher tax bracket, automatically increasing the value of charitable contributions and their budget cost, even if the taxpayer did
not make larger contributions. On the other hand, if both the
interest exclusion and the charitable deduction were repealed simultaneously, the increase in tax liability would be greater than
the sum of the two separate tax expenditures, each estimated on
the basis that the other remains in force.
Finally, the annual value of tax expenditures in the form of tax
deferrals, like the outlay figures for government lending programs,
is highly time-dependent while the unified budget is prepared on a
strict cash receipts and disbursement basis. For example, the
annual budget cost of tax deferrals arising from the exclusion from
employees' gross income of their employers' contributions to their
pension plans is the sum of two exclusions: the employers' current
year pension plan contributions and the current year pension fund
asset earnings, both accruing to the current benefit of employees
but not included in their gross income. If the tax expenditure
composed of these two exclusions were repealed, the immediate
budget impact would be only the employees new tax on the employers' current year contributions. Only as the existing population of
covered employees retired and received their annuities, thereby
depleting the stock of asset-reserves previously accumulated with
untaxed dollars, would the deficit-reducing impact of repealing this
tax expenditure be fully registered in the budget.

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• THE BUDGET FOR FISCAL YEAR 1988
T A X EXPENDITURES BY FUNCTION

The 1986-88 outlay equivalent estimates of tax expenditures are
displayed by functional category in table G - l and revenue loss
estimates for the same items are shown in table G-2. Whenever an
item is identified as a tax expenditure by application of the normal
tax rules, but not by the reference tax rules, both are shown in the
tables, the former designated as "Pre-1983 budget method", the
latter as "Post-1982 budget method." The headings are the functional categories used in Part 5 of the budget.
Inasmuch as the sources of data for estimating tax expenditures
are largely corporation and individual income tax returns, the
estimates are arrayed by type of return. It must be emphasized,
however, that listing estimates under the corporation and individual headings does not imply that these categories of filers benefit
from the functional program served by the special tax provisions in
proportion to the respective tax expenditure amounts shown.
Rather, these breakdowns principally show the specific tax accounts through which the cost of the program is cleared. Corporations as such neither pay tax nor receive Government payments.
They are the institutional conduit through which their employees,
creditors, and stockholders engage in exchanges with customers
and the Government. Thus, the reduction in tax deposits of corporations resulting from minerals tax preferences makes possible
higher wages and/or more employment for mineral workers,
higher royalties payable to mineral land owners (usually not the
mining company), and may even make possible lower minerals
prices. Little, if any, of the subsidy remains in the pockets of
corporations' creditors and equity holders in the form of interest
rates or rates of return that are higher than such capital can earn
elsewhere in the economy. Similarly, the exemption from Federal
income tax of interest paid by State and local governments provides a subsidy to those governments in the form of lower borrowing rates. Individual and corporate holders of such debt only benefit from the tax exemption to the extent their marginal tax rates
exceed the percentage spread between taxable and nontaxable interest rates.
With these caveats in mind, a review follows of the tax expenditure estimates by functional category, as shown in tables G - l and
G-2.
National defense.—The housing and meals provided military personnel, either in cash or in kind, are excluded from income subject
to tax. The exclusion is a tax expenditure relative to the normal as
well as the reference tax rules.
International affairs.—A U.S. citizen or resident alien who is a
resident of a foreign country or who is present in one or more
foreign countries for a prescribed period is allowed tax relief on

SPECIAL ANALYSIS B

B-15

foreign earnings. Beginning in 1982, the prescribed period of time
abroad is a minimum of 11 out of the past 12 months.
Eligible taxpayers in 1987 may exclude $70,000 per year of foreign earned income and may exclude or deduct reasonable housing
costs in excess of one-sixth of the salary of a civil servant at grade
GS-14, step 1. These provisions do not apply to persons who are
employed by the U.S. Government. However, they do apply to
persons who are not U.S. Government employees but who are paid
from public funds. The tax expenditure estimate also includes the
effect of another provision that excludes from their taxable income
certain allowances received by Federal employees working abroad.
These provisions depart from the income measurement rules of
both the reference and normal tax law under which no allowance
is made for regional cost-of-living differentials. Their effect is to
reduce the employers' cost of employing U.S. taxpayers abroad.
The Foreign Sales Corporation (FSC) provisions exempt from tax
a portion of U.S. exporters' foreign trading income. The exemption
rate is intended to reflect the sales functions of a FSC, which is a
foreign corporation; the FSC provisions, therefore, conform to the
General Agreement on Tariffs and Trade (GATT). However, they
are a departure from both the reference and normal income tax
standards.
With certain limited exceptions, the income of foreign corporations controlled by U.S. shareholders is not subject to U.S. taxation
because, under the reference tax rules, corporations chartered and
operating in foreign countries are not subject to U.S. income reporting and taxation. Therefore, the income of even those foreign
corporations controlled by U.S. shareholders (individuals and corporations) subject to U.S. taxation becomes taxable only when the
controlling U.S. shareholders receive dividends or other distributions with respect to their foreign stockholding.
As previously noted, this rule, however, is a deviation from the
normal income tax standard under which a controlling interest in
a foreign corporation, defined as ownership of more than 50 percent of the foreign corporation's common stock by U.S. shareholders, each holding 10 percent or more of the stock, is considered a
partnership interest held by the U.S. shareholders. Under this
normal tax accounting rule, the currently attributable foreign
source pretax income from such an interest is subject to U.S.
taxation, whether or not distributed. Thus, when the normal tax
rule is taken as a baseline, the excess of controlled foreign corporation income over the amount distributed to a U.S. shareholder
gives rise to a tax expenditure in the form of a tax deferral, that is,
an interest-free loan. This tends to encourage investment abroad by
U.S. shareholders. The Tax Reform Act of 1986 additionally restricted the types of foreign income eligible for such deferral.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Under both the reference and normal tax rules, the worldwide
income of U.S. persons is taxable by the United States and a credit
for foreign taxes paid is allowed. Because the amount of foreign
taxes that can be credited is limited to the precredit U.S. tax on
the foreign source income, an accurate "sourcing" of domestic and
foreign gross incomes and deductions is required to determine the
U.S. tax owed with respect to foreign- and domestic-source incomes.
The Tax Reform Act of 1986 revised the sourcing rules extensively but provided two exceptions. First is an exception for sales of
inventory property that reduces the U.S. tax of exporters. The
second exception concerns the rules that require allocation of interest expenses between domestic and foreign activities of a U.S.
taxpayer. These rules were also extensively revised by the act, but
financial institutions are exempted from application of these new
rules, as are certain financing operations of nonfinancial enterprises.
General science, space, and technology.—Research and development expenditures are intended to result in new products or processes, cost reductions, or other effects whose benefits will in nearly
all cases continue into the future. Such expenditures are, therefore,
capital outlays under the normal income tax rules that will generate amortization deductions over the period they are productive.
Quantification is to a substantial degree arbitrary, however, due to
lack of a clearly defined norm for the expected amortization period.
Yet, the expensing of R&D expenditures is a departure from the
normal tax rules and is, therefore, considered a tax expenditure
under this standard. It is not the case under the reference tax rule,
because Code section 174 makes such expensing the general tax
rule.
The Economic Recovery Tax Act of 1981 (ERTA) added a credit
for increasing research activities. The credit was equal to 25 percent of the increase in certain research and experimentation expenditures over the average expenditure during the preceding
three years. The taxpayer was not required to reduce his otherwise
allowable deduction for R&E expenses by the amount of credit
allowed. Although the credit expired at the end of 1985, it was
reinstated through 1988 by the Tax Reform Act of 1986, but at a
reduced rate of 20 percent. The act also tightened definitions of
qualified R&E and provided a separate credit at the same rate, but
with a fixed base, for grants to universities for basic research.
As is discussed in the section on International Affairs, both the
reference and normal tax rules for taxing the worldwide income of
U.S. persons require an accurate "sourcing" of deductions. Regulations issued in 1976 were designed to achieve a reasonable allocation of R&E expenses as between domestic and foreign activities,
but successive legislative enactments suspended their operation to

SPECIAL ANALYSIS B

B-15

August 1, 1986. The Tax Reform Act of 1986 then substituted for
the regulations a statutory allocation rule which reduces by half
the benefit enjoyed by taxpayers during the 10-year suspension of
the proposed regulation.
Energy.—Certain expenditures necessary to discover fuel mineral
properties may be deducted in whole or in part as current expenses
rather than being capitalized and amortized over the productive
life of the property. Included in this category are a number of
expenditures, the tax treatment of which departs from both the
reference and normal tax rules.
In the case of oil and gas investments, prior to enactment of the
Tax Reform Act of 1986, the intangible drilling costs (IDCs) of
successful wells could be expensed, such as wages and the costs of
using machinery for grading and drilling, and for nonsalvageable
materials used in constructing wells. The Tax Reform Act restricts
this provision to successful domestic wells.
However, integrated oil companies may currently deduct only 70
percent of such costs and amortize the remaining 30 percent over
five years; prior to 1987, these percentages were 85 and 15, respectively. Other oil producers may currently deduct 100 percent of
their IDCs, but the amount of annual IDCs in excess of the amount
which could be deducted had the IDCs been capitalized and amortized over ten years, less 65 percent of the taxpayer's oil and gas
income is subject to the minimum tax. In the case of other fuel
minerals, expensing may be applied to the exploration and development costs of surface stripping and the construction of shafts and
tunnels. Only 70 percent of these exploration and development
costs may be currently deducted. The remaining 30 percent are
deductible over five years. Under prior law, these percentages were
also 85 and 15 respectively. These departures from both the reference and normal tax rules yield subsidies to the domestic supply of
these energy resources.
In addition, mineral fuel producers generally may take percentage depletion deductions rather than cost depletion as provided in
the reference and normal tax rules. Under cost depletion, actual
outlays, to the extent not immediately recovered through expensing of exploration, discovery, and development costs, may be deducted over the productive life of the property, much as other
businesses may take deductions for the depreciation of the capital
goods they use, the cost of which is capitalized when acquired.
Unlike depreciation, however, percentage depletion deductions are
not limited to the cost of the investment. Under percentage depletion, taxpayers may deduct a percentage of gross income from
mineral production at rates that are 22 percent for uranium, 15
percent for oil, gas and oil shale, and 10 percent for coal. However,
the deduction is limited to 50 percent of net income from the

C-14

• THE BUDGET FOR FISCAL YEAR 1988

property (65 percent of taxable income in the case of oil and gas).
Percentage depletion for oil and natural gas is available only for
limited quantities of output from independent oil and gas producers and royalty owners. Production from geothermal deposits is
eligible for percentage depletion at the same rate as allowed for oil
and gas, but with no limit on output and no limitation with respect
to qualified producers. In lieu of taking percentage depletion, holders of royalties from coal deposits could treat their payments as
capital gains rather than ordinary income.
A variety of tax incentives were available to stimulate energy
conservation and encourage conversion to energy sources other
than oil or natural gas. Individuals could take a 15 percent income
tax credit for home insulation and other energy-conserving components up to a maximum amount of $300. A credit of 40 percent of
the first $10,000 of qualifying expenditures was allowed on residential solar and other renewable energy source property. The residential energy credits expired on December 31, 1985.
The Tax Reform Act of 1986 extends through 1988 the energy tax
credits for solar energy property and geothermal energy property
at declining rates. The solar energy credit is 15 percent in 1986, 12
percent in 1987, and 10 percent in 1988. The geothermal energy
credit is extended at 15 percent in 1986 and 10 percent in 1987-88.
The credit for ocean thermal property is extended through 1988 at
a 15 percent rate. The credit for biomass property is extended for
two years, at 15 percent in 1986, and 10 percent in 1987. Other
energy tax credits provided under prior law were allowed to expire,
as scheduled, at the end of 1985. However, the credit for small
scale hydroelectric generating property is available through December 31, 1988, for projects filed with the Federal Energy Regulatory Commission (FERC) before January 1, 1986.
Prior to December 31, 1982, there were also additional 10 percent
credits allowed for alternative energy property (i.e., property using
fuel other than oil or natural gas), specially defined energy property (i.e., property used in an existing industrial, agricultural or
commercial facility to reduce the amount of energy consumed or
heat wasted), recycling equipment, shale oil equipment, cogeneration equipment, alumina electrolytic cells, and equipment for producing natural gas from geopressurized brine. The additional investment credit can still be claimed for long term projects under
these provisions if the taxpayer completed all engineering studies
and applied for all required environmental and construction permits in connection with the project prior to January 1, 1983.
A nontaxable $3 per barrel of oil-equivalent production credit is
provided for several forms of alternative fuels. As a general rule, it
is available as long as the price of oil stays below $29.50 (in 1979
dollars).

SPECIAL ANALYSIS B

B-15

Gasohol (a motor fuel composed of at least 10 percent alcohol) is
exempt from 6 of the 9 cents per gallon Federal excise tax on
gasoline. There is a corresponding income tax credit for alcohol
used as a fuel in applications where the excise tax is not assessed.
This credit, equal to a subsidy of 60 cents per gallon for alcohol
used as a motor fuel, is intended to encourage substitution of
alcohol for petroleum-based gasoline. A similar subsidy was provided for neat alcohol fuels; this was 90 cents per gallon before it was
repealed by the enactment of the Tax Reform Act.
Tax-exempt bond financing for small scale hydroelectric generating facilities expired at the end of 1985. However, if an application
for license of such a facility had been filed with FERC before
January 1, 1986, tax-exempt financing is available through 1988.
Another prior law provision authorizing tax-exempt financing for
steam generating or alcohol production facilities was repealed by
the Tax Reform Act of 1986. Both these incentives had been intended to increase the supply of nonpetroleum energy sources.
Natural resources and environment—As is true for fuel minerals,
certain capital outlays associated with exploration and development of nonfuel minerals may be expensed rather than capitalized
and depreciated over the life of the asset. Most nonfuel mineral
extractors also make use of percentage depletion rather than cost
depletion, with percentage depletion rates ranging from 22 percent
for sulphur down to 5 percent for sand and gravel.
Interest on State and local government debt issued to finance
pollution control and waste disposal facilities of private firms was
excludable from income subject to tax. This authorization was repealed for pollution control equipment and a cap placed on the
amount of debt that could be issued for waste disposal facilities by
the Tax Reform Act.
Expenditures to preserve and restore historic structures qualified
for a 25 percent investment credit prior to 1987. Furthermore,
taxpayers were permitted to depreciate 87.5 percent of the investment notwithstanding the 25 percent capital grant implicit in the
credit. Annual depreciation amounts were determined by the 18year straight-line method. Beginning in 1987, as provided in the
Tax Reform Act of 1986, the credit is reduced to 20 percent, the
depreciable basis of restored historic structures must be reduced by
the full amount of the credit taken, and annual depreciation deductions must be determined by the straight-line method over 27.5
years for residential structures and 31.5 years otherwise.
The pretax income derived from the cutting of timber and iron
ore royalties was taxed as capital gain at rates lower than those
applicable to ordinary income prior to passage of the Tax Reform
Act. The act repealed the capital gain distinction except that, in
1987, the maximum capital gains rate is restricted to 28 percent.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

The Tax Reform Act of 1986, for the first time, codified and made
uniform the definition of the costs that must be capitalized when
incurred in the production of goods for inventory, for use in one's
own trade or business, or under contract for another party. In
addition, when the production of property extends over more than
two years, the producer is required to capitalize interest he might
have paid to the extent that the production costs he had incurred
could have been used to retire debt. These new cost accounting
rules are effective with respect to all such production begun after
December 31, 1986. However, timber production was specifically
exempted from these "multiperiod" cost capitalization rules formulated in the act. The new special benefit thus derived from this
taxable income deferral is especially important in forestry due to
the extremely long period of production.
Private forestry is, in addition, encouraged by a special provision
permitting up to $10,000 ($5,000 for a married taxpayer filing a
separate return) of direct costs incurred in a taxable year to forest
or reforest a site for the commercial production of timber to be
amortized over a 7-year period rather than to be capitalized and
recovered when the timber is cut, 20 or more years later. The
$10,000 of costs are also eligible for a special 10 percent investment
tax credit, notwithstanding that investments in timber stands are
not depreciable nor that the regular investment tax credit has been
repealed by the Tax Reform Act.
Agriculture.—Farmers, other than certain corporations and partnerships engaged in agriculture, are allowed to deduct currently
certain expenditures for feed and fertilizer as well as for soil and
water conservation measures. The latter are limited by the Tax
Reform Act to projects conforming to state and federal plans. Current expensing is allowed, even though these expenditures are for
inventories held at the end of the year or for capital improvements
that are otherwise required to be capitalized under reference tax
income accounting rules. Capital gains treatment generally applies
to the profit from the sale of livestock and certain other agricultural products but, as previously noted, ordinary tax rates will apply
after 1986.
The Tax Reform Act of 1986 provides a special one-time grant to
those farmers with accumulated unused ("carryover") investment
tax credits as of the end of 1986, i.e., claimable credits for qualified
investment made in prior years but which exceeded the annual tax
liability limitations. Taxpayers who had reported gross farm
income in excess of 50 percent of their total gross income during
the prior three years were allowed by the act to carryback for 15
years the least of 50 percent of their unused credits, their total net
tax liability over the 15 years, or $750. This provision was a special
exception to the general rule that had limited carryback periods

SPECIAL ANALYSIS B

B-15

for investment credits to three years and to that particular provision in the act which reduced by 35 percent the value of all other
taxpayers' carryover credits as of the end of 1986.
The Tax Reform Act also provides farmers two additional tax
subsidies: The first is an exemption from the newly codified uniform production cost capitalization rules, described above. This
provides an additional gain (income) to those farmers who are
engaged in the establishment of orchards, the construction of farm
facilities for their own use, or the production of any goods for sale
the production period of which extends for more than one year.
However, farmers who elect to expense their multiperiod production costs must use straightline depreciation methods with respect
to all the depreciable property they use.
The second new farm subsidy enacted by the Tax Reform Act
concerns the tax treatment of "forgiven" debt, i.e., settlement of a
debt for an amount less than the principal of a loan. Normally, the
amount of loan forgiveness is accounted for as a gain (income) of
the debtor, a loss of the creditor, and the debtor must either report
the gain, or reduce his recoverable basis in the property to which
the loan relates. If he elects to reduce basis and the amount of
forgiveness exceeds his basis in the property, the excess forgiveness
is taxable. However, in the case of insolvent ("bankrupt") debtors,
the amount of loan forgiveness never results in an income tax
liability. The insolvent taxpayer's carryover losses and unused
credits are extinguished first, and then his basis in assets reduced
to no less than amounts still owed creditors. Finally, the remainder
of taxable income is itself forgiven. The act provides that any
farmer with forgiven debt will be considered "insolvent" for tax
purposes and thus qualify for income tax forgiveness.
Commerce and housing credit.—This category includes a number
of tax expenditure provisions that also affect economic activity in
other functional categories. In general, provisions related to investment, such as accelerated depreciation, could as well have been
classified under the natural resources and environment, energy,
agriculture, or transportation categories.
Beginning in 1987, the Tax Reform Act repealed the exclusion of
up to $100 ($200 on a joint return) previously allowed for dividend
income.
The interest on small issue industrial development bonds (IDBs)
issued by State and local governments to finance private business
property is excluded from income subject to tax. Depreciable property financed with small issue IDBs must be depreciated using the
straight-line method. Small issue IDBs are generally limited only
to the face amount of the bond issue, although certain facilities,
such as recreation or entertainment facilities, cannot be so financed. The tax exemption of small issue bonds expired on Decern-

C-14

• THE BUDGET FOR FISCAL YEAR 1988

ber 31, 1986, except for small issue IDBs exclusively issued to
finance manufacturing facilities for which the tax exemption is
scheduled to expire three years later.
Interest is exempt from taxation on all mortgage revenue bonds
issued before January 1, 1989, by State and local governments to
finance below-market rate mortgages for certain owner-occupied
homes. Bond proceeds generally are used to finance homes purchased by first time buyers of dwellings with prices under 110
percent (90 percent after 1986) of the average area purchase price.
The annual volume of mortgage revenue bonds is restricted to
State-by-State ceilings. The Tax Reform Act included mortgage
revenue bonds under the new unified volume cap which also covers
student loan bonds and IDBs, as noted below.
Because mortgage revenue bonds were found to be relatively
inefficient in providing subsidies to first time home buyers, States
have been authorized through December 31, 1988, to issue mortgage credit certificates (MCCs) in lieu of qualified mortgage bonds.
MCCs entitle home buyers to income tax credits for a specified
percentage of interest on qualified mortgage loans. When utilizing
MCCs the entire amount of the subsidy flows directly to the home
buyer without part of it ending up with investors and middlemen
as under the bond program.
The aggregate annual amount of MCCs a State may issue may
not exceed 20 percent (25 percent after August, 15 1986) of the
amount of qualified mortgage bonds that may be issued under the
annual State by State ceiling and that the State elects to surrender
in lieu of MCCs. Because of this relationship between MCCs and
qualified mortgage bonds, their outlay equivalent and revenue loss
estimates are presented in tables G - l and G-2 as single line items.
Prior to 1987, State and local government issues of IDBs to
finance private multifamily residential rental projects were restricted to multifamily rental housing projects that included 20
percent (15 percent in targeted areas) of units for low and moderate income families whose income did not exceed 80 percent of the
area's median income. The Tax Reform Act increased these percentages set aside for low and moderate income families while
lowering the defined income limits. The setaside is either 40 percent for tenants having incomes of no more than 60 percent of the
area median income, or 20 percent for families with incomes of 50
percent or less of the area median income. Other tax-exempt bonds
for multifamily rental projects are issued generally with the requirement that all tenants must be low or moderate income families.
There are also limits imposed on State and local government
bonds for private activity, specifically IDBs and student loan bonds.
The annual limit on the aggregate volume of student loan and

SPECIAL ANALYSIS B

B-15

most industrial development bonds that each State could issue was
initially the greater of $150 for each resident of a State or $200
million. The Tax Reform Act of 1986 combines the prior law
volume cap for single-family mortgage revenue bonds and multifamily rental housing bonds with the cap for student loans and
IDBs. The cap is set at the greater of $75 per capita or $250 million
for each State through 1987 after which it is the greater of $50 per
capita or $150 million for each State.
The earnings of credit unions not distributed to members as
interest or "share dividends" are exempt from income tax. Under
the Tax Reform Act of 1986, commercial banks with less than $500
million in assets, mutual savings banks, and savings and loan
associations also are provided a subsidy. They are permitted to
deduct additions to bad debt reserves in excess of actually experienced losses. Under prior law, all commercial banks were eligible
for such treatment. Moreover, deductions for additions to loss reserves in excess of prior loss experience were permitted. Under the
Tax Reform Act, the deduction for additions to loss reserves allowed qualifying mutual savings banks and savings and loan associations was reduced from 40 percent of otherwise taxable income
to 8 percent. To qualify, the thrift institutions must maintain a
specified fraction of their assets in the form of mortgages, primarily residential.
Life insurance policies, other than term policies, generally contain a savings element. Savings in the form of policyholder reserves are accumulated from premium payments and interest is
earned on the reserves. Such interest income is taxable neither as
it accrues nor when received by beneficiaries upon the death of the
insured.
A special deduction for life insurance companies equal to 20
percent of their life insurance company taxable income was enacted in 1984. The Tax Reform Act of 1986 repealed this provision
beginning after December 31, 1986.
Under the Tax Reform Act of 1986, deductions allowed individuals for interest paid on consumer credit, which had been allowed
without limit under prior law, will be phased out over a 5-year
period. For 1987, only 65 percent of such interest is deductible,
which drops to 40 percent in 1988, 20 percent in 1989, 10 percent in
1990, and none in 1991 and thereafter.
Owner-occupants of homes may deduct mortgage interest and
property taxes (but not maintenance outlays or depreciation) on
their primary and secondary residences as itemized nonbusiness
deductions. However, under the Tax Reform Act, the mortgage
interest deduction is limited to interest on debt no greater than the
owner's basis in the residence, plus qualified medical and educational expenses financed by the mortgage. These are tax expendi-

C-14

• THE BUDGET FOR FISCAL YEAR 1988

tures because, under the reference and normal tax rules, the taxpayers are not required to report gross income from the properties
to which the deductions pertain.
The Tax Reform Act of 1986 eliminates the special tax treatment
of taxpayer's long-term capital gains, that is, gains on the sales of
assets held longer than 6 months. Beginning in 1987, capital gains
will be subject to tax at the same rate as other income. However,
for 1987 only, when the maximum ordinary income tax rate for
individuals will be 38.5 percent, the maximum tax rate on longterm capital gains will be limited to 28 percent.
Under prior law, sixty percent of net long-term gains from the
sale of capital assets were excluded from taxable income. However,
the excluded 60 percent of net long-term gains was treated as a
preference item in computing the alternative minimum tax for
individuals. This tax was applicable only if it was greater than a
taxpayer's regular income tax. Half of net long-term capital losses
and 100 percent of net short-term capital losses could be offset
against ordinary income up to a maximum deduction of $3,000 per
year with an unlimited carryforward. This maximum offset and
unlimited carryforward of excess losses has been retained in current law.
Capital gains of corporations will also be taxed as ordinary
income, although again for 1987 only, when the maximum corporate tax rate will be 40 percent, the maximum tax on such gains
will be 28 percent. Under prior law, with the maximum corporate
tax rate at 46 percent, corporations could elect a 28 percent alternative tax rate on capital gains. The tax expenditure is the subsidy
provided by taxing at a preferential rate these gains that would
otherwise have been taxed at ordinary rates.
Capital gains on the sale of a home are recognized only to the
extent that the "adjusted sales price" exceeds the cost of a new
home purchased and occupied within 2 years before or after the
sale. The "adjusted sales price" is the amount realized (gross proceeds less selling expenses) minus qualified fixing up expenses. If a
new house is constructed, it must be occupied within 2 years after
the sale of the previous residence. The deferral of tax with respect
to these gains on owner-occupied dwellings is the tax expenditure.
A taxpayer who is 55 years of age or older at the time of the sale
of his residence may elect to exclude up to $125,000 of gain from its
sale. This is a once-in-a-lifetime election. In effect, this provision
converts some prior deferrals of tax into forgiveness of tax.
The gain on the sale of capital assets acquired by inheritance is
computed as the excess of the sales price over their value at the
time of the original owner's death, rather than as the excess over
their value at the time of acquisition by the original owner. The

SPECIAL ANALYSIS B

B-15

estimate assumes that the difference in the computed gain would
be taxed as part of the capital gain in the year of sale.
The Tax Reform Act of 1986 repealed the 10 percent tax credit
for investment in depreciable personal property (6 percent for investment in 3-year recovery period assets) that had been provided,
at different rates and with certain time lapses, since 1962. Otherwise qualified property acquired after December 31, 1985, will receive no investment credit unless it satisfies certain transition
rules regarding prior commitments to its purchase and its placement in service before specified dates extending through 1991.
Prior to 1983, taxpayers were permitted to recover the full price of
the asset notwithstanding the grant implied by the tax credit received. After 1983, an investor was required to either reduce his
recoverable basis in the asset by half the credit allowable or to
accept a 2 percentage point reduction in the credit rate. The Tax
Reform Act provides that, with respect to transition property qualifying for investment credits after 1985, the investor must reduce
his recoverable basis by the full amount of the credit allowed.
As a general rule, investments in land, buildings, or otherwise
eligible property used abroad were not eligible for the investment
tax credit. Credits for property subject to long construction periods
could be claimed as the purchaser made progress payments. The
maximum annual amount of credit allowed was limited to the first
$25,000 of tax liability plus a statutory percentage of tax liability
in excess of $25,000. This percentage was 85 percent in 1986. Claimable credits in excess of the annual tax liability limitation could be
carried back 3 years and thus qualify for "refund," or they could be
carried forward 15 years.
In addition to repealing the investment tax credit, the Tax
Reform Act of 1986 provided that taxpayers reduce by 35 percent
the amount of their as yet unused ("carryover") credits creditable
against 1987 and later tax liabilities. Moreover, the annual amount
of credit carryforward allowed in 1987 and later years was limited
to $25,000 plus 75 percent of tax liability in excess of $25,000,
provided the net tax due and payable is not reduced thereby to less
than 75 percent of the alternative minimum tax otherwise due and
payable for the year. However, the Act provided two exceptions to
these modifications of investment credit carryforwards to benefit
steel companies and farmers. As noted in the discussion of farming
tax subsidies, this exception provides that the qualified steel companies may elect to receive as tax refunds the lesser of the
amounts determined by carrying back to the preceding 15 years,
the lesser of 50 percent of their unused investment tax credits as of
the end of 1986, or their net tax liability for those years. To qualify
for this grant-like tax subsidy, the steel companies must have been
described in the Steel Import Stabilization Act or have been incor-

C-14

• THE BUDGET FOR FISCAL YEAR 1988

porated on February 11, 1983, in Michigan; altogether 10 steel
companies qualified.
The Tax Reform Act also replaced previous statutory and administrative rules governing annual depreciation allowances. In place
of the previous six recovery period classes introduced in 1981, the
Act provides eight: six for depreciable personal property, and two
for depreciable real property. The recovery periods for personal
property range from 3 to 20 years as compared to the 3 to 15 year
range under prior law. The recovery period for residential real
property now is 27.5 years, and for nonresidential, 31.5 years;
under prior law, the recovery period was 19 years for both residential and nonresidential property.
For the four of these personal property classes with recovery
periods of less than 15 years, the annual depreciation deduction
may be computed by declining balance formulas at twice the
straight-line rate; for the two with recovery periods of 15 and 20
years, the declining balance rate is 1.5 times the straight-line rate.
Under prior law, the declining balance rate for all personal property was 1.5 times the straight-line rate. Residential property only
can be depreciated by the straight-line method over 27.5 years and
nonresidential property over 31.5 years; under prior law, declining
balance rates were permitted ranging from 1.75 to 2 times (for lowincome housing) the straight-line rate.
The Tax Reform Act's new depreciation rules for personal property not only slow the depreciation rates to 1.5 or less times the
straight-line rate, but follow reasonably closely the ADR midpoints
that, as previously noted, approximate the depreciation norm of
the normal tax standard used in the "Pre-1983 budget method".
There are, therefore, no tax expenditures from depreciation of
personal property type assets placed in service after December 31,
1986. However, the Tax Reform Act provisions for recovery periods
of depreciable real property are more accelerated then the statutory 40 year guideline for such property that is leased to tax-exempt
organizations. Therefore, a tax expenditure is generated from the
depreciation of real property under the normal tax standard used
in the "Pre-1983, budget method". There are none from the depreciation of any assets under the "Post-1982 budget method", because
the Tax Reform Act's depreciation system now is the reference tax
law standard.
In 1984, the Deficit Reduction Act reduced the tax benefits that
were up to then available for tangible property leased by taxexempt entities, including federal, state, and local governments.
The Act provided that lessors of property to tax-exempt entities
could only use far less rapid write-offs. These more restrictive
depreciation rules for lessors were continued by the Tax Reform
Act of 1986.

SPECIAL ANALYSIS B

B-15

When an individual or corporation acquires or otherwise enters
into a new business, certain "start-up" expenses, such as the costs
of investigating opportunities and legal services, are normally incurred. The taxpayer may elect to amortize these outlays over 60
months although they are similar in kind to other payments he
makes for nondepreciable intangible assets to be used in the business that are not recoverable until the business is sold.
Before expiring at the end of 1985, taxpayers who held common
or preferred stock in a qualified dividend reinvestment plan established by a domestic public utility company could exclude from tax
up to $750 per year ($1,500 for joint returns) of distributions in the
form of common stock rather than cash. The stock so received had
a zero basis; the proceeds of sales of the stock were taxed as capital
gain if the sale took place at least one year after the record date of
the distribution. This creates a subsidy and, therefore, a tax expenditure, because under the normal and reference tax rules, distributions from corporate income are taxable to individual shareholders as ordinary income in the year received.
Prior to enactment of the Tax Reform Act of 1986, corporate tax
rates ranged from 15 percent of the first $25,000 of taxable income
to 46 percent on all income over $100,000. As compared with a flat
46 percent tax rate, the graduated rates reduced corporate tax
liabilities by $20,250 for corporations with $100,000 of taxable
income. This was "recaptured" in the cases of corporations with
taxable incomes over $1 million by a 5 percent tax which therefore
eliminated the benefits of this rate graduation for all corporations
with taxable incomes over $1.4 million. The Tax Reform Act modified the graduated corporate rate schedule so that the first $50,000
of taxable corporate income is taxed at 15 percent, the next $25,000
at 25 percent, and all taxable income over $75,000 at the maximum
rate which, beginning in 1988, will be 34 percent. As compared
with a flat 34 percent tax, the new rate graduation thus provides a
$11,750 reduction of tax for corporations with taxable incomes of
$75,000. The Tax Reform Act provides that this benefit will be
"recaptured" in the cases of corporations with taxable incomes of
$100,000 or more by a 5 percent tax on corporate income in excess
of $100,000, thereby eliminating all benefit for corporations with
incomes over $335,000.
Under the "Post-1982 Budget Method", graduated rates are part
of the reference tax rules and, therefore, do not give rise to a tax
expenditure. Under the "Pre-1983 Budget Method", however, this
rate progression departs from the normal tax rule that all corporation income be taxed at the single rate at which most corporation
income is taxed (34 percent) and gives rise to a tax expenditure
intended to encourage small business.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Transportation.—Certain companies that operate U.S. flag vessels receive an indefinite deferral of income taxes on that portion
of their income used for shipping purposes, primarily construction,
modernization and major repairs of ships, and repayment of loans
to finance these qualified investments. Prior to January 1, 1987,
the deferral permitted was indefinite. Under the terms of the Tax
Reform Act, the deferral will be limited to 25 years. Within this
period, the deferred taxable income will have to be spent for qualified investments or be taxed. Also, before repeal of the investment
tax credit by the Tax Reform Act, a credit of one half the regular
investment credit could be claimed on the tax-deferred amounts
withdrawn from capital construction funds. This was an exception
to the tax law standards that the credit may be claimed only with
respect to the taxpayer's basis in qualified property.
Until expiration on December 31, 1984, State and local governments were allowed to issue tax-exempt obligations to finance the
purchase of mass transit commuting vehicles for lease to government transit agencies.
As a consequence of the deregulation of motor carriers in 1980,
the value of operating authorities held by affected firms diminished. Under the reference and normal tax rule asset value
changes are recognized only when an exchange transaction occurs,
so this loss of value would occasion no income tax consequence. A
motor carrier would simply experience a diminished gross income
as competition reduced tariffs and, accordingly, would pay less
income tax. Only in the event a carrier liquidated or sold out to
another firm would the loss trigger a tax refund. To relieve existing motor carriers continuing in business of some of the loss they
experienced due to deregulation, a tax expenditure was provided in
the form of an exceptional 60-month amortization of their investment in operating authorities (a nondepreciable intangible asset).
The provision applies to taxable years ending after June 30, 1980.
The Tax Reform Act extended this special treatment to bus operators and freight forwarders.
Community and regional development.—Until it expired on December 31, 1986, taxpayers could, under certain conditions, elect to
amortize rehabilitation expenditures for low and moderate income
rental housing over a 5-year period in lieu of ACRS depreciation.
Rehabilitation expenditures could not exceed $20,000 per dwelling
unit but had to exceed $3,000 to qualify. The limit was $40,000 per
dwelling unit if the rehabilitation was on units which the tenants
could purchase at a price that limited the profit to the seller.
In place of the five-year amortization the Tax Reform Act of 1986
introduced a low income housing tax credit for investment in new,
substantially rehabilitated, and certain unrehabilitated, existing,
low income housing. For qualified projects without other federal

SPECIAL ANALYSIS B

B-15

subsidies, the credit is structured to have a present value of 70
percent of construction or rehabilitation costs incurred and is allowed over 10 years. For federally subsidized projects and those
involving unrehabilitated existing low income housing, the credit is
structured to have a present value of 30 percent. Notwithstanding
the capital grant character of this subsidy, the recoverable basis of
the investor is not reduced by the substantial credit allowed.
An investment tax credit is available for the rehabilitation of
buildings that are used for business or productive activities (other
than for residential purposes). Prior to the Tax Reform Act, the
credit was 15 percent of rehabilitation expenditures for buildings at
least 30 years old and 20 percent for buildings at least 40 years old.
The basis of the rehabilitation recoverable as depreciation had to
be reduced by the amount of the credit. Under the Tax Reform Act
of 1986, the credit rate was reduced to 10 percent of rehabilitation
expenditures, and is available only with respect to buildings erected before 1936. Full reduction in the taxpayer's recoverable basis
by the amount of the credit is required.
Until passage of the Tax Reform Act of 1986, the interest on
IDBs issued by State and local governments to finance airports,
docks, wharves, and sports and convention facilities was exempt
from tax. The Act repealed authorization to issue such bonds to
finance all sports and convention facilities as well as privately
owned airports, docks, and wharves. Government-owned airports,
docks and wharves, may continue to be financed with tax-exempt
bond issues, and these bonds are not covered by a volume cap.
Education, training, employment, and social services.—Under the
Tax Reform Act of 1986, scholarships and fellowships no longer
will be excluded from taxable income to the extent they exceed
tuition and course-related expenses of the grantee. Previously, the
first $300 per month received by students as scholarship or fellowship aid was excluded from students' gross incomes, provided the
amounts were not emoluments awarded them for services they
perform in association with the payor. From a strictly economic
point of view, scholarships and fellowships are either gifts not
conditioned on the performance of services, or they are rebates of
educational costs by the institutions in which students are enrolled.
Thus, under the post-1982 budget method utilizing the reference
tax law standard, the exclusion is not a tax expenditure because
the reference law does not include either gifts or price reductions
in a taxpayer's gross income. However, under the "Pre-1983 Budget
Method," the exclusion is considered a tax expenditure, because
under the normal tax standard gifts of Government funds—and
many scholarships are derived directly and indirectly from Government funding—are includable in gross income.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Interest on State and local government debt issued to finance
student loans and facilities used by private nonprofit educational
facilities is excluded from income subject to tax. The Treasury
Department has exclusive jurisdiction over any determination by
the executive branch as to whether interest on any such obligation
is exempt from tax. As mentioned before, the aggregate volume of
such private activity bonds that each State may issue during any
calendar year is limited.
Prior to passage of the Tax Reform Act of 1986, taxpayers could
claim personal exemptions for dependent children age 19 or over
who received parental support payments of $1,000 or more per year
if the children were full-time students. The student could also
claim an exemption on his own return; the extra exemption
claimed by parents was, therefore, a tax expenditure. Under the
Tax Reform Act, a taxpayer may not claim a personal exemption if
already claimed as a dependent on another tax return.
Many employers provide employee benefits that are excluded
from employee income. The employers' costs for these benefits are
deductible business expenses. The exclusion from an employee's
income of the value of meals and lodging provided by an employer
for his own convenience is a tax expenditure, as are the exclusion
of housing allowances and the rental value of parsonages from the
taxable income of ministers.
From January 1, 1979, through December 31, 1985, an employer
was able to set up an educational assistance program to provide
educational benefits to his employees. The program could pay for
tuition, fees, books, and supplies, and amounts received under the
program were excluded from an employee's gross income. Employer contributions to prepaid legal services plans and the value of
legal services received under such plans were also excluded from
employee income until the exclusion expired at the end of 1985.
However, the Tax Reform Act retroactively reinstated both exclusions and extended their availability for two years.
Prior to January 1, 1983, a corporation could claim an additional
1 percent investment tax credit if an equivalent amount of its
common stock were set aside in a employee stock ownership plan
(ESOP). A further one-half of 1 percent investment tax credit could
be claimed to the extent that additional employer contributions to
an ESOP were matched by employee contributions. The base for
the tax credit for contributions of stock to an ESOP is limited to
one-half of 1 percent of total compensation paid to all employees
under the plan from 1983 through 1986, after which it expires.
Employees generally are prohibited from withdrawing their share
of an ESOP for 7 years. The effective subsidy rate for this form of
employee compensation exceeds 100 percent; the employer is fully
reimbursed for the stock he transfers, and the benefited employees

SPECIAL ANALYSIS B

B-15

are not required to include this compensation in their current year
gross income.
Contributions to charitable, religious, and certain other nonprofit
organizations are allowed as an itemized deduction for individuals,
generally up to 50 percent of adjusted gross income. Between 1982
and 1986, nonitemizers could also deduct some or all (depending on
the year) of their charitable contributions. Taxpayers whose contributions to charitable or educational organizations are in the form
of capital assets (usually securities that have appreciated in value)
obtain a deduction for the contribution at the current value of the
asset without taxation of the appreciation in value. Beginning in
1982, corporations could also deduct charitable contributions of up
to 10 percent of their pretax income. The Tax Reform Act of 1986
includes in the alternative minimum tax bases of individuals and
corporations the untaxed appreciation of contributed property. Tax
expenditures resulting from the deductibility of contributions are
shown separately for educational and other institutions. Contributions to health institutions are reported under the health function.
A 30 percent tax credit may be claimed by married couples for
child and dependent care expenses incurred when both spouses
work full time or when one spouse works part time or is a student.
The credit may also be claimed by divorced or separated parents
who have custody of children and by single parents. Expenditures
up to a maximum $2,400 for one dependent and $4,800 for two or
more dependents are eligible for the credit. The credit is equal to
30 percent of qualified expenditures for taxpayers with incomes of
$10,000 or less with the credit reduced by one percentage point for
each $2,000 of income between $10,000 and $28,000. This aid to
encourage employment of spouses is supplemented by excluding
from employees' income the value of employer-furnished child care.
An additional aid to spousal employment was repealed by the
Tax Reform Act effective January 1, 1987. This provision allowed a
deduction for two-earner married couples filing jointly. The deduction was equal to the lesser of $3,000 or 10 percent of the income of
the lower earning spouse. The deduction was justified by the argument that the income of second earners is stacked on top of their
spouse's earnings and thus taxed at a higher marginal rate than if
the second earner had been taxed as a single person. This so-called
"marriage penalty" largely disappears with the introduction of
only two marginal tax rates of 15 and 28 percent in 1988.
The targeted jobs tax credit, previously scheduled to expire December 31, 1985, was reinstated retroactively and extended through
1988 by the Tax Reform Act of 1986. Employers may claim a tax
credit for qualified wages paid to individuals who are certified as
members of various targeted groups. The amount of the credit that
may be claimed is 40 percent of the first $6,000 paid during the

C-14

• THE BUDGET FOR FISCAL YEAR 1988

first year of employment. A tax credit equal to 85 percent of the
summer employment wages paid 16 and 17 year old youths who are
members of low income families is also provided. These credits are
structured to ensure the wage subsidy they provide is taxable; the
employer must reduce his deduction for wages paid by the amount
of the credit claimed.
Prior to the Tax Reform Act of 1986, to encourage the adoption
of children found by a State to.be difficult to place without financial assistance to the adopting parents, taxpayers could deduct up
to $1,500 of adoption expenses incurred during a year. Only those
adoption expenses incurred with respect to a child with "special
needs" as defined in section 473 of the Social Security Act qualified
for this tax expenditure. The Act repealed this provision, replacing
it with a direct expenditure program.
Health.—Employee compensation in the form of payments by
employers for health insurance premiums and other medical expenses are deducted as business expenses by employers but excluded from employee gross income. The exclusion from employee
income of this form of compensation gives rise to a tax expenditure.
For tax years beginning in 1983, the floor for deductible medical
expenses was increased from 3 percent to 5 percent of a taxpayer's
adjusted gross income. Beginning in 1984, the one percent of adjusted gross income floor under the deductible amount of drug expenditures was eliminated. However, only expenditures for prescription
drugs and insulin are now deductible. The Tax Reform Act of 1986
raised the floor for these expenditures to 7.5 percent of adjusted
gross income beginning in 1987.
Interest on State and local government debt issued to finance
hospital construction is excluded from income subject to tax.
Contributions to nonprofit health institutions are allowed as a
deduction for individuals and corporations. Tax expenditures resulting from the deductibility of contributions to other charitable
institutions are listed under the education, training, employment,
and social services function.
Drugs for the treatment of rare diseases or physical conditions
are often called "orphan drugs" because the narrow markets for
their use discourages private firms from undertaking the costly
investment in clinical testing that must be completed before manufacture and general distribution may be approved by the Food and
Drug Administration. To encourage the development of such drugs,
a tax credit equal to 50 percent of the clinical testing costs incurred by the taxpayer was introduced. Because the drug firm is
not required to reduce its deduction for testing expense (an R&D
expenditure), this credit reduces the private cost of clinically testing "orphan drugs" to little more than 24 cents per $1 expended.

SPECIAL ANALYSIS B

B-15

This tax expenditure was scheduled to expire at the end of 1987
but was extended through 1990 by the Tax Reform Act of 1986.
Income security.—The exclusion from taxable income of public
assistance benefits received by individuals is listed as a tax expenditure under the "Pre-1983 Budget Method" because, under the
normal tax rules, cash transfers from government are includable in
gross income. In contrast, gifts not conditioned on the performance
of services, including transfers from government as well as from
individuals, are not taxable under the reference tax baseline.
Therefore, under the "Post-1982 Budget Method" the exclusion
from taxable income of public assistance benefits is not shown as a
tax expenditure.
Beginning on January 1, 1988, the Administration proposes to
tax the income replacement portion, but not the medical payments,
of the special benefits received by disabled coal miners suffering
from "black lung" ailments, which is currently excluded from taxable income. This, as well as the exclusion from tax of a portion of
unemployment benefits give rise to tax expenditures. The Tax
Reform Act of 1986 eliminated the latter exclusion, beginning in
1987. In prior years, if the sum of a taxpayer's adjusted gross
income, unemployment compensation and excludable disability
income was over $12,000 ($18,000 for a joint return), the lesser of
one-half of that amount over the $12,000 limit or the actual unemployment benefits were taxable.
Disability-related military pension income received by current
retirees is mostly excluded from income subject to tax. The exclusion is a tax expenditure because of the subsidy it provides.
Certain contributions to pension plans by employers, amounts set
aside by the self-employed, and contributions to individual retirement accounts (IRAs) are excluded from the individual's adjusted
gross income in the year of contribution. Self-employed persons can
make deductible contributions to their own retirement (defined
contribution) plans equal to 25 percent of their income up to a
maximum of $30,000 per year. Prior to 1987, employees could
deduct annual contributions to an IRA of $2,000 (or 100 percent of
compensation, if less), or $2,250 on a joint return if one spouse had
no income. The Tax Reform Act of 1986 maintained these limits on
deductible IRA contributions if neither an individual nor his
spouse is an active participant in an employer-provided retirement
plan, or if their adjusted gross income falls below $40,000 ($25,000
for a single taxpayer). The allowable IRA deduction is phased out
between $40,000 to $50,000 for a joint return and $25,000 to $35,000
for a single return. Beyond these income limits, nondeductible
contributions to IRAs are available to taxpayers who are active
participants in employer-provided retirement plans. The Act also
limits to $7,000 per year the amount which an employee can ex-

C-14

• THE BUDGET FOR FISCAL YEAR 1988

elude from his adjusted gross income under a qualified cash or
deferred arrangement with his employer (401(k) plan). Further, the
Act limits to $9,500 annually the amount an employee may exclude
from his adjusted gross income of his own contributions to a taxsheltered annuity (403(b) plan). The investment income earned by
pension funds and other qualifying retirement plans is not taxable
when earned, and, therefore, is also a tax expenditure.
The exclusion from employee income of certain other employer
payments, including payments for premiums of group life insurance and accident and disability insurance, are listed here because
of their relationship to income security. The exclusion of certain
other benefits is listed under the education, training, employment,
and social services function.
The Tax Reform Act of 1986 eliminated the additional personal
exemptions previously allowed taxpayers who were blind or 65
years of age or older. Instead, the Act provides that taxpayers in
either of these categories may take an additional $750 standard
deduction, if single, or $600, if married. Moreover, for 1987, such
taxpayers may avail themselves of the new larger standard deductions (greater by $620 to $1,860, depending on filing status) other
taxpayers may not use until 1988.
Effective December 31, 1983, the tax credit for the elderly was
expanded to cover as well the permanently disabled. Prior to then,
a limited portion of disability payments made by employers was
excluded from the taxable income of the disabled employees. The
credit allows individuals who are 65 years of age or older to take a
tax credit equal to 15 percent of earned and retirement income up
to $2,500 for single individuals and married couples filing a joint
return where only one spouse is 65 years of age or older, and up to
$3,750 for joint returns where both spouses are 65 years of age or
older. The $2,500/$3,750 base is reduced by one-half of the taxpayer's adjusted gross income over $7,500 for single individuals and
$10,000 for married couples filing a joint return. The credit works
similarly for the disabled under this provision.
Premiums paid for casualty and theft insurance with respect to
items of one's personal or real property are considered personal
expenditures on a par with purchases of the property itself. Neither the purchases of property nor insurance premiums are deductible, therefore, as costs of earning income, and receipt of reimbursement for insured loss of such property is not reportable as
gross income by the insured. Thus, under neither the reference nor
normal tax baselines would the amount of an uninsured loss of
such property be reportable. However, a special provision permits
taxpayers to deduct casualty and theft losses of more than $100
each, but only to the extent that total losses during the year exceed
10 percent of adjusted gross income (AGI). This special relief for

SPECIAL ANALYSIS B

B-15

taxpayers suffering an uninsured loss is, accordingly, a tax expenditure.
The earned income credit may be claimed by low-income workers
with minor dependents. The Tax Reform Act of 1986 liberalized
this form of assistance. Before 1987, the credit was 11 percent of
the first $5,000 of earned income, for a maximum annual credit of
$550. The credit phased out at the rate of 12% cents per dollar of
the larger of earned income or adjusted gross income (AGI) over
$6,500. For 1987, the credit will be 14 percent of the first $6,080 of
income, a maximum credit of $851.20, and the credit will be reduced by 10 percent of income over $6,920. After 1987, the maximum amount of income on which the credit may be taken will be
adjusted for inflation, as will the income level at which the phaseout begins. Furthermore, in any tax year the amount of the credit
allowed must be reduced by the alternative minimum tax liability
of the tax payer. Earned income tax credits in excess of tax liabilities are paid to individuals. This portion of the credit is included
in outlays, while the amount that offsets tax liabilities is shown as
a tax expenditure.
Social Security.—Social security benefits, like other forms of deferred employee compensation, give rise to tax expenditures to the
extent that they exceed employees' contributions of previously
taxed income to pay for those benefits. These additional retirement
benefits are paid for by employers' contributions that were excluded from employees' taxable compensation. Up to one-half of
any recipient's social security benefits and tier 1 railroad retirement benefits may be subject to inclusion in the income tax base.
Thus, this tax expenditure is reduced to the portion which remains
excluded from the tax base. Benefits will be taxable if a recipient's
"modified adjusted gross income" plus one-half of his or her social
security and railroad retirement benefits exceed a certain base
amount: $32,000 for those filing joint tax returns; $25,000 for single
persons; and zero for those married filing separately (if they did
not live apart from their spouse for the entire year). Modified
adjusted gross income is AGI plus (a) the amount, if any, taken as
a deduction for two-earner married couples, (b) foreign or U.S.
possession income excluded from AGI, and (c) tax-exempt interest
excluded from AGI. After 1987, because the Tax Reform Act of
1986 repealed the two-earner deduction, modified AGI is equal to
AGI plus (b) and (c) only. If the modified AGI exceeds the specified
base amount, the lesser of one-half of the excess or one-half of the
social security or railroad retirement benefits must be included in
income subject to tax.
Other benefit payments from the Social Security Trust Fund, for
disability and for dependents and survivors, are excluded from
beneficiaries' gross incomes and thus also give rise to tax expendi-

C-14

• THE BUDGET FOR FISCAL YEAR 1988

tures. However, beginning in 1984, Social Security disability benefits were modified when the elderly tax credit (see Income Security,
above) was expanded.
Veterans benefits and services.—All compensation due to death or
disability and pensions paid by the Veterans Administration are
excluded from taxable income. GI bill benefits are also excluded.
The interest on general obligation bonds issued by State and
local governments to finance housing for veterans is excluded from
income subject to tax. However, there are restrictions on veterans
mortgage revenue bonds including limits on their issuance to preexisting State programs (five) and amounts based upon previous
volume levels for the period beginning on January 1, 1979 and
ending on June 22, 1984. Furthermore, future issuance of these
bonds is limited to veterans who served in active duty before 1977.
General government—Through 1986, a 50 percent credit could be
claimed for political contributions up to $100 ($200 for joint returns). This provision was repealed by the Tax Reform Act of 1986.
General purpose fiscal assistance.—Interest on State and local
government debt is excluded from Federal taxation. Most of these
bonds are owned by individuals, but a substantial proportion is also
held by commercial banks and casualty and property insurance
companies. As a result of the tax exemption, State and local governments can sell debt obligations at a lower interest cost than
would be possible if such interest were subject to tax. The exclusion
of interest on State and local government securities to finance
private activities, such as student loans, businesses, private nonprofit organizations, and housing, is classified elsewhere. Only the
excluded interest on bonds for public purposes, such as schools,
roads, and sewers, is included in this functional tax expenditure.
The deductibility of nonbusiness State and local taxes gives indirect assistance to these governments by reducing the costs of the
services they provide and, thus, the burden on their taxpayers. The
Tax Reform Act of 1986 disallows the deduction for general sales
taxes beginning in 1987. The estimates shown here are primarily
for the deductibility of State and local income taxes and pre-1987
sales taxes. The deductibility of property taxes on owner-occupied
homes is classified under commerce and housing credit.
Under certain conditions, U.S. corporations receiving income
from an active trade or business, or from investments located in a
U.S. possession, can claim a special credit against U.S. tax otherwise due. The Tax Reform Act of 1986 modified the rules for
measuring both active and passive income earned in U.S. possessions that had the effect of slightly reducing the amount of such
income eligible for the special credit.
Interest—The interest on U.S. savings bonds is not taxable until
the bonds are redeemed, thereby deferring tax liability.

SPECIAL ANALYSIS B

B-15

Table G - l . OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES BY FUNCTION
(In millions of dollars)
Fiscal years
Description

Corporations
1986

National defense:
Exclusion of benefits and allowances to Armed
Forces personnel
International affairs:
Exclusion of income earned abroad by United
States citizens
Exclusion of income of foreign sales corporations
1,575
(ESC)
Inventory property sales source rules exception
Certain nonfinancial institutions operations interest
allocation rules exception
Deferral of income from controlled foreign corporations:
Pre-1983 budget method
650
Post-1982 budget method
Total (after interactions)1
2,225
General science, space, and technology:
Expensing of research and development expenditures:
Pre-1983 budget method
840
Post-1982 budget method
Credit for increasing research activities
2,265
Suspension of the allocation of research and experimentation expenditures
440
Total (after interactions)
3,855
Energy:
Expensing of exploration and development costs:
Oil and gas
-1,255
Other fuels
35
Excess of percentage over cost depletion:
Oil and gas
300
Other fuels
320
Capital gains treatment of royalties on coal
15
Exclusion of interest on State and local industrial
180
development bonds for certain energy facilities....
Residential energy credits:
Supply incentives
Conservation incentives
Alternative, conservation and new technology credits:
Supply incentives
360*
Conservation incentives
Alternative fuel production credit
25
Alcohol fuel credit 2
10
Energy credit for intercity buses
5
Special rules for minning reclamation reserves
50
Total (after interactions)
30
Natural resources and environment:
Expensing of exploration and development costs,
nonfuel minerals
30
Excess of percentage over cost depletion, nonfuel
410
minerals

1987

Individuals
1988

1986

1987

1988

2,535

2,435

2,235

2,405

2,350

2,225

2,405

2,350

2,225

1,475
495

1,310
705

325

100

2,320

2,170

1,330

1,370

1,260

1,060

"25

535
3,385

2,875

100

-1,255
35

-950
35

490

435

465

195
220
5

135
175

1,075
20
110

655
15
25

450
15

200

205
175
70

200

325*

90*

15
10*

45
-145

40
-175

295

280

5
1,390

5
825

5
665

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table 6 - 1 . OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES BY FUNCTION—Continued
(In millions of dollars)
Fiscal years
Description

Exclusion of interest on State and local IDBs for
pollution control and sewage and waste disposal
facilities
Tax incentives for preservation of historic structures
Capital gains treatment of iron ore
Capital gains treatment of certain timber income
Expensing of multiperiod timber growing costs
Investment credit and seven-year amortization for
reforestation expenditures
Total (after interactions)
Agriculture:
Expensing of certain capital outlays
Expensing of certain multiperiod production costs
Treatment of loans forgiven solvent farmers as if
insolvent
Capital gains treatment of certain income
Special investment credit carryback rules for farming
Total (after interactions)
Commerce and housing credit:
Dividend exclusion
Exclusion of interest on small issue industrial
development bonds
Exemption of credit union income
Excess bad debt reserves of financial institutions
Exclusion of interest on life insurance savings
Deductions for special percentage of taxable
income for life insurance companies
Deductibility of interest on consumer credit
Deductibility of mortgage interest on owner-occupied homes
Deductibility of property tax on owner-occupied
homes
Exclusion of interest on State and local housing
bonds for owner-occupied housing
Exclusion of interest on State and local debt for
rental housing
Capital gains (other than agriculture, timber, iron
ore and coal)
Deferral of capital gains on home sales
Exclusion of capital gains on home sales for
persons age 55 and over
Carryover basis of capital gains at death
Investment credit, other than ESOP's, rehabilitation
of structures, energy property, and reforestation
expenditures
Special investment credit carryback rules for steel
companies
Accelerated depreciation on rental housing:
Pre-1983 budget method
Post-1982 budget method

Corporations

Individuals

1986

1987

1,455

1,660

1,930

155

135*

140

550

140
125

250

50
2,595

50
2,385

55
2,630

260
730

680

130

2,470
285
735

2,110

2,635
270
525

280
5
30
80

280

275

275
745

425

425*

460
5

10
755

10
160

1,105

555

740

185

9,450

7,960

8,345

18,155

10,835

5,560

30,670

23,840

19,855

8,595

7,955

7,205

44,375
2,960

15,570
5,240

1,445
6,550

1,275
7,690

2,255
13,600

2,820
17,010

3,355

2,115

1,370

1,235

1,260

1,110

310
25
120

180

310
730

2,805
250
75

1,440

1,900

2,010

2,035

1,275

1,335

1,320

2,460

625

28,010

1988

18,500

11,810
565

1,665

1,520

1,210

SPECIAL ANALYSIS B

B-15

Table G - l . OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES BY FUNCTION—Continued
(In millions of dollars)
Fiscal years
Description

Accelerated depreciation of buildings other than
rental housing:
Pre-1983 budget method
Post-1982 budget method
Accelerated depreciation of machinery and equipment:
Pre-1983 budget method
Post-1982 budget method
Safe harbor leasing rules
Amortization of start-up costs
Reinvestment of dividends in public utility stock
Reduced rates on the first $100,000 of corporate
income:
Pre-1983 budget method
Post-1982 budget method
Total (after interactions) 1
Transportation:
Deferral of tax on shipping companies
Exclusion of interest on State and local government bonds for mass commuting vehicles
Deduction for motor carrier operating rights
Total (after interactions)
Community and regional development:
Five-year amortization for housing rehabilitation
Credit for low-income housing investments
Investment credit for rehabilitation of structures
(other than historic)
Exclusion of interest on IDBs for airports, docks
and sports and convention facilities
Total (after interactions)
Education, training, employment, and social services:
Exclusion of scholarship and fellowship income:
Pre-1983 budget method
Post-1982 budget method
Exclusion of interest on State and local student
loan bonds
Exclusion of interest on State and local debt for
private nonprofit educational facilities
Parental personal exemption for students age 19
or over
Deductibility of charitable contributions (education)
Employer educational assistance
Total education (after interactions) 1
Exclusion of employer provided child care
Exclusion of employee meals and lodging (other
than military)
Exclusion of contributions to prepaid legal services
plans
Investment credit for ESOPs
Credit for child and dependent care expenses

Corporations
1986

1987

3,575

3,470

29,550

Individuals
1986

1987

1988

3,065

1,585

1,705

1,655

24,685

23,105

1,285

7,655

7,395

1,600
35

975
30

660
25

295
170

255

195

8,700

7,915

5,845

84,930

66,305

52,440 134,670

97,415

78,100

130

115

20
15
165

135

170

15
15

15
55

30
155

30
520

285

190

150

100

595
940

685
950

785
1,055

185

300

665

770

705

585

285

310

315

1,240

2,195

2,270

1,180
75
3,600
25

860
80
4,210
35

805
25
4,055
45

970

910

760

4,260

4,345

4,590

260

280

285

485

465

435

745

"720

2,005

870

320

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table G - l . OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES BY FUNCTION—Continued
(In millions of dollars)
Fiscal years
Description
1986

Targeted jobs credit
Deduction for two earner married couples
Total training and employment (after interactions)
Deductibility of charitable contributions, other than
education and health
Deduction for certain adoption expenses
Exclusion of parsonage allowances
Total social services, (after interactions)
Grand total (after interactions) 1
Health:
Exclusion of employer contributions for medical
insurance premiums and medical care
Deductibility of medical expenses
Exclusion of interest on State and local debt for
private nonprofit health facilities
Deductibility of charitable contributions (health)
Tax credit for orphan drug research
Total (after interactions)
Income security:
Exclusion of railroad retirement system benefits
Exclusion of workmen's compensation benefits
Exclusion of public assistance benefits:
Pre-1983 budget method
Post-1982 budget method
Exclusion of special benefits for disabled coal
miners
Exclusion of untaxed unemployment insurance benefits
Exclusion of military disability pensions
Net exclusion of pension contributions and earnings-.
Employer plans
Individual Retirement Accounts
Keogh plans
Exclusion of other employee benefits:
Premiums on group term life insurance
Premiums on accident and disability insurance....
Income of trusts to finance supplementary unemployment benefits
Additional exemption for the blind
Additional deduction for the blind
Additional exemption for elderly
Additional deduction for the elderly
Tax credit for the elderly and disabled
Deductibility of casualty losses
Earned income credit 3
Total (after interactions) 1
Social Security:
Exclusion of social security benefits:
Disability insurance benefits
OASI benefits for retired workers
Benefits for dependents and survivors
Total (after interactions)

Individuals

Corporations

430

1987

255

1988

1986

1987

6,510

45
1,625

400

2,435

1,125

720

12,015

7,075

600

580

540

12,265*

8,875*

600
3,780

580
2,450

540
1,980

175
12,440
28,055

185
9,060
20,345

29,910
3,825

28,730
2,325

2,105
295*

2,250
285*

2,250
270*

1,730

1,250

2,400

2,535

2,520

35,465

32,305

420
2,500

400
2,425

580

490

145

130

1,080

120

270
110

71,940
22,470
3,730

64,505
15,150
2,820

2,960
175

2,730
160

30
35

110
270
700
107,850

30
10
10
710
810
105
230
1,110
90,360

1,195
13,270
3,920
18,385

1,145
12,980
3,S
17,925

2,785

SPECIAL ANALYSIS

B-15

Table G - l . OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES BY FUNCTION—Continued
(In millions of dollars)
Fiscal years
Description
1986

Veterans benefits and services:
Exclusion of veterans disability compensation
Exclusion of veterans pensions
Exclusion of Gl bill benefits
Exclusing of interest on state and local debt for
veterans housing
Total (after interactions)
General government:
Credits and deductions for political contributions
General purpose fiscal assistance:
Exclusion of interest on public purpose State and
local debt
Deductibility of nonbusiness State and local taxes
other than on owner-occupied homes
Tax credit for corporations receiving income from
doing business in United States possessions
Total (after interactions)
Interest:
Deferral of interest on savings bonds

Individuals

Corporations

2,010

3,155
5,165

1987

2,235

2,855
5,090

2,330

2,415
4,745

1986

1987

1,705
195
105

1,585
120
85

1,440
80
70

290
2,295

295
2,085

305
1,895

220

7,160

7,875

8,040

23,965

18,235

14,845

31,125

26,110

22,885

825

790

710

* $2.5 million or less. All estimates have been rounded to the nearest $5 million.
1 Totals include only pre-1983 budget method.
2 In addition, the exemption from the excise tax for alcohol fuels results in a reduction in excise tax receipts of $400 million in 1986, $340
million in 1987, and $300 million in 1988.
3 The figures in the table indicate the tax subsidies provided by the earned income tax credit. The effect on outlays is: 1986, $1,415 million;
1987, $1,491 million; 1988, $2,910 million.

C-14

• THE BUDGET FOR FISCAL YEAR 1988
REVENUE LOSS ESTIMATES FOR T A X

EXPENDITURES

Table G-2 shows the estimated revenue loss associated with each
tax subsidy item for which an outlay equivalent estimate was
provided in table G-l. As explained in the text under the heading
"Measuring Tax Expenditures," revenue loss estimates do not take
into account the additional resources (if any) that would be required to provide the same after-tax incentive if the expenditure
program were administered as a direct outlay rather than through
the tax system. As was also previously explained, these revenue
loss estimates are not equivalent to estimates of the increase in
Federal receipts that would accompany the repeal of tax expenditure provisions.
Table G-2. REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES BY FUNCTION
(In millions of dollars)
Fiscal years
Description

Corporations
1986

945

Individuals

1987

1986

1987

2,095

2,050

1,925

1,490

1,555

1,630

960
320

915
495

390

210

635

1,170

1,405

665

1,815

750

"20

260

350

140

-1,110
35

-1,300
35

-955
35

600

425

455

200
235
10

165
205
5

115
140

905
15
75

625
15
45

410
15

-25

210

215

190

315
190

SPECIAL ANALYSIS B

B-15

Table G-2. REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES BY FUNCTION—Continued
(In millions of dollars)
Fiscal years
Description

Corporations
1986

Alternative, conservation and new
technology credits:
Supply incentives
Conservation incentives
Alternative fuel production credit
Alcohol fuel credit 1
Energy credit for intercity buses
Special rules for minning reclamation reserves
Natural resources and environment:
Expensing of exploration and development costs,
nonfuel minerals
Excess of percentage over cost depletion, nonfuel
minerals
Exclusion of interest on State and local IDBs for
pollution control and sewage and waste disposal
facilities
Tax incentives for preservation of historic structures
Capital gains treatment of iron ore
Capital gains treatment of certain timber income
Expensing of multiperiod timber growing costs
Investment credit and seven-year amortization for
reforestation expenditures
Agriculture:
Expensing of certain capital outlays
Expensing of certain multiperiod production costs....
Treatment of loans forgiven solvent farmers as if
insolvent
Capital gains treatment of certain income
Special investment tax credit carryback rules for
farming
Commerce and housing credit:
Dividend exclusion
Exclusion of interest on small issue industrial
development bonds
Exemption of credit union income
Excess bad debt reserves of financial institutions....
Exclusion of interest on life insurance savings
Deduction for special percentage of taxable income
for life insurance companies
Deductibility of interest on consumer credit
Deductibility of mortgage interest on owner-occupied homes
Deductibility of property tax on owner-occupied
homes
Exclusion of interest on State and local housing
bonds for owner-occupied housing
Exclusion of interest on State and local debt for
rental housing
Capital gains (other than agriculture, timber, iron
ore and coal)
Deferral of capital gains on home sales
Exclusion of capital gains on home sales for
persons age 55 and over

1987

Individuals
1988

265*

290*

120*

1987

1986

5
5
35

10
*5

300

280

220

-305

-230

-225

1,905

1,965

150*

140*

135

320

155
100

280
15
90

170

305
10
60
35

180

175

425

10
605

10
125

535

365

3,175

3,195

6,990

6,130

17,945

12,065

30,435

24,920

8,560

8,030

-400
195
480
1,425

-395
190
365

-265
175
55

910

510

495

430

1,540

1,570

340

335

280

900

975

2,190

905

28,820
1,985

22,520
2,285

925

1,065

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table G-2. REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES BY FUNCTION—Continued
(In millions of dollars)
Fiscal years
Corporations
1986

1987

Carryover basis of capital gains at death
Investment credit, other than ESOP's, rehabilitation
of structures, energy property, and reforestation
17,305 12,260
expenditures
8,350
Special investment credit carryback rules for steel
companies
565
Accelerated depreciation on rental
housing:
1,570
Pre-1983 budget method
1,605
1,235
Post-1982 budget method
Accelerated depreciation of buildings other than rental housing:
3,505
3,525
3,110
Pre-1983 budget method
Post-1982 budget method
Accelerated depreciation of machinery and equipment:
Pre-1983 budget method
30,260 25,075 23,165
Post-1982 budget method
Safe harbor leasing rules
1,065
690
1,700
Amortization of start-up costs
20
20
25
Reinvestment of dividends in public utility stock
Reduced rates on the first $100,000 of corporate
income:
Pre-1983 budget method
4,655
4,645
3,910
Post-1982 budget method
Transportation:
130
115
115
Deferral of tax on shipping companies
Exclusion of interest on State and local bonds for
-5
-5
20
mass commuting vehicles
5
Deduction for motor carrier operating rights
Community and regional development:
15
15
15
Five-year amortization for housing rehabilitation
5
25
Credit for low-income housing investments
Investment credit for rehabilitation of structures
130
100
165
(other than historic)
Exclusion of interest on IDBs for airports, docks
-70
-70
-70
and sports and convention facilities
Education, training, employment, and social services:
Exclusion of scholarship and fellowship income:
Pre-1983 budget method
Post-1982 budget method
Exclusion of interest on State and local student
loan bonds
Exclusion of interest on State and local debt for
70
private nonprofit educational facilities
Parental personal exemption for students age 19
or over
Deductibility of charitable contributions (educa470
440
480
tion)
Employer educational assistance
Exclusion of employer provided child care
Exclusion of employee meals and lodging (other
than military)

Individuals
1986

1987

4,940

5,685

12,385

2,750

1,935

1,260

1,105

1,300

1,160

1,515

1,680

1,690

8,750

7,745

7,480

220

200

165

40*

30
75

30
295

110

655

710

680

705

650

535

280

290

250

265

300

250

1,220

2,060

2,305

1,160
75

870
80
30

815
25
40

850

745

685

1988

280

SPECIAL ANALYSIS B

B-15

Table G-2. REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES BY FUNCTION—Continued
(In millions of dollars)
Fiscal years

1986

Exclusion of contributions to prepaid legal services
plans
Investment credit for ESOPs
Credit for child and dependent care expenses
Targeted jobs credit
Deduction for two earner married couples
Deductibility of charitable contributions, other than
education and health
Deductions for certain adoption expenses
Exclusion of parsonage allowances
Health:
Exclusion of employer contributions for medical
insurance premiums and medical care
Deductibility of medical expenses
Exclusion of interest on State and local debt for
private nonprofit health facilities
Deductibility of charitable contributions (health)
Tax credit for orphan drug research
Income security:
Exclusion of railroad retirement system benefits
Exclusion of workmen's compensation benefits
Exclusion of public assistance benefits:
Pre-1983 budget method
Post-1982 budget method
Exclusion of special benefits for disabled coal
miners
Exclusion of untaxed unemployment insurance benefits
Exclusion of military disability pensions
Net exclusion of pension contributions and earnings:
Employer plans
Individual Retirement Accounts
Keoghs
Exclusion of other employee benefits:
Premiums on group term life insurance
Premiums on accident and disability insurance....
Income of trusts to finance supplementary unemployment benefits
Additional exemption for the blind
Additional deduction for the blind
Additional exemption for elderly
Additional deduction for the elderly
Tax credit for the elderly and disabled
Deductibility of casualty losses
Earned income credit 2
Social Security:
Exclusion of social security benefits:
Disability insurance benefits
OASI benefits for retired workers
Benefits for dependents and survivors....;
Veterans benefits and services:
Exclusion of veterans disability compensation
Exclusion of veterans pensions

Individuals

Corporations

Description

1987

1988

405

3,170
80
6,530

3,455
45
4,875

545

12,025*

9,005*

140

150

23,435
3,755

23,305
3,130

2,165
1,705

2,350
1,270

450
2,425

370
2,505

580

495

145

135

1,085
120

690
110

48,950
14,890
2,135

45,725
13,890
2,070

2,200
130

2,120
120

30
35

105
275
590

30
15
10
1,135
790
100
230
540

1,195
13,275
3,905

1,145
12,945
3,815

1,700
195

1,605
130

665

230

430

255

595

585

65
290

1987

60
1,165

70
295

1986

55
270

2,750

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table G-2. REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES BY FUNCTION—Continued
(In millions of dollars)
Fiscal years
Description

Corporations
1986

Exclusion of Gl bill benefits
Exclusion of interest on State and local debt for
veterans housing
General government:
Credits and deductions for political contributions
General purpose fiscal assistance:
Exclusion of interest on public purpose State and
local debt
Deductibility of nonbusiness State and local taxes
other than on owner-occupied homes
Tax credit for corporations receiving income from
doing business in United States possessions
Interest:
Deferral of interest on savings bonds

2,170

1,895

1987

2,225

1,855

Individuals
1988

2,000

1986

1987

1988

105

225

220

190

260

220

7,420

7,995

6,950

23,985

18,800

14,995

820

810

745

1,690

*$2.5 million or less. All estimates have been rounded to the nearest $5 million.
1 In addition, the exemption from the excise tax for alcohol fuels results in a reduction in excise tax receipts of $400 million in 1986, $340
million in 1987, and $300 million in 1988.
2 The figures in the table indicate the effect of the earned income tax credit on receipts. The effect on outlays is: 1986, $1,415 million; 1987,
$1,491 million; 1988, $2,910 million.

SPECIAL ANALYSIS

FEDERAL AID TO STATE AND LOCAL GOVERNMENTS

State and local governments have a vital constitutional role in
providing government services. They have the major role in providing domestic public services, such as public education, law enforcement, public roads, water supply, and sewage treatment. The Federal Government contributes directly toward that role both by
promoting a healthy economy and by providing grants, loans, and
tax subsidies to States and localities.
Federal grants help State and local governments finance programs covering most areas of domestic public spending, including
income support, capital spending, and other assistance. Federal
grant-in-aid outlays, estimated to be $109.9 billion in 1987, are
projected to decline to $106.3 billion in 1988. This reduction reflects
the administration's efforts to restrain Federal spending, which is
essential to continued long-term economic growth, and to reduce
Federal involvement in activities that are primarily State and local
responsibilities.
The major proposals affecting grants-in-aid in the 1988 Budget
include reforms, reductions, and terminations. The major reforms
include:
• replacement of the trade adjustment assistance and Job
Training and Partnership Act programs for dislocated workers with a greatly expanded new worker adjustment assistance program. The new program would be carefully designed
to help workers who lose their jobs because of economic
change to recognize quickly their situation and move on to
new careers.
• a new welfare youth training and employment program that
would restructure the existing summer youth employment
program. The new program would allow States and localities
to provide year-round skill training, summer jobs, or both for
youth in families receiving support from the aid to families
with dependent children (AFDC) program.
• a proposed highway block grant that would provide funds to
States for urban and rural highways, including the bridges on

1 Federal aid to State and local governments is defined as the provision of resources by the Federal Government to support a State or local program of governmental service to the public. The three primary forms of aid
are grants-in-aid (including shared revenues), loans, and tax expenditures.

H-1

C-14

• THE BUDGET FOR FISCAL YEAR 1988

those systems. States could use the funds on any main public
road without advance Federal approval; and
• reforms in the Federal payment for State administrative expenses associated with the medicaid, food stamps, aid to families with dependent children, and child support enforcement
programs. The administration is proposing a uniform matching rate for all types of administrative costs, replacing the
complicated and disparate set of matching rates now in place
for various types of State overhead costs. In addition, the
matching rate for AFDC, medicaid, and food stamps would be
reduced for States with excessively high administrative costs
per recipient.
The administration is also proposing reductions or terminations
of grant programs that are unnecessary, ineffective, or an inappropriate use of Federal funds. These proposals are motivated both by
the need to reduce the Federal deficit and by a fundamental conviction about the proper relationship between Federal, State, and
local governments. The major reductions or terminations include:
• medicaid changes that would reduce 1988 outlays $1.3 billion
from levels under existing law. In subsequent years, the program would be allowed to grow at the rate of increase in
prices in the medical sector.
• large reductions for mass transit programs. The penny gas
tax for mass transit activities would continue to be used to
fund mass transit activities, but general tax dollars would not
be used (except for the Washington, D.C. metro, which is
authorized separately).
• termination of urban development action grants and economic
development assistance in order to reduce direct Federal
intervention in the economic decisions of firms and individuals; and
• a phased termination of the community services block grant
to allow grantees time to solicit other sources of Federal,
State, local, and private funding.
The accompanying chart shows trends in outlays in major grant
categories from 1978 to 1988. Grant outlays for payments for individuals are estimated to be 50 percent of total grants by 1988; for
physical capital investment, 22 percent; and for all other grants,
largely for education, training, and social services, 28 percent.
In addition to grants-in-aid, Federal direct lending and loan guarantees to State and local governments are another source of Federal aid. Federal loans are used by States and localities for many
purposes, including land and water resource development and education. In 1988, the Federal Government is expected to disburse
$515 million in loans to State and local governments, compared to

SPECIAL ANALYSIS B

B-15

$668 million in 1987. New guaranteed loans are estimated to be $99
million in 1988, compared to $191 million in 1987.
The two major State and local tax expenditures are the deductibility of most State and local taxes and the exclusion of interest on
State and local securities from Federal taxation. Some State and
local tax expenditures were changed significantly in the Tax
Reform Act of 1986. Federal aid to State and local governments
through tax expenditures is estimated to be $36.1 billion in 1988.

Federal Grants to State and Local Governments

Rscal Years

HIGHLIGHTS OF THE FEDERAL A I D

Estimate

PROGRAM

This section provides an overview of the Federal aid program
proposed for 1988. Shown first are major differences between
actual grant outlays in 1986 and estimated amounts for 1987 and
1988. This presentation is followed by a more detailed description
of proposals for specific grant programs and a discussion of proposed levels of Federal aid through loans and tax expenditures.
Table H-l shows changes in grant outlays between 1986 and 1987
and between 1987 and 1988. These changes are divided into three
categories: payments for individuals, grants for physical capital
investment, and all other grants.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Between 1986 and 1987, the largest estimated outlay increase is
for medicaid, which increases $1.7 billion. The largest decrease is
$5.0 billion for the elimination of general revenue sharing.
Between 1987 and 1988, the largest estimated increase is $0.4
billion for housing assistance. Proposed decreases occur in many
areas, the largest being $0.8 billion for family support payments,
which includes aid to families with dependent children and the
child support enforcement program.
Table H - l . FEDERAL GRANT-IN-AID CHANGES, 1986-88
(In billions of dollars)

Total grants, 1986 actual
Changes:
Payments for individuals:
Medicaid
Food and nutrition assistance..
Family support payments
Other
Subtotal, payments for individuals, 1986-87 change..
Physical capital investment:
Highway programs
Sewage treatment plants
Mass transit
Other
Subtotal, capital, 1986-87 change..
Other programs:
General revenue sharing
Elementary and secondary education....
Housing
Other
Subtotal, other programs, 1986-87 change..
Total grants, 1987 estimate
Payments for individuals:
Housing assistance
Family support payments
Food and nutrition assistance
Low-income home energy assistance.
Other
Subtotal, payments for individuals, 1987-88 change..
Physical capital investment:
Highway programs
Sewage treatment plants
Community development block grants
Mass transit
Other
Subtotal, capital, 1987-88 change..
Other programs, 1987-88 change
Total grants, 1988 estimate..

SPECIAL ANALYSIS B

B-15

Energy, Natural Resources, Environment, and Agriculture.—State
and local energy conservation grants administered by the Department of Energy are used to weatherize school buildings, hospitals,
and the homes of low-income individuals. Grants are also available
to help States develop energy conservation programs. The administration proposes to rescind a portion of the funds for 1987 and
terminate funding for these programs in 1988. These activities are
more properly the responsibility of the States and can be financed
by the $2.8 billion States have received in the past year as a result
of the settlement of petroleum overcharge cases.
Grants to States for land acquisition and development of outdoor
recreation lands, and for State historic preservation efforts are also
proposed for elimination in 1988, with rescissions proposed for
1987. These needs can be met through State, local, and private
resources and the positive effect of Federal tax incentives on private investment in historic buildings.
The budget authority requested for grants for the abandoned
mine reclamation fund in 1988 is $151 million, $10 million less
than the 1987 level. Approximately 225 projects in 22 States will be
financed by the 1988 request.
Outlays for sport fish restoration grants are estimated to increase
from $121 million in 1987 to $153 million in 1988, using increased
funds from motorboat fuel taxes, excise taxes, and customs duties
added by the Deficit Reduction Act of 1984.
The Environmental Protection Agency construction grants program was created to help State and local governments build municipal wastewater treatment systems. The original objective of this
program—to reduce the pollution from municipal waste—has largely been met with the assistance that has been provided since 1972.
In order to complete the Federal role, the administration proposes
$12 billion in budget authority through 1993. After authorization to
phase out the program by 1993 has been enacted, the administration will request $2.0 billion in budget authority for 1988. Outlays
are estimated to be $2.3 billion in 1988, largely from prior year
commitments.
The hazardous substance superfund pays for the cleanup of abandoned hazardous waste sites and chemical spills. Budget authority
of $297 million has been requested in 1988 for site specific cooperative agreements with States. This funding level, which is $32 million above the 1987 level, should finance the cleanup of 21 sites in
1988.
The Extension Service makes formula and project grants to
States to provide out-of-school education in agriculture and other
subjects at State and local levels. The administration proposes to
terminate the project grants to States, which are used to support
such programs as urban gardening, pest management, support for

C-14

• THE BUDGET FOR FISCAL YEAR 1988

rural development centers, and food and nutrition education. Funding for the formula grant would continue. Proposed budget authority for Extension Service grants for 1988 is $263 million, a $69
million reduction from the 1987 amount, but slightly more than
the amount for formula grants in 1987.
Coastal zone management State grants were created in 1972 to
encourage and assist States in dealing with increasing and competing demands for the use of the Nation's coastal areas. Now that
most States have federally-approved management plans that cover
approximately 90 percent of the U.S. coastline, the administration
believes the program's purpose has been achieved and no further
Federal funding is necessary or appropriate. More than $500 million has been provided to coastal States since the beginning of the
program. The administration proposes to rescind unobligated balances of 1987 appropriations ($37 million) and terminate the program in 1988.
Similarly, the sea grant program was initiated to develop a network of colleges and universities with marine education programs
and to provide outreach to communities and individuals through
marine advisors that now total 300. Twenty-one colleges and eight
institutions have established marine science programs under sea
grant auspices that cover all coastal States and Puerto Rico. Fifteen States make direct allocations to the sea grant programs for
ongoing funding of local and regionally oriented research projects
and marine services. The Federal objective has been accomplished.
The administration proposes to rescind unobligated balances of
1987 appropriations ($22 million) and terminate the program in
1988.
Transportation.—The Federal Government assists States and localities with their transportation programs by providing aid for
highways, bridges, mass transit, airports, and other projects. The
administration is requesting $16.0 billion in budget authority for
these programs in 1988, a $2.0 billion reduction from the 1987 total.
The Federal-aid highway program helps fund the interstate highway system, other primary highways, bridges, and rural and urban
highways. The administration is proposing to reauthorize the highway programs for 1987-90 at $13.2 billion of budget authority per
year, $1.2 billion below the 1986 authorized level. At this lower
amount, planned highway and safety obligations supported by the
highway trust fund would equal the average annual anticipated
highway user fee receipts from the public.
The proposed reauthorization includes several new proposals.
Specifically, funding for the categorical interstate construction,
interstate rehabilitation and primary highway programs would be
replaced by a combined interstate/primary program of $8.2 billion
annually. States would have the discretion to use these funds for

SPECIAL ANALYSIS B

B-15

either construction or repair of the 43,000-mile interstate highway
system or for the 308,400-mile primary system. The primary system
consists of connected main roads important to interstate and regional travel. In contrast, rural and urban roads are primarily the
responsibility of State and local governments, which must decide
their own priorities and expenditures for construction, maintenance and rehabilitation. To help States meet these needs, the
administration proposes to consolidate into a block grant the existing trust fund resources for urban and secondary highway systems,
including bridges on those systems. States would have the discretion to use the funds on any main public road without advance
Federal project approval.
The administration proposes budget authority of $120 million in
1988 for two highway safety grant programs, the same level as for
1987. These grants supplement other State highway safety programs.
The administration seeks a 4-year reauthorization (1987-1990)
that would provide two fundamental changes in mass transit subsidies beginning in 1988. First, mass transit funding (except for
Washington Metro) would be limited to receipts provided by the
one cent per gallon of the gasoline tax dedicated to mass transit
activities. Second, these subsidies would be distributed by formula
to States and large urban areas for their use on local transit
projects. Proposed 1988 mass transit budget authority from the
trust fund is $1.4 billion.
The administration is also proposing no funding in 1988 or later
years for discretionary grants to build new or expand current
transit systems. In the past, these subsidies have promoted the
construction of local transit systems that often have been unnecessary, too costly, and underutilized.
In addition to the $1.4 billion from trust funds, the administration proposes a $130 million construction grant from general funds
for the Washington, D.C. metrorail system.
Grants-in-aid for airports are proposed to be funded at $1.0 billion in budget authority in 1988, the same as for 1987. Three
important changes are proposed. First, commercial airports that
can be self-financing would be allowed to withdraw from the Federal program and assess their own fees to finance capital improvements. Second, 22 percent of the funds would be allocated to States
to administer for general aviation, reliever, and small commercial
service airports. Third, discretionary grant funds would be targeted
to projects that would increase national airport capacity and improve safety. These proposed changes would provide increased flexibility to large airports and allow States to meet their own needs.
Community and Regional Development—The community development block grant program (CDBG) provides flexible community and

C-14

• THE BUDGET FOR FISCAL YEAR 1988

economic development support to cities, counties, Indian tribes, and
U.S. territories. The administration proposes to rescind $375 million of 1987 budget authority, with total proposed budget authority
of $2.6 billion for 1987 and $2.5 billion for 1988. Although this will
reduce the total resources available for this program, the administration will propose legislation to target CDBG resources to the
most needy communities.
The administration proposes to terminate the urban development
action grants program in 1988 and rescind $238 million of the 1987
appropriation. This proposal is consistent with the Governmentwide effort to reduce local economic development subsidies and
reduce excessive Federal intervention in the economic decisions of
firms and individuals. Cities may use CDBG resources for economic
development projects.
In 1983, the administration proposed and Congress enacted, the
rental rehabilitation grant program to help States and localities
rehabilitate properties for low-income renters. This program was
intended for communities that do not have enough standard quality low- and moderate-income housing to support a rental voucher
program. The administration is proposing to rescind $125 million of
1987 budget authority and continue the program at $95 million in
1987 and $75 million in 1988—an amount adequate to meet this
program's objectives.
Congress enacted a second grant program in 1983 to subsidize the
construction or substantial rehabilitation of rental housing in lowand moderate-income neighborhoods with shortages of rental housing. The rental development grant program is proposed to be terminated in 1987. All $100 million of 1987 budget authority and $10
million of earlier budget authority is proposed for rescission and no
new budget authority is proposed for 1988. New housing construction is an expensive means of housing the poor compared to approaches that utilize existing housing. Moreover, this program is
difficult to justify with the high vacancy rates for housing and the
poor targeting of funds to areas with real need.
The administration is not requesting funds in 1988 for the economic development assistance programs administered by the Economic Development Administration (EDA). The budget also proposes to rescind some unobligated funds in 1987 and use the remainder to close the agency. There is no evidence that categorical
EDA project grants create net employment gains for the Nation.
Instead, federally-targeted aid for businesses merely distorts
market incentives. Funds for State and local community and economic development are available in 1988 through the community
development block grant program.
Programs administered by the Appalachian Regional Commission (ARC) are intended to promote economic development of the

SPECIAL ANALYSIS B

B-15

13-State Appalachian region. Both the Commission and its programs are proposed to be terminated in 1988. The administration
also proposes to rescind uncommitted funds. This proposal reflects
the administration's policy to rely on the private sector to provide
the major stimulus for economic development. Moreover, ARC
highway funds duplicate other Federal highway programs, and
ARC development programs assist rural districts that are no worse
off than rural communities elsewhere, and are therefore not deserving of special assistance.
Education.—The administration's policies for assisting education
activities of State and local governments continue the Nation's
tradition that primary responsibility for education lies with the
family, State and local governments, and private institutions. Federal aid should primarily provide supplementary aid for persons
with disabilities and for the educationally and economically disadvantaged. For elementary, secondary, and vocational education the
administration is requesting $7.1 billion in budget authority, a
reduction of $0.4 billion from the proposed 1987 amount.
Major education grants for students with special needs include
compensatory education for the disadvantaged, education for the
handicapped, vocational and adult education, bilingual education,
and Indian education. The 1988 budget authority request for these
activities is $5.8 billion, $0.2 billion below the amount proposed for
1987. For the major program, compensatory education for the disadvantaged, the administration is proposing $4.1 billion in budget
authority for 1988, an increase of $0.2 billion above the 1987 enacted level. A legislative proposal would improve targeting of funds
to schools with the highest concentrations of poor children, and
would offer parents of eligible children an option to purchase education services from other public or private schools. The administration proposes to end Federal funding for vocational education.
Research has shown that the Federal investment in vocational
education has only small and transitory benefits for recipients;
vocational education is now funded by at least ten State and local
dollars for every Federal dollar.
Budget authority requested for the State education block grant
for 1988 is $500 million, the same as enacted for 1987. This block
grant provides States and localities with resources that can be used
for a wide variety of educational purposes.
Impact aid payments compensate school districts whose enrollments and available revenues are deemed to have been adversely
affected by Federal activities. The major category of aid is for
districts with children who both live on and whose parents work on
Federal property. No funds are proposed for the current authority
to provide funds to school districts with children who either live on
or whose parents work on Federal property. In general, the pres-

C-14

• THE BUDGET FOR FISCAL YEAR 1988

ence of these children imposes little or no burden on most districts.
Budget authority of $548 million is requested in 1988 for districts
with children who live and whose parents work on Federal property, about the same as the 1987 amount.
Training and Employment—Budget authority proposed for basic
State block grants under the Job Training Partnership Act of 1982
(JTPA) is $1.8 billion in 1988, about the same as the 1987 enacted
level. States have considerable discretion in using these funds to
prepare youth, welfare recipients, and other unskilled adults for
employment.
The summer youth employment program finances minimum-wage
public sector jobs for youth between the ages of 14 and 21. There is
little evidence that simply providing jobs during the summer has
benefited those youth most in need of employment skills. The
administration therefore proposes to replace the current summer
program with a more flexible program of jobs and training directed
to youth on welfare, which is described below. The administration
is proposing $650 million for the jobs program for the summer of
1988, which includes a $100 million rescission. This $650 million is
slightly more than the funds appropriated for the summer of 1987.
Legislation will be proposed for a new welfare youth training and
employment program to replace the existing summer youth employment program. The new program would allow States and local
areas to establish a comprehensive program of services for youth in
families receiving support from the aid for families with dependent
children (AFDC) program. States and localities could operate a
year-round program of remedial education, basic skills training,
and related support; a subsidized summer jobs program as they do
now; or a mixture of both programs. Budget authority of $800
million in 1988 is proposed for this program, which will be coordinated with other work and training initiatives for assisting the
welfare population, described below in the "other income security"
section.
For dislocated workers, the administration proposes to replace
the two existing programs with an entirely new worker adjustment
assistance program. This new program would be available to all
dislocated workers, whether they are unemployed due to increased
imports, have been permanently laid off, have lost their farms, or
are long-term unemployment insurance recipients. Services, which
could include counseling, job search assistance, basic education,
and job skill training, would be provided in a two-tiered approach,
with services that lead to quick adjustment provided first. The
administration is proposing $980 million in budget authority in
1988.
No budget authority is requested in 1988 for the work incentive
(WIN) program. The job services provided by this program would be

SPECIAL ANALYSIS B

B-15

provided more effectively by the AFDC work and training proposal
(described in the "other income security" section below) and the
new welfare youth training and employment program described
above.
Grant outlays for the State employment service are estimated to
be $843 million in 1988, $72 million less than the 1987 amount, as
the new worker adjustment assistance program begins providing
substantial job services now financed with these grants. Legislation
will be proposed to decentralize authority, financing, and responsibility for administering State employment services and unemployment insurance programs in the States.
Social Services.—Budget authority requested for the social services block grant is $2.7 billion for 1988, the same as was enacted for
1987. Child day care, foster care, child protective service, preparation and delivery of meals, and legal services are some examples of
social services offered by the States. In addition, States may transfer up to 10% of their social services allotment to block grants that
support health services, health promotion and disease prevention,
or low-income home energy assistance.
The administration proposes to phase out the community services
block grant program beginning in 1988. This will give local grantees time to solicit other sources of Federal, State, local, and private
funding.
Grants for vocational rehabilitation services help physically and
mentally disabled persons become gainfully employed and live
more independently. The administration is proposing $1.3 billion of
budget authority for 1988 for this program, slightly more than the
amount proposed for 1987. The increase offsets inflation from 1987
to 1988.
In 1988, budget authority of $682 million is requested for foster
care and adoption assistance. These family social services support
State efforts to reunite children with their families or to place
them promptly in adoptive homes. The administration is proposing
modifications to control the rapidly growing State administrative
costs. Maintenance payments to 110,000 foster care children and
39,000 adoption assistance families would not be reduced.
Grants for human development services supplement State, local,
and nonprofit efforts to improve the quality of life for low-income,
neglected, abused, or homeless children, and for elderly people and
other special groups. The largest program for children is Head
Start, which helps local community groups provide child development programs for low-income preschool children. For 1988 the
administration proposes a generic appropriation of $2.2 billion for
these social services activities. Under a generic appropriation, the
Department of Health and Human Services would be able to use its
program expertise to emphasize high priority programs, such as

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Head Start, and take advantage of emerging opportunities to serve
needy poplulations better.
Health.—The medicaid program continues to be the largest
grant-in-aid. This program supports State and local efforts to provide health services to an estimated 23.8 million low-income residents. Almost half of the spending is to help finance the costs of
long-term institutional care for the low-income elderly and the
mentally retarded. For 1988, medicaid outlays are estimated to be
$26.9 billion, after savings of $1.3 billion from legislative proposals
to reduce costs.
Most of the savings would result from proposals to:
• put a reasonable growth limit on Federal assistance to States
for their medicaid programs. This proposal would reduce Federal expenditures by $1.0 billion in 1988 and, for later years,
limit increases in Federal aid to the rate of inflation in medical prices;
• limit Federal aid for State administrative costs to 50 percent
of those costs; and
• further reduce the matching rate for States with excessively
high administrative costs per recipient.
Another proposal, which would not result in savings, would give
States new incentives to enroll medicaid beneficiaries in health
maintenance organizations (HMO's) or with other providers who
are paid a monthly fee and are responsible for all of a person's
health care. This proposal, known as capitation, would replace the
current fee-for-service reimbursements for enrolled beneficiaries.
Budget authority of $1.2 billion is requested in 1988 for the
health block grants, $0.1 billion more than for 1987. The block
grants include those for maternal and child health; preventive
health and health services; and alcohol, drug abuse, and mental
health. The administration is proposing a new family planning
block grant to give States greater flexibility in delivering voluntary
family planning services.
An increase from $15 million in 1987 to $20 million in 1988 is
also proposed for State and local demonstrations of communitybased mental health care sponsored by the Alcohol, Drug Abuse,
and Mental Health Administration. This additional funding would
be provided to complete demonstration projects targeted on mental
health services for the homeless mentally ill.

Administration of

Unemployment Compensation.—Grants

States for the administration of the unemployment compensation
program, which provides income to eligible unemployed workers,
are financed by a Federal tax on employers. Outlays for this grant
are estimated to be $1.7 billion in 1988, $0.1 billion above the 1987

SPECIAL ANALYSIS B

B-15

level. The increase will allow for increases in costs and to improve
State quality control efforts. Legislation will be proposed to decentralize authority, financing, and responsibility for administering
State unemployment insurance and employment service programs.
Housing Assistance.—Housing vouchers are the cornerstone of
the administration's housing policy. They are targeted to very lowincome households, can be used in most privately-owned rental
units that meet certain housing quality standards, and are less
costly than other housing subsidies. Moreover, they give tenants
greater freedom to choose where they wish to live.
Outlays for the grant portion of the subsidized housing program
are estimated to be $5.2 billion in 1988, $0.3 billion more than in
1987. Grant outlays under this program include those for public
and Indian housing. Also included are the vouchers, existing housing, moderate rehabilitation, and State-sponsored new construction
programs funded under Section 8 of the Housing Act of 1937. The
administration is proposing grants for vouchers for 79,000 additional housing units and grants for construction of 1,000 Indian housing units to add to an estimated 4.3 million households served by
the Department of Housing and Urban Development (HUD). Approximately 20-25 percent of the 79,000 vouchers would be provided for nonmetropolitan areas.
In addition, the administration proposes 20,000 housing vouchers
to be provided by the Farmers Home Administration (FmHA) in
rural areas and 1,200 vouchers to assist families displaced due to
prepayment of rural rental housing loans. Both the HUD nonmetropolitan vouchers and the FmHA vouchers would replace the
units formerly provided by the FmHA rural housing construction
subsidy loan and grant programs proposed for termination in the
1988 Budget. Because it is uncertain how many of the FmHA
vouchers will go to public housing authorities, the FmHA vouchers
are not classified as grants to State or local governments.
Budget authority of $1.4 billion is requested for payments for the
operation of low-income housing. These payments are used to subsidize operating costs for more than 1.4 million low-rent public and
Indian housing units. This request assumes no growth in personnel
and related expenses, but allows for inflation adjustments for utilities and other nonpersonnel expenses that are generally beyond
the ability of housing authorities to control.
The Consolidated Omnibus Budget Reconciliation Act of 1985
changed the treatement of loans in the low-rent public housing
loan fund. Beginning in 1986 these "loans" to local housing authorities are forgiven if the funds are used as specified. The payments are therefore not loans but grants and are now classified in
the budget as grants-in-aid. Outlays for these grants were $1.0

C-14

• THE BUDGET FOR FISCAL YEAR 1988

billion in 1986, and are estimated to be $1.9 billion in 1987 and $1.6
billion in 1988.
The administration is proposing increases for several programs
for the homeless. In addition to the demonstration projects for the
homeless mentally ill described above in the health section, in 1987
the Department of Housing and Urban Development (HUD) received $15 million in budget authority for two new shelter programs: $10 million for the emergency shelter grants program and
$5 million for the transitional housing demonstration program. In
addition, the Federal Emergency Management Agency (FEMA) continues to administer the emergency food and shelter program, which
was funded at $70 million in 1987. These three programs assist
homeless persons by providing funds for food, shelter, and supportive services. The administration's 1988 budget requests $80 million
for FEMA's emergency food and shelter program and $5 million for
a second year of HUD's transitional housing demonstration program. In addition, HUD has made available approximately $100
million worth of Section 8 rental subsidies for the homeless.
Food and Nutrition Assistance.—Food stamps help low income
families maintain a nutritious diet. Benefits are paid directly to
individuals by the Federal Government; food stamp administrative
expenses are shared between the States and a grant from the
Federal Government. The budget proposes to bring food stamps
into closer conformity with medicaid and aid to families with dependent children by holding States liable for the full dollar value
of the benefits issued in error above the legislatively mandated
tolerance level (5 percent). To improve Federal collection of State
error liabilities, the budget proposes to begin withholding each
State's estimated liabilities from their Federal administrative
grants during 1988. Other reforms affecting State administrative
expenses are described at the beginning of this Special Analysis.
Outlays for the Federal share of State administrative expenses for
the food stamp program are estimated to be $1.1 billion in 1988.
In place of the regular food stamp program, the Government of
Puerto Rico receives a nutrition assistance block grant. Outlays for
this grant are estimated to be $0.8 billion in 1988.
Child nutrition programs subsidize institutions for meals served
to students in schools, child care facilities, and other institutional
settings. The administration proposes to improve targeting of Federal funds to the needy by maintaining institutional subsidies for
meals served to students whose family incomes are below 185 percent of the poverty level but discontinue subsidies to students with
family incomes above that level. Under this proposal, nearly 13
million children would still receive federally subsidized meals in
1988. Budget authority proposed for the program in 1988, including

SPECIAL ANALYSIS B

B-15

food donations from the Section 32 program, is $3.8 billion, including $0.8 billion in savings from legislative proposals.
The special supplemental food program for women, infants, and
children (WIC) provides nutritious food supplements and nutrition
education to more than 3 million low-income women, infants, and
children. WIC is designed to prevent health problems associated
with inadequate diets during critical stages of child development.
The budget authority request of $1.7 billion for 1988 would maintain monthly participation levels somewhat above 3 million.
The Commodity Credit Corporation (CCC) donates surplus food
such as cheese, butter and nonfat dry milk to needy families,
charitable institutions, and schools. CCC donated commodities
valued at $1.3 billion are expected to be distributed through State
and local governments in 1988. (These funds are classified as grants
in the agriculture function in the budget.)
Other Income Security.—Family support payments to States include the aid to families with dependent children (AFDC) program
and the child support enforcement (CSE) program. AFDC helps
State and local governments finance their cash assistance payments to needy families. The administration proposes legislation to
achieve selected reforms of AFDC. Under a new AFDC work and
training proposal, teenage recipients will be encouraged to remain
in or return to school, and older recipients will participate in a
variety of employment and training activities designed to improve
their employment status. This reform, and the welfare youth training and employment program previously described, would replace
the unsuccessful work incentive (WIN) program, for which the
Congress provided only nine months of financing in 1987. Other
reforms would prohibit unmarried minor mothers from leaving
their parents' home solely to qualify for AFDC, and would eliminate payments to employable AFDC parents whose youngest child
is age 16 or older.
The child support enforcement program finances most State and
local administrative expenses for establishing paternity and for
collecting support from legally liable absent parents. These collections offset State and Federal AFDC costs. Under the administration's proposal, States would be required to establish mandatory
child support guidelines to help ensure that single-parent families
receive adequate support from parents who are absent from the
home.
Proposed budget authority for 1988 for the AFDC and CSE programs combined is $9.8 billion, including a legislative savings proposal for $0.5 billion.
The Federal Government subsidizes States for all of the initial
resettlement costs of welfare, health, employment, English language training, and other services for refugees and entrants. The

C-14

• THE BUDGET FOR FISCAL YEAR 1988

administration is proposing to reduce the number of months for
which it pays 100 percent of the normal State share of AFDC and
medicaid. Benefits to the individuals would not be reduced because
States would then provide their normal share of the costs. The
administration also plans to reduce the period for which refugees
may receive assistance above and beyond that available to U.S.
citizens. Budget authority of $245 million is requested in 1988 for
refugee assistance, $83 million below the 1987 level.
For low-income home energy assistance, $1.2 billion in budget
authority is proposed for 1988, $0.6 billion below the 1987 requested
level. This program is a block grant to help States make payments
to individuals, fuel vendors, or public housing operators for the fuel
bills of low-income households. This reduction recognizes the hundreds of millions of dollars in oil overcharge settlements available
to States for these purposes.
Administration of Justice.—For the three major justice assistance
programs, juvenile justice, State and local assistance, and the new
anti-drug abuse grant authorized in 1986, the administration is
proposing no new budget authority for 1988. These programs are
primarily the responsibility State and local governments.
The administration will continue to support the victims of crime
program in accordance with the Comprehensive Crime Control Act
of 1984. Outlays are estimated to be $55 million in 1988.

General Purpose Fiscal Assistance.—In 1986 new authorizing legislation for the general revenue sharing program was not enacted.
According to law, the only 1987 outlays will be to distribute the
remainder of funds already appropriated in prior years and otherwise still available, and to satisfy all legitimate claims.
The Federal Government collects receipts for the sale of timber
and leasing of minerals on Federal lands and returns a portion of
the receipts to States and localities. The administration proposes to
share natural resource receipts with States and counties after the
costs associated with management of the resources are deducted.
This conversion to sharing receipts on a net rather than gross basis
reduces natural resource payments in 1988 by $353 million from
current services levels.
The District of Columbia's operating budget is financed in part
by an annual reimbursement for the net cost of the Federal presence. The administration requests $527 million in budget authority
for the Federal payment to the District of Columbia in 1988, a
reduction of $53 million from the 1987 level. The reduction is
primarily because the administration is proposing that Federal
agencies be billed directly by the District for water and sewer
charges. These amounts are therefore not included in Federal payment to the District.

SPECIAL ANALYSIS B

B-15

Additional information on these and other grant programs is in
Part 5 of the 1988 Budget. For a detailed list of all grant programs
and proposed budget authority and outlays, see Table H-ll.
Loans.—Another form of Federal aid to State and local governments is assistance in obtaining credit, either directly through
loans and advances, or indirectly through loan guarantees. The
Federal Government provides credit assistance to States, localities,
and Indian tribes on more favorable terms than private lenders.
Direct loans and loan guarantees are used to finance rural and
community development, land acquisition, and a variety of other
activities.
Direct loan disbursements (excluding repayments) are estimated
to be $515 million in 1988, compared to $668 million in 1987.
A Federal loan guarantee occurs when a government agency
enters into a formal commitment to use government funds to repay
a lender upon default by the borrower. New loan guarantees to
State and local governments are estimated to be $99 million in
1988, compared to $191 million in 1987.
More information on Federal credit activities is available in table
H-12 and in Special Analysis F.
Tax expenditures.— Federal aid to State and local governments is
also provided through tax expenditures. Tax expenditures are one
of the means by which the Federal Government carries out public
policy objectives; in many cases they can be considered alternatives
to direct spending programs. To compare direct Federal spending
with assistance provided through tax expenditures, estimates for
tax expenditures are generally shown as outlay equivalents; that is,
the level of budget outlays required to provide the same amount of
after-tax benefits is the tax expenditure. A detailed discussion of
the measurement and definition of tax expenditures and a complete list of revenue loss and outlay equivalent estimates for specific tax expenditure items is contained in Special Analysis G.
The two major categories of tax expenditures that provide aid to
State and local governments are the deductibility of most State and
local taxes and the exclusion of interest on State and local securities from Federal taxation. Individuals can claim nonbusiness sales,
income, and property tax payments to State and local governments
(other than payments already taken as business deductions) as
itemized deductions on their Federal tax returns. This permits
States and localities to raise a dollar of revenue with less than a
dollar of net cost to their citizens. Beginning in 1987, the Tax
Reform Act of 1986 disallows the deduction for sales taxes.
Interest on virtually all State and local government securities is
tax exempt. As a result, State and local governments can sell their
debt at lower interest rates than would be possible if such interest

C-14

• THE BUDGET FOR FISCAL YEAR 1988

were taxable. The exclusion of interest on public purpose State and
local debt subsidizes the financing of traditional public projects,
such as toll roads, sewer systems, and schools. However, as shown
in table H-2, State and local jurisdictions also provide the benefits
of tax-exempt financing to a wide variety of private and quasipublic activities, such as pollution control, housing and small businesses. The growth of private purpose tax-exempt bonds and other
issues pertaining to tax-exempt credit are discussed in more detail
in Special Analysis F.
Table H-2. TAX EXPENDITURES AIDING STATE AND LOCAL GOVERNMENTS
(Outlay equivalents; in millions of dollars)
Description

Deductibility of:
Property taxes on owner-occupied homes
Nonbusiness State and local taxes other than on owner-occupied
homes
Exclusion of interest on:
Public purpose State and Local debt
IDBs for certain energy facilities
IDBs for pollution control and sewage and waste disposal facilities
Small-issue IDBs
Owner-occupied mortgage revenue bonds
State and local debt for rental housing
Mass commuting vehicle IDBs
IDBs for airports, docks and sports and convention facilities
State and local student loan bonds
State and local debt for private nonprofit educational facilities
State and local debt for private nonprofit health facilities
State and local debt for veterans housing
Total (after interactions)1

Fiscal year
1986

1987

1988

8,595

7,955

7,205

23,965

18,235

14,485

9,170
180
1,455
2,470
1,900
1,275
20
595
285
260
2,105
290

10,110
200
1,660
2,635
2,010
1,335
20
685
310
280
2,250
295

10,370
205
1,930
2,805
2,035
1,320
55
785
315
285
2,250
305

42,710

38,970

36,075

1 The estimate of total tax expenditures reflects interactive effects among the individual items. Therefore the individual items cannot be added
to obtain a total.

To curb the rapid growth of private purpose tax-exempt bonds,
recent legislation has placed restrictions on their use. The Mortgage Subsidy Bond Tax Act of 1980 imposed a number of restrictions on tax-exempt mortgage revenue bonds (MRBs) for owneroccupied housing as well as multifamily rental housing bonds, including limitations on the volume issued in each State. The Deficit
Reduction Act of 1984 (DEFRA) extended these limitations to December 31, 1987. The Tax Reform Act of 1986 (TRA) included
mortgage revenue bonds under a new unified volume cap which
also covers student loan bonds and industrial development bonds
(IDBs), as noted below. DEFRA also placed restrictions on qualified
veteran's MRBs. The issuance of these bonds is limited to five
preexisting State programs in amounts based on previous volume
levels. Future issuance will be limited to veterans who served in
active duty before 1977.

B-15

SPECIAL ANALYSIS B

The Tax Equity and Fiscal Responsibility Act of 1982 required
that industrial development bonds (IDBs) be approved by an elected
public official after a public hearing and that assets of certain IDBfinanced projects placed in service after 1982 be depreciated using
straight-line rather than accelerated depreciation. The 1982 Act
also eliminated the tax exemption for small issue IDBs issued after
1986. DEFRA extended the expiration date to December 1988 and
the TRA extended it one more year to December 1989 for small
issue IDBs that are issued exclusively to finance manufacturing
facilities.
DEFRA also placed limits on the total volume of private purpose
industrial revenue and student loan bonds that could be issued
within each State. The maximum amount was limited to the greater of $150 per capita or $200 million per year. As mentioned
earlier, the TRA combines the prior law volume cap for single
family mortgage revenue bonds and multifamily rental housing
bonds with the cap for IDBs and student loans. The cap is set at
the greater of $75 per capita or $250 million for each State,
through 1987. Subsequently, it is the greater of $50 per capita or
$150 million.
FEDERAL GRANTS-IN-AID BY FUNCTION, AGENCY, AND REGION

Distribution of grants by function.—Under the Congressional
Budget Act of 1974, the Congress reviews the budget and sets
targets by function. Consequently, the functional classification of
the budget has become important not only for analysis but also for
congressional control.
Table H-3. FEDERAL GRANT-IN-AID OUTLAYS BY FUNCTION
(In billions of dollars)
Function

National defense
Energy
Natural resources and environment
Agriculture
Commerce and housing credit
Transportation
Community and regional development
Education, training, employment, and social servicesHealth
Income security
Veterans benefits and services
Administration of justice
General government
General purpose fiscal assistance
Total outlays
*$50 million or less.

Actual
1986

0.2
0.5
4.3
1.9
*

Estimate
1987

1988

0.2
0.4
3.8
2.0
*

1989

0.2
0.3
3.4
1.9

1990

1991

1992

0.2
0.3
3.2
1.5

0.2
0.2
3.2
1.2

0.2
0.3
3.2
1.0

0.2
0.3
3.0
1.0

18.4
4.9
19.0
26.8
29.1
0.1
0.1
0.2
7.0

17.5
4.9
18.6
28.7
31.0
0.1
0.3
0.2
2.2

17.2
4.2
19.2
28.7
29.2
0.1
0.3
0.1
1.5

18.3
3.5
19.9
29.9
27.6
0.1
0.2
0.1
1.6

17.7
3.2
20.1
31.4
28.8
0.1
0.1
0.1
1.6

17.0
3.0
20.1
32.9
29.4
0.2
0.1
0.1
1.7

17.3
2.9
19.5
34.4
30.0
0.2
0.1
0.1
1.7

112.4

109.9

106.3

106.5

107.9

109.2

110.6

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table H-3 shows a functional distribution of Federal grant-in-aid
outlays.2 (Consistent with the emphasis now being placed on longer
range budget planning, Table H-3 and other tables in this Special
Analysis show estimates through 1992.) The functional composition
of grant outlays has changed significantly over the years, as shown
in table H-4. The health function has increased from 3 percent of
Federal aid in 1960 to an estimated 27 percent in 1988. Transportation has declined from 43 percent in 1960 to an estimated 16
percent in 1988. Other changes occurred between 1960 and 1988 in
education, training, employment, and social services programs,
which increase from 7 percent in 1960 to an estimated 18 percent
in 1988. General purpose fiscal assistance also increased with the
addition of general revenue sharing, from 2 percent in 1960 to 9
percent in 1980. In 1987, outlays for this function are expected to
drop to 2 percent of total grants, due primarily to the termination
of the general revenue sharing program.
Table H-4. PERCENTAGE DISTRIBUTION OF FEDERAL GRANT-IN-AID OUTLAYS BY FUNCTION
Actual
1960

Natural resources and environment .
Agriculture
Transportation
Community and regional development....
Education, training, employment, and
social services
Health
Income security
General purpose fiscal assistance
Other
Total

1970

Estimate

1980

1986

1987

1988

1989

2
3
43
2

2
3
19
7

6
1
14
7

4
2
16
4

3
2
16
4

3
1
17

7
3
38
2

27
16
24
2
1

24
17
20
9
1

17
24
26
6
1

17
26
28
2
1

100

1990

1991

1992

3
1
16
3

18
27
28
1
1

19
28
26
1
1

19
29
27
1
1

18
30
27
2
1

18
31
27
2
1

100

* 0.5% or less.

Distribution of grants by agency.—Table H-5 shows grant outlays
by agency. The Department of Health and Human Services will
provide 44 percent of total estimated grant-in-aid outlays in 1988,
far more than any other agency.
Distribution of grants by region.—Most grant funds are distributed among States or localities by formulas, with elements in the
formula that reflect program objectives. For example, the distribution of most highway funds among States is affected by the number
of miles of highways in the State; the distribution of education
grants is affected by the number of school children meeting certain
criteria. Two of the largest grants, medicaid and aid to families
with dependent children, are open-ended grants, whereby States
determine the program level and the Federal Government reim2 Table H - l l contains functional data and programmatic detail within each function for both budget authority and outlays.

B-15

SPECIAL ANALYSIS B
Table H-5. FEDERAL GRANT-IN-AID OUTLAYS BY AGENCY
(In billions of dollars)
Agency

Estimate

Actual 1986

Funds Appropriated to the President
Department of Agriculture
Department of Commerce
Department of Education
Department of Energy
Department of Health and Human Services
Department of Housing and Urban Development
Department of the Interior
Department of Justice
Department of Labor
Department of Transportation
Department of the Treasury
Environmental Protection Agency
Other
Total outlays

1987

1988

0.3
10.4
0.4
8.8
0.3
45.0
11.4
1.3
0.1
5.7
18.3
5.4
3.4
1.5

0.3
11.3
0.4
8.5
0.2
47.4
12.3
1.4
0.3
5.5
17.5
0.4
3.0
1.6

0.2
9.8
0.2
8.6
0.1
46.3
12.0
1.3
0.3
5.9
17.1
0.3
2.7
1.5

112.4

109.9

106.3

burses the States for a portion of their total costs. As a result of
these and other factors, the distribution of grants differs among
regions, as shown in Table H-6.
Table H-6. DISTRIBUTION OF GRANTS BY REGION, SELECTED FISCAL YEARS
Dollars per capita
Federal Region

Maine, Vermont, New Hampshire, Massachusetts, Connecticut, Rhode
Island
New York, New Jersey, Puerto Rico, Virgin Islands
.
Virginia, Pennsylvania, Delaware, Maryland, West Virginia, District of
Columbia
.
Kentucky, Tennessee, North Carolina, South Carolina, Georgia, Alabama,
Mississippi, Florida
.
.
Illinois, Indiana, Michigan, Ohio, Wisconsin, Minnesota
.
Arkansas, Louisiana, Oklahoma, New Mexico, Texas
Iowa, Kansas, Missouri, Nebraska
Colorado, Montana, North Dakota, South Dakota, Utah, Wyoming
Arizona, California, Nevada, Hawaii, other territories
.
Idaho, Oregon, Washington, Alaska
United States

19861
total
grants

1976

1986 2

Average
annual
percent
increase,
197686

6.6
18.3

298
329

518
635

5.5
6.6

12.6

290

497

5.4

16.7
20.7
10.7
4.7
4.0
13.8
4.4

243
240
238
226
301
269
323

391
449
377
393
526
423
502

4.8
6.3
4.6
5.6
5.6
4.5
4.4

112.4

268

459

5.4

1 Preliminary estimate, in billions of dollars.
2 See "Federal Expenditures by State," Bureau of the Census, for additional information concerning State distribution of Federal grants and
other Federal spending.

The highest per capita aid in 1986 went to Region II, which
includes New York, New Jersey, Puerto Rico, and the Virgin Islands. The lowest per capita aid in 1986 went to Regions IV, VI,
and VII, generally covering the South and the Plains States.

C-14

• THE BUDGET FOR FISCAL YEAR 1988
HISTORICAL PERSPECTIVES

In recent decades, Federal aid to State and local governments
has become a major factor in the financing of certain government
functions. The rudiments of the present system date back more
than 120 years to the Civil War. The Morrill Act, passed in 1862,
established the land grant colleges and instituted certain federally
required standards, as is characteristic of the present grant-in-aid
system. Federal aid was later initiated for agriculture, highways,
vocational education and rehabilitation, forestry, and public health.
In the depression years, Federal aid was extended to meet income
security and other social welfare needs.
Table H-7. HISTORICAL TREND OF FEDERAL GRANT-IN-AID OUTLAYS
(Fiscal years; dollar amounts in billions)
Federal grants <is a percent of
Total
grants-inaid

Five-year intervals:
1950
1955
1960
1965
1970
1975
Annually:
1980
1981
1982
1983
1984
1985
1986
1987 estimate
1988 estimate
1989 estimate
1990 estimate
1991 estimate
1992 estimate

$2.3
3.2
7.0
10.9
24.1
49.8
91.5
94.8
88.2
92.5
97.6
105.9
112.4
109.9
106.3
106.5
107.9
109.2
110.6

Federal outlays1
Total

Domestic
programs2

State and
local
expenditures 3

Gross
National
Product

5.3%
4.7
7.6
9.2
12.3
15.0

11.6%
17.2
20.6
20.3
25.3
23.1

10.4%
10.1
14.6
15.2
19.2
22.7

0.8%
0.8
1.4
1.6
2.4
3.3

15.5
14.0
11.8
11.4
11.5
11.2
11.4
10.8
10.4
10.0
9.7
9.5
9.4

23.3
21.6
19.0
18.6
19.6
19.3
19.8
18.9
18.6
17.8
17.4
17.0
16.6

25.8
24.6
21.6
21.3
21.1
21.0
20.6
NA
NA
NA
NA
NA
NA

3.4
3.2
2.8
2.8
2.6
2.7
2.7
2.5
2.2
2.1
2.0
1.9
1.8

Includes off-budget outlays; all grants are on-budget.
Excludes outlays for national defense, international affairs, and net interest.
As defined in the national income and product accounts.
NA=Not available.
Note—For additional detail, see the Historical Tables volume of the Budget of the United States Government, Fiscal Year 1988.
1

2
3

However, Federal grants did not become a significant factor in
Government expenditures until after World War II. As shown in
table H-7, Federal grants to State and local governments were $2
billion in 1950, and by 1965 they had risen to $11 billion. In 1981
they increased to nearly $95 billion, an average annual increase of
14.2 percent since 1965. In 1988 Federal grants are estimated to be
$106.3 billion, 10.4 percent of total Federal outlays and 18.6 percent
of domestic Federal outlays.

B-15

SPECIAL ANALYSIS B

Table H-7 also shows grants-in-aid as a percent of State and
local expenditures and as a percent of gross national product
(GNP). Grants as a percent of State and local expenditures increased from 10.4 percent in 1950 to 25.8 percent in 1980, declining
to 20.6 percent in 1986. Grants increased as a percent of GNP from
0.8 percent in 1950 to 3.4 percent in 1980, and are projected to
decline to 1.8 percent by 1992.
Table H-8 shows the composition of grant-in-aid outlays for selected years since 1950 according to the categories of payments for
individuals, physical capital investment, and other purposes.
Almost half of estimated 1988 grants are to States and localities as
payments for individuals.3 Among the larger of these programs are
medicaid, family support payments (AFDC), housing assistance,
and nutrition programs.
Table H-8. COMPOSITION OF GRANT-IN-AID OUTLAYS
(Fiscal years; dollar amounts in billions)
Composition of grants-in-aid

Five-year intervals:
1950
1955
1960
1965
1970
1975
Annually:
1980
1981
1982
1983
1984
1985
1986
1987 estimate
1988 estimate

Total
grants-inaid

Grants for
payments
for
individuals 1

Grants for
physical
capital
investment 2

2.3
3.2
7.0
10.9
24.1
49.8

1.3
1.6
2.5
3.7
8.6
16.4

0.5
0.8
3.3
5.0
7.0
10.9

91.5
94.8
88.2
92.5
97.6
105.9
112.4
109.9
106.3

31.9
36.9
37.9
41.6
44.3
48.1
51.4
54.2
52.9

22.5
22.1
20.1
20.5
22.7
24.8
26.2
24.8
23.4

Other

Share of State and local
capital expenditures financed
by—
Grants-in-aid

Own source
revenues

0.5
0.8
1.2
2.2
8.4
22.5

8.4%
8.3
23.9
24.8
24.6
25.7

91.6%
91.7
76.1
75.2
75.4
74.3

37.1
35.7
30.2
30.4
30.6
33.0
34.7
30.8
30.0

36.4
35.9
34.0
33.7
34.9
33.7
31.3
NA
NA

63.6
64.1
66.0
66.3
65.1
66.3
68.7
NA
NA

1 For an identification of accounts in this category, see Table H—11, including its footnotes.
2 Excludes capital grants that are included as payments for individuals.
NA=Not available.

Table H-8 also shows the share of State and local capital expenditures financed by Federal grants or by revenues from State and
local own sources. The Federal share increased from 8.3 percent in
1955 to 23.9 percent in 1960 largely because of the initiation of
Federal trust fund financing for the interstate highway system.
The share increased from 24.6 percent in 1970 to 36.4 percent in
1980, increasing by almost half in ten years. In contrast, this
3 Payments for individuals are defined as Federal outlays providing benefits in cash or in-kind that constitute
income transfers to individuals or families.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

percentage declined to 31.3 percent in 1986, largely because State
and local capital spending financed by their own revenues has
increased significantly. The major capital investment programs are
for highways, mass transit, community development block grants,
and sewage treatment systems.
Grants for capital investment are estimated to be $23.4 billion in
1988, 22 percent of total grants-in-aid.
GRANTS

MANAGEMENT

The increase in grant expenditures since World War II was
accompanied by an increase in the number of grants designated for
specific purposes. This increase took place especially in the 1960's
and early 1970's. These grants usually contained Federal legislative
and regulatory mandates, required matching funds from the recipient governments, and gave little discretion in their use to State
and local officials. They came to be known as categorical grants,
with complex administrative requirements to ensure that their
purposes were met.
To reverse this trend and to devolve authority, broad-based
grants have been emphasized in recent years. In addition, many
mandatory administrative or procedural requirements associated
with grant programs have been simplified or eliminated. Regulatory reforms and management improvements have increased the
efficiency of the intergovernmental grant-in-aid system and have
strengthened the authority of State and local elected officials over
Federal financing and development activities in their jurisdictions.

General purpose and broad-based grants.—General-purpose aid
gives State and local governments almost complete discretion in
determining their use. Broad-based aid, which includes block
grants, gives State and local governments considerable discretion
within a broadly defined program area. Table H-9 shows generalpurpose and broad-based grants as a percent of total grants for
selected years from 1972 to 1990.
General-purpose aid increased dramatically with the introduction
of the general revenue sharing program, from less than 2 percent
of all grants in 1972 to more than 14 percent in 1975, but declined
to 6.5 percent in 1985. The general revenue sharing program was
terminated in 1986. The remaining programs in this category are
expected to comprise 1.6 percent of total grants-in-aid in 1988.
Under the current administration, broad-based aid has increased
as a percent of total Federal aid. Based on proposals in the 1982
Budget, Congress enacted nine block grants that consolidated 57
grant programs. In 1982, Congress enacted the Job Training Partnership Act, which replaced several expiring Comprehensive Em-

SPECIAL ANALYSIS B

B-15

ployment and Training Act programs with a block grant to the
States.
In this budget the administration is proposing new block grants
for highways and for family planning services. Broad-based aid is
estimated to increase to 13.2 percent of total grants-in-aid in 1988.
Table H-9. OUTLAYS FOR GENERAL-PURPOSE, BROAD-BASED, AND OTHER GRANTS
(Dollar amounts in billions)
Actual
1972

General-purpose grants:
General revenue sharing
Other general purpose fiscal
assistance and TVA 1
Subtotal, generalpurpose grants
Broad-based:
Highway block grant
Community development
Health block grants
State education block grants
Employment and training
Social services block grant
Low-income home energy
assistance
Other
Subtotal, broad-based
grants
Other grants
Total
ADDENDUM: PERCENT OF
TOTAL
General-purpose grants
Broad-based grants
Other grants
Total

1975

Estimate
1980

1986

1987

1988

1989

1990

6.1

6.8

5.1

0.1

0.5

0.9

1.8

2.1

2.4

1.7

1.8

1.9

0.5

7.0

8.6

7.2

2.4

1.7

1.8

1.9

*
0.1

3.9
0.1

1.9

1.3
2.0

2.1
2.8

3.3
1.1
0.4
1.9
2.7

0.1
3.3
1.1
0.5
1.8
2.7

1.6
3.0
1.1
0.6
1.8
2.7

2.1
2.7
1.2
0.5
1.8
2.7

2.0
2.6
1.2
0.5
1.8
2.7

0.8

1.1

1.4

2.0
1.9

1.8
2.1

1.3
2.0

1.2
1.8

1.2
1.6

2.9
31.0

4.6
38.2

10.3
72.5

13.4
91.8

13.4
94.1

14.1
90.5

14.1
90.6

13.6
92.4

34.4

49.8

91.5

112.4

109.9

106.3

106.5

107.9

1.6%
8.3%
90.1%

14.1%
9.2%
76.7%

9.4%
11.3%
79.3%

6.4%
11.9%
81.7%

2.2%
12.2%
85.6%

1.6%
13.2%
85.2%

1.7%
13.2%
85.1%

1.7%
12.6%
85.6%

0.1

100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

*$50 million, on or less.
1 For detail, see grants in the general purpose fiscal assistance function, Table, H—11. Amounts in Table H-9 above include shared revenues
from the Tennessee Valley Authority, shown in the energy function.

In 1986 there were approximately 340 different grant programs.
Most of the spending is concentrated in relatively few—more than
85 percent of estimated obligations in 1986 were concentrated in
only 25 programs.
Most general-purpose and broad-based grants reduce or eliminate
the requirement that recipients match Federal funds with their
own. Despite the increase in these grants, matching requirements
for all grants as a whole have increased. In 1980, State and local
governments were estimated to provide approximately $.37 of required matching funds for each $1 of Federal aid; the State and
local share in 1986 was about $.50 for each Federal dollar. The

C-14

• THE BUDGET FOR FISCAL YEAR 1988

increase is because of the significant growth in programs such as
medicaid that require a larger than average matching share.
Federalism.—The President's success in restoring governmental
authority and establishing regulatory flexibility to State and local
governments has been substantial. Last year the Domestic Policy
Council's Working Group on Federalism submitted a Statement of
Federalism Principles to the President for his signature. On April
8, 1986, the President signed the Statement which serves to clarify
the relationship between Federal, State, and local governments.
The Federalism Working Group is currently considering alternative ways to carry out these principles throughout the Government.
The Federalism Working Group has also recommended to the Domestic Policy Council that "crossover sanctions", which apply to
one grant program in order to influence State policy in another
area, be evaluated.
Regulatory relief.—Regulatory relief is another area where the
administration is seeking to give more flexibility and authority to
State and local governments. The administration's regulatory
policy guidelines include provisions that state:
• Federal regulations should not preempt State laws or regulations, except to guarantee rights of national citizenship or to
avoid significant burdens on interstate commerce.
• Regulations establishing terms or conditions of Federal grants,
contracts, or financial assistance should be limited to the minimum necessary to achieve the purposes for which the funds
were authorized and appropriated.
The structural changes legislated to convert categorical programs
into block grants were accompanied by dramatic regulatory relief
that reduced red tape and gave States and localities more flexibility in the use of the funds. Administration initiatives continue to
provide State and local governments with regulatory relief for
individual grant programs, maintain the regulatory relief provided
for the new block grants, and reform selected crosscutting requirements, using "common" rules to carry out Federal regulations.
OMB continued to lead a Presidential task force to make grants
management more business-like and revise OMB Circular A-102,
"Uniform Requirements for Grants to State and Local Governments." A-102 was identified as a target for regulatory relief by
the Presidential Task Force on Regulatory Relief. Two products
were developed: (1) a revised and shortened OMB circular, providing guidance to agencies on business-like management practices,
and (2) a single, "common" agency rule, specifying terms and conditions of awards to grantees, to eliminate redundant and inconsistent administrative requirements among the 26 agencies.

SPECIAL ANALYSIS B

B-15

Management Improvements. —In 1986, the administration carried
out a number of efforts to improve management of the grant-in-aid
system. The major accomplishments included the following:
• New emphasis was placed on efforts to curb fraud, waste, and
abuse. The President signed Executive Order 12549, "Debarment and Suspension" on February 18, 1986, directing over 20
agencies to participate in a government-wide system of debarment and suspension for nonprocurement programs and activities (grants, loans, etc.). OMB and an interagency task force
developed procedural guidelines to ensure consistency in
agency implementation, prescribing which programs and activities are covered by the Order, government-wide criteria,
and minimum due process procedures. Proposed OMB guidelines were issued in February, 1986; final guidelines are expected in early 1987.
• In February, 1986, pursuant to a Presidential memorandum, 17
agencies issued a single, "common" final regulation simplifying
uniform relocation assistance policies. The common rule recognizes State and local competence, deletes regulatory planning
requirements, and changes the reporting frequency, which had
been annual in most cases, to no more than every three years.
• A cash management seminar promoting the new cash management policies developed by a joint State and Federal task force
was held in 1986. Several States expressed interest in one of
the optional funding techniques. OMB and Treasury have prepared proposed amendments to the Intergovernmental Cooperation Act to permit full implementation.
OTHER SOURCES OF FEDERAL A I D INFORMATION

The grant-in-aid series in the budget provides a comprehensive
picture of Federal grants-in-aid, which are programs financed but
not directly administered by the Federal Government. The Census
series (published in Governmental Finances) and the national
income and product accounts (NIPA) series (published in Special
Analysis B and in the Survey of Current Business) are parts of a
broader statistical concept encompassing the entire economy, and
as a consequence grants-in-aid are defined somewhat differently
than in the budget. Both series omit the following items that the
budget includes:
—Federal aid to the Governments of Puerto Rico and U.S. territories;
—certain payments in-kind, primarily commodities purchased by
the Department of Agriculture and donated to the school lunch
and other nutrition programs; and

C-14

• THE BUDGET FOR FISCAL YEAR 1988

—payments to private, nonprofit entities (such as nonprofit hospitals) that operate under State auspices or within a State
plan.
One major group of payments excluded in the budget definition
of grants but included in the Census and NIPA series is payments
for research conducted by public universities. The budget series
excludes these payments because they are considered to be a purchase of services for the Federal Government rather than aid for
State or local programs. Because both Census and the NIPA series
focus on total cash payments to State and local governments, they
count these as grants. A major item included only in the Census
definition is unemployment compensation for Federal employees,
ex-servicemen, and temporary extended benefits. One major kind of
outlay included in the budget and Census definitions but excluded
from the NIPA series is grants to subsidize the operation of public
enterprises, mainly housing and transportation facilities. These are
counted as subsidies by the Federal Government in the NIPA
rather than as grants. Table H-10 shows these and other minor
differences among the three series, but the differences are largely
offsetting and the three series exhibit similar patterns.
Table H-10. THREE MEASURES OF FEDERAL GRANTS-IN-AID TO STATE AND LOCAL GOVERNMENTS,
1982-85
(In billions of dollars)
1982

Budget (Special Analysis H)
Less principal exclusions:
Agricultural commodities
Geographical exclusions
Plus payments for research
Federal unemployment benefits and related
All other (net)
Federal payments (Census)
Less:
Low-rent public housing
Federal unemployment benefits and related
All other (net)
Grants-in-aid (national income and product accounts)

1983

1984

1985

88.2

92.5

97.6

105.9

-1.1
-1.8
3.4
0.4
-3.1

-2.0
-2.5
4.2
0.2
-3.9

-1.8
-2.6
4.6
0.4
0.7

-2.5
-2.7
5.1
0.4
1.0

86.0

88.5

99.0

107.2

-4.8
-0.4
2.6

-5.5
-0.2
2.9

-5.6
-0.4
-2.3

-6.2
-0.4
-2.9

83.4

85.7

90.7

97.7

In addition to these data sources, information on the distribution
of Federal funds to State and local governments can be found in
several other documents.
—Budget Information for the States (BIS) provides estimates of
State funding allocations for the largest formula grant programs for the past, present and budget year. These programs
comprise approximately 80 percent of total Federal aid to State
and local governments. The document is prepared by the Office
of Management and Budget soon after the Budget is released.

SPECIAL ANALYSIS B

B-15

—Federal Expenditures by State is a report prepared by the
Bureau of the Census that shows Federal spending by State for
the most recently completed fiscal year. This document includes the outlay data on Federal grants to State and local
governments that previously appeared in the Department of
the Treasury publication, Federal Aid to States.
—The Consolidated Federal Funds Report (CFFR) is two annual
documents that show the distribution of Federal spending by
county areas and by local governmental jurisdictions. It is
released by the Bureau of the Census in the Spring.
—The Catalog of Federal Domestic Assistance is prepared by the
General Services Administration with data collected by the
Office of Management and Budget and is available from the
Government Printing Office. The basic edition of the Catalog is
usually published in June and an update is generally published
in December. It contains a detailed listing of grant-in-aid and
other assistance programs; discussions of eligibility criteria,
application procedures, and estimated obligations; and related
information. This is a primary reference source for communities wishing to apply for grants-in-aid.
—The Federal Register is published daily by the Government
Printing Office and has current information on agencies that
are accepting applications for specific programs. These notices
also provide information on eligibility criteria and application
procedures.
—The Federal Assistance Awards Data System (FAADS) provides
computerized information about current grant funding. Data
on all direct assistance awards are provided quarterly to the
States and to the Congress.
T H E STATE AND LOCAL GOVERNMENT SECTOR OF THE NATIONAL
INCOME AND PRODUCT A C C O U N T S 4

The national income and product accounts (NIPA) provide a
comprehensive statistical description of the U.S. economy that includes State and local government receipts and expenditures. These
data measure the relationship between the State and local governments as a sector of the economy and other sectors.
There are three major differences between NIPA data and a
government's own budgetary accounting for receipts and expenditures. First, financial transactions and the purchase and sale of
land and other existing assets are excluded from NIPA data but
are generally included in budgetary data. Second, a large number
of transactions in the NIPA accounts are recorded on an accrual
basis, while many governments show transactions on a cash basis.
4 Special Analysis B provides general information on the Federal sector of the national income and product
accounts.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Third, NIPA data aggregate total State and local transactions,
whereas many governments separate their general fund from special funds. As a result of these differences, NIPA totals are not the
same as an aggregate of these governments' financial budgets.
However, the NIPA data do provide timely estimates of total State
and local fiscal transactions not otherwise available and if used
with care can provide helpful financial indicators.
NIPA State and local sector.—The following chart shows State
and local operating account surpluses and deficits as a percent of
receipts, excluding the social insurance funds (primarily pensions).
The social insurance funds have been excluded because their surpluses are for future pension obligations and are not available for
carrying out the general responsibilities of these governments. It is
reasonable for the operating account to be in deficit because it
includes capital expenditures, often financed through borrowing.
The peaks and troughs in the operating account are largely the
result of:
—changes in economic activity, which affect primarily receipts;
—decisions regarding debt-financed capital spending; and
—changes in Federal aid.
The operating account was in deficit every year from 1955 to
1971. Unlike this earlier period, during the 1970's it was generally
in surplus. In part, this change reflected the growth of Federal
grants (rather than State and local borrowing) to finance new
infrastructure.
—The surpluses in the early 1970's were largely the result of the
initiation of general revenue sharing and strong economic
growth.
—The low point in 1975 was largely the result of the recession.
—The surpluses in the latter 1970's were largely the result of the
economic recovery, increases in anti-recession Federal grants,
reductions in debt-financed capital spending, and general restraints in government spending exemplified by the passage of
Proposition 13 in California in 1978.
The recession brought the account into deficit in 1980 and 1982,
albeit quite small ones relative to the 1955-71 period. As a result of
the recession, States and localities reduced expenditures, and increased taxes. These actions along with national economic growth
over the past four years have helped return the account to surplus
for 1983-1986.

SPECIAL A N A L Y S I S

B-15

State and Local Surpluses and Deficits (Operating Account)
as a Percent of Receipts
Percent

Percent

Note: Excludes Social Insurance Funds
DETAILED FEDERAL A I D

TABLES

The following two tables present detailed Federal aid data for
1986, 1987, and 1988. Table H - l l , "Federal Grants to State and
Local Governments—Budget Authority and Outlays," provides detailed budget authority and outlay data for grants-in-aid. Table H 12, "Credit Assistance to State and Local Governments," provides
information on direct and guaranteed loans to State and local
governments.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table H - l l . FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS—BUDGET AUTHORITY AND
OUTLAYS
(In millions of dollars)
BUDGET AUTHORITY
Function, agency and program

NATIONAL DEFENSE:
Department of Defense-Military:
National Guard centers construction
Other
Federal Emergency Management Agency:
Emergency management planning and
assistance
Total, national defense.
ENERGY:
Department of Energy:
Energy conservation
Department of Housing and Urban Development:
Assistance for solar and conservation
improvements
Tennessee Valley Authority:
Tennessee Valley Authority fund
Total, energy..
NATURAL RESOURCES AND ENVIRONMENT:
Department of Agriculture:
Watershed and flood prevention operations
Resource conservation and development.
State and private forestry
Forest research
Department of Commerce-.
Operations research and facilities
Department of the Interior:
Abandoned mine reclamation fund
Regulation and technology
Land acquisition
Urban park and recreation fund
Historic preservation fund
Resource management
Construction
Sport fish restoration
Miscellaneous permanent appropriations..
Environmental Protection Agency:
Sewage treatment system construction
grants
Abatement control, and compliance
Hazardous substance superfund
Leaking underground storage tank trust
Total, natural resources and environment
AGRICULTURE:
Department of Agriculture:
Food donations (Commodity Credit Corporation)
Temporary emergency food assistance
program
Extension Service
Cooperative State Research Service

1986
actual

1987
estimate

OUTLAYS

1988
estimate

1987
estimate

1986
actual

100

175

177

174

263

311

215

263

172

196

202

538

431

169
10
25

101
7
29
7

139

129

149
35
46

161
45

151
45

130
34
90
7
25

140
45
73
7

24
5

22
2

122
121

141
110

174
114

3
39
152

1
121
113

1,774
271
32

2,000
275

2,000
296
297

3,109
260
49

2,599
285
74

266

16
2,926

3,155

3,138

4,255

3,757

1,281

1,400

1,279

1,281

1,400

50
328
285

332
308

50
340

25
332
285

263
240

260

B-15

SPECIAL ANALYSIS B

Table H - l l . FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS—BUDGET AUTHORITY AND
OUTLAYS—Continued
(In millions of dollars)
BUDGET AUTHORITY
Function, agency and program

1986
actual

1987
estimate

OUTLAYS

1988
estimate

1987
estimate

1986
actual

Payments to States and possessions
(AMS)
Total, agriculture..

1,945

2,063

1,782

1,932

2,044

14,465
126
9
16
38
2,058
1,053
191

13,242
110
10

13,242
110
10
50

13,785
136
11
14
164
1,652
633
389

12,319
128
9
27
120
1,996
898
360

COMMERCE AND HOUSING CREDIT:
Department of Agriculture:
Miscellaneous expiring appropriations
Department of Commerce:
Enterprise development and opportunity..
Total, commerce and housing
credit
TRANSPORTATION:
Department of Transportation:
Federal-aid highways (trust fund)
Highway traffic safety grants
Highway-related safety grants
Motor carrier safety grants
Other highway programs
Formula mass transit grants
Discretionary grants - transit
Interstate transfer grants - transit
Research, training, and human resources
Washington metro
Miscellaneous expired accounts
Federal Railroad Administration
Grants-in-aid for airports
Boat safety
Research and special programs
Pipeline safety
Washington Metropolitan Area Transit Authority:
Interest payments
Total, transportation.
COMMUNITY AND REGIONAL DEVELOPMENT:
Funds Appropriated to the President:
Disaster relief
Department of Agriculture:
Rural water and waste disposal grantsRural community fire protection grantsRural development loan fund
Miscellaneous expiring appropriations
Department of Commerce:
Economic development assistance programs
Other programs
Department of the Interior:
Bureau of Indian Affairs..
Department of Housing and Urban Development:
Community development block grants
Urban development action grants
Rental housing development and rehabilitation
Other community development

6
217

973
48
4

80
2,000
1,002
200

1,374

201

130

10
1,017
45
4

84
533

1,017
30

853
23
4

7
196
450
45
889
39
4

19,273

18,046

16,019

18,366

17,544

297

102

106

288

266

109
3

30
1

178
3

167
1
14
1

191

253

201
3

2,990
316

2,625
20

2,510

3,326
461

3,292
428

144

142
13

322

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table H - l l . FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS—BUDGET AUTHORITY AND
OUTLAYS—Continued
(In millions of dollars)
BUDGET AUTHORITY
Function, agency and program

1987
estimate

actual

Federal Emergency Management Agency:
Emergency management planning and
assistance
National insurance development fund
Appalachian Regional Commission:
Appalachian regional development programs
Neighborhood Reinvestment Corporation:
Neighborhood Reinvestment CorporationTotal, community and regional
development
EDUCATION, TRAINING, EMPLOYMENT,
AND SOCIAL SERVICES:
Department of Commerce:
Public telecommunications facilities
Miscellaneous appropriations
Department of Defense-Civil:
Payment to the Henry M. Jackson
Foundation
Department of Health and Human Services, except Social Security:
Social services block grant
Community services
Interim assistance to States for immigration
Human development services
Family social services
Work incentives
Department of the Interior:
Operation of Indian programs
Department of Labor:
Training and employment services
Federal-State employment service
Community service employment for
older Americans
Department of Education:
Compensatory education for the disadvantaged
Impact aid
Special programs
Bilingual education
Immigrant education
Indian education
Education for the handicapped
Rehabilitation services and handicapped
research
Payments to institutions for the handicapped
Vocational and adult education
Student financial assistance1
Higher education
Higher education facilities loans and
insurance
Libraries
Community Services Administration:
Community services programs
Corporation for Public Broadcasting:
Public broadcasting fund

OUTLAYS
1986
actual

estimate

112
18
4,211

3,012

1987
estimate

154

135

2,735

4,861

4,881

10
2,671
350

2,661
368

682

1,831
794
227

1,912
908
110

2,680
928

2,634
840

3,693
843

3,019
957

2,885
915

3,525
676

3,938
699
809
104

4,144
548
722
104

1,205

60
1,302

60
1,352

3,392
678
575
52
46
59
1,596

3,097
760
615
112
21
48
1,239

3,946
576
820
102
7
60
1,165

1,191

1,234

1,278

1,198

1,264

1,265

5
898
73
10

6
546

128

3
1,008
82

10
1,035
60
9

6
516
2
8

115

186

2,584
352

2,700

1,827
746
203

1,981
978
103

626

98
29

368

2,700
310
928
2,210

6
98
- 2

160

200

258

160

-2

-1

200

170

B-15

SPECIAL ANALYSIS B

Table H - l l . FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS—BUDGET AUTHORITY AND
OUTLAYS—Continued
(In millions of dollars)
OUTLAYS

BUDGET AUTHORITY
Function, agency and program

1986
actual

1987
estimate

1988
estimate

1986
actual

1987

20,101

18,953

18,573

24,995

26,700

1,078
164

1,079
175

National Endowment for the Arts:
National Endowment for the Arts..
Institute of Museum Services:
Institute of Museum Services
Total, education, training, employment, and social services
HEALTH:
Department of Agriculture:
Food Safety and Inspection Service
Department of Health and Human Services, except Social Security:
Medicaid 1
Public health service management
Health resources and services1
Disease control, research and training
Alcohol, drug abuse, and mental
health 1
Department of Labor:
Occupational Safety and Health Administration
Mine Safety and Health Administration...
Total, health
INCOME SECURITY:
Department of Agriculture:
Child nutrition programs (incl. Sect.
32) i...
Food stamp program administration1
Nutrition assistance for Puerto Rico 1 ....
Women, infants, and children programs 1
Commodity supplemental food program 1
Special milk program 1
Cash and commodities for selected
groups 1
Rural housing preservation grants 1
Rural housing for domestic farm labor 1
Mutual and self-help housing 1
Department of Health and Human Services, except Social Security-.
Family support payments to States
(AFDC and CSE) 1
Program administration
Payments to States from receipts for
child support
Low income home energy assistance1...
Refugee and entrant assistance1
Department of Labor:
Unemployment trust fund - administration
Department of Housing and Urban Development:
Subsidized housing program 1
Shelter programs1
Payments for operation of low income
housing 1

18,139

18,753

24,644

26,640

1,045
177

1,068
214

26,864
155
930
216

490

697

522

494

640

26,449

28,719

28,753

26,823

28,693

4,083
947
820

4,375
1,056
853

3,850
1,090
825

4,014
968
824

4,322
1,128
849

1,578

1,661

1,685

1,577

1,700

37
11

36
15

42
19

194
19
10

194
5

193

183

211
20
10

9,899
15

10,414
18

9,776
3

9,877

10,606

2,008
391

1,822
328

1,237
245

2,046
422

1,838
366

1,598

1,599

1,700

1,570

1,599

3,693

3,969
15

3,920
5

5,221

4,925

1,159

1,435

1,377

1,181

1,344

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table H - l l . FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS—BUDGET AUTHORITY AND
OUTLAYS—Continued
(In millions of dollars)
BUDGET AUTHORITY
Function, agency and program

Low-rent public housing (forgiven
loans)
Congregate services program 1
Federal Emergency Management Agency:
Emergency food and shelter 1
Total, income security.

1987
estimate

1986
actual

estimate

1987
estimate

actual

1,552

1,012
4

29,709

27,573

29,070

110

121

895
3

1,829
3

70
27,437

OUTLAYS

VETERANS BENEFITS AND SERVICES:
Veterans Administration:
Medical care 1
Grants for constructing State care facilities 1
Other veterans
Total, veterans benefits and services
ADMINISTRATION OF JUSTICE:
Department of Justice:
Justice assistance
Crime victims fund
National Institute of Corrections
Revolving fund
Department of the Treasury:
Payments to the Government of Puerto
Rico
Department of Housing and Urban Development:
Fair housing assistance
Equal Employment Opportunity Commission:
Equal Employment Opportunity Commission
Other Temporary Commissions:
State Justice Institute: salaries and expenses
Total, administration of justice..

125
59
6

358
63
3

215

464

133

151

140

171

685

274

399

100

105

100

423

435

391

423

83
11

76
13
65

50
13
70

19
12
78

GENERAL GOVERNMENT:
Department of the Interior:
Administration of territories
Trust Territory of the Pacific Islands...
Total, general government.
GENERAL PURPOSE FISCAL ASSISTANCE:
Department of Agriculture:
Forest Service permanent appropriations.
Department of Defense-Civil:
Corps of Engineers permanent appropriations
Department of the Interior:
Payments in lieu of taxes
Payments to States - mineral leasing
receipts
Bureau of Land Management permanent
appropriations
National wildlife refuge fund
Payments to the U.S. territories

30,986

SPECIAL ANALYSIS B

B-15

Table H - l l . FEDERAL GRANTS TO STATE AND LOCAL GOVERNMENTS—BUDGET AUTHORITY AND
OUTLAYS—Continued
(In millions of dollars)
BUDGET AUTHORITY
Function, agency and program

Department of the Treasury:
General revenue sharing
Internal revenue collections for Puerto
Rico
Miscellaneous permanent appropriationsDepartment of Energy:
Payments to States under the Federal
Power Act
District of Columbia:
Federal payment to the District of Columbia
Total, general purpose fiscal assistance
Total, grants-in-aid

1986
actual

1987
estimate

OUTLAYS

1988
estimate

4,185

1987
estimate

1988
estimate

5,114

205
97

205
108

205
111

205
100

205
108

205
111

530

580

527

530

580

527

6,403

1,869

1,505

6,988

2,231

1,504

107,676

106,231

102,118

112,357

109,879

106,278

*$500 thousand or less.
1 Programs included in the 'grants for payments to individuals' category shown in Table H-8.

1986
actual

C-14

• THE BUDGET FOR FISCAL YEAR 1988
Table H-12. CREDIT ASSISTANCE TO STATE AND LOCAL GOVERNMENTS

(In millions of dollars)
1986
actual

Function, agency and program

1987
estimate

Direct Loans
Energy, natural resources and environment:
Department of the Interior:
Bureau of Reclamation loan program

Loan disbursements..

Met loans

47
38

507

Outstandings
Drought emergency loan fund

Loan disbursements..

-1

Net loans

Outstandings
Environmental Protection Agency:
Construction grants

Abatement, control, and compliance

Loan disbursements..

Net loans

-11

Outstandings

Loan disbursements..

22
22

Net loans

Outstandings
Total, energy, natural resources and enviLoan disbursements..
ronment

Net loans

Outstandings

48
72

532

596

Commerce and housing credit:
Department of Agriculture:
Rural housing insurance fund..

Loan disbursements..

Net loans

Outstandings

Transportation:
Department of Transportation:
Federal-aid highways (trust fund).

Loan disbursements..

Net loans

Total, transportation

48
131

Loan disbursements..

48•

207

208

Net loans

Loan disbursements..

Net loans

Loan disbursements..

Net loans

Outstandings

Department of Interior:
BIA revolving fund for loans.,

396

Loan disbursements..
Outstandings

Outstandings
Department of Commerce:
Coastal energy impact fund..

381

Outstandings
Community and regional development:
Department of Agriculture:
Rural development insurance fund..

25
15

Outstandings
Right-of-way revolving fund.

25
13

Loan disbursements..

Net loans

453

249

7,957

383

-1,659
6,298

100

SPECIAL ANALYSIS

B-15

Table H-12. CREDIT ASSISTANCE TO STATE AND LOCAL GOVERNMENTS '—Continued
(In millions of dollars)
1986
actual

Function, agency and program

Outstandings
Department of Housing and Urban Development:
Loan disbursements
Community development

Net loans

Outstandings
FHA revolving fund (liquidating programs)

Net loans
Outstandings

Urban renewal programs

Net bans

Outstandings
Higher education facilities loan and insurance
fund
Net loans
Outstandings
Loan disbursements

Net loans

Outstandings
Total education, training, employment, and
social services
Loan disbursements

Net loans

Outstandings

Net loans
Outstandings

300

61
66

-8

292

-38

-26
359
*

Education, training, employment, and social services:
Department of Education:
College housing loans
Loan disbursements

Grand total, direct loans

Outstandings

General purpose fiscal assistance:
Other independent agencies:
Loans to the District of Columbia

Outstandings

Net loans

Health:
Department of Health and Human Services:
Medical facilities guarantee and loan fund

Net loans

Total, community and regional development... Loan disbursements

Student loans and other

1987
estimate

322

554

470

8,766

7,074

-323

717

395

-6

109

104

169
23

-22

-16

153
37

-344

995

651

-1

Net loans

-564

Outstandings

1,008

715

723

668

11,905

9,653

New loans

Net loans
Outstandings

61
29

-51

241

-218
104

-1

239 -1,693

-23

1988
estimate

-293

—271 -2,251

400

-4,153

2,921

-293

102

-51
52

-75
78
20

-420

232

-1
13

-30
685
515

-4,571

4,724

C-14

• THE BUDGET FOR FISCAL YEAR 1988
Table H-12. CREDIT ASSISTANCE TO STATE AND LOCAL GOVERNMENTS '—Continued
(In millions of dollars)
1987
estimate

1986
actual

Function, agency and program

Guaranteed Loans
Community and regional development:
Department of Agriculture:
Rural development insurance fund

Net loans
Outstandings..

Department of Housing and Urban Development:
Revolving fund (liquidating programs)

-14
393

New guaranteed loans..

Net loans

Outstandings

-14

Urban renewal programs
Community development

Outstandings
New guaranteed loans..

147

Net loans

147

Outstanding
Department of Interior:
Indian loans

New guaranteed loans..

Net loans

Outstanding
Total, community and regional development.

New guaranteed loans..

Net loans

Outstandings
Income security:
Department of Housing and Urban Development:
Low-rent public housing
Net loans
Outstandings..
Grand total, guaranteed loans..

-10
383

New guaranteed loans..

46
292
50

30
26
117
191

151

498

650

-275

-312

8,612

8,300

191
-161
8,950

Net loans

-244

Outstandings

9,110

* $500 thousand or less.
1 Only direct loans are included in budget outlays. New direct loan disbursements less loan repayments, sales, etc., are net loans, which are
counted in the budget as outlays. Guaranteed loans are non-Federal loans guaranteed by the Federal Government. For a discussion of credit in the
budget, see Special Analysis, F, "Federal Credit Programs"

SPECIAL ANALYSIS I
CIVILIAN EMPLOYMENT IN THE EXECUTIVE BRANCH
The Administration reduced nondefense employment by nearly
91,000 from 1981 to 1986. The Administration is committed to
continuing to restrain the size of the Federal workforce to the
minimum necessary to carry out essential functions efficiently.
This analysis discusses the mechanisms used to control civilian
employment in the Executive Branch and the resulting employment ceilings. It also deals with personnel compensation and benefits and compares the Federal workforce with other government
employment, as well as with overall civilian employment in the
United States.
FULL-TIME EQUIVALENT OF TOTAL FEDERAL CIVILIAN

EMPLOYMENT

IN THE EXECUTIVE B R A N C H

Total employment of civilian agencies in the executive branch is
controlled on a full-time equivalent (FTE), or workyear, basis.
Postal Service employment by law is not subject to Presidential
control, and section 904 of the 1982 Defense Authorization Act
(Public Law 97-986) exempts the Department of Defense from fulltime equivalent employment controls.
Table I - l is a tabulation of full-time equivalent employment
estimates for the major departments and agencies of the executive
branch. Generally, the estimates for 1987, 1988, and 1989 constitute
upper limits on agency FTE employment.
The 1987 through 1989 totals for "Civilian Agency Employment"
contain adjustments to reflect the fact that actual nondefense employment tends to fall short of assigned employment ceilings. The
average shortfall for the period 1982-1986 is about two percent,
with a range of 3.38 to 1.16 percent. For 1987, a shortfall of 2
percent is projected; this decreases to 1.75 percent in 1988 and to
1.50 percent in 1989.
SIGNIFICANT CHANGES IN FULL-TIME EQUIVALENT

EMPLOYMENT

Nondefense employment is expected to increase by about 8,100
from 1987 to 1988 and to then decrease by about 2,800 from 1988 to
1989.
Many agencies show decreases, in Table I-l, from the 1987 estimates to the corresponding estimates for 1988:

I-l

C-14

• THE BUDGET FOR FISCAL YEAR 1988
Table 1-1. FULL-TIME EQUIVALENT OF FEDERAL CIVILIAN EMPLOYMENT

Fiscal year
1986
actual2

1987
estimate

estimate

102,997
32,321
28,511
4,526
16,193
128,105
11,720
70,657
63,307
17,931
25,261
60,375
130,845
12,931
21,660
220,642

106,393
33,849
28,348
4,500
16,100
124,745
12,535
71,350
69,463
18,339
26,147
60,480
136,807
14,165
21,800
221,227

99,085
41,049
28,347
4,500
15,950
119,099
12,438
70,400
76,920
18,060
26,658
59,868
146,188
14,323
22,425
216,709

98,894
43,577
28,347
4,500
15,850
114,208
11,428
70,400
77,782
17,997
26,803
57,404
148,574
14,263
22,425
215,218

4,675
22,745
3,445
5,306
8,336
4,054
27,613
8,981
39,652

4,825
22,281
3,369
5,419
8,550
4,115
29,500
9,120
43,529
-21,939

4,825
21,677
3,250
5,195
8,665
4,227
29,500
9,020
44,049
-19,292

4,825
20,877
3,180
5,005
8,665
4,050
29,500
9,020
43,981
-16,452

Civilian agency employmentDefense—military functions3

1,072,789
1,041,352

1,075,017
1,039,000

1,083,135 1,080,321
1,037,000 1,036,000

Subtotal
Postal Service Employment4

2,114,141 2,114,017 2,120,135 2,116,321
794,000
824,000
739,574
764,590

Agriculture
Commerce
Defense—civil functions
Education
Energy
Health and Human Services
Housing and Urban Development.
Interior
Justice
Labor
State
Transportation
Treasury
Environmental Protection Agency
National Aeronautics and Space Administration..
Veterans Administration
Other:
Agency for International Development
General Services Administration
Nuclear Regulatory Commission
Office of Personnel Management
Panama Canal Commission
Small Business Administration
Tennessee Valley Authority
United States Information Agency
Miscellaneous
Estimated nondefense lapse

Total, Executive Branch

2,853,715

2,878,607

2,914,135 2,940,321

Excludes developmental positions under the Worker-Trainee Opportunity Program (WTOP) as well as certain statutory exemptions.
2 Data are estimated for portions of Defense—civil functions as well as for the Federal Reserve System, Board of Governors and the
International Trade Commission.
3 Section 904 of the 1982 Defense Authorization Act (Public Law 97-86) exempts the Department of Defense from full-time equivalent
employment controls. Data shown are estimated.
4 Includes the Postal Rate Commission.
1

• Department of Agriculture (—7,308). The decrease is due to
significant funding reductions in several major areas. The
1988 Budget proposes to privatize programs now operated by
the Federal Crop Insurance Corporation. The Farmers Home
Administration will shift most of its lending from direct to
privately originated guaranteed loans. With private banks
originating and servicing the loans, Federal employment will
be reduced. Similarly, the Federal role in conservation and
extension activities would be reduced and staffing levels adjusted. The Forest Service is also slated for reductions, consistent with implementation of management efficiencies.

SPECIAL ANALYSIS B

B-15

• Department of Health and Human Services (—5,646). Most of
this reduction results from increased productivity in the
Social Security Administration, which is continuing an ongoing investment of nearly $ 1 billion in its automated systems.
Another major reduction results from the transfer of Saint
Elizabeth's Hospital to the District of Columbia, beginning in
fiscal year 1988. The Hospital's staff of more than 1,000 will
no longer be Federal employees. Modest reductions also result
from phasing down staff connected with the Health Professions program and other efficiencies, e.g., the consolidation of
six separate program staffs into the Family Support Administration.
• Veterans Administration (—4,518). This reduction reflects anticipated productivity increases in all areas, together with
savings in medical care staffing that result largely from the
expectation that fewer non-service disabled veterans with
higher incomes will be served. Staffing for the care of all
service-disabled and low and moderate income non-service disabled veterans who are expected to apply will continue to be
provided. These decreases are partially offset by increases for
additional medical staff to be used for modernized medical
facilities.
• Department of the Interior (—950). This net decrease is due to
reductions in the Bureau of Reclamation planning program,
productivity improvements, and program reductions distributed across the entire Department.
• Department of Transportation (—612). This reduction is due
to program and activity terminations, most predominantly
the transfer of Washington National and Dulles airports' control to the control of a regional authority, and to general
efficiency gains throughout the Department. The decrease is
offset in part by staffing increases for air traffic controllers,
aviation security personnel, and Coast Guard support personnel and a staffing increase related to the Department's assumption of certain Interstate Commerce Commission activities once the ICC is phased out.
• General Services Administration (—604). GSA's reduction is
due primarily to planned improvements in the agency's organization and also to contracting out under the guidelines of
OMB Circular No. A-76.
• Department of Labor (—279). This decrease reflects increased
productivity together with reductions in overhead and support
staff.
• Office of Personnel Management (—224). OPM's decrease in
FTE's results primarily from scheduled OMB Circular No. A 76 and productivity savings.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

• Department of Energy (—150). Employment will continue to
decline due to implementation of management improvements
and reductions in regulatory activities and in short-term research and development activities. This decline is consistent
with the administration's policy of primary reliance on the
market place to achieve energy goals.
• Nuclear Regulatory Commission (—119). This reduction is due
to reorganization of the regulatory and inspection functions
and consolidation of the headquarters staff into one building.
• United States Information Agency (—100). This decrease results from increased automation and productivity improvements and from other reductions.
Some agencies show increases:
• Department of the Treasury (9,381). Treasury's FTE increase
is attributable primarily to staffing increases within the Internal Revenue Service. In particular:
—nearly 8,000 positions to improve tax law enforcement
and increase tax revenues collected;
—about 1,100 positions for automated data processing, some
of which will have direct effects on increased revenues;
and
—approximately 1,000 additional staff to implement the
Tax Reform Act of 1986.
Within the IRS and other Treasury bureaus, productivity increases and other reductions result in a net Treasury increase
of 9,381.
• Department of Justice (7,457). This increase reflects implementation of immigration reform legislation, the expansion of
the U.S. trustees program nationwide, the opening of new
Federal prisons, and increases in high priority programs in
the Federal Bureau of Investigation and the legal divisions.
• Department of Commerce (7,200). This increase is attributable
primarily to the mandated quinquennial censuses of agriculture and economics in 1988, as well as the buildup required
for testing and other preparation for the 1990 decennial
census of population and housing in the United States and
territories.
• National Aeronautics and Space Administration (625). This
increase augments NASA's management oversight capability
to meet the challenges faced in restoring the Space Shuttle to
safe routine flight and to conduct effectively the Space Station program. Additional staffing is also provided for the
safety, reliability and quality assurance program, and for internal auditing.
• Department of State (511). This increase is primarily for continuation of the multiyear program to improve the security of

SPECIAL ANALYSIS B

B-15

United States employees and facilities at diplomatic missions
overseas.
• Environmental Protection Agency. (158) These increases are
primarily to implement the Superfund Amendments and Reauthorization Act of 1986. They will accompany increased
activities in site cleanup and will strengthen the Superfund
enforcement process.
• Panama Canal Commission (115). An increase is required to
meet the higher workload associated with the higher traffic
projected to transit the Canal in 1988.
• Small Business Administration (112). This increase reflects
the transfer of 142 FTE's from the Department of Commerce
to the Small Business Administration for minority business
development activities formerly conducted by the Minority
Business Development Agency, less FTE reductions expected
to be achieved through contracting out activities currently
conducted by Federal employees.
END-OF-YEAR EMPLOYMENT LEVELS

Between January 1981, when this administration took office, and
September 30, 1986, nondefense total employment fell from
1,232,181 to 1,122,302; a decrease of 109,879 employees. Total Federal civilian employment in the executive branch was 2,150,155 at
the end of 1986, excluding Postal Service and special category
employees.
Table 1-2 shows Government-wide Federal civilian employment
as of the end of fiscal years 1984, 1985, and 1986. Postal Service
employment (including the Postal Rate Commission) is also shown,
together with data for the legislative and judicial branches and for
active duty military personnel.
Full-time permanent employment accounted for nearly 88 percent of executive branch employment (excluding the Postal Service)
at the end of fiscal year 1986. The remainder is made up of parttime employees, intermittent employees (those employed on an
irregular basis) and full-time temporary employees (generally, in
positions occupied for less than one year).

C-14

• THE BUDGET FOR FISCAL YEAR 1988
Table 1-2. TOTAL FEDERAL EMPLOYMENT END-OF-YEAR
Description

Actual, as of September 30
1984

1985

1986

1,881,590
265,085
(1,004,529)
(1,142,146)

1,898,980
286,933
(1,043,240)
(1,142,673)

1,885,139
265,016
(1,027,853)
(1,122,302)

2,146,675

2,185,913

2,150,155

560,952
121,764

587,132
162,952

607,725
183,294

682,716

750,084

791,019

24,522

27,546

25,558

2,853,913

2,963,543

2,966,732

2,138,157
39,560

2,151,032
38,487

2,169,112
37,284

Subtotal, military personnel

2,177,717

2,189,519

2,206,396

Total, executive branch employment

5,031,630

5,153,062

5,173,128

32,097
23,982

32,644
24,345

33,115
22,341

56,079

56,989

55,456

5,087,709

5,210,051

5,228,584

Civilian employment in the executive branch:
Full-time permanent
Other than full-time permanent

DOD—Military functions (total employment)
Non-DOD (total employment)
Subtotal

Postal Service:
Full-time permanent
Other than full-time permanent
Subtotal
Special categories1
Subtotal, executive branch civilian employment
duty: 2

Military personnel on active
Department of Defense
Department of Transportation (Coast Guard)

personnel:3

Legislative and judicial
Full-time permanent
Other than full-time permanent

Subtotal, legislative and judicial branches
Grand total

Developmental positions under the Worker-Trainee Opportunity Program; disadvantaged summer and part-time workers under such Office of
Personnel Management programs as Summer Aids, stay in school, and junior fellowship; and certain statutory exemptions.
2 Excludes reserve components.
3 Excludes members and officers of Congress.
1

PERSONNEL COMPENSATION AND BENEFITS

Direct compensation of the current Federal work force includes
base pay, merit pay, cash incentive and performance awards, meritorious and distinguished executive awards, premium pay for overtime, Sunday and holiday pay, differentials for night work and
overseas duty, and flight and other hazardous duty pay. In addition, it includes uniform allowances (when paid in cash), cost-ofliving and overseas quarters allowances.
In the case of military personnel, compensation includes basic
pay, special and incentive pay (including enlistment and reenlistment bonuses), and allowances for clothing, housing, and subsistence.
Related compensation in the form of personnel benefits for current personnel consists primarily of the Government's share (as
employer) of health insurance, life insurance, old-age survivors'
disability and health insurance, and payments to the Department

B-15

SPECIAL ANALYSIS B

of Defense's DOD Military Retirement Fund and the Civil Service
Retirement and Disability Fund to finance future retirement benefits.
Table 1-3. COMPENSATION AND BENEFITS FOR CURRENT PERSONNEL
(In millions of dollars)
Description

Civilian personnel costs:
Executive branch:
Direct compensation
Personnel benefits 1

DOD—Military functions, civilian personnel:
Direct compensation
Personnel benefits
Subtotal

Postal Service:
Direct compensation
Personnel benefits
Subtotal
Legislative and judiciary: 2
Direct compensation
Personnel benefits
Subtotal
Allowance for civilian pay
Total, civilian personnel costs

1986 actual

1987 est.

58,475
12,894

60,299
14,132

61,085
16,709

(26,741)
(3,340)

(27,099)
(3,777)

(27,655)
(4,903)

71,369

74,431

77,794

20,901
3,805

22,161
4,423

23,504
6,496

24,706

26,584

30,000

1,132
139

1,232
175

1,320
245

1,271

1,407

1,565

97,346

102,422

1,160
110,519

46,016
22,642

48,067
23,098

49,342
23,871

68,658

71,165

73,213

raise 3

Military personnel costs: 4
Direct compensation
Personnel benefits
Subtotal

1988 est.

Allowance for military pay raise 5

2,056

Total, military personnel costs

68,658

71,165

75,269

Grand total, personnel costs 3

166,004

173,587

185,788

23,729
17,946

24,756
18,358

24,634
19,316

41,676

43,114

43,951

ADDENDUM
Retired pay for former personnel:
Civilian personnel
Military personnel
Total

In addition to the employing agency's contributions to the costs of life and health insurance, retirement, and Medicare Hospital Insurance, this
amount includes transfers from general revenues to amortize the effects of general pay increases on Federal retirement systems, for employees in
the legislative and judicial branches as well as employees (nonPostal) in the executive branch. The transfers amounted to $4,407 million in 1986
and are estimated to be $4,556 million in 1987 and $4,720 million in 1988.
2 Excludes members and officers of Congress.
3 Assumes a 2 percent pay raise, effective January 1988.
4 Excludes reserve components.
6 Comprised of allowances for a 4 percent pay increase effective January, 1988 for military personnel as follows: for the Department of
Defense, $2,008 million; for the Coast Guard, $48 million.
1

The 1988 Budget includes proposals that are designed individually and as a whole to gain control over the Government's expenditures as an employer. For 1988, the Administration will propose:

C-14

• THE BUDGET FOR FISCAL YEAR 1988

• reform of the Civil Service Retirement System to bring costs
more into line with those of the recently enacted Federal
Employees Retirement System (FERS);
• changing the formula used to determine the Government's
contribution to enrollees' health premiums to a program-wide
weighted average that reflects the premiums of all plans and
enrollee distribution among the plans; and
• elimination of the current system of virtually automatic
within-grade pay increases based primarily on longevity. This
reform would substitute a new system that will permit managers to make meaningful pay distinctions based on performance, either through one-time pay increases or permanent
salary raises.
Additional details on these proposals can be found under the
income security, health, and allowances functions in Part 5 of the
Budget of the United States Government, 1988—Supplement
The budget assumes a 4 percent military pay increase and a 2
percent increase in pay for Federal white- and blue-collar workers
in January 1988. The final decision on the pay adjustment for
white-collar workers will be made in late summer, as the law
provides, after Presidential review of the recommendations of the
President's Pay Agent, the Federal Employees Pay Council, and
the Advisory Committee on Federal Pay, and after a review of
prevailing economic conditions.
As required by law, the Commission on Executive, Legislative,
and Judicial Salaries has submitted recommendations to the President on salaries for senators, representatives, Federal judges, cabinet officers and other agency heads, and certain other officials in
the executive, legislative and judicial branches. The statute requires the President to set forth, in the budget next submitted by
him after receipt of the report of the Commission, his recommendations for adjustment of these salaries. The President has included
his recommendations as a part of his January 5, 1987 budget
transmittal.
As indicated in table 1-3, obligations for executive branch civilian personnel compensation and benefits in 1988 are projected to
reach nearly $77.8 billion, excluding the Postal Service.
GOVERNMENT EMPLOYMENT AND LABOR FORCE COMPARISONS

As shown on the following chart, Government employment—
Federal, State, and local—comprised about 15.5 percent of the total
employed civilian labor force in 1986.
Within this segment, Federal civilian employment in the executive branch accounts for 2.69 percent of the total employed civilian
labor force in 1986, down from a high of 3.82 percent in 1968.

SPECIAL ANALYSIS B

B-15

The portion of the total employed civilian labor force attributable to State and local government has grown from 11.2 percent in
1966 to 12.8 percent in 1986.

Government Civilian Employment
as a Percent of Total Civilian Employment
Percent

Percent

Fiscal Years
•Executive Branch
G O V E R N M E N T E M P L O Y M E N T A N D POPULATION

COMPARISONS

As illustrated in the following chart and in table 1-4, the Federal
share of total government employment has declined significantly
over the last three decades, from 31.9 percent in 1956 to 17.3
percent in 1986. Employment for all government had been rising
steadily due to increases in State and local government. In 1981 it
began to decline but in 1983 this trend reversed and State and local
government is again increasing.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

The ratio of Federal civilian employment to the total U.S. population was 12.3 per thousand in 1986. As is evident in table 1-4, the
main reason for the decrease in this ratio from 1985 is a large
increase in the total U.S. population relative to a small increase in
executive branch employment. The latter is due to a large increase
in the Postal Service, offset in part by decreases elsewhere in the
executive branch (see table 1-2).

SPECIAL ANALYSIS

B-15

Table 1-4. GOVERNMENT EMPLOYMENT AND POPULATION, 1956-86
Government employment
Fiscal year

1956
1957
1958
1959
1960 2
1961 2
1962
1963 3
1964 3
1965
1966
1967
1968
1969 4
1970 2
1971 2
1972
1973
1974
1975
1976
1977 5
1978
1979
1980 2
1981 2
1982
1983
1984
1985
1986

Federal
executive
branch1
(thousands)

2,372
2,391
2,355
2,355
2,371
2,407
2,485
2,490
2,469
2,496
2,664
2,877
2,951
2,980
2,944
2,883
2,823
2,775
2,847
2,848
2,832
2,789
2,820
2,823
2,821
2,806
2,768
2,819
2,854
2,964
2,967

Population

State and
local
governments
(thousands)

All
governmental
units
(thousands)

Federal as
percent of all
governmental
units

5,064
5,380
5,630
5,806
6,073
6,295
6,533
6,834
7,236
7,683
8,259
8,730
9,141
9,496
9,869
10,372
10,896
11,286
11,713
12,114
12,282
12,704
13,050
13,359
13,542
13,274
13,207
13,453
13,504
13,865
14,155

7,436
7,771
7,985
8,161
8,444
8,702
9,018
9,324
9,705
10,179
10,923
11,607
12,092
12,476
12,813
13,255
13,719
14,061
14,560
14,962
15,114
15,493
15,870
16,182
16,363
16,080
15,975
16,272
16,358
16,829
17,122

31.9
30.8
29.5
28.8
28.1
27.7
27.6
26.7
25.4
24.5
24.4
24.8
24.4
23.9
23.0
21.8
20.6
19.7
19.6
19.0
18.7
18.0
17.8
17.4
17.2
17.5
17.3
17.3
17.4
17.6
17.3

Total United
States
(thousands)

6
6
6
6
6
6
6

168,903
171,984
174,882
177,830
180,671
183,691
186,538
189,242
191,889
194,303
196,560
198,712
200,706
202,677
205,052
207,661
209,896
211,909
213,854
215,973
218,035
220,904
223,278
225,779
228,468
230,848
233,184
235,439
237,669
239,929
242,115

Federal
employment
per 1,000
population

14.0
13.9
13.5
13.2
13.1
13.1
13.3
13.2
12.9
12.8
13.6
14.5
14.7
14.7
14.4
13.9
13.4
13.1
13.3
13.2
13.0
12.6
12.6
12.5
12.3
12.2
11.9
12.0
12.0
12.4
12.3

1 Covers total end-of-year civilian employment of full-time permanent, temporary, part-time, and intermittent employees in the executive branch,
including the Postal Service, and, beginning in 1970, includes various disadvantaged youth and worker-trainee programs.
2 Includes temporary employees for the decennial census.
3 Excludes 7,411 project employees in 1963 and 406 project employees in 1964 for the public works acceleration program.
4 On Jan. 1, 1969, 42,000 civilian technicians of the Army and Air Force National Guard converted by law from State to Federal employment
status. They are included in the Federal employment figures in this table starting with 1969.
5 Data for 1956 through 1976 are as of June 30; for 1977 through 1986, as of Sept. 30.
6 U.S. population data for 1980-1986 are the latest available from the Census Bureau.

SPECIAL ANALYSIS I
RESEARCH AND DEVELOPMENT
This analysis covers the funding of research and development
across all agencies with R&D programs of $10 million or more. It
consists of two sections. The first highlights the R&D policies and
trends in the 1988 budget. The second describes in more detail the
R&D programs of 12 agencies whose R&D obligations individually
exceed $150 million. These agencies fund over 99 percent of total
Federal R&D.
P A R T I. HIGHLIGHTS

In 1988, total Federal obligations for research and development,
including R&D facilities, are estimated at $66.7 billion, an increase
of over $7 billion or .12 percent above the 1987 estimated level of
$59.5 billion as shown in table J-1. Support for the conduct of basic
research, included within this total, is estimated to increase by
about 4 percent, from $8.8 billion in 1987 to $9.1 billion in 1988.
The Federal Government supports research and development:
• to meet the direct needs of the Federal Government where
the supporting agencies are also the principal users of the
results of the R&D. Examples include R&D for national security and research to support regulatory activities; and
• to assist in meeting broad national needs, particularly where
the private sector lacks sufficient incentives for adequate investment to assure long-term economic growth and continued
improvement in the quality of life for all citizens. Examples of
such R&D include Federal investments in basic research
across all fields of science and engineering, and agricultural
and health-related R&D.
The ability of the Nation to meet global competition, to provide
for the national security, and to improve the quality of life for all
citizens depends in part on national investments in science and
technology. For 1988, the budget provides increased support for
R&D to meet key national needs. The budget also provides increased support for basic research, particularly at universities, to
help generate the new knowledge necessary for continued technological innovation and to help assure the future availability of
high-quality scientists and engineers. Interdisciplinary basic research will receive special emphasis, since research at the junction
of disciplines can lead to the creation of important new fields of

J-l

C-14

• THE BUDGET FOR FISCAL YEAR 1988

science. The Federal government will also increase efforts to help
encourage the transfer to the private sector of technology and new
knowledge created in Federal laboratories.
Even in a constrained fiscal climate, the 1988 budget reflects a
continued high priority for R&D that is appropriate for Federal
support. It provides significant increases for:
• the R&D programs of the Department of Defense;
• the R&D programs of the National Aeronautics and Space
Administration; and
• selected basic research activities across the government, particularly basic research support by the National Science
Foundation and the Department of Energy.
At the same time, the 1988 budget continues to propose reductions in programs that are not an appropriate Federal responsibility and which should be left to the states or the private sector for
needed investments. These include large reductions across the
energy technology programs of the Department of Energy, as well
as elimination of selected programs of the Department of Commerce (e.g., the Sea Grant program), and certain research activities
of the Department of Interior (e.g., the Mineral Institutes program).
Table J - l . TOTAL FEDERAL FUNDING FOR CONDUCT OF R&D AND RELATED FACILITIES
(In billions of dollars)
Outlays

Obligations
1986 actual

1987 estimate

1988 estimate

1986 actual

1987 estimate

1988 estimate

Conduct of R&D
R&D facilities

52.6
1.6

57.6
1.9

64.8
2.0

51.6
1.6

54.6
1.8

59.1
1.9

Total

54.2

59.5

66.7

53.1

56.3

61.0

CONDUCT OF RESEARCH AND DEVELOPMENT

The budget for 1988 includes nearly $65 billion in obligations for
the conduct of R&D, an increase of $7 billion or 12 percent over
1987. Highlights of the proposed programs of the seven major R&D
agencies, which account for 97 percent of the obligations for the
conduct of R&D by the Federal Government, are presented below.
• Department of Defense (DOD).—Obligations for the conduct
of R&D by DOD are estimated at $44.1 billion for 1988, an
increase of $6.5 billion or about 17 percent above 1987. The
increased funds proposed for R&D allow growth for several
important programs, including the Strategic Defense Initiative, the Advanced Tactical Fighter and the Small Intercontinental Ballistic Missile. There is also an increase for the joint

SPECIAL ANALYSIS B

B-15

NASA-DOD program to explore technologies for a future
transatmospheric vehicle (National Aerospace Plane).
• Department of Energy (DOE).—Obligations for the conduct of
R&D by the Department of Energy are estimated to be $5.0
billion, an increase of $215 million over 1987. Increases are
proposed to strengthen the Nuclear Weapons R&D program,
to enhance support for long-term energy research, and to
maintain a strong national basic research effort in High
Energy and Nuclear Physics. Support for the energy technology programs will remain at nearly the same levels as in 1987.
Obligations for Energy Programs will increase by $14 million
over 1987 to $1,862 million in 1988. Funding for the National
Defense Program will increase by over 6 percent to $2,531
million. High Energy and Nuclear Physics R&D will increase
from $575 million in 1987 to $623 million in 1988. Included in
this total are funds for the first full year of operation of 3
newly completed accelerator facilities: the Stanford Linear
Collider in California, the Tevatron Collider at Fermi National Laboratory in Illinois, and Tandem/Alternating Gradient
Synchrotron at Brookhaven National Laboratory in New
York.
• Department of Health and Human Services (HHS).—HHS
R&D activities in 1988 will continue to be funded at stable
and sustainable levels. In 1988, the National Institutes of
Health (NIH) will support about 19,100 research project
grants, about 560 research centers, and about 10,900 research
trainees. In addition, the budget proposes funding for the full,
multi-year costs of grant commitments incurred in 1988. This
would eliminate annual uncertainties over the level and
timing of allotments for grantees and ensure proper review of
the full cost of funding additional grants. In 1988, total HHS
obligations will approach $6.3 billion.
• National Aeronautics and Space Administration (NASA).—
NASA obligations for the conduct of R&D are estimated at
about $4.5 billion in 1988, an increase of $313 million over
1987. This increase is necessary primarily to continue development of the Space Station and to provide for two new initiatives, the Global Geospace Science program (GGS) and the
Civil Space Technology Initiative (CSTI). GGS will expand
international cooperative efforts to investigate the interaction
of the Sun with the Earth's environment, and CSTI will explore a variety of generic space technologies important to
continued U.S. leadership in space. For other science and
applications programs, the budget continues support for major
flight projects such as the Space Telescope, the Galileo mis-

C-14

• THE BUDGET FOR FISCAL YEAR 1988

sion to Jupiter, the Upper Atmosphere Research Satellite
(UARS), and the Ocean Topography Mission (TOPEX).
• National Science Foundation (NSF).—Obligations for research supported by NSF are expected to increase by about
$238 million, or about 17 percent—to $1.7 billion in 1988. The
budget principally provides enhanced support for basic research across a wide spectrum of high-priority scientific and
engineering disciplines, including materials sciences, computational science and engineering, and biotechnology. Increases
will also be provided for instrumentation and graduate student support. The budget also provides for significant new
efforts in improving research and education at the undergraduate level, and for the initiation of a new activity, Basic
Science and Technology Centers. These new centers, modeled
after the Engineering Research Centers, are intended to
foster and strengthen multidisciplinary research in the basic
physical and life sciences.
• Department of Agriculture (USDA).—Obligations for the conduct of R&D are estimated at $961 million for 1988, a decrease of about 2 percent from the 1987 level of $978 million.
Within the USDA total, the Cooperative State Research Service will provide $238 million for research and development,
primarily conducted by colleges and universities. The Agricultural Research Service expects to obligate $527 million, an
increase of $37 million over 1987, with emphasis on basic
research in plant germplasm, biotechnology, new agricultural
products, and the improvement of commodity exports. The
Forest Service will continue its research on land management
planning and forest inventory.
• Department of Commerce (DOC).—Obligations for R&D undertaken by DOC decrease by $63 million from 1987 to $333
million in 1988. The proposed reductions reflect the Administration's continued efforts to reduce funding for programs
that are more appropriately the responsibility of the private
sector and state or local governments. Programs proposed for
elimination include the Sea Grant and National Undersea
Research Programs of the National Oceanic and Atmospheric
Administration (NOAA), and reductions are proposed in the
fire and building research programs at the National Bureau
of Standards (NBS). Increases are proposed for NBS in areas
of growing importance, such as optical fiber systems. The
budget also provides for an increase in construction funding
for the Cold Neutron Research Facility at NBS.
Table J-2 summarizes Federal support for the conduct of R&D by
agency.

B-15

SPECIAL ANALYSIS B

Table J-2. CONDUCT OF RESEARCH AND DEVELOPMENT BY MAJOR DEPARTMENTS AND AGENCIES
(In millions of dollars)
Obligations
Department or agency

1986
actual

Defense-Military functions
34,205
Health and Human Services
5,661
(National Institutes of Health)
(5,004)
Energy
4,708
National Aeronautics and Space Administration.. 3,420
National Science Foundation
1,336
925
Agriculture
387
Transportation
Interior
378
317
Environmental Protection Agency
394
Commerce
Agency for International Development
211
Veterans Administration
188
All other 1
483
Total

52,612

Outlays

1987
estimate

1988
estimate

1986
actual

1987
estimate

1988
estimate

37,533
6,353
(5,519)
4,801
4,185
1,441
978
308
366
329
397
217
211
514

44,080
6,294
(5,573)
5,016
4,498
1,680
961
290
364
346
333
233
214
463

33,292
5,504
(4,845)
4,705
3,432
1,392
914
430
386
307
373
195
183
464

35,153
6,012
(5,211)
4,819
3,711
1,390
952
390
373
333
375
300
214
525

39,112
6,187
(5,458)
4,863
4,159
1,604
999
306
370
352
314
171
209
463

57,631

64,771

51,576

54,548

59,108

Includes the Departments of Education, Justice, Labor, Housing and Urban Development and Treasury, the Tennessee Valley Authority, the
Smithsonian Institution, the Corps of Engineers, and the Nuclear Regulatory Agency.
1

CONDUCT OF BASIC RESEARCH

The 1988 budget continues the already strong emphasis that this
Administration has placed on enhancing support for basic research
across all scientific and engineering disciplines. Even in a fiscally
austere environment, support for basic research, especially at universities, is an important factor in generating new knowledge to
ensure continued technological innovation. It is an essential investment in the nation's future. The Federal Government has traditionally assumed a key role in support of basic research because
the private sector has insufficient incentives to invest in such
research.
Funding for basic research is included within the overall Federal
support for the conduct of R&D. In 1988, obligations for the conduct of basic research are estimated at $9.1 billion, an increase of
$312 million, or almost 4 percent above the level for 1987.
Support for basic research at universities serves the dual role of
providing new knowledge and helping to ensure the future availability of high-caliber scientists and engineers. Both of these are
key elements in the long-term ability of the nation to compete in
global markets. University-based researchers receive about half of
the total Federal obligations for basic research. Federal support for
R&D at universities and colleges, more than two-thirds of which is
basic research, is estimated to increase by over 5 percent in 1988 to
a total of almost $7.7 billion. This would represent an increase of
18 percent over the period 1986 to 1988.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Table J-3 summarizes Federal support for the conduct of basic
research by agency.
Table J-3. CONDUCT OF BASIC RESEARCH BY MAJOR DEPARTMENTS AND AGENCIES
(In millions of dollars)

Obligations
Department or agency

Agencies supporting primarily physical sciences and engineering:2
National Science Foundation
Defense—Military functions
Energy
National Aeronautics and Space Administration
Interior
Commerce
Other Agencies3
Subtotal
Agencies supporting primarily life and other
sciences:4
Health and Human Services
(National Institutes of Health)
Agriculture
Smithsonian Institution
Environmental Protection Agency
Veterans Administration
Education
Other Agencies5
Subtotal
Total
1
2
3
4
5

Outlays

1986
actual

1987
estimate

1988
estimate

1986
actual

1987
estimate

1988
estimate

1,259
921
964

1,359
858
1,084

1,585
907
1,133

1,313
845
947

1,310
844
1,087

1,513
811
1,143

917
129
26
10

1,069
123
24
10

1,016
115
24
9

932
135
27
11

983
129
23
11

1,002
118
24
10

4,227

4,527

4,788

4,210

4,387

4,620

3,335
(3,118)
431
63
39
15
11
17

3,663
(3,360)
454
73
38
16
12
16

3,712
(3,442)
454
78
39
16
11
13

3,234
(3,013)
419
59
36
15
8
14

3,475
(3,185)
440
67
39
15
15
15

3,579
(3,308)
474
72
40
16
11
15

3,909

4,271

4,322

3,786

4,067

4,207

8,137

8,798

9,110

7,996

8,454

8,827

Amounts reported in this table are included in totals for conduct of R&D.
Includes mathematics and computer sciences.
Includes the Corps of Engineers, the Tennessee Valley Authority, and the Department of Transportation.
Includes psychology and social sciences.
Includes the Departments of Labor, Justice, and Treasury, and the Agency for International Development.

R&D FACILITIES

In 1988, within the total for support for R&D facilities, funding is
provided for major scientific instrumentation, including the specialized research facilities at national laboratories and university centers, e.g., particle accelerators, telescopes, and advanced computers.
Such specialized facilities are critical to advancing the frontiers of
science in a number of scientific disciplines. Funds for R&D facilities are also used for construction or renovation of general purpose
laboratories and research support facilities.
In 1988, obligations for R&D facilities are expected to total
nearly $2.0 billion, an increase of $57 million from 1987. The
budget provides for construction of several major new projects in
DOE, including the 1-2 GeV'synchrotron source at Lawrence
Berkeley Laboratory, the Accumulator Booster Ring at the Brook-

B-15

SPECIAL ANALYSIS B

haven Alternating Gradient Synchrotron, and a new 3 GeV injector for the SPEAR storage ring at the Stanford Synchrotron Radiation Laboratory.
Table J-4 summarizes Federal support for R&D facilities and
capital equipment.
Table J-4. RESEARCH AND DEVELOPMENT FACILITIES BY MAJOR DEPARTMENTS AND AGENCIES
(In millions of dollars)
Obligations
Department or agency

1986
actual

Energy
Defense—Military functions
National Aeronautics and Space Administration..
Agriculture
National Science Foundation
Health and Human Services
(National Institutes of Health)
All other 1
Total

750
301
276
79
68
41
(32)
48
1,563

1987
estimate

744
525
325
93
80
58
(56)
88
1,914

Outlays
1988
estimate

848
502
420
25
94
6
(5)
76
1,972

1986
actual

784
284
299
50
72
33
(22)
46
1,567

1987
estimate

820
398
294
68
78
38
(33)
67
1,762

1988
estimate

793
409
384
77
90
29
(26)
73
1,854

Includes the Departments of Transportation, Commerce, Education, Interior, Justice, and Treasury, Veterans Administration, Tennessee Valley
Authority, Agency for International Development, and the Smithsonian Institution.
1

ARCTIC RESEARCH

Two complementary policy documents currently govern U.S.
Arctic research policy. The Arctic Research and Policy Act of 1984
(Public Law 98-373) requires an
. . integrated, coherent, and
multiagency request . .
for research in the Arctic as part of the
President's annual budget request to Congress. National Security
Decision Directive 90 (NSDD 90, April 14, 1983) identifies four basic
elements of U.S. Arctic Policy:
• protection of essential security interests in the Arctic region,
including the adjacent seas and airspace;
• support for sound, rational development in the Arctic region,
while minimizing adverse effects on the environment;
• promotion of scientific research in fields which contribute
knowledge about the Arctic, or which are most advantageously studied in the Arctic; and
• promotion of mutually beneficial international cooperation in
the Arctic to achieve the above objectives.
In response to these directives, the Interagency Arctic Research
Policy Committee (established by Public Law 98-373) has compiled
a detailed listing of agency programs in Arctic research, including
budgetary estimates, and has grouped them into three major categories of national concern:
• national security;
• rational development with minimal environmental or adverse
social impact; and

C-14

• THE BUDGET FOR FISCAL YEAR 1988

• research on Arctic phenomena and on science best studied in
the Arctic (the Arctic as a natural laboratory).
The Act also directs that the Interagency Committee,
. . in
consultation with the [Arctic Research] Commission, the Governor
of the State of Alaska, the residents of the Arctic, the private
sector, and public interest groups, shall prepare a comprehensive 5year plan for the overall Federal effort in Arctic research . .
Over the past year, the Interagency Committee, with advice and
assistance from the Arctic Research Commission, has developed a
draft 5-year plan for Federal Arctic Research, including recommendations for necessary programs.
The Arctic Research and Policy Act requires public participation
in the development of recommendations for the 5-year Arctic Research Plan. This requirement has been fulfilled through:
• extensive participation by the scientific community and
others in the report by the National Research Council entitled, National Issues and Research Priorities in the Arctic;
• presentation of statements from the public before the Interagency Committee; and
• hearings of the Arctic Research Commission.
The Interagency Committee also held a Consultative Workshop
in Alaska in November of 1986. Respresentatives from the groups
named in the Act attended the Workshop and agreed to consensus
recommendations. It is anticipated that the proposed 5-year Plan
will be submitted to the President for transmittal to the Congress
prior to the July 31, 1987 deadline established by the Act.
Table J-5 provides a summary of Federal support for Arctic
research integrated by major category. These estimates are subsumed within agency totals for the conduct of research and development.
Table J-5. FEDERAL SUPPORT FOR ARCTIC RESEARCH

(Obligations in thousands of dollars)
Category

National security
Rational development
Natural laboratory
Total

1986
actual

1987
estimate

1988
estimate

26,125
32,176
23,613

26,278
32,774
27,295

26,300
31,334
30,590

81,914

86,369

88,224

Includes the Departments of Defense, Energy, Health and Human Services, Interior, Commerce, and Transportation, the National Science
Foundation, the National Aeronautics and Space Administration, the Environmental Protection Agency, and the Smithsonian Institution.
1

PART II. AGENCY R & D PROGRAMS

Presented below are summaries of the R&D activities of the 12
agencies whose R&D obligations individually exceed $150 million.

SPECIAL ANALYSIS B

B-15

DEPARTMENT OF DEFENSE

DOD research and development ranges from support of basic
research, primarily in the physical sciences, to full scale development of hardware and its testing and evaluation. The primary
purpose of DOD R&D is to provide new strategic and tactical
weapons and supporting systems to improve the Nation's defense.
Obligations for DOD research and development, including R&D
facilities, total $44.6 billion, about 67 percent of total Federal funding for research and development in 1988.
In 1988, DOD obligations for the conduct of R&D will increase by
$6.5 billion, or 17 percent above the 1987 level, to $44.1 billion.
DOD funding of technology base programs (basic and applied research) will increase from about $3.2 billion in 1987 to about $3.3
billion in 1988. Funding for R&D facilities will decrease by $23
million from 1987 to a total of $502 million in 1988.
By mission category, major R&D efforts for 1988 include:
—Technology Base and Advanced Technology Development—
These programs constitute the research end of the spectrum of
programs that comprise Research and Development, Test and
Evaluation. The programs are intended to provide choices for
future system development and to help avoid technological
surprise.
The Strategic Defense Initiative, a program to investigate
the feasibility of defense against ballistic missiles, will increase
to $5.3 billion (including $0.1 billion for facilities) in 1988.
Other areas emphasized include the joint NASA-DOD National Aerospace Plane program, materials research, and environmental research important to the military mission. There is
also continued emphasis on electronics, including the Very
High Speed Integrated Circuits and Millimeter Wave Monolithic Integrated Circuits programs.
—Strategic Programs.—Major programs for 1988 include the
MILSTAR communications satellite program, the Small Intercontinental Ballistic Missile (Small ICBM), a short range airlaunched attack missile, a rail garrison mobile basing mode for
the Peacekeeper ICBM and the Advanced Technology Bomber.
Development of the Trident II submarine-launched ballistic
missile and the Peacekeeper missile near completion.
—Tactical Programs.—These programs support the development
of systems to increase the capability of U.S. general purpose
and theater nuclear forces, and to develop the capability to
project forces rapidly anywhere in the world where the vital
interests of the United States are threatened. In 1988 these
programs include:

C-14

• THE BUDGET FOR FISCAL YEAR 1988

• in the Army, development of new munitions for its M l - A l
tank, a new family of trucks and forward area air defenses.
Work on the LHX light helicopter will continue.
• in the Navy, development of the Seawolf attack submarine,
and the Sealance, a new sub-launched, anti-submarine, standoff weapon. Other major programs include the V-22 Osprey
tilt-rotor aircraft, start of the Advanced Air-to-Air Missile,
and continuations of upgrades to the F-14 fighter and A-6
attack airplanes. Several efforts are being continued to improve fleet air defenses.
• in the Air Force, continuing development of the Joint STARS
radar, the Advanced Tactical Fighter aircraft, the C-17 transport aircraft, and various electronic warfare programs, including the Airborne Self Protection Jammer. Work on smart
munitions and the interdiction version of the F-15 fighter
also progresses.
—Intelligence and Communications, Program Management and
Support—R&D supported by these programs is directed toward
improvements in defense intelligence systems, command control and communications programs, and test and evaluation
capabilities. Work will continue in such areas as the use of
technology to reduce manufacturing costs and to extend the
life and capability of existing defense systems.
Table J-6 provides the details of the Department of Defense
military R&D funding.
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION

NASA invests in R&D programs to provide for a permanent U.S.
presence in space with a future space station; to support the Shuttie-based Space Transportation System; to advance knowledge of
the Earth, the near-earth environment, the solar system and the
universe; and to support long-term research and technology advancement. It also supports long-term research and selected systems technology projects in aeronautics.
R&D accounts for over 50 percent of the total budget for NASA.
The balance of the NASA budget includes funding primarily for
Shuttle production and operations, tracking and data acquisition
activities, and related institutional support.
In 1988, NASA obligations for R&D including facilities for the
agency will be approximately $4.9 billion, a net increase of $408
million, or 9 percent, over 1987. Within this total, funds are available to complete projects currently under development, to augment
major research and technology programs, and to initiate a major
new flight project in space science and applications. Within the
total funding for R&D, basic research obligations in 1988 are estimated at $1.0 billion, a decrease of $53 million from 1987.

SPECIAL ANALYSIS B

B-15

Table J-6. DEPARTMENT OF DEFENSE—MILITARY RESEARCH AND DEVELOPMENT
(In millions of dollars)
Type of activity

OBLIGATIONS
Conduct of R&D:
Research, development, test and evaluation:
Technology base
Advanced technology development
Strategic programs
Tactical programs
Intelligence and communications
Program management and support
Other appropriations
Total conduct of R&D 1
Total conduct of basic research, included above
R&D facilities
Total obligations

1986
actual

1987
estimate

1988
estimate

3,207
4,046
7,419
10,109
4,442
3,936
1,178

3,177
5,091
8,095
11,383
4,799
3,902
1,252

3,345
7,284
9,767
13,529
5,191
3,889
1,034

34,205

37,533

44,080

(921)
301

(858)
525

(907)
502

34,506

38,058

44,582

33,292
284

35,153
398

39,112
409

33,576

35,551

39,521

OUTLAYS
Conduct of R&D
R&D facilities
Total outlays
1

Includes funds for Operational Systems Development of $8,970 million in 1986, $9,879 million in 1987 and $9,881 million in 1988.

Space Station and Space transportation.—Obligations for Space
Station R&D are estimated to increase from $374 million in 1987 to
$663 million in 1988. This increase is consistent with funding
needed to pursue design, definition, and development of the space
station for planned initial operating capability in the mid-1990,s.
The space station is intended to enhance the nation's science and
applications programs, to help develop advanced technologies potentially useful to the economy, and to encourage greater commercial use of space.
For Space Transportation the 1988 budget provides for sustained
support for the Space Shuttle program to achieve routine and
reliable access to space for all planned users, and for continued
investments to further improve the safety and reliability of the
Shuttle fleet. Other major continuing activities will include planning for the use of Spacelab; further development of the tethered
satellite program, a Shuttle-based science program conducted in
cooperation with the Italian government; and development of an
Orbital Maneuvering Vehicle for future near-Earth orbital transfers.
Space science and applications.—Obligations for space science
and applications are estimated in 1988 at $1.5 billion, a decrease of
$144 million below the 1987 level due in large part to project
rephasing to meet the new Shuttle flight schedule. The funding

C-14

• THE BUDGET FOR FISCAL YEAR 1988

provided will allow initiation of a major new flight project, continued support of ongoing flight projects, and the analysis of scientific
data being sent back to Earth from spacecraft now in space.
The 1988 budget continues support for space science research to
enhance understanding of the Sun, the planets, and the universe;
space-related research on the Earth's climate, resources, surface
and atmosphere; research to advance knowledge in materials science and materials processing through low gravity experiments in
space; and continuing long-term basic technology work for satellite
communications.
The major new flight project proposed for initiation in 1988 is
the Global Geospace Science (GGS) mission. The GGS mission will
obtain coordinated measurements of the interaction of the Earth's
magnetic field and the solar wind. GGS is the United States' contribution to an international solar terrestrial physics program, which
includes spacecraft from the Japanese and European space agencies.
Continuing development efforts for ongoing major flight projects
yet to be launched include:
• the Space Telescope, planned for launch in 1989, which is
expected to serve as a major astronomy facility for a 10- to 15year period;
• the Gamma Ray Observatory, planned for launch in 1990,
which will enhance basic research in high energy astrophysics, providing new knowledge about objects in deep space;
• Spacelab astronomy experiments, which will be conducted on
the Shuttle with the goal of improving our understanding of
the Earth's vicinity, the Sun and the universe;
• the Magellan project, planned for launch in 1989, to map the
planet Venus;
• the Mars Observer Mission, a major space science project
planned for launch in the early 1990's, to continue the scientific exploration of the planet Mars;
• the Galileo orbiter and probe mission to Jupiter, now planned
for launch in 1989, to carry out long-term studies of the
planet, its satellites, and its magnetosphere;
• the Upper Atmosphere Research Satellite (UARS) spacecraft,
to be launched in 1991, to investigate the chemical composition of the Earth's stratosphere and mesophere;
• the Scatterometer project, a research instrument to measure
global wind patterns on the surface of the oceans. This instrument will be flown in 1990; and
• the Ocean Topography Experiment (TOPEX) scheduled for a
1991 launch as part of a collaborative mission with France.
Continued support will be provided in 1988 for several spacecraft
already in flight including:

SPECIAL ANALYSIS B

B-15

• two Voyager spacecraft, launched in 1977, which have successfully encountered Jupiter and Saturn; Voyager 2 encountered Uranus in January 1986 and is scheduled to fly by
Neptune in 1989; and
• a number of smaller, Explorer-class scientific satellites
launched in prior years.
The budget also provides for continuing research and technology
work in areas such as space-related life science research; nearEarth experiments using balloons and sounding rockets; research
in geodynamics, ocean processes, and atmospheric dynamics; Shuttle-based science and applications experiments; and preparations
for the future launch of planned missions. Continuing efforts to
improve satellite communications technology will be refocused towards generic and longer-term technology-based efforts, in recognition of the responsibility of the private sector to pursue relatively
near-term satellite communications technologies.
Commercial Programs.—These programs include the Technology
Utilization program which promotes the dissemination of new developments in aerospace technology to industrial sectors other than
aerospace, and the Commercial Use of Space program which encourages increased private sector awareness, participation and investment in space technologies.
Transatmospheric research and technology.—In 1988, funding will
increase as planned to continue research and advanced technology
leading to a transatmospheric flight research vehicle demonstration in the early 1990's. This program is jointly supported with
DOD to investigate the technologies necessary for a National Aerospace Plane.
Aeronautical research and technology.—Obligations for aeronautical research and technology are estimated to decrease slightly from
$315 million to $306 million in the 1988 budget. Ongoing research
in fundamental aeronautical disciplines such as materials and
structures, propulsion and selected systems technology projects will
be continued.
Agency-wide support activities.—Obligations for agency-wide support activities will total $1.4 billion in 1987, a 13 percent increase
above the 1987 level. These programs include primarily R&D-related NASA civil service and administrative costs; tracking and data
acquisition system improvements; safety, reliability and quality assurance; and R&D addressing fundamental space technology problems and opportunities common to a wide spectrum of space programs.
The 1988 budget proposes $70 million to begin a new program
within Space Research and Technology, the Civil Space Technology
Initiative (CSTI). This effort will support research in a wide variety
of technology areas including space-based propulsion, automation

C-14

• THE BUDGET FOR FISCAL YEAR 1988

and robotics and control of large structures, which are crucial to
the nation's ability to provide efficient, reliable access to space.
CSTI will involve researchers from all sectors, industry, universities and the Federal government, and represents a combination of
augmentations to ongoing efforts as well as totally new activities.
Table J-7 provides the details of NASA's R&D funding.
Table J-7. NATIONAL AERONAUTICS AND SPACE ADMINISTRATION—RESEARCH AND DEVELOPMENT
(In millions of dollars)
Type of activity

OBLIGATIONS
Conduct of R&D:
Space station
Space transportation systems capability
Space science and applications
Commercial programs
Transatmospheric research and technology
Aeronautical research and technology
Agency-wide support activities:
Space research and technology
Safety, reliability and quality assurance
Tracking and data acquisition
Research and program management
Total conduct of R&D..
Total conduct of basic research, included above..
R&D facilities
Total obligations..

1986
actual

1987
estimate

1988
estimate

173
357
1,473
21
292

374
562
1,599
49
43
315

663
.551
1,455
53
65
306

149
7
15
933

182
9
18
1,034

238
16
18
1,134

3,420

4,185

4,498

(1,069)
325

(1,016)
420

3,696

4,510

4,918

3,432
299

3,711
294

4,159
384

3,731

4,005

4,543

(917)
276

OUTLAYS
Conduct of R&D..
R&D facilities
Total outlays.

DEPARTMENT OF ENERGY

The R&D programs of the Department of Energy include: a
National Defense Program related to the development and testing
of nuclear weapons; a General Science Program of basic research in
high energy physics and nuclear sciences; and an Energy Program
focused on longer-term R&D in support of energy technology development. Table J-8 provides summary information on the funding
of these programs.
Obligations for the conduct of R&D by the Department are estimated to total $5.0 billion in 1988, an increase of $215 million from
1987. Obligations in 1988 for R&D facilities, including the construction or upgrading of general purpose laboratories and other research support facilities, will amount to $848 million.

SPECIAL ANALYSIS B

B-15

Obligations for the conduct of basic research, included in the
total for the conduct of R&D, are estimated to be $1,133 million in
1988, an increase of $50 million over 1987. Within the basic research total, funds are provided to continue or initiate a number of
major projects, in both the energy program and the general science
program, that will enhance the nation's capability in basic research and help contribute to global competitiveness.
The National Defense Program supports the continued research,
development and testing of nuclear weapons. It also supports the
development of improved naval propulsion reactors, technologies
for monitoring nuclear weapons treaties, and methods for safeguarding nuclear materials. In addition, R&D efforts will continue
in developing methods for the safe storage and disposal of radioactive wastes resulting from weapons production. Obligations for the
conduct of R&D by the national defense program will increase from
$2.4 billion in 1987 to $2.5 billion in 1988. Increased funding for
conduct of R&D supports new and ongoing Department of Defense
requirements including isotope separation techniques, increased
weapons testing, and increased research in the basic physics of
nuclear weapons. Increases in the advanced weapons concepts activities, which support the Strategic Defense Initiative (SDI), will
focus on investigations of Nuclear Directed Energy Weapons
(NDEW) to assess the Soviet NDEW capability to threaten either a
nuclear or non-nuclear strategic defense system. SDI funding will
increased from $349 million in 1987 to $481 million in 1988.
The General Science Program supports basic research in high
energy and nuclear physics. A proposed increase of $48 million, to
$623 million, in 1988 for the conduct of basic research will enhance
support for experimental efforts to understand the basic constituents of matter and energy and the forces that govern their interaction. Obligations for R&D facilities will also increase $47 million to
$189 million.
The 1988 budget request will provide for:
• increased utilization of existing accelerator facilities, including the first full year of operation of the Stanford Linear
Collider at SLAC; the Tandem/Alternating Gradient Synchrotron at Brookhaven National Laboratory and Tevatron I at
Fermilab;
• continued construction of the Central Computing Facility
project at Fermilab, the Accumulator/Booster Ring upgrade
at the Brookhaven Alternating Gradient Synchrotron and the
advanced nuclear physics electron accelerator facility at Newport News, Virginia; and
• continued support for advanced accelerator and detector research and development activities related to next-generation
high energy and nuclear physics accelerators.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

The Energy Program funds basic science and engineering research underlying both nuclear and non-nuclear technologies, R&D
to support development of specific energy technologies, and research on the environmental and human health effects of energy
production technologies. Energy program obligations for the conduct of R&D will increase by $14 million over the 1987 level to
$1,862 million in 1988. This increase consists of increases for basic
supporting research and the clean coal technology program, offset
by proposed reductions in support for nearer-term non-nuclear
energy technology programs. Obligations for R&D facilities in this
program will be $169 million, nearly the same as in 1987.
In the basic energy sciences, funding is proposed at a level of $479
million in 1988, an increase of $32 million over 1987, for the
conduct of research in such fields as nuclear science, chemistry,
engineering, materials science, applied mathematics, biology, and
the geosciences. The program provides the fundamental scientific
and technical base for future advances in both nuclear and nonnuclear technology development. In addition, the program provides
support for the operation of several major national facilities that
are used by researchers from industry, universities and national
laboratories. These include the National Synchrotron Light Source
(NSLS) at the Brookhaven National Laboratory, the Intense Pulsed
Neutron Source (IPNS) facility at Argonne National Laboratory,
and the Combustion Research Facility at Sandia National Laboratory.
The 1988 budget continues to provide support for construction of
the Center for Advanced Materials and the 1-2 GeV synchrotron at
at Lawrence Berkeley Laboratory and the experimental detection
halls at the Los Alamos Neutron Scattering Center. In addition,
construction of a 3 GeV injector for the SPEAR Storage Ring at
Stanford will be initiated to provide the Stanford Synchrotron Radiation Laboratory with an independent light source.
Funds in 1988 are also provided for an additional Class VII
computer to handle the backlog of computational needs of all the
basic research programs of DOE and for R&D activities related to
advanced synchrotron and neutron facilities required for future
state-of-the-art engineering and science research. Funds to maintain operations of existing research facilities at the 1987 level are
also included in the 1988 Budget.
A major expansion in the Energy Program for 1988 involves the
clean coal technology program. The goal of this program is to
demonstrate technologies to burn coal more cleanly. The Department solicits proposals from the private sector for 50 percent costshared commercial-scale demonstrations of clean coal technologies.
Typical examples of such technologies include: advanced coal cleaning techniques, alternate combustion technologies, preparation of

SPECIAL ANALYSIS B

B-15

clean coal-based fuels, and post-combustion cleanup systems. The
demonstrations are targeted closely to the recommendations of the
U.S. and Canadian Special Envoys' Report on Acid Rain. Obligations for the program in 1988 will be $351 million, an increase of
$292 million over 1987.
The 1988 budget will continue the redirection of the on-going
non-nuclear R&D programs to limit federal support to longer-term
generic research and place greater reliance on the private sector
for support of nearer-term technology development. To increase the
involvement of the private sector in the direction and management
of industry-based R&D programs, $17 million will be available in
1988 to support DOE participation in cooperative R&D ventures in
broad areas of generic technology development. Obligations for the
conduct of R&D in the technology base programs of the fossil,
solar/renewables and conservation programs are expected to be
$283 million in 1988, a decrease of about $213 million from 1987.
Funding proposed for the conduct of fossil related R&D and
associated facilities will be $162 million in 1988, a decrease of $100
million from 1987. The 1988 budget is focused on research to improve technologies for utilizing coal and for extracting oil and gas
from unconventional sources. Support in the technology base program continues to be provided in such areas as the chemistry of
coal conversion, environmental controls, and combustion research.
Research in support of solar and other renewable energy technologies, proposed at a level of $103 million, will emphasize longer
term, technology base R&D in areas such as photovoltaics, solar
thermal energy, biofuels, wind and geothermal energy, electrical
energy systems, and energy storage. The total request in 1988 for
the energy conservation R&D program is $75 million and includes
research in buildings and community systems, industry, and transportation.
The 1988 budget continues to provide for a broad program of
research in nuclear fission and fusion energy technologies. Total
obligations for these R&D programs will be about $680 million in
1988, approximately the same as the 1987 level. Conduct of R&D
will total approximately $600 million, and funding for related facilities will be $79 million.
In the fission program, obligations of $334 million are estimated
for the conduct of R&D in 1988, the same level as in 1987. Total
obligations for R&D facilities in 1988 will be $42 million. The
nuclear fission R&D program will continue to shift efforts from the
advanced civilian reactor program toward R&D on reactor concepts
that can meet space and military nuclear power requirements. The
restructured program, while serving national security interests,
will also maintain a technical and industrial base for any future
deployment of advanced nuclear technologies in the commercial

C-14

• THE BUDGET FOR FISCAL YEAR 1988

sector. The fission R&D program will also seek to resolve technical
issues associated with the technology of nuclear waste storage and
consequent environmental impacts.
In the magnetic fusion program, funding of $346 million is proposed for the conduct of R&D, the same level as in 1987. In 1988,
the fusion program will focus on the development of the toroidal
magnetic confinement system by supporting the continued operation of Princeton's large tokamak test reactor (TFTR), of GA
Technologies' Doublet-III-D machine, and of the Oak Ridge National Laboratory's ATF torsatron. Fabrication of three smaller
toroidal devices also will continue in 1988: a reversed field pinch
machine (RFP) at Los Alamos, a compact toroid called a field
reversed configuration (FRC) experiment, and a high field high
density tokamak (Alcator C-MOD) at Massachusetts Institute of
Technology (MIT). Two new toroidal experiments will be initiated
in 1988, the construction of a Compact Ignition Tokamak (CIT)
which is designed to prove a plasma can ignite and burn, and a
novel heating experiment using a free election laser which could
make steady state tokamak operation possible. Other research that
supports the President's Geneva Initiative on expanded cooperation
with the Soviets in fusion research will also continue in 1988.
Finally, the energy program supports R&D to better understand
the biological and environmental effects of energy production and
use. The level of funding for the biological and environmental
research program will be $218 million in 1988, an increase of $23
million or 12 percent above 1987. The biological program emphasizes the health effects of radiation, the use of radiation in medical
diagnosis and therapy, and generic biological research related to
radiation and other cellular traumas. A new initiative in 1988 will
be the beginning phase of a study to "map the human genome".
Results from this research hold the promise for enabling the structure and function of genes to be decoded and for detecting changes
in human DNA caused by exposure to toxic pollutants. The environmental program supports research in areas related to energy
technologies, such as atmospheric processes involved in acid rain
formation and deposition and carbon dioxide-induced climatic effects. A major thrust in 1988 will be an expanded program of radon
research. Recent information indicates that potential exposures to
radon gas in residential structures, and the number of people so
exposed, may be substantial. The main themes of the preliminary
stages of this new program will be investigations of sources and
health effects of radon and a survey of factors affecting possible
methods of mitigating radon levels in indoor environments. Funding in 1988 for radon-related, acid rain-related, and carbon dioxiderelated research is nearly $34 million, an increase of 47 percent
over 1987.

SPECIAL ANALYSIS B

B-15

Table J-8 provides the details of funding for the Department of
Energy.
Table J-8. DEPARTMENT OF ENERGY
(In millions of dollars)
Type of activity

1986
actual

1987
estimate

1988
estimate

2,248
517
1,943

2,378
575
1,848

2,531
623
1,862

4,708

4,801

5,016

(1,084)
744

(1,133)
848

5,459

5,545

5,864

4,705
784

4,819
820

4,863
793

5,489

5,639

5,656

OBLIGATIONS
Conduct of R&D:
National defense program
General science program
Energy program
Total conduct of R&D
Total conduct of basic research, included above
R&D facilities
Total obligations

(964)
750

OUTLAYS
Conduct of R&D
R&D facilities
Total outlays

DEPARTMENT OF HEALTH AND HUMAN SERVICES

The Department of Health and Human Services will obligate a
total of $6.3 billion in 1988 for the conduct of R&D. Within this
total, funding for basic research is estimated to be $3.7 billion.
Direct obligations for R&D facilities will total $6 million in 1988,
with Federal overhead payments providing additional funds which
can be used to replace or modernize existing R&D facilities.
Health.—About 90 percent of the Department's funds for the
conduct of R&D will be obligated by the National Institutes of
Health for biomedical research to advance the nation's capabilities
for the prevention, diagnosis, and treatment of disease. Several
other agencies within the Department—the Alcohol, Drug Abuse,
and Mental Health Administration, the Food and Drug Administration, the Centers for Disease Control, the Health Resources and
Services Administration, the Health Care Financing Administration, and the Office of the Assistant Secretary for Health—also
support health-related research.
The National Institutes of Health (NIH) consist of 12 separate
Institutes which will obligate $5.6 billion in 1988 for the conduct of
R&D, a slight increase over 1987. NIH will fund about 19,100
research project grants, about 560 centers, and about 10,900 research trainees in 1988. Continued emphasis will be given to support of basic research in 1988. About 60 percent, or $3.4 billion, of
NIH's proposed R&D budget will support basic research.

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Among the continuing R&D activities to be supported by NIH
are:
• continuation of research and cooperative clinical trials on the
Acquired Immune Deficiency Syndrome (AIDS); and
• clinical research with emphasis on medical intervention in
the disease process, including prototype development and refinement of products, techniques, processes, methods, and
practices.
The Alcohol, Drug Abuse and Mental Health Administration
(ADAMHA) conducts studies on the causes, prevention and treatment of alcohol and drug abuse and on mental disease and neurological disorders, with emphasis on improving knowledge of effective prevention of these public health problems.
The 1988 budget continues to emphasize research into drug
abuse, and stabilizes ADAMHA's extramural research programs in
biomedical, behavioral and clinical areas by supporting about 1,600
research project grants per year. Of the $569 million in 1987 obligations, about $30 million will be available through 1988 for drug
abuse research. ADAMHA will obligate $491 million in 1988.
The Food and Drug Administration supports research relevant to
its mission of regulating food, drugs, biologies, medical devices and
radiological products. In 1988, obligations for these activities are
estimated at $87 million.
The Centers for Disease Control support studies on the epidemiology and control of communicable diseases and on health promotion
and disease prevention. In 1988, obligations for these activities are
estimated at $56 million.
Other Health Related Agencies within the Department support
research in areas such as the efficacy and cost-effectiveness of
emerging health care technologies; the effect of increased numbers
of physicians on access to care and health care costs; and, survey
methods and techniques for analysis of health statistics. This support is provided through programs of the Health Resources and
Services Administration, the Office of the Assistant Secretary for
Health and the Health Care Financing Administration.
Human services.—Most of the 1988 funding for human services
R&D activities administered by HHS is included in the $2.2 billion
generic appropriation request for the Office of Human Development Services. Depending on Congressional priorities within this
level of effort, the proposed budget could support a variety of
development and social services research on the Head Start program, the elderly, child abuse and neglect, day care systems, family
and community support systems, and foster care and adoption assistance.
Table J-9 provides details of the R&D funding of the Department
of Health and Human Services.

SPECIAL ANALYSIS B

B-15

Table J-9. DEPARTMENT OF HEALTH AND HUMAN SERVICES—RESEARCH AND DEVELOPMENT
(In millions of dollars)
Type of activity and organizational units

OBLIGATIONS
Conduct of R&D:
Health:
National Institutes of Health
Alcohol, Drug Abuse, and Mental Health Administration.
Food and Drug Administration
Centers for Disease Control
Health Care Financing Administration
Office of the Assistant Secretary for Health
Health Resources and Services Administration
Subtotal, Health..
Human Services:
Social Security Administration
Family Support Administration
Office of Human Development Services]
Departmental Management
Subtotal, Human Services..
Total conduct of R&D
Total conduct of basic research, included above..
R&D facilities
Total obligations..

1986
actual

1987
estimate

5,004
396
79
52
30
18

5,519
569
84
59

5,588

6,290

6
3
58

12
3
41

5,661

6,353

(3,335)
41

(3,663)
58

5,702

6,411

5,504
33

6,012
38

5,536

6,051

23
9

OUTLAYS
Conduct of R&D.,
R&D facilities
Total outlays..
1

No 1988 detail available; awaiting Congressionally-defined priorities within the requested level of effort.

NATIONAL SCIENCE FOUNDATION

The National Science Foundation (NSF) supports primarily basic
research in all disciplines through grants to scientists and engineers in academic institutions. NSF support is particularly important because it complements the R&D programs of other agencies
and assists in balancing Federal support for promising research
across all fields of science and engineering.
The 1988 NSF budget provides $1.7 billion in obligations for the
conduct of R&D, an increase of $238 million or about 17 percent
above 1987. Within this total, support for basic research will also
increase by about 17 percent.
For 1988, emphasis will be placed on three major themes:
• Education and Human Resources ($273 million, a 50 percent
increase over 1987): will provide increased support for the
NSF Graduate Fellowship Program (200 additional Fellows,
for a total of about 760 new awards) and for the Presidential

C-14

• THE BUDGET FOR FISCAL YEAR 1988

Young Investigators program (200 new awards, for a total of
about 900 new awards). A major increase for undergraduate
programs will provide important new opportunities for faculty
enhancement, and student research participation as well as
providing for much needed instrumentation. There will also
be a significant enhancement of support to encourage the
participation of underrepresented groups in scientific and engineering research.
• Basic Science and Technology Centers and Groups ($529 million, an 18 percent increase over 1987): will provide increases
for ongoing efforts such as the Engineering Research Centers
(ERCs) and the Advanced Scientific Computing Centers
(ASCs), as well as the initiation in 1988 of a new program,
Basic Science and Technology Centers. This new program will
expand the concept of the ERCs to fields of science such as
biology, materials science, and computer and information sciences. Like the ERCs, these new centers will be universitybased, multidisciplinary, will incorporate strong involvement
by the private sector and state and local governments, and
will provide important opportunities to train future scientists
and engineers. It is expected that perhaps as many as 15 such
centers will be started in 1988. In addition to the centers, a
number of research areas, including global geosciences and
biotechnology, will be the focus for research by a number of
coordinated groups.
• Strengthened Disciplinary Programs and Facilities ($1.1 billion, an increase of 10 percent over 1987): will provide for a
continued steady improvement of NSF's traditional broad support for high-quality research programs and specialized research facilities across a wide spectrum of disciplines. A high
priority will be given to increasing grant sizes and enhancement of support for emerging fields of high scientific opportunity (e.g., storm-scale meteorology, cognitive sciences, parallel
processing). In addition, specialized research facilities including the Very Long Baseline Array radio-telescope (VLBA), the
Cornell Electron Storage Ring (CESR), the National Center
for Atmospheric Research (NCAR) and the national astronomy centers will receive priority attention. The FY 1988
budget also provides funds for the U.S. Antarctic Program
(USAP) to lease a new icebreaker to support research as well
as operations in the Antarctic. The USAP is managed by NSF
and is the principal expression of U.S. presence on the Antarctic continent.

SPECIAL ANALYSIS B

B-15

DEPARTMENT OF AGRICULTURE

The Department of Agriculture supports research and development in several disciplines related to agriculture and forestry to
ensure the continued high productivity of U.S. agricultural and
forest lands.
Obligations of the Department for the conduct of research and
development are expected to total $961 million in 1988, compared
to the $978 million in 1987. Of the total, $454 million will support
basic agricultural research, maintaining the 1987 estimated level.
The Department's 1988 Budget for research and development is
highlighted below by major bureau.
The Agricultural Research Service expects to obligate $527 million in 1988 to conduct basic and applied research in plant and
animal productivity; commodity conversion and delivery; soil and
water conservation; and integration of systems. This is an increase
of $37 million in obligations over 1987. In 1988, increased emphasis
will be placed on basic research in plant germplasm and biotechnology to improve the profitability and competitiveness of U.S.
agriculture. Research will also be directed at reducing fat in consumer meats.
The Cooperative State Research Service (CSRS) estimates that
$238 million will be obligated in 1988. CSRS supports research on
agriculture and forestry through grants to land-grant colleges.
Also, within CSRS, the Competitive Research Grants program
funds basic research in biotechnology, plant and animal science,
pest science, and human nutrition.
The Forest Service estimates that $122 million will be obligated
for research and development in 1988. This represents a decrease
from the $126 million obligated in 1987. The long-range goal of
forestry research is to provide the information needed to manage
and protect forest and range land resources, and to gain maximum
economic and social benefits from their use.
Other Departmental programs will obligate approximately $75
million for R&D in 1988, covering a broad spectrum of research
activities, such as research in agricultural economics, international
agricultural cooperation, and statistical reporting.
DEPARTMENT OF COMMERCE

The Department of Commerce undertakes research primarily in
ocean science and engineering, meteorology and weather forecasting, and in the maintenance of measurement standards to support
science and industry.
Obligations for the conduct of R&D by the Department in 1988
are estimated at $333 million, a decrease of $63 million from 1987.
This reflects reduced levels of support by the National Oceanic and
Atmospheric Administration for applied research, that is more ap-

C-14

• THE BUDGET FOR FISCAL YEAR 1988

propriately the responsibility of state and local governments or the
private sector.
National Oceanic and Atmospheric Administration (NOAA).—
NOAA obligations for the conduct of research and development
will decrease from $277 million in 1987 to $215 million in 1988 as a
result of greater reliance on support from the private sector and
state and local governments, and elimination of lower priority
research in such programs as Seafloor Spreading Center Research,
National Undersea Research Program, National Sea Grant College
Program, and some programs of the National Marine Fisheries
Service. Acid rain research and R&D to support the Pacific Salmon
Treaty will be maintained.
National Bureau of Standards (NBS).—NBS conducts research
aimed at maintaining and improving a system of measurement
required to support the nation's industrial and scientific endeavors.
In 1988, NBS is expected to obligate $106 million for the conduct of
R&D. This represents an increase of $6 million from 1987. Funding
will increase to support development of measurements and standards for process and quality control, high-performance composites,
fiber optics, bioprocess engineering and the Cold Neutron Research
Facility. Funding for several programs, including fire and building
research, will be reduced because such research can and should
appropriately be supported by other sectors of the economy.
Other Commerce R&D Activities.—Funding for smaller R&D programs in the Department, which include those in General Administration, the Bureau of the Census, the Economic Development Administration, and the National Telecommunications and Information Administration, are proposed at $12 million in 1988, a decrease of $7 million from the 1987 level.
DEPARTMENT OF THE INTERIOR

The R&D activities of the Department of the Interior principally
derive from its broad-ranging responsibilities for management of
the nation's natural resources, including developing energy and
mineral resources, and restoring and preserving wildlife habitats.
R&D programs also serve the needs of other Federal agencies and
the private sector.
Obligations for the conduct of R&D for the Department of the
Interior for 1988 are estimated at $364 million. This represents a
decrease of $2 million from the 1987 level.
About 92 percent of the Department's 1988 funds for the conduct
of R&D will be obligated by the Geological Survey ($212 million),
Fish and Wildlife Service ($51 million), and the Bureau of Mines
($71 million). Highlights of the 1988 research objectives of these
and other departmental programs are described below.

SPECIAL ANALYSIS B

B-15

The Geological Survey undertakes research on the extent, distribution, and character of the nation's water and other natural
resources and on the geologic processes, structures, and hazards
that affect the development and use of the land and physical
environment. For 1988, obligations will increase by $5 million, to a
total of $212 million.
Research in 1988 will be directed toward:
• accurate appraisals of mineral resources and new improved
methods of mineral exploration;
• development of basic data on geologic principles and processes;
• improvement of the scientific basis for appraisal and evaluation of water resources; and
• development and application of new technologies, including
remote sensing, to prepare cartographic information.
The Fish and Wildlife Service supports research in the Service's
laboratories and field stations and cooperative efforts with state
fish and game departments. It also provides Federal aid to states
for research on restoration of fish and wildlife resources. This
research provides basic biological information about species numbers, population dynamics, ecological relationships, and habitat requirements. Obligations will total $51 million in 1988.
The Fish and Wildlife Service will support research activities
concerned with:
• the habitats of waterfowl, migratory and non-migratory birds,
and mammals;
• the status and distribution of endangered and threatened species;
• impact of broad-scale environmental changes on fish and wildlife populations and habitat; and
• diseases of freshwater and anadromous fish.
The Bureau of Mines conducts basic and applied research across
the minerals cycle to improve understanding of the principles of
mining and minerals processing and to reduce associated health
hazards. Obligations for the conduct of R&D are expected to decrease by $7 million to $71 million in 1988. This decrease in obligations is the result of proposed reductions in applied research, particularly in projects which are more appropriate for support by
non-Federal sources. The 1988 budget reflects continued emphasis
on strategic and critical minerals R&D activities and stresses:
• long-range, high-risk research in extractive metallurgy technology;
• development of domestic source substitutes for imported strategic and critical minerals;
• health-related research on the proper quality and quantity of
air flow in underground mines; and

C-14

• THE BUDGET FOR FISCAL YEAR 1988

• long-term, generic research on mine disaster prevention,
ground control, industrial hazards, explosives, and systems
engineering.
Other Departmental Programs expect to obligate about $30 million in 1988, a decrease of about $3 million from 1987.
DEPARTMENT OF TRANSPORTATION

The R&D program of the Department of Transportation is oriented toward providing the information and new technology needed
for its own operational (e.g., air traffic control) programs and for
regulatory (e.g., automotive and aircraft safety standards) programs. Obligations for the conduct of research and development by
the Department are estimated at $290 million for 1988, a decrease
of $19 million from 1987.
The Federal Aviation Administration (FAA) is expected to obligate $160 million in 1988. This funding level is consistent with the
National Airspace System Plan. Major initiatives include continued
development of a new ATC automation system, modernization of
the communications system, development of radars for detection
and tracking of severe weather, and completion of programs which
will determine the future mix of navigation systems. Other work
includes Automated En Route Air Traffic Control (AERA); aircraft
safety, which includes explosive or sabotage detection, research
into biomedical factors related to aircraft accidents, injuries and
fatalities; and minimization of environmental consequences of
flight such as noise reduction and control, and reduction and control of aircraft engine emissions.
The National Highway Traffic Safety Administration will obligate $27 million for motor vehicle and highway safety research,
and demonstrations including safety belt usage, alcohol countermeasures, and emergency medical services.
The Urban Mass Transportation Administration (UMTA) is expected to obligate $11 million to conduct research, training, and
human resources programs in all phases of urban mass transportation which will promote private sector involvement in mass transportation services or contribute toward meeting total urban transportation needs at minimum costs. In addition, UMTA supports
interdisciplinary research at colleges and universities including
training of personnel to conduct further research or to obtain
employment in urban mass transportation planning, construction,
operation or management.
The Federal Highway Administration will obligate $52 million to
continue research programs in highway planning, design, construction, and maintenance to ensure an effective and efficient highway
system. Research will also be directed toward identifying and correcting impediments to highway safety and improving truck safety.

SPECIAL ANALYSIS B

B-15

The Federal Railroad Administration will obligate $10 million to
support R&D efforts to enhance railroad safety.
The U.S. Coast Guard will obligate $21 million to support research to maintain and improve search and rescue systems, environmental protection, marine safety, aids to navigation, the enforcement of laws and treaties, and activities affecting all Coast
Guard missions.
The Research and Special Programs Administration will obligate
$2 million for R&D in hazardous materials, pipeline safety, radionavigation, transportation statistics, and emergency transportation.
The Office of the Secretary will obligate $8 million for broadbased policy research on domestic and international transportation
issues of importance to the nation and research in support of
licensing and the promotion of expendable launch vehicles.
ENVIRONMENTAL PROTECTION AGENCY

The Environmental Protection Agency (EPA) conducts research
and development in support of its regulatory responsibilities to
protect human health and the environment. The 1988 budget proposes $346 million in total obligations, representing an increase of
5 percent above 1987. The 1988 budget emphasizes: (1) a continued
commitment to acid rain research to provide a scientifically valid
framework for sound policy decisions; (2) enhanced research in air
toxics and new efforts to understand the phenomena of stratospheric ozone depletion and global climate change; and (3) providing the
scientific information necessary to support the Agency's hazardous
waste and Superfund activities.
The acid rain/energy research program will continue to support
development of more reliable information upon which mitigation
decisions can be made. The program directs basic research in areas
identified by the Interagency Task Force on Acid Precipitation to
provide enhanced data on the physical and chemical mechanisms
governing the acid rain phenomenon.
The air research program will be expanded in 1988 to include
studies to determine the effects of ozone on tree growth; development of manuals for the prevention and cleanup of accidental
releases of high hazard chemicals; new studies to characterize and
reduce emissions from incineration of municipal waste; development of advanced monitoring methods to characterize complex
mixtures of pollutants; and development of risk assessment methods for health endpoints other than cancer. EPA will also participate in the next National Health and Nutrition Examination
Survey (NHANES) as part of a multi-year interagency effort.
The pesticides program will continue to support development of
methods to detect the presence of and exposure to pesticides in
groundwater, and to assess management strategies to prevent such

C-14

• THE BUDGET FOR FISCAL YEAR 1988

contamination. Pesticides research will also support studies on the
effects of bioengineered pesticides.
The toxic substances research program will continue to address
hazards associated with products of biotechnology, as well as to
support ongoing engineering efforts that focus on the development
and evaluation of release and control methods for new and existing
chemicals.
The hazardous waste research program will address several areas
of study needed to implement regulations required by the 1984
RCRA Amendments.
The Superfund research program will be expanded under the
new Amendments to provide technical support in conducting cleanups and enforcement actions at Superfund sites. Field demonstrations of newly developed technologies for cleaning up Superfund
sites will be initiated and a new health research program will be
established to assess the risks of and monitor exposure to hazardous substances.
The drinking water research program will examine the health
effects of complex chemical mixtures and will provide technology
and monitoring data to support the development of drinking water
standards. The water quality research program will continue to
provide scientific data needed to support a water quality-based
approach to pollution control as well as develop data to support the
ocean disposal, estuarine and Great Lakes programs.
VETERANS' ADMINISTRATION

The Veterans' Administration (VA) conducts and administers a
program of medical, rehabilitation, and health services research
designed to improve the quality and increase the effectiveness of
health care for the veteran. In 1988, the VA will obligate $214
million for the conduct of R&D. This is an increase of $3 million
above 1987.
The VA intramural biomedical research program covers a wide
range of medical problems, with special emphasis on Agent
Orange, aging, alcoholism, post-traumatic stress, the health problems of female veterans and former prisoners of war, schizophrenia, spinal cord injury and tissue regeneration.
Rehabilitation research focuses on the problems of the disabled
veteran, the amputee and the paralyzed, and develops sensory aids
for impaired vision and hearing. This work brings the latest electronic and computer technology to bear on problems of prosthetics,
orthotics, wheelchair design, and spinal cord injury (including functional electrical stimulation of muscles in paralyzed limbs).
Health services research is designed to help health care professionals and managers to improve the effectiveness, economy, and
accessibility of health care services provided to the veteran. Re-

SPECIAL ANALYSIS B

B-15

search in this area deals with such areas as aging and preventive
medicine.
AGENCY FOR INTERNATIONAL DEVELOPMENT

Research and development activities of the Agency for International Development (AID) consist mainly of applied research to
solve specific problems associated with basic human needs and
social and economic research aimed at improving U.S. and hostcountry understanding of the barriers to development. Programs
under AID reflect the administration's recognition of the importance of R&D in addressing the problems faced by the Third World.
Over the years, AID has provided substantial support to research
efforts undertaken by U.S. universities and international research
centers such as the International Rice Research Institute in the
Philippines.
Obligations by AID for the conduct of R&D are estimated at $233
million for 1988, an increase of $16 million over 1987.
AID will continue to support research aimed at improving agricultural production capability, with an emphasis on efforts to overcome the mounting food crisis in Third World nations. R&D funds
will also be devoted to two other critical problems: population
growth, emphasizing methods of controlling increasing population
growth rates in the developing countries, and energy supply, emphasizing renewable and nonconventional energy sources critical
for development to proceed.
Significant research efforts are also being pursued in two other
promising areas: oral rehydration therapy and a malaria vaccine.
The former holds the promise of significantly reducing the incidence of child mortality associated with diarrheal diseases, currently estimated to claim the lives of over 1 million children annually.
Similarly, AID-supported research on a malaria vaccine may lead
to a breakthrough in controlling a disease which currently infects
some 200 million people worldwide and is the leading cause of
death in Third World nations.
OTHER AGENCY PROGRAMS

An additional 9 departments and agencies (listed in table J-2,
footnote 1) will obligate an estimated $463 million in 1988, for the
conduct of R&D, a decrease of about 10 percent below the 1987
level. Obligations by these agencies amount to less than 1 percent
of all federally-funded programs in R&D. The programs of these
agencies, like those of other agencies discussed above, are closely
related to serving the agencies' missions.
Among the agencies in this category that expect to increase their
obligations for R&D in 1988 are the Smithsonian Institution, the

C-14

• THE BUDGET FOR FISCAL YEAR 1988

U.S. Army Corps of Engineers, and the Departments of Labor,
Housing and Urban Development, and Treasury.
Table J-10 provides information on the long-term trends in Federal funding for the conduct of R&D.
Table J-10. TRENDS IN CONDUCT OF R&D
(Obligations in billions of dollars)
All other

Year

196 0
196 1
196 2
196 3
196 4
196 5
196 6
196 7
196 8
196 9
197 0
197 1
197 2
197 3
197 4
197 5
197 6
197 7
197 8
197 9
198 0
198 1
198 2
198 3
198 4
198 5
198 6
1987 (estimate)..
1988 (estimate)..
1
2

Includes military-related programs of the Departments of Defense and Energy.
Included in totals for conduct of R&D.

6.1
7.0
7.2
7.8
7.8
7.3
7.5

8.6
8.3
8.4

8.0

8.1
8.9
9.0
9.0
9.7
10.4
11.9
12.6
13.6
15.1
17.8
22.1
24.5
28.3
33.4
36.5
39.9
46.6

1.5
2.1
3.1
4.7
6.4
7.3
7.8
7.9
7.6
7.2
7.3
7.4
7.6
7.8
8.4
9.3
10.4
11.6
13.2
14.5
14.7
15.3
14.3
13.9
14.9
16.1
16.2
17.7

18.2

Full text of Budget of the United States Government, Special Analyses : Fiscal Year 1988

FRASER