Full text of Budget of the United States Government, Special Analyses : Fiscal Year 1989

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

•. C
EXECUTIVE OFFICE OF
Y
T
H
E
president
j ? / OFFICE OP MANAGEMENT
'v
£
AND BUDGET

SPECIAL
ANALYSES

BUDGET OF THE
UNITED STATES
GOVERNMENT

FISCAL YEAR

THE BUDGET

DOCUMENTS

Budget of the United States Government, 1989 contains the Budget Message of the
President and presents an overview of the President's budget proposals. It includes
summary information on the economic assumptions used in the 1989 Budget, Federal receipts, and Federal spending. In addition it includes supplemental information
on the baselines used in the Budget, Federal credit programs, Federal capital
expenditures, several topics that help place the budget in perspective, the budget
system and concepts, a listing of the Federal program by agency and account, and
summary tables.
United States Budget in Brief, 1989 is designed for use by the general public. It
provides a more concise, less technical overview of the 1989 budget than the above
volume, including summary and historical tables on the Federal budget and debt,
together with graphic displays.
Budget of the United States Government, 1989—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
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, 1989 contains analyses
that are designed to highlight specified program areas or provide other significant
presentations of budget data. The first part of this document includes information
about two alternative views of the budget; i.e., the current services and GrammRudman-Hollings budget baselines, and the national income accounts. The second
part provides analyses and tabulations of the totals that cover the Federal Government s finances and operation as a whole and reflect the ways in which Government
finances affect the economy. Financial information on Federal research and development programs and data on Federal civilian employment are also included in this
part.
Historical Tables, Budget of the United States Government, 1989 provides data on
budget receipts, outlays, surpluses or deficits, and Federal debt covering extended
time periods—in many cases from 1940-1993. 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 1989 Budget, so the data series are
comparable over time.
Management of the United States Government, 1989 includes the President's Management Message and provides the goals and strategies of the President's Management Improvement Program. It reports on the 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 and the
status of debt collection and prompt payment efforts.
Major Policy Initiatives, 1989 highlights the major policy changes proposed in the
1989 Budget. Each description includes a brief history of the program and the
conditions that precipitated the need for change. The President's proposal describes
concisely the initiative and, in most examples, presents a summary funding chart
that contains the budget authority and. outlay changes that would occur if enacted.
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. Baseline Estimates
B. Federal Transactions in the National Income and
Product Accounts

1-1
A-l

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

2-1
C-l
D-l
E-l
F-l
G-l
H-l
1-1
J-l

B-l

iii

PART 1

ALTERNATIVE VIEWS OF
THE BUDGET

INTRODUCTION
Part 1 includes two alternative views of the budget—baseline
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 (Baseline Estimates) presents two sets of baseline estimates required by law. The first, current services, reflects
the anticipated costs of continuing ongoing Federal programs and
activities at present levels without any policy changes. Estimates
are provided through 1993. The second, the Gramm-Rudman-Hollings budget baseline, is the baseline used to determine if automatic reductions will be triggered under the Balanced Budget and
Emergency Deficit Control Act as amended. These estimates are
provided for 1989 only.
Special Analysis B (Federal Transactions in the National Income
and Product Accounts) presents the Federal Government estimates
through 1989 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
BASELINE

ESTIMATES

This analysis discusses the two sets of baseline estimates that are
required to be submitted with the President's Budget. The first,
current services, is designed to show what budget estimates would
be if current policy continued unchanged into the future. The
second, the Gramm-Rudman-Hollings budget baseline, is developed
using the rules required to determine whether automatic spending
reductions would be triggered under the Balanced Budget and
Emergency Deficit Control Act of 1985 as amended in 1987. Each of
the baselines is discussed in turn. A final section compares the two
baselines.
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.
Current services estimates are designed to show what outlays,
receipts, and budget authority would be if no policy changes were
made, thus providing a base against which the administration's
budget proposals, or other proposals, may be compared. 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 1988-1993 will
actually be. Rather, they provide a base against which budgetary
alternatives may be assessed. This base embodies the cumulative

A-1

A-10

THE BUDGET FOR FISCAL YEAR 1989

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 is to make the results useful to the
Congress and the public. The current services concepts used in this
analysis are not the only ones possible. Different concepts may be
useful for different purposes. For mandatory programs and receipts, the current services estimates presented in this analysis
generally reflect the expected costs of continuing ongoing programs
through 1993, without policy change; that is, they omit all proposed
new legislative initiatives, presidential or congressional, that are
not now enacted. 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. For
discretionary programs, the current services estimates are based on
the 1988 levels in enacted appropriations. For 1989 only, the 1988
levels are adjusted to include the increases assumed in the Bipartisan Budget Agreement as stated in the Omnibus Budget Reconciliation Act (OBRA) of 1987. (The Act set targets for discretionary
programs that are not automatically self-enforcing; achieving them
will require specific appropriations.) The 2 percent increase assumed for nondefense accounts in 1989 represents the change in
budget authority between the nondefense ceiling set for 1988 and
the one set for 1989. The 1989 level then provides the program base
to project discretionary programs into 1990 and beyond. (The major
exceptions to this approach are described below.)
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

A-ll

SPECIAL ANALYSIS A

the selected economic assumptions, see Part 3 of the Budget of the
United States Government, Fiscal Year 1989.
Table A-1. 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
State and local purchases deflator
Unemployment rate (percent, annual average)
Interest rate, 91-day Treasury bills (percent)
Interest rate, 10-year Treasury notes (percent)

1987

1988

1989

1990

1991

1992

1993

4,409

4,706

5,023

5,388

5,759

6,119

6,465

2.5

3.3

2.8

3.5

3.4

3.3

2.7
2.7
4.2

3.3
4.3
3.8

3.8
4.2
4.1

3.6
3.7
3.9

3.3
3.3
3.5

2.8
2.8
3.0

2.3
2.3
2.4

6.3

5.8

5.6

5.4

5.3

5.2

5.7

5.5

5.2

5.0

4.6

4.1

3.6

7.9

8.4

7.5

6.9

6.2

5.2

4.5

The current services estimates reflect the effects of inflation on
virtually all budget accounts, including, for 1990 through 1993,
discretionary programs. (For 1989, discretionary programs are held
slightly below the assumed inflation rate because of the incorporation of the Bipartisan Budget Agreement levels.) The current services estimates thus provide a "constant real program" base against
which to measure the President's budget proposals. To further
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
authority and outlay totals are the same as those proposed by
the President. The budget authority and outlay levels for 1989
are the same as the ceilings on defense spending included in
OBRA. For 1990 and beyond, budget authority for the national
defense function includes two percent real growth per year.
—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 and

A-10

THE BUDGET FOR FISCAL YEAR 1989

for veterans compensation for which historically such an adjustment has been enacted.
—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.
—Individual grants to State and local governments are assumed
to increase by 2 percent in 1989, consistent with the discretionary ceilings in OBRA, and then to be funded at the same real
(constant-dollar) amounts as in 1989, through 1993, unless the
grants are: (a) set by law at specified amounts; (b) tied by
legislation to cost-of-living increases or the unemployment
rate; or (c) affected by changes in beneficiary populations or
other factors that alter benefit payments under entitlement
programs.
—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 set by law, the 1988 Federal pay raise was 2 percent for
civilians and military personnel. All funding for the pay raise
is assumed to come from already enacted 1988 appropriations,
as specified in the conference report on the 1988 Continuing
Resolution (Public Law 100-202). For 1989, the civilian agency
pay raise is assumed to be 2 percent, as agreed to by the
bipartisan budget negotiators. Funding for the pay raise is
assumed to be included within the two percent increase applied to discretionary accounts. For 1990 and beyond, the civilian agency pay raise is assumed to equal the inflation rate as
measured by the gross national product deflator. Funding for
these raises is included in an allowance.
—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.

A-ll

SPECIAL ANALYSIS A

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
generally assumed for purposes of current services estimates that it
will be renewed. 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 $1,102.4 billion in 1989, 4.4 percent higher than in 1988, and
budget authority is estimated to be $1,224.8 billion, an increase of
4.1 percent over 1988. Outlays are projected to grow at an average
annual rate of 4.1 percent from 1989 to 1993. Receipts for 1989 are
estimated to increase 6.1 percent on a current services basis, from
$908.9 billion in 1988 to $964.0 billion in 1989. Receipts are projected to grow at an average annual rate of 6.9 percent from 1989 to
1993. The resulting 1989 current services deficit is $138.5 billion,
$9.0 billion lower than the $147.5 billion deficit for 1988. The deficit
is projected to decline further each year, falling to $39.0 billion in
1993.
Table A-2. CURRENT SERVICES TOTALS
(In billions of dollars)

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

1987
actual

1988

1989

1990

1991

1992

1993

1,099.9
(886.5)
(213.4)
854.1
(640.7)
(213.4)
1,004.6
(810.8)
(193.8)

1,176.2
(936.3)
(239.9)
908.9
(669.0)
(239.9)
1,056.4
(853.3)
(203.1)

1,224.8
(966.3)
(258.5)
964.0
(705.5)
(258.5)
1,102.4
(889.1)
(213.4)

1,293.8
(1,011.4)
(282.4)
1,043.2
(760.8)
(282.4)
1,154.2
(930.0)
(224.2)

1,385.4
(1,079.4)
(306.0)
1,123.2
(817.2)
(306.0)
1,209.2
(973.1)
(236.2)

1,440.0
(1,115.0)
(325.0)
1,189.0
(864.0)
(325.0)
1,251.9
(1,006.8)
(245.1)

1,496.3
(1,149.5)
(346.8)
1,257.3
(910.5)
(346.8)
1,296.2
(1,042.2)
(254.0)

-150.4
-147.5
-138.5
-111.0
-86.0
-62.9
-39.0
(-170.0) (-184.3) (-183.5) (-169.3) (-155.9) (-142.8) (-131.7)
(19.6)
(36.8)
(58.3)
(69.8)
(92.7)
(45.1)
(79.8)

Receipts.—Table A-3 shows receipts by major source on a current services basis. Current services receipts are projected to increase by $55.1 billion from 1988 to 1989 and by $293.3 billion from

A-10

THE BUDGET FOR FISCAL YEAR 1989

1989 to 1993, largely due to assumed increases in incomes resulting
from both real economic growth and inflation.
Individual income taxes are estimated to increase by $19.4 billion
from 1988 to 1989 on a current services basis. This growth of 4.9
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 7.9 percent between 1989
and 1993, to $559.5 billion.
Corporation income taxes on a current services basis are estimated to grow by $12.8 billion or 12.1 percent from 1988 to 1989, in
large part due to higher corporate profits. Corporation income
taxes are projected to increase at an average annual rate of 7.1
percent from 1989 to 1993.
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)

1987
actual

1988

1989

1990

1991

1992

1993

392.6
83.9

393.4
106.0

412.8
118.8

450.3
130.9

492.1
142.5

526.3
151.0

559.5
156.2

303.3
(89.9)
(213.4)
32.5
41.9

331.5
(91.6)
(239.9)
35.4
42.7

352.9
(94.5)
(258.5)
35.2
44.2

380.5
(98.1)
(282.4)
34.9
46.6

407.9
(101.9)
(306.0)
32.6
48.1

431.0
(106.0)
(325.0)
31.8
49.0

458.1
(111.3)
(346.8)
32.2
51.3

854.1
(640.7)
(213.4)

908.9
(669.0)
(239.9)

964.0
(705.5)
(258.5)

1,043.2
(760.8)
(282.4)

1123.2
(817.2)
(306.0)

1,189.0
(864.0)
(325.0)

1,257.3
(910.5)
(346.8)

Social insurance taxes and contributions are estimated to increase by $21.4 billion on a current services basis between 1988 and
1989, and by an additional $105.1 billion between 1989 and 1993.
The estimates reflect assumed increases in total wages and salaries
paid; scheduled increases in the combined employer-employee
social security (OASDHI) tax rate from 15.02 percent to 15.3 percent on January 1, 1990; and annual increases in the social security
taxable earnings base to $57,600 in 1993.
On a current services basis, excise taxes are estimated to decrease by $0.1 billion or 0.4 percent from 1988 to 1989 and by $3.0
billion from 1989 to 1993. The estimates for 1992 and 1993 assume
extension of the highway trust fund taxes scheduled to expire
September 30, 1993 and the hazardous substance response trust
fund taxes scheduled to expire December 31, 1991. The estimates
for 1991-93 assume extension of the airport and airway trust fund
taxes that are scheduled to expire December 31, 1990. However, in
accordance with the current law requirement that beginning in

SPECIAL ANALYSIS A

A-ll

calendar year 1990 these taxes must be reduced if appropriations
for the programs they fund are less than 85 percent of authorizations, the estimates assume that most of these taxes are extended
at 50 percent of their current law rate.
Other receipts (estate and gift taxes, customs duties, and miscellaneous receipts) are projected to increase on a current services
basis by $7.6 billion from 1988 to 1993.
Outlays.—The level of outlays necessary to continue ongoing Federal programs and activities at current services levels is estimated
at $1,102.4 billion in 1989. The increase in current services outlays
from 1988 to 1989 is $46.1 billion, or 4.4 percent. Between 1989 and
1993 current services outlays are projected to increase at an average annual rate of 4.1 percent.
Table A-4 shows current services outlays by function. Estimates
by agency are presented in table A-5. The nondefense outlay increases from 1988 to 1989 are largely due to increases in the
number of beneficiaries, cost-of-living adjustments, increases in discretionary programs agreed to as part of the Bipartisan Budget
Agreement and, in the case of interest, increased borrowing requirements.
Table A-6 shows the major components of the changes in current
services outlays between 1988 and 1989. Outlays for social security
(OASDI) are estimated to increase by $14.1 billion between 1988
and 1989, from $219.7 billion in 1988 to $233.8 billion in 1989.
Medicare outlays are estimated to increase by $6.2 billion, from
$78.9 billion in 1988 to $85.0 billion in 1989, largely as a result of
increases in medical care prices and utilization. Outlays for income
security programs are estimated to rise by $6.2 billion, from $129.6
billion in 1988 to $135.8 billion in 1989. This increase includes $2.0
billion for civil service retirement and disability programs, resulting from an automatic cost-of-living adjustment and an increase in
the number of beneficiaries and $1.5 billion for subsidized housing
resulting from increases in rental housing prices and more households being served. Outlays for the remaining income security programs are estimated to grow by $2.8 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 $8.6 billion
from 1988 to 1989 primarily from spending approved in prior years.
The decline of $4.9 billion for the commerce and housing credit
function is primarily the result of a decrease in Federal Deposit
Insurance Corporation outlays because costs associated with assistance to certain large banks will not recur in 1989, a decrease in
Federal Savings and Loan Insurance Corporation because the
volume of assistance provided through the issuance of notes is
anticipated to be less in 1989 than 1988, and a decrease in postal

A-10

THE BUDGET FOR FISCAL YEAR 1989
Table A-4. CURRENT SERVICES OUTLAYS BY FUNCTION
(In billions of dollars)

1987
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
Off-budget
Veterans benefits and services
Administration of justice
General government
Central federal credit activities
Net interest
On-budget
Off-budget
Allowances
Undistributed offsetting receipts:
Employer share, employee retirement (onbudget)
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...

274.0
8.0
11.6
9.2
4.1
13.4
27.4

6.2
26.2

5.1

29.7
40.0
75.1
123.2
207.4
(4.9)
(202.4)

26.8

Current services
1988
estimate

1989
estimate

administration
proposals

277.3
8.1
9.9
10.9
2.7
15.1
22.4
12.4
27.2
6.3

285.5
8.5
13.4
11.5
4.7
15.9
22.3
7.4
27.9

6.6

285.5
8.5
13.3
13.1
3.1
16.0
21.7
7.9
27.3
5.9

33.7
44.5
78.9
129.6
219.7
(5.0)
(214.7)
28.7
8.3
8.9

35.2
48.0
85.0
135.8
233.8
(5.6)

37.4
47.8
84.0
135.6
233.8
(5.6)

(228.2)
28.8

(228.2)

138.6
(143.9)
(-5.3)

147.9
(155.2)
(-7.3)

<!ffil

29.6
9.9
9.5
-6.3
151.8
(161.9)
(-10.1)

-27.3

-28.7

-29.0

-3.3

-4.3

-4.7

-4.0
-1.9

-3.2

-3.9

-3.9
-3.3

-36.5
(-33.2)
(-3.3)

-36.1
(-31.8)
(-4.3)

-37.7
(-33.0)
(-4.7)

-41.0
(-36.3)
(-4.7)

1,004.6
(810.8)
(193.8)

1,056.4
(853.3)
(203.1)

1,102.4
(889.1)
(213.4)

1,094.2
(880.9)
(213.3)

7.5
7.6

8.5
9.2

151.9

* $50 million or less.

service due to increased postage receipts resulting from the projected 16 percent average rate increase in April, 1988.
Outlays for the foreign military sales credit program and Rural
Electrification Administration will increase by $3.3 billion and $2.0
billion, respectively, largely because 1988 outlays are artifically low
due to expected large loan prepayments. Other large changes are a
$2.5 billion increase for medicaid grants and an increase in receipts
from the Outer Continental Shelf, which reduces outlays by $0.8
billion.

A-ll

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

1987
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
Undistributed offsetting receipts:
Interest received by on-budget trust funds.
Interest received by off-budget trust funds
Interest received by OCS escrow accountEmployer share, employee retirement (onbudget)
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....

Current services
1988
estimate

1989
estimate

1989
administration
proposals

2.1

1.8
1.2
0.1
10.4
50.4
2.1
274.0
20.7
16.8
10.7

1.9
1.4
0.1
5.2
50.7
2.5
277.3
22.3
18.8
10.5

1.9
1.4
0.1
8.7
53.1
2.7
285.5
23.7
20.5
10.9

1.7
0.1
8.8
48.3
2.6
285.5
23.7
22.7
11.8

148.9

160.4

170.1

168.6

202.4

214.7

228.2

15.5
5.0
4.3
23.5

18.6

19.1
5.3
5.3
23.2
3.4
27.1
211.3
5.0

21.6
5.0
5.8
23.1
3.4
26.4
205.7
5.1

2.8

25.4
180.3
4.9
0.1

5.4
5.2

22.1

3.3
26.3
198.3
4.9

-0.2

11.0

9.1
28.5
0.3
28.5
17.9

9.7
30.5
0.3
28.7
13.5

30.5
-0.4
29.5
13.3

-29.7
-5.3
-0.9

-34.3
-7.3

-38.2

-10.1

-0.5

-27.3

-28.7

-29.0

-3.3

-4.3

-4.7

-4.0
-1.9

-3.2

-3.9

-3.9
-3.3

-86.5
(-71.7)
(-14.9)

-89.9
(-75.0)
(-14.9)

1,102.4
(889.1)
(213.4)

1,094.2
(880.9)
(213.3)

7.6
27.0
-0.1

27.0
14.3

-72.3
(-63.7)
(-8.6)
1,004.6
(810.8)
(193.8)

-77.7
(-66.1
(-11.6
1,056.4
(853.3)
(203.1)

* $50 million or less.

The estimated 1989 current services deficit of $138.5 billion
would add a like amount to the Federal debt. Primarily due to this
increase in debt, net interest outlays would increase by $4.0 billion
between 1988 and 1989 under current services assumptions.

A-10

THE BUDGET FOR FISCAL YEAR 1989

Table A-6. CHANGE IN CURRENT SERVICES BUDGET AUTHORITY AND OUTLAYS, 1987-88
(In billions of dollars)
Budget
authority

1988 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
Undistributed offsetting receipts
All other programs, net
Subtotal, changes
(On-budget)
(Off-budget)
1989 current services estimate ..
(On-budget)
(Off-budget)

1,176.2
(936.3)
(239.9)
8.1
22.4
11.1
-0.1

3.8
-0.4
-0.3
0.1

0.2

3.2

*0.2
0.3
1.9
-3.6
0.1
-2.0
0.5

2.5
0.7
-0.2

4.0
-1.6

0.7
48.5
(29.9)
(18.6)
1,224.8
(966.3)
(258.5)

* $50 million or less.

Budget Authority.—Current services budget authority is estimated to total $1,224.8 billion in 1989, $48.5 billion more than in 1988.
Increases in budget authority between 1988 and 1989 generally
reflect the higher funding levels for discretionary programs agreed
to as part of the Bipartisan Budget Agreement and increases
needed to maintain mandatory programs at levels specified in current law. 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

A-ll

SPECIAL ANALYSIS A

erratic year-to-year changes due to sporadic funding patterns or
advance funding.
Table A-7. PROGRAMMATIC ASSUMPTIONS
Fiscal years
1988

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 income 2
Maintenance assistance (AFDC)
Food stamps 3
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 4
Strategic petroleum reserves annual fill rate
(millions of barrels)

1990

1989

1991

1993

1992

38,470
920
2,032
1,557
2,528
1,229
339
4,415
11,002
18,823

39,047
903
2,101
1,589
2,508
1,160
320
4,540
11,079
18,771

39,679
887
2,167
1,618
2,487
1,099
301
4,660
11,124
18,351

40,316
872
2,232
1,647
2,465
1,045
283
4,790
11,204
18,160

40,844
857
2,294
1,677
2,441
996
263
4,902
11,268
18,005

41,363
840
2,356
1,708
2,418
955
248
5,005
11,343
17,954

4,255
24,178

4,405
24,996

4,485
25,179

4,565
25,426

4,645
25,648

4,725
25,871

31,820
31,576

32,428
32,183

33,016
32,773

33,580
33,330

34,127
33,859

34,661
34,384

4.2
4.2
1.4

4.2
4.2
4.1

4.0
4.2
3.6

3.6
3.6
3.2

3.1
3.1
2.8

2.6
2.6
2.4

5.8
2.2

5.6
2.2

5.4
2.0

5.3
2.0

5.2
1.9

In current pay status as of June.
2 Includes those receiving federally administered State supplements.
3 Average monthly participation.
4 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

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 1988 and 1989 are also shown in table A-6.
An increase in budget authority of $22.4 billion for social security (for which trust fund receipts constitute budget authority) is
primarily due to higher payroll tax payments. Budget authority for
the national defense function increases by $8.1 billion to reach the
ceiling included in OBRA. Other major changes in current services
budget authority include an $11.1 billion increase for medicare, a
$3.8 billion increase for Federal employee retirement and disability
programs, and a $3.6 billion decrease for commerce and housing
credit programs.

A-10

THE BUDGET FOR FISCAL YEAR 1989
Table A-8. CURRENT SERVICES BUDGET AUTHORITY BY FUNCTION
(In billions of dollars)

1987
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
Off-budget
Veterans benefits and services
Administration of justice
General government
Central federal credit activities
Net interest
On-budget
Off-budget
Allowances
Undistributed offsetting receipts:
Employer share, employee retirement (onbudget)
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 budget authority ..
On-budget
Off-budget

Current services
estimate

1989
estimate

1989
administration
proposals

279.5
8.0
18.7
12.5
3.4
14.6
25.4
10.9
27.0
6.6

283.2
8.3
16.2
10.7
5.5
15.4
22.5
16.3

290.8
8.7
16.2

9.5

7.5

33.2
41.3
84.0
160.7
226.9
(4.9)
(222.0)
27.5
8.8
8.7

35.0
45.5
93.9
171.0
256.5
(5.0)
(251.5)
29.3
8.5
9.2

35.6
48.8
105.0
174.1
278.9
(5.6)
(273.3)
29.1
8.7
9.7

138.6
(143.9)
(-5.3)

147.9
(155.2)
(-7.3)

151.9
(162.0)
(-10.1)

39.4
48.8
106.5
173.2
278.9
(5.6)
(273.3)
30.2
10.3
9.9
3.4
151.8
(161.9)
(-10.1)

-27.3

-28.7

-29.0

-3.3

-4.3

-4.7

-4.0
-1.9

-3.2

-3.9

-3.9
-3.3

-36.5
(-33.2)
(-3.3)

-36.1
(-31.8)
(-4.3)

-37.7
(-33.0)
(-4.7)

-41.0
(-36.3)
(-4.7)

1,099.9
(886.5)
(213.4)

1,176.2
(936.3)
(239.9)

1,224.8
(966.3)
(258.5)

1,233.2
(974.7)
(258.5)

28.0

11.0

5.5
15.8
24.4
12.6

28.2

290.8
8.7
16.5
13.9
4.8
15.2
23.8
14.8
27.0

6.2

* $50 million or less.

Change in Current Services Since Release of the 1988.—When the
1988 Budget was released in January, 1987, the current services
deficit for 1988 was estimated to be $150 billion. These projections
were based on the 1987 continuing resolution and enacted law at
the time they were issued. The current estimate for 1988 is $147
billion, or $3 billion less. The net effect of changes in the national
defense function have reduced the estimate of the 1988 deficit by
$12 billion since last January. Changes in economic assumptions
have increased the deficit by approximately $21 billion, from the
effects of reducing receipts due primarily to lower real growth and

A-ll

SPECIAL ANALYSIS A

increasing outlays due primarily to higher interest rates. Nondefense policy changes have reduced the 1988 deficit by approximately $17 billion, mostly from legislation enacted to implement the
Bipartisan Budget Agreement. Technical reestimates account for
the remaining difference, or a $6 billion increase in the 1988 current services deficit.
Table A-9. CURRENT SERVICES BUDGET AUTHORITY BY AGENCY
(In billions of dollars)

1987
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
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 (onbudget)
Employer share, employee retirement (offbudget)
Rents and royalties on the Outer Continental Shelf
Sale of major assets

Current services
1988
estimate

1989
estimate

1989
administration
proposals

1989
difference

1.9
1.3
0.1
13.0
52.5
2.2
279.5
35.1
19.6
10.1

1.9
1.3
0.1
10.5
59.9
2.4
283.2
36.9
20.3
10.8

2.0
1.4
0.1
10.4
57.6
2.7
290.8
38.4
20.8
11.5

2.1
1.7
0.1
10.6
55.5
2.4
290.8
38.5
24.2
12.5

159.7

176.7

190.0

191.4

222.0

251.5

273.3

14.7
5.3
5.2
30.3
3.8
26.1
181.9
5.3
0.3

15.4
5.4
5.4
31.5
3.7
27.1
198.3
5.0
0.1

15.2
5.3
5.5
31.3
3.8
27.4
211.5
5.0
0.1

16.2
4.8
6.2
31.7
3.8
26.1
215.8
4.7

0.9
-0.5
0.7
0.5

10.9
44.8
0.6
27.4
18.8

8.9
47.7
0.5
29.2
20.3

9.1
50.4
0.5
29.0
18.0

11.5
50.5
0.8
30.1
17.8

2.4

0.2
0.4

_ *

0.2
-2.1
-0.2
*

3.4
1.0
1.4

_ *

-1.3
4.2
-0.3
-0.1
*

0.3
1.1
-0.2

_ *

-29.7
-5.3
-0.9

-34.3
-7.3

-38.2
-10.1
-0.5

-27.3

-28.7

-29.0

-3.3

-4.3

-4.7

-4.0
-1.9

-3.2

-3.9

-3.9
-3.3

-3.3

Total Undistributed offsetting receipts
On-budget
Off-budget

-72.3
(-63.7)
(-8.6)

-77.7
(-66.1)
(-11.6)

-86.5
(-71.7)
(-14.9)

-89.9
(-75.0)
(-14.9)

-3.3
(-3.3)
(-*)

Total budget authority
On-budget
Off-budget

1,099.9
(886.5)
(213.4)

1,176.2
(936.3)
(239.9)

1,224.8
(966.3)
(258.5)

1,233.2
(974.7)
(258.5)

8.4
(8.4)
(-*)

* $50 million or less.

_ *

A-10

THE BUDGET FOR FISCAL YEAR 1989

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 $8.9 billion in 1989 and would reduce the 1993
deficit by $15.7 billion. Between 1988 and 1993, the cumulative
deficit reductions proposed by the administration total $50.8 billion. Receipts proposals would reduce the deficit by a total of $4.8
billion, whereas proposed outlay reductions would reduce the deficit by $46.0 billion. As shown in Table A - l l , cumulative increases
for international affairs, space and science, and administration of
Table A-10. SUMMARY OF CURRENT SERVICES AND PROPOSED BUDGET TOTALS
(In billions of dollars)
1987
actual

1991

1992

1993

964.0
.7

1,043.2
.9

1,123.2
1.2

1,189.0
.9

1,257.3
.8

909.2

964.7

1.044.1

1,124.4

1,189.9

1.258.1

1,004.6

1,056.4
-0.5

1,102.4
-8.2

1.154.2
-5.9

1,209.2
-5.6

1,251.9
-10.9

1.296.2
-14.9

1,004.6

1,055.9

1,094.2

1,148.3

1,203.7

1,241.0

1,281.3

-150.4 -147.5 -138.5
0.7
8.9

-111.0
6.8

-86.0
6.8

-62.9
11.9

-39.0
15.7

-150.4 -146.7 -129.5 -104.2

-79.3

-51.1

-23.3

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

Estimate
1990

1988

1989

854.1

908.9
.3

854.1

Table A - l l . COMPOSITION OF ADMINISTRATION BUDGET PROPOSALS:
CHANGE FROM CURRENT SERVICES
(In billions of dollars)
1993

Total 19881993

-10.9

7.2
-10.3
-0.9
-11.0

31.1
-27.9
-2.0
-47.3

-5.6
-1.2

-10.9
-0.9

-14.9
-0.8

-46.0
-4.8

-6.8

-11.9

-15.7

-50.8

1988

1989

1990

1991

1992

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

0.7
-1.0
-0.1
-0.1

2.9
-2.0
-0.3
-8.9

5.5
-2.2
-0.3
-8.9

7.3
-5.0
-0.4
-7.4

7.5
- 7 . 5*

Subtotal, outlaysReceipts 2

-0.5
-0.3

-8.2
-0.7

-5.9
-0.9

-0.7

-8.9

-6.8

Total deficit
reduction

Note: Estimates exclude the effect of the administration's credit reform proposal.
*50 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.

A-ll

SPECIAL ANALYSIS A

justice are $31.1 billion. Reductions to human resources programs
account for $27.9 billion of the cumulative reduction in total deficits. Reductions in other domestic program areas account for $47.3
billion of the total deficit reduction. Net interest savings from all of
the reductions during 1988-1993 total $2.0 billion.
Receipts.—As shown in table A-12, the administration's estimate
of receipts for 1988 is only $0.3 billion greater than the current
services level of $908.9 billion.
Current services receipts for 1989 are estimated at $964.0 billion.
Legislative and administrative proposals, which are estimated to
increase receipts to $964.7 billion, or $0.7 billion above the current
services level, include the following: extension of medicare hospital
insurance (HI) coverage to all State and local government employees, revision of research and experimentation (R&E) allocation
rules, initiation of a permanent R&E tax credit, exemption of
mutual fund shareholder expenses from the two percent floor for
miscellaneous deductions, increases in Nuclear Regulatory Commission (NCR) and Federal Emergency Management Agency
Table A-12. DIFFERENCES BETWEEN CURRENT SERVICES AND ADMINISTRATION POLICY RECEIPTS
(In billions of dollars)
1988

Current services receipts estimates..
(On-budget)
(Off-budget)
Differences:
Extend HI coverage to State and
local employees
R&E allocation rules
R&E credit
Mutual fund exemption
Customs user f e e s 1 2
FEMA fees
NRC fees
Other
Total differences 3
(On-budget)
(Off-budget)
Administration policy receipts estimates
(On-budget)
(Off-budget)

908.9
(669.0)
(239.9)

-0.4
0.6

1990

1991

1992

1993

964.0
(705.5)
(258.5)

1,043.2
(760.8)
(282.4)

1,123.2
(817.2)
(306.0)

1,189.0
(864.0)
(325.0)

1,257.3
(910.5)
(346.8)

1.6
-0.6
-0.4
-0.4
0.6*

2.1
-0.7
-0.8
-0.5
0.5
*
*
0.2

2.1
-0.7
-1.0
-0.6
0.5

2.2
-0.8
-1.2
-0.7
0.5*

2.2
-0.9
-1.4
-0.9
0.5*

*
0.9

*
1.2

1989

*
_ *

-0.1

*
0.8

0.3
(0.3)

0.7
(0.7)

0.9
(0.9)
(-*)

1.2
(1.3)
(-0.1)

0.9
(1.0)
(-0.1)

0.8
(0.9)
(-*)

909.2
(669.3)
(239.9)

964.7
(706.2)
(258.5)

1,044.1
(761.7)
(282.4)

1,124.4
(818.5)
(306.0)

1,189.9
(865.0)
(324.9)

1,258.1
(911.3)
(346.7)

*$50 million or less.
1 Net of income tax offsets.
2 These estimates reflect only the effect of the proposal on budget receipts. The proposal increases Customs outlays by the following amounts:
1988, $0.7 billion; 1989, $0.7 billion; 1990, $0.7 billion; 1991, $0.8 billion; 1992, $0.8 billion; and 1993, $0.8 billion.
3 Because the proposed reclassification of the Customs user fee is estimated to increase outlays, the receipts proposals increase or decrease
( - ) the deficit by the following amounts: 1988, $0.4 billion; 1989, $26 million; 1990, $ - 0 . 2 billion; 1991, $ - 0 . 4 billion; 1992, - 0 . 1 billion;
and 1993, $ - 1 7 million.

(FEMA) user fees, and a modification and reclassification of the
customs ad valorem user fee as governmental receipts. A more
detailed discussion of the administration's receipts proposals is pre-

A-10

THE BUDGET FOR FISCAL YEAR 1989

sented in the Budget of the United States Government, Fiscal Year
1989, Part 4, "Federal Receipts by Source."
The administration's proposals are estimated to increase receipts
above the current services level between $0.8 billion and $1.2 billion each year, 1990-1993.
Outlays.—The total outlay change proposed by the administration is, on net, a $8.2 billion reduction for 1989. Of this reduction,
$7.5 billion is from loan and real asset sales. The remaining $0.8
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 1989, 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 1989, Part 5, "The Federal Program
by Function."
Table A-13. DIFFERENCES BETWEEN CURRENT SERVICES AND ADMINISTRATION POLICY OUTLAYS
(In billions of dollars)
1988

Current services estimates
1,056.4
(On-budget)
(853.3)
(203.1)
(Off-budget)
Differences:
National defense
International affairs:
International development and
humanitarian assistanceInternational security assistance:
Military assistance
Other
Subtotal, international
security assistance.
Conduct of foreign affairs
Foreign information and exchange activities
International financial programs
Subtotal, international affairs
General science,
technology

space,

1990

1991

1992

1993

1,296.2
(1,042.2)
(254.0)

1,102.4
(889.1)
(213.4)

1,154.2
(930.0)
(224.2)

1,209.2
(973.1)
(236.2)

-0.3

-0.4

-0.5

-0.7

-0.1
0.2

-0.1
0.3

-0.2
0.2

-0.3
0.1

0.1*

0.2
0.1

_ *

-0.1
0.2
*

-0.2
0.2

0.1

*
0.1

0.2
0.1

0.1

1,251.9
(1,006.8)
(245.1)

0.1
0.1

-0.1

0.1

-0.1

-0.4

-0.7

1.6

3.8

5.3

5.5

5.4

-1.7

-0.3

-0.5

-0.7

-1.1

0.1

-1.6

-0.3

-2.0

-1.2

and

Energy
Natural resources and environment

1989

A-ll

SPECIAL ANALYSIS A

Table A-13. DIFFERENCES BETWEEN CURRENT SERVICES AND ADMINISTRATION POLICY OUTLAYS—
Continued
(In billions of dollars)
1988

Agriculture:
Farm income stabilization
Agricultural research and
services

1989

1990

1991

1992

1993

-0.5

-0.7

-0.8

-0.6

-0.1

-0.2

-0.3

-0.4

Subtotal, agriculture

-0.6

-0.7

-1.0

-1.2

-1.1

Commerce and housing credit:
Mortgage credit and deposit
insurance
Postal service
Other advancement of commerce

0.8
-0.2

1.6*

0.9
0.1

0.2
0.3

-0.1
0.6

-0.2

0.2

0.1

-0.1

0.4

1.4

1.1

0.5

0.4

-1.2
0.3
0.2*

-2.0
0.5
0.3
*

-2.8
0.6
0.4

-3.2
0.6
0.5*

-3.4
0.6
0.5*

-0.6

-1.1

-1.8

-2.0

-2.3

-0.7

-1.2

-1.8

-2.0

-2.1

2.2
- 0 . 1*

3.0
0.3
-0.2

1.9
0.3
-0.5

0.8
0.2
-0.6

-0.2
0.2
-0.8

2.1

3.1

1.8

0.3

-0.9

-0.4
0.2

-0.5
0.6

-0.6
0.5

-0.7
0.3

-0.8
0.2

-0.2

0.1

-0.1

-0.4

-0.6

-1.0

-2.0

-3.2

-4.2

-5.7

*
*

_*
*

_ *
*

-0.1

- 0 . 1*

-0.1
-0.3

0.1
-0.1
-0.7
_*

_*
-0.3

0.1
-0.1
-0.6
_*

Subtotal, commerce and
housing credit
Transportation:
Ground transportation
Air transportation
Water transportation
Other transportation
Subtotal, transportation, „
Community and regional development
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
Medicare
Income security:
General retirement and disability (excluding social
security)
Federal employee retirement
and disability
Unemployment compensation.
Housing assistance
Food and nutritional assistance
Other income security
Subtotal, income security..,
Social security

-0.1

-0.2
-0.1

_ *

-0.5

-0.6

-0.7

-0.3

-0.5

-0.9

-1.3

-1.5

_ *

-0.1

-0.2

-0.3

A-10

THE BUDGET FOR FISCAL YEAR 1989

Table A-13. DIFFERENCES BETWEEN CURRENT SERVICES AND ADMINISTRATION POLICY OUTLAYS—
Continued
(In billions of dollars)
1988

(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

(-*)

-0.4

(*)
(-0.2)

1993

(*)
(-0.3)
_ *

_ *
*
*

1.2

0.9

0.7

0.1
0.7

-0.9

0.8

1.2

0.9

0.7

0.9
0.2
0.3

0.9
0.4
0.4

0.9
0.6
0.4

0.9
0.8
0.4

0.9
0.9
0.5

0.7

1.4

1.7

1.9

2.2

2.3

-0.1

0.2
0.2

0.3
0.2

0.3
0.1

0.4
-0.3

0.4
-0.1

-0.1

0.3

0.5

0.4

0.3

-6.3

-7.7

-6.3

-5.3

-5.2

-0.1
(-0.1)

-0.1
(-0.1)
(-*)
*

0.2
(0.2)
(*)

0.3
(0.3)
(*)

0.9
(0.9)
(*)

-0.5

-0.6

-0.5

-0.3

-0.4
(-0.4)
(*)

-0.4
(-0.5)
(0.1)

-0.7
(-0.7)
(0.1)

-1.0
(-1.1)
(*)

-3.3

-1.9

-0.2

-3.3
(-3.3)

-2.3
(-2.3)
(*)

-0.7
(-0.7)
(0.1)

-0.9
(-1.0)
(0.1)

-1.3
(-1.3)
C)

-0.5
(-0.5)

-8.2
(-8.2)
(-*)

-5.9
(-5.9)
(-0.1)

-5.6
(-5.5)
(-0.1)

-10.9
(-10.8)
(-0.1)

-14.9
(-14.7)
(-0.2)

1,055.9
(852.8)
(203.1)

1,094.2
(880.9)
(213.3)

1,148.3
(924.2)
(224.1)

1,203.7
(967.6)
(236.1)

1,241.0
(996.0)
(245.0)

1,281.3
(1,027.5)
(253.8)

Subtotal, undistributed offsetting receipts
(On-budget)
(Off-budget)

(*)
(-0.2)

1992

0.8

Undistributed offsetting receipts:
Employer share, employee retirement
(On-budget)
(Off-budget)
Rents and royalties on the
Outer Continental Shelf
Sale of major assets

Administration policy
estimates
(On-budget)
(Off-budget)

1991

-0.5

Allowances

Total, differences
(On-budget)
(Off-budget)

-0.1
*

(*)
(-0.1)

Central federal credit activities
Net interest
(On-budget)
(Off-budget)

1990

1989

A-ll

SPECIAL ANALYSIS A

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 1993 by $50.8 billion, from $2,458.4 billion to $2,407.5
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

1992

1989

1990

128.0
127.2

135.9
127.0

110.5
103.6

85.5
78.7

62.3
50.5

38.4
22.6

0.7

8.9

6.8

11.9

15.7

2,025.8 2,161.8 2,272.2
2,025.1 2,152.1 2,255.7

2,357.7
2,334.4

2,420.0
2,384.9

2.458.4
2.407.5

23.2

35.1

50.8

Difference

0.7

9.7

1991

1993

1988

16.5

Tables A-15 and A-16 provide a more detailed comparison (by
function, subfunction, and program) of the President's policy estimates for 1989 with the current services budget authority and
outlay estimates.
Table A-15. CURRENT SERVICES BUDGET AUTHORITY BY FUNCTION AND PROGRAM
(In millions of dollars)

1987
actual

74,010
79,607
80,234
35,644
5,093
3,075
2,647
-841

Current services
1988
estimate

76,145
80,684
81,027
36,695
5,354
3,149
854
-750

1989
estimate

78,399
85,649
80,037
38,157
5,743
3,272
788
-766
-310
-185

279,469

283,159

290,784

7,478

7,749

8,100

480

508

645

287,427

291,416

299,529

1,207
237

1,206
245

1,230
249

A-10

THE BUDGET FOR FISCAL YEAR 1989

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

1987
actual

Agency for International Development:
Existing law
Proposed credit reform
P.L. 480 food aid:
Existing law
Proposed credit reform
Refugee assistance
Other:
Existing law
Proposed credit reform
Offsetting receipts

1988
estimate

1989
estimate

1989
administration
proposals

2,162

2,240

2,273

2,169
16

1,083

1,060

1,128

361

338

345

1,023
-214
340

300

292

297

-449

-479

-456

296
25
-458

4,902

4,901

5,066

4,722

4,053

4,017

4,130

950
3,576
98
-464

701
3,201
532
89
-114

715
3,265
643
91
-132

4,460
155
467
3,281
643
94
-132

8,213

8,425

8,711

8,968

153 Conduct of foreign affairs:
Administration of foreign affairs:
Existing law
Proposed credit reform
International organizations and conferences
Other

2,091

2,039

2,071

2,071*

420
80

sis
91

526
93

525
89

Subtotal, Conduct of foreign affairs

2,591

2,645

2,689

2,685

1,022

1,041

1,058

1,110

811

-791

-1,214

110

1,196
-89

-90

-92

Subtotal, International development and humanitarian assistance
152 International security assistance:
Foreign military sales credit:
Existing law
Proposed credit reform
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:
Existing law
Proposed credit reform
Other
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

336
-92

1,997

-771

-1,306

-970

18,724

16,241

16,219

16,515

1,639
702

1,733
804

1,767
821

2,066
1,197

2,340

2,537

2,588

3,263

6,864

4,683

4,776

6,359

2,297

2,444

2,493

2,998

255 Supporting space activities

1,037

1,077

1,098

1,259

Total budget authority

12,538

10,741

10,955

13,879

Subtotal, General science and basic research
253 Space flight
254 Space science, applications, and technology

A-ll

SPECIAL ANALYSIS A

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

1987
actual

270 ENERGY
271 Energy supply:
Research ana development
Petroleum reserves
Federal power marketing
Tennessee Valley Authority:
Existing law
Proposed credit reform
Uranium enrichment
Nuclear waste disposal fund
Subsidies for nonconventional fuel production
Rural electric and telephone:
Existing law
Proposed credit reform

1988
estimate

1989
estimate

1989
administration
proposals

1,704
-542
64

2,416
-596
-213

2,938
-596
-219

2,852
-574
-175

1,243

1,269

858

55
58
-596

-159
- 1 4 8*

-323
- 1 6 9*

858
-45
-108
-88
16

294

1,442

1,429

22
81

2,280

4,010

3,917

2,838

232
2

310
2

316

Subtotal, Energy conservation

234

311

316

274 Emergency energy preparedness:
Existing law
Proposed legislation

153

609

627

513
684

Subtotal, Energy supply
272 Energy conservation:
Energy conservation grants and R&D
Solar Energy and Energy Conservation Bank

Subtotal, Emergency energy preparedness
276 Energy information, policy, and regulation
Total budget authority
300 NATURAL RESOURCES AND ENVIRONMENT
301 Water resources:
Corps of Engineers
Bureau of Reclamation:
Existing law
Proposed credit reform
Other
Offsetting receipts:
Existing law
Proposed legislation
Subtotal, Water resources
302 Conservation and land management:
Management of national forests, cooperative forestry,
ana forestry research (Forest Service)
Management of public lands (BLM)
Mining reclamation and enforcement
Conservation reserve program
Other conservation of agricultural lands
Other resources management
Offsetting receipts:
Existing law
Proposed legislation
Subtotal, Conservation and land management
303 Recreational resources:
Federal land acquisition:
Existing law
Proposed legislation
Urban park and historic preservation funds

153

609

627

1,197

763

588

664

711

3,430

5,518

5,524

4,837

3,236

3,471

3,498

3,537

951

1,057

1,079

218

206

210

1,077
-7
138

-297

-459

-438

-483
10

4,107

4,274

4,350

4,273

2,054
564
319
642
293

2,071
520
309
1,086
687
301

2,189
528
315
1,107
700
307

1,971
547
260
1,864
486
303

-2,151

-2,298

-2,348

-2,354
23

1,721

2,676

2,799

3,101

244

232

235

81
-30

A-10

THE BUDGET FOR FISCAL YEAR 1989

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

1987
actual

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
Leaking underground storage tank trust fund
Offsetting receipts
Subtotal, Pollution control and abatement..
306 Other natural resources:
Program activities
Offsetting receipts
Subtotal, Other natural resources..
Total budget authority
350 AGRICULTURE
351 Farm income stabilization:
Commodity Credit Corporation:
Existing law
Proposed legislation
Proposed credit reform
Crop insurance
Agricultural credit:
Existing law
Proposed credit reform
Other programs and unallocated overhead..
Subtotal, Farm income stabilization
352 Agricultural research and services:
Research programs
Extension programs
Marketing programs
Animal and plant health programs
Economic intelligence
Other programs and unallocated overhead.
Offsetting receipts
Subtotal, Agricultural research and services..
Total budget authority
370 COMMERCE AND HOUSING CREDIT
371 Mortgage credit and deposit insurance:
Mortgage-Backed securities (GNMA):
Proposed credit reform
Mortgage purchase activities (GNMA)
Mortgage credit (FHA):
Existing law
Proposed credit reform
Housing for the elderly or handicapped:
Existing law
Proposed credit reform

1988
estimate

1989
estimate

1,475

1,560

1,609

-59

-109

-113

1,685

1,710

1,760

1,487
1,411
7
2,361
50

1,538
1,128
5
2,304
14

1,569
1,151

-20

-68

2,350
15
-104

5,296

4,922

4,986

1,781

1,868

-11

-26

1,905
-27

1,770

1,842

1,878

14,578

15,424

15,773

20,115

16,344

15,696

345

429

437

2,933

3,615

6,161

23,394

20,388

22,294

902
339
138
319
188
219
-98

910
358
141
336
204
224
-103

928
365
142
343
208
229
-103

2,007

2,070

2,112

25,401

22,458

24,406

480

825

957

533

584

525

A-ll

SPECIAL ANALYSIS A

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

1987
actual

1988
estimate

1989
estimate

Rural housing programs (FmHA)
Federal Deposit Insurance Corporation
Federal Savings and Loan Insurance Corporation and
other

2,434
1,099
1,600

3,986

2,000

Subtotal, Mortgage credit and deposit insurance...,

6,148

12,652

7,695

9,994

2,944

1,699

2,763

2,764
-351

2,944

1,699

2,763

2,412

644

515

524

404

317
298

362
473

368
699

336
378
704

535

562

571

372 Postal service:
Existing law
Proposed legislation
Subtotal, Postal service
376 Other advancement of commerce:
Small and minority business assistance:
Existing law
Proposed legislation
Proposed credit reform
Science and technology
Economic and demographic statistics
International trade and other:
Existing law
Proposed legislation
Subtotal, Other advancement of commerce
Total budget authority
400 TRANSPORTATION
401 Ground transportation:
Highways
Highway safety
Mass transit:
Existing law
Proposed legislation
Railroads
Regulation:
Existing law
Proposed legislation
Subtotal, Ground transportation

6,339
903

4,185
27

1989
administration
proposals

3,864
27

597
- 1

1,792

1,912

2,163

2,419

10,885

16,262

12,621

14,825

13,581
298

13,806
402

13,804
321

13,701
315

3,598

3,334

3,428

720

671

682

1,430
144
57

44
-13

18,244

18,258

18,279

15,678

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

4,761
727
30

6,147
723
24

6,235
738
24

6,937
872

Subtotal, Air transportation

5,518

6,895

6,998

7,809

2,588

2,526

2,608

2,968

531

332

164

163
206*

3,120

2,772

3,338

-86

407 Other transportation

115

108

110

138

Total budget authority

26,996

28,032

28,159

26,963

3,000

2,880

2,938

2,480

450 COMMUNITY AND REGIONAL DEVELOPMENT
451 Community development:
Community development block grants

A-10

THE BUDGET FOR FISCAL YEAR 1989

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

1987
actual

1989
estimate

estimate

Urban development action grants
Rental rehabilitation and rental development
Pennsylvania Avenue Development Corporation.,
Other
Subtotal, Community development..
452 Area and regional developmentRural development:
Existing law
Proposed legislation
Proposed credit reform
Economic development assistance
Indian programs:
Existing law
Proposed credit reform
Regional commissions
Tennessee Valley Authority
Offsetting receipts
Subtotal, Area and regional development..
453 Disaster relief and insurance:
Small business disaster loans:
Proposed credit reform
Other
Subtotal, Disaster relief and insuranceTotal budget authority
500 EDUCATION, TRAINING, EMPLOYMENT, AND
SOCIAL SERVICES
501 Elementary, secondary, and vocational education:
School improvement programs:
Existing law
Proposed legislation
Compensatory education:
Existing law
Proposed legislation
Education for the handicapped
Impact aid
Vocational and adult education:
Existing law
Proposed legislation
Other:
Existing law
Proposed legislation
Subtotal, Elementary, secondary, and vocational
education
502 Higher education:
Student financial assistance:
Existing law
Proposed legislation
Guaranteed student loan program:
Existing law
Proposed legislation
Proposed credit reform
Other:
Existing law
Proposed legislation

225
314

216
206

273

245

220
210
6
249

3,819

3,552

3,622

1,447

4,468

2,277

217

205

211

990

1,100

1,118

108
100
-242

111

103
-251

113
105
-253

2,620

5,736

3,571

210

202

284

210

202

284

6,649

9,490

7,476

939

1,040

1,061

3,952

4,337

4,423

1,742
718

1,869
708

1,906
723

995

1,013

1,033

656

541

550

9,001

9,508

9,696

5,483

5,545

5,652

2,717

2,565

2,745

852

902

910

A-ll

SPECIAL ANALYSIS A

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

1987
actual

1988
estimate

1989
estimate

1989
administration
proposals

9,052

9,012

9,308

12,714

1,308

1,352

1,408

1,260
76

1,308

1,352

1,408

1,336

3,706

3,805

3,823

336
126
990
67

331
93
982
71

331
94
1,002
72

3,431
948
336

5,226

5,282

5,324

5,713

730

778

794

806

2,700
405
1,485

2,700
382
1,590

2,700
390
1,622

2,700
310
1,616

1,061
2,100
156
24

811
2,456
163
957

966
2,505
166
672

1,075
2,457
166
670

7,932

9,059

9,021

8,994

33,249

34,992

35,550

39,383

27,612
1,459

30,657
1,789

33,146
2,374

32,733
2,374

3,814

4,156

4,167

4,129*

Subtotal, Health care services

32,886

36,601

39,687

39,235

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

5,894
766

6,368
689

6,470
702

6,233
1,620

6,660

7,057

7,173

7,853

289

299

305

302

202

209

213

43
-3
17
35

Subtotal, Education and training of health care
work force

530

548

559

394

554 Consumer and occupational health and safety:
Consumer safety
Occupational safety and health

858
392

902
405

920
414

907
420

Subtotal, Higher education
503 Research and general education aids:
Existing law
Proposed legislation
Subtotal, Research and general education aids
504 Training and employment:
Training and employment services
Worker readjustment (proposed)
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 services block grant
Rehabilitation services
Payments to states for foster care and adoption
assistance
Human development services
Domestic volunteer programs
Other social services
Subtotal, Social services
Total budget authority
550 HEALTH
551 Health care services:
Medicaid grants
Federal employees' health benefits
Other health care services:
Existing law
Proposed credit reform

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

926
72

A-10

THE BUDGET FOR FISCAL YEAR 1989

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

1987
actual

Subtotal, Consumer and occupational health and
safety

Current services
1988
estimate

1989
estimate

1989
administration
proposals

1,250

1,308

1,334

1,327

41,325

45,514

48,752

48,810

62,735

67,858

72,794

72,794
1,660

27,797

34,871

42,737

42,855
-285

-6,520

-8,800

-10,534

-10,563
87

83,998

93,928

104,997

106,548

600 INCOME SECURITY
601 General retirement and disability insurance
(excluding social security):
Railroad retirement
Special benefits for disabled coal miners
Other

4,627
1,136
75

4,734
1,584
80

4,646
1,567
87

4,354
1,558
87

Subtotal, General retirement and disability insurance (excluding social security)

5,838

6,397

6,301

5,999

44,145

46,528

48,770

31,919
226

33,563
205

35,060
257

48,770
4
35,060
253

76,290

80,296

84,087

24,037

24,479

24,036

24,110
-102

24,037

24,479

24,036

24,008

6,903

7,368

7,488

1,350
1,300

1,450
1,436

1,479
956

6,533
382
1,518
956

311

229

234

189*

Subtotal, Housing assistance

9,864

10,483

10,156

9,578

605 Food and nutrition assistance:
Food stamps and aid to Puerto Rico
Child nutrition and other programs

12,646
6,922

13,518
7,132

13,418
7,319

13,428
7,330

19,568

20,650

20,737

20,758

10,797

12,571

12,482

12,474

Total budget authority
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

602 Federal employee retirement and disability:
Civilian retirement and disability programs:
Existing law
Proposed legislation
Military retirement
Federal employees workers' compensation (FECA)
Subtotal, Federal employee retirement and disability
603 Unemployment compensation:
Existing law
Proposed legislation
Subtotal, Unemployment compensation
604 Housing assistance:
Subsidized housing
Rural housing voucher program
Public housing operating subsidies
Low-rent public housing loans
Other housing assistance:
Existing law
Proposed credit reform

Subtotal, Food and nutrition assistance
609 Other income security:
Supplemental security income (SSI)

-14

A-ll

SPECIAL ANALYSIS A

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

1987
actual

Family support payments.Existing law
Proposed 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)
Disability insurance (Dl)
Interfund transactions
Total budget authority
On-budget
Off-budget
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).
Post-Vietnam era education
All-volunteer force educational assistance trust fund....
Veterans jobs program
Other:
Proposed credit reform
Subtotal, Veterans education, training, and rehabilitation
703 Hospital and medical care for veterans:
Medical care and hospital services:
Existing law
Proposed legislation
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 credit reform

Current services
1988
estimate

1989
estimate

10,461

11,125

10,355

1,410
340
2,078

2,893
347
1,720

3,897
320
1,754

1989
administration
proposals

10,355
368
3,897
279
1,386

25,086

28,656

28,808

28,759

160,682

170,962

174,125

173,188

206,870
20,052
1

234,246
22,244*

254,844
24,064

226,922

256,490

278,908

(4,930)
(221,992)

(5,022)
(251,468)

(5,572)
(273,336)

10,505

10,832

11,110

3,794

3,854

3,865

10,749
361
3,865

123

147

145

1,391

1,421

1,426
23

145
-4
1,426

-444

-434

-420

23
4
-420

15,392

15,850

16,149

763

651

598

-170
30

— i 69

-166

-166
*

623

482

432

9,728

10,120

10,322

531
255
-33

563
240
-113

576
245
-138

10,328
24
543
253
-138

10,481

10,810

11,005

11,009

100

1,282

658

1,091

A-10

THE BUDGET FOR FISCAL YEAR 1989

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

1987
actual

Current services
1988
estimate

1989
estimate

Direct loan revolving fund:
Proposed credit reform
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 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)
Customs user fee:
Existing law
Proposed legislation
Protection activities (Secret Service)
Other enforcement
Subtotal, Federal law enforcement activities
752 Federal litigative and judicial activities:
Civil and criminal prosecution and representation
Federal judicial activities
Representation of indigents in civil cases
Subtotal, Federal litigative and judicial activities
753 Federal correctional activities:
Existing law
Proposed legislation
Subtotal, Federal correctional activities

1989
administration
proposals

100

1,282

658

1,749

792
78

797
68

813
71

803
76

870

865

884

878

27,466

29,289

29,128

30,217

1,788
198
1,977

1,883
218
2,162

1,920
222
2,147

2,041
219
2,229

-680

-707

351
411

382
427

389
436

-707
707
370
469

4,726

4,391

4,407

5,328

1,082
1,292
306

1,195
1,369
306

1,276
1,397
312

1,414
1,751
250

2,680

2,869

2,984

3,416

867

921

940

1,370
20

867

921

940

1,390

502

324

328

173

8,775

8,505

8,659

10,307

1,572

1,599

1,637

1,786

115

125

127

136

4,445

5,059

5,160

5,300

352

340

344

383
2
4

4,797

5,399

5,504

5,689

804 General property and records management:
Property receipts
Records management
Other

-78
102
357

-160
116
281

-162
119
288

-287
118
314

Subtotal, General property and records management

380

238

245

145

141

145

148

150

754 Criminal justice assistance
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
Proposed credit reform
Subtotal, Central fiscal operations

805 Central personnel management

A-ll

SPECIAL ANALYSIS A

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

1987
actual

806 General purpose fiscal assistance:
Payments and loans to the District of Columbia
Payments to States and counties from Forest Service
receipts
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
Subtotal, General purpose fiscal assistance
808 Other general government:
Compacts of free association
Territories
Treasury claims
Other
Subtotal, Other general government
809 Deductions for offsetting receipts
Total budget authority

1988
estimate

1989
estimate

287

520

552

493

213

314

306

375

412

439

13
105
176
199

162
105
175
213

90
105
178
213

1,369

1,902

1,883

1,825

395
146
361
84

325
120
328
87

179
123
313
87

179
74
313
83

985

860

702

650

-623

-1,098

-500

8,736

9,170

9,745

9,880

870 CENTRAL FEDERAL CREDIT ACTIVITIES
871 Central federal credit activities:
Proposed credit reform

3,432
3,432

Total budget authority
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
908 Other interest:
Interest on loans to Federal Financing Bank
Interest on refunds of tax collections
Interest on univested funds:
Existing law
Proposed credit reform
Other
Subtotal, Other interest
Total budget authority
On-budget
Off-budget
920 ALLOWANCES
923 Savings from reform of Davis-Bacon and
Service Contract Acts:
Proposed legislation

1989
administration
proposals

195,249

210,108

220,727

220,210
52

195,249

210,108

220,727

220,262

-29,662

-34,321

-38,219

-38,189
-52

-29,662

-34,321

-38,219

-38,240

-5,290

-7,271

-10,136

-15,216
1,941

-15,127
1,756

-14,397
1,793

-14,224
1,793

-8,479

-7,237

-7,885

18
177
-7,846

-21,732

-20,590

-20,471

-20,082

147,926

151,901

151,804

138,565
(143,856)
(-5,290)

(155,197) (162,037) (161,940)
( — 7,271) ( - 1 0 , 1 3 6 ) ( - 1 0 , 1 3 6 )

-50

A-10

THE BUDGET FOR FISCAL YEAR 1989

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

1987
actual

Current services
1988
estimate

1989
estimate

Total budget authority

1989
administration
proposals

-50

950 UNDISTRIBUTED OFFSETTING RECEIPTS
951 Employer share, employee retirement (onbudget):
Military retired contributions
Contributions to HI trust fund
Contributions from Postal Service
Contributions from other civilian agencies

-18,288
-1,700
-2,788
-4,483

-18,353
-1,888
-3,647
-4,782

-18,577
-1,945
-3,421
-5,095

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

-27,259

-28,670

-29,038

952 Employer share, employee retirement (offbudget)

-3,300

-4,298

-4,719

953 Rents and royalties on the Outer Continental
Shelf

-4,021

-3,155

-3,920

954 Sale of major assets:
Sale of Conrail
Sale of petroleum reserve (proposed)
Sale of power administrations (proposed)
Subtotal, Sale of major assets
Total budget authority
On-budget
Off-budget
Total budget authority
On-budget
Off-budget
*$500 thousand or less.

-1,875

-3,225
-100
-3,325

-1,875
-36,455

-36,123

-37,677

-41,002

(-33,155) (-31,825) (-32,958) (-36,283)
(-3,300) (-4,298) (-4,719) (-4,719)
1,099,893
(886,491)
(213,402)

1,176,236
(936,337)
(239,899)

1,224,751
(966,270)
(258,481)

1,233,151
(974,670)
(258,481)

A-ll

SPECIAL ANALYSIS A
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM
(In millions of dollars)

1987
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 tunas and other:
Existing law
Proposed legislation
Offsetting receipts
Allowances: Savings from reform of Davis-Bacon and
Service Contract Acts:
Proposed legislation
Allowances: Other legislation (proposed)
Subtotal, Department of Defense—Military..
053 Atomic energy defense activities
054 Defense-related activities
Total outlays..
150 INTERNATIONAL AFFAIRS
151 International development and humanitarian
assistance:
Multilateral development banks
International organizations
Agency for International Development:
Existing law
Proposed credit reform
P.L. 480 food aid:
Existing law
Proposed credit reform
Refugee assistance
Other:
Existing law
Proposed credit reform
Offsetting receipts
Subtotal, International development and humanitarian assistance
152 International security assistance:
Foreign military sales credit:
Existing law
Proposed credit reform
Military assistance
Economic support fund
Guarantee reserve fund
Other
Offsetting receipts
Subtotal, International security assistance..
153 Conduct of foreign affairs:
Administration of foreign affairs:
Existing law
Proposed credit reform
International organizations and conferences....
Other
Subtotal, Conduct of foreign affairs..

Current services
estimate

1989
estimate

72,020
76,205
80,744
33,596
5,853
2,908

75,453
80,433
79,166
33,127
5,418
3,022

77,827
82,725
79,820
36,295
5,668
3,229

3,481

1,405

-841

-750

906
-40
-766
-196
33

273,966

277,275

285,500

7,451

7,631

7,945

582

517

575

281,999

285,423

294,020

1,043
263

1,248
257

1,311
258

2,012

2,056

2.141

1,155

1,177

970
..........

335"

328

139

173

184

-449

-479

-456

4,319

4,744

4,944

3,758

-2,264

1,085

356
3,466
-117
108
-464

633
3,362
723
89
-114

3,450
701
91
-132

7,106

2,428

5,883

1,793

2,037

2,109

360
65

565
97

524
94

2,218

2,699

2,726

A-10

THE BUDGET FOR FISCAL YEAR 1989
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)

1987
actual

154 Foreign information and exchange activities
155 International financial programs:
Foreign military sales trust fund (net)
Special defense acquisition fund
Export-Import Bank:
Existing law
Proposed credit reform
Exchange stabilization fund
Other
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
Subtotal, General science and basic research

Current services
1988
estimate

1989
estimate

1989
administration
proposals

990

1,119

1,112

1,115

1,407
-21

155
31

142
-38

-2,300

-985

-1,084

-1,410
-572
-89

-176

-168

-1,084
81
-168

-90

-92

-2,985

-1,065

-1,240

-1,160

11,649

9,926

13,425

13,334

1,562
697

1,673
795

1,733
816

1,818
1,104

2,260

2,468

2,550

2,922

253 Space flight

4,137

5,180

5,434

6,350

254 Space science, applications, and technology

1,942

2,352

2,418

2,673

255 Supporting space activities

878

903

1,078

1,158

9,216

10,903

11,480

13,103

2,285
-515
-401

2,469
-597
-622

2,686
-599
-600

2,664
-587
-580

979

907

774

-102
5

-3
-87
108

-278
-143
161

774
-45
-91
-102
161

-998

1,018

805
-2,093
10

2,318

1,177

3,018

915

271
10

322
4

306
2

Subtotal, Energy conservation

281

325

308

274 Emergency energy preparedness:
Existing law
Proposed legislation

788

611

714

634
479

788

611

714

1,113

727

600

671

724

4,115

2,713

4,711

3,061

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

Subtotal, Emergency energy preparedness
276 Energy information, policy, and regulation
Total outlays

272
-206

A-ll

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

1987
actual

300 NATURAL RESOURCES AND ENVIRONMENT
301 Water resources:
Corps of Engineers
Bureau of Reclamation:
Existing law
Proposed credit reform
Other
Offsetting receipts:
Existing law
Proposed legislation
Subtotal, Water resources.
302 Conservation and land management:
Management of national forests, cooperative forestry,
ana forestry research (Forest Service)
Management of public lands (BLM)
Mining reclamation and enforcement
Conservation reserve program
Other conservation of agricultural lands
Other resources management
Offsetting receipts:
Existing law
Proposed legislation
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 programsHazardous substance response fund
Oil pollution funds (gross)
Sewage treatment plant construction grants
Leaking underground storage tank trust fund
Offsetting receipts
Subtotal, Pollution control and abatement..
306 Other natural resources:
Program activities
Offsetting receipts
Subtotal, Other natural resources..
Total outlays
350 AGRICULTURE
351 Farm income stabilization:
Commodity Credit Corporation:
Existing law
Proposed legislation
Proposed credit reform
Crop insurance

1988
estimate

1989
estimate

2,873

3,440

3,495

964

919

1,076

243

254

215

-297

-459

-438

3,783

4,154

4,349

1,876
537
325
580
306

2,068
545
324
736
786
298

2,159
538
303
1,235
721
306

-2,151

-2,298

-2,348

1,473

2,459

2,913

281
29

312
33

273
31

1,312

1,612

1,556

-59

-109

-113

1,564

1,847

1,747

1,419
541

1,511
778
8
2,566
23

-20

-68

1,547
1,115
7
2,407
27
-104

4,869

4,819

4,999

-11

-26

1,929
-27

1,675

1,860

1,902

13,363

15,139

15,909

22,454

17,707

17,170

454

491

498

2,920

1,686

A-10

THE BUDGET FOR FISCAL YEAR 1989
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)

1987
actual

Agricultural credit:
Existing law
Proposed credit reform
Other programs and unallocated overhead
Subtotal, Farm income stabilization
352 Agricultural research and services:
Research programs
Extension programs
Marketing programs
Animal and plant health programs
Economic intelligence
Other programs and unallocated overhead.
Offsetting receipts
Subtotal, Agricultural research and services..
Total outlays
370 COMMERCE AND HOUSING CREDIT
371 Mortgage credit and deposit insurance:
Mortgage-backed securities (GNMA):
Existing law
Proposed credit reform
Mortgage purchase activities (GNMA)
Mortgage credit (FHA):
Existing law
Proposed credit reform
Housing for the elderly or handicapped
Rural housing programs (FmHA):
Existing law
Proposed legislation
Federal Deposit Insurance Corporation
Federal Savings and Loan Insurance Corporation and
other
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:
Existing law
Proposed legislation
Proposed credit reform
Science and technology
Economic and demographic statistics
International trade and other:
Existing law
Proposed legislation

2,564

Current services
estimate

2,124

1989
estimate

2,597

12"

25,492

20,334

20,264

808
319
103
324
183
225
-98

885
353
134
338
191

903
364
142
342
205
228
-103

220

-103

1,864

2,018

2,081

27,356

22,352

22,346

-234

-100

-278

—481

27"

-T

-555

281

154

404

545

530

799

3,248

3,029

-1,438

2,268

502

4,755
-188

2,189
-253

951
-295

3,062

1,205

4,586

1,593

2,223

843

1,593

2,223

843

342

471

469

370
246

411
480

366
619

569

575

564

Subtotal, Other advancement of commerce.

1,527

1,936

2,018

Total outlays

6,182

12,364

7,448

12,687
269

13,336
302

13,597
316

400 TRANSPORTATION
401 Ground transportation:
Highways
Highway safety

A-ll

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

1987
actual

Mass transit:
Existing law
Proposed legislation
Railroads
Regulation:
Existing law
Proposed legislation

Current services
1988
estimate

1989
estimate

1989
administration
proposals

3,104
309
26

3,351

3,589

3,842

808

527

563

44
-16

17,157

17,797

18,363

17,172

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

4,858
635
26

5,311
679
24

5,564
723
24

5,801
797
5

Subtotal, Air transportation

5,520

6,014

6,311

6,603

2,575

2,775

2,727

2,961

886

604

402

401
8
-5

3,365

Subtotal, Ground transportation

403 Water transportation:
Marine safety and transportation
Ocean shipping:
Existing law
Proposed legislation
Proposed credit reform
Reimbursement to Treasury from Panama Canal Commission
Subtotal, Water transportation
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
Pennsylvania Avenue Development Corporation
Other
Subtotal, Community development
452 Area and regional development:
Rural development:
Existing law
Proposed legislation
Proposed credit reform
Economic development assistance
Indian programs:
Existing law
Proposed credit reform
Regional commissions
Tennessee Valley Authority
Other
Offsetting receipts
Subtotal, Area and regional development
453 Disaster relief and insurance:
Small business disaster loans:
Existing law
Proposed credit reform
National flood insurance fund
Other
Subtotal, Disaster relief and insurance

-86
3,461

3,293

3,129

133

116

141

26,228

27,237

27,920

27,280

2,991
354
166
11
157

2,980
400
324
9
55

2,977
366
354
14
242

2,959
366
348
13
233

3,680

3,768

3,953

3,920

300

1,181

1,142

341

268

247

1,128
-118
-18
226

950

1,088

1,111

152
112
-14
-242

134
85
-6
-251

120
96
-7
-253

1,044
1
116
89
-7
-250

.1,599

2,500

2,457

2,210

-362

-150

-112

-219
352

-107
310

-70
395

-484
-90
-70
393

-229

213

-251

A-10

THE BUDGET FOR FISCAL YEAR 1989
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)
Current services

1987
actual

Total outlays..
500 EDUCATION, TRAINING, EMPLOYMENT, AND
SOCIAL SERVICES
501 Elementary, secondary, and vocational education:
School improvement programs:
Existing law
Proposed legislation
Compensatory education:
Existing law
Proposed legislation
Education for the handicapped
Impact aid
Vocational and adult education:
Existing law
Proposed legislation
Other:
Existing law
Proposed legislation
Subtotal, Elementary, secondary, and vocational
education
502 Higher education:
Student financial assistance:
Existing law
Proposed legislation
Guaranteed student loan program:
Existing law
Proposed legislation
Proposed credit reform
Other:
Existing law
Proposed legislation
Subtotal, Higher education.
503 Research and general education aids:
Existing law
Proposed legislation
Subtotal, Research and general education aids..
504 Training and employment:
Training and employment services
Worker readjustment (proposed)
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 services block grant
Rehabilitation services
Payments to states for foster care and adoption
assistance
Human development services
Domestic volunteer programs
Other social services

1988
estimate

5,051

1989
estimate

6,321

6,623

733

1,058

3,210

3,841

4,341

1,339
704

1,801
756

1,863
748

1,231
537

979
505

913
528

7,911

8,614

9,450

4,780

5,319

5,708

2,548

2,630

2,747

519

838

7,406

8,468

9,294

1,255

1,407

1,417

1,255

1,407

1,417

3,604

3,717

3,820

312
137
968
64

329
95
1,008
71

332
94
990
74

5,084

5,221

5,310

675

768

797

2,688
361
1,405

2,685
406
1,585

2,700
404
1,605

802
1,959
159
21

996
2,389
160
957

933
2,478
165
671

A-ll

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

1987
actual

Subtotal, Social services

1988
estimate

1989
estimate

1989
administration
proposals

7,394

9,176

8,955

8,951

29,724

33,654

35,224

37,362

27,435
1,799

30,664
1,835

33,146
1,914

32,733
1,914

3,382

3,811

4,059

3,991

Subtotal, Health care services

32,616

36,309

39,119

38,637

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

4,971
628

5,682
795

6,304
736

6,214
1,155

5,599

6,477

7,040

7,369

251

218

253

250

156

210

162
-4
18
36

Subtotal, Education and training of health care
work force

556

415

504

465

554 Consumer and occupational health and safety:
Consumer safety
Occupational safety and health

827
370

879
398

902
404

891
409

Total outlays
550 HEALTH
551 Health care services:
Medicaid grants
Federal employees' health benefits
Other health care services:
Existing law
Proposed credit reform

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

Subtotal, Consumer and occupational health and
safety

_ *

1,197

1,278

1,306

1,300

39,968

44,479

47,968

47,771

50,803

52,484

55,713

55,782
-980

30,837

35,173

39,847

40,026
-337

-6,520

-8,800

-10,534

-10,563
87

75,120

78,857

85,026

84,015

600 INCOME SECURITY
601 General retirement and disability insurance
(excluding social security):
Railroad retirement
Special benefits for disabled coal miners
Pension Benefit Guaranty Corporation
Other

3,963
1,602
-72
72

3,889
1,556
-571
74

4,028
1,575
-505
81

4,005
1,619
-504
81

Subtotal, General retirement and disability insurance (excluding social security)

5,565

4,948

5,178

5,200

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

A-10

THE BUDGET FOR FISCAL YEAR 1989
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)

1987
actual

602 Federal employee retirement and disability:
Civilian retirement and disability programs
Military retirement
Federal employees workers' compensation (FECA)
Federal employees life insurance fund:
Existing law
Proposed legislation

Current services
1988
estimate

1989
estimate

1989
administration
proposals

26,161
18,080
206

27,552
19,128
205

29,532
20,320
257

29,532
20,324
253

-702

-722

-775

-769
18

43,745

46,163

49,334

49,357

17,080

15,764

16,493

16,477
-102

17,080

15,764

16,493

16,375

9,786
14
1,388
1,356
112

10,630
19
1,486
1,492
208

12,087
20
1,497
1,022
235

12,069
24
1,515
1,022
218

Subtotal, Housing assistance

12,656

13,833

14,860

14,847

605 Food and nutrition assistance:
Food stamps and aid to Puerto Rico
Child nutrition and other programs

12,407
6,533

13,426
7,103

13,408
7,346

13,412
7,354

18,940

20,530

20,754

20,765

10,909

12,636

12,482

12,474

10,540

10,785

10,772

1,410
387
2,017

2,893
305
1,757

3,897
321
1,757

10,772
168
3,897
295
1,421

Subtotal, Federal employee retirement and disability
603 Unemployment compensation:
Existing law
Proposed legislation
Subtotal, Unemployment compensation
604 Housing assistance:
Subsidized housing
Rural housing voucher program
Public housing operating subsidies
Low-rent public housing loans
Other housing assistance

Subtotal, Food and nutrition assistance
609 Other income security:
Supplemental security income (SSI)
Family support payments:
Existing law
Proposed 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 (OASI)
Disability insurance (Dl)
Interfund transactions
Total outlays
On-budget
Off-budget
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

25,264

28,376

29,230

29,028

123,250

129,614

135,850

135,573

186,124
21,227
1

197,528
22,189

210,642
23,170

210,615
23,155

207,353

219,717

233,811

233,769

(4,930)
(202,422)

(5,022)
(214,695)

(5,572)
(228,239)

(5,572)
(228,197)

10,500

10,771

11,070

3,793

3,849

3,864

131

147

145

1,034

1,077

i f 132

10,671
325
3,864
145
-4
1,132

A-ll

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

1987
actual

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)
Post-Vietnam era education
All-volunteer force educational assistance trust fund...
Veterans jobs program
Other:
Existing law
Proposed legislation
Proposed credit reform
Subtotal, Veterans education, training, and rehabilitation
703 Hospital and medical care for veterans:
Medical care and hospital services:
Existing law
Proposed legislation
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 credit reform
Direct loan revolving fund:
Existing law
Proposed credit reform
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:
Existing law
Proposed legislation
Subtotal, Other veterans benefits and services..
Total outlays
750 ADMINISTRATION OF JUSTICE
751 Federal law enforcement activities:
Criminal investigations (DEA, FBI, and 0CDE)
Alcohol, tobacco, and firearms investigation (ATF).
Border enforcement activities (Customs and INS)...
Customs user fee:
Existing law
Proposed legislation
Protection activities (Secret Service)
Other enforcement
Subtotal, Federal law enforcement activities..

estimate

-52

-44

1989
estimate

-41

-444

—434

—420"

14,962

15,366

15,750

776
51
-401
38

677
59
-309
32

608
89
-222
5

-10

- 6

454

451

474

9,500

10,083

10,294

563
236
-33

604
253
-113

579
243
-138

10,266

10,828

10,979

382

1,048

730

-33

-67

-27

-19

153

330

1,134

703

715

825

816

769

896

890

26,782

28,674

28,797

1,633
179
1,616

1,786
217
2,099

1,873
221
2,123

-680

-707

312
365

404
447

383
440

4,105

4,273

4,334

A-10

THE BUDGET FOR FISCAL YEAR 1989
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)

1987
actual

752 Federal litigative and judicial activities:
Civil and criminal prosecution and representation
Federal judicial activities
Representation of indigents in civil cases
Subtotal, Federal litigative and judicial activities
753 Federal correctional activities:
Existing law
Proposed legislation
Subtotal, Federal correctional activities
754 Criminal justice assistance
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
Proposed credit reform

Current services
1988
estimate

1989
estimate

1989
administration
proposals

977
1,196
309

1,116
1,397
296

1,202
1,400
311

1,313
1,710
257

2,482

2,809

2,912

3,280

711

842

883

1,092
20

711

842

883

1,112

250

366

352

295

7,548

8,290

8,482

9,894

1,444

1,574

1,619

1,755

110

123

127

133

4,162

5,061

5,138

5,255

-244

243

150

184

4
3,918

5,304

5,288

5,443

804 General property and records management:
Federal buildings fund
Property receipts
Records management
Other

-84
-78
96
211

-133
-160
113
281

-286
-162
118
287

-55
-287
117
291

Subtotal, General property and records management

146

101

-43

143

145

132

134

267

523

554

495

303

289

308

375

412

439

89
105
168
312

86
105
175
214

90
105
178
213

1,621

1,804

1,886

1,828

296
93
361
60

325
127
328
189

179
133
313
45

179
92
313
47

Subtotal, Other general government

810

969

670

632

809 Deductions for offsetting receipts

-623

-1,098

-500

7,569

8,921

9,179

9,492

Subtotal, Central fiscal operations

805 Central personnel management
806 General purpose fiscal assistance:
Payments and loans to the District of Columbia
Payments to States and counties from Forest Service
receipts
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
Subtotal, General purpose fiscal assistance
808 Other general government:
Compacts of free association
Territories
Treasury claims
Other

Total outlays

A-ll

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

1987
actual

1988
estimate

1989
estimate

870 CENTRAL FEDERAL CREDIT ACTIVITIES
871 Central federal credit activities:
Direct loan revolving fund:
Proposed credit reform
Guaranteed loan revolving fund:
Proposed credit reform

1,981
-8,263
-6,282

Total outlays
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
908 Other interest:
Interest on loans to Federal Financing Bank
Interest on refunds of tax collections
Interest on univested funds:
Existing law
Proposed credit reform
Other
Subtotal, Other interest
Total outlays
On-budget
Off-budget
920 ALLOWANCES
923 Savings from reform of Davis-Bacon and
Service Contract Acts:
Proposed legislation

1989
administration
proposals

195,249

210,108

220,727

220,210
52

195,249

210,108

220,727

220,262

-29,662

-34,321

-38,219

-38,189
-52

-29,662

-34,321

-38,219

-38,240

-5,290

-7,271

-10,136

-15,216
1,941

-15,127
1,756

-14,397
1,793

-14,224
1,793

-8,472

-7,237

-7,885

18
177
-7,846

-21,727

-20,590

-20,471

-20,082

138,570

147,926

151,901

151,804

(143,860)
(-5,290)

(155,197) (162,037) (161,940)
(-7,271) (-10,136) (-10,136)

-48

Total outlays

-48

-18,288
-1,700
-2,788
-4,483

-18,353
-1,888
-3,647
-4,782

-18,577
-1,945
-3,421
-5,095

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

-27,259

-28,670

-29,038

952 Employer share, employee retirement (offbudget)

-3,300

-4,298

-4,719

953 Rents and royalties on the Outer Continental
Shelf

-4,021

-3,155

-3,920

954 Sale of major assets:
Sale of Conrail
Sale of petroleum reserve (proposed)

-1,875

—3,225

A-10

THE BUDGET FOR FISCAL YEAR 1989
Table A-16. CURRENT SERVICES OUTLAYS BY FUNCTION AND PROGRAM—Continued
(In millions of dollars)

1987
actual

Current services
1988
estimate

1989
estimate

1989
administration
proposals

Sale of power administrations (proposed)
Subtotal, Sale of major assets
Total outlays

-100
-1,875
-36,455

On-budget
Off-budget
Total outlays
On-budget
Off-budget

-3,325
-36,123

-37,677

-41,002

(-33,155) (-31,825) (-32,958) (-36,283)
(-3,300) (-4,298) (-4,719) (-4,719)
1,004,586
(810,754)
(193,832)

1,056,386
(853,260)
(203,126)

1,102,443
(889,059)
(213,384)

1,094,215
(880,873)
(213,342)

*$500 thousand or less.

GRAMM-RUDMAN-HOLLINGS BUDGET BASELINE
The Balanced Budget and Emergency Deficit Control Act of 1985
defines a budget baseline for calculating a budget deficit to determine whether automatic spending reductions are to be triggered.
The 1987 amendments specified that the President's budget include
a baseline estimate developed using the same rules. The Act also
stipulates that this baseline use economic and technical assumptions consistent with current services estimates.
The Act (commonly known as Gramm-Rudman-Hollings or G-RH) stipulates that budget deficits must decrease annually and specifies measures that must be taken to achieve this result. If by
October 15 when revised estimates are required, the estimated G-RH budget baseline deficit exceeds $146 billion (the 1989 deficit
target of $136 billion plus the $10 billion "cushion" allowed under
the Act), a sequestration will be triggered to reduce the baseline
deficit. For 1989, the Act stipulates that the deficit must be reduced by $36 billion or to $136 billion, whichever requires the
smaller reduction.
G - R - H BUDGET BASELINE TOTALS FOR 1 9 8 9

Under the specifications set forth in the Act, the deficit for 1989
is $142.7 billion. Outlays total $1,107.4 billion; while receipts total
$964.6 billion. Since the estimated deficit exceeds $136 billion by
less than $10 billion, a sequester would not be triggered.
These estimates generally assume that current law for revenues
and entitlements will continue unchanged. Because these estimates
are being prepared prior to appropriations action for 1989, the
estimates for discretionary programs are required to be based on
enacted 1988 appropriations. The 1988 levels are adjusted for inflation and pay-related cost increases. The aggregate spendout rate

A-ll

SPECIAL ANALYSIS A

for sequesterable nondefense discretionary budgetary resources is
estimated to be 50 percent. Spendout rates for each account are the
same as those used for current service estimates. These were developed in close cooperation with the Congressional Budget Office, in
keeping with the instruction of the Bipartisan Budget Agreement
that the two institutions work together to minimize technical differences. The use of these spendout rates also conforms with the
requirement that the G-R-H budget baseline be based on technical
factors consistent with the current services estimates. However, the
result is a difference in aggregate spendout rate from the October,
1987 G-R-H aggregate spendout rate in excess of one half of one
percent.
The G-R-H budget baseline is estimated using the economic assumptions shown in Table A-1, the same assumptions used for
current services and proposed policy estimates. The Act requires
that this report include the assumptions used for the rate of real
growth for each quarter of the fiscal year and for the last two
quarters of the preceding fiscal year. Table A-17 presents these
assumptions.
Table A-17. REAL ECONOMIC GROWTH RATES BY QUARTER
(In percents, annual rates)
1989

1988
Jan-Mar
1988

Real growth rate

2.5

Apr-Jun
1988

2.0

Jun-Sep
1988

2.5

Oct-Dec
1988

2.5

Jan-Mar
1989

3.5

Apr-Jun
1989

3.5

Jun-Sep
1989

3.5

SEQUESTERABLE RESOURCES

If reductions in outlays were required under the Act, they would
not be made directly; rather, they would be achieved by the permanent cancellation—referred to under the Act as "sequestration"—of
budget authority and other authority to obligate and expend funds
(except that amounts sequestered in special and trust funds remain
in such funds). For defense programs, sequesterable budgetary resources are defined to be new budget authority provided for 1989
and unobligated balances of budget authority provided in previous
years. For nondefense programs, the sequesterable budgetary resources are new budget authority; new direct loan obligations, commitments, or limitations; new guaranteed loan commitments or
limitations; obligation limitations, and spending authority as defined in Section 401(c)(2) of the Congressional Budget Act of 1974.
As defined, spending authority includes various mandatory and
permanent appropriations, as well as Federal payments financed
by offsetting collections that are credited to budget accounts.

A-10

THE BUDGET FOR FISCAL YEAR 1989

Not all programs and not all budgetary resources are subject to
sequestration. The Act exempts many programs and activities of
the Federal Government. The largest are social security benefits,
net interest, certain low-income programs, most Federal retirement
and disability benefits, veterans compensation and pensions, and
regular State unemployment insurance benefits. Federal administrative expenses for most otherwise exempt programs and activities, however, are sequesterable, including programs that are selfsupporting. Budgetary resources that are exempt from sequestration are unobligated balances of prior-year appropriations for nondefense programs, prior legal obligations of the Government in
certain specified budget accounts, as well as the program bases for
certain programs whose automatic spending increases are subject
to sequester.
Under the Act, the President is granted authority to exempt all
military personnel accounts from sequester. Since the notification
to Congress is not required for this report, Table A-18 presents the
composition of baseline estimates under two scenarios; all military
personnel are exempt and no special exemptions are made.
Certain programs and activities, while not exempt, are subject to
special rules that have the effect of limiting the amount of the
spending reduction. For example, the sequestration reduction for
medicare, veterans medical care, and certain health programs (but
not for the administrative expenses of these programs) is limited to
two percent annually. In addition, the total amount of the automatic spending increases in three programs specified in the Act is
sequesterable.
For credit programs, the sequesterable budgetary resources are
direct loan obligations and guaranteed loan commitments. In the
event of a sequester, the Act requires that credit limitations enacted in annual appropriation acts be reduced, and that de facto
limitations be imposed on both types of new credit activity where
there is no enacted limitation.
COMPOSITION OF BASELINE OUTLAYS

Table A-18 provides detail on the OMB G-R-H baseline outlay
estimates for 1989. An estimated $107.4 billion of 1989 outlays for
defense programs, or 37 percent of total defense outlays, are associated with budgetary resources that would be subject to an acrossthe-board percentage reduction if all military personnel accounts
were exempted by the President. If these accounts were not
exempt, $182.9 billion of 1989 outlays or 62 percent of total defense
outlays would be in this category.
An estimated $210.5 billion of outlays for nondefense programs,
or 26 percent of total nondefense outlays, are associated with sequesterable budgetary resources. About $105.8 billion of these out-

A-ll

SPECIAL ANALYSIS A
Table A-18. COMPOSITION OF BASELINE OUTLAYS FOR 1989
(In billions of dollars)
Estimate

Defense.-1
Subject to across-the-board reduction
Exempt from sequestration
Subtotal, defense programs
Nondefense programs:
Subject to sequestration:
Certain programs with automatic spending increases
Programs subject to special rules
Subject to across-the-board reduction
Subtotal, subject to sequestration
Exempt from sequestration:
Social security
Federal retirement, disability, and workers compensation
Earned income tax credit
Low-income programs
Veterans compensation and pensions
State unemployment benefits
Offsetting receipts
Net interest
Other
Subtotal, exempt from sequestration
Subtotal, nondefense programs
Total
Memorandum:
Defense with all military personnel accounts exempt:
Subject to across-the-board reduction
Exempt from sequestration
1

182.9
110.8
293.7

1.3
104.6
104.7

0.1
9.4
9.5

210.5

19.0

232.6
61.1
3.9
74.4
14.9
14.4
-61.7
152.1
111.4

21.0
5.5
0.4
6.7
1.3
1.3
-5.6
13.7
10.1

603.1

54.5

813.6

73.5

1,107.4

100.0

107.4
186.3

9.7
16.8

Excludes Federal Emergency Management Agency accounts.

lays, or 13 percent of total nondefense outlays, are associated with
programs with automatic spending increases and certain special
rule programs, the largest of which is medicare. The Act limits the
extent of spending reductions for these programs.
Of the total estimated 1989 nondefense outlays of $813.6 billion,
an estimated $104.7 billion—about 13 percent of nondefense outlays—are associated with budgetary resources subject to an acrossthe-board percentage reduction. An estimated $603.1 billion of nondefense outlays, or 74 percent of total nondefense outlays, are
exempt from sequestration.
Tables A-19 and A-20 show the G-R-H budget baseline by function and agency.
SEQUESTRATION CALCULATIONS

Under the current G-R-H budget baseline estimates, sequestration is not triggered and no further calculations are required. If

A-10

THE BUDGET FOR FISCAL YEAR 1989
Table A-19. 1989 G-R-H BUDGET BASELINE BY FUNCTION
(In billions of dollars)
Budget
authority

National defense
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
Veterans' benefits and services
Administration of justice
General government
Net interest
Undistributed offsetting receipts

306.8
16.7
11.2
5.7
16.3
24.5
12.5
28.4
7.5
35.3
49.6
105.0
175.9
278.9
29.5
8.9
9.9
152.1
-37.8

294.0
15.9
11.6
4.8
16.3
22.4
7.5
27.8
6.6
35.5
48.3
85.2
135.9
234.1
29.1
8.7
9.5
152.1
-37.8

Total

1,236.8

1,107.4

estimates developed in August or October yield a deficit greater
than $146 billion, the following steps would be taken to determine
the sequestration amounts.
First, the deficit reduction to be achieved through sequester
would be calculated by determining the amount that the estimated
deficit exceeds the $136 billion target. If the excess is less than $36
billion, it would become the total sequester amount. If it is greater
than $36 billion, $36 billion would be the required reduction. Onehalf of the required deficit reduction would be assigned to defense
programs (budget accounts in the national defense function, 050,
excluding the Federal Emergency Management Agency) and the
other half to nondefense programs.
Second, all savings from eliminating automatic spending increases in three specific programs—the National Wool Act, the
special milk program, and vocational rehabilitation—would be applied to the required reduction in outlays for nondefense programs.
Third, the amount of outlay savings to be obtained by applying
two of the four special rules would be calculated. These special
rules are for guaranteed student loans and for foster care and
adoption assistance. The estimated savings from these special rules
would be applied toward the required spending reductions in nondefense programs. If the nondefense sequester percentage was
greater than two percent, the savings from applying two additional
special rules for medicare and certain other health programs would

A-ll

SPECIAL ANALYSIS A
Table A-20. 1989 G-R-H BUDGET BASELINE BY AGENCY
(In billions of dollars)

authority

2.0
1.4
0.1
11.1
53.4
2.6
285.5
23.7
20.8
10.9
170.6
228.5
19.1
5.4
5.4
23.1
3.4
26.9
211.6
5.1

Legislative Branch
Judicial Branch
Executive Office of the President
Funds appropriated to the President
Agriculture
Commerce
Defense—Military
Defense—Civil
Education
Energy
Health and Human Services, except Social Security
Health and Human Services, 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
Undistributed offsetting receipts

2.0
1.4
0.1
10.6
57.9
2.5
298.2
38.5
21.3
11.6
190.5
273.3
15.9
5.5
5.6
31.4
3.9
27.5
211.9
5.1
0.1
9.3
51.0
0.4
29.4
18.3
-86.7

9.8
30.5
0.4
29.0
13.6
-86.7

Total

1,236.8

1,107.4

also be calculated at this stage and applied toward the required
spending reductions for nondefense.
The reductions in defense programs and remaining reductions in
nondefense programs must be taken on a uniform percentage basis,
computed separately for each category. The uniform reduction percentages are computed from outlay estimates. The remaining
outlay savings to be achieved separately in defense and nondefense
spending would be divided by the estimated outlays associated with
sequesterable budgetary resources in each category. The two resulting uniform reduction percentages for defense and nondefense
would then be applied separately to all of the remaining sequesterable budgetary resources (budget authority, credit authority, and
other spending authority) in each category.
DIFFERENCES BETWEEN CURRENT SERVICES AND THE G - R - H
BUDGET BASELINE

The two baselines presented in this analysis are closely related.
The current services deficit for 1989 is $138.5 billion, while the GR-H budget baseline deficit is $142.7 billion. For mandatory pro-

A-10

THE BUDGET FOR FISCAL YEAR 1989

grams the two baselines are nearly identical. One difference that
does exist between the baselines concerns a program under which
the Internal Revenue Service reduces tax refunds of borrowers who
have not met repayment schedules on loans from the Government.
Because the authorizing legislation for this program will expire
before the beginning of 1989, the G-R-H budget baseline can not
legally assume that collections from this source will continue. The
current services baseline does assume that the program will be
reauthorized. As a result, net outlays in current services are $0.2
billion below net outlays in the G-R-H budget baseline.
Asset sales and loan prepayments are treated differently in the
two baselines. Under rules specified in the Act, these items can
only be counted if they were enacted prior to September 18, 1987 or
were part of an agency's ongoing activities in 1986. Current services estimates include all such sales and prepayments that have
been enacted. The current services estimates, therefore, include
specific loan prepayments enacted in the 1988 Continuing Resolution and the Omnibus Budget Reconciliation Act of 1987. The inclusion of these prepayments makes current services outlays $2.5
billion below G-R-H budget baseline outlays.
A small difference between the baselines, less than $50 million,
relates to the treatment of clearly temporary discretionary programs. Current services estimates assume such programs will
sunset as scheduled while the G-R-H budget baseline estimates, as
specified in the Act, assume continuation of the programs.
The remaining difference between the baselines is a result of
including portions of the Bipartisan Budget Agreement in current
services but not in the G-R-H budget baseline. For discretionary
programs, the current services baseline incorporates levels agreed
to by the bipartisan budget negotiators. The G-R-H Act does not
permit these levels to be incorporated into the G-R-H budget baseline until they are specifically enacted in appropriations action.
Thus, the G-R-H budget baseline adjusts all discretionary programs
for inflation and increased pay-related costs as required by the Act.
For nondefense programs, the current services estimates will be
below the G-R-H budget baseline estimates for both budget authority and outlays. For defense programs, current services budget
authority will be below the G-R-H budget baseline estimates; while,
due to a shift in composition of budget authority in current services, outlays will be nearly identical in the two baselines. The
current services baseline also uses different pay raises than the GR-H budget baseline, again because Bipartisan Budget Agreements
are included only in current services estimates. The pay raise
difference also leads to a difference in governmental receipts because a lower pay raise leads to fewer employee contributions to
employee retirement and social security (OASDHI) and to reduc-

SPECIAL ANALYSIS A

A-ll

tions in individual income taxes. Thus, current services receipts are
below the G-R-H receipts.

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 is a report to the Congress and the people on how the
Government has spent the funds entrusted to it in past years.
• It is an economic document that reflects the taxation and
spending policies of the Government for promoting economic
growth, high employment, and a stable price level.
• 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.
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 (NIPAs) of the United States provide
the most useful measures. This special analysis shows Federal finances as measured in the NIPAs. 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 1988 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 3 of the Budget 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 1987-89.

B-l

A-10

THE BUDGET FOR FISCAL YEAR 1989
Table B - l . FEDERAL SECTOR RECEIPTS AND EXPENDITURES IN THE NIPAs
(In billions of dollars)
Description

1987 actual

1988 estimate

1989 estimate

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

401.9
104.0
54.1
345.6

406.3
129.7
57.6
380.2

421.2
138.2
60.1
409.6

905.6

973.8

1,029.1

374.9
(290.5)
(84.4)
410.1
(398.7)
(11.4)
103.1
139.6
27.5
0.1

375.3
(289.1)
(86.2)
433.8
(421.3)
(12.5)
110.7
147.8
30.4
-0.1

396.4
(295.4)
(101.0)
459.4
(447.4)
(12.0)
113.3
152.7
24.1

Total expenditures

1,055.1

1,098.1

1,145.9

Deficit ( - )

-149.5

-124.3

-116.8

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: The estimates for 1988 and 1989 are preliminary; revisions will be published in the February 1988 issue of the Survey of Current
Business.

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 1989 levels.
The 3-year averages limit 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

1956-58
average
actual

1966-68
average
actual

1976-78
average
actual

1986-88
average
estimate

1989
estimate

8.1
4.6
2.6
2.8

8.1
4.0
2.0
4.6

8.4
3.1
1.3
6.5

8.8
2.4
1.2
7.9

8.4
2.8
1.2
8.2

18.1

18.6

19.3

20.2

20.5

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

SPECIAL ANALYSIS A

A-ll

real 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
19§1 (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 1989.
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
NIPAs 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 NIPAs 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
comprised 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 1989

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, airports and airways, makes
them an important source of financing for certain specialized ^programs in the budget.

Distribution of Federal Sector Receipts by Category
Percent

Rtrcant

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
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

SPECIAL ANALYSIS A

A-ll

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 Revenue 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; additional details on an NIPA basis will be
published in the February 1988 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.
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.
Over most of this period, defense purchases of goods and services
constituted a declining share of Federal spending. This trend was

A-10

THE BUDGET FOR FISCAL YEAR 1989

Distribution of Federal Sector Expenditures by Category
PtoncAnt

1961

Fiscal Years

89
Estimate

temporarily reversed for three 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 decline as a share of total spending, as a result of the
Bipartisan Budget Agreement, from 27.5 percent in 1987 to 26.3
percent in 1988 and 25.8 percent in 1989.
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 transfer 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

SPECIAL ANALYSIS A

A-ll

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 will decline from
16.2 percent in 1978 to 9.9 percent in 1989. Conversely, the net
interest share doubled in the past decade—from about 6.5 percent
throughout the 1960s and early 1970s to 13.5 percent in 1988. This
increase was due to a combination of growth in Federal debt and
higher interest rates. In 1989, however, the increase in the net
interest share is expected to reverse, because of lower interest rates
and lower deficits that will slow 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

1956-58
average
actual

9.7
1.4
3.4
0.4
0.9
1.2

1966-68
average
actual

8.5
2.4
4.7
0.3
1.9
1.2

1976-78
average
actual

5.1
2.4
8.6
0.2
3.4
1.5

1986-88
average
estimate

6.4
2.0
9.0
0.3
2.4
3.2

1989
estimate

5.9
2.0
8.9
0.2
2.3
3.0

0.5

0.6

0.4

0.6

0.5

17.6

19.5

21.7

23.9

22.8

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

In 1956-58, after the Korean war, defense purchases were nearly
10 percent of GNP. The years 1966-68 include the large military
build-up for the Vietnam war, yet the defense expenditures share
of GNP (8.5 percent) was significantly lower than the post-Korean
war level. By the 1976-78 period after the Vietnam war, defense
purchases had declined to 5.1 percent of GNP. For 1986-88 defense
purchases are expected to be 6.4 percent of GNP, reflecting the
Reagan administration's defense build up. In 1989 they are expected to be 5.9 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

THE BUDGET FOR FISCAL YEAR 1989

A-10

significantly in recent years. Spending for everything except defense purchases averaged 7.9 percent of GNP in 1956-58. In 198688 such spending is estimated to average 17.5 percent of GNP; in
1989 its share is estimated to decline to 16.9 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. 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 $6.3 billion in defense purchases in
1989 over 1988.
Table B-4. PURCHASES OF GOODS AND SERVICES BY CHARACTER OF EXPENDITURE
(In billions of dollars)
1984
actual

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

1985
actual

1986
actual

1987
actual

1988
estimate

1989
estimate

93.4
135.1

99.4
153.7

103.8
171.5

107.7
182.8

111.5
177.6

115.7
179.7

228.5

253.1

275.3

290.5

289.1

295.4

36.7
32.0

39.0
48.3

39.6
53.5

41.0
43.4

43.3
42.9

45.2
55.8

68.7

87.3

93.1

84.4

86.2

101.0

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 grew more rapidly than nondefense purchases through 1987,
although they are expected to decline in 1988 and increase only
modestly in 1989.
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

SPECIAL ANALYSIS A

A-ll

years 1980 to 1989, reflecting the agency structure in the 1989
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, 1984, 1988, and 1989—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 NIPAs 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 $20.9 billion in
1989, 85 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 $10.9 billion in 1989 nondefense purchases, and the Department of Energy, with $4.5 billion in
1989 nondefense purchases, conduct major research and development programs. The Transportation Department's $8.0 billion of
1989 nondefense purchases are mainly for the Federal Aviation
Administration and the Coast Guard. The Corps of Engineers has
an estimated $3.3 billion in 1989 nondefense purchases, which,
along with the Tennessee Valley Authority's $1.8 billion, is primarily used for natural resources public works projects and for power
activities.

A-10

THE BUDGET FOR FISCAL YEAR 1989

Table B-5—NONDEFENSE PURCHASES OF GOODS AND SERVICES BY AGENCY AND ACTIVITY
(In billions of dollars)
Actual
1980

Legislative and judicial
branches
Department of Agriculture
Commodity Credit
Corporation
Forest Service
All other
Department of Commerce
Corps of Engineers, Civil
Department of Education
Department of Energy
Department of Health and
Human Services
Health, including medicare.
Social security, income
security, and other
Department of Housing and
Urban Development
Department of the Interior., .
Department of Justice
Department of Labor
Department of State
Department of TransportationCoast Guard
Federal Aviation
Administration
Other
Department of the Treasury....
Internal Revenue Service....
Other
Environmental Protection
Agency
National Aeronautics and
Space Administration , .
Veterans Administration
Hospital and medical care..
Administration and other....
All other
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

1981

1982

1983

Estimate
1984

1985

1986

2.6
12.1

2.7
15.9

1987

1988

1989

1.8
5.4

1.8
5.6

2.1
12.9

2.2
2.4
9.6 - 2 . 0

(1.0)
(1.7)
(2.7)
1.9
3.2
0.7
2.6

(1.2)
(1.9)
(2.6)
1.5
3.2
0.8
7.8

(8.0)
(1.9)
(3.0)
1.5
3.0
0.8
5.2

(4.3) ( - 7 - 6 )
(1.8) (1.8)
(3.5) (3.9)
1.6
1.6
3.0
3.0
0.7
0.9
5.1
4.8

7.5
(5.3)

8.3
(5.9)

8.7
(5.9)

8.6
(5.8)

9.2
(6.3)

9.8
(7.1)

10.0
(7.5)

10.7
(7.8)

11.8 12.9
(8.7) (10.0)

(2.2)

(2.4)

(2.8)

(2.7)

(2.8)

(2.7)

(2.5)

(2.9)

(3.1)

(2.9)

0.5
3.9
2.1
1.9
1.0
4.8
(1.4)

0.4
4.0
2.3
1.9
1.0
5.1
(1.6)

0.5
3.9
2.4
1.9
1.1
5.3
(1.8)

0.7
4.2
2.7
1.5
1.3
5.7
(2.1)

1.0
4.3
3.0
1.5
1.4
6.0
(2.2)

1.1
4.5
3.4
1.4
1.6
6.3
(2.2)

1.6
4.4
3.5
1.6
1.9
6.5
(2.1)

0.5
4.3
4.2
1.5
1.9
7.0
(2.2)

0.9
4.6
4.9
1.8
2.2
7.4
(2.3)

0.7
4.5
5.6
1.9
2.3
8.0
(2.5)

(2-5)
(0.9)
4.0
(2.3)
(1.7)

(2.7)
(0.8)
4.2
(2.4)
(1.8)

(2.5)
(0.9)
4.2
(2.5)
(1.7)

(2.8)
(0.8)
4.6
(2.9)
(1.7)

(3.1)
(0.8)
4.7
(3.2)
(1.5)

(3.4)
(0.6)
5.4
(3.6)
(1.9)

(3.8)
(0.6)
5.8
(3.8)
(2.0)

(4.0)
(0.8)
6.2
(4.2)
(2.0)

(4.3)
(0.8)
7.3
(5.1)
(2.2)

(4.7)
(0.8)
8.1
(5.3)
(2.8)

0.9

1.0

0.9

1.0

1.1

1.3

1.4

1.6

1.8

2.2

4.7
7.1
(6.3)
(0.8)
8.8

5.3
7.6
(6.8)
(0.8)
9.3

5.9
8.1
(7.3)
(0.8)
8.8

6.5
8.9
(8.1)
(0.8)
9.0

6.9
9.6
(8.7)
(0.9)
9.1

7.2
10.3
(9.3)
(1.0)
9.8

7.5
9.1 10.9
7.3
10.6
11.0 11.8 11.8
(9.7) (10.1) (10.7) (10.9)
(0.9) (0.9) (1.1) (0.9)
11.0 11.9 12.3 13.3

(0.4)

(0.5)

(0.6)

(0.7)

(0.8)

(0.4)

(0.5)

(0.4)

(1.9)
(0.4)
(1.7)

(2.3)
(0.5)
(1.5)

(2.5)
(0.4)
(1.0)

(2.7)
(0.6)
(0.9)

(3.0)
(0.9)
(0.2)

(2.9)
(1.0)
(0.8)

(2.7)
(1.3)
(1.3)

(2.8)
(1.7)
(1-7)

(3.1)
(1.4)
(1.8)

(3.3)
(1.7)
(1.8)

(0.4)

(0.5)

(0.6)

(0.7)

(0.8)

3.3
3.0
4.4 - 2 . 6

3.7
4.0

(6.3) (10.9) ( - 0 . 8 ) ( - 8 . 2 ) ( - 1 . 7 )
(2-0) (1.9) (1.9) (2.1) (2.0)
(3.9) (3.1) (3.3) (3.5) (3.7)
1.7
1.8
1.7
2.1
2.4
3.0
2.8
2.8
3.2
3.3
0.8
0.8
0.9
0.9
0.9
5.0
3.5
3.3
3.4
4.5

A-ll

SPECIAL ANALYSIS A

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

Imputed bank service
charges
Other
Total nondefense
purchases

Estimate

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

(0.3)
(3.3)

(0.4)
(3.3)

(0.4)
(3.1)

(0.4)
(2.8)

(0.5)
(3.0)

(0.6)
(2.8)

(0.5)
(3.1)

(0.6)
(3.2)

(0.5)
(3.6)

(0.5)
(4.0)

62.8

71.1

77.1

77.0

68.7

87.3

93.1

84.4

86.2

101.0

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
1989, largely due to increases in the covered population and cost-ofliving adjustments. Social security is estimated to account for 50.2
percent of total domestic transfer payments in 1989, while medicare accounts for another 20.6 percent, unemployment assistance
for 3.3 percent, Federal civilian and military employees' retirement
and disability for 11.0 percent, and veterans benefits for 3.8 percent
of the total. Program trends on a unified budget basis are discussed
extensively in Part 5 of the Budget and elsewhere in the budget
documents.
Most domestic transfer payments are for income support and are
characterized by automatic eligibility of coverage and automatic
benefit increases to adjust for changes in the cost of living. For
these programs 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 $1.6 billion between 1980 and 1989, despite
a 50 percent higher price level. 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
1978

1979

1980

1981

1982

Estimate
1983

1984

1985

1986

1987

1988

1989

HUMAN RESOURCES PROGRAMS
Social security (OASDI)

89.3

99.4

113.7

134.1

149.6

163.3

170.9

181.2

190.9

199.3

211.2

224.8

Medicare (HI&SMI)

24.2

28.1

33.8

41.1

49.0

56.1

60.8

68.3

73.8

81.5

86.4

92.1

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

3.9
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
22.0
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

6.1
21.8
16.3
16.9
1.6
8.1
10.7
1.2
1.0
0.1

6.2
23.0
15.6
16.0
1.6
8.7
10.7
1.1
1.1
0.1

6.3
23.9
17.5
16.4
1.6
9.3
10.6
1.4
1.1
0.4

6.5
25.7
17.9
15.6
1.5
9.8
10.4
1.4
1.2
0.5

6.7
27.2
19.0
14.2
1.5
10.5
11.4
2.9
1.2
0.5

6.9
29.2
20.2
14.8
1.5
11.4
11.3
3.9
1.3
0.4

46.7

50.6

65.0

74.5

81.9

94.2

83.9

84.1

88.5

90.6

95.1 j

100.8

Health

0.6

0.7

0.6

0.7

0.8

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

3.4

4.5

5.7

5.3

5.9

6.1

6.3

6.1

5.9

6.5

6.9

0.8

0.9

1.5

1.1

0.9

0.8

1.0

1.1

3.5

4.3

6.0

6.8

6.2

6.7

7.1

7.3

7.1

6.9

7.6

8.0

13.5

14.0

14.4

15.5

16.2

16.5

16.3

16.5

16.6

16.5

16.3

17.0

Subtotal, income security

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

Total human resources programs

177.8

196.9

233.5

272.7

303.6

337.4

339.6

358.0

377.5

395.5

417.3

443.6

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

2.0
1.2

2.5
1.5

2.5
1.3

1.5

1.8

1.9

2.1

2.3

2.7

2.6

3.0

3.2

4.0

3.8

179.3

198.5

235.4

274.6

305.6

339.8

342.3

360.6

380.5

398.7

421.3

447.4

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.

W
I
i—1
00

A-10

THE BUDGET FOR FISCAL YEAR 1989

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
NIPAs, 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 St£te 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 will rise by 11.8 percent in 1988 and
6.7 percent in 1989. Transportation grants will rise by 5.6 percent
in 1988, 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 increase by only 1.8 percent in 1989. The administration also proposes to reduce expenditures for most other grants-in-aid categories.

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

Description

1978

1980

1979

Estimate
1983

1982

1981

1984

1987

1986

1985

1988

1989

HUMAN RESOURCES PROGRAMS
Income security:
Family support payments
Child nutrition and other food programsOther

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

7.8
4.7
5.4

8.2
5.4
5.4

8.5
5.8
5.5

9.2
6.2
5.6

10.5
6.6
4.7

10.7
7.2
4.4

10.9
7.5
4.1

Subtotal, income security

11.0

11.5

13.3

17.2

16.7

17.9

19.0

19.8

20.9

21.8

22.3

22.4

10.6

12.4

13.9

16.8

17.3

18.9

20.0

22.6

24.9

27.4

30.6

32.6

2.7

3.0

3.1

2.8

3.0

3.2

3.7

3.4

3.7

4.0

13.4

15.1

16.9

19.9

20.5

21.8

23.0

25.7

28.6

30.8

34.3

36.6

Health:
Medicaid
Other (includes research, construction,
services, and medical training)
Subtotal, health
Education, training, employment,
social services:
Education
Training and employment
Social services

M
O
>
tr1
>

tr
KJ
HH
GO

and
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

8.0
2.9
6.3

9.0
2.9
7.1

9.6
2.9
7.1

Subtotal, education, training, employment, and social services

19.3

20.3

21.3

19.6

15.3

15.5

16.6

17.6

17.3

19.0

19.7

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

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

Total human resources programs

44.1

47.4

52.0

57.2

53.2

55.8

58.2

62.9

68.1

70.7

76.6

79.8

W
i

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

Actual
1978

1979

1980

Estimate
1984

1983

1982

1981

1985

1987

1986

1989

1988

OTHER FUNCTIONS:
Natural resources and environment:
EPA
Other

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
0.7

3.2
0.7

2.9
0.8

2.8
0.5

3.8

4.5

5.2

4.8

4.7

3.9

3.7

4.0

4.1

4.0

3.7

3.3

2.9
2.4
1.5

1.6
3.2
1.6

0.4
4.0
1.8

0.1
4.3
1.5

4.1
1.1

3.9
0.9

4.1
0.8

4.2
0.8

3.7
0.8

3.2
0.6

3.3
0.7

3.3
0.6

6.8

6.4

6.2

5.9

5.2

4.8

5.0

4.9

4.5

3.9

4.0

3.9

Transportation

8.1

9.6

11.8

12.2

10.8

12.1

14.3

16.0

17.7

16.1

17.0

17.3

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

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

1.4

1.5

9.1

7.8

7.9

6.3

5.9

6.1

6.6

1.5

1.4

1.5

2.8

3.5

3.7

3.6

3.3

3.4

3.8

6.5

7.1

8.0

7.5

Total other functions

30.6

31.7

34.7

32.9

30.3

29.9

32.5

34.9

39.4

32.4

34.1

33.5

Total grants-in-aid

74.7

79.1

86.7

90.1

83.4

85.7

90.7

97.8

107.4

103.1

110.7

113.3

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

*50 million or less.

SPECIAL ANALYSIS A

A-ll

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 0.2 percent of GNP. The
peak year for foreign transfer payments was 1949; in that year
they were equal to 1.9 percent of GNP, due to the Marshall Plan.
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.
"Government enterprise" is the term used in the NIPAs 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. 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
Other 1
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
All other1

Actual
1979

1978

Estimate
1984

1983

1985

1986

1987

1988

1989

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

8.0
1.9
0.3
11.0
0.3
1.6
0.1

10.3
2.1
0.2
11.0
0.3
1.3
0.1

13.2
1.7
0.2
11.0
0.2
1.3
0.1

13.8
1.6
0.3
11.9
0.2
1.3
0.1

14.3
1.1
0.3
13.3
0.3
0.4
0.1

8.9

9.9

9.5

11.7

13.5

18.2

24.4

23.2

25.3

27.8

29.2

29.8

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
-0.3

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

2.5
0.6
-0.7
-1.5
-0.4
-1.1

2.0
1.1
-0.7
-2.0
-0.5
-1.2

4.4
-0.1
-0.5
-2.3
-0.7
-1.4

9.0
-0.3
-0.3
-2.4
-2.9
-1.4

9.2
-0.5
-0.6
-2.7
-1.7
-1.6

4.3
-1.5
-0.5
-2.9
-1.7
-1.7

-0.3

-0.3
-0.2

-0.3

-0.2

-0.3

-0.4
0.1

-1.5
-0.2

-1.9

-1.6
-0.4

-1.3
-0.3

0.7

Total subsidies less current
surplus

9.7

1982

2.3
0.4
0.4
3.5
0.5
1.4
0.3

Subtotal

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

1981

1980

_ *

9.9

_ *

1.0

0.9

-0.5

2.7

-1.0

-2.6

-2.4

-0.3

-1.1

-5.6

10.4

12.5

13.0

20.9

23.4

20.7

22.9

27.5

30.4

24.2

SPECIAL ANALYSIS A

A-ll

Wage disbursements less accruals.—This is an adjustment occasionally made in the NIPAs 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 NIP As 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 1987 to 1989. 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 1989 budget.

Table B-9. FEDERAL RECEIPTS AND EXPENDITURES IN THE NIPAs, QUARTERLY, 1987-89
(In billions of dollars; seasonally adjusted at annual rates)
Actual
Description

Estimate

Oct.-Dec.
1986

Jan.-Mar.
1987

Apr.-June
1987

July-Sept.
1987

Oct.-Dec.
1987

Jan.-Mar.
1988

Apr-June
1988

July-Sept.
1988

Oct.-Dec.
1988

Jan.-Mar.
1989

Apr.-June
1989

376.4
90.5
51.1
334.5

381.5
103.0
53.3
341.5

415.6
107.9
54.2
345.2

404.3
114.5
53.9
350.3

413.8
117.9
54.6
356.6

399.0
131.8
57.7
382.5

417.8
133.6
58.7
387.6

399.3
135.6
59.6
392.6

407.1
138.1
59.8
398.4

413.1
134.9
59.8
407.6

425.4
138.2
60.2
413.5

430.7
141.7
60.7
419.2

852.5

879.3

922.9

923.0

943.0

971.0

997.7

987.1

1,003.4

1,015.4

1,037.3

1,052.3

368.6
(279.0)
(89.6)
405.7
(391.0)
(14.7)

366.9
(287.5)
(79.4)
406.7
(396.0)
(10.7)

379.6
(294.5)
(85.1)
412.0
(401.5)
(10.5)

382.1
(299.0)
(83.0)
413.4
(403.7)
(9.8)

393.7
(300.0)
(93.7)
420.6
(406.2)
(14.4)

375.8
(292.8)
(83.0)
434.0
(422.1)
(11.9)

367.4
(283.9)
(83.5)
437.9
(426.0)
(11.9)

365.7
(280.8)
(84.9)
441.5
(429.6)
(11.9)

386.6
(285.2)
(101.4)
445.0
(433.0)
(12.0)

393.6
(293.4)
(100.2)
461.5
(449.5)
(12.0)

398.8
(297.9)
(100.9)
464.0
(452.0)
(12.0)

406.7
(305.2)
(101.5)
466.4
(454.4)
(12.0)

102.8
137.8

102.2
139.5

106.0
139.8

103.5
142.9

107.0
148.3

110.6
147.8

112.5
147.2

112.5
147.8

112.6
149.6

113.0
151.6

113.5
153.7

114.0
155.8

26.3

34.3

24.8

17.2
0.3

35.9
-0.3

31.0

32.1

21.6
-0.3

34.5
0.3

23.1

22.9

15.8

Total expenditures

1,041.2

1,049.8

1,062.1

1,058.8

1,105.8

1,099.2

1,097.1

1,089.4

1,128.0

1,142.8

1,152.9

1,158.7

Deficit ( - )

-188.7

-170.5

-139.2

-135.8

-162.8

-128.2

-99.4

-102.3

-124.6

-127.4

-115.6

-106.4

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.

SPECIAL ANALYSIS A

A-ll

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 NIPAs. Adjustments required to reconcile
the budget to the Federal sector in the NIPAs are explained below.
Table B-10. RELATIONSHIP OF THE BUDGET TO THE FEDERAL SECTOR, NIPA
(In billions of dollars)
1985
actual

1986
actual

1987
actual

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

734.1
32.3
14.6
-3.3
-1.2

769.1
33.7
12.6
0.2
-1.2
-0.2

854.1
35.5
13.7
3.7
-1.5

909.2
38.9
16.4
10.9
-1.6

964.7
41.5
18.4
6.1
-1.7

Federal sector, NIPA receipts

776.4

814.2

905.6

973.8

1,029.1

Total budget outlays 1
946.3
Lending and financial transactions
-27.2
Government contributions for employee retirement (grossing)..
32.3
Other netting and grossing
14.6
Defense timing adjustment
0.9
Bonuses on Outer Continental Shelf land leases
1.9
Geographic exclusions
-5.4
Other
-2.4

990.3
-11.9
33.7
12.6
4.0
2.1
-5.4
2.3

1,004.6
-6.4
35.5
13.7
7.4
1.6
-5.5
4.3

1,055.9
-9.3
38.9
16.4
3.0
0.7
-5.7
-1.9

1,094.2
-7.2
41.5
18.4
-0.5
1.2
-6.0
4.4

Federal sector, NIPA expenditures

1,027.8

1,055.1

1,098.1

1,145.9

1988
estimate

1989
estimate

RECEIPTS

EXPENDITURES

961.0

Includes off-budget amounts.

Lending and financial transactions.—The NIPAs 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 NIPAs 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 NIPAs.

A-10

THE BUDGET FOR FISCAL YEAR 1989

In 1987, the administration began a pilot program to sell existing
and newly made loan assets without recourse, or the right to make
a claim against the Federal Government in the event of borrower
default. In 1987, loans with a face value of $7.9 billion were sold or
prepaid by borrowers and yielded $5.5 billion in net offsetting
receipts. In 1988, the administration proposes to sell loans with a
face value of $12.8 billion, which are expected to yield $10.9 billion.
In 1989 the loans to be sold have a face value of $12.0 billion and
will yield an estimated $8.5 billion. The net proceeds of all of these
loans will be excluded from the NIPAs.
The other major financial transaction excluded from the NIPAs
was the sale of Conrail stock. In 1987, the Federal Government
received $1.9 billion from the sale of Conrail.
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 NIPAs 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 NIPAs 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

SPECIAL ANALYSIS A

A-ll

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
NIPAs, 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
and expenditures, imputed accruals have no impact on the surplus
or deficit. However, the contributions imputed in the NIPAs 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 NIPAs 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 NIPAs 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 NIPAs.
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 NIPAs as indirect business nontaxes;
this converts the collections from an offset to outlays in the budget
to a receipt in the NIPAs.
All netting and grossing items, including Government contributions for employee retirement, have an equal impact on receipts

A-10

THE BUDGET FOR FISCAL YEAR 1989

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 NIPAs attempt to record most receipts from the business sector in the time period in which the liability is incurred
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 NIPAs 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 NIPAs 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 NIPAs. 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 NIPAs. As already noted, the budget records these bonuses as
proprietary receipts and, therefore, deducts them from budget outlays. The NIPAs 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,

SPECIAL ANALYSIS A

A-ll

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 NIPAs exclude such transactions, this constitutes a major reconciliation item between the two data series.
Other.—In 1989, the administration proposes to sell the naval
petroleum reserves and other physical assets, yielding $3.5 billion
in offsetting receipts. The NIPAs exclude this transaction, along
with other purchases and sales of land and existing natural assets.
This category also contains miscellaneous adjustments, such as
foreign currency transactions that are included in the NIPAs but
not in the budget.

Table B - l l . FEDERAL TRANSACTIONS IN THE NATIONAL INCOME AND PRODUCT ACCOUNTS, 1978-1989
(In billions of dollars)

Description

Actual

Estimate

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

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

302.5
75.3
54.9
279.2

340.6
74.3
56.0
305.6

358.0
80.3
51.7
324.1

401.9
104.0
54.1
345.6

406.3
129.7
57.6
380.2

421.2
138.2
60.1
409.6

424.3

491.2

538.6

623.8

643.3

645.7

711.9

776.4

814.2

905.6

973.8

1,029.1

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)

297.2
(228.5)
(68.7)
352.2
(342.2)
(9.9)

340.4
(253.1)
(87.3)
374.0
(360.6)
(13.4)

368.4
(275.3)
(93.1)
394.8
(380.5)
(14.3)

374.9
(290.5)
llO.'l'
(398.7)
(11.4)

375.3
(289.1)
(86.2)
433.8
(421.3)
(12.5)

396.4
(295.4)
(101.0)
459.4
(447.4)
(12.0)

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

97.8
128.0

107.4
134.3

103.1
139.6

110.7
147.8

113.3
152.7

9.7
-0.1

9.9*

10.4

12.5
-0.1

13.0*

20.9
0.4

23.3
-0.1

20.7
0.1

22.9

27.5
0.1

30.4
-0.1

24.1

459.9

506.4

589.0

682.4

755.9

832.4

873.0

961.0

1,027.8

1,055.1

1,098.1

1145.9

-35.6

-15.2

-50.4

-58.5

-112.6

-186.7

-161.0

-184.5

-213.6

-149.5

-124.3

-116.8

*$50 million or less.
Note—The estimates for 1988 and 1989 are preliminary; revisions will be published in the February 1988 issue of the Survey of Current Business.

PART 2

ANALYSES OF THE TOTALS

2-1

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. It includes a section on the measurement of borrowing and
debt.
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
2-2

2-3
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.

SPECIAL ANALYSIS C
FUNDS IN THE BUDGET
This analysis provides information about Federal Government
transactions. It includes breakouts of Federal and trust funds, receipts and outlays, surpluses and deficits, net obligations, and net
balances.
Federal and trust funds.—All Federal Government receipt and
expenditure accounts are in one of these two groups. Federal funds
include the general fund, special funds, public enterprise revolving
funds, and intragovernmental management and revolving funds.
Trust funds include regular (non-revolving) trust funds and trust
revolving funds.
Governmental receipts and outlays.—Governmental receipts include only payments by the public that result from exercise of the
Government's sovereign powers (primarily taxes and other compulsory assessments). 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 another
Federal Government account's spending is also offset against Federal Government outlays. Thus, receipts measure the income of the
government in its sovereign capacity, and outlays measure the net
spending that must be financed from receipts. Calculating the difference between receipts and outlays yields the surplus or deficit.
Any income that is recorded as an offset to outlays rather than
as governmental receipts is entitled "offsetting collections." Offsetting collections may be offset within the expenditure account that
they finance (reimbursements to appropriations) or may be deposited within receipt accounts that are recorded as offsets to outlays
rather than as on-budget or off-budget receipts (offsetting receipts).
There is no substantive difference between reimbursements to appropriations and offsetting receipts—the differences are purely a
matter of the legal status of the money. In almost all budgetary
presentations, all offsetting collections are offsets to outlays rather
than being included as on-budget or off-budget receipts. However,
the tables in Special Analysis C show several presentations of
receipt and outlay tabulations partially grossed, and then show the
offsets, to arrive at the net receipts and net outlays. (A further
discussion of the nature and treatment of offsetting collections may
be found in the "collections" section in part 6e in the 1989 Budget).

C-l

A-10

THE BUDGET FOR FISCAL YEAR 1989

When the budget is disaggregated by fund group, payments from
any account within a fund group to another account within the
same fund group ("intrafund transactions") are 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 accounts, and from on-budget trust fund accounts to
Federal fund accounts ("interfund transactions''), the income is
normally included on the receipts side of the collecting fund group.
As a result, these interfund transactions must be deducted when
Federal fund and on-budget trust fund receipts are aggregated to
arrive at total receipts; to arrive at a figure of total budget (governmental) receipts from the public. Likewise, the interfund transactions must be deducted when the Federal fund and on-budget trust
fund outlays are aggregated to arrive at total budget outlays; to
avoid double-counting. These deductions are shown in table C - l .
Note that neither the on-budget nor the off-budget totals include
the receipts and disbursements of the Thrift Savings Fund established under the Federal Employees' Retirement Act of 1986. The
monies in the Fund are owned by the individuals who contribute
them, and are managed in a purely fiduciary capacity by the
Federal Retirement Thrift Investment Board. This is further explained in Part 6e of the Budget.
The Balanced Budget and Emergency Deficit Control Act of 1985
(Public Law 99-177) eliminated the off-budget status of former offbudget Federal entities, but it also required that the receipts and
outlays of the two social security trust funds (the Federal old-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.
The movement of the previously off-budget Federal entities to onbudget status means that all Federal funds are now on-budget.
However, the movement of the two social security trust funds offbudget 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 deduc-

SPECIAL ANALYSIS A

A-ll

tions 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.

A-10

THE BUDGET FOR FISCAL YEAR 1989
Table C - L FEDERAL GOVERNMENT RECEIPTS AND OUTLAYS BY FUND GROUP
(In millions of dollars)
Description

1987
actual

1988
estimate

1989
estimate

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

577,086
-19,754
-685
-18,833

596,461
-19,473
-820
-15,412

631,822
-18,873
-774
-18,983

537,814

560,756

593,191

Trust funds.Total in receipt accounts
Intrafund receipts from on-budget
Intrafund receipts from off-budget
Proprietary receipts from the public

235,925
-10
-2,614
-16,656

253,322

271,149

-2,890
-18,913

-3,009
-20,228

Subtotal, trust fund receipts

216,645

231,517

247,910

-113,718

-123,010

-134,909

640,741

669,264

706,193

227,640
-14,205
-33

257,310
-17,411

279,682
-21,201

Total off-budget (trust fund) receipts

213,402

239,899

258,481

Total receipts

854,143

909,163

964,674

800,188
-19,754
-685
-18,833

840,666
-19,473
-820
-15,412

873,978
-18,873
-774
-18,983

760,916

804,961

835,348

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

182,836
-10
-2,614
-16,656

192,632

203,672

-2,890
-18,913

-3,009
-20,228

Subtotal trust fund outlays

163,556

170,827

180,434

-113,718

-123,010

-134,909

810,754

852,778

880,873

208,070
-14,205
-33

220,537
-17,411

234,544
-21,201

193,832

203,126

213,342

1,004,586

1,055,904

1,094,215

Subtotal, Federal fund receipts

Interfund transactions
Total on-budget receipts
Off-budget:
Trust funds:
Total in receipt accounts
Interfund receipts from on-budget
Proprietary receipts from the public

- 1

OUTLAYS
On-budget:
Federal funds.Total in expenditure 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 expenditure accounts
Interfund receipts from on-budget
Proprietary receipts from the public
Total off-budget (trust fund) outlays
Total outlays

- 1

SPECIAL ANALYSIS A

A-ll

Table C - l . FEDERAL GOVERNMENT RECEIPTS AND OUTLAYS BY FUND GROUP—Continued
(In millions of dollars)
Description

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

1987
actual

1988
estimate

1989
estimate

-223,103
53,089

-244,204
60,690

-242,157
67,476

-170,014

-183,514

-174,680

19,570

36,773

45,139

-150,444

-146,741

-129,542

FEDERAL FUNDS

As stated above, 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 outlays are
net of collections at the account level. There are five types of
expenditure (appropriation or fund) accounts and two types of receipt accounts associated with the Federal fund group, as follows:
• General fund receipt accounts—Receipt accounts in which all
collections not earmarked by law for a specific purpose are
deposited. Receipt accounts, in turn, are categorized as being
governmental or offsetting receipts. Offsetting receipts are
stratified to identify the paying and receiving side of each
transaction. For example, proprietary receipts from the public
include all offsetting receipts collected from outside the Federal Government ("the public"). Intergovernmental offsetting
receipts are collections in receipt accounts of money paid by
the Government to itself. These are stratified into the categories "intrafund" receipts and "interfund" receipts in order to
identify the fund group of both the paying and receiving
accounts.
• Special fund receipt accounts—Receipt accounts in which collections that are earmarked by law for a specific purpose are
deposited and held until appropriated. Special fund receipts
may be governmental or offsetting receipts. Special fund offsetting receipts are stratified into the same categories as general fund offsetting receipts, in order to identify both the
source of the payment and of the offsetting collection.

A-10

THE BUDGET FOR FISCAL YEAR 1989

• General fund appropriation accounts—Expenditure or fund
accounts established to record amounts appropriated by law
for the general support of Federal Government activities and
the subsequent outlay of these funds.
• Special fund expenditure accounts—Expenditure accounts established to record special fund amounts appropriated by law
for specific programs and the subsequent outlay of the funds.
Special fund income is deposited in receipt accounts as they
are collected. When they are appropriated, they are credited
to expenditure accounts.
• Public enterprise revolving fund accounts—Expenditure accounts authorized to be credited with collections, primarily
from outside the Government, that are earmarked to finance
a continuing cycle of business-type operations, primarily with
the public, and financed primarily by crediting the expenditure account with the income derived from the sale of its
goods and services. No additional appropriation is required to
obligate these funds.
• Intragovernmental revolving fund accounts—Expenditure 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. No additional appropriation is required to
obligate these funds.
• Management fund accounts—Expenditure 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. No additional appropriation is required to
obligate these funds.
Federal fund receipts and outlays.—In 1989, the Federal fund
receipts are estimated at $593 billion and outlays are estimated at
$835 billion. Table C-2 presents the distribution of receipts by
source and outlays by agency for the Federal fund group. As explained above, all Federal funds are on-budget. The Federal fund
receipts shown in Table C-2 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 "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.

SPECIAL ANALYSIS A

A-ll

Table C-2. FEDERAL FUND RECEIPTS AND OUTLAYS
(In millions of dollars)
Description

1987
actual

estimate

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

392,557
83,730
14,844
7,493
15,032
24,158

393,395
105,234
15,749
7,567
16,234
22,577

537,814

560,756

1,810
1,170
109
9,002
50,511
2,104
273,968
13,280
16,800
10,676
95,083
15,484
4,922
4,333
5,000
2,894
9,322
180,617
4,917
51
7,591
17,499
-65
26,328
14,307

1,939
1,356
124
5,077
50,676
2,456
277,255
13,363
18,795
10,506
108,003
18,553
5,219
5,151
4,795
3,336
9,081
199,339
4,345
-135
9,112
17,978
280
26,939
14,572

-903
-4,021
-1,875

-3,155

760,916

804,961

-223,103

-244,204

OUTLAYS BY AGENCY
Legislative branch
The Judiciary
Executive Office of the President
Funds appropriated to the President
Agriculture
Commerce
Defense—Military
Defense—Civil
Education
Energy
Health and Human Services, except social securityHousing 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
Allowances1
.
Undistributed offsetting receipts:
Other interest
Rents and royalties on the Outer Continental Shelf.
Sale of major assets
Total outlays, Federal fundsExcess of outlays ( — )
1

Reflects allowance for savings from reform of Davis-Bacon and Service Contract Acts.

Obligations.—The obligations (net) for Federal funds are estimated at $836 billion for 1989, as set forth in table C-3. These transactions flow largely from budget authority for Federal funds of $863
billion for the year, although some flow from prior years' budget
authority.

A-10

THE BUDGET FOR FISCAL YEAR 1989
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
Defense—Civil
Education
Energy
Health and Human Services, except social securityHousing 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
U.S. Postal Service
Railroad Retirement Board
All other independent agencies
Allowances:1
Undistributed offsetting receipts:
Other interest
Rents and royalties on the Outer Continental Shelf.,
Sale of major assets
Total..
1

1987
actual

estimate

1,916
1,204
114
12,532
48,187
2,323
294,251
13.518
18.519
10,818
96,813
23,762
5,009
5,008
4,953
3,111
9,088
182,012
4,255
488
8,752
17,613
-59
26,797

2,019
I,379
123
4,737
49,889
2,564
289,127
13,569
20,239
II,557
109,170
22,536
5,374
5,527
5,021
3,881
8,231
200,183
4,418
90
10,395
18,056
218
28,458

-2,315
1,515
2,808
2,787
7,683

-1,410
-1,405
1,438
3,084
8,325

-903
-4,021
-1,875

-3,155

796,665

823,639

Reflects allowance for savings from reform of Davis-Bacon and Service Contract Acts.

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 only 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 long-term 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.

SPECIAL ANALYSIS A

A-ll

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
Funds appropriated to the
President
Agriculture
Commerce
Defense—Military
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
Railroad Retirement
Board
All other independent
agencies
Allowances1
Total

End 1987

Start 1987
Obligated

386
115
17

Unobligated

401
9
*

Obligated

End 1988
]

Unobligated

458
146

338
58

Obligated

End ]L989

Unobligated

Obligated

Unobligated

519
169

224
4

585
220

207
1

31,667
30,209
1,460
198,620
607
13,670
7,047

27,220
1,106
382
59,577
426
1,676
2,651

34,745
31,592
1,544
213,866
845
13,637
7,131

28,394
1,453
244
47,546
522
2,241
1,832

34,343
31,380
1,643
224,563
1,051
14,977
8,194

28,339
909
76
41,165
296
1,759
598

34,485
25,398
1,418
230,911
1,187
15,984
8,310

28,365
669
111
39,996
140
1,954
754

7,549

508

9,202

583

10,323

615

10,968

194

205,381
2,072
1,003
3,791
853
11,687
1,360

56,698
738
346
1,990
1,009
1,816
19,065

208,002
1,981
1,679
3,714
1,008
10,914
1,769

48,162
695
534
1,987
1,245
1,615
20,017

195,449
2,137
2,056
3,930
1,553
10,064
1,793

38,994
424
389
2,421
665
1,082
19,673

178,871
1,926
2,310
4,294
1,998
8,336
3,308

34,052
326
496
3,100
145
289
31,251

8,440

950

7,493

1,400

7,566

1,096

7,306

497

375

1,275

750

1,106

975

1,002

1,208

837

1,640

1,256

2,795

3,298

4,078

1,738

5,043

1,179

914

132

664

209

278

274

176

421
3,471

444
2,552

426
3,862

785
2,032

364
5,373

850
1,590

300
5,874

1,632
1,420

1,732

797

1,561

1,093

889

1,207

128

1,669

6,671

1,084

3,431

1,169

6,160

9,255

13,770

3,766

15,038

4,156

14,463

4,155

15,598
-2

4,862

554,024

188,661

577,745

173,171

578,084

155,712

566,260

163,577

*500 thousand or less.
1 Reflects allowance for savings from reform of Davis-Bacon and Service Contract Acts.

Public enterprise revolving funds.—Public enterprise funds are
used to conduct a cycle of business-type operations, primarily with
the public. These funds are usually provided from the general fund,
directly or through the Federal Financing Bank (FFB), and, in a
few cases, by borrowing from the public.

A-10

THE BUDGET FOR FISCAL YEAR 1989

Data on public enterprise funds are displayed net of collections in
tables C - l through C-4. Information on the gross outlays and applicable collections is shown in table C-5. Collections of public enterprise funds are estimated at $118 billion in 1989, and gross outlays
are estimated at $133 billion, resulting in a net outlay of $15
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 Development:
Public and Indian Housing
programs
Federal Housing Administration
fund
Housing for the elderly or
handicapped 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
Treasury1..
General Services Administration....

1987
actual

1988 estimate

Gross outlays
1989 estimate

1987
actual

estimate

827

698

710

1,421

123
287

136
244

139
270

37
267

35
275

19,484

21,615

15,586

41,892

39,272

5,096

3,009

3,722

5,894

6,255

3,561

3,697

3,618

6,124

5,820

1,924

1,528

1,199

1,715

2,305

332

318

336

609

608

4,257
104

5,850
83

5,573
72

3,944
200

4,275
97

690

350

240

132

2,505

3,006

3,086

2,554

2,794

158

137

103

123

101

1,454

1,531

6,363

6,060

5,083

5,808

6,341

559

583

628

964

1,128

1,194

966

746

538

1,159

159
160

320
130

117
52

71
125

119
113

189

240

279

188

240

155
31
637
289
1,780
3

179
37
779
725
184
3

204
104
976
362
14,032
3

152
32
565
851
370
4

179
49
207
582

A-ll

SPECIAL ANALYSIS A
Table C-5. PUBLIC ENTERPRISE FUND TRANSACTIONS—Continued
(In millions of dollars)
Gross outlays

Applicable collections
Description

Small Business Administration:
Business loan and investment
fund
Disaster loan fund
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
1

1987
actual

1988 estimate

1989 estimate

1987
actual

1988
estimate

1989
estimate

1,014
744

869
657

1,138
910

1,011
382

961
507

852
317

2,931
534

2,701
518

2,240
502

3,313
472

3,269
428

2,676
465

4,953

3,424

3,033

2,653

2,438

1,863

492

623

685

285

532

631

3,203

7,681

6,852

7,970

9,870

7,803

683
32,681
5,425
267

704
36,121
5,670
628

799
38,476
5,432
892

494
33,624
6,516
695

452
37,827
6,661
1,031

504
39,132
6,249
873

103,838

110,621

117,777

132,687

139,008

132,726

(97,058)

(102,363)

(98,241)

(6,780)

(8,258)

(19,537)

Includes two new Federal credit revolving funds in 1989.

TRUST FUNDS

As stated above, the trust fund group is composed of the regular
trust funds and a few trust revolving funds. The regular trust funds
collect certain earmarked taxes and other receipts to finance
spending programs specified by law, such as payment of social
security benefits, or in accordance with the terms of a trust agreement. There are two types of appropriation accounts and one type
of receipt account associated with the trust fund, as follows:
• Trust fund expenditure accounts—Appropriation accounts established to record amounts appropriated to finance programs
specified by law as being trust funds.
• Trust fund receipt accounts—Receipt accounts credited with
collections generated by statute or 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 are used
to conduct a cycle of business-type operations and their outlays are

A-10

THE BUDGET FOR FISCAL YEAR 1989

normally displayed net of collections. Trust fund receipts, outlays,
and balances are presented in tables C-6 through C-9. Both onbudget and off-budget (social security) trust funds are shown.
Cash operations.—Trust fund receipts are estimated at $506 billion in 1989, with outlays planned at $394 billion, as shown in
tables C - l and C-6. This includes off budget funds of $258 billion in
receipts and $213 billion in outlays for transactions of the Federal
old-age and survivors insurance and disability insurance funds.
In fiscal years 1987-89, estimated trust funds receipts exceed
outlays by the following amounts:
(In millions of dollars)
1987 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

1988 estimate

430,047
(216,645)
(213,402)
357,388
(163,556)
(193,832)
72,659
(53,089)
(19,570)

1989 estimate

471,416
(231,517)
(239,899)
373,953
(170,827)
(203,126)
97,463
(60,690)
(36,773)

506,391
(247,910)
(258,481)
393,776
(180,434)
(213,342)
112,615
(67,476)
(45,139)

Trust fund balances.—Total balances of the trust funds continue
to increase, as shown below:
1986
actual

Open book balances
On-budget
Off-budget
Investments in U.S. securities:
Public debt
On-budget
Off-budget
Agency debt
Total

1987
actual

1988
estimate

1989
estimate

22,459
(21,873)
(586)

19,096
(19,205)
(-109)

17,630
(17,029)
(601)

17,999
(17,398)
(601)

354,976
(309,692)
(45,283)
765

430,342
(364,793)
(65,548)
715

530,498
(428,886)
(101,611)

642,451
(495,700)
(146,751)

378,200

450,153

548,128

660,450

Table C-6. OUTLAYS AND RECEIPTS OF TRUST FUNDS
(In millions of dollars)
Receipts

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)

1987
actual

1988
estimate

1989
estimate

1987
actual

1988
estimate

1989
estimate

8,620
643
1,074
26,046
18,078
20,527
81,640
13,476
2,631

8,967
613
1,115
27,587
19,123
17,500
87,657
14,219
3,007

9,335
729
1,167
29,568
20,320
18,500
94,491
14,705
3,858

9,277
642
1,408
44,029
31,919
27,613
90,532
14,310
3,940

9,815
610
1,437
46,563
33,563
26,200
102,728
15,506
4,238

9,678
729
1,440
48,810
35,060
26,100
117,024
15,527
4,580

76
9,910
2,151

8,572
3,050

8,204
3,623

8,504
3,750

8,417
4,244

8,062
4,140

SPECIAL ANALYSIS A

A-ll

Table C-6. OUTLAYS AND RECEIPTS OF TRUST FUNDS—Continued
(In millions of dollars)
Outlays
Description

1987
actual

1988
estimate

Receipts
1989
estimate

1987
actual

-2,037

1,222

-830

Subtotal
182,836
Intrafund receipts from on-budget .,
-10
Intrafund receipts from off-budget
-2,614
Proprietary receipts from the public- - 1 6 , 6 5 6

192,632

203,672

Trust revolving funds

Total on-budget

163,556

Off-budget:
Federal old-age, survivors, and disability insurance trust funds
208,070
Interfund receipts from on-budget
-14,205
Proprietary receipts from the public..
-33

1988
estimate

1989
estimate

253,322

271,149

-2,890
-18,913

-3,009
-20,228

235,925
-10
-2,614
-16,656

170,827

180,434

216,645

231,517

247,910

220,537
-17,411

234,544
-21,201

227,640
-14,205
-33

257,310
-17,411

279,682
-21,201

- 1

-2,890
-18,913

-3,009
-20,228

Total off-budget

193,832

203,126

213,342

213,402

239,899

258,481

Total

357,388

373,953

393,776

430,047

471,416

506,391

Trust fund receipts.—Table C-7 presents information classifying
the trust fund receipts by major fund and by source for each such
fund.
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)...
Subtotal, railroad retirement trust funds
Black lung disability trust fund:
Excise taxes
Advances from general fund
Other receipts
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)

1987
actual

1988
estimate

1989
estimate

3,634
157
453
2,614
2,419

3,452
142
599
2,890
2,732

3,380
68
593
3,009
2,628

9,277

9,815

9,678

572
68
2

578
30
2

603
124
2

642

610

729

964
444

1,003
434

1,020
420

1,408

1,437

1,440

4,715
15,860

4,717
17,314

4,691
18,370

23,453

24,531

25,745

A-10

THE BUDGET FOR FISCAL YEAR 1989
Table C-7. TRUST FUND RECEIPTS (in millions of dollars)—Continued
[Amounts under proposed legislation are shown separately]
Description

Other receipts
Proposed legislation

1987
actual

1988
estimate

1989
estimate

1
4

Subtotal Federal employees retirement funds

44,029

46,563

48,810

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

18,288
10,524
3,107

18,353
10,285
4,924

18,577
10,648
5,835

31,919

33,563

35,060

25,418
1,909
285

23,585
2,313
302

22,921
2,859
320

27,613

26,200

26,100

55,992
6,520
4,913
1,700
21,407

59,718
8,800
5,892
1,888
26,430

63,405
10,563
7,095
1,945
32,641
1,375

90,532

102,728

117,024

13,032
1,278

14,332
1,174

14,298
1,229

14,310

15,506

15,527

3,060
880

3,382
857

3,658
921

3,940

4,238

4,580

Foreign military sales trust fund

8,504

8,417

8,062

Other trust funds (nonrevolving):
Current law
Proposed legislation

3,750

4,244

4,150
-10

3,750

4,244

4,140

235,925
-10
-2,614
-16,656

253,322

271,149

-2,890
-18,913

-3,009
-20,228

216,645

231,517

247,910

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

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

- 1

SPECIAL ANALYSIS A

A-ll

Table C-7. TRUST FUND RECEIPTS (in millions of dollars)—Continued
[Amounts under proposed legislation are shown separately]
1987
actual

Description

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)
Subtotal, Federal old-age, survivors, and disability insurance trust funds
Interfund receipts from on-budget
Proprietary receipts from the public
Total off-budget receipts
Total receipts
On-budget
Off-budget

1988
estimate

1989
estimate

213,402
5,290
3,300
5,648

239,899
7,271
4,298
5,842

258,481
10,136
4,719
6,347

227,640

257,310

279,682

-14,205
-33

-17,411

-21,201

213,402

239,899

258,481

430,047
(216,645)
(213,402)

471,416
(231,517)
(239,899)

506,391
(247,910)
(258,481)

Trust fund outlays.—Corresponding information on trust fund
outlays, classifying the data for the larger funds, is found in table
C-8.
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

1987
actual

1989
estimate

1988
estimate

6,148
2,417
55

6,367
2,540
59

6,621
2,651
63

8,620

8,967

9,335

593
50

557
55

673
56

643

613

729

1,074

1,115

1,167

24,541
1,451
54

26,086
1,443
58

27,745
1,757
67

26,046

27,587

29,568

Military retirement fund

18,078

19,123

20,320

Unemployment trust fund:
Withdrawals for benefit payments
Repayment of advances from general fund

15,535
2,433

14,138
600

14,865
900

Subtotal, railroad retirement trust funds
Black lung disability trust fund:
Benefit payments
Federal administrative expenses
Subtotal, black lung disability trust fund
Veterans life insurance trust funds
Federal employees retirement:
Benefit payments and claims
Refunds to former employees
Administrative expenses and other
Subtotal, Federal employees retirement

A-10

THE BUDGET FOR FISCAL YEAR 1989
Table C-8. TRUST FUND OUTLAYS (in millions of dollars)—Continued
[Amounts under proposed legislation are shown separately]
Description

Administrative expenses and other
Subtotal, unemployment trust fund
Health insurance trust funds-.
Benefit payments
Administrative expenses and other
Proposed legislation
Subtotal, health insurance trust funds
Highway trust funds (mainly grants to
States)
Airport and airway trust fund
State and local government fiscal assistance
trust fund: Payments for general revenue
sharing

1987
actual

1988
estimate

1989
estimate

2,559

2,762

2,735

20,527

17,500

18,500

79,736
1,904

85,584
2,073

93,329
2,479
-1,317

81,640

87,657

94,491

13,476

14,219

14,705

2,631

3,007

3,858

Foreign military sales trust fund

9,910

8,572

8,204

Other trust funds (nonrevolving):
Current law
Proposed legislation

2,151

3,050

3,623
_*

2,151

3,050

3,623

-2,037

1,222

-830

182,836
-10
-2,614
-16,656

192,632

203,672

-2,890
-18,913

-3,009
-20,228

163,556

170,827

180,434

202,476
2,614
2,980

214,552
2,890
3,094

228,386
3,009
3,149

208,070

220,537

234,544

-14,205
-33

-17,411

-21,201

193,832

203,126

213,342

357,388
(163,556)
(193,832)

373,953
(170,827)
(203,126)

393,776
(180,434)
(213,342)

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
Subtotal, Federal old-age, survivors, and disability insurance trust funds
Interfund receipts from on-budget
Proprietary receipts from the public
Total off-budget outlays
Total outlays
On-budget
Off-budget

- 1

*500 thousand or less.

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 in-

A-ll

SPECIAL ANALYSIS A

elude both obligated and unobligated balances. The balances on a
budget authority basis differ from the cash balances because, for
some accounts, contract authority (a form of budget authority) has
been provided to a trust fund in advance of receiving money, while
unappropriated receipts are included in the cash balances but are
not a part of the budget authority balances. The note to table C-9
lists these accounts and reconciles the balances on a budget authority basis with the cash balances.
For 1989, the largest net investments are expected to be those of
the Federal employees retirement funds. The investments reported
differ from the amounts reported by the Treasury Department.
Special Analysis E, "Borrowing and Debt/' provides further information.
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
1986 actual

1987 actual

1988 estimate

1989 estimate

6,072
3
10,022
162,543
23,670
22,942
48,105
12,773
8,625

6,747
3
10,356
180,526
37,511
30,010
56,998
13,607
9,935

7,594

7,937

10,677
199,503
51,951
38,710
72,069
14,894
11,167

10,950
218,745
66,690
46,310
94,603
15,715
11,888

259
6,507
5,114
25,695

183
5,100
6,007
27,732

183
4,945
7,713
26,510

183
4,803
7,909
27,367

45,870

65,440

102,212

147,351

378,200
(332,331)
(45,870)

450,153
(384,713)
(65,440)

548,128
(445,915)
(102,212)

660,450
(513,099)
(147,351)

Note—The following table reconciles balances on a budget authority basis with the cash balances shown above:

1986
Balance available on an authorization basis
Unfinanced contract authority-.
Highway trust funds
Airport and airway trust fund
Foreign military sales trust fund
Other
Unappropriated receipts:
Available for appropriation by Congress:
Highway trust funds
Airport and airway trust fund
Inland waterways trust fund
Aquatic resources trusl fund
Hazardous substance superfund
Leaking underground storage tank trust fund
Other
Retained as permanent endowment
Balance available on a cash basis

1987

1988

1989

405317

476,746

572,617

683,884

-30,784
-1,994
-11,554
_61

-31,024
-1,651
-12,365
-32

-31,484
-2,288
-11,574
-26

-32,954
-2,878
-10,360
-19

10,799
5,884
240
153
9

10,567
7,209
295
175

12,923
8,474
306
205
283
249
332
5
660,450

186
5

24
202
5

11,249
8,268
320
209
444
151
237
5

378,200

450,153

548,128

A-10

THE BUDGET FOR FISCAL YEAR 1989

Trust revolving funds.—The activities of the trust revolving fund
subgroup are shown in table C-10. The largest trust revolving
funds are those used by the Office of Personnel Management to
buy health and life insurance for Government employees.
Table C-10. TRUST REVOLVING FUND TRANSACTIONS
(In millions of dollars)
Offsetting collections
Description

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

Receipts from the public
Receipts from other accounts
1

Gross outlays

1987
actual

1988
estimate

1989
estimate

8,828
6,579
822

11,331
5,431
857

13,547
5,463
896

8,333
5,141
719

10,347
7,699
795

12,282
5,965
829

16,229

17,619

19,906

14,193

18,841

19,076

(8,777)
(7,452)

(8,443)
(9,175)

(9,399)
(10,506)

1987
actual

1988
estimate

1989
estimate

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

Trust fund obligations.—The obligations (net) for trust funds are
estimated at $391 billion for 1989, as set forth in table C - l l . This
includes $229 billion in obligations (net) for transactions of the
Federal old-age, survivors, and disability insurance trust funds that
are off-budget.
Table C - l l . 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..

1987
actual

1988 estimate

3
7
814
35
12
18,262*

3
3
-787
164
35
25
19,493*

-3
75,110
203,462

3
79,074
215,851*

204

276

21,266
241
16,754
83
1,052

18,239
273
18,514
24
1,492

25,698

25,970

-26

SPECIAL ANALYSIS A

A-ll

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

Veterans Administration
Federal Deposit Insurance Corporation
Railroad Retirement Board
All Other Independent Agencies
Undistributed offsetting receipts
Total
On-budget
Off-budget
*500 thousand or less.

1987
actual

1988 estimate

930
1,705
6,203

-1,209
6,178
24
-8,590

-11,569

360,179
(156,717)
(203,462)

375,951
(160,098)
(215,851)

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. This
special analysis focuses on Federal investment outlays, including
grants to State and local governments for investment purposes,
that reflect the President's budget proposals for 1989.
A short overview of Federal investment outlays based on this
special analysis is presented in Part 6c, "Federal Capital Expendit u r e s , o f the main budget volume. Data on historical trends in
gross Federal outlays for public 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 1989.
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
current services projections of Federal physical investment spending in current dollars, 5-year projections in 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 to State
and local governments or for direct Federal outlays. They can be
for investment in physical capital, which yields a stream of services
over a period of years; and investment in research, development,
education, and training, which provide less tangible long-term benefits. They can also be for lending, which yields a monetary return.
Inherent in the classification of these data are two problems, one
involving grants to others, and one involving spending that could
be shown in more than one category. For example:
• 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

A-10

THE BUDGET FOR FISCAL YEAR 1989

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 category. 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 category
that is most commonly recognized as investment. 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 of physical assets. Similarly, the purchase of equipment for research
and development is included in the acquisition of equipment
category, not in conduct of research and development.
This analysis is organized in four sections:
• the composition of Federal investment outlays;
• historical trends in major public physical investment;
• calculations of physical investment outlays net of depreciation; and
• detailed data tables.
COMPOSITION OF FEDERAL INVESTMENT OUTLAYS
The composition of Federal investment outlays is shown in Table
D - l . These outlays are estimated to be $222.3 billion in 1989, $16.7
billion or 8 percent more than the 1988 estimate of $205.7 billion.
This section discusses first physical investment, such as construction, rehabilitation, and the acquisition of major equipment, and
discusses the more marginal categories (in terms of classification)
at the end, such as purchases of agricultural commodities and
international development activities.
Outlays for physical investment are estimated to be $128.5 billion
in 1989, an increase of $1.8 billion above the 1988 estimate of
$126.8 billion. This investment includes primarily outlays for construction, rehabilitation, and the purchase of major equipment.
Investment directly by the Federal Government is estimated to be
$103.7 billion in 1989 and outlays for grants to State and local
governments for physical investment are estimated to be $24.9
billion.
The direct investment by the Federal Government is primarily
for national defense, estimated to be $88.5 billion in 1989. Almost
all of this, or an estimated $81.6 billion in 1989, is for the procurement of weapons and other military equipment, and the remainder,
$6.9 billion, is primarily for construction of military bases and
family housing for military personnel.

SPECIAL ANALYSIS A

A-ll

TABLE D - l . COMPOSITION OF FEDERAL INVESTMENT OUTLAYS
(In billions of dollars)
1984

Physical investment:
Direct:
National defense
Nondefense

1985

1986

1987

1988 estimate 1989 estimate

68.2
9.8

78.0
11.7

84.7
11.3

89.5
12.5

87.5
14.2

88.5
15.2

Subtotal, direct physical investment

78.0

89.7

95.9

102.1

101.7

103.7

Grants to State and local governments

22.7

24.9

26.3

23.8

25.1

24.9

Subtotal, physical investment

100.7

114.6

122.2

125.9

126.8

128.5

Conduct of research and development:
National defense
Nondefense

25.8
15.2

30.4
16.9

35.7
16.5

37.1
16.2

36.5
18.1

39.8
19.8

Subtotal, conduct of research
and development

41.0

47.2

52.1

53.3

54.6

59.6

11.5

11.6

11.2

11.6

12.2

15.4

10.6

11.4

12.6

12.3

13.4

14.1

Conduct of education and training:
Direct
Grants to State and local government
Subtotal, conduct of education
and training
Loans and financial investments
Other (including commodity inventories) 1
Total, Federal investment outlays
MEMORANDUM
National defense
Nondefense
1

22.1

23.0

23.7

23.9

25.6

29.5

5.2

32.5

20.5

-2.4

-6.4

-1.2

6.0

5.9

10.9

8.2

5.1

5.9

175.0

223.2

229.5

208.9

205.7

222.3

94.4
80.6

109.6
113.6

120.9
108.6

126.9
82.0

124.3
81.4

128.6
93.7

Includes a small amount of outlays for private physical investment.

Outlays for direct physical investment by the Federal Government for nondefense purposes are estimated to be $15.2 billion in
1989, $0.9 billion more than the 1988 estimate. The 1989 outlays
include $9.4 billion for construction and rehabilitation. These outlays are largely for water, power, and natural resources projects of
the Corps of Engineers, the Department of Interior, the Tennessee
Valley Authority and the power administrations, and for construction and rehabilitation of veterans hospitals and Postal Service
facilities. Outlays for the acquisition of major equipment are estimated to be $5.7 billion in 1989. This is largely for the space
program, the air traffic control system, energy research, the Coast
Guard, and veterans hospitals.
Outlays for grants to State and local governments for physical
investment are estimated to be $24.9 billion in 1989, $0.2 billion

A-10

THE BUDGET FOR FISCAL YEAR 1989

less than the 1988 estimate. More than half of these outlays, or
$13.1 billion in 1989, are grants to assist with construction of the
Interstate highway system and other major highways. Other major
grants for physical investment are for sewage treatment plants,
community development, airports, and mass transit. Information
on grants-in-aid to State and local governments, both for investment and for other purposes, is available in Special Analysis H in
this volume.
Outlays for the conduct of research and development1 are estimated to be $59.6 billion in 1989, $5.0 billion more than the 1988
estimate. These outlays are devoted to increasing our basic scientific knowledge and promoting related research and development activities. They increase our national security, improve the marginal
productivity of capital and labor for both public and private purposes, and enhance the quality of life. About two-thirds of the
outlays for the conduct of research and development, an estimated
$39.8 billion in 1989, are for national defense.
Nondefense outlays for the conduct of research and development
are estimated to be $19.8 billion in 1989, $1.7 billion or 9 percent
more than in 1988. This is almost entirely for direct spending by
the Federal Government, and is largely for the space programs, the
National Science Foundation, health research, and research for
nuclear and non-nuclear energy facilities. Research and development activities are discussed in detail in Special Analysis J, "Research and Development/' in this volume.
Outlays for the conduct of education and training 1 are estimated
to be $29.5 billion in 1989, $3.9 billion more than the 1988 estimate.
These outlays are classified as investment because they are intended to add to the stock of human capital by developing a more
skilled and productive labor force. Grant outlays to State and local
governments for this category are estimated to be $14.1 billion in
1989, almost half of the total. These are primarily for the disadvantaged and the handicapped, and for vocational and adult education.
Outlays for direct education and training spending by the Federal
Government are estimated to be $15.4 billion in 1989, $3.2 billion
more than the 1988 estimate. Programs in this category are primarily aid for higher education through student financial assistance, guaranteed student loans, the veterans GI bill, and health
training programs.
Loans and financial investments include direct loan disbursements for new loans, repayments of previous loans, the sale of loan
assets, and related activities.2 For these investments, repayments
and other collections are estimated to exceed disbursements by $1.2
Outlays for physical investment for these programs are included in the physical investment category.
The sale of loan assets with recourse is not defined as an offsetting collection but rather as a means of
financing the budget deficit other than by borrowing from the public.
1

SPECIAL ANALYSIS A

A-ll

billion in 1989. Included in this category are the proceeds of loan
asset sales of $5.6 billion in 1987, and estimated proceeds from loan
asset sales and prepayments of $10.9 billion in 1988 and $8.5 billion
in 1989. In addition, the 1987 data include $1.9 billion in proceeds
from the sale of Conrail stock. The major loan activities are for the
sale of military equipment to foreign countries, promotion of exports and housing, and assistance to farmers and college students.
The large decrease from $20.5 billion in 1986 to —$2.4 billion in
1987 is primarily because of the asset sales in 1987 mentioned
above and because of a net decrease of $8.6 billion in loans by the
Commodity Credit Corporation to farmers for price support programs. These loans decreased because of increased demand for
agricultural commodities, which decreased the demand for loans.
The 1989 budget includes a major credit reform proposal, which
involves a restructuring of the way the Federal Government budgets and accounts for direct and guaranteed loans. This proposal and
other aspects of loans and financial investments are discussed in
considerable detail in Special Analysis F, "Federal Credit Programs,M in this volume and in Part 6b of the main volume of the
1989 Budget.
The other investment-type outlays are estimated to be $5.9 billion
in 1989, $0.7 billion more than the 1988 estimate. These are almost
entirely for direct Federal nondefense outlays.
A major portion of outlays in this category is for the purchase or
sale of agricultural products pursuant to farm price support programs. Net receipts from sales of these commodities in 1989 are
estimated to be $1.4 billion. Other outlays in the category are for
purchases of oil for the strategic petroleum reserve, for direct
conservation activities by the Federal Government to improve agricultural and other lands, for the collection of information, such as
by the Bureau of the Census, and for foreign economic assistance
grants for general economic development or humanitarian needs.
This category also includes the proceeds from the proposed sale of
the naval petroleum reserve and power administrations, with estimated receipts of $3.3 billion in 1989.
Outlays for these investment activities are shown in greater
detail in Tables D-5 through D-8.
Information on most major programs and proposals is available
in Part 5 of the main volume of the 1989 budget.
HISTORICAL TRENDS IN MAJOR PUBLIC PHYSICAL INVESTMENT

This section presents data on physical investment for selected
years from 1960 to 1989. Other sections of the budget documents
contain historical information that can be used to analyze major
trends in specialized segments of Federal investment-type spending. Besides the Historical Tables, historical data for education and

A-10

THE BUDGET FOR FISCAL YEAR 1989

training outlays are available as part of the functional tabulations
in the main budget volume, 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 physical investment at
5-year intervals from 1960 to 1980 and annually from 1980 to 1989.
Table D-3 adjusts these trends for inflation by showing the data
in constant fiscal year 1982 dollars, and, as an additional comparison, shows the data relative to GNP. In constant dollars, national
defense investment is estimated to be $77.2 billion in 1989, an
average annual increase of 8 percent from 1980 to 1989. This
compares to 3 percent per year growth from 1975 to 1980, and an
average decline of 10 percent per year from 1970 to 1975, as the
Vietnam War was ending.
Direct nondefense investment in constant dollars is estimated to
be $13.7 billion in 1989, an increase on the average of 5 percent per
year from 1980 to 1989, slightly more than the 4 percent average
annual rate of increase from 1970 to 1980. In contrast, grants for
investment are estimated to decline in real terms 2 percent per
year from 1980 to the estimated 1989 level of $20.4 billion. This
compares to an average annual rate of increase of 6 percent from
1975 to 1980.
Most categories of grants for physical investment increased from
1975 to 1980 in terms of current dollars, which resulted in an
increasing share of State and local capital spending financed by
grants. In 1975, Federal capital grants financed 26 percent of total
State and local capital spending. This share increased ten percentage points to 36 percent by 1980. In contrast, with the restraint in
Federal grants since 1980 and increases in capital spending financed by State and local own source revenues, this share returned
to 26 percent in 1987.
As a percent of GNP, national defense investment is estimated to
be 1.8 percent in 1989, higher than the 1980 percentage of 1.2
percent but below the percentage in 1970 during the Vietnam War
of 2.4 percent. Direct nondefense capital spending as a percent of
GNP has remained fairly steady from 1970 to 1989.
The trends for grants as a percent of GNP are similar to the
trends for grants described above. For 1989, these grants are estimated to be 0.5 percent of GNP, a decrease from the 0.8 percent in
1980. The 1980 percent was higher than the 0.7 percent in 1975.

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, family
housing, and other
Atomic energy defense

1965

1970

1975

1980

1981

1982

1983

1984

1985

1986

1987

1988
estimate

1989
estimate

13.3

11.8

21.6

16.0

29.0

35.2

43.3

53.6

61.9

70.3

76.5

80.7

79.2

79.8

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

6.0
2.8

5.6
2.7

6.0
2.7

Subtotal, national defense..

17.2

14.2

23.6

18.7

32.5

39.1

48.0

59.2

68.2

78.0

84.7

89.5

87.5

88.5

Nondefense:
Construction and rehabilitation-.
Water and power projects
Other
Acquisition of major equipment...

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

4.6
3.8
4.2

5.3
3.9
5.0

5.2
4.2
5.7

Subtotal, nondefense

1.9

3.0

2.5

4.8

8.1

8.8

8.5

8.0

9.8

11.7

11.3

12.5

14.2

15.2

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

102.1

101.7

103.7

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

12.5

13.1

0.1

0.2

1.0

2.6

3.1

2.9

3.2

3.8

3.2

3.6

3.5

3.8

4.1

0.1

0.6

1.6

2.5

5.8

5.6

5.2

4.7

4.9

5.0

4.5

4.0

4.3

4.2

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

Continued

(In billions of dollars)
I960

Natural resources and environment:
Pollution control facilities
Other
All other 2

1965

1970

1975

1980

1981

1982

1983

1984

1985

1986

1987

1988
estimate

1989
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
0.3

3.0
0.6
0.2

2.6
0.7
0.3

2.9
0.7
0.4

3.2
0.7
0.4

3.0
0.6
0.3

2.7
0.8
0.4

2.5
0.5
0.3

Total grants for physical
capital investment2

3.3

5.0

7.1

10.9

22.5

22.1

20.2

20.5

22.7

24.9

26.3

23.8

25.1

24.9

Total public assets financed by the Federal
Government

22.4

22.3

33.2

34.4

63.0

70.0

76.6

87.7

100.7

114.6

122.2

125.9

126.8

128.5

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

89.6
36.3

87.6
39.2

88.6
39.9

Memorandum
National defense
Nondefense

*
*

*$50 million or less.
1 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.

Table D-3. SUMMARY COMPARISONS OF FEDERAL OUTLAYS FOR MAJOR PUBLIC PHYSICAL CAPITAL INVESTMENTS
I960

1965

1970

1975

1980

1981

1982

1983

1984

1985

1986

1987

1988
estimate

1989
estimate

In billions of constant (fiscal year 1982) dollars
Assets acquired by the Federal
Government:
National defense
Nondefense

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

63.2
9.8

71.9
11.5

76.9
11.1

84.0
12.2

79.1
13.4

77.2
13.7

57.6

49.1

61.9

41.3 ,

48.7

52.1

56.4

64.9

73.0

83.4

88.0

96.2

92.6

90.0

11.0

14.2

12.4

9.4

12.7

12.2

10.7

11.9

13.8

14.7

15.7

14.2

14.5

14.2

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
0.3

4.1
3.4
0.3

3.6
3.2
0.2

3.7
2.9
0.3

3.4
2.5
0.2

Subtotal grants

12.2

17.3

19.4

18.3

24.6

22.7

20.2

20.3

22.0

22.9

23.6

21.2

21.5

20.4

Total

69.8

66.4

81.3

59.6

73.3

74.8

76.6

85.3

95.0

106.3

111.5

117.4

114.0

111.4

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

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

1.78
0.24

1.85
0.27

1.98
0.30

2.02
0.27

2.03
0.28

1.86
0.30

1.76
0.30

3.77

2.57

2.64

1.54

1.52

1.60

1.80

2.02

2.12

2.27

2.29

2.32

2.16

2.06

Table D-3. SUMMARY COMPARISONS OF FEDERAL OUTLAYS FOR MAJOR PUBLIC PHYSICAL CAPITAL INVESTMENTS—Continued
I960

1965

1970

1975

1980

1981

1982

1983

1984

1985

1986

1987

1988
estimate

1989
estimate

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

0.59

0.61

0.46

0.37

0.43

0.40

0.34

0.36

0.39

0.40

0.42

0.36

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

0.13
0.09
0.01

0.11

0.01

0.13
0.09
0.01

0.09
0.01

0.09
0.08
0.01

0.09
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

0.54

0.53

0.49

Total

4.42

3.31

3.35

2.26

2.36

2.34

2.44

2.64

2.73

2.91

2.86

2.69

2.56

0.11

SPECIAL ANALYSIS A

A-ll

CALCULATIONS OF PHYSICAL INVESTMENT OUTLAYS NET OF
DEPRECIATION

This section presents data on physical investment in capital
assets and estimates of the depreciation on these assets, which is
their reduction in value due to wear and tear, obsolescence, and
other factors. The difference between total, or gross investment,
and depreciation is net investment. These data are presented in
constant fiscal year 1982 dollars.
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. 36-38 of the November 1987 issue and
the references therein.) 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 extends back to 1940.
However, rough estimates of such spending were prepared extending back to 1915. These data were then converted to constant prices
to approximate replacement costs and a formula was developed to
estimate approximate depreciation. The product is a set of estimates of nondefense federally financed public net investment in
constant dollars.
The historical budget data were adjusted to constant fiscal year
1982 dollars using price deflators for Federal nondefense capital
purchases. The resulting constant dollar series is shown as gross
investment in Table D-4. These are the same nondefense data as
presented in the previous sections. 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; 46 years for water and power projects; 30 years for other
nondefense construction and rehabilitation; and 16 years for major
equipment. The difference between gross investment and depreciation is shown as net investment.

Table D-4. COMPOSITION OF NEW AND NET FEDERAL AND FEDERALLY FINANCED INVESTMENT IN NONDEFENSE PUBLIC PHYSICAL CAPITAL IN CONSTANT (1982) PRICES

u
I

(In billions of dollars)
Total investment

Net direct Federal investment

Depreciation

Water and
power

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

Year

Gross

Net

Total

Other

Gross

Depreciation

Net

Transportation (mainly
highways)

Community
and regional
development

Natural
resources
and
environment

Other

1970
1971
1972
1973
1974

25.4
26.5
27.6
27.9
27.9

12.1
12.6
13.2
13.8
14.4

13.3
13.9
14.4
14.1
13.5

1.2
1.8
2.7
2.9
2.8

0.9
1.5
1.7
1.5
1.8

0.2
0.3
0.9
1.4
1.0

19.3
19.8
19.9
19.7
19.6

7.2
7.7
8.1
8.6
8.9

12.1
12.2
11.8
11.1
10.7

7.5
7.0
6.3
6.0
4.3

3.3
3.6
4.1
3.6
3.2

0.3
0.9
0.7
1.2
2.8

1975
1976
TQ
1977
1978
1979

26.4
30.0
8.4
33.5
35.3
34.8

14.9
15.4
4.0
15.9
16.5
17.0

11.5
14.6
4.5
17.6
18.9
17.8

2.5
2.5
0.7
2.8
3.5
3.8

2.1
2.1
0.6
2.5
2.7
2.8

0.5
0.4
0.1
0.3
0.8
1.0

18.2
21.7
6.2
24.7
25.6
24.6

9.3
9.6
2.5
9.9
10.3
10.6

8.9
12.1
3.8
14.8
15.4
14.0

3.3
5.5
1.4
5.0
4.2
4.5

2.5
2.8
1.0
4.6
7.3
5.6

2.9
3.5
1.4
5.0
4.0
4.2

0.2
-0.2
-0.3

1980
1981
1982
1983
1984

33.6
32.0
28.6
28.3
31.7

17.7
18.4
19.0
19.6
20.3

16.0
13.7
9.6
8.7
11.4

2.6
2.6
1.6
1.0
2.6

1.7
1.6
0.7
0.9
0.1

0.9
1.1
0.9
0.2
2.5

24.5
22.7
20.1
20.3
21.9

11.1
11.7
12.1
12.6
13.1

13.4
11.0
8.0
7.7
8.8

5.4
4.6
2.8
3.8
5.3

4.3
3.5
2.9
2.3
2.2

4.2
3.3
2.7
2.0
1.6

-0.5
-0.5
-0.4
-0.5
-0.4

1985
1986
1987
1988 estimate
1989 estimate

34.4
34.6
33.4
34.8
34.1

21.1
21.9
22.6
23.5
24.3

13.3
12.6
10.7
11.3
9.8

4.1
3.4
4.3
5.1
5.1

0.7
0.3
0.7
1.2
0.9

3.4
3.0
3.6
3.9
4.2

22.9
23.5
21.1
21.4
20.4

13.7
14.2
14.7
15.2
15.6

9.2
9.3
6.4
6.2
4.7

5.9
6.6
4.7
4.6
4.0

2.0
1.4
0.8
0.8
0.5

1.7
1.7
1.4
1.0
0.6

-0.4
-0.4
-0.4
-0.3
-0.4

H
ffi
M
W

1.0
0.7
0.6
0.4
0.3

0.3
0.2

O
w

o>
r
*
M
>

SPECIAL ANALYSIS A

A-ll

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
selected sources. There are no consistent outlay data on nondefense physical capital investment for this period, and the
estimates are approximations.
• Price adjustments.—The replacement cost of the Federal stock
of nondefense physical capital has increased through time,
but the rate of increase is not known exactly. For this presentation, an estimate of replacement costs in 1982 prices was
made through the application of the National Income and
Product Accounts deflator series for Federal, State, and local
purchases of durables and structures indexed to 1982 prices.
There are no specific price indices for public purchases of
durables and structures for 1915 through 1939, and estimates
were made on the basis of Census Bureau historical statistics
on constant price public capital formation.
• Depreciation estimates.—The 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 public nondefense physical capital investment.
The data in Table D-4 show that net investment, measured in
constant dollars, increased between 1970 and 1979 because gross
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 grew. The value of newer assets being depreciated was greater
than the value of older assets being retired (and thus no longer
depreciated). In the early 1980,s, gross investment declined slightly
and then increased. Depreciation continued to rise, because the
new levels of investment were still high relative to the years before
1970. As a result, the pattern for net investment has been uneven
in the 1980's, varying from $16.0 billion in 1980 to $8.7 billion in
1983.
The composition of nondefense public physical capital investment—on both a gross and a net basis—has changed substantially
over time. Before the mid-1950,s, direct nondefense gross investment exceeded grants for investment, on both a gross and a net
basis. However, by the end of the 1950's, this had been reversed
and grants-in-aid for investment substantially exceeded direct investment. This has continued on a gross basis, but the trend on a net
basis has changed. With increasingly higher depreciation for assets

A-10

THE BUDGET FOR FISCAL YEAR 1989

financed by grants-in-aid, net investment for grants is estimated to
be about the same as for net direct investment in 1989 for the first
time since the mid 1950's.
DETAILED DATA TABLES

The remaining tables in this analysis provide detail on the composition of investment spending and current outlays. They provide
two basic displays of Federal spending. Table D-5 is a summary
table showing the data divided between national defense spending
and nondefense spending. Table D-7 provides detailed data for
Table D-5. Table D-6 is a summary table identifying the grants to
State and local governments separately from all other Federal
outlays. Table D-8 provides detailed data for Table D-6.
The discussion of the investment data accompanied Table D-L
earlier in this Special Analyis. The following sections discuss briefly the operating or current outlays and outlays that are unclassified.
Current Outlays.—Programs that provide benefits generally in
the current year are classified as current outlays. Some of these
outlays may be used in part by their recipients for investment
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
benefits. Total current outlays are estimated to be $923.2 billion in
1989; $165.8 billion are for defense programs and $757.3 billion for
nondefense programs.
Provision of benefits is the largest category of current outlays in
the budget. These outlays are estimated to be $530.8 billion in 1989.
Social security and other disability and retirement benefits constitute the largest element in this category; they are estimated to be
$296.1 billion in 1989. 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 1989 are estimated to be $11.0 billion, of
which $10.0 billion are for grants to State and local governments.
Aids to agriculture, commerce, and transportation include agriculture price support subsidies, transportation programs, and assistance to small businesses. Outlays for these programs are estimated
to be $33.2 billion in 1989.
Outlays for the repair, maintenance, and operation of physical
assets are estimated to be $93.3 billion in 1989. Almost all of this,
or an estimated $87.9 billion, is for national defense.

SPECIAL ANALYSIS A

A-ll

Outlays for net interest are estimated to be $151.8 billion in 1989.
The other categories of current outlays are for regulation, control, and law enforcement; general purpose fiscal assistance; general
administration; and other operating outlays. Outlays for these categories are estimated to be $103.0 billion in 1989.
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 undistributed
offsetting receipts, most payments from the Government to itself,
and the associated offsetting collections. Outlays for this category
are estimated to be —$51.3 billion in 1989.

A-10

THE BUDGET FOR FISCAL YEAR 1989

Table D-5. SUMMARY OF FEDERAL INVESTMENT AND OPERATING OUTLAYS BY DEFENSE—
NONDEFENSE
(In millions of dollars)
1987 actual

National Defense:
Investment-type outlays:
Construction and rehabilitation
Acquisition of major equipment and other physical assets
Conduct of research and development
Other investment-type outlays
Subtotal, investment-type outlays
Current outlays:
Repair, maintenance, and operation of physical assets
Other current outlays
Subtotal, current outlays
Unclassified (primarily offsetting receipts)
Total, national defense outlays
Nondefense:
Investment-type outlays:
Construction and rehabilitation
Acquisition of major equipment
Conduct of research and development
Conduct of education and training
Loans and financial investments
Commodity inventories
Other physical assets
Other investment-type outlays
Subtotal, investment-type outlays
Current outlays:
Provision of benefits:
Benefits
Administrative expenses of benefit programs
Subtotal, provision of benefits
Other current programs
Net interest
Subtotal, current outlays
Unclassified (primarily offsetting receipts)
Total, nondefense outlays
TOTAL OUTLAYS

1988 estimate

1989 estimate

7,225
82,410
37,097
170

6,803
80,804
36,465
253

7,047
81,602
39,802
151

126,902

124,325

128,602

80,836
74,475

85,156
76,165

87,873
77,971

155,310

161,321

165,844

-213

-223

-426

281,999

285,423

294,020

31,678
4,190
16,159
23,898
-2,410
1,201
2,748
4,506

33,605
5,016
18,133
25,583
-6,424
-3,919
4,387
4,990

33,737
5,714
19,798
29,526
-1,188
-506
1,574
5,091

81,971

81,372

93,745

458,152
13,560

486,308
14,631

515,901
14,907

471,712

500,939

530,808

73,744
138,570

88,571
147,871

74,699
151,804

684,027

737,381

757,311

-43,411

-48,272

-50,861

722,587

770,481

800,195

1,004,586

1,055,904

1,094,215

SPECIAL ANALYSIS A

A-ll

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

Grants-in-Aid:
Investment-type programs:
Construction, rehabilitation, & acquisition of physical assets
Conduct of research and development
Conduct of education and training
Other investment-type programs

1988 estimate

1989 estimate

23,843
464
12,292
8

25,064
452
13,432
9

24,852
359
14,142
10

36,607

38,957

39,363

52,051
6,512

55,755
7,085

58,506
7,349

58,563

62,840

65,854

13,222

14,869

13,798

71,785

77,709

79,652

108,392

116,666

119,015

15,469
86,599
52,792
11,624
-2,411
1,132
2,341
4,721

15,906
85,816
54,145
12,160
-6,424
-3,905
3,830
5,211

16,371
87,316
59,240
15,395
-1,188
-596
1,135
5,311

172,266

166,739

182,984

406,227
7,047

430,688
7,546

457,540
7,558

413,275

438,234

465,098

215,707
138,570

234,889
147,871

226,601
151,804

767,552

820,993

843,503

Unclassified (primarily offsetting receipts)

-43,624

-48,495

-51,287

Total, direct Federal outlays

896,194

939,238

975,200

1,004,586

1,055,904

1,094,215

Subtotal, investment-type programs
Current programs:
Provision of benefits
Benefits
Administrative expenses of benefit programs
Subtotal, provision of benefits
Other current programs
Subtotal, current programs
TOTAL, grants-in-aid
Direct Federal Programs:
Investment-type outlays
Construction and rehabilitation of physical assets
Acquisition of major equipment
Conduct of research and development
Conduct of education and training
Loans and other financial investments
Acquisition of commodity inventories
Other physical assets
Other investment-type programs
Subtotal, investment-type outlays
Current outlays-.
Provision of benefits:
Benefits
Administrative expenses of benefit programs
Subtotal, provision of benefits
Other current programs
Net interest
Subtotal, current outlays

TOTAL OUTLAYS

A-10

THE BUDGET FOR FISCAL YEAR 1989

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

National Defense:
Investment-type outlays:
Construction and rehabilitation of physical assets:
Military construction
Family housing
Atomic energy defense activities and other
Subtotal, construction & 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 developmentOther investment-type outlays
Subtotal, investment-type outlays
Current outlays:
Repair, maintenance, and operation of physical assets-.
Department of Defense, Military
Other
Subtotal, repair, maintenance & operation of physical assets.,
Other current outlays.Military personnel
Other national defense
Subtotal, other current outlays
Subtotal, current outlays
Unclassified (primarily offsetting receipts).
Total, national defense outlays
Nondefense:
Investment-type outlays-.
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

1988 estimate

1989 estimate

5,630
487
1,108

5,188
548
1,067

5,438
645
964

7,225

6,803

7,047

80,763
444

79,170
454

79,820
494

81,207

79,624

80,314

1,203

1,180

1,286

34,732
2,365

33,951
2,513

37,117
2,685

37,097

36,465

39,802

170

253

153

126,902

124,325

128,602

78,478
2,358

82,711
2,445

85,296
2,577

80,836

85,156

87,873

70,884
3,591

74,629
1,535

77,006
965

74,475

76,165

77,971

155,310

161,321

165,844

-213

-223

-426

281,999

285,423

294,020

12,497
2,551
105
963
167
2,967
354
778
3,156
2,150
815
2,559
763

13,088
2,801
113
1,018
184
3,037
400
998
2,897
2,640
935
2,834
813

13,119
2,984
57
1,160
134
3,015
366
880
2,867
2,749
818
2,518
763

SPECIAL ANALYSIS A

A-ll

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

Other programs
Subtotal, construction & rehabilitation of physical assets
Acquisition of major equipment:
Transportation
Space flight, control and data communications
General science and basic research
Postal Service
Other
Subtotal, acquisition of major equipment
Conduct of research and development:
General science, space and technology
NASA
NSF
Other general science
Subtotal, general science, space, technology
Energy
Transportation
Department of Transportation
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
Loans:
International affairs
Agriculture
Mortgage credit and deposit insurance
Aids to commerce
Transportation
Disaster relief
Other community and regional development

1988 estimate

1989 estimate

1,853

1,849

2,307

31,678

33,605

33,737

1,208
1,689
118
188
987

1,337
2,103
128
245
1,202

1,307
2,280
626
255
1,245

4,190

5,016

5,714

2,693
1,426
576

3,373
1,508
640

4,115
1,634
279

4,695

5,521

6,029

2,321

2,305

2,407

347
557

395
589

379
704

905

984

1,083

4,942
869

5,643
1,030

6,181
1,564

5,811

6,673

7,745

796
886
745

833
989
828

834
920
780

16,159

18,133

19,798

7,453
7,529
263

8,037
8,244
291

11,153
9,007
240

15,246

16,573

20,401

746
3,656
1,054
3,196

625
3,773
974
3,638

579
3,896
1,035
3,616

23,898

25,583

29,526

552
2,227
-1,671
-246
73
-498
-965

-2,994
-3,455
1,047
-230
38
-389
-1,052

-248
-2,491
-1,381
-731
-31
-708
-413

A-10

THE BUDGET FOR FISCAL YEAR 1989
Table D-7. DETAIL OF FEDERAL INVESTMENT AND OPERATING OUTLAYS BY DEFENSE—
NONDEFENSE—Continued
(In millions of dollars)
1987 actual

Education
Federal credit direct loan revolving fund
Other
Subtotal, loans..
Other financial investments:
International development..
Other
Subtotal, other financialCommodity inventories:
Agriculture
Other
Subtotal, commodity inventories.
Other physical assets:
Sale of the naval petroleum reserves and other assets.,
Other physical assets
Subtotal, other physical assets.
Other investment-type outlays
Collection of information
International development
Subtotal, other investment-type outlays..
Subtotal, investment-type outlays
Current outlays:
Provision of benefits:
Benefits:
Retirement, survivor, and disability benefits:
Social security
Civil service
Military retirement
Railroad retirement and disability benefitsVeterans disability benefits
Other retirement and disability benefits
Subtotal, retirement, survivor, and disability benefits.
Other benefits:
Veterans pension benefits
Medicare
Medicaid
Other health benefits
Unemployment compensation
Housing programs
Food and nutrition programs
Supplemental security income
Family support payments to States
Other assistance payments
Subtotal, other benefitsDirect provision of services:
Hospital and medical care for veterans..
Other health

J estimate

-81

296

-480

-1,084

-1,088

-7,823

468
-1,790

1,248
152

-1,322

1,400

685
516

-4,292
374

1,201

-3,919

2,748

4,387

2,748

4,387

1,703
2,803

2,026
2,963

4,506

4,990

81,971

81,372

202,476
24,277
18,080
6,411
10,665
1,731

214,566
25,734
19,128
6,606
10,551
1,808

263,641

278,393

3,793
79,741
26,032
15,657
11,150
18,631
9,923
8,543
10,154

3,836
85,605
29,070
I,285
14,297
12,159
19,694
II,441
8,592
11,359

184,788

197,339

8,448
1,120

8,966
1,338

1,162

A-ll

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

Other
Subtotal, direct provision of services
Subtotal, benefits
Administrative expenses of benefit programs:
Social security retirement and disability (off-budget)
Medicare and medicaid
Unemployment compensation, assistance payments, & other
Subtotal, administrative expenses of benefit programs

1988 estimate

1989 estimate

156

272

113

9,723

10,576

10,665

458,152

486,308

515,901

2,280
3,130
8,150

2,236
3,475
8,919

2,359
3,484
9,064

13,560

14,631

14,907

Subtotal, provision of benefits

471,712

500,939

530,808

Social service and related programs:
Human development services
Employment training programs
Social services block grant
Other

1,833
1,422
2,688
3,690

2,240
1,438
2,685
5,313

2,298
1,306
2,700
4,654

Subtotal, social service and related programs

9,632

11,676

10,958

Aids to agriculture, commerce, and transportation:
Agriculture
Postal Service
Small business assistance
Mortgage credit & thrift insurance
Ground transportation
Air transportation
Water transportation and waterways
Other

21,357
281
622
-402
1,512
2,707
2,271
2,521

27,287
1,211
847
-140
1,387
3,003
2,045
2,784

23,329
-516
1,033
1,450
548
3,253
2,299
1,833

30,869

38,423

33,229

621
-963
604

507
-1,002
1,056

470
-1,021
1,557

262

561

1,006

-2,398
5,589

-3,014
6,285

-3,048
7,496

3,453

3,833

5,454

757
1,360

669
1,380

638
1,453

2,117

2,049

2,091

1,279
1,013
1,103
461
344
3,388
1,177

1,303
1,034
1,177
381
362
4,176
1,513

1,384
1,124
1,204
456
334
1,385
1,506

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
Subtotal, repair, maintenance & operation, physical assets
General purpose fiscal assistance:
General purpose grants-in-aid
Shared revenues
Subtotal, general purpose fiscal assistance
Regulation, control, and law enforcementRegulatory and inspection activities:
Natural resources and environment
Transportation
Health
Energy
Agriculture
Deposit insurance institutions
Tax collection

A-10

THE BUDGET FOR FISCAL YEAR 1989

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

Other

829

909

898

10,855

8,290

4,006
2,457
611
183

4,798
2,780
713
296

5,049
3,249
917
232

7,258

8,588

9,446

16,851

19,442

17,737

3,002
1,507

3,878
1,630

3,283
1,476

4,475
1,052

4,237
1,807
-9,499
4,405
752

9,269

11,036

1,702

3,809
-2,256

4,010
-1,898

4,321
-794

1,553

2,112

3,528

195,249
-29,662
-5,290
.. -21,727

210,052
-34,321
-7,271
-20,590

220,262
-38,240
-10,136
-20,082

Law enforcement activities:
Federal law enforcement
Federal litigative and judicial
Federal correctional activities
Other law enforcement assistance
Subtotal, law enforcement activities
Subtotal, regulation, control, and law enforcementGeneral administration:
International affairs
Legislative branch
Federal credit direct and guaranteed loan revolving funds.
Other general government
Other
Subtotal, general administration..

Subtotal, other current outlays
Net interest:
Interest on the public debt
Interest received by on-budget trust funds..
Interest received by off-budget trust funds.
Other interest

1989 estimate

9,593

Subtotal, regulatory and inspection activities.

Other operating outlays:
International security assistance
Other

1988 estimate

Subtotal, net interest...

138,570

147,871

151,804

Subtotal, current outlays..

684,027

737,381

757,311

-27,259
-3,300

-28,670
-4,298

-29,038
-4,719

.. -30,559

-32,968

-33,757

-4,021

-3,155

-3,920

-11,411
2,582

-15,040
2,891

-16,193
3,009

Subtotal, Unclassified (primarily offsetting receipts).

.. -43,411

-48,272

-50,861

Total, nondefense outlays

722,587

770,481

800,195

1,004,586

1,055,904

1,094,215

Unclassified:
Employer share, employee retirement
On-budget
Off-budget
Subtotal, employer share, employee retirement
Offshore oil receipts
Other unclassified:
On-budget
Off-budget

TOTAL OUTLAYS

SPECIAL ANALYSIS A

A-ll

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

Grants-in-Aid:
Investment-type programs:
Construction and rehabilitation 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
Subtotal, construction & rehabilitation of physical assets
Equipment and other physical assets
Conduct of research and development
Conduct of education and training:
Employment and training assistance
Elementary and secondary education
Other
Subtotal, conduct of education and training
Collection of information

1988 estimate

1989 estimate

12,478
2,551
19
917
2,961
211
2,967
354
675
299

13,069
2,801
25
979
2,682
207
3,037
400
862
441

13,097
2,984
16
1,110
2,544
114
3,015
366
786
381

23,434

24,503

24,413

409
464

561
452

439
359

2,929
7,181
2,181

3,014
7,957
2,462

3,066
8,684
2,392

12,292

13,432

14,142

Subtotal, investment-type programs

36,607

38,957

39,363

Current programs:
Benefits:
Medicaid
Nutrition and food programs
Assistance payments
Housing payments and related activities
Other

26,032
8,205
10,670
5,992
1,152

29,070
8,327
10,361
6,723
1,275

31,068
8,190
9,961
7,885
1,401

52,051

55,755

58,506

1,560
1,403
1,553
1,996

1,656
1,594
1,644
2,191

1,675
1,664
1,652
2,357

6,512

7,085

7,349

1,143
1,771
3,471
2,557

1,147
2,150
3,664
3,787

1,006
2,206
3,713
3,060

Subtotal, social service and related programs

8,942

10,748

9,986

Aids to agriculture, commerce, and transportation:
Transportation
Other

869
8

870
2

518

877

872

518

Subtotal, benefits
Administrative expenses of benefit programs:
Unemployment compensation
Medicaid
Nutrition and food programs
Assistance payments
Subtotal, administrative expenses of benefit programs
Social service and related programs.Employment programs
Human development services
Social service and child welfare services
Other

Subtotal, aids to agriculture, commerce, & transportation

A-10

THE BUDGET FOR FISCAL YEAR 1989

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

1988 estimate

1989 estimate

Repair, maintenance, and operation of physical assets
General purpose fiscal assistance:
General revenue sharing
Shared revenues
Other

425

317

347

76
1,360
749

1,380
742

1,453
713

Subtotal, general purpose fiscal assistance

2,185

2,122

2,166

132
559

192
555

124
582

691

747

706

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 Outlays:
Investment-type outlays:
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
Other construction
Subtotal, construction & rehabilitation of physical assets
Acquisition of major equipment:
National defense
NASA, nondefense
Postal Service
Other
Subtotal, acquisition of major equipment
Conduct of research and development
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
Loans & financial investments
Loans:
International affairs
Energy supply
Agriculture
Commerce and housing credit
Mortgage credit and deposit insurance
Transportation

102

71,785

77,709

79,652

108,392

116,666

119,015

7,118
2,025
923
2,559
318
737
1,110
680

6,675
2,502
1,081
2,834
330
780
750
953

6,934
2,686
1,089
2,518
247
728
916
1,253

15,469

15,906

16,371

82,408
1,689
188
2,314

80,800
2,103
245
2,668

81,602
2,280
255
3,178

86,599

85,816

87,316

52,792

54,145

59,240

829
7,364
634
670
1,047
1,080

788
8,009
514
696
939
1,216

783
11,110
563
735
1,013
1,191

11,624

12,160

15,395

552
-357
2,227
-246
-1,671
73

-2,994
-1,193
-3,455
-230
1,047
38

-248
-288
-2,491
-731
-1,381
-31

SPECIAL ANALYSIS A

A-ll

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

SBA disaster loan fund
Education
Veterans
Low-rent public housing
Federal credit direct loan revolving fundOther

1988 estimate

-1,293

-1,210

-708
457
192
-42
3,217
-591

Subtotal, loans

-1,089

-7,823

—2,645

Financial investments

-1,322

1,400

1,457

-2,411

-6,424

-1,188

513
685
-67

374
-4,292
14

910
-1,417
-90

1,132

-3,905

-596

2,341

3,830

-3,325
4,460

2,341

3,830

1,135

1,695
3,026

2,017
3,193

2,198
3,113

172,266

166,739

182,984

202,476
65,084
79,741
8,448
1,130
15,657
10,541
8,053
9,923
1,410
3,764

214,566
67,797
85,605
8,966
1,349
14,297
11,492
8,442
11,441
2,893
3,840

228,379
71,709
92,414
9,177
1,386
14,905
11,426
8,726
11,368
3,897
4,153

Subtotal, loans and financial investments.,
Commodity inventories:
Strategic Petroleum Reserve
Commodity Credit Corporation
Other commodity inventories
Subtotal, commodity inventories.
Other physical assets:
Sale of the naval petroleum reserves and other assets.,
Other physical assets
Subtotal, other physical assets.
Collection of information
International development
Subtotal, investment-type outlays..
Current outlays:
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, benefits-

-498
-81
241
-37

-389
296
307
-39

1989 estimate

406,227

430,688

457,540

Administrative expenses of benefit programs:
Social security retirement and disability (off-budget)
Medicare
Unemployment compensation, assistance payments and other.

2,280
1,727
3,041

2,236
1,882
3,428

2,359
1,820
3,380

Subtotal, administrative expenses of benefit programs

7,047

7,546

7,558

690

929

972

21,357
281
622
-402
647

27,287
1,211
847
-140
522

23,329
-516
1,033
1,450
34

Social service and related programs
Aids to agriculture, commerce, and transportation:
Agriculture
Postal Service
Small business assistance
Mortgage credit and deposit insurance
Ground transportation

A-10

THE BUDGET FOR FISCAL YEAR 1989

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

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, & operation of physical assets..
Regulation, control, and law enforcement
Other current programs:
Military personnel
Other national defense
Federal credit direct and guaranteed loan revolving funds
Other

1988 estimate

1989 estimate

2,707
2,271
2,509

3,003
2,045
2,777

3,253
2,299
1,829

29,992

37,552

32,710

80,830
3,033

85,156
3,516

87,873
5,107

83,863

88,672

92,980

16,161

18,695

17,031

70,884
3,397

74,629
1,328

10,720

13,085

77,006
745
-9,499
14,655

85,001

89,042

82,907

143,860
-5,290

155,142
-7,271

161,940
-10,136

Subtotal, net interest

138,570

147,871

151,804

Subtotal, current outlays

767,552

820,993

843,503

-27,259
-3,300

-28,670
-4,298

-29,038
-4,719

-30,559

-32,968

-33,757

-4,021

-3,155

-3,920

-11,625
2,582

-15,262
2,891

-16,619
3,009

-9,043

-12,371

-13,610

-43,624

-48,495

-51,287

896,194

939,238

975,200

1,004,586

1,055,904

1,094,215

Subtotal, other current programs
Net interest:
On-budget
Off-budget

Unclassified:
Employer share, employee retirement:
On-budget
Off-budget
Subtotal, employer share, employee retirement
Offshore oil receipts
Other unclassified:
On-budget
Off-budget
Subtotal, other unclassified
Subtotal, unclassified (primarily offsetting receipts)
Total, direct Federal outlays
TOTAL OUTLAYS

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
1989.
The data for borrowing and debt during 1985-87 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-°23 to E-32 discusses these revisions, a
change in the treatment of the proceeds from the sale of loan
assets with recourse, and the treatment of zero-coupon bonds.
Special Analysis F, "Federal Credit Programs/' examines the
related subject of Federal credit programs, which provide subsidies
through direct loans, loan guarantees, and loans by Government1 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 1986 data were published in the
winter (1st quarter) issue, 1987, pp. 119-127.

E-1

A-10

THE BUDGET FOR FISCAL YEAR 1989

sponsored enterprises. 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 1989
Federal budget.
BORROWING AND REPAYING DEBT

The Federal Government issues debt for two principal reasons.
First, it sells 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 that are 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 some
other 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
2 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.

SPECIAL ANALYSIS A

A-ll

public, despite the significance of this distinction, because the Federal Reserve's open market operations depend on future economic
developments and on policy decisions not yet made.
Table E - l summarizes Federal borrowing from 1987 through
1993. In 1987 the increase in gross Federal debt—i.e., the total
issuances of new securities less the total redemptions of existing
securities—was $225.2 billion. The issue of debt to Government
accounts was $73.5 billion, and the sale of debt to the public was
$151.7 billion. The Federal Reserve Banks increased their holdings
of Federal debt by $21.2 billion, so the increase in debt held by the
rest of the public was $130.5 billion. As a result of this borrowing,
Federal debt held by the public increased to $1,897.8 billion at the
end of 1987. Gross Federal debt was $2,355.3 billion. As noted
previously, these data reflect revisions beginning in 1985, which
are discussed in a later section of this special analysis.
Table E - l . FEDERAL BORROWING
(In billions of dollars)
Borrowing or repayment ( - ) of debt
Description

Debt outstanding, end
Ul fC
] dl

1987
actual

1988
estimate

1989
estimate

1990
estimate

1991
estimate

1992
estimate

225.0
0.3

224.1
2.2

242.2
1.5

227.3
0.4

216.0
0.1

199.4
_ *

185.5 2,816.6 3,644.8
_ *
8.7
9.2

225.2

226.3

243.7

227.7

216.1

199.3

185.6 2,825.3 3,654.0

73.6
-0.1

100.0
-0.9

116.7*

NA
NA

673.1
0.1

NA
NA

Debt held by Gov.
accounts1

73.5

99.0

116.7

124.1

137.5

148.9

162.9

673.2

1,246.5

Total, debt held by
public

151.7

127.2

127.0

103.6

78.7

50.5

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

21.2
130.5

NA
NA

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

1993
estimate

1989
estimate

1993
estimate

22.6 2,152.1 2,407.5

NA
NA

* $50 million or less.
1 Investment by Government accounts during 1990-93 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. In the early part
of this decade, 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 following three
years the recovery helped to restrain the growth of borrowing, but
the level of borrowing did not diminish. In 1987, however, borrow-

A-10

THE BUDGET FOR FISCAL YEAR 1989

ing from the public decreased to $151.7 billion, though in part this
was due to the transitional effects of the Tax Reform Act of 1986.
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 3b of the Budget,
"The Economic Outlook."
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. These
favorable economic factors have continued to the present, a period
that has now become the longest peacetime expansion in American
history.
The estimated deficits and borrowing during the forecast period
are reduced by the steady and strong economic expansion assumed
in this budget. As explained in Part 3b of the Budget, real GNP is
estimated to increase at an average annual rate of 3.3% from 1987
to 1993, and the total unemployment rate is estimated to decline to
5.2%. The estimated deficits and borrowing are also reduced by the
deficit reduction policies proposed in this budget, consistent with
the Bipartisan Budget Agreement negotiated in November 1987.
These economic conditions and deficit reduction policies are together estimated to reduce substantially the Federal deficit and the
borrowing from the public. As shown in table E-l, borrowing from
the public is estimated to decrease from $151.7 billion in 1987 to
$127.0 billion in 1989 and $22.6 billion in 1993.
The estimated borrowing based on the policies proposed in this
budget may be compared with the estimated borrowing based on
the current services deficit. The current services estimates of the
budget, as explained in Special Analysis A, "Baseline Estimates/'

SPECIAL ANALYSIS A

A-ll

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).3 As
shown in table E-2, they also show a substantial downward trend
in borrowing, though not as great as under the policies proposed in
this budget.
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

1988
estimate

1989
estimate

1990
estimate

1991
estimate

1992
estimate

1993
estimate

128.0
127.2

135.9
127.0

110.5
103.6

85.5
78.7

62.3
50.5

38.4
22.6

2,025.8 2,161.8 2,272.2 2,357.7 2,420.0 2,458.4
2,025.1 2,152.1 2,255.7 2,334.4 2,384.9 2,407.5
43.0
43.0

43.0
42.8

42.1
41.9

40.9
40.5

39.5
39.0

38.0
37.2

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.4 Since they had a large
combined surplus in 1987 and are estimated to have large and
growing surpluses during 1988-93, they reduce the requirements
for Treasury to borrow from the public by a substantial amount.
The total Federal deficit is financed either by borrowing from the
public or by several other means. 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-23, together with their effect on the means of
financing;
• seigniorage, which is the face value of minted coins less the
cost of their production; and

3 Further discussion of the current services concept is presented in Part 6a of the Budget, "Alternative Budget
Baselines."
4 Off-budget Federal entities are discussed in the Budget, Part 6d, "Perspectives on the Budget."

A-10

THE BUDGET FOR FISCAL YEAR 1989
Table E-3. MEANS OF FINANCING TH£ DEFICIT1
(In millions of dollars)
Description

1987 actual

1988 estimate 1989 estimate

1990 estimate

Surplus or deficit (—).... —150,444 -146,741 -129,542 -104,185
On-budget
Off-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
Proceeds from the sale
of loan assets with
recourse
Total, means of
financing other
than borrowing
from the public.

1992
estimate

1993
estimate

-79,268 -51,053 -23,266

-183,514
-174,680
-162,460
-170,014
-149,148 -130,963 -116,158
36,773
45,139
19,570
58,275
69,880
79,910
92,891

-5,052

16,436

5,154

2,265

2,619

-1,840
458

-280
375

-896
528

698

270

19,494

2,521

-1,280

556

578

597

618

556

578

597

618

Total,
requirements
for borrowing
from the public. -151,724 -127,247 -127,021 -103,629
Change in debt
held by the
public

1991 estimate

151,724

127,247

127,021

103,629

-78,690 -50,456 -22,648

78,690

50,456

22,648

Several amounts have been assumed to be zero during 1989-93 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, and
profit on sale of gold.
4 Does not include investment in Federal debt by deposit funds classified as part of the public.
1

2
3

• proceeds from the sale of loan assets with recourse, a new
category for this table, which is explained on pages E-29 to
E-30.
Except for seigniorage and the proceeds from the sale of loan
assets, all of these other means of financing can be either positive
or negative. They are changes in the Government's balance sheet,
either its asset or its liability accounts, and can move in either
direction. 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 1987, the Government borrowed $151.7 billion from the

SPECIAL ANALYSIS A

A-ll

public. Most of this amount, $150.4 billion, was used to finance the
Government deficit. The remaining $1.3 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
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.
As a whole, these other accounts did not require much borrowing
from the public in 1987 in order to be financed. In 1988, on the
other hand, they are themselves estimated to finance $19.5 billion
of the deficit. This is due mostly to the large initial Treasury
operating cash balance. Because the $36.4 billion cash balance on
September 30, 1987, was more than the $20 billion needed for
normal operations at that time of year, Treasury estimates a $16.4
billion decrease in cash balance during 1988. Since a decrease in
cash balance is a means of financing the Government, this will
allow borrowing in 1988 to be appreciably less than the size of the
deficit. As a result, the estimated borrowing from the public is
$24.5 billion less in 1988 than in 1987, whereas the estimated
deficit is $3.7 billion less.
In 1989, with the initial cash balance assumed to be normal, the
"other means of financing" are estimated to finance only $2.5
billion of the deficit. This is very much less than in 1988, and the
difference has to be made up by additional borrowing from the
public. Consequently, whereas the estimated deficit decreases by
$17.2 billion, the estimated borrowing from the public decreases by
only $0.2 billion.
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).

A-10

THE BUDGET FOR FISCAL YEAR 1989

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 198689 are compared in the table below (in billions of dollars):
1986
actual

Investment by Government accounts in Federal debt
Total trust fund surplus

66.3
61.8

1987
actual

73.5
72.7

1988

99.0
97.5

1989

116.7
112.6

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
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.5
SIZE AND GROWTH OF FEDERAL DEBT

Gross Federal debt has risen substantially over the past half
century, from $16.9 billion in 1929 to $2,355.3 billion at the end of
1987. 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 and debt
held by the public increased by eight to nine times, and the
amount of debt held in Federal Government accounts (primarily
trust funds) rose by nearly ten times. 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 15.0% from 1980
to 1987. It is estimated to grow at the much slower rate of 4.0%
from 1987 to 1993.

5 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."

SPECIAL ANALYSIS A

A-ll

Table E-4. TRENDS IN FEDERAL DEBT1
(Dollar amounts in billions)
Debt outstanding, end of year
Held by
Fiscal year

1955
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969 2
1970 3
1971
1972
1973 4
1974
1975
1976 5
TQ
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988 estimate
1989 estimate
1990 estimate
1991 estimate
1992 estimate
1993 estimate

Gross
Federal
debt

274.4
272.8
272.4
279.7
287.8
290.9
292.9
303.3
310.8
316.8
323.2
329.5
341.3
369.8
367.1

Federal
Government
accounts

The public
Total

382.6
409.5
437.3
468.4
486.2
544.1
631.9
646.4
709.1
780.4
833.8

47.8
50.5
52.9
53.3
52.8
53.7
54.3
54.9
56.3
59.2
61.5
64.8
73.8
79.1
87.7
97.7
105.1
113.6
125.4
140.2
147.2
151.6
148.1
157.3
169.5
189.2

226.6
222.2
219.4
226.4
235.0
237.2
238.6
248.4
254.5
257.6
261.6
264.7
267.5
290.6
279.5
284.9
304.3
323.8
343.0
346.1
396.9
480.3
498.3
551.8
610.9
644.6

914.3
1,003.9
1,147.0
1,381.9
1,576.7
1,827.5
2,130.0
2,355.3
2,581.6
2,825.3
3,053.0
3,269.2
3,468.5
3,654.0

199.2
209.5
217.6
240.1
264.2
317.6
383.9
457.4
556.5
673.2
797.3
934.7
1,083.6
1,246.5

715.1
794.4
929.4
1,141.8
1,312.6
1,509.9
1,746.1
1,897.8
2,025.1
2,152.1
2,255.7
2,334.4
2,384.9
2,407.5

Federal
Reserve
Banks

23.6
23.8
23.0
25.4
26.0
26.5
27.3
29.7
32.0
34.8
39.1
42.2
46.7
52.2
54.1
57.7
65.5
71.4
75.2
80.6
85.0
94.7
96.7
105.0
115.5
115.6
120.8
124.5
134.5
155.5
155.1
169.8
190.9
212.0
NA
NA
NA
NA
NA
NA

GNP

Debt held
by public
as percent
of GNP

Other

203.0
198.5
196.4
200.9
209.0
210.7
211.4
218.7
222.4
222.8
222.5
222.5
220.8
238.4
225.4
227.2
238.8
252.3
267.9
265.4
311.9
385.6
401.6
446.8
495.5
529.0
594.3
670.0
794.9
986.2
1,157.5
1,340.1
1,555.3
1,685.8
NA
NA
NA
NA
NA
NA

386.4
418.1
440.5
450.2
481.5
506.7
518.2
557.7
587.8
629.2
672.6
739.0
794.6
849.4
929.5
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
2,670.6
2,986.4
3,139.1
3,321.9
3,687.6
3,943.6
4,192.4
4,408.7
4,705.8
5,023.3
5,387.8
5,758.6
6,119.3
6,464.8

58.6
53.2
49.8
50.3
48.8
46.8
46.0
44.5
43.3
40.9
38.9
35.8
33.7
34.2
30.1
28.8
28.8
28.1
26.8
24.4
26.1
28.3
27.8
28.5
28.1
26.3
26.8
26.6
29.6
34.4
35.6
38.3
41.6
43.0
43.0
42.8
41.9
40.5
39.0
37.2

1 Data from 1940 to 1993 in millions of dollars are published in Historical Tables, Budget of the United States Government, Fiscal Year 1989,
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.
NA=Not available.

A-10

THE BUDGET FOR FISCAL YEAR 1989

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.6 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*
Ftntant

1929

Ptnant

End of Ytar
•Ftderri Debt Is D«bf H«kJ by th« Public Qndudlnfl

Ftdfd

toxrv

Bonks)

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
6 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 A

A-ll

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 1974. 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, Federal debt held by the public increased year-by-year from 17.6% of credit market debt in 1979 to
22.9% in 1986. This was the highest percentage since 1968. The
counterpart to a higher proportion of Federal debt was a lower
proportion of private debt. In 1987, as a result of the much lower
deficit, Federal debt declined slightly to 22.7% of total credit
market debt. Private debt, in turn, rose slightly as a proportion.
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, it rose very sharply
from 26.6% of GNP to 29.6%, and it continued to rise significantly
in the following years. In 1987, despite the declining deficit, it
increased further to 43.0%. This percentage is higher than in any
other year since 1963. The reductions in borrowing estimated for
1988 and 1989 are only enough to maintain debt held by the public
at about 43% of GNP, but thereafter the ratio declines steadily to
37.2% in 1993.
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
the 1960's, and 6.3% in the 1970,s. It then averaged 12.1% in
calendar years 1980-82 before falling step-by-step to 5.8% in 1987.
Consequently, whereas the Federal debt held by the public increased by over eight times between 1955 and 1987, table E-5
shows that the interest paid on this debt increased by thirty times.

A-10

THE BUDGET FOR FISCAL YEAR 1989
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

Total1

Federal
Government
accounts

The public
Total

Federal
Reserve
Banks2

Other

GNP

Outlays3

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
.5
.7
.7
.8

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
11.8
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
2.9

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

75.2
96.0
117.5
128.9
154.1
179.4
191.5
197.1
212.2
222.0

14.8
17.1
19.9
21.3
25.2
31.2
36.2
39.6
46.3
53.1

60.4
78.9
97.7
107.7
129.0
148.2
155.4
157.5
165.9
168.9

12.5
13.4
15.4
15.3
16.3
16.8
16.3
NA
NA
NA

47.9
65.5
82.4
92.3
112.7
131.4
139.1
NA
NA
NA

2.26
2.64
3.11
3.24
3.50
3.76
3.71
3.57
3.53
3.36

10.22
11.63
13.10
13.32
15.14
15.66
15.70
15.68
15.72
15.44

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

11.0

1 Total interest on gross Federal debt is significantly larger than the outlays for the net interest function in the budget, because the net
interest function includes as deductions the interest paid to trust funds and Government collections of interest.
2 These figures are very approximate. They are estimated as the average of calendar year amounts or as an adjustment to deposits of
Gdl IllllgO.
3 Includes off-budget outlays. Historical series of outlays are published in the Budget, Part 6g, table 24.
NA=Not available.

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

SPECIAL ANALYSIS A

A-ll

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 3.6% in
1987, despite large Federal borrowing, because of a decrease in
market interest rates. It is estimated to fall somewhat further in
1988 and 1989.
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 and 15.7% in 1986 and 1987. It is estimated to remain at
15.7% in 1988 but then decrease to 15.4% in 1989. The importance
of interest on the debt relative to either GNP or Federal outlays is
thus much more now than in earlier years, although it has now
leveled off or is declining to a small extent.
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 4x/4% that has been maintained since 1918 on the interest rate for Treasury bonds. Longterm market rates exceeded 4XA% 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, 1987, the amount of notes
outstanding with an original maturity over 5 years was $509.7
billion, of which $324.2 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
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 11 steps. The
last increase to the exemption was from $250 billion to $270 billion,
enacted in December 1987. As of December 31, 1987, $279.8 billion
of the bonds outstanding had been sold since the change of law in
1971, whereas only $2.7 billion of bonds issued in earlier years were

A-10

THE BUDGET FOR FISCAL YEAR 1989

still outstanding. The public exclusive of the Federal Reserve
Banks held $249.3 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 2% years at the end of 1975. Since then, however, as the
restriction has been relaxed further, the average maturity has
gradually lengthened to 5% 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
financial assets acquired in the United States largely took the form
of U.S. Government securities.
In the early 1980's, both of these factors were reversed. Foreign
countries drew down on their reserves to support their currencies
against the dollar in the exchange markets, and the aggregate
OPEC current account surplus shifted to a deficit. However, these
reversals were more than offset by the large amount of private

SPECIAL ANALYSIS A

A-ll

Table E-6. FOREIGN HOLDINGS OF FEDERAL DEBT
(In billions of dollars)

Fiscal year

Debt held by
the public
Total

Foreign1

Borrowing from the
public
Total2

Foreign

Interest on debt held
by the public
Total

Foreign3

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
1987

1,509.9
1,746.1
1,897.8

209.8
253.4
267.3

197.3
236.3
151.7

34.3
43.6
13.9

148.2
155.4
157.5

21.2
22.3
23.5

1 Estimated by Treasury Department. These estimates exclude agency debt, the holdings of which are believed to be small.
2 Borrowing from the public is defined as equal to the change in debt Held by the public from the beginning of the year to the end, except to
the extent that the amount of debt is changed by reclassification. 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 the
benchmark revision as well as transactions in Federal debt securities.

capital inflow that accompanied the growing deficit in the U.S.
current account. The net result was a large increase in holdings of
dollar assets by foreigners, and this was reflected in the further
increase in the Federal debt held by foreigners.
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. This contrasts with the late
1970's, when almost all of the Federal debt held by foreign residents was owned by foreign central banks and other official institutions. In part, the increase in foreign private holdings may be
attributable to the repeal in 1984 of the withholding tax on the
interest paid to non-resident aliens on U.S. Government and corporate securities. In fiscal year 1987, however, foreign commercial
banks and other private investors reduced their holdings of Treasury securities. At the same time, foreign central banks increased

A-10

THE BUDGET FOR FISCAL YEAR 1989

their holdings considerably, using for this purpose part of the
proceeds from their intervention in the foreign exchange market
that was intended to support the dollar. At the end of 1987, private
investors owned about 29% of the Federal debt held by foreign
residents. 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
1987 foreign holdings of Treasury debt had reached $267.3 billion,
which was 14% 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
16% of borrowing from the public. This percentage was higher
during the 1970's than the 1980,s, being 30% in the earlier period
compared to 12% later. In 1987, the $13.9 billion of Federal securities purchased by foreign residents was only 9% 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
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 - l and is shown
by agency in table E-7 for 1987-89. During 1987 more debt was
newly issued than was repaid, due to the new types of notes issued
by the Federal Savings and Loan Insurance Corporation. Over the

SPECIAL ANALYSIS A

A-ll

period as a whole total agency debt increases by $4.0 billion. The
agency debt outstanding is less than 1.0% of gross Federal debt.
Table E-7. AGENCY BORROWING
(In millions of dollars)
Borrowing or repayment ( - ) of c
Description

Borrowing from the public:
Agriculture: Farmers Home Administration1
Defense
Education:
College housing loans 1
Higher education facilities 1
Health and Human Services1
Housing and Urban Development:
Federal Housing Administration
Housing for elderly or handicapped1
Government National Mortgage Association1
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
Federal Savings and Loan Insurance Corporation
Postal Service
Tennessee Valley Authority
Total, borrowing from the public..
Borrowing from other funds:
Agriculture: Farmers Home Administration]
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 Assoc.1.
Revolving fund (liquidating programs) 1
Small Business Administration1
Veterans Administration1

1987
actual

1988
estimate

-3
-17

-138

-3
-14

-239
-47
-5

68
-52

-39
-11
- 2

-12

1989
estimate

- 1

143

-32
-5

503
3,586

-233
1,600

470
6,106
250
1,380

3,090

1,509

8,597

-245
332

299

-202

-25
-309
-242
920

Debt end
1989
estimate

-121
-208

-41
-5
81

-12

-19
-5
-32

-45
-170
-28

-31
-269

Total, borrowing from other funds..

-56

-928

Total, agency borrowing included in gross Federal
debt

276

2,161

1,514

8,678

-1,805
6
1,499
1,309
-84

-1,843
25
1,239
1,075

-1,367
25
1,380
694

9,254
102
6,972
18,155

925

496

732

34,542

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.

A-10

THE BUDGET FOR FISCAL YEAR 1989

As implied by the addendum to table E-7, the amount of agency
borrowing has been profoundly affected by the Federal Financing
Bank (FFB).7 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 $0.9
billion from the FFB in 1987 and are estimated to borrow $0.5
billion in 1988 and $0.7 billion in 1989. 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 14 years or is scheduled to take place in the future except for
borrowing that is inherent in the operation of certain programs.
Because the latter reason for borrowing was not relatively important until 1986, the change in agency debt from the establishment
of the FFB to 1986 was generally 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 1989, $1.6 billion of agency debt, or nearly one-fifth
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, $34.4 billion in debt will be owed to the FFB by these

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

SPECIAL ANALYSIS A

A-ll

two agencies together with the Export-Import Bank, which has now
repaid all its borrowings from the public. The Small Business Administration issued $74 million of participation certificates in 1986
and 1987 but does not plan to issue any more. A further $9 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 $2.0 billion
of agency debt at the end of 1987 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 1988.
The remaining agency debt at the end of 1988—four-fifths of the
total—will have been issued by four 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 four
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 has 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 $381 million of debentures outstanding
at the end of 1989 (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
monetary credits can use them for specified purposes such as payments for Federal coal or mineral leases. An estimated $8 million
of monetary credits will be outstanding at the end of 1989.
The Federal Deposit Insurance Corporation (FDIC) began to issue
notes in 1986 as part of some agreements with prospective purchasers to buy failing banks. An estimated $470 million of these notes
will be outstanding at the end of 1989 (5% of total agency debt).
The Federal Savings and Loan Insurance Corporation (FSLIC) has
likewise issued notes to help resolve the financial problems of
troubled thrift institutions. FSLIC is estimated to borrow $6.1 billion during 1987-89 in the course of these operations, with the
result that by the end of 1989 the FSLIC notes alone will comprise
70% of total agency debt. The budgetary treatment of the FDIC

A-10

THE BUDGET FOR FISCAL YEAR 1989

and FSLIC notes is discussed further in a following section on
pages E-25 to E-26.
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 $73.5 billion
in 1987 and, as shown in table E-8, it is estimated to reach $116.7
billion in 1989.
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
(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
Social Security Amendments of 1983. As a result of this act and the
expanding economy, these trust funds as a whole now have large
surpluses and invest increasing amounts each year—a cumulative
total of $149.2 billion during 1987-89, which constitutes 52% of the
total estimated investment by Government accounts.
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

SPECIAL ANALYSIS A

A-ll

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

1987
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 DevelopmentFederal Housing Administration
Government National Mortgage Association
Other
Interior: Outer Continental Shelf deposit funds
Labor:
Unemployment trust fund
Pension benefit guaranty corporation
State: Foreign Service retirement and disability trust fund
Transportation:
Highway trust fund
Airport and airway trust fund
Treasury: Exchange stabilization fund
Environmental Protection Agency: Hazardous response trust
fund
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
National Credit Union Adm.: Share insurance fund
Postal Service fund
Railroad Retirement Board trust funds
Other Federal funds
Other trust funds
Other deposit funds2
Total, investment in Treasury debt ..
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

1988
estimate

1989
estimate

9,768
84
21,408
-1,143
12,489
-3,258

103
15,228
134
36,028
35
15,603
-78

108
14,740
260
44,229
910
19,652
2,881

957
-79
-125
-2,764

445
-2,164
50
-345

434

6,677
70
534

8,091
571
454

7,068
504
493

1,192
1,341
2,454

2,203
1,220

176

821
721
168

363
22,704
465

1,599
18,685
1,013

258
18,737
1,264

357
57
19
1,184
-3,891
180
785
690
480
539
-35

479
56
20
-1,765
1,852
295
-1,288
897
-48
408

293
55
14
-735
649
320
1,050
343
26
222

73,581

99,956

116,707

2,117

-405

-12

-134
-24
-175
-135
-54

Total, investment in agency debt-

-56

-928

Total, investment in Federal debt.

73,525

99,028

116,712

-68

5,655
66,814
45,140
-896

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.

1,008

55,051
20,265
-2,799

63,378
36,063
-345

Only those deposit funds classified as Government accounts.

A-10

THE BUDGET FOR FISCAL YEAR 1989

21% of the total investment by Government accounts during 198789, and the latter accounts for 14%. Altogether, these two retirement funds and the three funds financed by the social security
payroll tax account for 86% of the estimated investment by Government accounts during 1987-89.
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 $673.2
billion at the end of 1989. This will comprise 24% of the gross
Federal debt. One major trust fund—the civil service retirement
and disability trust fund—will account for 32% of total holdings,
and the three trust funds financed by the social security tax will
account for 35%. All the trust funds together will account for 95%
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
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

SPECIAL ANALYSIS A

A-ll

assumed that the remaining disputes will be settled and the
amounts distributed by the end of 1989.
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).
MEASUREMENT OF BORROWING, DEBT, AND MEANS OF FINANCING

As stated previously in this special analysis, the actual data for
debt held by the public, debt held by Government accounts, and
gross Federal debt for 1985 and 1986 have been revised from the
figures previously published in the budget and by Treasury. The
actual data for 1987 have also been revised from the figures previously published by Treasury. The budget a year ago made some of
these revisions. The present budget changes some of those revisions
and makes others.
Table E-9 displays the differences in borrowing and debt. There
is no fully satisfactory baseline for this comparison, because some
of the revisions a year ago have been altered and because Treasury

A-10

THE BUDGET FOR FISCAL YEAR 1989

Table E-9. BRIDGE FROM AMOUNTS ORIGINALLY REPORTED BY THE TREASURY TO AMOUNTS
CURRENTLY REPORTED IN THE BUDGET 1
(In millions of dollars)
Outstanding,
end of 1985

Gross Federal debt:
Amount originally reported
Revisions:
FDIC notes
FSLIC notes
SBA participation certificates
Total, increase in amount
Current budget amount
Debt held by Government accounts:
Amount originally reported
Revision:
Reclassification of Thrift Savings Fund
Current budget amount
Debt held by the public:
Amount originally reported
Revisions:
FDIC notes
FSLIC notes
SBA participation certificates
Reclassification of Thrift Savings Fund
Total, increase in amount
Current budget amount

1,827,470

Change in
1986

302,052
2

442

Outstanding,
end of 1986

Outstanding,
end of 1987

2,129,522

224,322

2,354,286

442

(3)

(3)
920
74

67
1,827,470

Change in
1987

510
510
302,562 2,130,031 [

920
7

927
994
225,249 2,355,280

317,612

66,307

383,919

74,252
-727

-727

317,612

66,307

383,919

73,525

457,444

1,509,857

235,745

1,745,602

150,070

1,896,114

442
67

(3)
920
7
727

a74

510
510
236,255 1,746,112

1,654
151,724

1,721
1,897,836

442
67

1,509,857

458,172

727

These revisions do not affect the amount of debt recorded as subject to the statutory debt limitation.
2 Treasury currently reports this amount in debt outstanding at the end of 1986. It reflects a $30 million correction from the figure published
in the 1988 budget.
3 Treasury's original report and the budget both record $200 million of FDIC debt outstanding at the end of 1987.
1

data for 1987 include the effect of one of the revisions. For the sake
of convenience, table E-9 uses the amounts originally published by
Treasury as a baseline.8 The net effect of the changes from this
baseline is to increase debt held by the public by $1.7 billion at the
end of 1987 and gross Federal debt by $1.0 billion. The amount of
debt subject to statutory limit is not affected.
The revisions in debt are of three kinds: the definition of certain
securities as agency debt, the budgetary classification of the Thrift
Savings Fund, and measurement of the debt held by two Government accounts in the Department of Defense. This section explains
these differences. It also explains two other subjects concerning the
measurement of debt: the classification of loan asset sales with
recourse, which affects the means of financing the deficit beginning
in 1988; and the measurement of zero-coupon bonds, which are
assumed to be sold in 1988. At the end of the latter section, a brief
discussion is given of Treasury plans to add a new measure of
Federal borrowing and debt to its present published series. Some of
the subjects in this section were discussed more extensively in the
8 See table 6 in the September issues of the Monthly Treasury Statement of Receipts and Outlays of the United
States Government.

SPECIAL ANALYSIS A

A-ll

corresponding section of Special Analysis E in last year's budget.9
This section is more technical than most of this special analysis.
FDIC and FSLIC 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 simultaneously outlays and borrowing. The debentures or
other special instruments are accordingly classified as debt.10
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 FHA debentures and Interior Department monetary credits
serve to pay the Government's bills and thus are equivalent to cash
transactions. These transactions are therefore classified as outlays
and borrowing, and the instruments are classified as agency debt.
Last year the budget reported that the Federal Deposit Insurance
Corporation (FDIC) borrowed $472 million in 1986 by issuing notes
as part of some agreements with prospective purchasers to buy
failing banks. That amount had not been reported to the Treasury.
Special Analysis E last year explained why these transactions were
FDIC borrowing and outlays, just as were the issuances of FHA
debentures and Interior Department monetary credits. In a subsequent report to Treasury, FDIC corrected the 1986 borrowing figure
to $442 million, which is $30 million less than recorded in last
year's budget. This budget and the current Treasury reports all use
the corrected figures for FDIC borrowing, debt, and outlays in
1986.11

See pages E-24 to E-30.
The definition of outlays and the relationship of outlays to obligations, budget authority, and borrowing are
discussed in Part 6e of the Budget, "The Budget System and Concepts."
11 Due to a technical error, the outlays for 1986 that were published in the 1988 Budget and BudgetSupplement did not include these transactions. This type of transaction was, however, included in the outlays for
all other years, in the borrowing and debt for all years, and in the outlays and other data shown in the FDIC
schedules in the Budget Appendix. The outlays for 1986 in the present budget include these transactions.
9

A-10

THE BUDGET FOR FISCAL YEAR 1989

The Federal Savings and Loan Insurance Corporation (FSLIC)
has been issuing notes akin to the FDIC notes as part of some
agreements with prospective purchasers to buy troubled thrift institutions. FSLIC ordinarily tries to arrange for the private sale of
troubled thrifts rather than liquidate them and pay off the depositors, in general because merger assistance is usually less expensive
to the Government. When a buyer is not found, FSLIC often arranges for the assumption of the troubled thrift's deposit liabilities
by another institution. In several cases, FSLIC has issued notes in
place of cash to cover the deposits transferred.
Recently FSLIC also began to resolve the problems of troubled
thrifts by the new technique of asset-backed transfers. FSLIC charters a new thrift, which assumes the insured deposits of a troubled
thrift, and provides it with cash and notes that in combination
equal the value of the deposits. Because the new thrift is not
designed to be viable in the long-term standing alone, FSLIC attempts to arrange its purchase by an institution in better financial
condition. As part of the inducement, FSLIC may restructure the
note (such as by increasing its amount). These notes are subsequently redeemed by FSLIC either paying cash or transferring
assets that it had acquired through receivership of failed thrifts.
The issuance of notes under these arrangements 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 FSLIC 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 from 1987 onwards to record outlays and borrowing at the time when the notes are issued. As shown in table E-9,
this increases the debt held by the public and gross Federal debt by
$920 million at the end of 1987. As shown previously in table E-7,
estimated FSLIC borrowing by means of these notes is $3.6 billion
in 1988 and $1.6 billion in 1989.
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
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

SPECIAL ANALYSIS A

A-ll

sale of participation certificates be classified as borrowing by the
agency that issues them instead of being classified as an offset to
the outlays of the agency.12 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 and 1987 data in the budget for outlays,
borrowing, and debt have been revised to show these transactions
as outlays and borrowing. SBA has restructured the way in which
it conducts these types of transactions so they will not give rise to
further Federal outlays and borrowing.
Thrift Savings Fund.—The Federal Employees' Retirement
System Act of 1986 established the Thrift Savings Fund as part of
the new retirement system for Federal employees. This fund receives contributions both from the employee and from the Federal
Government as employer. When the fund was established in 1987,
it was classified as a Federal account and its transactions were
included in the budget.
Upon further examination, however, it was concluded that the
Thrift Savings Fund is not part of the Federal Government. This
part of the Federal retirement system is a defined contribution
plan, not a defined benefit plan. Each participating employee has
his own separate account. His contributions to the fund, the employing agency's matching contributions (if any), and the earnings
on these contributions are vested immediately; the remaining
agency contributions are vested after two or three years of service.
The employee decides whether to contribute any of his salary at all
to the fund, and, if so, how much to contribute (up to a limit). The
employee who is a member of the Federal Employees' Retirement
System has options for choosing how the amount in his account is
to be invested. An employee may borrow from his own accumulated
contribution for certain specified purposes. If the employee leaves
the Government before retirement, the balance in his account belongs to him, and he may either leave his balance in the fund for
12 Report of the President's Commission on Budget Concepts (Washington: U.S. Government Printing Office,
1967), pp. 8, 47-48, and 54-55.

A-10

THE BUDGET FOR FISCAL YEAR 1989

later use or exercise specified options to withdraw it immediately.
If the employee retires from the Government, his benefits are
determined not by law or regulation but solely by his previous
contributions, the agency contributions (which are largely determined on the basis of a match to his own contributions), his investment decisions, and the rates of return on these investments. For
these and other reasons, the employee exercises substantial control
over his account in the fund, receives the benefits from the balances in his account, and therefore owns it. The Government's role
is strictly that of a fiduciary.
The Thrift Savings Fund, which consists of the individual accounts, has therefore been reclassified in this budget as part of the
public instead of the Federal Government. All of its transactions
have correspondingly been reclassified as non-budgetary. This classification distinguishes it from off-budget Federal entities (currently social security). They are federally owned and controlled and do
not operate in a fiduciary capacity, but their transactions have
been excluded from the budget totals under provision of law.
During 1987, its first year of operation, the fund acquired $727
million of Federal debt securities. These were recorded in the
Treasury reports as debt held by Government accounts, based on
the fund's budgetary classification at the time. Because the fund is
now considered to be part of the public, these holdings have been
reclassified retroactively in this budget as being debt held by the
public instead of debt held by Government accounts. This increases
the recorded borrowing from the public in 1987 by $727 million.
The non-budgetary surplus of the fund, which was $736 million in
1987, has been removed from the budget, which raises the recorded
budget outlays and deficit by $736 million in 1987.
The Federal Retirement Thrift Investment Board, which manages the Thrift Savings Fund in a fiduciary role, remains in the
budget, because it is a Federal agency, neither owned nor controlled by the participating employees. As a result, the Board's
administrative expenses are included in budget outlays. The budget
also includes the offsetting receipts that the fund pays to the Board
to reimburse the Board for its expenses.
Measurement of debt held by Government accounts.—The budget
a year ago requantified the investments by the Department of
Defense military retirement and education benefits trust funds.
During 1985 these two new trust funds began to buy significant
amounts of market-based Treasury securities at relatively large
premiums or discounts. Treasury followed its standard convention
of recording these securities at par, whereas the budget a year ago
requantified them at purchase price. As a result, the budget
showed an additional $2.9 billion of debt held by Government ac-

SPECIAL ANALYSIS A

A-ll

counts and gross Federal debt at the end of 1986. (Debt held by the
public and debt subject to statutory limitation were not affected.)
In the Mid-Session Review of the 1988 Budget (August 17, 1987),
the budget data on borrowing and debt were revised to agree with
the Treasury convention. The amount of unamortized premiums
and discounts is, however, shown in the Budget Appendix as part of
the trust funds' assets together with their cash and Government
securities (at par). The budget continues to calculate interest for
these two trust funds by amortizing the premiums and discounts
over the lives of the securities, and Treasury follows the same
method of calculating interest for securities purchased in 1987 and
later years.
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.
However, the sale of individual loans with recourse—i.e., with a
Government guarantee attached—has some characteristics that are
functionally equivalent to borrowing.13 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 may be deemed to turn 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 budget last year said that all new
loan asset sales with recourse would be classified as agency borrowing as of 1987 with the exception of sales made by two programs
already in existence—the Veterans Administration (VA) 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 were not exempted for 1988 or
1 3 Technically, the functional equivalent of borrowing may be deemed to be 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 proceeds received from a sale with recourse will be treated in the same way.

A-10

THE BUDGET FOR FISCAL YEAR 1989

later years. No other programs planned to sell loans with recourse
in 1987.
Subsequently, however, it was concluded in large part for practical accounting reasons that the sale of loan assets with recourse
should instead be classified as a "means of financing the deficit
other than borrowing from the public." Under this classification, as
under the classification announced last year, the sale of loan assets
with recourse does not offset outlays and reduce the deficit, as such
sales formerly did (and as sales without recourse and as loan
repayments will continue to do). Instead, the proceeds from the
sale of loan assets with recourse are classified together with the
decrease in the Treasury cash balance, seigniorage, and the other
transactions that are means for the Government to finance its
deficit but that do not constitute borrowing from the public. The
proceeds of sales with recourse are thus shown under "means of
financing other than borrowing from the public" in tables E-3 and
E - l l and in the corresponding tables in the Budget
The budget does not show any loan asset sales with recourse in
1987 except for the two programs that were exempted from reclassification for that single year. GNMA's final sales under the
tandem plan and VA's last use of recourse for its vendee loan sales
are both scheduled for 1988. One-time sales with recourse under
two other GNMA and FHA programs are scheduled for 1988 and
1989. The estimated total proceeds from the loan asset sales with
recourse are $698 million in 1988 and $270 million in 1989. No loan
asset sales with recourse are planned after 1989.14
Zero-coupon bonds.—A plan was announced in December 1987 to
reduce Mexico's debt to commercial banks. As part of the plan,
Treasury would sell Mexico zero-coupon bonds of up to $10 billion
in par value and with a 20-year maturity. Zero-coupon bonds, as
the term implies, do not pay any cash interest on a periodic basis
over the term of the security. They are sold at a discount from the
par value (or face value) of the bond, which is the principal amount
due at maturity. Zero-coupon bonds pay their entire interest
through the periodic amortization of the discount over the term of
the security. Although this is unlike standard bonds, it is the same
method as used to pay interest on Treasury bills, whose maturities
are one year or less. The periodic amortization of the difference
between the initial sales price and par value is also a normal part
of the effective interest on any security that pays cash interest on
a periodic basis.
The budget assumes that Treasury will sell zero-coupon bonds
with a par value of $10 billion at a cash price of $2 billion, although the actual amounts cannot be known at the present time.

Loan asset sales are discussed in Special Analysis F, section X.

SPECIAL ANALYSIS A

A-ll

The debt subject to statutory limitation, which is discussed in the
next section, is defined by law to be recorded at par for all securities except savings bonds. Therefore, the sale of these bonds is
estimated to raise the debt subject to statutory limit by $10 billion.
Until now, the debt held by the public and gross Federal debt
have also been measured at par value except for savings bonds.
However, this concept is not a meaningful measure of borrowing
and debt for economic or budgetary analysis. In the case of these
zero-coupon bonds, Treasury raises $2 billion of cash, and this cash
finances $2 billion of the budget deficit; Treasury assumes a liability having a market value of $2 billion at the time of the transaction, and Mexico buys bonds having a market value of $2 billion;
the impact on the credit market and saving flows is $2 billion. The
difference between the initial sales price and the par value is not
so great for other Treasury securities, and neither is the effect on
year-to-year changes in the measure of Federal debt held by the
public. However, the assumed $8 billion difference in this case is
very large. Therefore, the budget measures the initial borrowing
from the public at purchase price, assumed to be $2 billion. Debt
held by the public increases $2 billion; and, because gross Federal
debt is defined to be the sum of debt held by the public and debt
held by Government accounts, gross Federal debt also increases by
$2 billion.
The interest outlays on public issues of Treasury debt are measured on the basis of when the interest accrues, not when the
interest is paid in cash. The interest on the zero-coupon bonds will
be measured in this standard way. The accrual of interest, as
explained above, is simply the periodic amortization of the assumed
$8 billion discount between the par value and the initial cash price
of the bonds.
For the purpose of measuring debt held by the public and gross
Federal debt at dates after the initial sale, the value of the debt is
measured consistently with the accrual of interest. At any time,
the value of the debt is the initial cash price plus the interest that
has accrued up to that time (or, in other words, the initial cash
price plus the amount of the discount that has been amortized up
to that time). On the assumptions used for this budget, the amount
of debt held by the public that is composed of zero-coupon bonds is
estimated to be $2.1 billion at the end of 1988 rather than the
initial $2.0 billion. The unamortized discount is correspondingly
estimated to be $7.9 billion rather than the initial $8.0 billion.
There is thus a corresponding relationship between the accrual
of interest outlays on the zero-coupon bonds and the measured
value of the debt. As the interest outlays accrue, adding to the
deficit, debt held by the public increases by an identical amount.
The Government therefore finances the interest outlays automati-

A-10

THE BUDGET FOR FISCAL YEAR 1989

cally by implicitly borrowing an identical amount from the public.
The budgetary accounting for zero-coupon bonds and the financing
of their accrued interest are the same as employed for savings
bonds.
As a result of these methods of measurement, the unamortized
discount on zero-coupon bonds constitutes a difference in the
method of measuring debt for the purposes of calculating debt
subject to statutory limit and debt held by the public (or gross
Federal debt). At the time when the bonds are sold, debt subject to
statutory limit rises by $8 billion more than debt held by the public
or gross Federal debt. Table E-10 shows the relationship between
gross Federal debt and debt subject to statutory limit. It includes
the unamortized discount on zero-coupon bonds as one of the reasons for the difference. Because this table shows debt at the end of
the year, the unamortized discount shown for 1988 is slightly less
than $8 billion. Table E - l l shows the relationship between the
Federal funds deficit and the change in debt subject to statutory
limit. It includes the change in unamortized discount as one of the
factors affecting this relationship. These relationships are also
shown in the corresponding tables in the Budget
With the advent of these zero-coupon bonds, the Treasury Department plans to add a new measure of Federal borrowing and
debt to its present published series. This measure will equal the
par value of debt held by the public less the net amount of unamortized premiums and discounts on all Treasury securities held by
the public. The adjustment will thus include the unamortized discount on the zero-coupon bonds projected to be sold to Mexico, but
it will not be limited to these securities alone. Only the adjustment
for zero-coupon bonds in 1988, however, is expected to have a major
effect on year-to-year changes in the level of the debt. It is expected
that future budgets will apply this adjustment to their measures of
debt held by the public and gross Federal debt. However, the data
are not available to make this change for the present budget except
for the projected sale of zero-coupon bonds to Mexico.
LIMITATIONS ON FEDERAL DEBT

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

SPECIAL ANALYSIS A

A-ll

Federal debt outstanding. The latter type of limitation has been in
effect since 1941.15 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 6 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, the pressure from the
debt limit 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. This enabled Treasury to raise needed cash by selling securities to the public that
were subject to the debt limit. These FFB securities matured on
June 30, 1986. In August and September 1986, because of new
pressure from the debt limit, the Treasury issued $15.0 billion of
FFB securities to the civil service retirement and disability trust
fund. The $5.0 billion of FFB securities that subsequently matured
on June 30, 1987, were rolled over into new FFB securities, and a
small amount was redeemed in the course of normal disinvestment
on October 1, 1987. Of the $14.8 billion of FFB securities that
remain outstanding, $4.8 billion mature on June 30, 1988, and $5.0
billion mature on June 30 of each of the next two years.
The only other Treasury debt not subject to limit consists almost
entirely of currencies no longer being issued, such as silver certifi-

1 5 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 1989, 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 6 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.

A-10

THE BUDGET FOR FISCAL YEAR 1989

cates 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
Other
Agency debt not subject to limit:
Department of Defense
Department of Interior
Export-Import Bank
Small Business Administration
Postal Service
Federal Deposit Insurance Corp
Federal Savings and Loan Insurance Corp.
Tennessee Valley Authority
Participation certificates1
Total, Federal debt not subject to
limit
Gross Federal debt subject to statutory limit
Unamortized discount on zero-coupon bonds
Other debt subject to limit, and adjustments
Total, debt subject to statutory limit-

1986
actual

1987
actual

1988
estimate

1989
estimate

1,746,112
383,919

1,897,836
457,444

2,025,083
556,473

2,152,104
673,184

2,130,031

2,355,280

2,581,556

2,825,288

15,000
601

15,000
600

10,000
599

5,000
599

40
15
6
67
250
442

22
13

10
8

9
8

1,625
1,030

74
250
200
920
1,380
830

74
250
703
4,506
1,380

74
250
470
6,106
1,380

19,076

19,289

17,530

13,896

2,110,955

2,335,991

2,564,026
7,904
23

2,811,392
7,728
23

2,110,975

2,336,014

2,571,954

2,819,143

* $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 as amended.
The only categories now included are the debentures issued by the
Federal Housing Administration and the participation certificates
sold in 1968. These securities comprised 26% of all agency debt at
the end of 1987. However, because the participation certificates will
mature during 1988 and because the Federal Deposit Insurance
Corporation and Federal Savings and Loan Insurance Corporation
have begun to borrow in large amounts, the agency securities
subject to statutory limit are estimated to comprise only 4% of
total agency debt at the end of 1989.
Most of the agency debt not subject to the general statutory limit
is, however, subject to separate statutory limits. For example, the
Tennessee Valley Authority was first authorized to issue revenue
bonds to finance power facilities in 1959. The limit was $750 million outstanding. Subsequently, in order to enable TVA to finance

SPECIAL ANALYSIS A

A-ll

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 final significant portion of the debt subject to statutory limit
is the unamortized discount on zero-coupon bonds. As explained on
pages E-30 to E-32, it is assumed that this year the Treasury will
sell zero-coupon bonds to Mexico with a par value of $10 billion at
a cash price of $2 billion. For calculating debt held by the public
and gross Federal debt, these bonds will be measured in the budget
at their initial cash price plus the amortized discount. For calculating debt subject to statutory limit, however, it is required by law
that they be counted at par. Therefore, these bonds increase the
debt subject to limit relative to the other debt aggregates by an
amount equal to the difference in valuation, i.e., by the unamortized discount. As shown in table E-10, it is assumed that the
unamortized discount decreases from $8,000 million at the time of
sale to $7,904 million at the end of 1988 and to $7,728 million at
the end of 1989.
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 $2,336.0 billion at the end of
1987 and is estimated to rise to $2,819.1 billion by the end of 1989.
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 FFB
debt, the unamortized discount on zero-coupon bonds, and the
FSLIC notes.
Methods of changing the debt limit—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
1980-87 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

A-10

THE BUDGET FOR FISCAL YEAR 1989

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 and issuances of new securities, including 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
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 the 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 several
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.

SPECIAL ANALYSIS A

A-ll

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.17 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
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 numerous
times since the new procedure went into effect.
Recent changes in the debt limit—The statutory debt limit was
raised to $2,111 billion on August 21, 1986. This was sufficient for
the Treasury to keep the trust funds fully invested at the beginning of September. At the end of September, however, as at the
same time in the two previous years, Treasury could not fully
invest the trust funds. In anticipation of this problem, Treasury
had postponed or reduced the auctions of some securities. It had
also made further use of the Federal Financing Bank (FFB). As
explained previously, FFB debt is not subject to the general statutory debt limitation, so on several occasions beginning a year earlier Treasury had reduced the amount of debt subject to limit by
issuing FFB securities to the civil service retirement and disability
trust fund in place of regular Treasury securities. This enabled
Treasury to raise cash by selling to the public an equal amount of
securities that were subject to the debt limit. In September 1986
the Treasury issued FFB debt up to FFB's own statutory limit of
$15 billion. The FFB securities had the same interest rates and
maturity dates as the regular Treasury securities that they replaced.
On the last day of September 1986, however, as at the same time
in the two previous years, Treasury was not able to invest the trust
funds fully. An amount of $17.9 billion was supposed to be invested
for the civil service retirement and disability trust fund; during the
first three days of October additional funds were supposed to be
invested for the social security trust funds, the military retirement
17 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.

A-10

THE BUDGET FOR FISCAL YEAR 1989

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.
The course of the debt limit legislation during 1987 was closely
tied to efforts by the Congress and the Administration to control
the budget deficit. Specifically, it was an outgrowth of the GrammRudman-Hollings Act of 1985 (the Balanced Budget and Emergency
Deficit Control Act of 1985). The Gramm-Rudman-Hollings proposal
was designed to eliminate the deficit in a series of steps over
several years by setting annual deficit targets and establishing a
mechanism to enforce them. During the fall of 1985 this proposal
was offered as an amendment to the debt limit bill before the
Congress at that time. After lengthy consideration the debt limit
bill was enacted incorporating a revised version of this amendment, but subsequently the Supreme Court declared a key part of
the enforcement mechanism to be unconstitutional. Proposals were
made to develop a substitute, and debt limit legislation again provided a vehicle.
The first critical date in 1987 was May 15, the expiration date for
the temporary increase of the debt limit from $2,111 billion to
$2,300 billion. Until that time the Treasury was able to conduct its
normal debt financing operations, and on that date a new law was
enacted temporarily increasing the limit to $2,320 billion through
July 17.
On June 24, 1987, Congress enacted a budget resolution for fiscal
year 1988. The resolution stated that the appropriate level of debt
subject to limit was $2,565.1 billion. A joint resolution specifying
this amount as the debt limit was deemed to have passed the
House and was sent to the Senate for its consideration. This joint
resolution became the vehicle for subsequent proposals to revise
the budget process.
In the absence of further legislation, the debt limit dropped to
$2,111 billion on July 18. Treasury had to suspend the auction of
bills and notes; to stop the sales of bills, notes, savings bonds,
special issues of the State and local government series, and all

SPECIAL ANALYSIS A

A-ll

other securities; and to cease the investment of trust funds and all
other U.S. Government accounts. Treasury bills that matured thus
had to be redeemed with cash. In order to provide more time to
consider budget control measures, Congress passed a bill on July 29
restoring the debt limit to $2,320 billion through August 6. The
President signed the bill on July 30, and the Treasury immediately
rescheduled a large amount of auctions in order to raise needed
cash.
Congressional deliberations on budget control were not completed in time to prevent this temporary debt limit increase from
expiring. On August 7, 1987, the debt limit again reverted to $2,111
billion. On the same day Congress voted to raise the debt limit to
$2,352 billion through September 23, and the President signed the
legislation on August 10. Treasury thus had to suspend the sales of
all securities very briefly. Treasury had previously not scheduled
certain major auctions because of the uncertainty about the debt
limit but scheduled them as soon as the temporary legislation was
enacted.
On September 24 the temporary debt limit expired, and the limit
fell for a third time to $2,111 billion. As before, Treasury had to
postpone the auctions and sales of all securities. However, on that
same day, Congress passed the joint resolution on the debt limit
amended to incude several changes to the budget process. The
principal provision—the Balanced Budget and Emergency Deficit
Control Reaffirmation Act of 1987—revised the annual deficit targets and established a new enforcement mechanism in place of the
one declared unconstitutional. The new debt limit itself was
changed from the amount specified in the congressional budget
resolution. Instead of the $2,565.1 billion declared appropriate for
fiscal year 1988, the joint resolution was amended to raise the limit
to $2,800 billion in order to carry the Government into 1989. This
limit has no expiration date. The President signed the legislation
on September 29, 1987.
The new limit of $2,800 billion is more than the $2,572.0 billion
of debt subject to statutory limit that is estimated to be outstanding at the end of 1988. The limit is, however, less than the $2,819.1
billion estimated to be outstanding at the end of 1989. It is thus
estimated that calendar year 1988 will be the first calendar year
since 1968 that Congress will not have to enact new debt limit
legislation. However, it is estimated that a further increase in the
limit will be necessary during fiscal year 1989 in order for the
Federal Government to meet its obligations.

A-10

THE BUDGET FOR FISCAL YEAR 1989

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.18 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
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 the 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 unaffected. An increase in
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 borrowing from the public).
Federal funds borrowing is unchanged.
Federal funds borrowing consists almost exclusively of the Treasury issuing 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
18

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

SPECIAL ANALYSIS A

A-ll

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

Federal funds surplus
or deficit ( — )
Means of financing other
than borrowing:
Decrease or increase
( — ) in Treasury
operating cash balance..
Increase or decrease
( - ) in:
Checks outstanding,
etc 2
Deposit fund
balances3
Seigniorage on coins
Proceeds from the sale of
loan assets with
recourse
Total, means of
financing other
than borrowing..
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
Total,
requirements
for Federal
funds
borrowing
subject to debt
limit
Increase or decrease ( — )
in unamortized discount
on zero-coupon bonds
Increase in other 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

1987 actual

1988 estimate 1989 estimate 1990 estimate 1991 estimate 1992 estimate 1993 estimate

-223,103 -244,204 -242,157 -228,282 -216,720 -199,916 -186,183

-5,052

16,436

2,497

287

3,281

-1,840
458

-280
375

-896
528

698

270

-3,937

17,516

3,183

1,791

413

-4,759

213

-1,759

-3,634

556

578

597

618

556

578

597

618

-4,601

150

-41

-225,037 -228,036 -247,365 -232,327 -215,993 -199,358 -185,524

7,904

-176

-190

-206

-224

-242

235,940

247,189

232,137

215,787

199,134

185,282

1
225,038

2,336,014 2,571,954 2,819,143 3,051,280 3,267,067 3,466,201 3,651,483

* $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.
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, and
profit on sale of gold.
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.
2

A-10

THE BUDGET FOR FISCAL YEAR 1989

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). 19 A small
portion may be financed by certain Federal funds (or certain deposit funds 2 0 ) selling their holdings of Federal debt. Another small
portion may be financed by certain Federal funds selling debt that
is not subject to the statutory limit. The remainder of the Federal
funds deficit can only be financed by selling debt subject to the
statutory limit. This ordinarily comprises most of the total amount
to be financed. In addition to this financing, the debt subject to
limit may also increase because of an increase in the unamortized
discount on zero-coupon bonds, as explained previously on pages E 30 to E-32 and pages E-34 to E-35. However, zero-coupon bonds
were not issued in past years and, as shown in table E - l l , the
change in unamortized discount is assumed to be significant only
in 1988. Consequently, the Federal funds deficit approximately determines the increase in debt subject to statutory limit.
In 1987, for example, the total Federal funds deficit to be financed was $223.1 billion. The "means of financing other than
borrowing" required an additional $3.9 billion of financing, primarily because of the increase in Treasury cash balances. Certain
Federal funds and deposit funds decreased their holdings of Federal debt by $1.8 billion, which reduced the need for still further
borrowing; and certain Federal funds increased their debt outstanding that was not subject to limit by $0.2 billion, which replaced an equal amount of debt that was subject to limit. Therefore, a total of $225.0 billion had to be borrowed subject to the debt
limit. The increase in debt subject to limit in 1987 was thus approximately equal to the Federal funds deficit.
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 never have any 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
1 9 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.
2 0 Only those deposit funds classified as Government accounts.

SPECIAL ANALYSIS A

A-ll

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 1986 (just as it also had not been normal at the ends of 1984
and 1985). The statutory debt limit prevented Treasury from fully
investing this trust fund on the last day of 1986 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 $5.2 billion at the end of 1986. In terms of table E 11, this uninvested cash balance provided $5.2 billion to finance the
Federal funds deficit by an increase in checks outstanding, etc.,
instead of borrowing. Consequently, the debt subject to limit at the
end of 1986 was $5.2 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 $5.2
billion.
The full investment of the trust fund occurred by October 1986.
This was accomplished by issuing $5.2 billion of securities subject
to the debt limit, which would have been issued in the previous
fiscal year under normal circumstances. The counterpart to this
was a decrease in checks outstanding, etc., by $5.2 billion compared
to the amount it would have been under normal circumstances.
Thus, the increase in debt subject to limit during fiscal year 1987
was $5.2 billion higher compared to the Federal funds deficit than
it would have been under normal circumstances. The issuance of
these securities early in fiscal year 1987 cancelled out the effect on
the level of debt of not having been able to issue them at the end of
fiscal year 1986. As a result, the amount of debt subject to limit at
the end of 1987 was not affected by the delay in fully investing the
civil service retirement trust fund at the end of 1986.
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 1988 and 1989 the debt subject to limit is estimated to

A-10

THE BUDGET FOR FISCAL YEAR 1989

increase by $483.1 billion, whereas the debt held by the public is
estimated to increase by $254.3 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
other items shown). In order for the debt subject to limit to remain
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 Federal Government deficit of zero 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 achieve a balance in the Federal funds alone
than it is to achieve 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 1993 that are shown in tables E-3 and E - l l . In 1993
the Federal Government as a whole is estimated to have a $23.3
billion deficit, which requires it to borrow $22.6 billion from the
public. Nevertheless, the debt subject to limit increases by $185.3
billion, which is several times greater. The reason is that the
Federal funds have a deficit of $186.2 billion. The Federal Government as a whole is able to have a relatively small deficit, because
the trust funds have a surplus of $162.9 billion, which is almost as
large as the Federal funds deficit.
The same conclusion can alternatively be illustrated by comparing the trends in borrowing from the public and borrowing subject
to the debt limit. From 1987 to 1993, Table E-3 shows that annual
borrowing from the public decreases by $129.1 billion. This is in
line with the $127.2 billion decrease in the total Government deficit. Table E - l l shows, however, that the annual rise in the debt
subject to limit decreases only by $39.8 billion. This difference of
$89.3 billion is mostly because of a $90.3 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 pertains to the difficulty in preventing a continual rise in the gross Federal debt. Gross Federal debt is nearly

SPECIAL ANALYSIS A

A-ll

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: Government-guaranteed borrowing and borrowing by Governmentsponsored enterprises. The Federal Government also exempts the
interest on some obligations from income taxation.
Government-guaranteed borrowing.—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 $60.4 billion in 1987 and is estimated to be $20.8 billion in
1988 and $17.0 billion in 1989. Special Analysis F, "Federal Credit
Programs," presents detailed data on guaranteed loans and estimates the subsidies that are provided by loan guarantees. Part 6b
of the Budget, "Federal Credit," also discusses Federal credit and
explains the Administration's reform proposal for the control of
Federal credit.
Government-sponsored enterprise borrowing.—The other type of
federally assisted borrowing is borrowing by Government-sponsored
enterprises (GSEs), which are discussed in Special Analysis F.
These enterprises were established and chartered by the Federal
Government to perform specific credit functions but are now, with
one exception, entirely privately owned. The guidance for 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, set forth several criteria for determining whether an activity should be included in the budget.

A-10

THE BUDGET FOR FISCAL YEAR 1989

Based on the characteristics of the GSEs that existed in 1967, the
Commission recommended that the budget exclude those GSEs that
are entirely privately owned.21 Thus, the transactions of these
enterprises are not included within the Federal budget, and their
debt is not part of gross Federal debt. However, because they
represent Federal programs, the Commission also recommended
that their loans and borrowing be included at a prominent place in
the budget documents and that their complete financial statements
be published in the Budget Appendix.
Seven GSEs were created some years ago as financial intermediaries to assist private borrowers in housing, agriculture, and
higher education. 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
Mortgage Association, the Federal Home Loan Banks, and the
Student Loan Marketing Association are required to obtain Treasury approval of the terms and timing of specific offerings. The
Farm Credit System, composed of three GSEs regulated by the
Farm Credit Administration—the Banks for Cooperatives, Federal
Intermediate Credit Banks, and Federal Land Banks—borrows by
issuing consolidated Farm Credit bonds and notes rather than securities under each enterprise's separate name.
Six other GSEs have been created in the past three years, some
of which are also financial intermediaries. The College Construction Loan Insurance Association was established to insure loans
made for college construction and renovation, a purpose similar to
the purposes of the earlier GSEs though to be accomplished by a
different method of assistance. The others, however, were primarily
established to assist either a Federal agency or previously existing
GSEs. The Financing Corporation (FICO) was created to recapitalize the Federal Savings and Loan Insurance Corporation, a Federal
agency that insures deposits in savings and loan associations and
has had severe financial problems of its own because of the financial problems of the thrift industry. Four others were created to
assist the Farm Credit System, which has had severe financial
problems because of the financial problems of the farm sector. The
Farm Credit System Capital Corporation, however, established
under 1985 legislation, had its charter revoked by the legislation
signed by the President in January 1988 that created three new
GSEs. These are the Farm Credit System Financial Assistance
21 Report of the President's Commission on Budget Concepts (Washington: U.S. Government Printing Office,
1967), pp. 29-30.

SPECIAL ANALYSIS A

A-ll

Corporation, the Farm Credit System Insurance Corporation, and
the Federal Agricultural Mortgage Association.
Government sponsorship of these enterprises has traditionally
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 have included 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; their securities are eligible as collateral for public deposits;
they are exempt from Federal, State, and local corporate income
taxation; the interest on their debt securities is exempt from State
and local income taxation; they are exempt from SEC registration;
and they have authority to borrow from the Federal Government
in amounts that range up to $4 billion. In particular instances, one
or another GSE may have a further specific benefit such as partial
Federal or GSE ownership, a Federal guarantee of its securities, or
the Federal Government paying part of the interest on its debt.
Because of these specific advantages and the overall Federal sponsorship, the enterprises have been perceived by the securities
market to have a special relationship with the Federal Government. As a result of all these factors and despite the absence of
Federal guarantees (with one exception), the GSEs have borrowed
at lower interest rates than they would otherwise have had to pay.
The operations of the GSEs are not subject to the Federal budget
review process; and the economic assumptions on which their borrowing estimates are based for 1988-89 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 borrowing figures for
the sector 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.
Except for the Financing Corporation (FICO), the borrowing of the
newly created GSEs is not available for this year's budget and thus
is not shown in table E-12.
GSE borrowing 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 197880, however, and then expanded with only one interruption to $64.1
billion in 1985. Borrowing increased significantly again in 1986,
reaching $103.3 billion, and was $124.8 billion in 1987. The GSEs
estimate that it will be around $97 billion in 1988 and 1989.

A-10

THE BUDGET FOR FISCAL YEAR 1989
Table E-12. BORROWING BY GOVERNMENT-SPONSORED ENTERPRISES

(In billions of dollars)
Borrowing or repayment ( - )
Description

1986
actual

1987
actual

1988
estimate

1989
estimate

Debt
outstanding
end 1989
estimate

2.9

5.8

6.1

6.6

34.0

37.5

45.2

27.6

27.0

277.8

0.4
-2.6
-3.6

0.4
-2.7
-7.3

-0.2
-0.1
-0.5

0.3
0.3
-0.5

9.0
10.4
34.3

14.5
54.0

17.0
0.5
65.6

9.9
3.9
51.0

13.0
3.8
47.0

128.0
8.1
323.4

103.1

124.4

97.7

97.4

825.0

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

-0.2

-0.4

_ *

Total, borrowing by Government-sponsored enterprises

103.3

124.8

97.7

97.4

Education: Student Loan Marketing Association
Housing and Urban Development: Federal National
Mortgage Association
Farm Credit Administration:2
Banks for cooperatives
Federal intermediate credit banks
Federal land banks
Federal Home Loan Bank Board:
Federal home loan banks
Financing Corporation
Federal Home Loan Mortgage Corporation
Total

0.8
824.2

* $50 million or less.
1 Because data are unavailable, this table excludes College Construction Loan Insurance Association, Farm Credit System Capital Corporation,
Federal Agricultural Mortgage Corporation, Farm Credit System Financial Assistance Corporation, and Farm Credit System Insurance Corporation.
2 The debt represented by consolidated notes and bonds is attributed to the respective Farm Credit banks.

The major Government-sponsored borrowers are currently 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 1987 they borrowed $110.8 billion altogether; during
1988-89 they are estimated to borrow $74-79 billion each year. For
these three years combined, their borrowing is 82% of total GSE
borrowing. This high level of borrowing is almost entirely being
carried out through FHLMC's and FNMA's programs of mortgagebacked securities. Under both of these programs the GSE purchases 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 1989, FHLMC and FNMA
are estimated to have raised their combined share of total Government-sponsored debt from 42% in 1980 to 73%.
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 thereby also support the housing sector. The
Student Loan Marketing Association is also estimated to borrow
significantly.
In contrast, the three GSEs that comprise the Farm Credit
System contracted their net lending and borrowing in 1986 and

SPECIAL ANALYSIS A

A-ll

1987. As a group, they are estimated to neither expand nor contract much during 1988 and 1989. These past results and projections of the future reflect in part the recent economic difficulties of
the farm sector and of the Farm Credit System itself. However, the
three new GSEs designed to support the Farm Credit System and
other agricultural lenders are expected to begin operation during
this period. Estimates of their borrowing are not available to include in table E-12, but the Farm Credit System Financial Assistance Corporation is expected to borrow about $2 billion in the next
two years.
Tax exemption.—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, comprised over half of all new long-term, tax-exempt
issues from 1979 through 1985. In 1987 the total tax-exempt borrowing (net of repayments) estimated in the Federal Reserve flowof-funds accounts was $30.1 billion. This was down from the $115.6
billion borrowed in 1986, which was abnormally high due to transitory reasons, and also below the borrowing during 1982-85. 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 (GSEs) are presented both as total amounts for the sector as
a whole and as net amounts. The net amounts include 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 GSE
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 GSE borrowed in
order to finance its purchase.

A-10

THE BUDGET FOR FISCAL YEAR 1989
Table E-13. FEDERAL AND FEDERALLY ASSISTED BORROWING
(In billions of dollars)
Borrowing or repayment ( - )
Description

Federal borrowing from the public 1
Guaranteed borrowing (net) 2 3
Less increase in guaranteed loans held by Federal agencies: 3
Government National Mortgage Association
Primary guaranteed borrowing4
Borrowing by Government-sponsored enterprises5
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
Government-sponsored borrowing
Total, Federal and federally assisted borrowing

1987
actual

1988
estimate

1989
estimate

Debt
outstanding
end 1989
estimate

151.7

127.2

127.0

2,152.1

59.9

20.7

16.6

544.8
*

-0.4

-0.1

-0.4

60.4

20.8

17.0

554.8

124.8
3.3

97.7
-1.5

97.4
0.5

824.2
4.2

_ *
4.9
0.1

3.6
4.2

3.9
- 0_. *9

4.3
0.4

21.0
31.3*

1.1
-2.3

-0.4

0.2

3.9
0.8

115.0

96.7

92.0

757.9

327.1

244.7

236.0

3,454.8

_ *

* $50 million or less.
1 See table E-1.
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. Excludes GSEs listed in footnote 1 to that table.
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 latter amount is subtracted
out above as an increase in Government-sponsored debt held by Federal agencies.

Federal borrowing from the public to finance the deficit comprises nearly half of total Federal and federally assisted borrowing
in 1987 and a little over half in 1988 and 1989. While Federal
borrowing declines from 1987 to 1988, GSE borrowing and guaranteed borrowing also decline, and they decline even more in total.
The decline in GSE borrowing is largely due to a slowdown in the
rapid expansion of the FNMA and FHLMC programs of mortgagebacked securities; the decline in guaranteed borrowing is largely
due to a much smaller increase in Federal Housing Administration
(FHA) insured loans. Borrowing by all three sectors is about the
same in 1989 as in 1988. GSE borrowing is the major part of
federally assisted borrowing during 1988 and 1989. As an average
of the two years, GSE borrowing is $94.3 billion whereas guaranteed borrowing is $18.9 billion.
The following chart depicts the trends in Federal and federally
assisted borrowing from 1968 to 1989. The series are volatile, and

SPECIAL ANALYSIS A

A-ll

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 times strongly related to the
pattern of recession and recovery.
Total Federal and federally assisted borrowing increased steadily
and substantially during periods of recession from $80.8 billion in
1979 to $280.5 billion in 1983. With a subsequent lower deficit as
the economy recovered and with federally assisted borrowing not
rising very much, the total was lower in 1984 and 1985. However,
in 1986 Government-sponsored borrowing rose by $45.3 billion, Federal borrowing by $39.0 billion, and guaranteed borrowing by $13.0
billion, for a combined increase of $97.3 billion. This produced a
record $374.0 billion of Federal and federally assisted borrowing in
1986. In 1987 a sharp decrease in Federal borrowing brought down
the total by $46.9 billion despite an increase in GSE and guaranteed borrowing. The total is estimated to decrease another $82.3
billion or 25% in 1988 and to maintain about the same level in
1989.
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 1980-87 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 estimates
for 1988 and 1989 in table E-13 suggest that the upward trend of
relative Federal participation in the credit market may no longer
be continuing.

A-10

THE BUDGET FOR FISCAL YEAR 1989

Federal and Federally Assisted Borrowing
$ Billions

$ Blilfons

400

Fiscal Yscrs

1 —

Estimate

SPECIAL ANALYSIS

A-ll

Table E-14. FEDERAL GOVERNMENT FINANCING AND DEBT
(In billions of dollars)
1987
actual

Estimate
1988

1989

1990

1991

1992

1993

FINANCING
Surplus or deficit ( - )
On-budget
Off-budget
Means of financing other
than borrowing from
the public:
Decrease or increase
( - ) in Treasury
operating cash balance..
Increase or decrease
( - ) in;
Checks outstanding,
etc. 1
Deposit fund balances....
Seigniorage on coins.
Proceeds from the sale of
loan assets with
recourse
Total, means of
financing other
than borrowing
from the public

-146.7
-150.4
-129.5
-104.2
-79.3
-51.1
-23.3
(-170.0) (-183.5) (-174.7) (-162.5) (-149.1) (-131.0) (-116.2)
(45.1)
(58.3)
(36.8)
(69.9)
(79.9)
(92.9)
(19.6)

-5.1

16.4

5.2
-1.8
0.5

2.3
-.3
0.4

2.6
-.9
0.5

0.7

0.3

0.6

-1.3

19.5

2.5

0.6

Total, requirements
for borrowing
from the public

-151.7

-127.2

-127.0

-103.6

-78.7

-50.5

-22.6

Change in debt held by
the public

151.7

127.2

127.0

103.6

78.7

50.5

22.6

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

2,350.3

2,574.4

2,816.6

3,043.9

3,259.9

3,459.3

3,644.8

5.0

7.2

8.7

9.1

9.2

2,355.3

2,581.6

2,825.3

3,053.0

3,269.2

3,468.5

3,654.0

457.4
1,897.8
212.0
1,685.8

556.5
2,025.1

673.2
2,152.1

797.3
2,255.7

934.7
2,334.4

1,083.6
2,384.9

1,246.5
2,407.5

A-10

THE BUDGET FOR FISCAL YEAR 1989
Table E-14. FEDERAL GOVERNMENT FINANCING AND DEBT—Continued
DEBT SUBJECT TO STATUTORY LIMITATION, END OF YEAR
(In billions of dollars)

Debt issued by Treasury
Treasury debt not subject to
limitation 2
Agency debt subject to
limitation
Unamortized discount on
zero-coupon bonds
Total, debt subject to
statutory limitation 3 .

Estimate

1987
actual

1988

1989

1990

1991

1992

1993

2,350.3

2,574.4

2,816.6

3,043.9

3,259.9

3,459.3

3,644.8

-15.6

-10.6

-5.6

-.6

1.3

0.3

0.4

7.9

7.7

7.5

7.3

7.1

6.9

2,572.0

2,819.1

3,051.3

3,267.1

3,466.2

3,651.5

2,336.0

Besides checks outstanding, includes accrued interest payable on Treasury debt, miscellaneous liability accounts, allocations of special drawing
rights, and, as an offset, cash and monetary assets other than the Treasury operating cash balance, miscellaneous asset accounts, and profit on
sale of gold.
2 Consists of Federal Financing Bank debt and other Treasury debt not subject to statutory limitation.
3 The statutory debt limit is $2,800 billion.
1

SPECIAL ANALYSIS F
TABLE OF CONTENTS

Page

I. Introduction

F-3

II. Controlling Federal Credit Programs

F-4

III. The Credit Budget:
A. Credit Budget Principles

F-9

B. Congressional Credit Budget Controls

F-10

C. Direct Loans

F-15

D. Loan Guarantees

F-19

IV. Government-Sponsored Enterprises

F-24

V. Contingent Liabilities and Federal Deposit Insurance

F-34

VI. Changes in the Quantity and Price of Federal Credit

F-37

VII. Federal Credit Subsidies

F-40

VIII. Defaults

F-46

IX. Federal Financing Bank

F-48

X. Loan Asset Sales to the Public

F-50

XI. Leasing

F-55

XII. Tax-Exempt Credit

F-57

XIII. Summary

F-62

XIV. Appendix

F-62

F-1

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 1987
Table F-6 Summary of Direct Loan Transactions
Table F-7 Summary of Primary Guaranteed Loan Transactions
Table F-8 Some Benefits Enjoyed by Government-Sponsored Enterprises
Table F-9 Summary of Lending and Borrowing by Government-Sponsored
Enterprises
Table F-10 Contingent Liability of the Federal Government
Table F - l l Summary of Outstanding Federal and Federally Assisted Credit..
Table F-12 Estimated Subsidy Costs for 1989 Direct Loan Obligations
Table F-13 Estimated Subsidy Costs for 1989 Guaranteed Loan Commitments
Table F-14 Direct Loan Write-offs and Guaranteed Loan Terminations for
Defaults
Table F-15 Summary of FFB Financing of Agency Activities
Table F-16 Loan Asset Sales to the Public
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 FFB Financing of Agency Activities
Table F-22 Federal Participation in Domestic Credit Markets

F-10
F-ll
F-ll
F-l2
F-15
F-l6
F-21
F-25
F-26
F-35
F-40
F-43
F-45
F-47
F-49
F-51
F-60
F-64
F-79
F-88
F-91
F-94

CHARTS

Page

Chart F - l Total Federal Credit Budget
Chart F-2 Used and Unused Balance of Enacted Limitations—Eximbank
Chart F-3 Government-Sponsored Enterprises and High Quality Corporate
Note Index: Spread Above Treasuries
Chart F-4 Federal Participation in Domestic Credit Markets
F-2

F-4
F-14
F-28
F-39

SPECIAL ANALYSIS F
FEDERAL CREDIT PROGRAMS
I. INTRODUCTION

The Federal Government is the Nation's largest financial intermediary. At the end of 1987, it held loans with a face value of $234
billion in its direct loan portfolio, which was 75 percent larger than
the loan assets of the largest commercial bank in the United
States. The Federal Government also had guaranteed loans with an
outstanding balance of $507 billion at the end of 1987. Governmentsponsored enterprises had an additional $581 billion of loans outstanding at the end of the year. Thus, directly or indirectly, the
Federal Government had influenced the allocation of $1.3 trillion
of outstanding credit to farmers, homeowners, small businesses,
exporters, utilities, shipbuilders, and State, local, and foreign governments. The accompanying chart compares the pattern of new
lending over the last two decades with the most recent patterns
and with estimates of future trends through 1993.
Federal credit is designed to meet various social or economic
goals that, for whatever reason, the private sector does not meet on
its own. 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 for credit programs, does not take into account
explicitly the most important aspect of Federal credit—the economic subsidy offered to borrowers. 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 and appropriations process
the subsidies provided by credit programs. The credit reform proposal is outlined in Part 6b, "Federal Credit," of the Budget of the
United States Government, FY 1989.
This special analysis presents data and information on the broad
spectrum of Government credit programs and policies from 1987

F-3

F-10

THE BUDGET FOR FISCAL YEAR 1989

Total Federal Credit Budget

through 1993. It examines some of the problems in controlling
Federal credit programs through existing budgetary processes and
summarizes how the administration's credit reform proposal would
address those problems. This document discusses the basis of the
credit budget and how the credit budget relates to appropriation
act limitations on direct loan obligations and guaranteed loan commitments. The direct and guaranteed loan transactions of the Government are presented in detail. It also outlines the credit activity
of Government-sponsored enterprises, describes trends in Federal
credit, presents estimates of Federal credit subsidies, and includes
discussions of other credit-related 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
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.

SPECIAL ANALYSIS F

F-ll

In some cases, the Government offers credit to borrowers for whom
no private source of credit is available. Compared to fully private
loans, the terms and conditions of Federal loans 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 to screen loan applications in a manner
common 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.
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 if they have little, zero, or even negative
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
available fund balances, which can be augmented by loan repayments and asset sales. Moreover, the budget treatment can be
different even for otherwise similar accounts because of differing
congressional practices. For all these reasons, the appropriations
process does not normally control directly the amount of new
direct loans extended.

F-10

THE BUDGET FOR FISCAL YEAR 1989

Second, guaranteed loan commitments, an important form of
credit, do not constitute outlays and are not reflected in the unified
budget except to the extent that defaults occur. 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. The credit budget
was a significant step forward because it provided a method of
controlling new activity; however, even 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.
OMB Circulars.—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. The circular places
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

SPECIAL ANALYSIS F

F-ll

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 for recommendation to the Congress to change the legislation so the
programs will conform to standards enunciated in Circular A-70.
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 management
improvement program.
Credit Reform Initiative.—Part 6b of the Budget 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.
Two new Federal credit revolving funds would be established
within the Department of the Treasury—one for the financing of
direct loans and the other for guaranteed loan insurance. Agencies
would continue to originate and close direct loans and make loan
guarantees as they do now. As they make obligations and commitments, information about their terms and conditions would be sent
to Treasury, which would oversee the subsidy estimate.
As borrowers draw down the obligated direct loans, the agency
would pay the subsidy component of the loan into the direct loan
revolving fund. This fund would provide the balance of the loan, or
non-subsidized financing portion, through borrowing from Treasury. The original borrower would pay interest and repayments of
principal to the lending agency, which in turn would pass these
amounts through to the direct loan revolving fund to repay the
financing portion. For loan guarantees, fees from the borrower and
the appropriated subsidy would be paid to the loan guarantee
revolving fund, which would assume responsibility to cover defaults. Excess balances of this fund would be available for use in
lieu of borrowing from Treasury.
Credit Vouchers.—The use of credit vouchers as an alternative
means for controlling Federal credit programs continues to be explored by the administration. Credit vouchers represent grants
equal to the subsidy portion of Federal credit programs. Individual
credit program recipients could receive a voucher for financial
assistance that could be used to obtain privately originated credit
instead of a Federal direct or federally guaranteed loan. For exam-

F-10

THE BUDGET FOR FISCAL YEAR 1989

pie, vouchers could be used to lower the amount borrowers would
need to obtain from private sources (compared with what an individual would need without Federal assistance) and thereby lower
borrowing costs. Alternatively, a voucher could be used to buy
private loan insurance that, in turn, would enable a borrower to
get a private loan at a lower cost.
The use of vouchers to provide congressionally mandated subsidies is not new—various types of housing voucher programs for
rental subsidies have been in effect since the early 1970s. Government housing support through vouchers may be preferable to other
producer or consumer subsidies because of the perception that this
type of assistance is less costly to the taxpayer and offers recipients
a wider range of housing choices.
Federal credit vouchers could allow a direct subsidy similar to
the proposal to appropriate the subsidy component of Federal
loans—credit voucher amounts could be budgeted and appropriated
on an equal basis with other Federal grants, transfers, and purchases—and the Federal Government could remove itself from the
rest of the process. As a result, vouchers would provide assistance
to targeted borrowers while simultaneously encouraging the maximum amount of private sector involvement through private origination, risk bearing, and servicing of loans. However, unless vouchers are specifically tailored to the needs of individual borrowers,
they may be regressive in their impact. That is, if two borrowers,
one more creditworthy than the other, are given vouchers with the
same value, the less creditworthy individual would not be able to
obtain the same amount of credit as the more creditworthy recipient.
Using private sector expertise in the origination and servicing of
loans is more efficient for the Government in two ways. First,
private sector review of applicants' creditworthiness will ensure
that the least risky among those eligible for subsidies will receive
credit. This selection process will result in the least distorted allocation of credit as possible consistent with providing Federal assistance. Also, from the Government's perspective, vouchers are more
efficient than making direct loans and loan guarantees that typically have high administrative and servicing costs.
From the perspective of the recipient of Federal credit assistance, borrowers are able to choose the least costly loan in a competitive environment. More importantly, borrowers are able to establish relationships with private lenders that could help them
obtain unsubsidized credit in the future.

SPECIAL ANALYSIS F

F-ll

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 direct 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. In the unified budget, budget
authority for direct loan programs is required only when collections are insufficient to finance new loans for those programs
funded through revolving funds; budget authority for loan guarantees is needed only to pay for defaults when other resources are
insufficient to fund those costs. In contrast, credit authority is
measured on a gross basis and does not reflect repayments of loans
or defaults on loan guarantees. As a result, credit authority is a
needed tool because subsidies are incurred for all new direct loans
and loan guarantees, regardless of the extent to which new loans
are offset by repayment of 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 Veterans Administration
runs the home loan guaranty program, which is one of the largest
credit programs that offers a guaranty for less than the full value
of the loan. As the result of recently enacted legislation, the Federal Government's amount of guaranty, and therefore contingent
liability, changed to: (1) 50 percent for loans of $45,000 or less; (2)
the lesser of 40 percent or $36,000 is guaranteed (with a minimum
of $22,500) for loans greater than $45,000; and (3) the lesser of 40
percent or $20,000 is guaranteed for manufactured homes. In approximately 75 percent of all VA guaranty loan foreclosures, VA
acquires the property from the lender instead of paying the
amount of the guaranty. This has the effect of limiting the lenders
risk to less than the amount of the stated guaranty.
In the aggregate, of the $507 billion of guaranteed loans outstanding in 1987, the Government's contingent liability was $419

F-10

THE BUDGET FOR FISCAL YEAR 1989

billion or 83 percent. Excluding the VA, the contingent liability
was $354 billion for $361 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)
1987 actual

1988 estimate

1989 estimate

Veterans Administration mortgage guarantees:
Contingent liability
Full principal

65.4
146.3

65.6
147.0

66.8
150.0

All other loan guarantee programs-.
Contingent liability
Full principal

353.6
360.7

372.1
380.8

383.6
394.9

419.0
507.0

437.7
527.8

450.4
544.8

Total outstanding:
Contingent liability
Full principal

Table F-2 provides the credit budget totals for 1985 through
1990. It also shows the major direct loan programs and loan guarantee programs.
For 1989, the administration proposes that the credit budget
decrease by $12 billion, or 8 percent below the 1988 totals. The
programmatic reasons for the changes in the credit budget totals
since 1987 are discussed below in the sections on direct loans and
guaranteed loans.
B. Congressional Credit Budget Controls
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 1989 budget proposes limitations for programs
whose funding amounts to 74 percent of the credit budget totals.
Approximately 38 percent of direct loan obligations and 80 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 shows the breakdown of loans subject to, and exempt from,
appropriations act limitation.
The first stage of congressional action on the credit budget is the
budget resolution. The congressional budget requires functional
allocations for direct loan obligations and primary loan guarantee

F-ll

SPECIAL ANALYSIS F
Table F-2. CREDIT BUDGET TOTALS
(In billions of dollars)
Actual
1985

Direct loan obligations:
Farmers Home Administration
Foreign military sales
Commodity Credit Corporation
Rural Electrification Administration
Veterans Administration
Export-Import Bank
Low-rent public housing
All other
Total obligations
Guaranteed loan commitments:
Federal Housing Administration
Veterans Administration housing
Guaranteed student loans
Export-Import Bank
Commodity Credit Corporation
Small Business Administration
Farmers Home Administration
Rural Electrification Administration
Foreign military sales
All other
Total

commitments1

Total credit budget

1986

Estimate
1987

1988

1989

1990

7.9
4.9
10.4
4.0
1.0
0.7
14.1
9.6

5.0
5.0
17.7
3.1
1.0
0.6

3.6
4.1
16.6
1.2
1.0
0.7

3.3
4.1
15.0
2.0
1.1
0.7

0.9
4.5
10.7
0.2
1.0
0.7

0.7
4.5
10.9
0.2
0.7
0.7

8.9

2.6

2.0

2.2

52.6

41.3

29.8

28.8

20.0

19.9

47.4
12.1
8.9
7.8
2.7
2.8
1.2

102.6
34.3
8.6
5.5
2.5
2.8
1.6

80.0
34.9
9.7
6.8
3.0
3.4
1.7
0.6

1.8

1.3

2.0

59.8
18.3
9.6
14.6
5.5
3.7
2.9
2.0
5.2
1.6

61.8
17.9
10.0
10.2
3.5
3.6
3.7
1.3
2.3
1.0

63.9
17.0
10.5
10.4
3.5
3.6
3.9
1.4
3.3
0.6

84.7

159.2

142.1

123.2

115.3

118.1

137.6

200.6

172.1

147.2

135.6

138.0

54.6

138.0

140.0

83.4

83.6

84.5

MEMORANDUM
Secondary guaranteed loan commitments....

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

Table F-3. CREDIT BUDGET PROGRAMS SUBJECT TO AND EXEMPT FROM APPROPRIATIONS ACTS
LIMITATIONS
(In millions of dollars)
Direct loan obligations
1987

Limitations enacted
Less: Unused balance of limitation,
expiring
Loan subject to limitation
Loans exempt from limitation
Total

1988

Guaranteed loan commitments
1989

1987

1988

1989

12,807

11,987

7,664

114,651

114,147

92,331

-2,259

-1,000

-456

-25,847

-35,876

-13,210

10,548
19,269

10,987
17,830

7,208
12,797

88,804
53,260

78,270
45,404

79,121
36,185

29,817

28,817

20,005

142,064

123,333

115,306

139,976

83,355

83,609

ADDENDUM
Secondary guarantees subject to limitation

F-10

THE BUDGET FOR FISCAL YEAR 1989

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 23 of the 31 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: (1) is a 1year limitation; (2) sets a ceiling on direct loan obligations and/or
guaranteed loan commitments; and (3) 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 1987 and 1988, and proposed limitations in 1989 for
credit programs.
Table F-4. CREDIT APPROPRIATIONS ACTS LIMITATIONS
(in millions of dollars)
Estimate

Actual 1987

Limitations on direct loan obligations:
Foreign military sales credit
Overseas Private Investment subsidies
Overseas Private Investment Corp
AID, Private sector loan subsidies
AID, Private sector revolving fund
Agricultural credit insurance subsidies
Agricultural credit insurance fund
Rural housing programs (FmHA)
Rural development insurance subsidies
Rural development insurance fund (FmHA)
Rural electrification and telephone revolving fund.
Rural telephone bank subsidies
Rural telephone bank
Education
PMA, Bonneville fund
Health resources and services
FHA loan subsidies
FHA fund
Housing for elderly or handicapped subsidies
Housing for elderly or handicapped
Nonprofit sponsor assistance
Nonprofit sponsor assistance subsidies
Bureau of Reclamation, Loan program

4,053

4,049

1,817
1,919

1,625
1,715

426
2,155

426
1,794

185
60
10

177
62

"79"

593

566

F-ll

SPECIAL ANALYSIS F
Table F-4. CREDIT APPROPRIATIONS ACTS LIMITATIONS—Continued
(in millions of dollars)
Actual 1987

Bureau of Indian Affairs
Highways and mass transportation
VA, Income security
VA, Mortgage insurance and other housing
Export-Import Bank subsidies
Export-Import Bank
SBA, Business loan and investment fund
SBA, Disaster loan fund
National Credit Union Administration, Central liquidity fund.
Total, limitations on direct loan obligations
Limitations on guaranteed loan commitments:
Overseas Private Investment Corporation subsidies
Overseas Private Investment Corp
AID private sector loan subsidies
AID housing and other loan subsidies
AID housing and other guarantee programs
Agricultural credit insurance subsidies
Agricultural credit insurance fund
Rural development insurance subsidies
Rural development insurance fund (FmHA)
Rural electrification and telephone subsidies
Economic development assistance
Health education assistance subsidies
FHA loan subsidies
FHA fund
Community development and other
Bureau of Indian Affairs
Export-Import Bank subsidies
Export-Import Bank
SBA, Business loan subsidies
SBA, Business loan and investment fund
Total, limitations on guaranteed loan commitments

Estimate
1988

16
48

680
86

693
85

600

12,807

11,987

200

145

125

2,498

2,793

115

96
..........

188"

100,000
150

96,000
144

11,355

14,601

114,651

114,147

139,976

83,355

ADDENDUM
Secondary guaranteed loan commitments:
GNMA, Guarantees of mortgage-backed securities
GNMA, Guarantees of mortgage-backed securities subsidies..
•$500,000 or less.

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) consistently exceeded the actual demand for loans between 1983 and 1986.
In 1987, however, the Congress reduced the limitation on direct
loans to better reflect actual program usage. The accompanying
chart illustrates the used and unused portions of the enacted limitations for 1983-1987.

F-10

THE BUDGET FOR FISCAL YEAR 1989

Limitations vs. Actual Use
Export-Import Bank, 1984 - 1987

•

Unused Limitation

Actual Use

$ Billions

14 -

Pfrret U>gn?

Quqrgntgej Lpqn?
- 12 -

- 10 -

6
-

4 2

Fiscal Years

There are several programs 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 1987 for several credit programs for
which the limitations exceeded use.
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.
For some programs, appropriations limitations on annual activity
are 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.

F-ll

SPECIAL ANALYSIS F

Table F-5. COMPARISON OF ENACTED LIMITATIONS WITH ACTUAL LOAN LEVELS FOR SELECTED
PROGRAMS IN 1987
(In millions of dollars)
Enacted
limitation

Direct loan obligations:
Agricultural credit insurance fund (FmHA)
Rural housing programs (FmHA)
Rural electrification and telephone revolving fund
Bonneville power administration fund
Housing for the elderly or handicapped fund
National Credit Union Administration, Central liquidity fund
Guaranteed loan commitments:
Agricultural credit insurance fund
Economic development assistance
Federal Housing Administration fund
GNMA, Guarantees of mortgage-backed securities
Export-Import Bank

Acutal loan
level

1,817
1,919
2,155
10
593
600

1,493
1,716
1,033

2,498
188
100,000
150,000
11,355

1,565

574
106

79,995
139,976
6,754

Unused
balance of
limitation

324
203
1,123
10
19
494
933
188
20,005
10,024
4,601

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. The effective point of control is earlier, at the time of the
original guaranteed loan commitment.
Third, loan limitations are unnecessary for programs where
other types of limitations exert effective control. For example, the
appropriation language for the P.L. 480 food assistance loan program (Title I) sets a limitation on the total program level, allowing
for a portion of the cost of shipping the commodities financed to be
paid for with program funds. The program limitation serves as an
effective ceiling on new loans while accommodating other requirements of the authorizing legislation.
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.

F-10

THE BUDGET FOR FISCAL YEAR 1989

Direct loan obligations in a given year do not result in an equal
volume of new direct loan disbursements in the same year for two
major 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
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 many loans 4 to 7 years or longer 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 or because the time to draw down the
funds has expired.
As shown in Table F-6, direct loan obligations are proposed to
decline between 1987 and 1989 from $29.8 billion to $20.0 billion.
Overall, the agricultural and business sectors will receive 63 percent and 30 percent, respectively, of the 1989 credit budget. Table
F-18 in the back of this special analysis presents data for Federal
direct loan programs from 1987 through 1993. 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)
Estimated

Actual
1986

Obligations
Loan disbursements
Change in outstandings
Outstandings

1987

1988

1989

28.8
20.0
41.3
29.8
42.2
27.7
35.2
34.5
11.2 - 1 9 . 0 - 1 6 . 2 - 1 0 . 6
251.6 234.2 218.0 207.4

1990

1991

1992

1993

19.9
25.6
-8.3
199.1

19.2
24.4
-2.4
196.7

18.3
23.2
-3.6
193.1

19.1
23.0
-4.4
188.7

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 support loan
rate. When market prices are below the price support 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 from
$16.6 billion in 1987 to an estimated $15.0 billion in 1988, loan
obligations remain at high levels following sustained increases in

SPECIAL ANALYSIS F

F-ll

agricultural production that resulted in lower crop prices and,
hence, higher Federal crop support outlays. In 1989, commodity
loan obligations are estimated to decrease to $10.7 billion. The
decrease is projected to result from the administration's plan to set
support prices closer to market clearing levels. The reduction of
artificially high price supports should reduce 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 price support loan rates closer to market prices.
This provision was intended to reduce the demands for Government price support loans.
The Farmers Home Administration (FmHA) makes loans for
purchasing and operating farms, disaster assistance, improving
rural housing, and developing rural community facilities. In 1989,
FmHA direct loan obligations are proposed to total $900 million,
which is significantly below the 1987 total of $3.6 billion. This
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
replace the FmHA housing programs with housing assistance provided through a voucher program similar to the program now
administered by the Department of Housing and Urban Development. Rural housing loans have proven to be a costly form of
assistance. In many cases recipients are financially able to secure
private credit and are, by definition, not the neediest rural residents. Vouchers would be targeted to low income residents and
would give them a wider range of housing choices and a portable
sudsidy.
The Export-Import Bank (Eximbank) provides direct loans to
finance U.S. exporters in meeting competition supported by foreign
official export credit agencies. The successful negotiations within
the Organization for Economic Cooperation and Development
(OECD) to reduce export subsidies have reduced the demand for
Eximbank credits in recent years. The proposed level in 1989 is
$705 million, a 2 percent increase above the 1988 enacted level.
Within the $705 million ceiling, Eximbank offers long-term loans
($435 million), medium-term loans ($250 million) and small business
loans ($20 million).
Rural Electrification Administration (REA) direct lending to
rural electric cooperatives is proposed to be terminated in 1989.
The administration proposes to increase the reliance of rural electric and telephone systems on private financing through the use of
partial REA guarantees of privately originated loans because the
goals of the REA program have largely been accomplished and
direct lending to financially healthy borrowers is very costly to the
taxpayer.

F-10

THE BUDGET FOR FISCAL YEAR 1989

Starting in 1989, the administration proposes to accomplish this
goal by making 80 percent guarantees of private loans to power
supply borrowers instead of the 100 percent guaranteed REA loans
disbursed by the FFB. In addition, starting in 1989, direct loans
previously made at 5 percent from the rural electrification and
telephone revolving fund would be made by private lenders with a
70 percent REA guarantee. Electric and telephone borrowers that
serve largely urban, suburban, or recreation areas, and telephone
borrowers who are subsidiaries of major telecommunications holding companies would not be eligible for such lending assistance.
Also, the administration proposes to take the necessary steps to
privatize the Rural Telephone Bank by 1995. This includes charging interest rates adequate to set aside $30 million per year to
repurchase Treasury-owned Class A stock of over $500 million (that
pays only a 2 percent annual dividend) and paying its administrative expenses.
In addition, the administration encourages privatization by proposing that any borrower with outstanding REA guaranteed loans
disbursed by the FFB have the opportunity to prepay them using
an 80 percent REA guarantee and without paying the required
prepayment premium. Further, outstanding direct loans of the revolving fund could be prepaid at a discount if the borrower agrees
not to seek REA assistance in the future. Overall, the administration's proposed reforms would result in outlay savings of $2.3 billion in 1989, while continuing to provide a comparable level of REA
guarantees of private loans consistent with the direct lending programs in 1988.
Foreign military sales (FMS) credit provides financing to foreign
governments and international organizations for procurement of
U.S. military equipment and services. The program increased from
$4.0 billion in 1988 to $4.5 billion in 1989. The increased level of aid
will enable foreign countries and international organizations to
procure additional military equipment and services. All of these
loans will be forgiven, thereby reducing debt service problems that
many countries receiving U.S. military aid are trying to resolve.
Proposed direct loan obligations for elderly or handicapped housing decrease from $574 million in 1987 to $350 million in 1989. 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 1989 budget
proposes to rely on SBA's guaranteed loan programs to assist small

SPECIAL ANALYSIS F

F-ll

businesses for business credit needs. Therefore, the budget proposes
to terminate new direct business lending in 1989.
The budget proposes to restrict eligibility for SBA direct loans to
those who are unable to qualify for credit elsewhere. As a result of
this change, the level of direct disaster loans is expected to decrease from $350 million in 1988 to $265 million in 1989.
The Veterans Administration (VA) offers direct loan financing
with a minimal down payment, called a vendee loan, to creditworthy individuals purchasing properties that VA has acquired
through the default of a guaranteed home loan. The vendee loan
program is similar to real estate owned programs managed by
many banks and lending institutions that acquire properties from
foreclosed mortgages. In 1989, the level of such loans is estimated
to be $959 million.
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 something approximating a Government direct loan financed by Government borrowing. 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
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

F-10

THE BUDGET FOR FISCAL YEAR 1989

coupon 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. 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
loans as widely available as they are currently without Federal
guarantees because of the inherent, and significant, uncertainty
about many borrowers' future income stream. In this case, the
subsidy will be quite large and will have a dramatic effect on the
reallocation of credit. 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
estimate demand and supply elasticity effects.
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 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 Government assistance, and increases the interest rates on
financing available to these borrowers.
Loan guarantees are used in a wide variety of programs. Loan
guarantees 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.

F-ll

SPECIAL ANALYSIS F

Data for guaranteed loans for 1987 through 1993 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 in the back of this special analysis provides
data for guaranteed loan programs for 1987 through 1993.
Table F-7. SUMMARY OF PRIMARY GUARANTEED LOAN TRANSACTIONS
(In billions of dollars)
Actual

Commitments
New guaranteed loans
Change in outstandings
Outstandings

Estimated

1986

1987

1988

1989

1990

1991

1992

1993

159.2
89.6
34.6
449.8

142.1
151.7
60.4
507.0

123.2
100.1
20.8
527.8

115.3
95.2
17.0
544.8

118.1
100.8
18.3
563.1

117.0
99.7
14.7
577.8

119.9
102.3
16.0
593.8

122.9
105.4
12.5
606.3

Guaranteed loan commitments are estimated to decline from
$142 billion in 1987 to $115 billion in 1989. Further, composition of
the guaranteed loan portion of the credit budget is proposed to
change. Housing programs accounted for 81 percent of guaranteed
loan commitments in 1987, and are expected to drop to 69 percent
by 1989. The major programmatic changes are discussed below.
Guaranteed loan commitments in 1987 for the Federal Housing
Administration (FHA) decreased by 22 percent over 1986. Commitments, which were $80 billion in 1987 compared to $103 billion in
1986, are expected to decline further to $60 billion in 1988, but
then rise slightly to $62 billion in 1989.
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 1987
were $34.9 billion and are expected to be $18.3 billion in 1988. As
with the FHA loans, VA loan activity is returning to pre-1987
levels; the 1987 levels rose due to low interest rates and refinancing. In 1989, new commitments are estimated to remain at about
$17.9 billion.
The Commodity Credit Corporation (CCC) provides loan guarantees for export sales that might not otherwise occur without Federal credit assistance. CCC guaranteed loan commitments for U.S.
exports are estimated to rise from $3.0 billion in 1987 to $5.5 billion
in 1988. The increase is a result of the Food Security Act of 1985
which established the CCC loan program level at $5.5 billion. For
1989, the amount requested has been lowered to $3.5 billion, reflecting a general weakness in demand for those loans.

F-10

THE BUDGET FOR FISCAL YEAR 1989

The guaranteed student loan program (GSL) provides guarantees
of education loans to graduate and undergraduate students and to
parents of dependent students. Commitments for the program increased by $1.2 billion from 1986 to 1987 due to unanticipated
administrative problems involving the processing of student aid
applications that pushed some borrowing into 1987 that would
otherwise have occurred in 1986. This has led to a projected decline
in 1988 commitments from 1987 levels due to the one-time borrowing surge in 1987. The level of GSL commitments is estimated at
$9.6 billion in 1988, a decrease of $0.2 billion from 1987.
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 $1.5 billion per year. The administration is proposing
to increase risk-sharing with lenders and State guarantee agencies
to reduce the incidence of default and reduce the cost of defaults
that do occur.
The Export-Import Bank (Eximbank) provides guarantees to facilitate U.S. exports. Guaranteed loan commitments rose from $5.5
billion to $6.8 billion between 1986 and 1987. In 1988, Eximbank
estimates that commitments will be $14.6 billion, as risk protection
continues to be important to U.S. exporters. The proposed level in
1989 is $10.2 billion. Within the $10.2 billion ceiling, Eximbank
offers long-term financial guarantees ($2.9 billion), medium-term
guarantees ($0.8 billion) and short and medium-term export insurance ($6.5 billion), which is provided by the Foreign Credit Insurance Association (FCIA). Eximbank is the sole owner of the FCIA
and approves most of FCIA's policy decisions.
The Rural Electrification Administration (REA) reform proposal
would make available a new program of 80 percent REA guarantees of private loans for power generation starting in 1989. Existing
100 percent REA guaranteed FFB direct loans would be phased out
at the end of 1988. In addition, a new program of 70 percent REA
guarantees of private loans would be available in 1989 to replace
the existing direct loan program which will be phased out at the
end of 1988. Total guaranteed loans of $1.3 billion are requested for
REA programs in 1989.
Foreign military sales (FMS) credit guarantees (that finance the
same activities as FMS direct loans discussed above) are being
refinanced at lower interest rates. Commercial financial institutions are expected to provide the funds to prepay foreign countries'
FMS guarantees held by the FFB; new 90 percent guarantees will
be issued to cover the commercial loans. In 1988, $5.2 billion guarantees will be refinanced; in 1989, the estimate is $2.3 billion.
The Maritime Administration has the authority to provide guarantees for construction mortgage loans to build U.S.-flag vessels in

SPECIAL ANALYSIS F

F-ll

the United States; however, no new commitments were made in
1987. The administration proposes that this program be terminated
starting in 1988. The proposed termination 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 1989, 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 SBA share of the loan guarantee will be reduced, allowing for
lower Federal costs to provide the same amount of loans. The
budget proposes a total of $3.6 billion in SBA guaranteed loans in
1989, including $2.9 billion in guaranteed general business loans;
$450 million for development company loans; $167 million for
Small Business Investment Companies (SBIC) obligations; and $40
million in new authority for Minority Enterprise Small Business
Investment Companies.
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
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
$138 billion in 1986 to $140 billion in 1987. A decrease to about $83
billion is estimated for 1988 and beyond.
The administration is proposing to deregulate the fee GNMA
mortgage-backed issuers earn servicing FHA and VA mortgages
underlying GNMA's securities. The servicing fee issuers currently
earn is set by GNMA at 44 basis points per annum (44/100 of one
percent) of the outstanding mortgage amount. This minimum fee
was originally established to assure that lenders could profitably
service the GNMA mortgage pools. However, the fee may be in
excess of that needed to protect the Government's interest and may
in fact lead to higher mortgage rates for borrowers. The administration proposes to deregulate the fee and increase minimum capital requirements for issuers to protect the Government against
issuers defaulting on their mortgage pools.

F-10

THE BUDGET FOR FISCAL YEAR 1989
I V . GOVERNMENT-SPONSORED ENTERPRISES

The Federal Government influences the allocation of credit in
many different ways: through direct loans; loan guarantees; insurance for deposits in commercial banks, savings and loans, and
mutual savings banks; and various other methods. One of the
primary methods of influencing the allocation of credit has been
through the creation and use of Government-sponsored enterprises
(GSEs). GSEs typically act as financial intermediaries directing
capital to particular sectors of the economy. Due to their perceived
"special relationship" with the Federal Government, GSEs historically have been able to borrow in the credit markets at yields
carrying only slight premiums above those of Treasury securities of
comparable maturity. The special relationship has arisen both from
the intangible nature of Government sponsorship and through
direct benefits that have been available to most GSEs. Table F-8
lists some of the benefits that have historically been available to
GSEs.

Table F-8. SOME BENEFITS ENJOYED BY GOVERNMENT-SPONSORED ENTERPRISES
Type of Benefit

Line of credit at Treasury
Exemption of corporate earnings from Federal income tax
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
3
4

Indirect line of credit through the FHLBs.
Federal Land Banks, Federal Intermediate Credit Banks, and Federal Land Bank Associations.
Entity newly created; data not available.
Mortgage-backed securities may be exempt from State banking laws.

FHLB

Yes
Yes
Yes
Yes
Yes
Yes
Yes

FHLMC

Yes 1
No
No
Yes
Yes
Yes
Yes

FNMA

Yes
No
No
Yes
Yes
Yes
Yes

FCS

Yes
Yes 2
Yes
Yes
Yes
Yes
Yes

SLMA

Yes
No
Yes
Yes
Yes
Yes
Yes

CCLIA

No
No
n/a3
n/a3
n/a3
n/a3
n/a3

FAMC

Yes
No
n/a3
n/a3
Yes
No 4
Yes

FCSIC

No
Yes
n/a3
n/a3
n/a3
n/a3
n/a3

FCSFAC

Yes
Yes
Yes
n/a3
Yes
Yes
Yes

FICO

No
No
Yes
n/a 3
Yes
Yes
Yes

F-10

THE BUDGET FOR FISCAL YEAR 1989

Five new entities created within the past 3 years have been
preliminarily designated as GSEs in the 1989 budget. This designation may change, however, for one or more of these entities as they
are more closely examined both as to their structure and as to
their actual operations. Including these newly created entities in
the GSE category makes no assumption as to what the special
relationship will mean in the future.
The financial transactions of GSEs are not included in either the
unified budget or the credit control aspects of the budget. However,
since they were designed to further Government objectives and
since most continue to enjoy special benefits not received by other
privately owned financial intermediaries, their financial statements are shown, to the extent feasible, in Part IV of the Budget
Appendix. Table F-9 summarizes the lending and borrowing of
GSEs for 1987-1989; Table F-20 in the back of this analysis presents details of their activity. The new entities, however, in most
cases will have only a narrative description with limited or no
financial information for this budget.
Table F-9. SUMMARY OF LENDING AND BORROWING BY GOVERNMENT-SPONSORED ENTERPRISES
(In billions of dollars)
Actual

Estimate

1987

1988

1989

Total net lending:
Obligations
New transactions
Net change
Outstandings

427,518
414,092
107,785
581,073

425,093
420,571
92,277
673,352

462,161
453,983
88,355
761,706

Total borrowing:
Net change
Outstandings

115,046
569,212

96,681
665,893

91,994
757,887

GSEs have traditionally operated in three major areas: (1) to
assist farmers and associated rural borrowers to have better access
to the credit markets, (2) to facilitate credit operations for the
housing industry, and (3) to facilitate the financing of higher education. While the focus on these areas has not changed in the past
few years, the contingent liability of the Federal Government has
grown dramatically, due to the greater governmental involvement
in the newly created GSEs.
Agricultural Assistance.—The Federal Farm Credit System (FCS)
has traditionally been composed of four elements: the Farm Credit
Administration, a Federal agency, and three separate sets of GSEs
that constituted the FCS. Only the Farm Credit Administration,
which is the regulatory arm of the System, is included in the
unified budget. It is financed by user charges assessed on the banks

SPECIAL ANALYSIS F

F-ll

that it regulates. Since 1933, the FCS has been composed of three
kinds of financial intermediaries:
• The Banks for Cooperatives, which provide loans to farmerowned marketing, supply, and service cooperatives;
• The Federal Intermediate Credit Banks, which provide short
and intermediate term farm loans;
• The Federal Land Banks, which provide long-term loans secured by real estate.
Each System bank operates through regional banks. The banks
obtain funds through the sale of securities to investors in the
private credit markets. This borrowing is aggregated by the Farm
Credit System Funding Corporation, which in turn acts as a conduit through which the System Banks issue FCS debt to the credit
markets. These securities are "joint and several," meaning that
default by one System bank requires all others to honor the obligations of the security. As of September 30, 1987, there were $54.4
billion in outstanding consolidated, systemwide notes and bonds.
In recent years the depressed condition of farming in many areas
has led to massive losses incurred by the FCS—$1.9 billion in
calendar year 1986, and $197 million for the first nine months of
calendar year 1987. However, the System was and still is able to
borrow at rates substantially lower than those that would have
been charged to other privately owned intermediaries with similar
low net worth.
Legislation enacted in 1985 attempted to remedy the unequal
erosion in asset quality experienced by some of the System banks
due to the persistent agricultural crisis. The Act established the
Farm Credit System Capital Corporation, a GSE which was never
recognized as such in the budget, to provide assistance to troubled
FCS banks. The Corporation was to provide technical assistance as
well as administer a controversial asset sharing plan, whereby
available surplus capital and reserves were to be transferred from
strong banks to insolvent or nearly insolvent banks to improve
their balance sheets. Mandatory assessments were imposed on
System Banks to fund the Corporation's activities. However, the
functioning of the Capital Corporation had been significantly impaired due to lawsuits challeging the asset sharing requirement.
As a result of the inadequacies of the 1985 legislation as well as
continuing problems plaguing the farm sector, the Farm Credit
System formally submitted a request to Congress for financial assistance on May 6, 1987. The request was spurred by the continuing decline in System surplus funds, perceived erosion of borrower
confidence, and widening spreads on System obligations over comparable Treasury issues.
The goal of the legislation was to provide a long-term solution to
a persistent agricultural crisis. On January 6, 1988, the President

F-10

THE BUDGET FOR FISCAL YEAR 1989

Government-Sponsored Enterprises and High Quality
Corporate Note Index Spread above Treasuries
Basis Points

Calendar Year 1987

Basis Points

JAN FEB MAR APR MAY JUN JUL AUG SEPT OCT NOV DEC
'Composite with average maturity of approximately 3 years.

signed a law which requires sweeping changes in the System. The
charter of the Farm Credit System Capital Corporation has been
revoked. The Farm Credit System Assistance Board has been chartered to assume some of the Capital Corporation's duties, chiefly to
assist in restoring FCS institutions to economic viability and permitting such institutions to continue to provide credit. The Board is
also charged with carrying out a program to provide assistance to,
and protect the stock of borrowers of the institutions of the Farm
Credit System. Additionally, the Act created three new GSEs:
• The Farm Credit System Financial Assistance Corporation
(FCSFAS), was created to provide the financing mechanism
through which the System will raise needed capital. System
obligations issued by the Assistance Corporation will carry
the guarantee of the Federal Government and Treasury will
pay all or part of the interest cost on the Corporation's debt
for the next ten years.
• The Federal Agricultural Mortgage Corporation (FAMC), was
created to guarantee the timely repayment of principal and
interest on pools, or obligations backed by, pools of qualified
loans.

SPECIAL ANALYSIS F

F-ll

• The Farm Credit System Insurance Corporation (FCIS), was
created to insure the timely payment of principal and interest
on notes, bonds, debentures, and other obligations issued by
System banks.
In 1988, the Farm Credit System Financial Assistance Corporation will begin to issue U.S. guaranteed 15-year bonds. It is anticipated that $2 billion of the bonds will be issued over the next 2
years.
The U.S. Treasury is obligated to pay the entire interest cost on
the bonds during the first five years, and half of the interest cost
during the second five years with the System responsible for the
remainder. The System is responsible for the interest cost for the
last five year period as well as the full repayment of principal. The
Farm Credit banks are required to repay to the U.S. Treasury any
amount exceeding $2 billion, when they are financially able to do
so. System institutions, which are financially able to do so, will be
required to make a one-time Assistance Corporation stock purchase
as a downpayment on the retirement of the noncallable 15-year
bonds; at maturity the participating banks will be required to
contribute to repay principal on the basis of a formula using performing loan volume per bank as a measure of percentage responsibility in the entire obligation. The board of directors and employees
of the existing Federal Farm Credit Banks Funding Corporation
will be those designated to oversee and staff the new Assistance
Corporation.
The purpose of the Federal Agriculture Mortgage Corporation,
which some have dubbed Farmer Mac, is to establish a secondary
market for farm mortgages and certain rural housing loans similar
to the role created for the Government National Mortgage Association in the late 1960s. Farmer Mac will offer stock to banks,
insurance companies, System institutions and other financing entities to raise initial capital. The Corporation will have available $1.5
billion from the U.S. Treasury should it become necessary. Ongoing
operations will be financed through assessments for its guarantees
on participating institutions and occasional additional stock offerings. The loan pools guaranteed by Farmer Mac will be originated
by Farm Credit System banks, commercial banks, thrifts, insurance
companies and other qualified lenders.
The Farm Credit System Insurance Corporation, will insure all
bonds, notes, debentures, and other obligations issued by system
institutions. The Insurance Corporation will be capitalized initially
with funds from the Farm Credit System and subsequently through
the use of assessments charged for the insurance. During 1989, the
farm credit revolving fund, an on-budget fund, will be transferred
to the Insurance Corporation. Those banks wishing to maintain

F-10

THE BUDGET FOR FISCAL YEAR 1989

their Federal charter must purchase insurance from the corporation.
Restructuring of the System's banks was also mandated by the
Act. The Federal Land Banks and Federal Intermediate Credit
Banks in each district are required to merge; the 12 district Banks
for Cooperatives are required to vote on whether to merge into one
entity; and the 12 districts are required to vote on whether to
merge into six. Additionally, the Act strengthens the value of
existing borrower stock, improves borrowers rights, and expands
procedures for restructuring loans.
Housing Assistance.—Three GSEs have been providing assistance
to the housing sector for many years: the Federal Home Loan
Banks, the Federal Home Loan Mortgage Corporation, and the
Federal National Mortgage Association. A fourth GSE, the Financing Corporation, was created in 1987 to provide assistance in funding the operations of the Federal Saving and Loan Insurance Corporation, an on-budget, federally-owned corporation.
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 charge
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), an independent agency in the executive branch, has served primarily as the regulator of the system.
The Bank Board and the 12 regional Federal Home Loan Banks
(FHL Banks) comprised the original system. Subsequently, the Federal Savings and Loan Insurance Corporation (FSLIC), a Government agency, and the Federal Home Loan Mortgage Corporation
were added to the system in 1934 and 1970, respectively. The most
recent additions to the System are the Federal Asset Disposition
Association (FADA), wholly-owned by FSLIC and created in 1985,
and the Financing Corporation.
The primary purpose of the Federal Home Loan Banks is to
ensure the liquidity of member savings and loans and mutual
savings banks which historically have lent primarily to the housing
market. The FHL Banks accomplish this infusion of liquidity by
providing advances to help individual institutions meet short term
liquidity needs and by providing longer term loans to enable institutions to expand long-term lending historically associated with
housing loans. 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 least expensive source of
funds available after savings deposits. Each of the 12 FHL Banks is

SPECIAL ANALYSIS F

F-ll

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
much lesser extent, by accepting both demand and time deposits
from member institutions and through the issuance of additional
capital stock. As of September 30, 1987, $105.1 billion of these debt
securities were outstanding.
Federal insurance for the deposits made to the member savings
and loans and mutual savings banks is provided by FSLIC, which is
overseen by the FHLBB and is authorized to borrow up to a limit
of $750 million outstanding at any one time from the U.S. Treasury, should it become necessary. An explanation and examination
of FSLIC is detailed in Chapter V of this analysis. However, due to
persistent losses experienced by FSLIC-insured institutions and the
necessary intervention by FSLIC in providing cash infusions to
either keep institutions open or to liquidate them, FSLIC was
technically bankrupt at the end of calendar year 1986. In 1987,
expenses exceeded revenues by $12.5 billion.
The FSLIC Recapitalization Act, which was passed in 1987, created a new GSE to provide a financing mechanism for FSLIC. The
Financing Corporation (FICO) was created to assist in raising capital in the credit markets. FICO has the authority to borrow up to
slightly more than $10.8 billion through the issuance of debt obligations to the public and in turn to purchase stock in FSLIC. The
repayment of principal on FICO debt is guaranteed through the
use of a segregated account within the corporation which invests
funds in non-interest bearing eligible securities (zero-coupon bonds)
whose face value at maturity is equal to the face value of the
newly issued bonds at maturity. These funds are provided by the
FHL Banks through a mandatory FICO stock purchase plan. Interest payments on the debt will be paid by an assessment-sharing
plan with FSLIC and, if necessary, a special assessment on FSLICinsured institutions. In calendar year 1987, FICO issued $1.2 billion
of these bonds. The authorizing statute specifically states that the
bonds are not direct obligations of the United States Government.
FICO is controlled and staffed by the FHLBB and the FHL Banks.
All administrative expenses are paid by the FHL Banks.
Federal Home Loan Mortgage Corporation (FHLMC, or Freddie
MacI—Freddie Mac was created in 1970 by Congress to provide
mortgage lenders with an organized national secondary market in
which to sell conventional mortgages and to obtain additional
funds to meet new demands for mortgages. Freddie Mac serves as a
conduit to facilitate the flow of investment dollars from capital
market investors to mortgage lenders. Freddie Mac is a publiclychartered corporation whose preferred stock is owned by savings
institutions across the Nation. Typically, Freddie Mac purchases

F-10

THE BUDGET FOR FISCAL YEAR 1989

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 most of its purchases of mortgage loans by
pooling the mortgages together and issuing pass-through certificates backed by these loans. It guarantees the timely repayment of
interest at the certificate rate and the ultimate repayment of principal on the mortgages. 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 private
businesses greatly understate Freddie Mac's participation in the
secondary market.
Federal National Mortgage Association (FNMA, or Fannie
Mae).—Fannie Mae was established by Congress in 1938 to provide
supplementary assistance to the secondary market for home mortgages by supplying a degree of liquidity for mortgage investment
capital available for home financing. In 1968, it became a privately
owned corporation, and its stock is now fully transferable and is
listed on major stock exchanges.
Fannie Mae performs functions similar to Freddie Mac, purchasing mortgages from originators. These mortgages are then either
packaged, guaranteed by Fannie Mae, and sold to investors; or,
unlike Freddie Mac, kept by Fannie Mae in its portfolio for investment purposes. Because Fannie Mae finances the purchases of
mortgages by issuing its own debt, Fannie Mae's profitability is
much more sensitive to movements in interest rates than is Freddie Mac's. In recent years, the company has attempted to decrease
its sensitivity to interest rate fluctuations by using various methods, including matching more closely the duration of the securities
it holds in portfolio with the duration of its debt issues; increasing
fee income; increasing the issuance of its guaranteed mortgagebacked securities; and repurchasing some high coupon debt.
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 firms
have begun to issue mortgage-backed securities, in competition
with Fannie Mae and Freddie Mac. Privatization of Fannie Mae
and Freddie Mac would eliminate major hurdles private mortgagebacked securities issuers face in playing a significant role in the
Nation's housing credit markets. The administration is proposing
legislation to mitigate the effects of this unfair competition.
Educational Assistance.—The Student Loan Marketing Association, created in 1972, provides the major secondary market for
student loans. In 1987, the College Construction Loan Insurance

SPECIAL ANALYSIS F

F-ll

Association was created to provide insurance for facilities loans to
post-secondary institutions.
Student Loan Marketing Association (SLMA or Sallie MaeX—
Sallie Mae was created 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 through its
purchase of existing insured student loans from lenders. Another
method is through the provision of "warehousing" advances—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 the Federal Financing Bank (FFB), an arm of the U.S. Treasury, from May
1974 until January 1982; since then, all of Sallie Mae's new borrowings have been in the private credit markets. As of December 30,
1987, Sallie Mae had borrowed $16.4 billion in those credit markets. It will borrow an estimated $6.2 billion in 1988. 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. Since student loans are guaranteed to
yield the holder of the loan 325 basis points over 3-month Treasury
bills, 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. Like Fannie Mae and Freddie
Mac in the secondary mortgage market, Sallie Mae's dominance of
the secondary market for guaranteed student loans can apparently
be attributed partly to the low-cost source of funds it enjoys as a
GSE and, more importantly, to significant economies of scale.
College Construction Loan Insurance Association (CCLIA or
Connie LeeX—Connie Lee was authorized by Public Law 99-498 and
incorporated in February 1987. It was organized as a private, forprofit insurance corporation to guarantee and insure loans and
bonds made for college construction and renovation. The authoriz-

F-10

THE BUDGET FOR FISCAL YEAR 1989

ing statute explicitly states that "no obligation which is insured,
guaranteed, or otherwise backed by the corporation, shall be
deemed to be an obligation which is guaranteed by the full faith
and credit of the United States." In order to provide the initial
capitalization, the Secretary of Education, the Student Loan Marketing Association, and other investors are authorized to purchase
stock in Connie Lee. The Secretary of Education purchased $19
million in stock using funds appropriated for this purpose in 1988.
Sallie Mae purchased $22 million of Connie Lee's stock in 1987.
Initially, the Board of Directors will comprise eleven members,
four of whom are appointed by the Federal Government, three by
Sallie Mae, and the rest by the voting stockholders. The statute
authorizes the Secretary of Education to sell the Department's
stock in Connie Lee after five years, and requires the Secretary to
offer the stock to Sallie Mae prior to offering it to any other party.
If the Federal Government sells its stock in Connie Lee and if
Sallie Mae owns more than 50 percent of the voting common stock,
the entire eleven members would be elected by the voting stockholders.
V . CONTINGENT LIABILITIES AND FEDERAL DEPOSIT INSURANCE

Contingent Liabilities.—The Federal Government provides guarantees and insurance against several types of risk for many sectors
of the economy. If a given situation occurs, such as borrower default or natural disaster, the Government frequently 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-10 shows the current contingent liability of the Federal
Government. Unlike an annual corporate financial statement, the
data presented in the table do not represent the Government's
expected loss contingency for 1988 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.
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-10 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 insur-

F-ll

SPECIAL ANALYSIS F
Table F-10. CONTINGENT LIABILITY OF THE FEDERAL GOVERNMENT
(In billions of dollars)
Program or activity

Government-sponsored enterprises:
Farm Credit System Financial Assistance Corporation1
Deposit insurance:
Federal Deposit Insurance Corporation2
Federal Savings and Loan Insurance Corporation
National Credit Union Administration
Subtotal, deposit insurance
Other:
Loan guarantee programs3
National flood insurance
Overseas Private Investment Corporation insurance program
Federal crop insurance
Pension Benefit Guaranty Corporation
Subtotal, other
Total, contingent liabilities
1
2
3

1986 actual

1987 actual

1,673.2
817.2
130.0

1,605.7
836.1
152.9

2,620.4

2,594.7

691.9
133.8
9.6
7.2
4.5

816.5
159.0
9.4
6.3
3.8

847.0

995.0

3,467.4

3,589.7

Newly created GSE; data not yet available.
Data as of June 30, 1987.
Gross basis.

ance programs not in the table that increase the Federal contingent liability.
Deposit Insurance.—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 Federal Deposit Insurance Corporation (FDIC), the Federal Savings and Loan Corporation (FSLIC),
and the National Credit Union Administration (NCUA). 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-10, the value of insured deposits at the end of 1987 was nearly $2.6 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 gussets, and direct loans and loan guarantees.
The Federal Deposit Insurance Corporation was created by the
Banking Act of 1933 to provide protection for bank depositors and
to foster sound banking practices. In order to accomplish its varied

F-10

THE BUDGET FOR FISCAL YEAR 1989

functions, the corporation is authorized to promulgate and enforce
rules and regulations relating to the supervision of insured banks
and to perform other regulatory and supervisory duties consistent
with its responsibilities as insurer. The major portion of the corporation's operations consists of the examination of State banks that
are not members of the Federal Reserve System and liquidation
activities attendant to insured banks that have closed.
The insurance fund is supported by an authorization to borrow
up to $3 billion from the U.S. Treasury should it become necessary;
however, no borrowing under this authorization has been made to
date. Income of the corporation is derived principally from insurance assessments paid by insured banks and interest on investments in U.S. Government securities.
The Federal Savings and Loan Insurance Corporation is authorized under Title IV of the National Housing Act to insure savings
in all Federal savings and loan associations, Federal mutual savings banks, and in State-chartered institutions of the savings and
loan type which apply and qualify for insurance. This protection
may be provided either through the prevention of default or the
payment of insurance to savings account holders, up to the maximum insured amount of $100 thousand per depositor in the event
of liquidation. Preventing default, which protects each investor
regardless of the amount in his account, is accomplished by making
contributions or by purchasing all or part of an association's assets.
Additionally, the corporation is authorized to make loans to institutions in financial difficulty. In the event liquidation is necessary,
the corporation acts as receiver, or co-receiver.
FSLIC operates under the direction of the Federal Home Loan
Bank Board, which provides administrative services. The expenses
of the board and its staff offices are paid from assessments made on
the Corporation and the Federal Home Loan Banks. FSLIC has
continuing authority to borrow from the U.S. Treasury for insurance purposes, up to a limit of $750 million outstanding at any one
time. No borrowing under this authorization has ever taken place.
The record number of thrift failures has severely strained the
resources of the FSLIC both in manpower and finances in the past
few years. In an attempt to facilitate the liquidation of assets
acquired by FSLIC from failed member institutions and maximize
the return on those assets, the Federal Home Loan Bank Board
chartered the Federal Asset Disposition Association (FADA) in
1985. FADA was initially capitalized with $25 million from FSLIC.
FADA finances ongoing operating expenses through consulting and
management fees charged to FSLIC, its only client. The goal of
FADA was the creation of an independent entity, outside of Federal pay constraints, which would be able to attract highly qualified
people expert in real estate management and sales. They would

SPECIAL ANALYSIS F

F-ll

thus negotiate the highest prices possible for assets sold increasing
the return on liquidated assets to FSLIC. FADA has not been
entirely successful in funding operations solely through its consulting fees, however, and plans to ask FSLIC for an additional capital
infusion.
Despite the injection of $25 million in 1986 by FSLIC, an onbudget entity, the 1989 budget documents display FADA for the
first time. It will appear in the FSLIC section of the Budget Appendix. FADA was unable to supply data on a fiscal year basis for this
budget, so its financial statements are presented for calendar year
1987 only and are not included in the budget totals. In subsequent
budgets, actual data for the prior year, and estimates for the
current and fiscal years will be presented. The budgetary treatment of FADA may change in the future; its status will be reassessed over the next year.
Federal credit unions and privately owned, cooperative associations are organized for the purpose of promoting thrift among their
members and creating a source of credit. They are authorized by
the Federal Credit Union Act of 1934, as amended. The National
Credit Union Administration regulates these credit unions, provides liquidity assistance to member credit unions, and insures
depositors' accounts. The NCUA insurance fund is used to carry
out a program of insurance for member accounts in Federal credit
unions and State-chartered credit unions, which apply and qualify
for insurance.
The administration's activities consist of: (1) chartering new Federal credit unions; (2) supervising established Federal credit unions;
(3) making periodic examinations of their financial condition and
operating practices; and (4) providing administrative services.
The fund is structured to be entirely self supporting through
assessments paid by member credit unions. The monies received
plus the income generated from their investment are expected to
cover all administrative and financial costs, as well as increase the
fund balance proportionate to insured share growth. The fund has
$100 million in borrowing authority from the U.S. Treasury for use
in unforeseen emergencies.
V I . 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 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

F-10

THE BUDGET FOR FISCAL YEAR 1989

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
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 activities. 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 each year.
The net amount of Federal and federally assisted lending was
$149.2 billion in 1987. The supply of credit is the net increase in
the holdings of various investor groups. In 1987, this was $642.7billion. The participation ratio of Federal and federally assisted lending to total lending, therefore, was 23.2 percent in 1987. This
represents a new peak for the decade.
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

F-ll

SPECIAL ANALYSIS F

Federal Participation in Domestic Credit Markets
60
50-

40-

1978

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.
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 1987 was $327.1 billion. In 1987, the total funds borrowed (excluding the financial section and equities) in U.S. credit
markets was $723.8 billion. The borrowing participation ratio,
therefore, was 45.2 percent in 1987. As shown in the accompanying
chart, the borrowing participation ratio is more volatile than the
lending participation ratio, ranging from 19.3 percent to 54.8 percent of total borrowing between 1978 and 1987. The volatility is due

F-10

THE BUDGET FOR FISCAL YEAR 1989

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
analysis provides additional details on participation ratios.
Table F - l l summarizes outstanding Federal and federally assisted loans from 1986 to 1989. Total direct loans outstanding at the
end of 1987 were $234.2 billion and total guaranteed loans outstanding were $507.0 billion. In 1987, Federal and federally assisted
loans outstanding increased by 15 percent over 1986. Increases of 7
percent in both 1988 and in 1989 are estimated.
Table F - l l . SUMMARY OF OUTSTANDING FEDERAL AND FEDERALLY ASSISTED CREDIT
(In billions of dollars)
Actual
1986

Direct loans
Primary guaranteed loans
Loans by Government-sponsored enterprises
Total, Federal and federally assisted loans
Federal debt held by the public
Primary guaranteed debt (same as guaranteed
loans above)
Debt of Government-sponsored enterprises
Total, Federal and federally assisted debt

Estimate
1987

1988

1989

251.6
449.8
453.3

234.2
507.0
581.1

218.0
527.8
673.4

207.4
544.8
761.7

1,154.7

1,322.3

1,419.2

1,513.9

1,746.1

1,897.8

2,025.1

2,152.1

449.8
458.1

507.0
569.2

527.8
665.9

544.8
757.9

2,654.0

2,974.0

3,218.8

3,454.8

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.
V I I . FEDERAL CREDIT SUBSIDIES

Federal credit programs provide more favorable terms than borrowers could otherwise obtain 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; and availability of funds to borrowers for purposes for

SPECIAL ANALYSIS F

F-ll

which the private sector would not lend—at virtually any interest
rate under virtually any repayment terms.
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 willing to lend to the guaranteed
borrower at rates lower than the market rate since no premium, or
less than a normal premium, for default risk is required.
In many cases, large interest rate subsidies may be intended. The
economic support fund, for example, previously extended 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 not 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. But while the cost of long-term
Treasury borrowing has varied through the years, REA's lending
rate for its direct loans, proposed to be terminated by 1989, increased only to 5 percent.
However, 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. 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 (direct loan obligations and guaranteed loan
commitments) are summarized in the credit budget.
The administration's credit reform proposal, summarized above
and in Part 6b of the budget, would estimate the subsidy cost of
Federal credit programs, require the appropriation of those subsidies, and incorporate them in the unified budget. Under this proposal, subsidies would be estimated using the same method used to
estimate subsidies in this special analysis. 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 estimate of the interest rate and other terms on which a private
lender would have lent to a representative borrower from that
Federal program.
To derive the rate of return on a representative private loan,
estimates have been made of the private loan terms according to

F-10

THE BUDGET FOR FISCAL YEAR 1989

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. A
simplifying assumption used in these calculations is that a single
example can adequately represent the array of loans in a given
program. This assumption is not always a good approximation.
Several agencies (e.g., the Export-Import Bank or the Small Business Adminstration) have programs where loans are made to a
variety of borrowers with widely dissimilar risk characteristics.
The discount rate used to evaluate the present value of the
Government 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.
Excluding CCC priced support loans and FMS forgiven loans,
table F-12 shows subsidy values for 95 percent of the obligations
that direct loan programs are estimated to make in 1989. The
present value of the total estimated subsidies is $0.9 billion.
The method of evaluating direct loan subsidies, as explained
above, measures the cost of Federal credit by comparing the terms
and conditions of a similar loan from the private sector. This
method is therefore the same as evaluating the subsidy as the
difference between the face value of the loan and the proceeds
from promptly selling the loan without recourse in the market.
This difference measures the subsidy as the equivalent of a grant
that the Government provides to the borrower. The subsidy is
therefore equivalent to direct budget outlays for grants made to
individuals or businesses. In this manner the economic or programmatic effects of direct loans can be reasonably compared to the
effects of budget outlays.
Another measure of subsidy that has been proposed calculates
cost based on the Treasury borrowing rate, which is always less
than the method used here for two reasons. First, the Treasury'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, which provides safety to Treasury securities, and also due
to the great liquidity of the enormous market for these securities.
Second, the Government does not need to hold any reserves against
its loan guarantees or any capital against direct loan defaults,
which makes the Government less averse than is the private sector
to the level and variance of risk inherent in the credit it grants.

F-ll

SPECIAL ANALYSIS F
Table F-12. ESTIMATED SUBSIDY COSTS FOR 1989 DIRECT LOAN OBLIGATIONS

value of subsidy
Agency and program

Funds Appropriated to the President:
AID private sector revolving fund..
OPIC
Agriculture:
ACIF:
Emergency disaster
Farm operating
RDIF
Public Law 480 export credits
REA:
Rural Telephone Bank
Health and Human Services:
Health resources and services
Housing and Urban Development:
Housing for the elderly and handicappedFederal Housing Administration
Nonprofit sponsor assistance
Interior:
Bureau of Reclamation
Bureau of Indian Affairs
Transportation:
MarAd federal ship financing fund..
Veterans Administration:
Vendee loans
Direct loans
Vocational rehabilitation
Export-Import Bank
FSLIC
National Credit Union Adminstration:
Central liquidity facility
Share insurance fund
Small Business Administration:
Disaster loans
Tennessee Valley Authority:
Power program

Percent of direct
loan obligations

Millions of dollars

8.3
14.5

18.9
11.2
13.6
70.0
15.2
22.0
21.7
3.1

22.1

61.0
24.4
1.8
16.0
1.6
11.9
11.6
3.0
3.0
50.0
14.2
5.0

Total, direct loan subsidies..

If the Treasury borrowing rate were adopted instead of the
method used here to estimate the present value of the subsidies,
distortions would be created. The subsidy would be smaller than
the equivalent of a grant to the borrower. Thus, the budget would
continue to favor credit programs over direct spending programs. It
would not give policymakers and the public the information they

F-10

THE BUDGET FOR FISCAL YEAR 1989

need to compare fairly those two kinds of programs and to determine which form of assistance is more cost effective. Furthermore,
using the Treasury rate would not take full account of the loan's
riskiness, which would skew the allocation of resources toward the
most risky loans 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 a
few 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 instances, the subsidy can be measured by calculating the
present value of the difference in the fees charged by the Federal
Government and the fees that a private insurer would have
charged 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; sometimes, 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 those the private
insurer would charge. In these circumstances, the subsidy is calculated in terms of the interest rate and fees a private lender would
have charged the borrower in the absence of a Federal guarantee.
In both of these cases, as in the case of direct loans, the subsidy
is equivalent to a grant paid by the Government to the borrower.
The subsidy is thus equivalent to direct budget outlays for grants
made to individuals or businesses. In this manner, economic or
programmatic effects of loan guarantees can be reasonably compared to the effects of budget outlays.
Table F-13 presents these subsidy calculations for nearly all of
the gross commitments that loan guarantee programs are estimated to make in 1989. The present value of the total estimated
subsidies is $8.7 billion.
Table F-13, like Table F-12, estimates the value of the subsidy
by measuring the cost of a loan on the same basis as direct spending for grants, and not by using the cost of Treasury borrowing. It
would be inappropriate to use a Treasury borrowing cost basis for
calculating economic subsidies, since it would not measure the cost
of the loan guarantee to the economy. This could lead to the

F-ll

SPECIAL ANALYSIS F
Table F-13. ESTIMATED SUBSIDY COSTS FOR 1989 GUARANTEED LOAN COMMITMENTS

Present value of subsidy
Agency and program

Funds Appropriated to the President:
Foreign military sales credit
AID private sector loans
AID housing and other credit
Overseas Private Investment CorporationAgriculture:
ACIF
CCC export credits
RDIF
REA
Education:
Guaranteed student loans
Health:
Health education assistance loans
Housing and Urban Development:
FHA fund
GNMA secondary mortgage guarantees.
Interior:
Bureau of Indian Affairs
Veterans Administration:
Loan guarantees
Export-Import Bank
FSLIC
NCUA share insurance fund
Small Business Administration:
Business assistance

Percent of
guaranteed loan
commitments

7.5
11.3
15.7
13.1
0.8
13.7
0.9
17.3
33.6

2.0
1.2
1.9
2.5
6.6
2.5
2.5
100.0
9.1

Total, guaranteed loan subsidies..

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 require more detailed financial information about the borrower than the Federal Government requires. The private sector
would reflect these higher transaction costs in its charges for loans
and loan guarantees. The subsidy estimates do not take explicit
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
affect the price of similar unguaranteed loans. This is not true for

F-10

THE BUDGET FOR FISCAL YEAR 1989

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 whose fees are used for comparison may charge less than they otherwise would, thereby lowering the subsidy estimate.
V I I I . 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-14 shows the amount of direct loans written off and the
amount of guaranteed loans terminated for defaults. Of all direct
loans outstanding, only 0.8 percent are recorded as write-offs in
1987. Of total guaranteed loans outstanding, 2.0 percent are reported to be terminated in 1987.
The economic development, business, and agricultural loan programs have the highest estimated default or termination rates in
1987. The economic development loans are from terminated programs that aided the financing of various public works and business development projects. The objective of these terminated programs was to provide increased employment opportunities and
family income in areas of the country that lagged behind the rest
of the nation economically. The high rate of write-offs and terminations in this program is the result of loans to failed steel companies
and reflects the limited success of these types of loans in stimulating growth in certain areas of the country.
The high business loan write-off and termination rates are attributable to the nature of these loans—to small businesses that are
unable to obtain private financing. Accordingly, since the failure
rate is quite high for small businesses that are deemed creditworthy by private financial institutions, it is dramatically higher still
for firms that qualify for Federal or federally guaranteed loans as
the only source of financial assistance.
Delinquencies and defaults in various agricultural programs can
be traced to depressed market conditions. Starting in the early
1980s, the U.S. farm economy was characterized by declining
income and asset values. As a result of the depressed conditions,

F-ll

SPECIAL ANALYSIS F

Table F-14. DIRECT LOAN WRITE-OFFS AND GUARANTEED LOAN TERMINATIONS FOR DEFAULTS
In millions of dollars
Actual
1987

Direct loans.Commodity Credit Corporation
FmHA agricultural credit insurance
Rural housing insurance fund
Economic development revolving fund
Guaranteed student loans
Other education loans
Federal Housing Administration
MARAD ship financing fund
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
Federal Housing Administration fund
MARAD ship financing fund
BIOMASS energy development
VA loan guarantee revolving fund
SBA business loans
Other
Total terminations
1

As percentages of outstanding loans1

Estimated
1988

Actual

1989

1
865
31
99
121
24
65
196

63
1,220
30
100
225
60
68

78
663
30
26
328
50
69

411
181
3

377
144
22

1,997
456
90
57
148
1,382
4,433
342
196
1,898
548
26
9,576

1987

Estimated
1988

1989

17.62
1.74
0.48
1.46
12.69

20.04
4.42
3.29
1.50

0.56
2.77
0.12
6.22
5.80
4.00
1.55

364
128
24

10.51
4.56
0.01

13.49
4.09
0.02

14.53
4.48
0.02

2,309

1,760

0.82

1.02

0.83

642
126
50
20
1,728
5,016
250

635
190
40
15
1,855
5,027
100

11.72
3.99
2.80
19.80
4.25
1.80
6.18

10.67
4.73
2.57
16.48
4.44
1.87
2.72

2,426
540
74

2,322
505
187

12.42
3.87
2.51
77.49
3.56
1.78
7.38
24.62
1.31
6.31

0.11

1.65
5.85
0.27

1.66
5.57
0.30

10,872

10,876

2.00

2.10

2.03

3.07

0.11

0.38
4.61

0.11

Average of loans outstanding over year

delinquency, liquidation, and bankruptcy rates continue to rise.
However, this situation is expected to turn around owing to the
major improvement in export markets, record levels of farm
income in 1987, and the decline in farm debt that is projected for
the fifth straight year.
In addition, the VA loan guaranty revolving fund is experiencing
a dramatic increase in the home loan guarantees terminated due to
default in 1988. Some of these terminations were expected due to
the unprecedented high level of guarantees granted in 1987. The
majority of the terminations are occurring in the States worst hit
by the decline in the petroleum industry such as Texas, Colorado
and Louisiana. This trend is expected to level off in 1989.
Finally, there has been a growing awareness that losses in both
direct and loan guarantee programs are higher than reported. In
recognition of this problem, agencies have been instructed to periodically review their existing portfolios and to write-off accounts
that are determined to be uncollectible within a reasonable period

F-10

THE BUDGET FOR FISCAL YEAR 1989

of time. In 1987, $11.6 billion in uncollectible accounts were written
off by agencies, a 27 percent increase from the $9.1 billion in writeoffs and terminations reported in 1986. However, further improvements in this area of credit management are needed. The agencies
that have not already done so are expected to complete an initial
review of their portfolios in 1988. Also, Treasury's Financial Management Service will issue a guidance paper to assist agency portfolio managers in determining whether, when, and how to write off
uncollectible accounts.
I X . FEDERAL FINANCING BANK

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 and is, in reality, merely another "window" of the Treasury.
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.
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. None of the three
forms of FFB lending are recorded immediately as outlays; instead,
outlays are recorded when the proceeds of borrowing are spent by
the agencies.
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 "offbudget." 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
analysis and elsewhere in the budget have been incorporated into
the account of the agency originating the transaction.
Table F-15 summarizes the activities of the FFB on behalf of the
agencies it serves for 1987 through 1993. Table F-21 at the end of

F-ll

SPECIAL ANALYSIS F
Table F-15. SUMMARY OF FFB FINANCING OF AGENCY ACTIVITIES
(In billions of dollars)
Actual
1987

Estimated
1988

1989

1990

1991

1992

1993

0.6
-8.4
79.2

0.7
-7.0
72.2

Credit related:
New acquisitions
Net lending
Loans outstanding

3.4
-2.4
134.7

2.4
-16.3
118.4

1.4
-12.7
105.7

1.2
-11.8
93.5

0.5
-5.9
87.6

Other:
New acquisitions
Net lending
Loans outstanding

3.6
2.8
22.6

2.8
2.2
24.8

3.0
2.2
27.0

3.1
2.2
29.3

2.6
1.7
31.0

31.0

30.9

7.0
0.4
157.3

5.2
-14.0
143.2

4.4
-10.5
132.7

4.3
-9.6
122.8

3.1
-4.2
118.6

1.3
-8.4
110.2

2.0
-7.1
103.1

Total, all FFB acquisitions:
New acquisitions
Net lending
Loans outstanding

0.8
*

1.3

*$50 million or less.

this document shows the activities of the FFB over the same period
by agency and account.
The Omnibus Budget Reconciliation Act of 1986 authorized certain rural electric cooperatives to prepay their Rural Electric Administration guaranteed-loans held by the FFB without premium
or penalty, and provided that prepayments in excess of $2,017.5
million during 1987 were to be subject to the approval of the
Secretary of the Treasury. Prepayments of approximately that
amount were approved. Under this legislation, rural electric borrowers prepaid $589 million in principal with an associated taxpayer loss of $165 million.
The 1986 Act also authorized that refinancing be accomplished
using full Government guarantees in the private credit markets.
Refinancing in this manner (1) is contrary to the ongoing role and
effectiveness of the FFB; (2) interferes with the administration of
Federal credit policy; (3) competes with the Treasury financing of
the national debt; and (4) provides a further subsidy to borrowers.
This subsidy would be provided to borrowers that have already
received the lowest available rate at the time that they originally
borrowed funds, and this subsidy would be provided outside of the
normal appropriations process, without the determination of the
need of the borrower for the subsidy.
The Omnibus Budget Reconciliation Act of 1987 authorized an
additional $2 billion in premium-free prepayments during 1988
using full Government guarantees and provided that prepayments
in excess of $2 billion would be subject solely to the approval of the
Secretary of the Treasury. The Secretary has determined that par
prepayments in excess of $2 billion will not be approved because of
taxpayer costs involved. While it is difficult to estimate the final

F-10

THE BUDGET FOR FISCAL YEAR 1989

taxpayer costs because of changes in market interest rates that
affect those costs, if the full $2 billion were prepaid at par under
market conditions prevailing in January 1988, the costs could be as
high as $631 million.
In other congressional action, the Continuing Appropriations
Resolution for FY 1988 included a provision that allows FFB borrowers under foreign military sales guarantees to prepay at par
their debt with interest rates of 10 percent or higher. While the
amounts that these borrowers will choose to prepay are subject to a
variety of factors and thus cannot be estimated precisely, if the
$13.6 billion of FMS loans held by the FFB that have interest rates
of 10 percent or higher were prepaid, the associated taxpayer costs
could be as high as $3.5 billion.
X . LOAN ASSET SALES TO THE PUBLIC

The administration proposes to continue its pilot program of
selling existing and newly made loan assets to the public without
recourse or the right to make a claim against the Federal Government in the event of borrower default. The pilot program was first
proposed in the President's 1987 budget with the goal of selling
loan assets with a face value of $4.4 billion. This amount of sales
was increased by Congress in the Omnibus Budget Reconciliation
Act to approximately $7.1 billion in loan assets. As seen in table F 16, at the end of 1987, loans with a face value of $7.9 billion had
been sold or prepaid by borrowers and had yielded $5.5 billion in
net receipts.

Table F-16. LOAN ASSET SALES AND PREPAYMENTS
(in millions of dollars)
1987
Agency or Program

PROCEEDS INCLUDED IN THE GRH BASELINE 3
Sales:
Veterans Administration:
Vendee loans—without recourse
Vendee loans—with recourse4
Agriculture: rural development insurance fund
Education: college housing and academic facilities5
HUD: GNMA—with recourse
Subtotal, sales
Prepayments-.
Agriculture: rural development insurance fund
Education: college housing and academic facilities
Export-Import Bank
Transportation: railroad rehabilitation

Face value

Gross
proceeds 1

1988
Net
proceeds 2

Face value

680
388
635
650
24

1989
Gross
proceeds

Face value

Total 1987-89
Gross
proceeds

Face value

Gross
proceeds

436

1,341

781

356
336

1,125

630

2,021
1,292
3,667
887
650

1,411

6,575

3,682

525
120

950
792
2,926
535

556
499
2,926
325

904
1,907
237
241

1,045
98

1,004
97

2,144

1,143

1,101

1,965

1,128

80
792
1,901

51
499
1,901

51
479
1,901

870

505

500
370

500
205

385
2,466

525
165

1,217
2,031
434

Subtotal, prepayments

2,773

2,451

2,431

1,740

1,210

690

645

5,203

4,306

Subtotal, in baseline

4,917

3,594

3,532

3,705

2,338

3,156

2,056

11,778

7,988

529

130

529

130

4,741
1,600
483
122

2,830
972
230
76

306

188

PROCEEDS NOT INCLUDED IN THE GRH BASELINE

Sales:
Interior: Bureau of Reclamation
Agriculture:
Rural housing insurance fund 6
Rural Electrification Administration
Education: college housing and academic facilities
HHS: Medical facilities
HUD:
Public facilities

2,989

1,960

1,752
1,600
483
122

1,943

306

188

870
972
230
76

Table F-16. LOAN ASSET SALES AND PREPAYMENTS—Continued

Cn
to

(in millions of dollars)
1987
Agency or Program

Face value

Gross
proceeds 1

1988
Net
proceeds 2

103
441

FHA fund—without recourse
FHA fund—with recourse
SBA: business & disaster loans
Subtotal, sales not in base
Prepayments:
Funds Appropriated to the President- Foreign military sales
Agriculture:
Rural Electrification Administration (FFB)
Rural Electrification Administration
Rural Telephone Bank
HHS: Health maintenance organizations
HUD: public facilities
SBA: disaster loans
Economic Development Administration
Subtotal, prepayments not in base

Face value

2,989

1,960

1,943

1989
Gross
proceeds

Face value

Total 1987-89
Gross
proceeds

146

100

1,080

Face value

Gross
proceeds

178

710

249
441
1,080

710

938

396

5,183

2,958

9,110

5,314

W
CJ

5,900

2,300

8,200

2,000

2,000
230
20

1,000
152
50
20

3,000
250
280
60
11
4
10

3,000
152
280
40
8
3
10

w
H

230
30

1,000
250
50
30

3,522

11,815

11,693

11
4
10

8
3
10

8,160

8,150

3,630

Subtotal, not in base

3,014

1,981

1,964

9,098

8,546

8,813

6,480

20,925

17,007

Total, all sales

5,133

3,103

3,044

2,903

1,524

7,649

4,369

15,685

8,996

Total, all prepayments

2,798

2,472

2,452

9,900

9,360

4,320

4,167

17,018

15,999

7,931

5,575

5,496

12,803

10,884

11,969

8,536

32,703

24,995

Grand total, all sales and prepayments

Gross proceeds represent the receipts received by the Government. These figures do not equal the amounts paid by investors (the amounts prior to the deduction of various transaction costs at closing). In 1987, the amounts paid by
investors include: higher education and college housing—$127.0 million; rural development insurance fund—$1,134.1 million; and rural housing insurance fund—$1,840.7 million. In addition, the gross proceeds figures do not include any additional
equity interest retained by the Government.
2 Net proceeds calculations include lost principal and interest payments previously assumed in budget totals and all transaction costs including financial advisor, underwriter, legal, and filing fees.
3 "GRH baseline" categorization only applies to 1988 and 1989.
1

1
8

$
><

H
>
W
5
©
0
0
CD

4 Loans sold with recourse have the full faith and credit of the United States as backing and as such are similar in form to a Treasury security. Accordingly, both OMB and the Congressional Budget Office consider this type of sale to be a
means of financing other than borrowing instead of offsetting collections and thus the sale proceeds are scored as zero. Also, the face amounts of recourse sales are not included in the totals.
5 Sale proceeds for Education in 1988 includes $22 million from a prior year sale. The Department's securitized sale, not included in the sales proceeds amount, provided the Government with a junior pool that had an estimated market value
of $10.7 million.
6 Sale proceeds for RHIF in 1987 include an estimated market value of $215 million for the junior security that was not sold.

£
r

>
GO

cn
co

F-10

THE BUDGET FOR FISCAL YEAR 1989

The program is continuing in 1988 with loans having a face
value of $12.8 billion. These sales or prepayments are projected to
yield approximately $10.9 billion in offsetting collections. The loans
to be sold or prepaid under the program in 1989 will come from 13
different portfolios and have a face value of $12.0 billion. The
estimated market value of these assets is $8.5 billion.
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.
Collections from asset sales reduce Treasury borrowing and, therefore, have the potential to lower interest outlays in subsequent
years. In addition, the savings from improved management of
credit programs that occur as a consequence of asset sales are not
explicitly reflected in the budget. Finally, to the extent that newly
made loans are sold without recourse, the difference between the
face and market values provides an objective measure of the subsidy implicit in loan programs.
The nonrecourse requirement of loan asset sales is an important
part of the pilot program. Although selling with recourse would
yield a higher initial price than selling loans without recourse, the
primary reason behind loan asset sales is to improve the Government's credit management practices. Federal credit programs were
designed with an emphasis on granting loans, rather than collecting and servicing loans; as a result, delinquency and default rates
are frequently much higher than in the private sector. In addition,
prior to the current loan sales program, agency procedures and
standards varied and many field offices had inadequate documentation of their loans.
If loans are sold with recourse, there is no incentive for Federal
programs to improve the origination and documentation of loans
because borrowers will rely on the Federal guarantee rather than
demand improved credit management of the underlying loans.
Also, selling loan assets to the public with a Government guarantee is a form of Federal borrowing from the public in the sense that
a contingent liability is created. Since this type of borrowing from
the public is more costly than issuing Treasury securities—purchasers of the guaranteed loan assets typically offer prices well
below the face value of the loans because the assets may be relatively illiquid or have unique characteristics that reduce their
value to the purchaser—it is inefficient.
Management improvements have already occurred as a result of
the three sales completed. Specifically, loan originations have been
improved by including more rigorous legal review to ensure the
enforceability of each loan, and deficiencies in the documentation
of loans, as well as in the information systems used to track loan

SPECIAL ANALYSIS F

F-ll

repayments, have been identified and will be corrected. Also,
future sales will benefit from past sales in two ways. First, if
default and recovery experience on the portfolios sold turn out to
be better than expected, the Government will benefit to the extent
that more optimistic assumptions will raise the proceeds from
future sales. Second, the continuing sale of similar assets develops
buyer familiarity with the Government assets and enhances the
salability of future issues.
To the extent possible, the sale of new loans will be emphasized
in the 1988 and 1989 sales. This goal is in keeping with the credit
reform initiative objective of measuring the subsidy element of
Federal credit programs as the difference between the face and
market value of a loan. The sale of loans as they are originated, as
opposed to the sale of existing loan assets, not only provides information on the subsidy inherent in Federal programs, but it more
directly encourages improvements in loan origination and documentation practices. Loans sell at a higher price if screening and
documentation are up to private sector standards. The sale of loans
close to the time of origination would make this connection between improved credit management and higher asset prices more
direct than if the assets were to be sold at some indefinite point in
the future.
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 enterprises 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,

F-10

THE BUDGET FOR FISCAL YEAR 1989

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.
Like all contracts in the Government, leases are subject to the
requirements of the Anti-Deficiency Act (31 U.S.C. 1341). The act
requires the lessee agency to obligate funds sufficient to cover the
commitments of the Government in the contract. Leases typically
include termination clauses that limit the potential exposure of the
Government and, therefore, also limit the amount of funds needed
to be obligated.
Recently, however, several agencies and committees of the Congress have been proposing financing schemes involving lease-purchase arrangements. These are designed to allow agencies to enter
into multiyear contracts that do not include effective termination
rights and yet permit agencies to obligate only the annual costs, as
opposed to the full legal obligation of the lessee agency under the
contracts. Such proposals have included specific language exempting the transactions from the Anti-Deficiency Act. This, of course,
violates the intent of the Act by under-reporting the liabilities of
the Government. The administration is strongly opposed to any
such efforts by agencies or the Congress intended to hide outlays
and debts of the Government.
The Office of Management and Budget issued Circular No. A 104, "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. As originally issued, the circular did not apply to all lease-buy decisions. Recognizing 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 Circular A-104 on June 1,
1986. The revised circular prescribes a uniform method for the
economic analysis to be conducted when considering whether to use

SPECIAL ANALYSIS F

F-ll

leasing in place of direct Government purchase and ownership as a
means of acquiring the use of assets.
X I I . TAX-EXEMPT CREDIT

Interest on State and local government obligations generally has
been exempted from the Federal income tax since adoption of the
tax code in 1913. Federal tax exemption increases the demand for
these obligations, since it results in higher after-tax interest rates
for 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 have
averaged about 75 percent of taxable interest rates on long-term
obligations with similar credit risk. As a result of various provisions of the 1986 Tax Reform Act (Tax Act), the spread between
tax-exempt and taxable bonds has decreased markedly with taxexempt yields averaging 89 percent of long-term Treasury bond
yields in 1987. The Tax Act has additionally affected the supply as
well as the demand for municipal bonds. 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 taxexempt bonds.
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 who lack 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 under Federal income taxes.
Although tax-exempt financing alters the allocation of credit and
has costs similar to other Government financing programs, it is not
included in the credit budget. 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.

F-10

THE BUDGET FOR FISCAL YEAR 1989

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,
State and local governments purchase SLGS securities, which are
used as collateral for an outstanding bond issue of the entity. 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 1987, approximately $140 billion of these bonds were outstanding, which represents
nearly 20 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 default risk. This class of debt obligation is
therefore superior to Treasury securities.
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 for nongovernmental purposes. State or local governments typically establish
authorities that function as financial institutions in providing taxexempt financing to private borrowers. They use their tax-exempt
financing to purchase an asset, which in turn, is purchased or
leased 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.
Private purpose bonds have been a common means of financing
for a range of activities from sewage treatment plants and multifamily rental housing to owner-occupied housing and private edu-

SPECIAL ANALYSIS F

F-ll

cational facilities. Starting with the 1968 and 1969 tax acts and
most recently in the Tax Act of 1986, various prohibitions against
this type of bond were enacted. Tax-exempt private purpose bonds
are still permitted for the "public" activities undertaken by municipalities, but most of the business or private purpose bonds have
become subject to strict volume caps on a State-by-State basis.
Table F-17 shows the growth in the volume of long-term, taxexempt bonds. In anticipation of restrictions on tax-exempt bonds
being incorporated into the 1986 Tax Act, the growth in volume in
tax-exempt securities was unusually high in 1985. In 1986 and
1987, the volume of new issues dropped off markedly as a result of
the large volume issued in 1985 and the effects of tax reform.

Table F-17. TAX-EXEMPT FINANCING
(In billions of dollars)
Actual
1978

1979

1980

1981

1982

1983

1984

1985

1986

Preliminary
1987

Estimated
1988

1989

19.7

28.1

32.5

30.9

49.6

57.1

74.0

121.6

29.9

31.0

28.8

27.4

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
5.3
0.7

20.5
12.8
5.5
2.2

41.5
14.3
25.0
2.2

7.7
5.1
2.2
0.3

8.4
6.2
1.9
0.3

6.5
4.2
1.8
0.5

4.5
2.0
1.9
0.6

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

38.2
4.0
7.7
17.8
12.3

6.2
2.0
2.4
7.8
3.9

12.3
1.8
2.5
2.8
3.2

13.1
1.8
1.6
2.8
3.0

14.0
1.8
1.2
2.8
3.0

29.3

20.3

22.0

24.2

36.3

36.2

41.7

99.6

115.5

68.8

72.0

77.0

49.1

48.4

54.5

55.1

84.9

93.3

115.7

221.2

145.4

99.8

100.8

104.4

Private purpose tax-exempts

Public purpose tax-exempts3
Total new issues, long-term tax

exempts4

11.0

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 F

F-ll

The pattern of growth in new issues of private purpose taxexempt bonds was similar to the pattern of issuance for all bonds.
In 1985, the volume of private purpose bonds issued rose dramatically and then dropped off considerably in 1986 and 1987.
In 1976, private purpose tax-exempt bonds accounted for onethird of total tax-exempt, long-term issues. This percentage rose to
60 percent by 1980, and remained fairly constant until 1986 when
the percentage dropped back to 20 percent of the total. Again, the
change in the proportion of private purpose versus public purpose
bonds reflects the 1986 Tax Act limits on this type of tax exemption.
Owing to the specific provisions of the 1986 Tax Act, the supply
and the demand for municipal bonds are both expected to decrease.
In addition, the type of bonds issued as well as the type of investors
purchasing bonds are expected to change.
More specifically, the tax reform provisions influencing the issuance of municipal bonds include:
• Restricting the type of allowable uses for tax-exempt bonds to
Government use and certain private activity bonds. Taxexempt bonds can no longer be used to finance pollution
control facilities, sports stadiums, convention facilities, or
parking complexes.
• Imposing a single unified cap by State on most private activity tax-exempt bonds. The annual cap was the greater of $75
per capita or $25 million in 1987 and $50 per capita or $100
million beginning in 1988. This cap applies to all private
activity bonds except bonds under 501(c)(3)—nonprofit hospitals and private universities and colleges, qualified veterans
mortgages, and publicly owned airports, docks, wharfs, and
solid waste facilities.
• Permitting advance refundings only for governmental use and
501(c)(3) bonds as well as imposing a limit of at most two
advance refundings in an issue.
• Restricting the use of small issue industrial development
bonds (a particular type of private purpose bond) to manufacturing facilities (however, even this limited use of small issue
industrial development bonds will expire on December 31,
1989).
On the demand side of the municipal bond market, the outlook is
less predictable. The across-the-board reduction in marginal tax
rates for both individuals and corporations, the alternative minimum tax provision that could be triggered for certain taxpayers
investing in industrial development bonds that are still exempt
under the regular tax, and the elimination of the tax deduction on
interest that commercial banks used to enjoy when they borrowed
money to buy municipal bonds are three provisions that will tend

F-10

THE BUDGET FOR FISCAL YEAR 1989

to reduce the demand for tax-exempt bonds. Still, the Tax Act also
includes provisions that will tend to increase the demand for taxexempt bonds. Individuals who have not previously purchased taxexempt bonds may turn to the municipal market as other means
for sheltering income from Federal income tax are sharply curtailed. Similarly, the base-broadening measures aimed at business
will tend to increase taxable income in certain sectors of the economy and may increase the demand for municipals.
XIII.

SUMMARY

To gain better control over Federal credit, since January 1980
the budget has included a credit control system, composed of the
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 management improvement 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. The subsidy costs of operating these programs could
then be compared to the cost of grants and other Federal spending
programs. Policy makers would thus have information to choose
the form of Federal activity that is most cost effective in delivering
economic and social benefits.
X I V . APPENDIX: ADDITIONAL DISCUSSION OF FEDERAL CREDIT
PROGRAMS AND RELATED ISSUES IN THE 1 9 8 9 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 ("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).

SPECIAL ANALYSIS F

F-ll

• Part 6b of the Budget ("Federal Credit") presents an outline
of the credit reform initiative and a summary of much of the
material in this special analysis.
• Part 6g of the Budget ("Summary Tables") contains summary
tables of the credit budget totals (Table 1) and summaries by
agency and function of direct loan obligations, guaranteed
loan commitments, and program subsidies (Tables 4 and 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.
• The Historical Tables contain data on total direct loan obligations by sector—agriculture, business, education, and housing—and by agency or program for the period 1951-1993.
• Management of the United States Government, contains discussions of credit program management issues, the debt collection report, and agency credit management goals.

Table F-I9.GUARANTEEDLOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued

Funds Appropriated to the President:
Economic support fund

Estimate

Actual 1987

Agency or Program

Loan disbursements..
Change in t
Outstandings..

Foreign military sales..

Obligations
Loan disbursements..
Change in t
Outstandings.,

Guarantee reserve fund (foreign military sales defaults).

Obligations
Loan disbursements.,
Change in t
Outstandings

OPIC loan subsidies.

Obligations
Loan disbursements..

1989

AID functional development assistance..

Obligations
Loan disbursements.,
Change in c
Outstandings..
Obligations
Loan disbursements..
Outstandings..

1992

1991

25
65
-43
6,267

-73
6,194

6,116

6,035

-81

—87
5,948

4,049
4,351
1,066 —5,070
19,865
24,935

4,460
4,111
-1,571
18,293

4,540
4,286
-1,966
16,327

4,615
4,674
1,573
17,900

4,680
4,498
1,225
19,125

1,257
559
1,884

738
643
2,528

427
40
2,568

115
-5
2,563

143
-42
2,521

18
7

18
11
11
19

109
69
5
6,310
4,053
4,498

710
-95
1,325

Outstandings..
OPIC.

1990

23
13

124
263
229
3,654

23
13
4
53
65
260

220

3,874

260
215
4,089

—78

-1

220
169
4,258

—6

200

182 .
108

140
4,398

4,506

AID development loans revolving fund.,

AID private sector loan subsidies..

AID private sector revolving fund.

AID housing & other credit guarantees..

AID miscellaneous appropriations..

Agriculture:
Farmers Home Administration.Agricultural credit insurance fund.

Agricultural credit insurance fund.

Obligations
Loan disbursements.
Change in i
Outstandings..

-256
8,052

-279
7,773

-295
7,478

Obligations
Loan disbursements..
Change /
Outstandings..

Obligations
Loan disbursements.
Change in t
Outstandings.

-244
6,696

-240
6,456

2
4

3
4

3
4
4
11

45
23
92

12
9
7
24

51
19
112

51
20
132

- 6

49
21
179

52
19
198

51
15
213

-1

50
26
158

4
-4
31

8>HH
r
>

>
-7
318

- 6

312

Obligations
Loan disbursements.
Change in c
Outstandings.
Obligations
Loan disbursements
Change in outstandings..
Outstandings

-243
6,940

Obligations
Loan disbursements
Change in outstandings..
Outstandings
Obligations
Loan disbursements
Change in outstandings.
Outstandings

-295
7,183

1,493
1,513
-1,471
27,600

1,137
1,194
-2,270
25,329

-7
305

-7
298

-7
291

-7
284

600
570
570
570

500
505
452
1,022

400
405
299
1,321

100
115

1,303

70
-2,742
22,587

6
-2,554
20,033

15
-2,241
17,792

-1,918
15,874

-18

-7
277

EO
S
C

100
-31
1,272
6
-1,576
14,298

l
as
cn

Table F-I9.GUARANTEEDLOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued
Actual 1987

Agency or Program

Rural housing insurance fund..

Obligations
Loan disbursements.
Change in i
Outstandings.

Rural development loan subsidies..

Obligations
Loan disbursements..
Change in t
Outstandings.

Rural development insurance fund..

Obligations
Loan disbursements..
Change in i
Outstandings.

Commodity Credit Corporation:
Export loan subsidies

Short and medium term export loans.,

426
468
-1,796
6,431

1,714
1,918
301
26,811

426
542
-1,044
5,386

1989

Obligations
Loan disbursements..

Obligations
Loan disbursements..
Change in i
Outstandings.

1990

1991

1992

841
-2,434
24,377

206
-1,195
23,182

95
-1,228
21,954

-1,224
20,730

300
12
12
12

200
74
74
86

100
150
147
233

150
142
375

492
-810
4,576

221
70
4,646

168
14
4,660

81
-72
4,588

234
234
252

438
438

630
630
1,320

Obligations
Loan disbursements..
Change in t
Outstandings.

Outstandings.
Commodity loans.

1,716
1,766
-3,220
26,510

Estimate
1988

-49
778

-84
694

-10
684

16,566
16,566
-3,386
15,108

15,024
14,316
-4,735
10,374

10,746
10,746
—1,317
9,056

-26

657

10,923
10,923
-1,511
7,546

629

-42
587

10,330
10,330
-364
7,182

9,888
9,888
-471
6,710

- 2 8

Obligations
Loan disbursements
Change in outstandings..
Outstandings

-109
65

-55
10

Rescheduled guaranteed loans..

Obligations
Loan disbursements
Change in t
Outstandings..

478
513
2,626

Public Law 480 long-term export credits..

Obligations
Loan disbursements..
Change in t
Outstandings.

Rural electrification and telephone revolving fund..

Obligations
Loan disbursements
Change in outstandings..
Outstandings

Rural telephone bank subsidies..

Obligations
Loan disbursements
Change in outstandings..
Outstandings

Rural telephone bank..

Obligations
Loan disbursements
Change in outstandings..
Outstandings

185
52
13
1,447

Obligations
Loan disbursements..
Change in t
Outstandings..

Storage facility loans..

Commerce:
Economic development revolving fund..

EDA miscellaneous appropriations..

Obligations
Loan disbursements
Change in outstandings..
Outstandings

-10•

-73
-78

-136
-214

-196
-410

708
690
3,316

682
620
3,936

430
380
4,321

247
240
4,561

13
-51
4,510

804
740
597
11,219

777
780
543
11,762

739
742
499
12,261

752
751
607
12,868

764
763
556
13,424

775
774
578
14,002

1,033
1,342
-666
34,323

1,794
1,613
-1,117
33,206

1,489
-1,120
32,086

1,133
-918
31,168

847
-1,006
30,162

632
-1,274
28,887

177
11
11
11

177
50
50
60

177
85
85
145

177
110
110
255

177
106
-145
1,302

122
53
1,355

102
32
1,387

81
9
1,396

68
-4
1,391

145
-13
556

20
-114
441

15
-47
394

15
-13
381

-12

-5
85

—3
83

—3
80

370

-5.
364

Table F-I9.GUARANTEEDLOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued
Actual 1987

Agency or Program

ITA operations and administration

NOAA coastal energy impact fund

NOAA Federal ship financing (fishing)

Defense:
Navy industrial fund

Defense stock fund

Production guarantees

Estimate
1988

1989

1990

1991

1992

1993

Obligations
Loan disbursements
Change in outstandings
Outstandings

1
-1
7

Obligations
Loan disbursements
Change in outstandings
Outstandings

3
-8
89

—3
85

—3
82

-3
79

-3
75

-3
72

-3
69

Obligations
Loan disbursements
Change in outstandings
Outstandings

1
2
1
19

2
-2
17

2
-2
16

2
-2
14

2
-2
13

2
-2
11

2
-2
10

Obligations
Loan disbursements
Change in outstandings
Outstandings

77
40
1,788

-29
1,759

-38
1,721

-48
1,672

-48
1,624

-48
1,576

-48
1,528

Obligations
Loan disbursements
Change in outstandings
Outstandings

-1

Obligations
Loan disbursements
Change in outstandings
Outstandings

-10

-7

Education:
Guarantees of SLMA obligations.

Obligations
Loan disbursements.,
Change in c
Outstandings..

-30
4,940

-30
4,910

4,910

Guaranteed student loans

Obligations
Loan disbursements
Change in outstandings.
Outstandings

1,259
615
4,792

1,576
603
5,394

National direct student loans..

Obligations
Loan disbursements
Change in outstandings.,
Outstandings

-4,615
657

-17
639

College housing & academic facilities..

College housing loans.

Higher education..

Higher education facilities loans and insurance.

Obligations
Loan disbursements..
Change in i
Outstandings.
Obligations
Loan disbursements
Change in outstandings..
Outstandings
Obligations
Loan disbursements
Change in outstandings..
Outstandings
Obligations
Loan disbursements.,
Change in t
Outstandings..

-30

-30
4,850

-30
4,820

-30
4,790

1,690
531
5,925

1,690
319
6,244

1,634
43
6,287

1,527
-256
6,030

1,427
-543
5,488

-19
620

-18

-12

-13
577

-15
562

6
6

42
42
48

55
55
104

- 2

32
-1,035
1,194

35
-567
626

36
-424
203

30
13
216

-10

-33
17

-120
219

-111

108

602

-5

-70
38

590
19 .

121

120

3
218

24 .
6
225

-5
29

-5
24

118

-18

£
tr1
>

>
r
83

207

-4
34

-5
20

Oi
CD

Table F-I9.GUARANTEEDLOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued
Actual 1987

Agency or Program

Energy:
Geothermal resources

Bonneville Power Administration

Health and Human Services:
Medical facilities guarantees and loan fund

Health maintenance organization loan fund

Health resources and services

Health professions graduate student insurance fund

Estimate
1988

1989

1990

1991

1993

1992

Obligations
Loan disbursements
Change in outstandings
Outstandings

16
-7
122

Obligations
Loan disbursements
Change in outstandings. . .
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings

-8
129

-122

2
2

2
5

2
7

2
9

-13
92

-51
41

1
1

-41

Obligations
Loan disbursements
Change in outstandings
Outstandings

-54
440

-1
439

-2
438

-2
436

-2
435

-2
433

-2
432

Obligations
Loan disbursements
Change in outstandings
Outstandings

12
18
49

19
28
76

25
35
111

33
144

21
30
174

20
28
202

16
22
224

Housing and Urban Development:
Low-rent public housing

Obligations
Loan disbursements
Change in outstandings
Outstandings

Housing for the elderly or handicapped subsidies

Obligations
Loan disbursements
Change in t
Outstandings..

Housing for the elderly or handicapped

Obligations
Loan disbursements
Change in outstandings..
Outstandings

GNMA emergency mortgage purchases,

Mortgage-backed securities subsidies

Payments on mortgage-backed securities

FHA subsidies

Federal Housing Administration fund

Obligations
Loan disbursements
Change in outstandings..
Outstandings

-37
2,074

574
412
377
6,566
12

-427
457

-39
2,035

566
543
505
7,071

2 .

-55
402

-42
1,993

-44
1,949

—47
1,901

-50
1,851

-52
1,799

333

350

368
79
79
79

378
235
235
314

386
338
338
652

17
529
490
7,560

9
532
491
8,051

434
391
8,442

151
106
8,548

8,504

-393

a>
f
>

Obligations
Loan disbursements
Change in outstandings.
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings

276

104

Obligations
Loan disbursements
Change in outstandings.
Outstandings
Obligations
Loan disbursements
Change in outstandings..
Outstandings

169
92
102

802

399
4,645

41
811
-203
4,442

co
^
M

281
- 2 8

-22

103
53
41
41

151
107
148

675
42
4,484

654
280
4,764

168

-10

168

22
-9
34
168

21
-9
25
168

314

166

253
172
486

253
171
657

793
338
5,102

1,406
835
5,937

1,168

239

f
C
OI
I—
w

523
6,460

Table F-I9.GUARANTEEDLOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued
Actual 1987

Agency or Program

Rehabilitation loan fund

Revolving fund for liquidating programs

Obligations
Loan disbursements..
Change in c
Outstandings.
Obligations
Loan disbursements..
Change in l
Outstandings.

Nonprofit sponsor assistance subsidies..

Obligations
Loan disbursements
Change in outstandings..
Outstandings

Nonprofit sponsor assistance

Obligations
Loan disbursements..
Change in t
Outstandings.

Interior:
Bureau of Reclamation loans

BIA loan subsidies

Obligations
Loan disbursements
Change in outstandings..
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings

64
38
-52
658

Estimate
1988

1989

85
75

-20

639

329

—327
2

43
51
40
520

32
29
-349
171

-62

1990

47
-39
600

1991

-600

18
23
23
194

203

202

13
13
13
13

13
13
12
24

13
13

11
11

-1

BIA revolving fund..

BIA loan guaranty & insurance fund-

Transportation:
Railroad rehabilitation and improvement financing..

Federal-aid highways trust fund-

Right-of-way revolving fund-

Miscellaneous expired accounts.

Aircraft purchase loan guarantees.

MarAd ship loan subsidies..

Obligations
Loan disbursements..
Change in c
Outstandings.

7
10
108

13 .
14 .
6
115

-9
106

Obligations
Loan disbursements
Change in outstandings.
Outstandings

4
4
16

9
7
23

17
-7
16

Obligations
Loan disbursements
Change in outstandings..
Outstandings

4
3
638

18
-352
285

15
-151
134

Obligations
Loan disbursements
Change in outstandings..
Outstandings

-38
38

Obligations
Loan disbursements
Change in outstandings..
Outstandings

48
45
—27 .
104

Obligations
Loan disbursements
Change in outstandings.,
Outstandings
Obligations
Loan disbursements
Change in outstandings.
Outstandings
Obligations
Loan disbursements
Change in outstandings.
Outstandings

-18

-7
90

1
- 2

-29
105

-7
83

- 6

—3
6

-3
11

-105.

-21 ,

45
45

48
48

104

5
5
5
5

5
5
5
10

5
5
5
15

5
5
5
20

5
5
5
24

O
I—i
>
t"1
>
ss

%
co

-1

15
12
53

-a
00

Table F-I9.GUARANTEEDLOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued
Actual 1987

Agency or Program

MarAd Federal ship financing fund

Environmental Protection Agency.Abatement, control, and compliance.,

NASA-

Veterans Administration:
Vendee loan and repurchase subsidies..

Vendee loans and loans repurchased.

Direct loan subsidies..

Obligations
Loan disbursements
Change in outstandings.
Outstandings

343
137
1,612

Obligations
Loan disbursements
Change in outstandings..
Outstandings
Obligations
Loan disbursements
Change in outstandings..
Outstandings

—79

Estimate
1988

1989

5
255
244
1,856

Obligations
Loan disbursements.,
Change in t
Outstandings..

1,008
1,223

1,204

100
91
1,946

1991

1992

100
93
2,039

100
93
2,133

100
94
2,227

-6

- 6

17
49
46
74

100

-91
717

-105
612

-121

-138
354

-157
197

959
959
956
956

712
713
703
1,659

606
608
601

2,260

571
573
568
2,828

16
74
-260
626

7
35
-192
434

5
23
-168
266

3
17
-161
105

1
1

Obligations
Loan disbursements..
Change in t
Outstandings..
Obligations
Loan disbursements.
Change in c
Outstandings..

1990

1,061
1,223
-318
886

491

*
2

Direct loan revolving fund.

Other veterans programs

District of Columbia.Loans to the District of Columbia

Obligations
Loan disbursements..
Change in c
Outstandings.
Obligations
Loan disbursements
Change in outstandings.
Outstandings
Obligations
Loan disbursements
Change in outstandings.,
Outstandings

2
2
-27

2
2

-59
16

1
1

1
1
- 6

-293
715

1
1

—3
27

—3
24

-3
21

-3
19

-30
685

—31
654

-33
621

-35
586

-37
549

-39
510

705
103
96
96

718
252
218
315

730
371
297
612

740
431
309
921

751
473
302
1,223

606

-1,471
8,178

428
-960
7,218

194
-1,148
6,070

104
-1,076
4,994

31
-1,097
3,898

-1

-216
2,872

-50
2,822

-50
2,772

-50
2,722

-50
2,672

100
100

74
74
-35
1,722

25
25
15
1,737

25
25
15
1,752

25
25
15
1,767

25
25
15
1,782

Export-Import Bank.

Obligations
Loan disbursements
Change in outstandings..
Outstandings

677
468
-3,149
11,202

693 .
794
-1,552
9,649

Obligations
Loan disbursements
Change in outstandings..
Outstandings

-334
3,089

3,088

Obligations
Loan disbursements
Change in outstandings..
Outstandings

96
96
83
1,769

-1

-4
30

Obligations
Loan disbursements
Change in outstandings..
Outstandings

Federal Savings and Loan Insurance Corporation

1
-i 7

- 6

Export-Import Bank loan subsidies.

Federal Deposit Insurance Corporation1

-23
75

-12

1,757

3
>
r
>
>

KJ
HH
CO

I
Ol

Table F-I9.GUARANTEEDLOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued
Actual 1987

Agency or Program

National Credit Union Administration:
Share insurance fund

Central liquidity facility-

Small business:
Business and investment loans..

Small business investment companies.

Small business development companies..

Disaster loan subsidies.

Obligations
Loan disbursements
Change in outstandings.,
Outstandings

2
2

Estimate
1988

1989

20
20

1990

5
5

1991

1992

15
20

-1

-5
14

-5

Obligations
Loan disbursements
Change in outstandings..
Outstandings

106
106
6
112

127
127
25
137

144
144
25
162

150
150
25
187

150
150
25
212

150
150
25
237

Obligations
Loan disbursements
Change in outstandings.,
Outstandings

670
-159
2,874

85
608
-158
2,716

500
-420
2,296

421
-313
1,983

—87
1,896

282

170
—167
1,729

Obligations
Loan disbursements
Change in outstandings.,
Outstandings

-226
741

-130
611

-UO

-100
401

-100
301

221

Obligations
Loan disbursements
Change in outstandings..
Outstandings

115
84
900

60
10
910

-380
530

-530
265
239
172
489

265
239
145
634

Obligations
Loan disbursements..
Change in t
Outstandings..

-17

501

265
119
112
112

265
239
205
317

-5

Obligations
Loan disbursements
Change in outstandings
Outstandings

208
209
-503
3,719

350
224
-394
3,325

158
-942
2,383

-754
1,629

-607
1,022

Obligations
Loan disbursements
Change in outstandings
Outstandings

97
97
16
267

72
72
-6
261

70
70
-23
238

68
68
-12
226

65
65
-6
220

62
62
-8
212

59
59
-10
203

Seven States.

Obligations
Loan disbursements
Change in outstandings
Outstandings

156
156
-16
1,824

212
212
-80
1,744

180
180
169
1,912

208
208
-362
1,550

330
330
-190
1,360

247
247
-30
1,330

239
239
-599
732

Area and regional development

Obligations
Loan disbursements
Change in outstandings
Outstandings

*
3

*
2

Disaster loans,

Tennessee Valley Authority:
Power program

Payments for Conrail securities

United States Railway Association,

Other agencies and programs.

Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings
Obligations
Loan disbursements
Change in outstandings
Outstandings

-1022

w
G
>
t-1
>
>
5
CO

>—t
C
O

-851

-89
3
68
-5
948

3
26
-75
873

2
28
-79
794

3
3

-86
708

3
3

-77
631

3
3

-58
573

3
3

-43
530

Table F-18. DIRECT LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued
Actual 1987

Agency or Program

Grand total, net direct loans

Obligations
Loan disbursements
Change in outstandings
Outstandings

1989

29,817
28,817
20,005
35,171
34,468
27,651
-18,984 -16,211 -10,626
234,239 218,027 207,402

* $500,000 or less.
1 Direct loan obligations and disbursements for these programs represent increases in their holdings of loan assets rather than cash disbursements.

Estimate
1988

1990

19,877
25,553
-8,255
199,147

1991

19,195
24,433
-2,432
196,715

1992

18,321
23,238
-3,574
193,141

1993

19,094
23,033
-4,440
188,701

Table F-I9. GUARANTEED LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued
Agency or Program

Funds Appropriated to the President:
Foreign military sales

OPIC loan subsidies.

Overseas Private Investment Corporation..

Actual 1987

Commitments
New guaranteed loans...
Change in outstandings
Outstandings

-20

140

Estimate
1988

5,153
5,153
5,133
5,273

Commitments
New guaranteed loans...,
Change in outstandings
Outstandings
Commitments
New guaranteed loans....
Change in outstandings.,
Outstandings

200

85
40
308

200
80

30
338

1989

2,300
2,300

2,280
7,553

1990

1991

1992

3,266
3,266
2,730
10,283

-562
9,721

-541
9,180

181
114
92
171

184
114
70
242

175
11
11
11

178

69
19
357

52
-23
333

68
80

273

-51
111

-60

AID private sector loan subsidies..

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings

100

100
25
25
25

100
50
50
75

100
75
71
146

AID housing & other guarantee subsidies..

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings

100

100
50
50
50

AID housing and other credit guarantees..

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings

145
112
1,535

160
124
1,659

125

75
33
1,778

145
140
112
1,328

125
125
95
1,423

1,745

Table F-I9. GUARANTEED LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued
Agency or Program

Agriculture:
Rural electric and telephone loan subsidies..

Rural electric and telephone revolving fund..

Farmers Home Administration.Agricultural credit subsidies..

Agricultural credit insurance fund..

Rural housing insurance fund

Rural development insurance subsidies..

Estimate

Actual 1987

Commitments
New guaranteed loans.
Change in i
Outstandings.
Commitments..
New guaranteed loans.,
Change in t
Outstandings..

582
602

404
1,434

2,000
2,000
1,985
3,419

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings
Commitments
New guaranteed loans....
Change in outstandings..
Outstandings
Commitments
New guaranteed loans.,
Change in i
Outstandings.,
Commitments
New guaranteed loans.,
Change in i
Outstandings.

1990

1989

1,565
1,216
700
2,488

2,793
2,074
1,345
3,834

-5
177

-140
37

1991

1992

1,319
179
179
179

1,413
581
581
760

1,413
875
875
1,634

1,413
1,059
1,057
2,692

-15
3,404

-15
3,389

-15
3,374

-15
3,359

3,600
1,615
1,615
1,615

3,675
3,292
2,969
4,584

3,750
3,396
2,398
6,982

4,050
3,830
2,269
9,251

1,321
357
4,191

-757
3,433

212

375
-354
3,079

90
-505
2,575

-1

35
96
19
19
19

- 2

-5
28

-6

196
57
54
73

296
111

396
176
154
329

101
175

Rural development insurance fund

Commitments
New guaranteed loans..
Change in outstandings
Outstandings

CCC export loan subsidies,

Commitments
New guaranteed loans..
Change in outstandings
Outstandings

Commodity Credit Corporation export credits

Commitments
New guaranteed loans
Change in outstandings.
Outstandings

Commerce:
Economic development programs

ITA operations and administration,

National Oceanic and Atmospheric Administration

Education:
Guaranteed student loans

Commitments
New guaranteed loans..
Change in outstandings
Outstandings
Commitments
New guaranteed loans..
Change in outstandings
Outstandings

115
75
-438
1,918

2,998
2,447
123
3,732

96
116
-265
1,653

5,500
5,500
3,492
7,224

64
-189
1,464

30
-213
1,251

-20
-234
1,017

-83
-264
753

-161
-310
443

3,500
3,500
3,500
3,500

3,500
3,500
2,450
5,950

3,500
3,500
1,400
7,350

3,500
3,500
350
7,700

3,500
3,500
300
8,000

-2,879
4,346

-2,240
2,106

-1,729
377

-63
314

-57
257

-24
79

-23
56

-19
37

-10
27

-6
22

20
8

-191
95

103

- 2

-18

18 .

Commitments
New guaranteed loans..
Change in outstandings
Outstandings

80
57
250

85
85
64
315

-20
294

-18
277

-18
259

-18
242

-18
224

Commitments
New guaranteed loans..
Change in outstandings
Outstandings

9,730
9,266
2,585
40,067

9,576
9,124
1,190
41,256

10,039
9,567
1,049
42,306

10,521
10,029
860
43,166

11,027
10,515
813
43,979

11,564
11,030
1,037
45,016

12,250
11,688
1,242
46,258

co
•d
o
>
t-1
>

>
r*<
O
(C
-H
CO

I
00

Table F-I9. GUARANTEED LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued
Actual 1987

Agency or Program

Energy:
Geothermal resources development fund

Health and Human Services:
Medical facilities guarantees and loan fund

Health professions graduate student insurance fund

Health education assistance loan subsidies

Housing and Urban Development:
Low-rent public housing

Revolving fund (liquidating)

Estimate
1988

1989

1991

1990

1992

Commitments
New guaranteed loans...
Change in outstandings.
Outstandings

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings

792

-106
686

-102
584

-114
470

-126

343

-134
209

350
350
319
1,623

77
77
35
1,659

-39
1,620

-40
1,580

-40
1,539

100
100

Commitments
New guaranteed loans...
Change in outstandings.
Outstandings

221

221
199
1,305

Commitments
New guaranteed loans....
Change in outstandings.,
Outstandings
Commitments
New guaranteed loans..
Change in i
Outstandings..
Commitments
New guaranteed loans.
Change in t
Outstandings..

100

200

300

100

75
75
75
375

-300
5,677

-325
5,352

-350
5,002

-375
4,627

-15
24

-13
11

100

-249
6,252

-275
5,977

- 8

100

FHA loan subsidies.

Commitments
New guaranteed loans..
Change in outstandings
Outstandings

Federal Housing Administration (FHA)

Commitments
New guaranteed loans..
Change in outstandings
Outstandings

GNMA mortgage securities subsidies

Commitments
New guaranteed loans..
Change in outstandings
Outstandings

GNMA mortgage-backed securities.

Commitments
New guaranteed loans...
Change in outstandings.
Outstandings

Interior:
BIA guaranteed loan subsidies

BIA loan guaranty & insurance fund.

Transportation:
MarAd Federal ship financing fund

61,790
34,972
34,801
34,801
79,995
94,088
51,897
275,417

66,309
54,018
51,519
137,460

68,339
55,822
50,469
187,929

70,060
57,355
49,939
237,868

59,850
49,324
15,425
7,685 -27,174 -42,048 -41,153 -39,264 -42,539
283,102 255,928 213,880 172,727 133,463
90,925
83,609
51,452
50,422
50,422

139,976
115,299
67,767
308,997

63,918
52,088
51,141
85,942

84,462
64,971
62,128
112,550

85,409
65,699
60,893
173,443

87,242
67,109
60,303
233,746

89,508
68,852
59,998
293,744

83,355
64,119
12,863
32,522 -22,690 —36,771 -35,984 -34,132 -31,303
341,519 318,829 282,058 246,074 211,943 180,640

i§

8
>

Commitments
New guaranteed loans..
Change in outstandings
Outstandings

45
45
43
43

45
45
42
85

45
45
40
125

45
45
39
164

45
45
37
201

Commitments
New guaranteed loans..
Change in outstandings
Outstandings

39
39
26
169

34
34
18
187

-25
162

-7
155

-7
148

-7
142

-6
136

Commitments
New guaranteed loans..
Change in outstandings
Outstandings

26
—716
4,279

-464
3,815

-291
3,524

-276
3,248

-262
2,986

-249
2,736

—237
2,500

go
HH
GO

00
00

Table F-I9. GUARANTEED LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued
Agency or Program

Aircraft purchase loan guarantees.,

Miscellaneous expired accounts..

Treasury:
Biomass energy development..

Veterans Administration:
Loan guarantee subsidies..

Loan guarantee revolving fund..

Export-Import Bank subsidies..

Estimate

Actual 1987

1989

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings

-77
199

131

-38
93

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings

997

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings

-218

578

34,900
34,900
3,757
146,319

1990

1991

1992

-18

-11

997

555

17,940
17,940
16,743
16,743

17,033
17,033
14,804
31,547

15,973
15,973
11,464
43,012

15,770
15,770
9,694
52,706

18,287
18,287
675 -13,780 —12,547 -10,244
146,994 133,214 120,668 110,424

-8,708
101,716

—12
565

-10

10,200
3,185
1,184
1,184

10,384
5,291
1,498
2,682

10,555
6,362
1,461
4,143

10,703
6,962
1,381
5,524

Export-Import Bank..

Commitments
New guaranteed loans...
Change in outstandings.,
Outstandings

6,754
3,852
294
5,079

14,601
3,890
-115
4,964

1,041
-1,125
3,839

1,633
-647
3,192

828
-554
2,638

447
-475
2,163

256
-423
1,740

Federal Savings and Loan Insurance Corporation..

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings

1,260
1,260
1,110
4,063

623
623
—367
3,696

325
325
218
3,913

100
100
50
3,963

100
100
50
4,013

100
100
50
4,063

100
100
50
4,113

National Credit Union Administration..

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings

5
5

4
4

Small business:
Business and investment loan subsidies.

Business and investment loans..

Pollution control equipment guarantees.

Disaster loans..

62
62

1
6

-1

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings

3,596
1,600
1,345
1,345

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings

3,383
3,255
584
9,014

3,741
3,200
440
9,454

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings

4
12

50
10
-5
272

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings

-i 7

277

-3

3,596
3,200
2,485
3,830

3,596
3,200
1,625
5,455

3,596
3,200
815
6,270

3,596
3,200
405
6,675

-2,280
6,411

-1,530
4,881

-830
4,051

-430
3,621

1,600
-1,035
8,691

•d
H
o

>
>
r
GO
GO

00
Cn

Table F-I9. GUARANTEED LOAN TRANSACTIONS OF THE FEDERAL GOVERNMENT (in millions of dollars)—Continued
Actual 1987

Agency or Program

Tennessee Valley Authority:
Power program

Other agencies and programs..

Subtotal, guaranteed loans (gross).

Less secondary guaranteed loans:1
GNMA guarantees of FHA/VA/FmHA pools..

GNMA guarantees subsidies..

Subtotal, guaranteed loans (net).

i
00
01

Estimate
1988

1989

1991

1990

1992

1993

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings

Commitments
New guaranteed loans...
Change in outstandings.
Outstandings

30
54
32
669

144
130
111
780

72
19
799

-67
732

Commitments
New guaranteed loans...,
Change in outstandings..
Outstandings

282,040
266,982
127,697
816,483

206,588
164,249
53,270
869,753

198,914
159,493
44,344
914,097

202,587
165,734
43,662
957,759

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings

139,976
115,299
67,767
308,997

83,355
64,119
12,863
32,522 -22,690 -36,771 -35,984 -34,132 -31,303
341,519 318,829 282,058 246,074 211,943 180,640

-1

Commitments
New guaranteed loans....
Change in outstandings..
Outstandings
Commitments
New guaranteed loans....
Change in outstandings..
Outstandings

-1

83,609
51,452
50,422
50,422
142,064
151,683
59,930
507,486

123,233
100,130
20,748
528,235

115,306
95,178
16,611
544,846

-72
661

-77
584

-83
501

202,454 207,176 212,388
165,366 169,445 174,241
39,615
41,228
42,132
997,374 1039,506 1080,734

84,462
64,971

85,409
65,699
62,128
60,893
112,550 173,443

87,242
67,109
60,303
233,746

89,508
68,852
59,998
293,744

118,125
100,763
18,305
563,151

119,935
102,336
15,960
593,817

122,880

117,045
99,667
14,706
577,857

105,389
12,533
606,350

H
ffi
M
W
a
a
o
M
H
^

0
0
CO

Less guaranteed loans held as direct loans:2
By GNMA

Total, primary guaranteed loans

Commitments
New guaranteed loans
Change in outstandings
Outstandings

12
—427
457

2
-55
402

Commitments
New guaranteed loans
Change in outstandings
Outstandings

142,064
151,671
60,357
507,029

123,233
100,128
20,803
527,833

-393

115,306
95,178
17,004
544,837

118,125
100,763
18,305
563,142

117,045
99,667
14,706
577,848

119,935
102,336
15,960
593,809

122,880
105,389
12,533
606,342

* $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 When guaranteed loans are acquired by a budget account, they are counted as direct loans and shown in the direct loan table. Consequently, they are deducted from the totals in this table.

GG
TJ
M
O
HH
>
r
>
>
5
23

i
00

F-88

THE BUDGET FOR FISCAL YEAR 1989
Table F-20. LENDING AND BORROWING BY GOVERNMENT-SPONSORED ENTERPRISES
(In millions of dollars)
Actual
1987

Enterprise

Estimate
1988

1989

LENDING
Student Loan Marketing Association

Federal National Mortgage Association:
Corporation Accounts

Mortgage-backed securities.

Farm Credit Banks:
Banks for cooperatives-

Obligations
New transactions
Net change
Outstandings

5,260
5,260
3,540
17,729

5,786
5,786
3,893
21,622

6,365
6,365
4,283
25,905

Obligations
New transactions
Net change
Outstandings

22,171
22,690
-1,788
95,929

20,308
21,293
7,715
103,644

20,769
17,996
5,996
109,640

Obligations
New transactions . ,
Net change
Outstandings

80,944
66,999
44,181
130,540

43,067
37,560
21,764
152,304

42,266
36,861
21,528
173,832

Obligations
New transactions . . .
Net change
Outstandings

15,767
15,767
485
8,162

46,026
46,026
-272
7,891

45,593
45,593
343
8,233

Federal intermediate credit banks-

Obligations
New transactions
Net change
Outstandings

2,570
2,570
-3,731
9,478

7,180
7,180
-251
9,229

7,628
7,628
-245
8,982

Federal land banks

Obligations
New transactions
Net change
Outstandings

2,555
2,555
-10,965
32,504

1,606
1,606
-1,354
31,151

2,041
2,041
-137
31,014

Obligations
New transactions
Net change
Outstandings

197,143
197,143
20,802
120,865

225,000
225,000
12,907
133,772

260,000
260,000
13,997
147,769

Obligations
New transactions
Net change
Outstandings

1,983
1,983
-1,998
12,940

1,785
1,785
243
13,183

2,700
2,700
1,504
14,687

Participation certificate pools ]

Obligations
New transactions
Net change
Outstandings

99,125
99,125
63,349
208,350

74,335
74,335
50,219
258,569

74,799
74,799
45,960
304,529

Subtotal, lending (gross).

Obligations
New transactions
Net change
Outstandings

427,518
414,092
113,875
636,497

425,093
420,571
94,864
731,363

462,161
453,983
93,229
824,591

Federal Home Loan Bank system.Federal home loan banks

Federal Home Loan Mortgage Corporation:
Corporation accounts

Less loans between sponsored enterprises.,

Obligations
New transactions
Net change
Outstandings

-406
825 1

-5
820

- 1

819

F-ll

SPECIAL ANALYSIS F

Table F-20. LENDING AND BORROWING BY GOVERNMENT-SPONSORED ENTERPRISES—Continued
(In millions of dollars)
Actual
1987

Enterprise

Less secondary funds advanced from Federal sources:
SLMA from FFB 2
Obligations
New transactions..
Net change
Outstandings
TVAto FNMA

Estimate

-30
4,940

-30
4,910

Obligations
New transactions..
Net change
Outstandings

4,198
31,877

-927
30,950

Obligations
New transactions..
Net change
Outstandings

1,058
4,063

-367
3,696

Obligations
New transactions..
Net change
Outstandings

-2,290
839

839

Obligations
New transactions..
Net change
Outstandings..

Less guaranteed loans held as direct loans by:
Federal National Mortgage Association3

Federal home loan banks

Federal Home Loan Mortgage Corporation3

Farm Credit Banks

Obligations
New transactions..
Net change
Outstandings

Student Loan Marketing Association2

Obligations
New transactions..
Net change
Outstandings

3,570
12,789

3,923
16,712

Obligations
New transactions..
Net change
Outstandings

427,518
414,092
107,785
581,073

425,093
420,571
92,277
673,352

Total lending

BORROWING
Student Loan Marketing Association

Net change....
Outstandings..

5,803
21,329

6,101
27,430

Federal National Mortgage Association4

Net change....
Outstandings..

45,170
223,158

27,614
250,772

401
8,890

-185
1,705

Farm Credit System:
Farm Credit System Financial Assistance CorporationBanks for cooperatives

Net change....
Outstandings..
Net change....
Outstandings..

F-88

THE BUDGET FOR FISCAL YEAR 1989

Table F-20. LENDING AND BORROWING BY GOVERNMENT-SPONSORED ENTERPRISES—Continued
(In millions of dollars)
Estimate

Actual
1987

Enterprise

1988

Federal intermediate credit banks-

Net change
Outstandings..

-2,721
10,240

-90
10,150

Federal land banks..

Net change
Outstandings..

-7,325
35,300

-515
34,785

Net change....
Outstandings..

16,997
105,080

9,920
115,000

Net change....
Outstandings..

496
496

3,874
4,370

Net change
Outstandings..

65,592
225,409

51,003
276,412

Net change....
Outstandings..

124,413
629,902

97,722
727,624

Net change....
Outstandings..

-406
825

-5

Net change....
Outstandings..

-30
4,940

-30
4,910

Federal Home Loan Bank system:
Federal home loan banks
The Financing Corporation.
Federal Home Loan Mortgage Corporation..
Subtotal, borrowing (gross).
Less borrowing from other sponsored enterprises..
Less borrowing from Federal sources:
SLMA from FFB 2
TVAto FNMA.

Net change
Outstandings..

820

Total borrowing from the public..

Net change....
Outstandings..

124,849
624,057

97,757
721,814

Less investments in Federal securities.

Net change....
Outstandings..

3,281
5,266

-1,546
3,720

Net change....
Outstandings..

4,198
31,877

-927
30,950

Federal home loan banks..

Net change
Outstandings...

1,054
4,063

-367
3,696

Federal Home Loan Mortgage Corporation.

Net change
Outstandings..

-2,290
839

839

Farm Credit Banks.

Net change....
Outstandings..

-10

-7
4

Student Loan Marketing Association5

Net change....
Outstandings..

3,570
12,789

3,923
16,712

Net change....
Outstandings..

115,046
569,212

96,681
665,893

Less borrowing for guaranteed loans held as
direct loans by:
Federal National Mortgage Association

Total borrowed..

1 All new transactions are loans purchased from FHLMC corporation accounts.
2 All SLMA lending financed through the FFB has been counted in Table F-18 as direct loans. All SLMA loans are student loans guaranteed by
the Federal Government and, therefore, counted in Table F-19 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.
3 The estimates for 1988 and 1989 are made by OMB.
4 Loans purchased at discount are recorded at their acquisition cost.

SPECIAL ANALYSIS F

F-ll

Table F-21. FFB FINANCING OF AGENCY ACTIVITIES
(in millions of dollars)
Agency or Program

Actual

Estimates

1987

1988

1989

1990

1991

1992

1993

CREDIT RELATED ACTIVITIES
Overseas Private Investment Corp.:
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
Rural Electrification Administration.Loan asset purchases-.
New acquisitions
Net lending
Loans outstanding
Originations:
New acquisitions
Net lending
Loans outstanding
Medical facilities guarantees-.
New acquisitions
Net lending
Loans outstanding
Health maintenance organizations:
New acquisitions
Net lending
Loans outstanding
Small Business Administration:
Loan asset purchases:
New acquisitions
Net lending
Loans outstanding
Originations:
New acquisitions
Net lending
Loans outstanding
Foreign military sales credit:
New acquisitions
Net lending
Loans outstanding
Navy industrial fund:
New acquisitions
Net lending
Loans outstanding

- 1

-385
28,010

-385
27,625

-3,960
23,665

-3,322
20,343

-1,975
18,368

-5,510
12,858

-3,950
8,908

-150
28,951

-2,980
25,971

-1,725
24,246

-1,990
22,256

-1,415
20,841

-275
20,566

-410
20,156

170
170
8,048

-3,387
4,661

-200
4,461

4,461

4,241

394
224
4,465

258
-1,172
3,293

-297
19,508

-334
19,677

-372
19,707

-413
19,621

590
-248
21,196

803
-1,457
19,739

472
-641
19,099

608
-439
2,147

502
-464
1,181

402
-613
166

328
-695
-857

-6
102

-7
96

-96

-11
92

-49
42

-42

-7
22

-7
15

-6
9

-6
3

115
-143
1,640

60
-120
1,520

-490
1,030

-630
401

-100
301

-80
221

-60
161

1,099
367
19,164

623
-5,991
13,173

280
-2,740
10,433

74
-3,487
6,946

-303
6,643

-347
6,296

-349
5,947

77
40
1,788

-29
1,759

-38
1,721

-48
1,672

-48
1,624

-48
1,576

-48
1,528

635

-3

F-88

THE BUDGET FOR FISCAL YEAR 1989
Table F-21. FFB FINANCING OF AGENCY ACTIVITIES—Continued
(in millions of dollars)
Agency or Program

Low-rent public housing:
New acquisitions
Net lending
Loans outstanding
Revolving fund for liquidating programs
(HUD):
New acquisitions
Net lending
Loans outstanding
Community development grants:
New acquisitions
Net lending
Loans outstanding
Loans to territories:
New acquisitions
Net lending
Loans outstanding
Railroad programs:
New acquisitions
Net lending
Loans outstanding
Guarantees of SLMA obligations:
New acquisitions
Net lending
Loans outstanding
Federal building fund:
New acquisitions
Net lending
Loans outstanding
NASA:
New acquisitions
Net lending
Loans outstanding
WMATA:
New acquisitions
Net lending
Loans outstanding
Export-Import Bank:
New acquisitions
Net lending
Loans outstanding
Central liquidity facility (NCUA):
New acquisitions
Net lending
Loans outstanding
U.S. Railway Association:
New acquisitions
Net lending
Loans outstanding
Subtotal, credit related:
New acquisitions
Net lending
Loans outstanding

Actual
1987

Estimates
1988

1989

1990

1991

1992

1993

-42
1,993

-44
1,949

-47
1,901

-50
1,851

-52
1,799

22
-57
267

20
-56
211

-66
145

-55
90

-36
54

-20
34

-2
60

-2
59

-2
57

-2
55

-2
53

-2
51

-2
49

2
-5
55

1
-7
48

-9
39

-7
32

-5
27

-6
21

-7
19

-30
4,940

-30
4,910

4,910

-30
4,880

-30
4,850

-30
4,820

-30
4,790

-7
395

-8
387

-9
378

378

-79
809

-91
717

-105
612

-121
491

-138
354

-157
197

-115
82

177

511
-1,805
12,463

400
-1,843
10,621

257
-1,407
9,214

426
-1,368
7,845

-9
-973
6,872

114
-902
5,970

281
-918
5,052

106
6
112

127
25
137

144
25
162

50
25
187

50
25
212

50
25
237

50
25
262

1,158
2,430
1,431
3,368
- 2 , 4 0 0 -16,272 -12,715 -11,832
93,499
. 134,697 118,424 105,710

543
-5,867
87,632

566
-8,403
79,228

659
-7,044
72,188

-37
2,074

-39
2,035

-2
31

-31

63
24
324

-89

F-ll

SPECIAL ANALYSIS F
Table F-21. FFB FINANCING OF AGENCY ACTIVITIES—Continued
(in millions of dollars)
Agency or Program

Estimates

Actual
1987

1988

1989

1990

1991

1992

1,306
736
20,803

695
175
20,978

254
-22
20,956

816
-22
20,934

496

1993

OTHER ACTIVITIES
Tennessee Valley Authority:
Originations:
New acquisitions
Net lending
Loans outstanding
Acquisition of securities:
New acquisitions
Net lending
Loans outstanding
Postal Service:
New acquisitions
Net lending
Loans outstanding
Subtotal, other:
New acquisitions
Net lending
Loans outstanding
Total, all FFB financing:
New acquisitions
Net lending
Loans outstanding

156
-16
1,824

212
-80
1,744

180
169
1,912

1,809
1,309
16,386

1,075
1,075
17,461

1,194
694
18,155

1,635
1,499
4,353

1,500
1,239
5,592

1,641
1,380
6,972

1,827
1,500
8,472

1,900
1,500
9,972

504
28
10,000

10,000

3,600
2,792
22,563

2,787
2,234
24,797

3,015
2,243
27,039

3,133
2,236
29,275

2,595
1,675
30,950

758
6
30,956

1,312
-22
30,934

5,217
6,968
4,446
392 -14,038 -10,472
157,260 143,221 132,749

4,291
-9,596
122,773

3,138
-4,192
118,581

1,324
-8,397
110,184

1,971
-7,066
103,123

F-88

THE BUDGET FOR FISCAL YEAR 1989
Table F-22. FEDERAL PARTICIPATION IN DOMESTIC CREDIT MARKETS
(In billions of dollars)
Actual
1978

Total funds loaned in U.S. credit
markets 1
Direct loans
Guaranteed loans
Government-sponsored
enterprise loans 2
Federal and federally assisted
lending
Federal lending participation
ratio (percent)
Total funds borrowed in U.S.
credit markets 1
Federal borrowing from
public
Borrowing for guaranteed
loans
Government-sponsored
enterprise borrowing2
Federal and federally assisted
borrowing
Federal borrowing
participation ratio
(percent)

1979

1980

1981

1982

1983

1984

1985

1986

1987

379.0 413.0 359.0 410.5 391.1 547.6 649.5 687.5 830.0 642.7
6.3 28.0 11.2 - 1 9 0
19.8 19.6 24.2 26.1 23.4 15.3
13.4 25.2 31.6 28.0 20.9 34.1 20.1 21.6 34.6 60.4
25.2

28.1

24.1

32.4

43.3

37.1

53.1

60.7

58.4

72.9

79.9

86.5

87.6

86.5

79.5

110.3

15.4

17.7

22.3

22.1

22.4

15.8

12.2

16.0

379.0 418.5 351.1 409.5 393.3
59.1

33.6

70.5

79.3

13.4

25.2

31.6

28.0

21.4

21.9

21.4

34.8

93.9

80.7

123.5

24.8

19.3

35.2

83.3

107.8

129.1 149.2
15.6

23.2

511.4 700.7 758.2 906.1 723.8
197.3 236.3

151.7

135.0 212.3

170.8

20.9

34.1

20.1

21.6

34.6

60.4

43.6

34.0

55.5

57.9

103.2

115.0

142.1 199.5 280.4 246.4 276.8 374.1 327.1
34.7

50.7

54.8

35.2

36.5

41.3

45.2

1 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.

SPECIAL ANALYSIS G

TAX EXPENDITURES
The Congressional Budget Act of 1974 (Public Law 93-344) requires that a list of tax expenditures be included 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 a tax expenditure draws a distinction between
the baseline provisions of the tax structure and special or preferential provisions that are exceptions to the baseline structure. Public
Law 93-344 does not, however, specify the baseline provisions of
the tax law, so deciding which provisions are special or preferential
is necessarily a matter of judgment.
Prior to 1983, the list of tax expenditures in Special Analysis G
was almost identical to those published by the Congressional
Budget Office and the Joint Committee on Taxation. Both the
executive branch and congressional staffs used the same concept—
a "normal tax"—as the baseline. The normal tax standard they
used is a variant of a comprehensive income tax.
After 1982, tax expenditures in Special Analysis G were identified using an alternative baseline, the "reference tax law." This
year's Special Analysis G again displays tax expenditures identified
by both the reference tax baseline and the normal tax baseline. 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.
Before proceeding with this discussion it will be helpful to understand how the Tax Reform Act of 1986 (Public Law 99-514) has
affected the fiscal year 1988 tax expenditure budget. First, certain
tax expenditures were repealed outright, or restricted in scope,
while some new tax expenditures were enacted. Second, the act
altered the reference tax law and thereby changed the list of tax
expenditures identified by this standard. These two changes are
discussed below. Finally, the reductions in individual and corporate
tax rates called for by the act have reduced the value of almost all
tax expenditures. The top individual marginal tax rate was reduced
from 50 percent to 38.5 percent in 1987 and to 28 percent in 1988.

G-l

F-88

THE BUDGET FOR FISCAL YEAR 1989

The maximum corporate tax rate was reduced from 46 percent 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 was reduced by 23 percent in 1987 and by another 21
percent in 1988, a total of 44 percent as compared with 1986. For
corporations, the value of preferential deductions was reduced by
13 percent for each of the two years, a total of 26 percent.
In preparing the President's 1985 tax reform proposals and in
the course of the subsequent legislative debate on the Tax Reform
Act, a number of questions were raised concerning the normal tax
and reference tax law standards used for identifying tax expenditures. A number of provisions in the tax law were discovered that
could have been included in previous tax expenditure budgets. The
knowledge gained from tax reform is now being used to conduct a
comprehensive review of the tax expenditure budget concepts.
PRE-1983 BUDGET CONCEPTS

The "normal tax" structure used for identifying expenditures is
quite similar to a comprehensive income tax. Such a tax defines
taxable income as the sum of consumption, all other taxes, and the
change in net wealth in a given period of time. The normal tax is
not limited to a particular structure of tax rates, or by a specific
definition of the taxpaying unit (as between families and individuals). It also permits personal exemptions and a standard deduction. In addition, the normal tax, like a pure comprehensive
income tax, allows deductions from gross income when these are
expenses incurred to earn income and are subtracted in order to
arrive at a measure of taxable income. Examples are the deductions for interest incurred in financing income-producing assets
and for employee business expenses. The normal tax structure,
however, does make several major departures from a truly comprehensive income tax. For example:
• Under the normal tax structure, income is taxed when realized, not as it is accrued. Thus, for example, the tax deferred
on unrealized capital gains is not regarded as a tax expenditure.
• The current tax system taxes only cash income, and this is
reflected in the normal tax structure. The benefits that households receive from using their own capital to produce goods
and services for their own consumption are not included in
taxable income. Thus, the exclusion from tax of imputed
income from owner-occupied homes or the tax-free consumption by farmers of products grown on their farms, is not a tax
expenditure.
• The normal tax structure includes a separate tax on corporation income. The additional revenue resulting from the unin-

SPECIAL ANALYSIS F

F-ll

tegrated 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 during the time
assets are held. Thus it overstates real capital gains, interest
income or interest costs, and understates depreciation when
there is inflation. If the normal tax were a comprehensive
income tax, failure to take account of inflation in measuring
depreciation, capital gains, and interest income would be regarded as a negative tax expenditure. A failure to take account of inflation in measuring interest costs would be regarded as a positive tax expenditure, or subsidy for borrowing.
Notwithstanding these exceptions, the normal tax concept can be
thought of as a practical compromise with the ideal of a comprehensive income tax, one that avoids certain complexities while
preserving the general idea. Nevertheless, one could use a truly
comprehensive income tax as a standard where the failure to include accrued but unrealized income in the tax base would be a tax
expenditure. Alternately, the standard could be a comprehensive
personal tax on consumption. Here the failure to tax income that is
accrued but not realized would not be a tax expenditure, because
under a consumption based tax income earned but not consumed is
not taxable.
POST-1982 BUDGET CONCEPTS

Both definition and measurement of tax expenditures have undergone major changes in recent years. Two types of items had
been identified as tax expenditures in previous budgets: deviations
from general rules that could be compared to the subsidy and
transfer programs on the outlay side of the budget, and more
general deviations from some normative, comprehensive tax standard. The second group is no longer considered as tax expenditures.
To identify the "special" provisions that substitute for outlay
expenditures, tax expenditure budgets since fiscal year 1983 were
constructed using 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) the tax law would enable a taxpayer to
determine his tax liability in the absence of the provision, i.e., the
particular provision is an exception to a general rule that is part of
the "reference tax law"; and (b) the provision is sufficiently narrow
in scope that it could be replaced by an expenditure program
administrable by a Federal agency other than the Internal Revenue Service.

F-88

THE BUDGET FOR FISCAL YEAR 1989

Beginning with the fiscal year 1983 budget, tax expenditures
have also been estimated in terms of taxable "outlay equivalents."
This allows a comparison of the resource cost of tax expenditure
programs with other Federal Government expenditures, which are
pre-tax magnitudes. There are two reasons why taxable "outlay
equivalents" can be larger than revenue loss estimates.
The first reason is that some tax provisions are equivalent to taxfree grants. When tax benefits are not taxed themselves, it increases the subsidy by an amount equal to the additional "tax
saving" resulting from the tax exemption. For example, the Federal Government provides a 20-percent tax credit to the companies
that increase their research and experimentation (R&E) expenditures above a certain threshold. If companies making R&E expenditures were provided a direct grant, the grant would be included in
their taxable income and would be subject to tax. The R&E tax
credit however, is not included in the taxable income of the company, and thus it is equivalent to a tax-free grant. The outlay equivalent of the R&E credit is therefore larger than the revenue loss
associated with tax credits claimed.
The difference between "outlay equivalents" and revenue losses
does not arise for all provisions which are equivalent to tax-exempt
grants. If the grant is contingent on individuals' consumption decisions, then the grant is a price reduction, not an increase in the
individuals' taxable income. For instance, the mortgage interest
deduction reduces the after-tax interest rate on mortgage financing
and lowers individuals' taxes payable, but does not increase their
pre-tax incomes.
The second reason for a difference between taxable "outlay
equivalents" and revenue losses occurs when revenue losses are
partially offset by the loss of a tax benefit. For instance, the Targeted
Jobs Tax Credit (TJTC) is equivalent to a taxable grant, because
companies must include the amount of the tax credit earned in
taxable income by reducing the amount of deductions for wages by
the amount of the credit. The TJTC revenue estimate assumes that
companies' taxes will be increased due to these lower wage deductions, which partially offsets the amount of credits received. Federal budget expenditures which are taxable are not estimated taking
into account changes in taxable income resulting from the taxable
grant. Thus, if an equivalent targeted jobs program paid out $1
million, then the budget outlay would show $1 million, even though
the equivalent tax credit program would show a revenue loss of
less than $1 million. The outlay equivalent estimates make the
budget cost of tax subsidies equivalent to comparable budget cost
estimates of outlay programs.
Neither the Congressional Budget Office nor the Joint Committee on Taxation has adopted the reference tax law standard. Both

SPECIAL ANALYSIS F

F-ll

continue to use the modified income tax norm, described above, as
their basis for identifying tax expenditures. As a consequence, the
list of tax expenditures in the 1983 and 1984 Special Analysis G did
not fully correspond to these other lists of tax expenditures. Some
have found these discrepancies confusing. Beginning with the 1985
budget, therefore, both groups of tax expenditures have been listed
in Special Analysis G. The discussion below sets out in greater
detail the reference tax law used to identify the narrower set of tax
expenditures and identifies some of the differences between this
reference tax law and the normal income tax standard used prior
to 1983.
REFERENCE T A X RULES AND COMPARISON TO NORMAL T A X
STANDARD

The reference tax rules from which departures represent expenditure-like government programs include:
1. Definition of the taxpaying unit The taxpaying units are the
same in the normal and reference tax structures with one major
exception.1 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 received by 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. The Tax Reform
Act of 1986 generally did not change these provisions, so the reference tax law is unchanged.
2. Tax rate schedules. Separate schedules apply to the various
taxpaying units. These schedules are all included in the reference
tax system. The Tax Reform Act of 1986 reduced the number of
personal income tax brackets and reduced marginal tax rates. 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 are thus
regarded as a tax expenditure.

1 The Internal Revenue Service code identifies as taxpaying units 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.

F-88

THE BUDGET FOR FISCAL YEAR 1989

3. General accounting rules for determining income subject to the
tax. Income subject to tax is defined as gross income less the costs
of earning that income. The Federal income tax has always defined
gross income to include: (1) consideration received in the exchange
of goods and services, including one's labor services, or property;
and (2) the taxpayer's share of gross, or net income earned and/or
reported by another entity.2 Under the reference tax rules, therefore, gross income does not include gifts, defined as receipts of
money or property that are not consideration in an exchange, or
most transfer payments, which can be thought of as gifts from the
Government. Gross income does, however, include transfer payments associated with past employment, such as social security
benefits. The normal tax baseline also excludes gifts between individuals from gross income. Under the normal tax baseline used
prior to 1983 however, all cash transfer payments from government
to private individuals are counted in gross income, and exemptions
of such transfers from tax are identified as tax expenditures.
The costs of earning gross income are deductible in determining
taxable income under the reference tax rules. These costs include:
(1) expenses incurred in earning income from personal service (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 3 and an allowance for physical capital
used up in producing the output that generates the gross income of
the business; 4 and (3) interest paid creditors who have advanced
funds to help finance the ownership and use of assets by the trade
or business.
In the particular cases of individuals who hold "passive" equity
interests in businesses for which they report pro rata shares of
sales and expenses, the Tax Reform Act of 1986 imposed restrictions limiting the amounts of the above deductions reportable in a
year. For these purposes, a "passive" business activity is defined to
be one in which the holder of the interest, usually a partnership
interest, does not actively perform managerial or other participatory functions. For all his interests in "passive activities" the taxpayer may generally report no larger deductions for a year than
will reduce his taxable income from such activities to zero. Deductions in excess of the limitation may be taken in subsequent years,
or when the interest is liquidated.
With one exception, both the reference and normal tax law
standards have incorporated the general statutory provisions governing these allowable deductions. The exception is the rule for
2 Such as interest, dividends, rents, royalties, and profits of partnerships, subchapter S corporations, and
cooperatives.
3 Such as compensation of employees, goods and services purchased from other firms, royalties paid.
4 Depreciation in the case of machinery, equipment, and structures and depletion in the case of mineral
deposits.

SPECIAL ANALYSIS F

F-ll

determining tax depreciation allowances. Under the reference tax
law standard, the accelerated cost recovery system (ACRS) allowances 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) is the reference tax law
baseline for investments placed in service beginning with January
1, 1987. Thus, under the reference tax law standard, there are no
tax expenditures from "accelerated depreciation."
Under the normal tax standard baseline, however, the depreciation for personal property is determined by using statutory accelerated methods 5 over tax lives equal to mid-values of the asset
depreciation range (ADR).6 The depreciation baseline for real property is computed using 40-year straight line depreciation. Consequently, from 1981 through 1986, the ACRS depreciation provisions
generated tax expenditures under the normal tax baseline. Since
the Tax Reform Act of 1986 provides depreciation allowances approximately equal to those in the normal tax baseline for machinery and equipment, post-1986 investment will no longer generate
tax expenditures under either standard for investments of this
type.
In addition to determining what must be included in gross
income and what can be deducted, an operational income tax
system also stipulates rules for valuing the exchange of goods and
services and specifies when gross income is reportable and when
deductions may be taken. On these matters, both the reference and
normal tax law standards embody the provisions of enacted law
including: (1) valuation is determined at the time transactions
occur (realization as opposed to accrual accounting); (2) the market
value of services from owner occupied housing and other durable
goods or self-produced income, such as do-it-yourself repairs and
maintenance, are excluded; (3) historical costs determine allowable
deductions for capital cost recovery and the gain on the sale of an
asset (no inflation adjustments); (4) current expenses are deductible
from gross income in the period when the transaction is completed,
while capital expenditures are recovered by depreciation or depletion deductions over the asset's productive life; and (5) the accounting period to determine income subject to tax, computing tax due
and payable, and the dates when tax must be paid, as specified.
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.

5
6

Declining balance at double the straight-line rate or sum-of-years digits.
A statutory system in effect from 1971 through 1980.

F-88

THE BUDGET FOR FISCAL YEAR 1989
MAJOR DEPARTURES FROM THE REFERENCE RULES

Beginning with the 1983 budget, the reference tax law standard
has been used to identify as tax expenditures provisions that can
be thought of as substitutes for budget outlays. For example:
• Current law excludes some forms of employee compensation,
such as certain military housing and food allowances or employer-paid fringe benefits, from employees' gross income although they are clearly part of an employee's total compensation and are properly deductible from the gross income of the
trade or business of employers who are taxable entities.
• The interest payments on State and local tax-exempt government bonds are no less income than interest, dividends, rents,
and royalties received from other sources, but they are not
included in the bondholder's gross income.
• The dividend and interest receipts of pension funds are not
included as they accrue in the gross income of the taxable
beneficiaries who will ultimately receive them; they are reported only when they are paid out as retirement benefits
after compounding, perhaps for many years, at pre-tax interest rates.
Defense Department outlays for military personnel are lower
because part of military compensation takes the form of tax-free
housing and food allowances. Excluding this compensation from tax
substitutes for the higher direct outlays which would otherwise be
required to maintain an equivalent level of compensation. Compensation in this form, if received from another employer, would be
subject to tax. Similarly, the tax exclusion for interest paid by
State and local governments enables them to obtain funds at lower
rates. This exclusion is, therefore, equivalent to an interest subsidy
or capital grant to State and local governments on the outlay side
of the budget. The tax exclusion of employer-paid pension, health,
and other insurance premiums and the preferred treatment of
pension trust income are equivalent to direct Federal Government
subsidies that would partly pay for private retirement, health, and
insurance plans.
The tax laws also permit 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
would require. For example:
• Individuals may deduct contributions to charitable, educational, scientific, or religious organizations.
• Some oil, gas, and mineral producers may deduct a percentage depletion allowance that is not limited to recovery of the
cost of acquiring the deposit. In addition, some investments in
this type of property may be deducted in the year incurred,
rather than capitalized and recovered as production ensues.

SPECIAL ANALYSIS F

F-ll

These special rules permit investment costs to be recovered
more rapidly than the reference tax rules generally allow.
They, in fact, often permit more than the full investment to
be recovered tax free.
• Individuals are allowed to deduct mortgage interest from
their pre-tax incomes, although they have not reported the
(imputed) gross income they receive from the housing that the
mortgages finance.
These particular exceptions to the general rules for computing
taxable income have direct incentive effects that could just as well
be obtained with outlay programs. Matching grants to qualified
organizations based on contributor support could replace the
charitable deductions. Direct subsidies paid to mineral producers
could replace the preferential treatment of oil and mineral investments. Expanded Federal mortgage interest subsidy programs
could substitute for the deductibility of mortgage interest.
Finally, there are special exceptions to the general rules for
determining net income tax due and payable. After a taxpayer has
determined his pre-tax income, taking into account all preferential
exclusions from gross income and all the special deductions, and
has applied the appropriate tax rate schedule, there are still other
exceptions to consider before arriving at 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 imagine equivalent outlay programs that
would subsidize these activities directly.
All of these examples are tax expenditures using either the
reference tax rules or the normal tax rules. The major tax expenditures defined according to the normal tax baseline that are not tax
expenditures according to the reference tax rules are: deferral of
income of controlled foreign corporations, expensing of research
and development expenditures, progressive corporation income tax
rates, the tax exemption for certain government transfer payments, and the difference between statutory depreciation rules
(ACRS) for investments made between 1981 and 1986 and rules
providing a more accurate measure of economic income.
MEASURING T A X EXPENDITURES

Presenting budget outlays along functional lines, as in Part 5 of
the Budget, is a way of showing how the Federal Government

F-88

THE BUDGET FOR FISCAL YEAR 1989

influences the allocation of resources. The functions may be broadly categorized as: (1) the provision of public goods and services; (2)
the provision of subsidies; and (3) the payment of transfers. The
budget outlays for public goods, such as national defense, are used
to acquire the labor and capital services needed to produce such
goods. Subsidies, such as those for school lunches, are used to
reduce the effective price of the subsidized item. Transfers, such as
aid to families with dependent children, are intended to provide a
level of income to recipients they would not otherwise achieve.
These Government activities alter the composition of national
output. This occurs as a result of taxation or through the effects of
borrowing. There also will be direct effects because of the changes
in income and relative prices that these activities cause. Functional
budget outlay figures measure the resource cost to the Federal
Government of accomplishing the program objectives. Because
GNP measures the total 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 the
costs of specific programs, it is essential that the outlay figures be
both consistent and comprehensive. In particular, these costs
should reflect the pre-tax price of the resources. The market value
of the goods and services included in GNP covers indirect taxes
(sales and property taxes) as well as before tax incomes of wage
earners and property owners.7 Consistency requires that all budget
outlay measures also be stated in pre-tax magnitudes. Outlays for
the purchase of goods and services are generally gross of taxes.8
Similarly, subsidy outlays in the budget generally enter the gross
incomes of sellers of subsidized goods. In some instances government purchases (outlays) or subsidies are exempted from tax by a
special tax provision. When this occurs, the outlay figure understates the resource cost of the program and is, therefore, not comparable with other outlay amounts. For example, as noted above,
the outlays for certain military personnel allowances are not taxed.
If this form of compensation were treated as income taxable to the
employee, the Defense Department would have to make larger cash
payments to its military personnel to leave them as well off after
tax as they are now. The tax subsidy must be added to the taxexempt budget outlay to make this element of national defense
expenditures comparable with other outlays.
The estimates of tax expenditures in table G - l conform to the
functional budget classification for outlays. Table G - l figures are
The income of property owners is usually received in the form of rent, interest and profit.
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.
7

SPECIAL ANALYSIS F

F-ll

estimated as outlay equivalents, the magnitudes of which are consistent with direct budget outlays. The entries represent amounts
that could be added to the other functional budget outlays while at
the same time being added 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, 1987. In table G - l the estimates show the
expenditure equivalent of each special tax provision by fiscal year.
In estimating tax expenditures it is assumed—as is true for estimates of out-year budget outlays—that the existing tax structure is
unchanged. Aggregate output and income estimates are the same
as those used for the 1989 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 the taxable outlay
figures in the budget.
The tax expenditure estimates presented in this Special Analysis
should not be interpreted as estimates of the increase in Federal
receipts or the reductions in budget deficits 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 levels of income and
rates of economic growth. Consequently, large changes in tax expenditures could be expected to alter projected growth rates for
aggregate national income and product and thus, the tax base over
the forecast period. All receipts and expenditures in the budget are
based, however, on projections of income and growth that assume
all existing laws will continue.9
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 the demand for, and cost of, other Federal
subsidy programs will be increased. For example, if the exclusion of
employer-paid medical insurance from the gross income of employees were repealed, other tax-exempt forms of compensation, such as
employer-paid pensions, would probably expand. Thus, the net
effect on the budget of repealing the exclusion of employer-paid
medical insurance would not equal the estimated cost of that tax
expenditure, but a smaller amount after subtracting 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.

Except as amended by proposals made in the budget.

F-88

THE BUDGET FOR FISCAL YEAR 1989

Third, tax expenditures are all cleared through individual and
corporation tax accounts and, for this reason, their values become
interdependent. For example, excluding interest received from
State and local governments lowers a taxpayer's taxable income,
and in a tax system with progressive tax rates, this can reduce the
value of other tax deductions, such as charitable contributions. If
the interest exclusion alone were repealed, some taxpayers could
be thrust into higher tax brackets, automatically increasing the
value of charitable contributions and their budget cost, even if
taxpayers 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 assuming that the other remains in force.
Finally, the annual value of tax expenditures for tax deferrals,
like the outlay figures for government lending programs, is highly
time-dependent while the unified budget is largely prepared on a
strict cash receipts and disbursement basis. For example, the
annual budget cost of tax deferrals due to the exclusion from
employees' gross income of employers' contributions to employee
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 to tax the employees on the employers'
current year contributions and the current year pension fund asset
earnings. As the existing population of covered employees retired
and received their annuities, thereby depleting the stock of assetreserves previously accumulated with untaxed dollars, the deficitreducing impact of repealing this tax expenditure would be fully
registered in the budget.
T A X EXPENDITURES BY FUNCTION

The 1987-89 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 under the normal tax rules,
but not the reference tax rules, it is indicated by the designation,
"Pre-1983 budget method" in the table. In these cases a line also
appears, designated as "Post-1982 budget method" showing that tax
expenditures for this item would be zero using the reference tax
rules. The headings are the functional categories used in Part 5 of
the Budget.
Because the sources of data for estimating tax expenditures are
largely corporation and individual income tax returns, the esti-

SPECIAL ANALYSIS F

F-ll

mates 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 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 taxes of corporations resulting from minerals tax preferences
makes possible higher wages and more employment for mineral
workers, higher royalties payable to mineral land owners, and
lowers the price of minerals. Little, if any, of the subsidy remains
in the pockets of the corporations' creditors and equity holders in
the form of higher interest rates or excessive rates of return.
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, that are departures from both the reference and normal tax
law unless otherwise specifically identified.
National defense.—The housing and meals provided military personnel, either in cash or in kind, are excluded from income subject
to tax.
International affairs.—A U.S. citizen or resident alien who resides in a foreign country or who stays in one or more foreign
countries for a prescribed period is allowed tax relief on foreign
earnings. Beginning in 1982, the prescribed period is a minimum of
11 out of the past 12 months.
Eligible taxpayers 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 GS14, step 1. These provisions do not apply to persons who are employed by the U.S. Government. However, they do apply to some
persons paid from public funds. The tax expenditure estimate also
reflects another provision that excludes from their taxable income
certain allowances received by Federal employees working abroad.
The effect of these two provisions 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 to reflect the

F-88

THE BUDGET FOR FISCAL YEAR 1989

FSC's sales functions as foreign corporations. These provisions conform to the General Agreement on Tariffs and Trade (GATT).
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. The income of those foreign corporations
becomes taxable only when the controlling U.S. shareholders receive dividends or other distributions from their foreign stockholding.
The normal income tax standard defines a controlling interest in
a foreign corporation 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 the normal tax accounting rules, the currently attributable foreign source pre-tax
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. Foreign income eligible for such deferral was further restricted by The Tax Reform Act of 1986.
The worldwide income of U.S. persons is taxable by the United
States and a credit for foreign taxes paid is allowed. The amount of
foreign taxes that can be credited is limited to the precredit U.S.
tax on the foreign source income. An accurate "sourcing" of domestic and foreign gross incomes and deductions is required, therefore,
to determine the size of the credit and the U.S. tax owed. 10
General science, space, and technology.—The benefits of research
and development expenditures are normally expected to continue
for several years into the future. Such expenditures are treated
like outlays for fixed capital under the normal income tax rules
which means they would generate amortization deductions over the
period they are productive. Calculating such deductions would be
highly arbitrary, however, due to lack of a clearly defined norm for
the expected amortization period. Current law allows the expensing
of R&D expenditures, but this is a departure from the normal tax
rules and is, therefore, considered a tax expenditure under this
standard. It is not regarded as a tax expenditure under the reference tax rule, because Code section 174 makes such expensing the
general tax rule.

1 0 The Tax Reform Act of 1986 revised the sourcing rules extensively and provided two exceptions. The first is
an exception for sales of inventory property that reduces the U.S. tax of exporters. The second exception is for
financial institutions and certain financing operations of nonfinancial enterprises from the rules that require
allocation of interest expenses between domestic and foreign activities of a U.S. taxpayer.

SPECIAL ANALYSIS F

F-ll

The Economic Recovery Tax Act of 1981 (ERTA) added a credit
for additional investments in 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. In addition, the taxpayer was not required
to reduce his otherwise allowable deduction for R&E expenses by
the amount of credit he had taken. 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 above, both the reference and normal tax rules
for taxing foreign income require an accurate "sourcing" of deductions. Regulations issued in 1977 were designed to achieve a reasonable allocation of R&E expenses as between domestic and foreign
activities, but successive legislative enactments suspended the requirement to allocate R&E expenses to foreign income until August
1, 1986. The Tax Reform Act of 1986 then substituted for one year
a statutory allocation rule which reduced by half the benefit enjoyed by taxpayers during the suspension period. Currently, corporations are again required to follow the 1977 rules which contain
no tax expenditure element.
Energy.—Certain expenditures for discovering fuel mineral properties may be deducted current expenses rather than being capitalized and amortized over the productive life of the property. The tax
treatment of a number of expenditures in this category departs
from both the reference and normal tax rules.
In the case of oil and gas investments, the intangible drilling
costs (IDCs) of successful wells, such as wages, the costs of using
machinery for grading and drilling, and the cost of nonsalvageable
materials used in constructing wells, could be expensed prior to the
enactment of the Tax Reform Act of 1986. The Tax Reform Act
restricts this provision to successful domestic wells.
Integrated oil companies may currently deduct only 70 percent of
such costs and amortize the remaining 30 percent over five years.
Other oil producers may deduct 100 percent of their IDCs, but if
their IDCs less the amount which could be deducted had the IDCs
been capitalized and amortized over ten years exceed 65 percent of
the taxpayer's oil and gas income, the difference is subject to the
minimum tax. The exploration and development costs of surface
stripping and the construction of shafts and tunnels for other fuel
minerals are also partially expensed; 70 percent of these costs may
be currently deducted. The remaining 30 percent are deductible
over five years.

F-88

THE BUDGET FOR FISCAL YEAR 1989

In addition, fuel mineral producers are generally allowed to take
percentage depletion deductions rather than cost depletion as provided by the reference and normal tax rules. Under cost depletion,
outlays, not recovered immediately through expensing are deducted over the productive life of the property, much as other businesses take deductions for the depreciation of the capital goods they
use. Unlike depreciation, however, percentage depletion deductions
are not limited to the cost of the investment. Taxpayers instead
deduct a percentage of gross income from mineral production at
rates of 22 percent for uranium, 15 percent for oil, gas and oil
shale, and 10 percent for coal. The deduction, however, is limited to
50 percent of net income from the property and also to 65 percent
of total 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 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 have been 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 extended the energy tax credits for
solar energy property and geothermal energy property at declining
rates through 1988. The solar energy credit was 15 percent in 1986
and 12 percent in 1987, and is 10 percent in 1988. The geothermal
energy credit was extended at 15 percent in 1986 and 10 percent in
1987-88. The credit for ocean thermal property was extended
through 1988 at a 15 percent rate. The credit for biomass property
was extended for two years, at 15 percent in 1986, and 10 percent
in 1987. Other energy tax credits provided under prior law had
been 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 proper-

SPECIAL ANALYSIS F

F-ll

ty, 11 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).
Gasohol is exempt from 6 of the 9 cents per gallon Federal excise
tax on gasoline. 12 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. If an application for the
licensing of such a facility had been filed, however, with FERC
before January 1, 1986, tax-exempt financing would be 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.
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 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
private pollution control and waste disposal facilities 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 of 1986.
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
11 Property used in an existing industrial, agricultural or commercial facilities to reduce the amount of
energy consumed or heat wasted.
12 A motor fuel composed of at least 10 percent alcohol.

F-88

THE BUDGET FOR FISCAL YEAR 1989

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 was reduced to 20 percent, the
depreciable basis 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.
Income derived from cutting timber or iron ore royalties was
taxed at the capital gains rate which was lower than the tax rates
on 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 was restricted to 28 percent.
The Tax Reform Act of 1986, codified and made uniform the
definition of the costs that must be capitalized when goods are
produced for inventory in one's own trade or business, or under
contract for another party. When the production takes 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. 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 also encouraged by a special provision permitting a faster rate of amortization on reforestation projects. 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 can be amortized over a 7year period rather than capitalized and recovered when the timber
is cut, 20 or more years later. The costs are also eligible for a
special 10 percent investment tax credit up to a $10,000 limit,
notwithstanding that investments in timber stands are not depreciable nor that the regular investment tax credit has been repealed
by the Tax Reform Act of 1986.
Agriculture.—Farmers, except for certain agricultural corporations and partnerships, currently are allowed to deduct 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. Expensing is
allowed, even though these expenditures are for inventories held at
the end of the year or for capital improvements that would otherwise be capitalized. The profit from the sale of livestock and certain other agricultural products has been treated as capital gains

SPECIAL ANALYSIS F

F-ll

in the past but, as previously noted, ordinary tax rates apply after
1986.
The Tax Reform Act of 1986 provided a special one-time grant to
those farmers with accumulated unused ("carryover") investment
tax credits as of the end of 1986.13 Taxpayers whose reported gross
farm income made up more than 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: (1) 50 percent of their unused
credits; (2) their total net tax liability over the 15 years; or (3) $750.
This provision was an exception both to the general rule that had
limited carryback periods 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 provided 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.
Farmers, however, 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. 14 Normally, the
amount of loan forgiveness is accounted for as a gain (income) of
the debtor and he must either report the gain, or reduce his
recoverable basis in the property to which the loan relates. If the
debtor elects to reduce basis and the amount of forgiveness exceeds
his basis in the property, the excess forgiveness is taxable. However, in the case of insolvent ("bankrupt") debtors, the amount of
loan forgiveness never results in an income tax liability. 15 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

13 These are claimable credits for qualified investment made in prior years but which were not claimed
because they exceeded the annual tax liability limitations.
14 Settlement of a debt for an amount less than the principal of a loan.
1 5 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.

F-88

THE BUDGET FOR FISCAL YEAR 1989

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 December 31, 1986, except for small issue IDBs exclusively issued to
finance manufacturing facilities for which the tax exemption is
scheduled to expire on December 31, 1989.
Interest on all mortgage revenue bonds issued before January 1,
1989, by State and local governments is exempt from taxation.
Proceeds are used to finance first time buyers of homes
with prices under 90 percent 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.
Mortgage revenue bonds have been found to be relatively inefficient in providing subsidies to first time home buyers. States,
therefore, 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. In this
way the entire amount of the subsidy flows directly to the home
buyer without being partly diverted to financial middlemen or
bondholders.
The aggregate annual amount of MCCs a State may substitute
for mortgage bonds may not exceed 25 percent of the amount of
qualified mortgage bonds that it could have issued under its annual
ceiling. 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 one line item.
Prior to 1987, State and local government issues of IDBs were
restricted to multifamily rental housing projects in which 20 percent (15 percent in targeted areas) of the units were reserved for
families whose income did not exceed 80 percent of the area's
median income. The Tax Reform Act increased these percentages
while lowering the defined income limits. The setaside is now
either 40 percent or 20 percent for families with incomes of no

SPECIAL ANALYSIS F

F-ll

more than 60 percent or 50 percent of the area median income,
respectively. Other tax-exempt bonds for multifamily rental
projects are generally issued with the requirement that all tenants
must be low or moderate income families.
There are also limits imposed on the amount of tax-exempt State
and local government bonds that can be issued to fund private
activity. The annual limit on the aggregate volume of student loans
and most industrial development bonds was initially set at the
greater of $150 for each resident of a State or $200 million if that
was larger. The Tax Reform Act of 1986 combined 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 was set at $50 per capita or the larger of $150
million for each State.
Prior to 1987, sellers of real and personal property could defer
taxable income from "installment sales." Sellers who extended
credit to a purchaser could defer the tax gains from the sale until
the receipt of the loan repayment. The Tax Reform Act of 1986
denied use of the installment method to all sellers of property sold
in the national markets, such as securities, and to sellers using
"revolving credit" arrangements. The act also installed a "proportionate disallowance rule" which restricted the tax benefit to the
amount of credit extended that was financed by the seller's own
equity. Because the installment method was generally available to
all sellers before tax reform, the installment method was not considered a tax expenditure.
The Omnibus Budget Reconciliation Act of 1987 repealed the use
of the installment method by all dealers in personal and real
property, i.e., sellers who regularly hold property for sale or resale.
It also repealed the proportionate disallowance rule for non-dealers, defined as sellers of real property used in their business. The
1987 Act, however, requires payment of interest to the Federal
Government on deferred taxes attributable to the sellers' total
installment obligations in excess of $5 million but including only
property with sales prices exceeding $150,000. The payment of a
market rate of interest eliminates the benefit of the tax deferral.
Thus, the 1987 Act restores pre- tax reform law for nondealers with
total installment obligations of less than $5,000,000. The tax benefit
for these "small" nondealers is, therefore, a tax expenditure.
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

F-88

THE BUDGET FOR FISCAL YEAR 1989

for such treatment. 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 not taxed 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 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 was 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. The Tax Reform Act limited the mortgage interest
deduction to interest on debt no greater than the owner's basis in
the residence, plus qualified medical and educational expenses financed by the mortgage. The Omnibus Budget Reconciliation Act
of 1987 changed the rules for deducting the mortgage interest on
debt incurred after October 13, 1987. Interest on mortgage debt to
acquire or improve a principal or second residence is still fully
deductible for debt of no more than $1 million. Interest on up to
$100,000 of other debt secured by a lien on a principal or second
residence is also deductible, irrespective of the purpose of borrowing, provided the debt does not exceed the fair market value of the
residence. Mortgage interest deductions on personal residences are
tax expenditures because the taxpayers are not required to report
the value of owner occupied housing services as gross income.
The Tax Reform Act of 1986 eliminated 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
are subject to tax at the same rate as other income. However, for
1987 only, when the maximum ordinary income tax rate for individuals was 38.5 percent, the maximum tax rate on long-term
capital gains was limited to 28 percent.

SPECIAL ANALYSIS F

F-ll

Under prior law, the sixty percent of net long-term capital gains
excluded from taxable income 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 are now taxed as ordinary income
at a rate of 34 percent. Only in 1987, when the maximum corporate
tax rate dropped to 40 percent, was the maximum on such gains
held at 28 percent, as under prior law, when the maximum corporate rate was at 46 percent.
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 a 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 the gain
from its sale. This is a once-in-a-lifetime election. In effect, this
provision converts some prior deferrals of tax into forgiveness of
tax.
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 original acquisition. The estimate of this
tax expenditure 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). Property acquired after
December 31, 1985, receives no investment credit unless certain
transition rules are satisfied.16 Prior to 1983, taxpayers were permitted to recover through depreciation allowances the full price of
the asset notwithstanding that the tax credit represented an implicit grant from the government covering part of the purchase
price. After 1983, an investor was required to either reduce his
recoverable basis in the asset by half the credit or to accept a 2
percentage point reduction in the credit rate. The Tax Reform Act
16 These rules regard prior commitments to the property's purchase and its placement in service before
specified dates extending through 1991.

F-88

THE BUDGET FOR FISCAL YEAR 1989

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 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 set at 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 was not reduced thereby to
less than 75 percent of the alternative minimum tax otherwise due
and payable for the year. To benefit steel companies and farmers,
the act provided two exceptions, however, to these modifications of
investment credit carryforwards. As noted previously for farming,
this exception provides that the qualified steel companies may elect
to receive as tax refunds the amount determined by carrying back
to the preceding 15 years 50 percent of either their unused investment tax credits as of the end of 1986 or their net tax liability for
those years, whichever is less. The only steel companies that qualified for this grant-like subsidy were those described in the Steel
Import Stabilization Act or those incorporated before 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 compared to the 3 to 15 year
range under prior law. The recovery period now is 27.5 years for
residential real property and 31.5 years for nonresidential. Under
prior law, the recovery period was 19 years for both residential and
nonresidential property.
For the 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

SPECIAL ANALYSIS F

F-ll

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 and nonresidential real property
can only be depreciated by the straight-line method; under prior
law, declining balance rates were permitted ranging from 1.75 to 2
times (for low-income 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 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 no tax expenditures from
depreciation 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 then
available for tangible property leased by tax-exempt entities, including federal, state, and local governments. The Act provided
that property leased to tax-exempt entities could not be written off
as rapidly as other leased property. These more restrictive depreciation rules for lessors were retained in the Tax Reform Act of
1986.
When an individual or corporation acquires or otherwise enters
into a new business, certain "start-up" expenses, such as the costs
of investigating opportunities and legal services, are normally incurred. The taxpayer may elect to amortize these outlays over 60
months although they are similar to other payments he makes for
nondepreciable intangible assets that are not recoverable until the
business is sold.
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 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

F-88

THE BUDGET FOR FISCAL YEAR 1989

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 of 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 provided that this benefit is to be "recaptured" from 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.
The Tax Reform Act of 1986 disallowed the offset of passive
losses against income from other sources. Losses up to $25,000
attributable to certain rental real estate activity, however, were
exempted from this rule.
Transportation.—Certain companies that operate U.S. flag vessels receive a deferral of income taxes on that portion of their
income used for shipping purposes, primarily construction, modernization and major repairs to ships, and repayment of loans to
finance these qualified investments. Prior to January 1, 1987, the
deferral was indefinite. Under the terms of the Tax Reform Act,
the deferral is limited to 25 years. Within this period, the deferred
taxable income will have to be spent for qualified investments or
be taxed. 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.
Community and regional development—Until it expired on December 31, 1986, taxpayers could elect under certain conditions to
amortize rehabilitation expenditures for low and moderate income
rental housing over a 5-year period in lieu of ACRS depreciation.
To qualify, rehabilitation expenditures had to range between $3,000
and $20,000 per dwelling unit. The limit per dwelling unit was
raised to $40,000 on units which could be purchased by the tenants
at a price that limited the profit to the seller.

SPECIAL ANALYSIS F

F-ll

In place of the five-year amortization the Tax Reform Act of 1986
introduced a tax credit for investment in low income housing.17
For qualified projects without other federal 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 recoverable basis of the investment in rehabilitation was 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 was retained.
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 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 are
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 performed 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.
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
17 New, substantially rehabilitated, and certain unrehabilitated, existing low income housing can qualify for
the credit.

F-88

THE BUDGET FOR FISCAL YEAR 1989

under the normal tax standard gift-like transfers of Government
funds—and many scholarships are derived directly or indirectly
from Government funding—are included in gross income.
Interest on State and local government debt issued to finance
student loans or the construction of facilities used by private nonprofit educational institutions is excluded from income subject to
tax. The 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 who is already claimed as a dependent
on another tax return may not claim a personal exemption.
Many employers provide employee benefits that are not counted
in employee income. The employers' costs for these benefits are
deductible business expenses. The exclusion from an employee's
income of the value of 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 a tax subsidized educational assistance program
for 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 to December 31, 1987.
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 expired.
Employees generally are prohibited from withdrawing their share

SPECIAL ANALYSIS F

F-ll

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
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 take the form of
capital assets (usually securities that have appreciated in value)
can claim its current value as a deduction without the taxation of
any appreciation in value. Beginning in 1982, corporations could
also deduct charitable contributions 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 tax credit may be claimed by married couples for child and
dependent care expenses incurred when one spouse works full time
and the other works at least part time or goes to school. The credit
may also be claimed by divorced or separated parents who have
custody of children and by single parents. Expenditures up to a
maximum $2,400 for one dependent and $4,800 for two or more
dependents are eligible for the credit. The credit is equal to 30
percent of qualified expenditures for taxpayers with incomes of
$10,000 or less. The credit is reduced by one percentage point for
each $2,000 of income between $10,000 and $28,000. This aid is
supplemented by excluding the value of employer-furnished child
care from employees' income.
Another provision advantageous to two-earner married couples
was repealed by the Tax Reform Act effective January 1, 1987. This
provision allowed a deduction for such couples filing jointly equal
to $3,000 or 10 percent of the income of the lower earning spouse,
whichever was less. The tax code specified that the income of
second earners is to be 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. With the introduction of only two
marginal tax rates of 15 and 28 percent in 1988, this so-called
"marriage penalty" largely disappears.
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

F-88

THE BUDGET FOR FISCAL YEAR 1989

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
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, taxpayers could deduct up
to $1,500 of adoption expenses incurred during a year provided
those adoption expenses were incurred with respect to a child with
"special needs" as defined in section 473 of the Social Security Act.
The Tax Reform 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 they
are not included in employee gross income. The exclusion from
employee income of such in-kind compensation constitutes 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 additional one percent 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 all medical 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 demand for
them discourages private firms from undertaking the costly investment in clinical testing that must be completed before manufacture and distribution are 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 expenses (an R&D expenditure),
this credit reduces the private cost of clinically testing "orphan

SPECIAL ANALYSIS F

F-ll

drugs" to little more than 24 cents per $1 expended. 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 included in
gross income. In contrast, gifts not conditioned on the performance
of services, including transfers from government, are not taxable
under the reference tax baseline. Therefore, under the "Post-1982
Budget Method" the tax exclusion for public assistance benefits is
not shown as a tax expenditure.
The Tax Reform Act of 1986 eliminated the last portion of unemployment benefits that had been excludable from taxable income
prior to 1987. disability-related military pension income received by
current retirees is mostly excluded from income subject to tax.
These exclusions are tax expenditures because of the subsidy they
provide.
Certain employer contributions to pension plans along with
amounts set aside by the self-employed and individual contributions to individual retirement accounts (IRAs) are excluded from
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 and $50,000 for a joint return and $25,000 and
$35,000 for a single return. Beyond these income limits, nondeductible contributions to IRAs are available to taxpayers who are active
participants in employer-provided retirement plans. In 1988, the
Act also limits to $7,313 per year the amount which an employee
can exclude from his adjusted gross income under a qualified cash
or deferred arrangement with his employer (401(k) plan). Further,
the Act limits to the greater of $9,500 or the 401(k) limitation the
annual amount an employee may exclude from his adjusted gross
income of his own contributions to a tax-sheltered annuity (403(b)
plan). The investment income earned by pension funds and other
qualifying retirement plans is not taxable when earned, and this
exemption is, therefore, also a tax expenditure.

THE BUDGET FOR FISCAL YEAR 1989

F-88

The exclusion from employee income of certain other employer
payments, including group life insurance premiums and accident
and disability insurance premiums, are listed here because they
contribute to income security. Other tax exempt benefits are 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 provided that taxpayers in
either of these categories may take an additional $750 standard
deduction, if single, or $600, if married. Moreover, such taxpayers
could avail themselves in 1987 of the new larger standard deductions that other taxpayers could not use until 1988.18
Effective December 31, 1983, the tax credit for the elderly was
expanded to cover the permanently disabled as well. Before then, a
limited portion of disability payments by employers was excluded
from the taxable income of the disabled employees. Individuals who
are 65 years of age or older can take a tax credit equal to 15
percent of the sum of their earned and retirement income up to
$2,500 for single individuals or married couples filing a joint return
where only one spouse is 65 years of age or older, and up to $3,750
for joint returns where both spouses are 65 years of age or older.
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 to protect one's
personal or real property are considered personal expenditures
with purchases of the property itself. Neither the purchase of
property nor insurance premiums to protect its value are deductible as costs of earning income; therefore, reimbursement for insured loss of such property is not reportable as a part of gross
income. 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 taxpayers suffering an
uninsured loss is 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 and 2/9ths cents per

Depending on the filing status, the new standard deduction is greater by $460 to $1,860.

SPECIAL ANALYSIS F

F-ll

dollar of the larger of earned income or adjusted gross income
(AGI) over $6,500. For 1987, the credit was 14 percent of the first
$6,080 of earnings up to a maximum credit of $851.20, and the
credit was reduced by 10 percent of income over $6,920. After 1987,
the maximum amount of income on which the credit may be taken
is adjusted for inflation, as is the income level at which the phaseout begins. In addition, for tax years beginning on or after January
1, 1988, the income level at which the phaseout of the credit begins
is permanently adjusted upward by 38.5 percent. For 1988, the
credit is 14 percent of the first $6,240 of earnings up to a maximum
credit of $873.60. The credit is reduced by 10 percent of income
over $9,840, so that no credit is available at incomes over $18,576.
In any tax year the amount of the credit must be reduced by the
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 that exceed the beneficiary's contributions out of taxed income are deferred employee
compensation and the deferral of tax on that compensation is a tax
expenditure. These additional retirement benefits are paid for
partly by employers' contributions that were not included in employees' taxable compensation. Up to one-half of any recipient's
social security benefits and tier 1 railroad retirement benefits are
included in the income tax base 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 twoearner 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 twoearner deduction, modified AGI is equal to AGI plus (b) and (c)
only. If the modified AGI exceeds the specified base amount, either
one-half of the excess or one-half of the social security or railroad
retirement benefits is included in income subject to tax, whichever
is less. This limits the tax expenditure to the portion of the benefit
which is still excluded.
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 expenditures. However, beginning in 1984, Social Security disability benefits were modified when the elderly tax credit (see Income Security,
above) was expanded.

F-88

THE BUDGET FOR FISCAL YEAR 1989

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, as well as other veterans'
readjustment and education benefits, are also excluded from taxable
income.
The interest on general obligation bonds issued by State and
local governments to finance housing for veterans is excluded from
taxable income. There are, however, some restrictions on veterans
mortgage revenue bonds. They are limited to five preexisting State
programs and to amounts based upon previous volume levels for
the period beginning on January 1, 1979 and ending on June 22,
1984. Furthermore, future issues are limited to veterans who
served on 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 as well as 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 use of
tax-exempt State and local government securities to finance student loans, private businesses, private non-profit 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 disallowed 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 F

F-ll

PROPOSED CHANGES IN T A X EXPENDITURES

The Administration proposes a number of tax revisions that
would introduce one new tax expenditure, make permanent two
others, reintroduce an expired one, and change the cost of an
existing one.
College Savings Bonds.—The Administration proposes to exclude
from taxation the interest on certain savings bonds that are redeemed to pay post-secondary educational expenses. The exclusion
would be phased out above certain income levels that would be
adjusted for inflation. This proposal is estimated to reduce 1989 net
revenues by $10 million.
Treatment of Regulated Investment Company Shareholder Expenses.—Individuals may deduct miscellaneous expenses only to the
extent that they exceed 2 percent of adjusted gross income. Regulated investment company (RIC)—i.e. mutual fund—shareholder expenses were exempt from this floor for the tax year 1987. The
Administration proposes that the exemption of these RIC expenses
be made permanent, otherwise taxpayers will be required to include in their taxable income amounts greater than now actually
received from mutual funds. If implemented, the proposal would
cost $0.4 billion in revenue losses in 1989.
Permanent Research and Experimentation Credit.—The current
20 percent R&E tax credit is scheduled to expire at the end of 1988.
The Administration is proposing a permanent credit that would
reduce the taxpayers' uncertainty and encourage more research
and experimentation. A permanent credit would reduce receipts by
$0.4 billion in 1989.
Research and Experimentation Expense Allocation Rules.—The
allocation of multinational companies' R&E expenses between their
domestic and international operations was by formula for one year
before reverting back to 1977 Treasury rules in August 1987.
During the 1981 to 1986 Congressional moratorium on these rules,
all R&E expenses effectively could be allocated to domestic income.
The Administration proposes that at least 67 percent of R&E expenses be allocatable to domestic income. The revenue cost of the
proposal would be $0.6 billion in 1989.
Oil and Gas Depletion Rule Modifications.—Currently, "proven"
oil and gas properties that are transferred from integrated oil
companies to independent oil and gas producers are ineligible for
percentage depletion. This discourages the transfer of marginal
wells. The Administration proposes to remove the restriction. The
independent producers currently may not deduct more than 50
percent of the net income from a property as percentage depletion.
The Administration also proposes to raise the deduction back to
100 percent. The revenue cost of these modifications would be less
than $0.1 billion in 1989.

F-88

THE BUDGET FOR FISCAL YEAR 1989
Table G - l . OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES BY FUNCTION
(In millions of dollars)
Fiscal years
Description

Corporations
1987

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
1,370
(FSC)
3,150
Inventory property sales source rules exception
Certain nonfinancial institutions operations interest
30
allocation rules exception
Deferral of income from controlled foreign corporations:
420
Pre-1983 budget method
Post-1982 budget method
Total (after interactions) 1
4,970
General science, space, and technology:
Expensing of research and development expenditures:
Pre-1983 budget method
565
Post-1982 budget method
Credit for increasing research activities
2,685
Suspension of the allocation of research and ex465
perimentation expenditures
3,985
Total (after interactions)
Energy:
Expensing of exploration and development costs:
-1,100
Oil and gas
35
Other fuels
Excess of percentage over cost depletion:
185
Oil and gas
310
Other fuels
Capital gains treatment of royalties on coal
Exclusion of interest on State and local industrial
development bonds for certain energy facilities....
380
Residential energy credits:
Supply incentives
Conservation incentives
Alternative, conservation and new technology credits:
170
Supply incentives
_*
Conservation incentives
25
Alternative fuel production credit
10*
Alcohol fuel credit 2
Energy credit for intercity buses
40
Special rules for minning reclamation reserves
45
Total (after interactions)
Natural resources and environment:
Expensing of exploration and development costs,
30
nonfuel minerals
Excess of percentage over cost depletion, nonfuel
385
minerals

1988

Individuals
1987

1989

2,385

1,710
730
4,130

645
4,415

170

155

5,090

5,310

1,710

830

1,145

1,220

790

2,170

2,015

-870
35

-680

425

145
210

130
200

385

400

845
20
65

15
10
_ *

40
130

305

295

5
1,015

F-ll

SPECIAL ANALYSIS F

Table G-l. 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 onds
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
Exemption of RIC expenses from miscellaneous
deduction floor
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
Deferral of Income from Post-1987 Installment
Sales
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

Corporations

Individuals

1987

1988

1989

2,085

2,150

2,215

210
95

160

40
2,855
65

1988

1989

115

110

175

150
10
80
35

10
105

125

40
2,690

40
2,765

170
465

170
420

425

460
5

470
5

10
160

315
735

450

7,015

6,775

6,805

11,845

240
6,530

3,280

34,745

33,675

32,185

10,285

10,100

10,410

2,420

2,375

2,360

1,730

1,650

1,630

160

500

96,950
2,970

265
4,435

4,690

2,935
9,210

3,730
16,030

3,910
17,310

1,310

490

370

1987

555
470

3,420
265
575
460

3,435
240
120
425

3,475

220

65
430

480

100

170

1,230

16,435

10,805

3,660

565

-25

THE BUDGET FOR FISCAL YEAR 1989

F-88

Table G-l. OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES BY FUNCTION—Continued
(In millions of dollars)
Fiscal years
Description

Corporations
1987

1988

Individuals
1989

1987

1989

Accelerated depreciation on rental housing:
70
110
140
180
220
130
Pre-1983 budget method
Post-1982 budget method
Accelerated depreciation of buildings other than
rental housing:
110
70
100
190
240
280
Pre-1983 budget method
Post-1982 budget method
Accelerated depreciation of machinery and equipment:
5,370
6,220
3,010
10,270 16,550 21,300
Pre-1983 budget method
Post-1982 budget method
535
975
660
Safe harbor leasing rules
215
200
270
Amortization of start-up costs
30
30
30
Reduced rates on the first $100,000 of corporate
income:
4,550
6,340
4,720
Pre-1983 budget method
Post-1982 budget method
Exception from passive loss rules for $25,000
1,255
580
1,580
of rental losses
Total (after interactions) 1
41,140 38,285 34,985 180,310 91,015 88,625
Transportation:
120
Deferral of tax on shipping companies
115
115
Exclusion of interest on State and local govern40
50
ment bonds for mass commuting vehicles
20
160
165
135
Total (after interactions)
Community and regional development:
25
30
30
15
15
15
Five-year amortization for housing rehabilitation
515
230
105
50
5
35
Credit for low-income housing investments
Investment credit for rehabilitation of structures
60
80
130
90
105
145
(other than historic)
Exclusion of interest on IDBs for airports, docks
1,000
950
960
and sports and convention facilities
630
355
1,270
220
1,170
1,170
Total (after interactions)
Education, training, employment, and social services:
Exclusion of scholarship and fellowship income:
685
665
625
Pre-1983 budget method
Post-1982 budget method
Exclusion of interest on State and local student
385
390
385
loan bonds
Exclusion of interest on State and local debt for
315
335
320
private nonprofit educational facilities
Parental personal exemption for students age 19
450
460
725
or over
Deductibility of charitable contributions (educa1,060
1,095
1,270
585
575
645
tion)
85
280
Employer educational assistance
2,050
1,925
2,695
"895
"900
"980
Total education (after interactions) 1
70
155
30
Exclusion of employer provided child care
Exclusion of employee meals and lodging (other
790
760
835
than military)
Exclusion of contributions to prepaid legal services
20
75
plans
950
310
195
Investment credit for ESOPs

F-ll

SPECIAL ANALYSIS F

Table G-l. OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES BY FUNCTION—Continued
(In millions of dollars)
Fiscal years
Description
1987

Credit for child and dependent care expenses
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 credit3
Total (after interactions) 1
Social Security:
Exclusion of social security benefits:
Disability insurance benefits
OASI benefits for retired workers

Individuals

Corporations
1989

1987

1988

115

165

235

4,380
30
5,390

4,725
45

1,065

475

430

10,835

5,630

800

715

725

11,535*

9,935

800
2,845

715
2,085

725
2,055

145
11,680
25,210

165
10,100
17,780

31,830
3,150

31,055
1,960

3,000
395*

2,870
350*

2,850
360*

1,295

1,115

3,395

3,220

3,210

36,275

34,130

400
2,740

380
2,660

530

390

135

115

690
115

105

64,120
19,345
3,780

56,150
11,995
2,125

2,425

160

2,395
160

30
15
10
1,205
1,630
205
285
590
96,440

1,535
225
265
1,090
78,040

1,170
14,285

1,095
13,470

THE BUDGET FOR FISCAL YEAR 1989

F-88

Table G-l. OUTLAY EQUIVALENT ESTIMATES FOR TAX EXPENDITURES BY FUNCTION—Continued
(In millions of dollars)
Fiscal years
Description

Corporations
1987

Benefits for dependents and survivors
Total (after interactions)
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

1988

Individuals
1989

1987

1988

3,025
18,480

2,850
17,415

1,615
130

1,470
85
70

375
2,210

355
1,980

250

2,195

3,310
5,505

2,375

2,675
5,050

2,530

2,605
5,135

11,595

12,035

22,480

17,250

34,075

29,285

870

885

* $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 $475million in 1987, $480
million in 1988, and $480 million in 1989.
3 The figures in the table indicate the tax subsidies provided by the earned income tax credit. The effect on outlays is: 1987, $1,410 million;
1988, $2,895 million; 1989, $3,895million.

F-ll

SPECIAL ANALYSIS F
REVENUE LOSS ESTIMATES FOR TAX 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
1987

Individuals

Corporations
1988

1989

1987

1988

1989

2,000

1,885

1,915

1,330

1,220

1,305

460
2,625

425
2,915

110

100

830

1,145

885

570

-870
35

-680
35

425

455

495

105
130

95
130

580
15
45

435
10

385
10

290

280
45*

F-88

THE BUDGET FOR FISCAL YEAR 1989
Table G-2.REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES BY FUNCTION—Continued
(In millions of dollars)
Fiscal years
Corporations

Description
1987

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 mining 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 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
Deductions for special percentage of taxable
income for life insurance companies
Exemption of RIC expenses from miscellaneous
deductions floor
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
Deferral of income from post 1987 installment sales...
Capital gains (other than agriculture, timber, iron
ore and coal)

1988

140

Individuals
1989

1987

1988

1989

_ *

10
*5

10
5

305

215

220

1,715

1,635

1,555

150

110

145
95

175

60
35

160

165

425

105
165

110
125
165

460
5

470
5

125

235
350
2,925
195
385
315

2,705
170

310

2,510
160
50
320

5,110

5,100

5,240

240
6,530

•

11,845

3,280

34,745

33,675

32,185

10,285

10,100

10,410

2,010

1,765

1,640

160

500

290

1,385
910

1,235
100

1,135
170
61,285

210

G-43

SPECIAL ANALYSIS G

Table G-2.REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES BY FUNCTION—Continued
(In millions of dollars)
Fiscal years
Description

Corporations
1987

Deferral of capital gains on home sales
Exclusion of capital gains on home sales for
persons age 55and 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
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
Reduced rates on the first $100,000 of corporate
income:
Pre-1983 budget method
Post-1982 budget method
Exception from passive loss rules for $25,000
of rental losses
Transportation:
Deferral of tax on shipping companies
Exclusion of interest on State and local government bonds for mass commuting vehicles
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
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)
Exclusion of employer educational assistance
Exclusion of employer provided child care

11,505

1988

Individuals
1989

1987

1988

1989

2,575

3,700

3,905

2,160
5,710

2,860
11,540

2,970
12,465

1,800

1,200

565

7,995

2,715

565

-25

140

180

220

110

130

190

240

280

100

110

10,270

16,550

21,300

3,010

5,370

6,220

1,065
20

690
20

550

200

165

150

3,710

3,155

2,695
350

1,100

120

115

15*

15
20

15
60

30
30

30
140

145

105

130

755

725

695

610

570

625

400

355

330

285

250

225

560

415

410

1,270
220
30

1,095
65
65

1,060

450

425

430

35
315

150

F-88

THE BUDGET FOR FISCAL YEAR 1989
Table G-2.REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES BY FUNCTION—<tontinued
(In millions of dollars)
Fiscal years
Description
1987

Exclusion of employee meals and lodging (other
than military)
Exclusion of employer 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
Deduction 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

Individuals

Corporations
1988

1989

1987

1988

745

685

665

230

145

115

165

235

3,475
30
5,390

3,920
45

560

525

530

11,535•

9,935

125

275

260

265

24,550
3,150

24,690
1,960

2,570
1,295

2,230
1,115

400
2,740

380
2,660

530

390

135

115

690
115

105

45,335
13,890
2,355

41,765
9,080
1,520

1,940
120

30
15

1,205
1,630

1,535

180

285
525

200

265
970

1,170
1,095
14,285 I 13,470

1,080
13,530

SPECIAL ANALYSIS

F-ll

Table G-2.REVENUE LOSS ESTIMATES FOR TAX EXPENDITURES BY FUNCTION—Continued
(In millions of dollars)
Fiscal years
Description

Corporations
1987

Benefits for dependents and survivors
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
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

1988

Individuals
1989

1987

1989

3,025

2,850

2,880

1,615
130
90

1,470
85
70

1,445
75
60

300

250

230

8,810

8,460

8,360

22,480

17,250

17,305

870

885

905

250

2,070

1,895

1,890

1,690

1,930

1,720

* $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 $475 million in 1987, $480
million in 1988, and $480 million in 1989.
2 The figures in the table indicate the effect of the earned income tax credit on receipts. The effect on outlays is: 1987, $1,410 million;
1988, $2,895 million; 1989, $3,895 million.

SPECIAL ANALYSIS H
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 $116.7 billion in 1988, are
projected to increase to $119.0 billion in 1989. This increase reflects
the administration's efforts to continue to support Federal grant
programs for the needy, and to reduce Federal involvement in
activities that are primarily State and local responsibilities.
The grant-in-aid proposals in the 1989 budget are affected by the
Bipartisan Budget Agreement of November 1987. This agreement
was designed to meet the Gramm-Rudman-Hollings deficit targets
for 1988 and 1989. The 1989 budget meets these targets as well as
the other targets in the agreement, such as those for total domestic
mandatory and domestic discretionary programs.
Consistent with the agreement, the administration is proposing
no major legislative changes for 1988 or 1989 for mandatory programs that are grants, such as medicaid or aid to families with
dependent children, except for welfare reform. For 1989, the budget
meets the overall target for total domestic discretionary programs,
but proposes increases for high-priority discretionary grants, such
as education and training, and reductions for grant programs that
are not Federal priorities, such as grants for economic subsidies,
community development, and mass transit.
The major proposals affecting grants-in-aid in the 1989 budget
include increases for welfare reform, education, and training, and
reductions and terminations of some discretionary grant programs:
• For welfare reform, the administration continues to support
the proposed "AFDC Employment and Training Reorganiza1 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

F-88

THE BUDGET FOR FISCAL YEAR 1989

tion Act of 1987" (H.R. 3200 and S.1655). This legislation
authorizes a comprehensive employment and training program in which teenage recipients would be encouraged to
remain in or return to school, and older recipients would
participate in a variety of employment and training activities
designed to improve their employment status. The child support enforcement system would be strengthened to ensure
that children receive adequate and timely support from parents who are absent from the home. States would have broad
flexibility to carefully test innovative alternatives to current
programs that support low income families and individuals.
• The administration proposes increases for major elementary
and secondary education programs and for major employment
and training programs above the 1988 levels. In addition to
the increases for welfare reform, these increases will assist
States and localities in meeting the educational and training
needs of youth and adults.
The administration is also proposing reductions or terminations
of discretionary 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:
• Large reductions for mass transit programs. The penny gas
tax for mass transit activities would continue to be used to
fund mass transit capital spending, rural transit, and operating subsidies to small cities, but general tax dollars would not
be used (except for the Washington, D.C. Metro, which is
authorized separately). Operating subsidies for medium and
large communities are proposed for elimination.
• Termination of urban development action grants, economic
development assistance, and Appalachian regional development grants in order to reduce direct Federal intervention in
the economic decisions of firms and individuals.
• 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 1979 to 1989. Grant outlays for payments for individuals are estimated to be 54 percent of total grants by 1989; for
physical capital investment, 21 percent; and for all other grants,
largely for education, training, and social services, 26 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

F-ll

SPECIAL ANALYSIS F

purposes, including land and water resource development and education. In 1989, the Federal Government is expected to disburse
$664 million in new loans to State and local governments, compared to $641 million in 1988. New guaranteed loans are estimated
to be $72 million in 1989, compared to $154 million in 1988.
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. As described later,
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 $43.5
billion in 1989.

Federal Grants to State and Local Governments
% Billions
120

$ Billions
120

-100

100-

1979

Fiscal Years

Estimate

HIGHLIGHTS OF THE FEDERAL AID PROGRAM

This section provides an overview of the Federal aid program
proposed for 1989. Shown first are major differences between
actual grant outlays in 1987 and estimated amounts for 1988 and
1989. 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.

F-88

THE BUDGET FOR FISCAL YEAR 1989

Detailed data supporting the description of grant programs are in
Table H - l l .
Table H - l shows changes in grant outlays between 1987 and
1988 and between 1988 and 1989. These changes are divided into
three categories: payments for individuals, grants for physical capital investment, and all other grants. From 1987 to 1989, grants for
payments for individuals increase $7.5 billion, capital grants increase $1.0 billion, and other grants increase $2.1 billion.
Table H - l . FEDERAL GRANT-IN-AID CHANGES, 1987-39
(In billions of dollars)

Total grants, 1987 actual
Changes:
Payments for individuals:
Medicaid
Housing assistance
Food and nutrition assistance..
Family support payments
Other
Subtotal, payments for individuals, 1987-88 change..
Physical capital investment:
Highway programs
Sewage treatment plants
Mass transit
Community and regional development
Other
Subtotal, capital, 1987-88 change..
Other programs:
Social services
Elementary and secondary education...
Other
Subtotal, other programs, 1987-88 change..
Total grants, 1988 estimate
Changes:
Payments for individuals:
Medicaid
Housing assistance
Food and nutrition assistance..
Other
Subtotal, payments for individuals, 1988-89 change..
Physical capital investment:
Sewage treatment plants
Other
Subtotal, capital, 1988-89 change..
Other programs, 1988-89 change
Total grants, 1989 estimate..
' Less than $50 million.

Energy, Natural Resources, Environment, and Agriculture.—State
and local energy conservation grants administered by the Depart-

SPECIAL ANALYSIS F

F-ll

ment 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. States have
received more than $3.0 billion from the settlement of cases involving violations of rules and regulations under the price control
program which expired in 1981. Because these amounts are available to fund the State grant programs, the budget includes no new
budget authority for these activities for 1989.
Grants to States for land acquisition and development of outdoor
recreation lands, and for State historic preservation efforts are also
proposed for elimination in 1989. 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 1989 is $130 million, $30 million less
than the 1988 level. The lower level reflects spending that can be
absorbed by States each year until program completion in 1992.
Approximately 225 projects in 22 States will be financed by the
1989 request.
Outlays for sport fish restoration grants are estimated to increase
from $148 million in 1988 to $163 million in 1989, using increased
funds from motorboat fuel taxes, excise taxes, and customs duties
added by the Deficit Reduction Act of 1984.
The Environmental Protection Agency sewage treatment 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. For 1989, the administration is requesting $1.5 billion in budget authority divided evenly between
the existing grant program and the new state revolving fund (SRF)
program. Capitalization grants to SRFs are intended to set up selfsustaining financial mechanisms that would make loans, support
refinancing, and provide loan guarantees. The 1989 funding level is
consistent with the President's long-term program level of $12
billion from 1986 to 1993 proposed in the 1988 budget. Outlays are
estimated to be $2.4 billion in 1989, largely from prior-year commitments.
The hazardous substance superfund pays for the cleanup of abandoned hazardous waste sites and chemical spills. Budget authority
of $219 million is requested for 1989 for site specific cooperative
agreements with States. This funding level, which is $25 million
above the 1988 level, should finance the cleanup of 26 sites in 1989,
nine more than in 1988.
The Extension Service makes formula and project grants to
States to provide out-of-school education in agriculture and other

F-88

THE BUDGET FOR FISCAL YEAR 1989

subjects at State and local levels. The administration proposes to
terminate the project grants to States that are used to support
such programs as urban gardening, pest management, and support
for rural development centers, and to reduce funding for food and
nutrition education. These activities can be funded from the formula grant, which would continue. Proposed budget authority for
Extension Service grants for 1989 is $300 million, a $58 million
reduction from the 1988 amount. Proposed funding for formula
grants is slightly more than 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 $17.0 billion in budget authority for
these grant programs in 1989, a $1.9 billion reduction from the
1988 total.
The Federal-aid highway program helps fund the interstate highway system, other primary highways, bridges, and rural and urban
highways. Obligations for Federal-aid highways are proposed to be
$12.3 billion in 1989, $0.7 billion less than in 1988. The administration is proposing to carry out the highway programs within the
level of anticipated user fee receipts. To ensure prudent use of the
user fee revenue, the administration plans to require States to
provide at least 20 percent of the project costs for all demonstration and special interest projects, now 100 percent federally funded.
The administration proposes budget authority of $196 million in
1989 for three highway and motor carrier safety grant programs.
The program level for these grants, which supplement other State
highway safety programs, is proposed to be $10 million more than
the 1988 level.
The administration is proposing $1.4 billion in budget authority
in 1989 for mass transit (except for Washington Metro). This
amount is limited to receipts provided by the one cent per gallon of
the gasoline tax dedicated to mass transit activities. Most of these
subsidies would be distributed by existing formulas to States and
localities, which could use the formula grant funds for public transportation capital projects provided they make matching contributions of at least 50 percent. The administration is also proposing to
terminate operating subsidies to large and medium-sized cities.
Only small urban and rural areas could use funds for transit
operating subsidies, which would also require a 50 percent match.
The administration is also proposing no funding in 1989 or later
years for discretionary grants that are used 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.

SPECIAL ANALYSIS F

F-ll

In addition to the $1.4 billion from trust funds, the administration proposes a $128 million construction grant from general funds
for the Washington, D.C. Metrorail system.
Grants-in-aid for airports are proposed to be funded at a program
level of $1.2 billion in 1989, slightly below the 1988 level of $1.3
billion. This grant is designed to assist airports with construction
needs in order to enhance capacity and safety in the national
airport and airway system.
Community and Regional Development.—The community development block grant program (CDBG) provides flexible community
and economic development support to cities, counties, Indian tribes,
and U.S. territories. The administration proposes to establish the
CDBG program level at $2.6 billion for 1989, slightly below the
1988 program level of $2.9 billion. The 1989 program level includes
$2.5 billion of new budget authority and a transfer of $145 million
from the rehabilitation loan fund upon its termination at the end
of 1988. Although this will reduce the total resources available for
the CDBG program, recently enacted legislation targets assistance
toward the most needy within communities.
The administration proposes to terminate the urban development
action grants program at the end of 1988. No funding is proposed
for 1989. This proposal is consistent with the Government-wide
effort to reduce local economic development subsidies and reduce
excessive Federal subsidization of 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 $150 million in budget
authority for this program in 1989, 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. 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. For these reasons the rental development grant program is
proposed to be terminated in 1989.
The administration is not requesting funds in 1989 for the economic development assistance programs administered by the Economic Development Administration (EDA). There is no evidence

F-88

THE BUDGET FOR FISCAL YEAR 1989

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 1989 through
the community development block grant program.
Programs administered by the Appalachian Regional Commission (ARC) are intended to promote economic development of the
13-State Appalachian region. Both the Commission and its programs are proposed to be terminated in 1989. 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 on the whole
are not substantially worse off than rural communities nationwide,
and therefore do not warrant special assistance.
Education.—The administration's policies for assisting education
activities of State and local governments provide significantly increased assistance for programs that provide supplementary aid for
persons with disabilities and for the educationally and economically disadvantaged. For these programs the administration is requesting $8.6 billion in budget authority, an increase of $0.4 billion
above the 1988 level of $8.2 billion.
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. For the largest program, compensatory education for the disadvantaged, the administration is requesting $4.6
billion in budget authority for 1989, an increase of $0.2 billion
above the 1988 enacted level. Budget authority for education for
the handicapped is proposed to be $1.8 billion in 1989, 3 percent
more than the 1988 level. The administration proposes to maintain
budget authority for vocational education at $0.9 billion, and increase funding for adult education from $122 million in 1988 to
$148 million in 1989. This increase is to enhance efforts to combat
adult illiteracy.
The administration is requesting budget authority of $1.0 billion
for 1989 to assist State and local governments carry out school
improvement programs, $95 million more than for 1988. Most of
this increase is for the State education block grant, which has
proposed budget authority of $540 million in 1989. 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

SPECIAL ANALYSIS F

F-ll

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 presence of these children imposes little or no burden on most districts.
Budget authority of $582 million is requested in 1989 for all impact
aid programs, a reduction of $118 million from the 1988 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 1989, the same as the 1988 enacted level.
States have considerable discretion in using these funds to prepare
low-income youth, welfare recipients, and economically disadvantaged unskilled adults for employment.
The summer youth employment program finances minimum-wage
public sector summer 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 change the current
summer program to give local areas flexibility in designing a program of jobs, basic skill remediation, and vocational training for
low-income youth. Under the proposal, the resources would be
available for year-round programs of assistance, for subsidized
summer jobs, or for both activities, depending on local choice. The
administration is proposing $718 million for this program for 1989,
the same as enacted in 1988.
The administration proposes to replace the two existing programs financed under the Trade Adjustment Assistance Act (TAA)
and the JTPA for assisting dislocated workers with an entirely new
worker readjustment assistance program (WRAP). 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 1989 for serving dislocated workers.
This includes a grant of $948 million and direct benefits of $32
million.
No budget authority is requested in 1989 for the work incentive
(WIN) program. The services provided by this program would be
provided more effectively by the work and training component of
the welfare reform proposal, described earlier and in the "other
income security" section below.
Grant outlays for the State employment service are estimated to
be $928 million in 1989, $49 million less than the 1988 amount.
Fewer funds will be required in 1989 when the new worker read-

F-88

THE BUDGET FOR FISCAL YEAR 1989

justment assistance program begins providing States with substantial new resources for job services now financed with these grants.
Social Services.—Budget authority requested for the social services block grant is $2.7 billion for 1989, the same as was enacted for
1988. 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 percent of their social services allotment to other block
grants that support health services, health promotion and disease
prevention, or low-income home energy assistance.
The administration proposes to begin to phase out the community services block grant program beginning in 1989, with termination proposed for 1993. 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 $1.5 billion of
budget authority for 1989 for this program, slightly more than the
amount enacted for 1988.
In 1989, budget authority of $1.1 billion is requested for foster
care and adoption assistance. These funds support State efforts to
reunite children with their families or to place them promptly in
adoptive homes.
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 1989 the
administration proposes $2.2 billion in budget authority for these
grant programs. This amount is the same as the 1988 amount,
which is $319 million more than the 1987 level.
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 25.0 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 1989, medicaid outlays are estimated to be
$32.7 billion. The administration is not proposing medicaid legislation for 1989. Medicaid outlays will be affected by changes in
regulatory and administrative policies beginning in 1989.
Budget authority of $1.3 billion is requested in 1989 for the
health block grants, $196 million more than for 1988. The block
grants include those for maternal and child health; preventive
health and health services; alcohol, drug abuse, and mental health

SPECIAL ANALYSIS F

F-ll

and a proposed new family planning block grant to give States
greater flexibility in delivering voluntary family planning services.
Administration of Unemployment Compensation.—Grants to
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 1989, slightly higher than the
1988 level. This will allow for increases in costs and improvement
of State quality control efforts.
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 $6.3 billion in 1989, $1.1 billion more than in
1988. Grant outlays under this program include new construction
and modernization activities 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 100,000 additional households and
grants for construction of 1,000 Indian housing units and 7,000
elderly or handicapped units to add to an estimated 4.3 million
households served by the Department of Housing and Urban Development (HUD). About 1,000 of the 7,000 units will be built for the
mentally handicapped homeless. Furthermore, under HUD's new
regulations, homeless families will receive priority in the voucher
program.
Approximately 20-25 percent of the 108,000 additional subsidized
units 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 plus
1,200 vouchers to assist rural families displaced due to prepayment
of rural rental housing loans. This is in addition to the 7,500
vouchers provided in 1987 legislation for rural housing demonstration programs. Both the HUD non-metropolitan 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 1989 budget.
Budget authority of $1.5 billion is requested for 1989 for payments for the operation of low-income housing. These payments are
used to subsidize operating costs for almost 1.4 million low-rent
public and Indian housing units. This request assumes implementa-

F-88

THE BUDGET FOR FISCAL YEAR 1989

tion of improved verification procedures to reduce fraud and abuse.
It also assumes public housing authorities will have more flexibility in setting rents so that both public housing authorities and
tenants will have greater incentive to reduce dependency on the
Federal Government.
The Consolidated Omnibus Budget Reconciliation Act of 1985
changed the treatment 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 are estimated to be $1.5
billion in 1988 and $1.1 billion in 1989.
Food and Nutrition Assistance.—Food stamps help low-income
families maintain a nutritious diet. Food stamp benefits are classified as direct payments to individuals by the Federal Government
and not as grants to State or local governments; a grant from the
Federal Government reimburses the States for about half of their
food stamp administrative expenses. Outlays for the Federal share
of State administrative expenses for the food stamp program are
estimated to be $1.2 billion in 1989, about the same as 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 $0.9 billion in 1989.
Child nutrition programs subsidize institutions for meals served
to students in schools, child care facilities, and other institutional
settings. Budget authority proposed for the grant program in 1989,
including food donations from the Section 32 program, is 4.8 billion, an increase of $0.1 billion from the 1988 amount.
The supplemental feeding programs, which include the special
supplemental food program for women, infants, and children (WIC)
and the commodity supplemental food program, provide 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
$1.9 billion for 1989 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 $0.7 billion are expected to be distributed through State
and local governments in 1989. (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

SPECIAL ANALYSIS F

F-ll

and the child support enforcement (CSE) program. AFDC helps
State and local governments finance their cash assistance payments to needy families. The child support enforcement grants
finance an average of 90 percent of State and local administrative
expenses for establishing paternity and for collecting support from
legally liable absent parents. Collections on behalf of AFDC recipients offset about 11 percent of State and Federal AFDC costs.
Proposed budget authority for 1989 for the AFDC and CSE programs is $10.7 billion, including welform reform, which is described
next.
For welfare reform, the budget reflects the administration's continued support of the "AFDC Employment and Training Reorganization Act of 1987" (H.R. 3200 and S.1655). This legislation proposes
reforms for AFDC work and training programs, strengthens the
Federal-State child support enforcement system and provides broad
authority to States to demonstrate new ways of helping families
and individuals achieve financial independence.
Under the comprehensive employment and training program,
teenage recipients would be encouraged to remain in or return to
school, and older recipients would participate in a variety of employment and training activities designed to improve their employment status. The unsuccessful work incentive (WIN) program classified in the education, training, employment and social services
function would no longer be funded.
Changes in child support enforcement would require States to
establish mandatory child support guidelines to help ensure that
single-parent families receive adequate support from parents who
are absent from the home. Employers would be required to automatically withhold from wages court ordered amounts to be paid as
child support.
Under the proposed demonstration activity, States could receive
waivers in a range of current programs for the low-income population if the demonstrations cost no more each year than the programs being modified, are designed to permit sound evaluation,
and do not adversely affect those in need. In total, welfare reform
would cost an estimated $168 million in Federal outlays in 1989.
The Federal Government subsidizes States for all of the initial
resettlement costs of welfare, health, employment, English language training, and other services for refugee and entrant assistance. Budget authority of $268 million is requested in 1989 for
refugee assistance, $65 million less than the 1988 level.
For low-income home energy assistance, $1.2 billion in budget
authority is requested for 1989, $0.3 billion below the 1988 enacted
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 hun-

F-88

THE BUDGET FOR FISCAL YEAR 1989

dreds of millions of dollars in oil overcharge settlements available
to States for these purposes.
Administration of Justice.—For the two major justice assistance
programs, juvenile justice and State and local assistance, the administration is proposing no new budget authority for 1989. These
programs have met their objectives and are now primarily the
responsibility of 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 $82 million in 1989.
General Government—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 $525
million in budget authority for the Federal payment to the District
of Columbia in 1989, a reduction of $25 million from the 1988 level.
The reduction is primarily because Federal agencies will now be
billed directly by the District for water and sewer charges. These
amounts are therefore not included in the Federal payment to the
District.
Additional information on these and other grant programs is in
Part 5 of the 1989 Budget. For a detailed list of all grant programs
and proposed budget authority and outlays, see Table H - l l .
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, housing, and a variety of other activities.
Direct loan disbursements (excluding repayments) are estimated
to be $664 million in 1989, compared to $641 million in 1988.
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 $72 million in
1989, compared to $154 million in 1988.
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

SPECIAL ANALYSIS F

F-ll

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 as 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 presented in Special Analysis G.
Tax expenditures that provide aid to State and local governments are estimated to be $43.5 billion in 1989. The two major
categories of tax expenditures 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 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 calendar year 1987, the Tax Reform
Act of 1986 disallowed 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
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.
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.
The Tax Equity and Fiscal Responsibility Act of 1982 required
that industrial development bonds (IDBs) be approved by an elected

THE BUDGET FOR FISCAL YEAR 1989

F-88

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)

Fiscal year
1987

1988

1989

10,285

10,100

10,410

22,480

17,250

17,305

13,790
380
2,085
3,420
2,420
1,730
20
950
385
335
3,000
375

14,410
385
2,150
3,435
2,375
1,650
50
960
385
320
2,870
355

15,440
400
2,215
3,475
2,360
1,630
40
1,000
390
315
2,850
350

46,940

42,975

43,480

The estimate of total tax expenditures reflects interactive effects among the individual items. Therefore the individual items cannot be added
to obtain a total.
1

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 was set at
the greater of $75 per capita or $250 million for each State,
through 1987. In 1988 and later years, 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

F-ll

SPECIAL ANALYSIS F
Table H-3. FEDERAL GRANT-IN-AID OUTLAYS BY FUNCTION
(In billions of dollars)
Actual
1987

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
Total outlays

Estimate
1988

1989

1990

1991

1992

1993

0.2
0.5
4.1
2.1

0.2
0.4
3.9
1.8

0.2
0.4
3.5
1.3

0.2
0.3
3.5
1.1

0.2
0.3
3.2
1.0

0.2
0.3
2.9
1.0

0.2
0.3
2.6
1.0

16.9
4.2
18.7
29.5
30.0
0.1
0.2
2.0

17.9
4.5
21.3
32.8
31.5
0.1
0.3
2.0

17.8
4.4
21.7
35.1
32.3
0.1
0.3
1.9

17.7
4.1
22.6
38.2
32.3
0.2
0.2
1.6

17.1
3.6
22.7
41.4
32.8
0.2
0.2
1.7

16.6
3.4
22.0
45.2
34.0
0.2
0.2
1.7

16.1
3.1
22.1
49.1
34.9
0.2
0.2
1.8

108.4

116.7

119.0

121.9

124.3

127.7

131.5

*$50 million or less.

the budget has become important not only for analysis but also for
congressional control.
One major function change has been made for this budget. The
general purpose and fiscal assistance function has been abolished
as a major function; all activities formerly included in this function
have been transferred to the general government function, where
they appear as a separate subfunction. This change was made
because the general revenue sharing program, which constituted
the bulk of the former major function, was ended by Congress, and
the remaining general purpose fiscal assistance activities are not
significantly large to warrant being a separate major function.
Table H-3 shows a functional distribution of Federal grant-in-aid
outlays.2 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 29 percent in 1989. Transportation has declined from 43
percent in 1960 to an estimated 15 percent in 1989. Other changes
occurred between 1960 and 1989 in education, training, employment, and social services programs, which increase from 7 percent
in 1960 to an estimated 18 percent in 1989. General government
also increased with the addition of general revenue sharing, from 2
percent in 1960 to 9 percent in 1980. In 1989, 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 in 1986.

2 Table H - l l contains functional data and programmatic detail within each function for both budget authority and outlays.

F-88

THE BUDGET FOR FISCAL YEAR 1989

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 government
Other
Total

1970

Estimate

1980

1987

1988

1989

1990

1991

1992

1993

2
3
43
2

2
3
19
7

6
1
14
7

4
2
16
4

3
2
15
4

3
1
15
4

3
1
14
3

2
1
13
3

2
1
12
2

7
3
38
2

27
16
24
2
1

24
17
20
9
1

17
24
28
2
1

18
28
27
2
1

18
29
27
2
1

19
31
26
1
1

18
33
26
1
1

17
35
27
1
1

17
37
27
1
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 46 percent of total estimated grant-in-aid outlays in
1989, far more than any other agency.
Table H-5. FEDERAL GRANT-IN-AID OUTLAYS BY AGENCY
(In billions of dollars)
Agency

Department of Agriculture
Department of Commerce
Department of Education
Department of Energy
Department of Health and Human Services
Department of Housing and Urban Development
Department of the Interior
Department of Justice
Department of Labor
Department of Transportation
Department of the Treasury
Environmental Protection Agency
Federal Emergency Management Agency
Other
Total outlays

Actual 1987

Estimate
1988

1989

10.9
0.4
8.7
0.2
47.9
10.9
1.3
0.2
5.6
16.9
0.4
3.3
0.4
1.5

11.3
0.4
9.7
0.2
52.6
12.1
1.4
0.3
5.8
17.8
0.3
2.9
0.4
1.5

11.0
0.2
10.4
0.2
54.4
12.7
1.3
0.2
5.8
17.8
0.3
2.8
0.4
1.5

108.4

116.7

119.0

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

F-ll

SPECIAL ANALYSIS F

determine the program level and the Federal Government reimburses 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 F

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..

19871
total
grants

1977

1987 2

Average
annual
percent
increase,
197787

6.5
18.0

348
388

507
623

3.8
4.9

12.2

330

478

3.8

15.9
19.5
10.0
4.5
3.8
13.5
4.3

282
278
259
241
326
314
355

367
423
353
378
502
403
490

2.7
4.3
3.2
4.6
4.4
2.3
2.2

108.4

307

439

3.6

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.
1

The highest per capita aid in 1987 went to Region II, which
includes New York, New Jersey, Puerto Rico, and the Virgin Islands. The lowest per capita aid in 1987 went to Regions IV, VI,
and VII, generally covering the South and the Plains States.
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.
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. From 1981 to 1989, they are estimated to

F-88

THE BUDGET FOR FISCAL YEAR 1989
Table H-7. HISTORICAL TREND OF FEDERAL GRANT-IN-AID OUTLAYS
(Fiscal years; dollar amounts in billions)
Federal grants as a percent of
Total
grants-inaid

Five-year intervals:
1950
1955
1960
1965
1970
1975
Annually:
1980
1981
1982
1983
1984
1985
1986
1987
1988 estimate
1989 estimate
1990 estimate
1991 estimate
1992 estimate
1993 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
108.4
116.7
119.0
121.9
124.3
127.7
131.5

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
11.3
10.8
11.0
10.9
10.6
10.3
10.3
10.3

23.3
21.6
19.0
18.6
19.6
19.3
19.8
18.9
19.0
18.7
18.1
17.6
17.3
17.0

25.8
24.6
21.6
21.3
20.9
20.9
20.5
18.2
NA
NA
NA
NA
NA
NA

3.4
3.2
2.8
2.8
2.6
2.7
2.7
2.5
2.5
2.4
2.3
2.2
2.1
2.0

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 1989.
1

2
3

grow at an average annual rate of 2.9 percent. In 1989 Federal
grants are estimated to be $119.0 billion, 10.9 percent of total
Federal outlays and 18.7 percent of outlays for domestic Federal
programs.
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, and
declined to 18.2 percent in 1987. 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 2.4 percent by 1989.
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. In
1989, 54 percent of grants are to States and localities as payments
for individuals.3 Among the larger of these programs are medicaid,

3 Payments for individuals are defined as Federal outlays providing benefits in cash or in-kind that constitute
income transfers to individuals or families.

F-ll

SPECIAL ANALYSIS F
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
1988 estimate
1989 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
108.4
116.7
119.0

31.9
36.9
37.9
41.6
44.3
48.1
52.8
56.4
61.0
63.8

22.5
22.1
20.1
20.5
22.7
24.8
26.2
23.8
25.0
24.8

Other

Share of State and local
capital expenditures financed
byGrants-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
33.3
28.2
30.7
30.4

36.4
35.9
34.0
33.7
34.7
33.4
30.9
26.3
NA
NA

63.6
64.1
66.0
66.3
65.3
66.6
69.1
73.7
NA
NA

For an identification of accounts in this category, see Table H-ll,including its footnotes.
Excludes capital grants that are included as payments for individuals.
NA=Not available.
1

family support payments (AFDC), housing assistance, and nutrition
programs.
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
percentage declined to 26.3 percent in 1987, largely because State
and local capital spending financed by their own revenues and by
borrowing 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 $24.8 billion in
1989, 21 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 recipi-

F-88

THE BUDGET FOR FISCAL YEAR 1989

ent 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 1991.
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. The general
revenue sharing program was terminated in 1986. The remaining
programs in this category are expected to comprise 1.8 percent of
total grants-in-aid in 1989.
Under the current administration, broad-based aid has increased.
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 Employment and Training Act
programs with a block grant to the States. The administration is
proposing a new block grant beginning in 1989 for family planning.
Broad-based aid is estimated to be 10.6 percent of total grants-inaid in 1989.
In 1987 there were approximately 372 different grant programs.
Most of the spending is concentrated in relatively few—more than
85 percent of estimated obligations in 1987 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 slightly. 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 $.41 for each Federal dollar. The

F-ll

SPECIAL ANALYSIS F
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:
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

1987

1988

1989

1990

1991

6.1

6.8

0.1

0.5

0.9

1.8

2.0

2.1

1.8

1.9

0.5

7.0

8.6

2.1

2.0

2.1

1.8

1.9

*
0.1

3.9
0.1

1.9

1.3
2.0

2.1
2.8

3.0
1.2
0.5
1.9
2.7

3.0
1.1
0.5
1.9
2.7

3.0
1.2
0.5
1.9
2.7

3.0
1.3
0.6
1.8
2.7

2.9
1.3
0.6
1.8
2.7

0.8

1.1

1.4

1.8
2.0

1.6
2.3

1.2
2.0

1.2
1.9

1.2
1.8

2.9
31.0

4.6
38.2

10.3
72.5

13.1
93.2

13.0
101.6

12.6
104.4

12.4
107.7

12.2
110.3

34.4

49.8

91.5

108.4

116.7

119.0

121.9

124.3

1.6%
8.3%
90.1%

14.1%
9.2%
76.7%

9.4%
11.3%
79.3%

1.9%
12.1%
86.0%

1.8%
11.2%
87.1%

1.8%
10.6%
87.7%

1.5%
10.2%
88.3%

1.5%
9.8%
88.7%

0.1

100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

*$50 million, on or less.
1 Includes most grants in the general government function, and shared revenues from the Tennessee Valley Authority, shown in the energy
function in Table H—11.

increase is because of the significant growth in programs such as
medicaid that require a larger than average matching share.
Federalism and Regulatory Relief.—Federalism and regulatory
relief are areas where the administration is providing more flexibility and authority to State and local governments. Some examples of administration action in this area are listed below.
In October 1987 the President signed Executive Order 12612,
"Federalism." This Executive Order is designed to restore the originally-intended division of responsibilities between the Federal Government and the States and to ensure that the principles of federalism guide agencies in the formulation and implementation of
policies. In addition to listing these principles, the Executive Order
establishes federalism policymaking criteria for the development of
regulatory and legislative proposals, establishes limits on Federal
preemption of State laws, and requires that each Executive department and agency designate an official to be responsible for imple-

F-88

THE BUDGET FOR FISCAL YEAR 1989

mentation of the order. Finally, the Office of Management and
Budget is given the authority for Government-wide coordination
and review to further ensure that the goals of the order are
achieved.
During 1987 the administration began a review of regulatory
impediments to efficient State management of federally-funded
programs. These impediments were identified by a number of
States as being particularly onerous and were submitted to the
President by the National Governors' Association. By February
1988 the administration will have taken action on nearly 50 of
these items and will have presented its final report to the States.
The administration will continue to work closely with the National
Governors' Association and other groups to further identify and
address a variety of regulatory impediments.
In March 1987, the President directed all Federal grant-making
agencies to simultaneously propose and subsequently adopt verbatim a single, Government-wide grants management "common rule"
to replace agency implementation of OMB Circular A-102, "Uniform Administrative Requirements for Grants and Cooperative
Agreements with State and Local Governments." The final rule is
scheduled to be published in March 1988 in the Federal Register.
The common rule will eliminate redundant and inconsistent administrative requirements among and within the 24 Federal grantmaking agencies by rescinding all inconsistent grants administration provisions in program regulations, and by superceding all
similar provisions of noncodified program manuals, handbooks, and
other materials, unless required by legislation or approved by
OMB.
The single, Government-wide grants management common rule
will also contain numerous policy changes to further federalism,
regulatory relief and business-like management of grants. Two particularly significant federalism changes affect States. First, States
will no longer have to follow uniform Federal standards or requirements for financial management systems, equipment or procurement. Instead, States will expend and account for grant funds
according to their own State laws and procedures. Second, in Stateadministered programs (other than the open-ended entitlement programs), States will no longer have to apply uniform Federal administrative standards to subgrantees. Instead, States will be free to
condition and manage funds which "flow-down" to subgrantees
according to their own State laws and procedures.
Finally, in March 1988 Federal agencies will be meeting for the
third consecutive year with State Single Points of Contact, who are
responsible for implementation of Executive Order 12372, the Intergovernmental Review Process. The Executive Order, now in its
fourth year of implementation, allows States to choose which Fed-

SPECIAL ANALYSIS F

F-ll

eral programs they wish to review and requires that the Federal
agencies accommodate State comments and concerns or explain
why they cannot. Since implementation of the Order, significant
achievements in intergovernmental cooperation and consultation
have been realized. The annual meeting affords both the Federal
agencies and State and local governments the opportunity to
review achievements in cooperation realized through the order, and
identify areas for further progress.
Management Improvements.—The administration has also carried
out a number of efforts to improve management of the grants-inaid system.
In December 1987, 18 agencies issued interim final rules to replace the February 1986 Government-wide common rule for Uniform Relocation Assistance with a Government-wide single rule,
promulgated by the Department of Transportation. The single rule
will continue to recognize State and local competence, delete regulatory planning requirements, and change the reporting frequency,
which had been annual in most cases, to no more than every three
years. Uniform Relocation Assistance is one of 68 crosscutting requirements that affect Federal assistance and direct Federal development.
In May 1987, OMB proposed for public comment new, standard
reporting formats for financial reporting on open-ended entitlement programs (e.g., medicaid and aid to families with dependent
children). This new reporting would replace the many inconsistent
and incomplete reports now called for with complete, consistent
and logical reporting across all of the affected programs.
As part of this administration's initiatives to curb fraud, waste,
and abuse, OMB is directing a series of actions so that suspension
and debarment decisions in nonprocurement (grants, loans, etc.)
programs by one Federal agency will have Government-wide effect,
as established by Executive Order 12549 of February 1986. Government-wide effect means that a suspended or debarred participant
for one Federal agency will no longer be able to receive a subgrant,
subcontract, or loan from another Federal agency. In May 1988,
agencies will issue final rules and start taking nonprocurement
suspension and debarment actions with Government-wide effect.
A State and Federal task force is working on ways to improve
the intergovernmental transfers of about $120 billion in Federal
assistance funds. Proposed legislation would require that States be
charged interest on Federal funds from the time they receive funds
to the time recipients' checks clear the States' banks. Similarly, the
Federal Government will pay interest when State funds are used
for Federal assistance payments. Full implementation of this proposal would save the Federal Government about $50 million in
interest costs annually.

F-88

THE BUDGET FOR FISCAL YEAR 1989
OTHER SOURCES OF FEDERAL AID 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
—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.
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.

F-ll

SPECIAL ANALYSIS F

Table H-10. THREE MEASURES OF FEDERAL GRANTS-IN-AID TO STATE AND LOCAL GOVERNMENTS,
1983-86
(In billions of dollars)
1983

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)

1984

1985

1986

92.5

97.6

105.9

112.4

-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

-1.7
-2.7
5.4
0.4
1.8

88.5

99.0

107.2

115.6

-5.5
-0.2
2.9

-5.6
-0.4
-2.3

-6.2
-0.4
-2.8

-6.2
-0.4
-1.6

85.7

90.7

97.8

107.4

—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.

F-88

THE BUDGET FOR FISCAL YEAR 1989

THE STATE AND LOCAL GOVERNMENT SECTOR OF THE NATIONAL
INCOME AND PRODUCT ACCOUNTS 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.
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.
4 Special Analysis B provides general information on the Federal sector of the national income and product
accounts.

SPECIAL ANALYSIS F

F-ll

—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. The gradual decline into deficit in 1987 is in part
due to increases by States and localities in capital spending financed by borrowing.

State and Local Surpluses and Deficits (Operating Account)
as a Percent of Receipts
Percent

Percent

Note: Excludes Social Insurance Funds
DETAILED FEDERAL AID TABLES

The following two tables present detailed Federal aid data for
1987, 1988, and 1989. 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.

F-88

THE BUDGET FOR FISCAL YEAR 1989

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:
Water resource management and improvement
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
programExtension Service
Cooperative State Research Service..

1987
actual

estimate

107
7

OUTLAYS

1989
estimate

1987
actual

estimate

110

191

211

199

193

200

107
7

242

10
203
202

202

455

102

124
7
27
13

7
27

158

141

158

161

160
40
17
-1
28
5

130
42

135
44

141
110

161

118

195
119

85
112

2,361
295
176

2,304
285
194

1,500
290
219

2,919
290
42

3,682

3,611

2,634

4,073

1,445

1,043

652

1,445

1,043

652

50
339
379

50
358
306

300
257

46
319
281

50
353
304

16
312
276

45
33
24
5

4
25
5

SPECIAL ANALYSIS

F-ll

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

Payments to States and possessions
(AMS)
Total, agriculture
COMMERCE AND HOUSING CREDIT:
Department of Commerce:
Minority business development
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 - mass
transit
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:
Department of Agriculture:
Rural water and waste disposal grants....
Rural community fire protection grants....
Rural development loan fund
Rural development grant program
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
Supplemental aid for facilities for the
homeless
Rental housing development and rehabilitation
Other community development
Federal Emergency Management Agency:
Disaster relief

1987
actual

1988
estimate

OUTLAYS
1987
actual

1989
estimate

2,214

1,758

1988
estimate

1989
estimate

2,092

1,751

1,257

1 i

13,262
121
10
50
96
2,000
1,097
200

13,486
220
10
50
101
1,736
1,200
124

6
201

2
180

11
869
29
4

11
1,700
22

1,700
15

18,009

109
3

1,209

_ 1

12,414
115
9
26
85
1,822
668
264

12,968
121
9
41
130
2,131
753
239

12,989
128
11
48
135
1,992
763
186

5
150

2
159

1
164

345
22
917
22
4

200
26
979
37
1
4

200
17
1,110
12

18,896

16,971

16,919

17,854

17,818

109
3

157
3

163
3
14
9

140
2

205
1

218
1

179

13,482
126
10
60
1,394

128

192

182

3,000
225

2,880
216

2,480
-50

2,967
354

3,037
400

3,015
366

15
314

206

150

166
7

324
10

348
10

112

108

173

201

157

230

H-32

THE BUDGET FOR FISCAL YEAR 1989

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

Appalachian Regional Commission:
Appalachian regional development programs
Neighborhood Reinvestment Corporation:
Neighborhood Reinvestment Corporation..
Total, 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 block grant
Interim assistance to States for immigration
Human development services
Foster care and adoption assistance
Work incentives
Department of the Interior:
Operation of Indian programs
Department of Labor:
Training and employment services
Worker readjustment
Federal-State employment service
Community service employment for
older Americans
Department of Education:
Compensatory education for the disadvantaged
Impact aid
School improvement programs
Bilingual, immigrant, and refugee education
Indian education
Education for the handicapped
Vocational rehabilitation and handicapped research
Payments to institutions for the handiVocational and adult education
Student financial assistance1
Higher education
Libraries
Chicago litigation settlement
Community Services Administration:
Community services programs
Corporation for Public Broadcasting:
Public broadcasting fund
National Endowment for the Arts:
National Endowment for the Arts..
Institute of Museum Services:
Institute of Museum Services

1987
actual

OUTLAYS

1989
estimate

estimate

101

102

4,104

3,840

1987
actual

1988
estimate

141

123

2,861

4,235

4,498

2,688
361

2,685
406

1,771
783
137

928
2,150
979
95

2,929

3,014

951

2,659
948
892

939

977

3,938
708

861

4,321
700
937

4,554
582
1,032

3,199
695
785

3,825
737
682

150

151

131
27

2,700
405

2,700
382

2,700
310

1,899
1,041

126

928
2,218
811
93

644
2,218
1,075

2,986

3,020

961

162

1,575

1,706

64
1,754

103
37
1,159

1,356

1,458

1,486

1,280

5
984
73
23
125

5
1,011

6
1,225

15
122

983
76

26
126
83

-3
200

214

228

200

1,627
1,451

6
964
96
21
150
17
- 2

214
32
6

F-ll

SPECIAL ANALYSIS F

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

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:
Medicaid1
Public health service management
Public health emergency fund
Health resources and services1
Health care improvement
Disease control, research and training
Alcohol, drug abuse, and mental
health1
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) 1
Food stamp program administration1
Nutrition assistance for Puerto Rico 1
Supplemental feeding programs1
Special milk program 1
Cash and commodities for selected
groups1
Rural housing preservation grants1
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 programs1
Supportive housing demonstration program 1
Emergency shelter grants program 1
Payments for operation of low income
housing 1
Low-rent public housing (forgiven
loans) 1
Congregate services program 1

OUTLAYS

1987
actual

1988
estimate

1989
estimate

1987
actual

20,430

22,015

22,530

18,657

21,336

21,687

27,612

30,657

27,435

30,664

30
1,091

32,733
140

1,140

1,128

23
1,183

214

226

1,032
15
233

182

176

32,733
70
5
1,233
8
217

711

791

733

622

713

736

59
5

47
5

48
5

59
5

46
5

47
5

29,757

32,902

34,974

29,466

32,846

35,091

4,637
1,056
853
1,703
18

4,701
1,129
879
1,850
21

4,845
1,189
908
1,921
19

4,289
1,107
852
1,701
15

4,649
1,154
876
1,859
23

4,867
1,181
907
1,919
21

194
19
10
8

199

188
10
9
6

193
18
11
8

198
20
11
8

10,460
15

11,125
3

10,723
3

10,540
3

10,784
8

10,933
8

1989
estimate

1988
estimate

1,822
328

1,532
333

1,187
268

1,829
374

1,558
293

1,218
284

1,633

1,656

1,675

1,560

1,656

1,675

5,053

4,913

5,723

4,588

5,192

6,334

85
60

64
8

29
37

45
30

1,350

1,450

1,518

1,388

1,486

1,515

1,300
3

1,436
4

956

1,393
4

1,531
5

1,064
5

F-88

THE BUDGET FOR FISCAL YEAR 1989

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

Federal Emergency Management Agency:
Emergency food and shelter1
Total, income security.

1987
actual

1988
estimate

OUTLAYS

1989
estimate

1987
actual

estimate

125

114

30,732

31,450

31,289

29,972

110

111

146

386
77

198
85

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
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..
GENERAL GOVERNMENT:
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
Bureau of Land Management permanent
appropriations
Payments to States - mineral leasing
receipts
National wildlife refuge fund
Payments to the U.S. territories
Administration of territories
Trust Territory of the Pacific Islands
Department of the Treasury:
General revenue sharing
Internal revenue collections for Puerto
Rico
Miscellaneous permanent appropriations..
Department of Energy:
Payments to States under the Federal
Power Act

148
49
3

506

328

165

234

213

314

306

303
7

105

150

375
11
69
76
67

412
12
70
75
42

439
12
70
68
3

375
11
71
52
38
76

185
107

205
105

205
108

225
97

31,494

F-ll

SPECIAL ANALYSIS F

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

District of Columbia:
Federal payment to the District of Columbia
Total, general government
Total, grants-in-aid
1

1987
actual

1988
estimate

OUTLAYS

1989
estimate

1988
estimate

1989
estimate

580

550

525

560

552

527

1,799

2,049

1,927

2,000

1,955

1,948

111,737

117,373

114,905

108,392

116,666

119,015

Programs included in the "grants for payments to individuals" category shown in Table H-8.

1987
actual

F-88

THE BUDGET FOR FISCAL YEAR 1989
Table H-12. CREDIT ASSISTANCE TO STATE AND LOCAL GOVERNMENTS1
(In millions of dollars)
1987
actual

Function, agency and program

1989
estimate

1988
estimate

Direct Loans
Energy, natural resources and environment:
Department of the Interior:
Bureau of Reclamation loan program..

Drought emergency loan fund..

Disbursements..

Net loans

Outstandings..

520

539

561

Net loans

-1

Disbursements..

Net loans

Outstandings..

Disbursements..

Net loans

Outstandings..
Transportation:
Department of Transportation:
Federal aid to highways (trust fund).

Disbursements..

Net loans

Outstandings..
Right-of-way revolving fund.

Disbursements..

Net loans

Outstandings..
Total, transportation.

Disbursements..

Net loans

Outstandings..
Community and regional development:
Department of Agriculture:
Rural development insurance fund..

Disbursements..

Net loans

Outstandings..
Department of Commerce:
Coastal energy impact fund..

Disbursements..

Net loans

Outstandings..
Department of Interior:
BIA revolving fund for loans.

Disbursements..

Net loans

Outstandings..

-1

100

565

628

676

395

407

416

Disbursements..

Total, energy, natural resources and environment
Disbursements..

-11

Net loans

Outstandings..

Agriculture, commerce and housing credit:
Department of Agriculture:
Rural housing insurance fund (program).,

Outstandings..
Abatement, control, and compliance..

Outstandings..
Environmental Protection Agency:
Construction grants

-38

-18

-21

104

-27

-65

-18

143

125

466

450

6,431

5,386

—1,796 -1,044

-8

—3

-21

104

504

—798
4,588

—3
82

-4
55

F-ll

SPECIAL ANALYSIS F
Table H-12. CREDIT ASSISTANCE TO STATE AND LOCAL GOVERNMENTS '—Continued
(In millions of dollars)
1987
actual

Function, agency and program

Department of Housing and Urban Development:
Community development
Disbursements..

Net loans

Outstandings..
Revolving fund (liquidating programs).

Net loans

1988
estimate

22
-57

324

267

-30

—327

Outstandings..

329

Total, community and regional development... Disbursements..

539

481

-1,808

-1,427

Outstandings..

7,228

5,801

Net loans

-523

-295

569

274

Net loans

Education:
Department of Education:
College housing loans

Outstandings..
College housing and academic facilities

Outstandings..

Higher education facilities loan and insurance
fund
Net loans
Outstandings..
Student loans

Disbursements..

Net loans

-59
107

Disbursements..
153

Net loans

- 7
9

-9

-588

-429

839

409

Disbursements..

Net loans

Outstandings..
Health:
Department of Health and Human Services-.
Medical facility guarantee and loan fund

Net loans
Outstandings..

Grand total, direct loans

New loans
Net loans
Outstandings..

-1

Net loans
Outstandings..

General purpose fiscal assistance:
Other independent agencies:
Loans to the District of Columbia

Outstandings..

Outstandings..
Total, education

-73

Net loans
Student financial assistance

-54

-293

-30

715

685

666
-2,708

641
-1,829

9,899

8,069

F-88

THE BUDGET FOR FISCAL YEAR 1989
Table H-12. CREDIT ASSISTANCE TO STATE AND LOCAL GOVERNMENTS '—Continued
(In millions of dollars)
1987
actual

Function, agency and program

1988
estimate

Guaranteed Loans
Community and regional development:
Department of Agriculture:
Rural development insurance fund

Net loans

-9

Outstandings..

343

Department of Housing and Urban Development:
New guaranteed loans..
Revolving fund (liquidating programs)

Net loans

Outstandings
Community development grants

Department of Interior:
BIA, Indian loans

New guaranteed loans..

Net loans

Outstanding

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..

New guaranteed loans..

118

84
528

-249
6,252
99

Net loans

-165

Outstandings

6,780

* $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 H
CIVILIAN

EMPLOYMENT

IN T H E

EXECUTIVE

BRANCH

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.
The Administration reduced nondefense full-time equivalent
(FTE) employment by nearly 89,000 from 1981 through 1987. The
Administration remains committed to continuing to restrain the
size of the Federal workforce to the minimum necessary to carry
out essential functions efficiently.
FULL-TIME EQUIVALENT OF TOTAL FEDERAL CIVILIAN EMPLOYMENT
IN THE EXECUTIVE BRANCH

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 Title 10, chapter 4, section 140b of the United States
Code exempts the Department of Defense from full-time 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 1988, 1989, and 1990 constitute
upper limits on agency FTE employment. The 1988 through 1990
totals for "Civilian Agency Employment" contain adjustments to
reflect the fact that actual nondefense employment tends to fall
short of assigned employment ceilings. For 1988, a shortfall of 1.5
percent is projected; this decreases to 1.0 percent in 1989 and to 0.5
percent in 1990.
SIGNIFICANT CHANGES IN FULL-TIME EQUIVALENT EMPLOYMENT

Nondefense employment is expected to decrease by 1,025 from
1988 to 1989. From 1989 to 1990, an increase of about 49,000 is
projected. Nearly all of this increase will take place in the Department of Commerce, which will hire temporary employees at the
Bureau of the Census to conduct the 1990 decennial Census of
Population and Housing.

I-l

F-88

THE BUDGET FOR FISCAL YEAR 1989
Table 1-1. FULL TIME EQUIVALENT OF FEDERAL CIVILIAN EMPLOYMENT

Fiscal year
Agency

1987
actual2

1988
estimate

1989
estimate

1990
estimate

Agriculture
Commerce
Defense—civil functions
Education
Energy
Health and Human Services
Housing & 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

102,579
31,916
28,199
4,412
16,116
122,656
12,282
69,662
65,703
17,674
25,724
60,310
138,353
13,488

104,962
38,430
28,227
4,495
16,266
119,624
13,101
70,468
72,455
18,518
26,125
61,162
151,801
14,448

102,047
36,273
28,615
4,489
15,804
115,045
12,673
69,725
77,324
18,591
25,837
62,242
153,358
14,570

100,378
85,222
28,542
4,489
15,404
110,972
12,243
69,725
80,344
18,637
25,831
62,612
154,641
14,334

22,001

22,425
220,869

22,950
218,420

22,950
216,247

4,569
19,882
3,376
5,108
8,433
4,048
28,297
8,849
40,161

4,725
21,071
3,250
5,372
8,665
4,121
29,500
8,950
42,313
-16,670

4,725
20,155
3,180
5,261
8,665
4,304
29,500
8,870
42,072
-11,047

4,725
19,663
3,120
5,088
8,665
4,234
29,500
8,700
42,139
-5,742

Civilian agency employment..
Defense—military functions3

1,074,818
1,031,317

1,094,673
1,028,809

1,093,648
1,017,012

1,142,663
1,017,000

Subtotal
Postal Service Employment

2,106,135
761,180

2,123,482
830,051

2,110,660
816,268

2,159,663
816,268

2,867,315

2,953,533

2,926,928

2,975,931

Total, Executive Branch

221,020

Excludes 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 Data are estimated for portions or Defense-Civil Functions as well as for the Federal Reserve System, Board of Governors and the
International Trade Commission.
3 By law (10 U.S.C., Chapter 4, section 140b), the Department of Defense is exempt from full-time equivalent employment controls. Data
shown are estimated.
4 Includes the Postal Rate Commission
1

A number of agencies show decreases, in Table 1-1, from the
1988 estimates to the corresponding estimates for 1989. The agencies with a decrease of more than 100 FTE's from 1988 are:
• Postal Service (—13,783). The impact of anticipated cost reductions, together with an expected workload decline in response to postage rate increases will cause this employment
decrease.
• Department of Defense—military functions (—11,797). This
decrease is the result of severe budget constraints on the
Department. Some of the reduction will be achieved through
productivity and efficiency improvements. The remainder will

SPECIAL ANALYSIS F

F-ll

be achieved through program reductions throughout the Department including adjustments in the force structure and
reductions in logistical and base operating support activities.
• Department of Health and Human Services (—4,579). Most of
this reduction results from increased productivity in the
Social Security Administration, which is investing nearly $1
billion in its automated systems.
• Department of Agriculture (—2,915). 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
less. The Federal role in some conservation programs will be
reduced and staffing levels adjusted accordingly. Other decreases reflect management improvements and increased contracting of services more appropriately conducted by the private sector.
• Veterans Administration (—2,449). This reduction reflects anticipated productivity increases in all areas. Staffing plans in
the medical care area anticipate that all veterans who apply
for care, and are in need of care, will be served and that
during fiscal year 1988, the ratio of patients to staff will
remain at the levels experienced during the first half of fiscal
year 1987. In the area of non-medical benefits administration,
staffing is being reduced slightly in recognition of decreased
workload.
• Department of Commerce (—2,157). This decrease is due to
completion of preliminary activities associated with the 1990
Decennial Census, the transfer of the Minority Business Development Agency to the Small Business Administration and
the phase-out of the Economic Development Administration.
• General Services Administration (—916). This decrease is due
primarily to contracting out under the guidelines of OMB
Circular No. A-76.
• Department of the Interior (—743). This reduction is related
primarily to the reorganization and reorientation of the
Bureau of Reclamation.
• Department of Energy ( — 462). Employment will continue to
decline due to implementation of management improvements,
including increased reliance on private sector contractors, 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.
• Department of Housing and Urban Development (—428). This
change is a result of decreased workloads in housing, public

F-88

THE BUDGET FOR FISCAL YEAR 1989

and Indian housing, and Community Planning and Development programs.
• Department of State (—288). This reduction reflects anticipated savings resulting from program efficiencies and productivity improvements, as well as implementation of the President's contracting out program.
• Office of Personnel Management (—111). OPM's decrease in
FTE's results for the most part from scheduled contracting
out and productivity savings.
Some agencies in Table 1-1 show increases of 100 or more FTE's
from 1988 to 1989:
• Department of Justice (4,869). Improved staffing and new activities at Federal Prisons, continued administration of immigration reform legislation, greater legal support for General
Legal Activities and U.S. Attorneys, and key programs within
the Federal Bureau of Investigation all contribute to this
increase.
• Department of the Treasury (1,557). The dominant component
of this increase is for the Internal Revenue Service (IRS),
partially offset by decreases in other Treasury bureaus.
Within the IRS, 1,015 will be added for returns processing,
520 for examinations, and 113 for tax fraud investigations.
• Department of Transportation (1,080). This change is primarily for Federal Aviation Administration staff increases for air
traffic control, safety inspections, security, and systems maintenance.
• National Aeronautics and Space Administration (525). This
increase provides the staffing required to restore the space
shuttle to safe, routine flight activity. Additional staffing is
also provided to the Office of the Inspector General.
• Department of Defense—civil functions (388). This increase, in
the Army Corps of Engineers, enables the Corps to accommodate additional design and construction management, done on
a reimbursable basis, for the Environmental Protection Agency's expanding Superfund program. The increase for the Superfund program is partially offset by scheduled savings from
contracting out.
• Small Business Administration (183). The increase reflects the
transfer of the Minority Business Development Administration from the Department of Commerce.
• Environmental Protection Agency (122). This change is due to
the increase in scope of the Superfund hazardous waste cleanup program resulting from its reauthorization in 1986.
In addition to the employment changes shown above some smaller agencies which comprise a part of the "miscellaneous" line in

SPECIAL ANALYSIS F

F-ll

Table 1-1 will experience significant increases, relative to their
size:
• Securities and Exchange Commission (156). Increases are required as a result of rising workload due to fundamental
changes in the securities markets.
• Federal Deposit Insurance Corporation (99). This increase relates to heavier workload for the Corporation because of the
rise in the number of troubled banks.
END-OF-YEAR EMPLOYMENT LEVELS

Between January 1981, when this administration took office, and
September 30, 1987, nondefense total employment fell from
1,232,181 to 1,155,959; a decrease of 76,222 employees. Total Federal
civilian employment in the executive branch was 2,205,296 at the
end of 1987, excluding Postal Service and special category employees.
Table 1-2 shows Government-wide Federal civilian employment
as of the end of fiscal years 1985, 1986, and 1987. 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 about 86 percent
of executive branch employment (excluding the Postal Service) at
the end of fiscal year 1987. The remainder was 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).

F-88

THE BUDGET FOR FISCAL YEAR 1989
Table 1-2. TOTAL FEDERAL EMPLOYMENT, END-OF-YEAR
Description

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

Actual, as of September 30
1985

1986

1987

1,898,980
286,933
(1,043,240)
(1,142,673)

1,885,139
265,016
(1,027,853)
(1,122,302)

1,903,852
301,444
(1,049,337)
(1,155,959)

2,185,913

2,150,155

2,205,296

587,132
162,952

607,725
183,294

635,088
162,822

750,084

791,019

797,910

27,546

25,558

26,865

2,963,543

2,966,732

3,030,071

2,151,032
38,487

2,169,112
37,284

2,174,217
38,783

Subtotal, military personnel

2,189,519

2,206,396

2,213,000

Total, executive branch employment

5,153,062

5,173,128

5,243,071

32,644
24,345

33,115
22,341

34,446
23,716

56,989

55,456

58,162

5,210,051

5,228,584

5,301,233

Categories1
Subtotal, executive branch civilian employment

Military personnel on active duty: 2
Department of Defense
Department of Transportation (Coast Guard)

Legislative and judicial personnel:3
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.

F-ll

SPECIAL ANALYSIS F
Table 1-3. COMPENSATION AND BENEFITS FOR CURRENT PERSONNEL
(In millions of dollars)
Description

Civilian personnel costs:
Executive branch (excluding Postal Service):
Direct compensation
Personnel benefits1
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
Total, civilian personnel costs
Military personnel costs: 4
Direct compensation
Personnel benefits
Total, military personnel costs:
Grand total, personnel costs:

1987 Actual

1988 est.

1989 est.

60,219
13,998

62,474
17,553

63,404
18,036

(27,424)
(3,871)

(27,711)
(6,557)

(27,959)
(6,652)

74,217

80,027

81,440

22,070
4,228

23,557
5,886

24,593
6,042

26,298

29,443

30,635

1,213
164

1,305
222

1,455
271

1,377

1,527

1,726

101,892

110,997

113,801

48,386
23,203

49,278
23,806

71,589

73,084

75,260

173,481

184,081

189,061

24,562
18,445

26,251
19,525

27,919
20,744

43,007

45,775

48,663

50,931
24,329

ADDENDUM
Retired pay for former personnel:
Civilian personnel
Military personnel
Total

In addition to employing agency 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 $4,557 million in 1987
and are estimated to be $4,720 in 1988 and $4,858 million in 1989.
2 Excludes members and officers of Congress.
3 In 1989, includes allowances of $54 million for aviation bonus pay.
4 Excludes reserve components.
1

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
of Defense's DOD Military Retirement Fund and the Civil Service
Retirement and Disability Fund to finance future retirement benefits.
The 1989 Budget includes a proposal designed as an aid in gaining better control over the Government's expenditures as an employer. For 1989, the Administration will propose that the Postal
Service and the government of the District of Columbia be required

F-88

THE BUDGET FOR FISCAL YEAR 1989

to contribute money to the civil service retirement fund to cover
the full cost of providing cost-of-living adjustments to Postal Service and D.C. Government annuitants. Additional details on this
proposal can be found under the income security, health, and allowances functions in Part 5 of the Budget of the United States
Government, 1989.
The budget assumes a 4.3 percent military pay increase and a
two percent increase in pay for Federal white- and blue-collar
workers in January 1989. 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 indicated in table 1-3, obligations for executive branch civilian personnel compensation and benefits in 1989 are projected to
reach nearly $81.4 billion, excluding the Postal Service.
GOVERNMENT EMPLOYMENT AND LABOR FORCE COMPARISONS

As shown on the following chart, Government employment—
Federal, State, and local—comprised nearly 15.5 percent of the
total employed civilian labor force in 1987.
Within this segment, Federal civilian employment in the executive branch accounts for 2.68 percent of the total employed civilian
labor force in 1987, down from a high of 3.82 percent in 1968.
The portion of the total employed civilian labor force attributable to State and local government has grown from 11.6 percent in
1967 to 12.8 percent in 1987.

SPECIAL ANALYSIS

F-ll

Government Civilian Employment
as a Perceni of Total Civilian Employment
Percent

Percent

-20
Total

1967

Fiscal Years
•Executive Branch

GOVERNMENT EMPLOYMENT AND 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 30.8 percent in 1957 to 17.3
percent in 1987. 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.

F-88

THE BUDGET FOR FISCAL YEAR 1989

Government Civilian Employment
Millions of Employees

1957

Ffecd Years
•Executive Branch

The ratio of Federal civilian employment to the total U.S. population was 12.4 per thousand in 1987. The main reason for the
increase in this ratio from 1986 to 1987 is due to increases in
overall executive branch employment; in the Postal Service, in the
Department of Defense, and in a number of nondefense agencies
(see table 1-2).

SPECIAL ANALYSIS

F-ll

Table 1-4. GOVERNMENT EMPLOYMENT AND POPULATION, 1957-87
Government employment
Fiscal year

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
1987

Federal
executive
branch1
(thousands)

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
3,030

State and
local
governments
(thousands)

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
13,220
13,504
13,827
14,190
14,451

All
governmental
units
(thousands)

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
16,039
16,358
16,791
17,157
17,481

Population
Federal as
percent of all
governmental
units

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
17.6
17.4
17.7
17.3
17.3

Total United
States
(thousands)

6
6
6
6
6
6
6

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
237,663
239,951
242,222
244,425

Federal
employment
per 1,000
population

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
12.2
12.4

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 1957 through 1976 are as of June 30; for 1977 through 1987, as of Sept. 30.
tt U.S. population data for 1981-1987 are the latest available from the Census Bureau.
1

SPECIAL ANALYSIS H
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 1989 budget. The second describes in more detail the
R&D programs of 12 agencies whose R&D obligations individually
exceed $150 million. In the aggregate, these agencies fund over 99
percent of total Federal R&D.
PART I. HIGHLIGHTS
In 1989, total Federal obligations for research and development,
including R&D facilities, are estimated at $64.6 billion, an increase
of about $2.7 billion or 4 percent above the 1988 estimated level of
$61.9 billion as shown in table J-1. Support for the conduct of basic
research, included within this total, is estimated to increase by 6
percent, from $9.7 billion in 1988 to $10.3 billion in 1989.
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 that the scientific and technological foundation is in place to support long-term economic growth and
continued improvement in the quality of life for all citizens.
Examples of such investments are those directed toward 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. In FY 1988 national spending for R&D is projected to
total about $132 billion, a real increase of about 3 percent over
1987. Of this amount, about $65 billion is expected from Federal
spending, $63 billion from industry, and the balance from universities, colleges and other non-profit organizations. The growth rate
between 1987 and 1988 is projected to be the lowest in this decade,
and is attributable both to tightening Federal budgetary con-

J-l

F-88

THE BUDGET FOR FISCAL YEAR 1989

straints, and, in the private sector, to corporate restructurings and
other factors. However, the rate of growth in national R&D spending is still expected to show a real increase above inflation.
For 1989, the budget provides increased Federal support for R&D
to meet key national needs. The budget also provides increased
support for basic research, particularly interdisciplinary research
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.
The Federal Government will also continue to encourage and
facilitate the transfer of technology and new knowledge from universities and Federal laboratories to the private sector. In addition
to technology transfer, industry has also benefitted from other
Federal actions that help to create a climate that encourages increased private sector support for R&D. Such actions have included
revisions of policies on ownership of patents and other intellectual
property to provide incentives for innovation, revisions of antitrust
laws to encourage joint industrial R&D efforts, and revisons of the
tax code (including a 1989 proposal to make the R&D tax credit
permanent) to encourage increased R&D expenditure.
Even in the context of the Bipartisan Budget Agreement which
places severe but necessary fiscal constraints on the budget as a
whole, the 1989 budget reflects the continued high priority the
Administration places on R&D that is appropriate for Federal support. The 1989 budget provides significant increases for R&D programs in key agencies including:
• selected R&D programs of the Department of Defense such as
the Strategic Defense Initiative and the Advanced Tactical
Fighter;
• most of the R&D programs of the National Aeronautics and
Space Administration including the Space Station, Project
Pathfinder, and other space science and technology programs;
• basic research support by the National Science Foundation
including the establishment of Science and Technology centers;
• support in the Department of Energy for initiation of construction of the Superconducting Super Collider (SSC), and for
a 5-year, $2.5 billion clean coal technology demonstration program; and
• Biomedical and AIDS R&D.
At the same time, the 1989 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 in the energy
technology programs of the Department of Energy, as well as elimination of selected programs of the Department of Commerce (e.g.,

F-ll

SPECIAL ANALYSIS F

the Sea Grant program), and certain research activities of the
Department of Interior (e.g., the Mineral Institutes program).
Table J-1. TOTAL FEDERAL FUNDING FOR CONDUCT OF R&D AND RELATED FACILITIES
(In billions of dollars)
Obligations
1987 actual

Outlays

1988 estimate

1989 estimate

1987 actual

1988 estimate

1989 estimate

Conduct of R&D
R&D facilities

56.1
1.7

60.0
2.0

62.5
2.1

52.9
1.5

54.2
1.8

59.3
1.9

Total

57.8

61.9

64.6

54.3

56.0

61.2

CONDUCT OF RESEARCH AND DEVELOPMENT

The budget for 1989 includes $62.5 billion in obligations for the
conduct of R&D, an increase of $2.6 billion or 4 percent over 1988.
The conduct of R&D associated with national defense (i.e. militaryrelated R&D programs of the Departments of Defense and Energy)
makes up about 65 percent of the total Federal spending on R&D.
In 1989, however, civilian R&D will grow at a faster rate than
defense-related R&D, due primarily to the constraints imposed by
the Bipartisan Budget Agreement. The limitations on defense
spending imposed by this agreement necessitated major reductions
across the board in defense programs including R&D. Limitations
were also imposed on domestic discretionary spending (which includes all civilian R&D). However, even with this constraint, the
Administration continues to assign a high priority to support for
appropriate R&D. Highlights of the proposed programs of the six
major R&D agencies, which account for 96 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 $38.8 billion for 1989, an
increase of $888 million (about 2 percent) above 1988. While
funding for R&D is relatively constant from 1988 to 1989, it
does allow growth for some important programs, including
the Strategic Defense Initiative and the Advanced Tactical
Fighter. There is also an increase for the joint DOD-NASA
program to support development of the National Aerospace
Plane.
• Department of Energy (DOE).—Obligations for the conduct of
R&D by the Department of Energy are estimated to be $5.2
billion, an increase of $95 million from 1988. Funding for the
National Defense Program will remain comparable to the
1988 level. High Energy and Nuclear Physics R&D in the
General Science Program will increase from $625 million in

F-88

THE BUDGET FOR FISCAL YEAR 1989

1988 to $704 million in 1989. Included in this total are funds
to enhance support for long-term basic research and to enhance substantially the R&D effort on the superconducting
magnets and other technical components required for the Superconducting Super Collider accelerator facility and to increase the levels of operation of all major on-line high energy
and nuclear physics accelerators. Obligations for Energy Programs will decrease by $27 million from 1988 to $2,026 million
in 1989. Increases are proposed to enhance support for longterm basic energy research, and to implement a 5 year, $2.5
billion clean coal technology demonstration program. These
increases are offset by proposed reductions in support for the
energy technology programs such as fossil energy, conservation, and renewable energy where reliance is placed on the
private sector to provide support for demonstrations and product development.
• Department of Health and Human Services (HHS).—HHS
R&D activities in 1989 are estimated to be $7.9 billion, up
from $7.2 billion in 1988. In 1989, the National Institutes of
Health (NIH) will support about 20,700-21,000 research
project grants and about 11,000 research trainees. In 1989,
NIH obligations are estimated at $6.2 billion.
• National Aeronautics and Space Administration (NASA).—
NASA obligations for the conduct of R&D are estimated at
about $5.4 billion in 1989, an increase of $637 million over
1988. This increase is necessary primarily to continue development of the Space Station and to provide for two new initiatives, the Advanced X-Ray Astrophysics Facility (AXAF) and
Project Pathfinder. AXAF will expand our ability to explore
x-ray features in the universe and Pathfinder will explore a
variety of advanced generic technologies underlying potential
future space missions that will enable expanded human presence and activity beyond Earth's orbit. For other science and
applications programs, the budget continues support for major
flight projects such as the Space Telescope, the Galileo mission to Jupiter, the Global Geospace Science mission and the
Ocean Topography Experiment (TOPEX), and increases support for the Explorer program.
• National Science Foundation (NSF).—Obligations for research supported by NSF are expected to increase by about
$303 million, or about 20 percent—to $1.8 billion in 1989. This
increase is part of the Administration plan to increase investments in basic research by proposing to double the NSF
budget over the next five years. The budget principally provides enhanced support for basic research across a wide spectrum of high-priority scientific and engineering disciplines,

F-ll

SPECIAL ANALYSIS F

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 new efforts in improving research and education at the undergraduate level, and the establishment of
Science and Technology Centers with a one-time fully-funded
appropriation of $150 million. These new centers, modeled
after the Engineering Research Centers, are intended to
foster and strengthen multidisciplinary research in the basic
physical and life sciences as well as to speed the transfer of
such knowledge to the private sector.
• Department of Agriculture (USDA).—Obligations for the conduct of R&D are estimated at $985 million for 1989, a decrease of about 3 percent from the 1988 level of $1,018 million. Within the USDA total, the Cooperative State Research
Service will provide $255 million for research and development, primarily conducted by colleges and universities. The
Agricultural Research Service expects to obligate $529 million, an increase of $16 million over 1988. Emphasis is given
to basic research on plant and animal productivity, biotechnology, new agricultural products, water quality, food safety,
protection of stratospheric ozone, and human nutrition. The
Forest Service will continue its research on land management
planning and forest inventory.
Table J-2 summarizes Federal support for the conduct of R&D by
agency.
Table J-2. CONDUCT OF RESEARCH AND DEVELOPMENT BY MAJOR DEPARTMENTS AND AGENCIES
(In millions of dollars)
Obligations
Department or agency

1987
actual

Defense—Military functions
36,088
Health and Human Services
6,643
(National Institutes of Health)
(5,850)
National Aeronautics and Space Administration.. 3,787
Energy
4,724
National Science Foundation
1,464
Agriculture
946
Interior
403
Environmental Protection Agency
348
Transportation
322
Commerce
405
Veterans Administration
210
Agency for International Development
223
All other 1
527
Total

56,089

Outlays

1988
estimate

1989
estimate

1987
actual

1988
estimate

1989
estimate

37,899
7,174
(6,318)
4,779
5,071
1,524
1,018
419
350
325
408
216
208
560

38,787
7,938
(6,229)
5,416
5,165
1,827
985
396
374
317
312
216
199
585

34,581
5,733
(4,956)
3,250
4,682
1,410
921
389
326
324
308
195
230
513

33,776
6,561
(5,643)
3,962
4,941
1,492
968
420
340
352
360
209
243
539

37,023
7,446
(6,181)
4,820
5,082
1,618
961
393
335
341
333
202
198
56.3

59,952

62,517

52,862

54,162

59,314

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

F-88

THE BUDGET FOR FISCAL YEAR 1989
CONDUCT OF BASIC RESEARCH

The 1989 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. Over the course of this Administration (1981 to 1989),
Federal support for basic research has increased by 52 percent in
real terms.
Funding for basic research is included within the overall Federal
support for the conduct of R&D. In 1989, obligations for the conduct of basic research are estimated at $10.3 billion, an increase of
$617 million, or 6 percent above the level for 1988.
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 13 percent in 1989 to a total
of $9.2 billion. This would represent a real increase of 54 percent
over the period of this Administration (1981 to 1989).
Table J-3 summarizes Federal support for the conduct of basic
research by agency.
R&D FACILITIES

In 1989, 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 1989, obligations for R&D facilities are expected to total $2.1
billion, an increase of $125 million from 1988. The budget provides
for construction of two major new projects in DOE, the Superconducting Super Collider (SSC) accelerator facility and a 6-7 GeV
synchrotron source at Argonne National Laboratory, as well as
ongoing construction of a 1-2 GeV synchrotron source at Lawrence
Berkeley Laboratory, an Accumulator/Booster Ring at the Brook-

F-ll

SPECIAL ANALYSIS F
Table J-3. CONDUCT OF BASIC RESEARCH BY MAJOR DEPARTMENTS AND AGENCIES
(In millions of dollars)

Outlays

Obligations
Department or agency

Agencies supporting primarily physical sciences and engineering:2
National Science Foundation
National Aeronautics and Space Administration
Energy
Defense—Military functions
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
Other Agencies5
Subtotal
Total
1
2
3
4
5

1987
actual

1988
estimate

1989
estimate

1987
actual

1988
estimate

1989
estimate

1,382

1,439

1,734

1,329

1,404

1,526

1,014
1,061
904
124
26
8

1,229
1,185
892
131
27
7

1,374
1,265
906
125
27
6

865
1,040
844
121
26
9

1,017
1,175
837
132
25
11

1,223
1,259
874
125
27
6

4,519

4,911

5,437

4,233

4,601

5,039

3,859
(3,578)
446
72
31
17
19

4,160
(3,854)
471
77
32
18
20

4,260
(3,965)
470
77
31
18
12

3,282
(3,007)
430
70
30
16
18

3,767
(3,429)
443
76
30
16
19

4,204
(3,891)
450
73
27
18
15

4,444

4,777

4,868

3,845

4,352

4,787

8,963

9,689

10,306

8,078

8,953

9,826

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 Education, Labor, Justice, and Treasury, and the Agency for International Development.

haven Alternating Gradient Synchrotron, and a 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

Energy
National Aeronautics and Space AdministrationDefense—Military functions
Agriculture
National Science Foundation
Health and Human Services
(National Institutes of Health)
All other 1
Total

1987
actual

775
309
318
112
64
38
(36)
63
1,680

1988
estimate

939
429
267
126
55
70
(68)
75
1,961

Outlays
1989
estimate

1,132
549
191
85
67
6
(5)
56
2,086

1987
actual

723
314
235
71
50
32
(29)
39
1,464

1988
estimate

918
386
239
105
54
44
(39)
65
1,810

1989
estimate

1,026
479
176
99
56
34
(33)
57
1,926

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

F-88

THE BUDGET FOR FISCAL YEAR 1989
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 . . . " f o r 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,
and the Arctic as a natural laboratory.
Based on current activities and future needs, 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, prepared a comprehensive plan for the overall Federal effort in Arctic research.
This U.S. Arctic Research Plan was transmitteed to the President on June 23, 1987. The President sent the Plan to Congress on
July 31, 1987.
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

1987
actual

1988
estimate

1989
estimate

22,197
30,535
38,362

23,647
29,250
41,464

25,129
29,525
40,626

91,094

94,361

95,280

Includes the Departments of Defense, Energy, Health and Human Services, Interior, Commerce, Agriculture, and Transportation, the National
Science Foundation, the National Aeronautics and Space Administration, the Environmental Protection Agency, and the Smithsonian Institution.
1

SPECIAL ANALYSIS F

F-ll

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.
DEPARTMENT OF DEFENSE

Research and development in the Department of Defense ranges
from support of basic research 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. R&D efforts directly
support the deployment of technologically superior systems to
offset quantitative advantages of potential adversaries. Obligations
for DOD research and development, including R&D facilities, total
$39.0 billion, about 60 percent of total Federal funding for research
and development, including R&D facilities, in 1989.
In 1989, DOD obligations for the conduct of R&D will increase by
$888 million, or 2 percent above the 1988 level, to $38.8 billion.
DOD funding of technology base programs (basic and applied research) will increase from about $3.1 billion in 1988 to about $3.3
billion in 1989. Increases for advanced technology development of
$854 million primarily reflect increases for the Strategic Defense
Initiative. Funding for R&D facilities will decrease by $76 million
from 1988 to a total of $191 million in 1989.
By mission category, major R&D efforts for 1989 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. They are intended to provide choices for future system
development and to help avoid technological surprise.
Two of the areas emphasized are materials research and electronics, including the Very High Speed Integrated Circuits program and Millimeter Wave Monolithic Integrated Circuits program. The private sector, with some DOD funding support, has
formed a consortium, SEMATECH, to maintain world-class semiconductor manufacturing capability in this country. Funding in
this area also supports the joint DOD/NASA National Aerospace
Plane.
The Strategic Defense Initiative, a program to investigate the
feasibility of defense against ballistic missiles, will increase to $4.6
billion in 1989.
—Strategic Programs.—Major programs for 1989 include the airlaunched short-range attack missile, the B-2 Advanced Technology
Bomber, the Advanced Cruise Missile, and the MILSTAR communi-

F-88

THE BUDGET FOR FISCAL YEAR 1989

cations satellite. The Trident II submarine-launched ballistic missile and the Peacekeeper missile development programs are near
completion. The budget also contains funds for ICBM modernization, including development of the Small ICBM and the rail garrison basing mode for the Peacekeeper. Requested funding for the
Small ICBM has been reduced substantially from the 1988 level,
pending further review of this program.
—Tactical Programs.—These programs support the development
of systems to increase the capability of U.S. general purpose and
theater nuclear forces, and to improve the capability to project
forces rapidly anywhere in the world where the vital interests of
the United States are threatened. In 1989 these programs include:
• in the Army, continued development of advanced anti-tank
weapon systems, cannon-fired precision munitions, and
ground-based missiles and control systems to fulfill its air
defense mission.
• in the Navy, a major effort to improve air, surface and submarine-based anti-submarine warfare capabilities, including
development of the Seawolf attack submarine. Other key programs include the V-22 Osprey tilt-rotor aircraft, the Advanced Tactical Aircraft, and continuation of upgrades to the
F-14 fighter. Several efforts are being continued to improve
fleet air defenses.
• in the Air Force, continued development of the Joint STARS
radar, the Advanced Tactical Fighter the C-17 transport aircraft, and various electronic warfare programs. Work on munitions for use against hardened targets, development of TR-1
surveillance aircraft sensors and ground stations, and
AW ACS radar system improvements also continue.
—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 manned Space Station; to support the
Shuttle-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 ad-

F-ll

SPECIAL ANALYSIS F
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
Total conduct of basic research, included above.,
R&D facilities
Total obligations..

1987
actual

1988
estimate

2,817
4,855
7,817
10,761
4,802
3,825

3,141
5,534
7,162
12,509
4,797
3,866

36,0

37,899

1,211

(904)
318

(892)
267

36,406

38,167

34,581
235

33,776
239

34,816

34,016

OUTLAYS
Conduct of R&D..
R&D facilities
Total outlays.
1

Includes funds for Operational Systems Development of $9,875 million in 1987, $9,370 million in 1988 and $9,493 million in 1989.

vancement. 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 1989, NASA obligations for R&D including facilities for the
agency will be approximately $6.0 billion, a net increase of $757
million, or 15 percent, over 1988. 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 project in space science and applications. Within the
total funding for R&D, basic research obligations in 1989 are estimated at $1.4 billion, an increase of $146 million or 12 percent over
1988.
Space Station.—Obligations for Space Station R&D are estimated
to increase from $415 million in 1988 to nearly $739 million in
1989. 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. In addition, the
budget will propose a 3-year appropriation for the Space Station in
order to provide necessary program and funding stability, and later

F-88

THE BUDGET FOR FISCAL YEAR 1989

in the year, legislation to establish a total program cost ceiling to
ensure strong cost control discipline.
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.
Space transportation systems capability.—Obligations for space
transportation systems capability are estimated in 1989 at $600
million, a slight decrease from 1988. The 1989 budget provides for
sustained research support for the Space Shuttle program to
achieve routine and reliable access to space for all planned users,
and for continued research 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
maneuvering spacecraft and payloads in near-Earth orbit.
Space science and applications.—Obligations for space science
and applications are estimated in 1989 at $1.8 billion, an increase
of $39 million over the 1988 level. The funding 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 1989 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.
For 1989, new proposals include:
• a major new science project proposed for initiation in 1989 is
the Advanced X-ray Astrophysics Facility (AXAF). The AXAF
mission will provide a space-based telescope for viewing in the
X-ray portion of the spectrum, 1,000 times more capable than
any previous or planned x-ray mission;
• augmentations for the Explorer program and for small payloads launched by SCOUT expendable launch vehicles;
• payloads will be developed for flight on promising commercial
space facilities; and
• augmentations to the Microwave Observing program (formerly the Search for Extraterrestrial Intelligence activity) for the
development of technologies necessary to analyze microwave
signals from space for evidence of advanced life elsewhere in
the galaxy.

SPECIAL ANALYSIS F

F-ll

Continuing development efforts for ongoing major flight projects
yet to be launched include:
• the Hubble Space Telescope, planned for launch in 1989,
which is expected to serve as a major astronomy facility for a
10 to 15 year period;
• the Gamma Ray Observatory, planned for launch in 1990,
which will enhance basic research in high energy astrophysics, providing new knowledge about the origin of the universe;
• 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 1992, 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 1992; and
• the Ocean Topography Experiment (TOPEX) scheduled for a
1991 launch as part of a cooperative mission with France.
Continued support will be provided in 1988 for several spacecraft
already in flight including:
• 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; Shuttie-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.

F-88

THE BUDGET FOR FISCAL YEAR 1989

Commercial Programs.—The goal of these programs is to support
opportunities for expansion of U.S. private sector investment and
involvement in civil space activities. These programs include the
Technology Utilization program which promotes the dissemination
of new developments in aerospace technology to non-aerospace industrial sectors, and the Commercial Use of Space program which
encourages increased private sector awareness, participation and
investment in space technologies. Support will continue for the 16
centers for the Commercial Development of Space which have been
established in a wide range of disciplines including materials processing, robotics, and remote sensing. These centers were designed
to create close working relationships between the private sector,
the States, and academia to encourage investments in and use of
space technology.
Transatmospheric research and technology.—In 1989, funding will
increase as planned to continue research and advanced technology
in the National Aerospace Plane (NASP) program leading to a
transatmospheric flight research vehicle demonstration in the
1990's. The NASP program is jointly supported with DOD.
Aeronautical research and technology.—Obligations for aeronautical research and technology are estimated to increase from $289
million to $349 million in the 1989 budget. Research in fundamental aeronautical disciplines such as advanced materials and structures, and advanced propulsion will be augmented in recognition of
the key role that these technologies play in ensuring the ability of
the U.S. to remain competitive in international markets.
Space research and technology.—Obligations for space research
and technology are estimated to increase from $277 million to $374
million in the 1989 budget. The 1989 budget continues the Civil
Space Technology Initiative (CSTI) as planned and also proposes
$100 million to begin a new program within space research and
technology, Project Pathfinder. This effort will support research in
a wide variety of technology areas including automated rendevous
and docking, orbital transfer propulsion, optical communications
and closed loop life support systems. Such technologies will be key
to achieving the national long-range goal of expanding human
presence and activity beyond the Earth's orbit into the Solar
System. Pathfinder will involve researchers from all sectors, industry, universities and the Federal government.
Agency-wide support activities.—Obligations for agency-wide support activities will total $1.4 billion in 1989, a 10 percent increase
above the 1988 level. These programs include primarily R&D-related NASA civil service and administrative costs; tracking and data
acquisition system improvements; and safety, reliability and quality assurance.
Table J-7 provides the details of NASA's R&D funding.

F-ll

SPECIAL ANALYSIS F

Table J-7. NATIONAL AERONAUTICS AND SPACE ADMINISTRATION—RESEARCH AND DEVELOPMENT
(In millions of dollars)
Type of activity

1987
actual

1988
estimate

1989
estimate

266
427
1,497
32
43
324
161

415
611
1,793
88
52
289
277

739
600
1,832
59
83
349
374

11
18
1,009

17
18
1,218

22
19
1,340

3,787

4,779

5,416

(1,014)
309

(1,229)
429

(1,374)
549

4,096

5,209

5,965

3,250
314

3,962
386

4,820
479

3,564

4,348

5,299

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
Space research and technology
Agency-wide support activities.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
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 $5.2 billion in 1989, an increase of $95 million over
1988. Obligations in 1989 for R&D facilities, including the construction or upgrading of general purpose laboratories and other research support facilities, will amount to $1.1 billion, an increase of
$193 million over 1988.
Obligations for the conduct of basic research, included in the
total for the conduct of R&D, are estimated to be $1,265 million in
1989, an increase of $80 million over 1988. 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

F-88

THE BUDGET FOR FISCAL YEAR 1989

at the frontiers of science and thus help contribute to U.S. 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 be $2.4
billion in 1989, a level comparable to the 1988 level. Funding for
conduct of R&D supports ongoing Department of Defense work
including isotope separation techniques, weapons testing, and research in the basic physics of nuclear weapons. R&D in support of
the Strategic Defense Initiative (SDI) will continue to focus on
investigations of Nuclear Directed Energy Weapons (NDEW) to
assess the Soviet NDEW capability to threaten a strategic defense
system. SDI funding will be maintained at level of effort at $285
million in 1989.
The General Science Program supports basic research in high
energy and nuclear physics. A proposed increase of $79 million, to
$704 million in 1989, for the conduct of basic research will enhance
support for theoretical and 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
$313 million to $490 million in 1989, mainly for the initiation of
construction of the Superconducting Super Collider (SSC) accelerator facility. The SSC is the largest and most powerful high energy
physics facility ever proposed for construction. It will be a 53 mile
circumference proton-proton collider producing particle collisions
with total energies approaching 40 trillion electron volts, an energy
twenty times the highest energy available in the world today. In
1989, the R&D program for the SSC will also be significantly
enhanced. The major new thrust in this research will be the initiation of fabrication of pre-production full-scale superconducting
magnets by American industry. Industrial participation is especially crucial for this aspect of the project since the heart of the SSC is
the collider which consists of two rings of superconducting magnets
requiring some 8,000 dipoles and nearly 1,800 quadrupole magnets.
The 1989 budget request will also provide for:
• increased utilization of existing accelerator facilities, with
major increases in levels of operation of the Stanford Linear
Collider and of the recently upgraded PEP electron-positron
collider at SLAC; the Alternating Gradient Synchrotron complex at Brookhaven National Laboratory and Tevatron I and
II at Fermilab;

SPECIAL ANALYSIS F

F-ll

• 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
(CEBAF) at Newport News, Virginia; and
• continued support for advanced accelerator and detector research and development activities related to effective utilization and novel exploitation of existing and next-generation
high energy and nuclear physics accelerators.
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 decrease by $27 million from the 1988 level to
$2,026 million in 1989. This decrease 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 $215 million, a decrease of $104 million from 1988.
This decrease consists almost entirely of the elimination of Congressional University Building add-ons for 1988.
The basic energy sciences programs will continue to support the
conduct of research in the fields of nuclear science, chemistry,
engineering, materials science, applied mathematics, biology, and
the geosciences. The program will continue to provide the fundamental scientific and technical base for future advances in both
nuclear and non-nuclear technology development.
Funding for basic energy sciences activities is proposed at a level
of $516 million, an increase of $37 million for the core research and
the user facilities programs. Support for the conduct of research
will increase nearly $23 million, or 6 percent over the 1988 level.
Increased funding is proposed to enchance the Department's high
temperature superconducting materials research effort while still
maintaining level of effort in other high priority advanced materials research such as ceramics, polymers, and semiconductors.
Funds in 1989 are also proposed 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 stateof-the-art engineering and science research.
The 1989 budget also continues to provide support for construction of the 1-2 GeV synchrotron at at Lawrence Berkeley Laboratory, the experimental detection halls at the Los Alamos Neutron
Scattering Center and the 3 GeV injector for the SPEAR Storage
Ring at the Stanford Synchrotron Radiation Laboratory. In addi-

F-88

THE BUDGET FOR FISCAL YEAR 1989

tion, funds are proposed to initiate the construction of a 6-7 GeV
synchrotron source at the Argonne National Laboratory.
In 1989 a new account will be created to suppport the operation
and construction of the basic research user facilities formerly
funded under the basic energy sciences program and the general
science programs. These major national facilities, used by researchers from industry, universities and national laboratories, 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 as well as Fermilab,
SLAC, LAMPF, and the Brookhaven high energy and nuclear physics accelerator facilities. Both the 6-7 GeV synchrotron source and
the SSC will also be supported by this new account. Funds to
maintain operations of all existing research facilities at the 1988
level are also included in the 1989 basic research user facility
budget.
In 1988 the Energy Program was expanded to include the clean
coal technology demonstation program. The goal of this program is
to provide support for projects to demonstrate technologies that
will burn coal more cleanly. The Department solicits proposals
from the private sector for at least 50 percent cost-shared, full-scale
demonstrations of clean coal technologies. Typical examples of such
technologies include: advanced coal cleaning techniques, alternate
combustion technologies, preparation of clean coal-based fuels, and
post-combustion cleanup systems. The proposed 1989 budget requests advance appropriations to provide full funding for the government's share of a five-year, $2.5 billion clean coal technology
program. Congress, to date, has provided the program $200 million
for 1988 and $525 million for 1989. The current request seeks
additional advance appropriations totaling $1,775 million, including
$575 million for 1990, $600 million for 1991, and $600 million for
1992. These funds will then be available to implement the demonstration program consistent with the recommendations made in the
Report of the U.S. and Canadian Special Envoys on Acid Rain, that
both the President and the Canadian Prime Minister have endorsed.
The 1989 budget will continue the redirection of the on-going
non-nuclear R&D programs to limit federal support for nearer-term
technology development. To increase the involvement of the private sector in the direction and management of industry-based
R&D programs and to leverage scarce Federal funds, $14 million
will, however, be available in 1989 to support DOE participation in
industry-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 con-

SPECIAL ANALYSIS F

F-ll

servation programs are expected to be $379 million in 1989, a
decrease of about $251 million from 1988.
Funding proposed for the conduct of fossil related R&D and
associated facilities will be $168 million in 1989, a decrease of $159
million from 1988. The 1989 request continues to support high
priority research in coal chemistry and use, environmental controls, coal conversion to liquid and gaseous fuels, and better extraction methods for petroleum and natural gas. In addition to an
enhanced geosciences program, a program to support industry
formed cooperative R&D ventures at a level of $9 million is also
proposed.
Research in support of solar and other renewable energy technologies, proposed at a level of $125 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. In 1989, the electrical energy
transmission and storage systems research budget includes a $13
million initiative to study potential electrical utility applications of
the new high temperature superconducting materials and also an
industry-cooperative R&D venture program to provide support for
industry driven applied R&D.
The total request in 1989 for the energy conservation R&D program is $86 million and includes research in buildings and community systems, industry, and transportation. In 1989, support will
continue for the recently conpleted materials engineering user facility at Oak Ridge National Laboratory (the High Temperature
Materials Laboratory) and for the advanced materials research
that is a major focus of the core research program in energy
conservation. The proposed 1989 budget also proposes a new materials research initiative to explore end-use applications of the new
high temperature superconductors.
The 1989 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 $715 million in
1989, an increase of $33 million over the 1988 level. In the fission
program, obligations of $241 million are estimated for the conduct
of R&D in 1989, approximately the same as in 1988. Total obligations for R&D facilities in 1989 will be $111 million. The nuclear
fission R&D program will continue to focus major effort on the
advanced civilian reactor program and R&D on reactor concepts
that can meet space and military nuclear power requirements. The
program will continue to serve national security interests as well
as maintain a technical and industrial base for any future deployment of advanced nuclear technologies in the commercial sector.
In the magnetic fusion program, funding of $360 million is proposed for the conduct of R&D, an increase of $25 million over 1988.

F-88

THE BUDGET FOR FISCAL YEAR 1989

In 1989, 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, of the Oak Ridge National
Laboratory's ATF torsatron, and of the free electron laser heating
experiment (MTX) at Livermore National Laboratory. Fabrication
of three smaller toroidal devices also will continue in 1989: 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). Funds are also provided to continue
the R&D and design effort for a Compact Ignition Tokamak (CIT), a
machine that will prove a plasma can ignite and burn in a predictable and controllable way. Other research that supports the President's Geneva Initiative on expanded cooperation with the Soviets
in fusion research will also continue in 1989.
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 $249 million in 1989, providing a 10
percent increase for the core research program. 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. In 1989
support for the human genome project initiated in 1988 will continue to increase. The new tools and methodologies to be developed by
the research effort are expected to markedly increase the pace and
lower the cost for mapping and sequencing human DNA. Results
from the 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 new thrust in 1989 will be an expanded
program of research to develop new noninvasive tools and methods
for detecting and decontaminating subsurface toxic wastes. Research into the health effects of radon and a survey of factors
affecting possible methods of mitigating radon levels in indoor
environments will also continue in 1989. Proposed funding in 1989
for radon-related, acid rain-related, and carbon dioxide-related research is over $38 million, nearly 12 percent higher than 1988.
Table J-8 provides the details of funding for the Department of
Energy.

F-ll

SPECIAL ANALYSIS F
Table J-8. DEPARTMENT OF ENERGY
(In millions of dollars)
Type of activity

1987
actual

1988
estimate

1989
estimate

2,358
569
1,797

2,393
625
2,053

2,435
704
2,026

4,724

5,071

5,165

(1061)
775

(1,185)
939

(1,265)
1,132

5,499

6,010

6,297

4,682
723

4,941
918

5,082
1,026

5,405

5,859

6,108

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
OUTLAYS
Conduct of R&D
R&D facilities
Total outlays

DEPARTMENT OF HEALTH AND HUMAN SERVICES

The Department of Health and Human Services is expected to
obligate a total of $7.9 billion in 1989 for the conduct of R&D.
Within this total, funding for basic research is estimated to be $4.3
billion. Direct obligations for R&D facilities will total $6.3 million
in 1989, with Federal overhead payments providing additional
funds which can be used to replace or modernize existing R&D
facilities.
Health.—About 80 percent of the Department's funds for the
conduct of R&D will be obligated by the National Institutes of
Health (excluding AIDS R&D) 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) consists of 12 separate
institutes which will obligate $6.2 billion (excluding AIDS R&D) in
1989 for the conduct of R&D, a 5 percent increase over the comparable 1988 level. (All Public Health Service AIDS funds will be
requested under a single account in 1989.) NIH will fund about
20,600-21,000 research project grants and about 11,000-11,100 research trainees. Continued emphasis will be given to support of
basic research in 1989. About 64 percent, or $4.0 billion, of NIH's
proposed R&D budget will support basic research.

F-88

THE BUDGET FOR FISCAL YEAR 1989

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 1989 budget continues to emphasize research into drug
abuse, and stabilizes ADAMHA's extramural research programs in
biomedical, behavioral and clinical areas by supporting between
1,650 and 1,825 research project grants per year. ADAMHA will
obligate a total of $522 million in 1989 for R&D.
The Food and Drug Administration supports research relevant to
its mission of regulating food, drugs, biologies, medical devices and
radiological products. In 1989, obligations for these activities are
estimated at $88 million.
The Centers for Disease Control support studies on the epidemiology and control of communicable diseases and on health promotion
and disease prevention. In 1989, obligations for these activities are
estimated at $63 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.
In 1989, the Administration is proposing the Health Care Improvement Fund, to be administered through the Health Resources
and Services Administration. The Fund would be dedicated to selectively supporting assessments of medical technologies and medical practices with the potential to reduce costs without impairing
quality of care. The Administration proposes $15 million for this
activity in 1989.
Human services.—Most of the 1989 funding for HHS' human
services R&D activities is included in the $77 million requested for
Human Services Research, Training, and Demonstrations under
the Office of Human Development Services (OHDS). OHDS will
support a variety of development and social services research on

F-ll

SPECIAL ANALYSIS F

the Head Start program, the elderly, child abuse and neglect,and
family and community support systems.
Table J-9 provides details of the R&D funding of the Department
of Health and Human Services.
Table J-9. DEPARTMENT OF HEALTH AND HUMAN SERVICES—RESEARCH AND DEVELOPMENT
(In millions of dollars)
Type of activity and organizational units

1987
actual

estimate

5,850

6,318

506
85
65

24
10

561
91
72
27
23
11

6,568

7,103

50
14
3

OBLIGATIONS
Conduct of R&D:
Health:
National Institutes of Health
Acquired Immune Deficiency Syndrome (AIDS) 1
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, HealthHuman Services:
Office of Human Development Services..
Social Security Administration
Family Support Administration
Departmental Management
Subtotal, Human Services..
Total conduct of R&D
Total conduct of basic research, included above..
R&D facilities
Total obligations..

3
5

6,643

7,174

(3,859)
38

(4,160)
70

6,680

7,244

5,733
32

6,561
44

5,765

6,605

OUTLAYS
Conduct of R&D..
R&D facilities
Total outlays.
1

All Public Health Service AIDS funds will be requested under a single account in 1989.

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 1989 NSF budget provides $1.8 billion in obligations for the
conduct of R&D, an increase of $303 million or about 20 percent
above 1988. Within this total, support for basic research will also
increase by about 20 percent. This increase is part of the Adminis-

F-88

THE BUDGET FOR FISCAL YEAR 1989

trations plan to increase investments in basic research by proposing to double the NSF budget over the next five years.
For 1989, emphasis will be placed on three major themes:
• Education and Human Resources ($285 million, a 18 percent
increase over 1988): will provide increased support for the
NSF Graduate Fellowship Program 100 additional Fellows,
for a total of about 860 new awards and for the Presidential
Young Investigators program 200 new awards, for a total of
about 800 new awards. An increase for undergraduate programs will provide opportunities for faculty enhancement,
and student research participation as well as providing for
much needed instrumentation. There will also be an enhancement of support to encourage the participation of underrepresented groups in scientific and engineering research.
• Basic Science and Technology Centers and Groups ($473 million, a 61 percent increase over 1988): will provide increases
for ongoing efforts such as the Engineering Research Centers
(ERCs), the Materials Research Laboratories, and the interagency Plant Science Centers, as well as the establishment of
Science and Technology Centers, with a one-time $150 million
appropriation in 1989. This 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 centers will be university-based, 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
funded over the next five years. In addition to the centers, a
number of research areas, including global geosciences, mathematics, materials research and biotechnology, will be the
focus for research by a number of coordinated groups.
• Strengthened Disciplinary Programs and Facilities ($1.2 billion, an increase of 9 percent over 1988): 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., materials chemistry, cosmology, manufacturing
processes). In addition, specialized research facilities including
the Very Long Baseline Array radio-telescope, Advanced Scientific Computing Centers and supercomputer networks will
receive priority attention. Continuing support for the National Center for Atmospheric Research and the National Astronomy Centers is provided. Three physics facility upgrades will

SPECIAL ANALYSIS F

F-ll

be completed and become operational in FY 1989; the Cornell
Electron Storage Ring, the Indiana University Cyclotron Facility, and the Michigan State University National Superconducting Cyclotron Laboratory. The FY 1989 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. These funds include significant upgrades of
research laboratory facilities at the McMurdo Station and the
refurbishment of a LC-130 research aircraft. The USAP is
managed by NSF and is the principal expression of U.S. presence on the Antarctic continent.
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 $985 million in 1989, compared
to the $1,018 million in 1988. Of the total, $470 million will support
basic agricultural research, maintaining the 1988 estimated level.
The Department's 1989 Budget for research and development is
highlighted below by major bureau.
The Agricultural Research Service expects to obligate $529 million in 1989 to conduct basic and applied research in plant and
animal productivity; water quality; food safety; protection of stratospheric ozone; human nutrition; and new agricultural products.
This is a 3 percent increase over the 1988 level. In 1989, 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
$255 million will be obligated in 1989. 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 $129 million will be obligated
for research and development in 1989. This represents a decrease
from the $136 million obligation estimate in 1988. 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 $71
million for R&D in 1989, covering a broad spectrum of research

F-88

THE BUDGET FOR FISCAL YEAR 1989

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 1989
are estimated at $312 million, a decrease of $96 million from 1988.
This reflects reduced levels of support by the National Oceanic and
Atmospheric Administration for applied research, that is more appropriately 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 $282 million in 1988 to $180 million in 1989 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. Funding of $15 million is proposed for an integrated program in Earth System Science that will provide a new coordinated
approach to conducting research to improve predictions of global
climate change. 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 1989, NBS is expected to obligate $120 million for the conduct of
R&D. This represents an increase of $10 million from the 1988
estimated level. Funding increases will support development of
measurements and standards for superconductors, process and
quality control, high-performance composites, fiber optics, and bioprocess engineering. Funding for 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 $13 million in 1989, a decrease of $4 million from the 1988 level.

SPECIAL ANALYSIS F

F-ll

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 1989 are estimated at $396 million. This represents a
decrease of $23 million from the 1988 level.
About 92 percent of the Department's 1989 funds for the conduct
of R&D will be obligated by the Geological Survey ($224 million),
Fish and Wildlife Service ($54 million), and the Bureau of Mines
($86 million). Highlights of the 1989 research objectives of these
and other departmental programs are described below.
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 1989, obligations will decrease by $12 million, to
a total of $224 million.
Research in 1989 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 $54 million in 1989.
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.

F-88

THE BUDGET FOR FISCAL YEAR 1989

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 $10 million to $86 million in 1989. 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 1989 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
• long-term, generic research on mine disaster prevention,
ground control, industrial hazards, explosives, and systems
engineering.
Other Departmental Programs expect to obligate about $33 million in 1989, an increase of about $3 million from 1988.
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 $317 million for 1989, a decrease
of $9 million from 1988.
The Federal Aviation Administration (FAA) is expected to obligate $165 million in 1989. This funding level is consistent with the
needs of the National Airspace System Plan. Major initiatives include enchancing the capability of a wide range of radar systems to
meet new operational requirements; continuing the Traffic Alert
and Collision Avoidance System (TCAS) Program; increasing systems and airports capacity; continuing developmental efforts for
Advanced Traffic Management (ATF) and Automated Enroute
Traffic Control (AERA); continuing development of radars for detection and tracking of severe weather; and continuing emphasis
on initatives in aviation security through expedited development of
devices for detection of weapons, explosives and flammable liquids.
The National Highway Traffic Safety Administration will obligate $30 million for motor vehicle, highway safety research, and
demonstrations including: National Occupant Protection, alcohol,
enforcement and emergency services and the National Driver Register. In 1989, increases are requested for crashworthiness and

SPECIAL ANALYSIS F

F-ll

crash avoidance research, highway safety research, the National
Occupant Protection Program, enforcement and emergency services
and the National Driver Register.
The Urban Mass Transportation Administration (UMTA) is expected to obligate $2 million to conduct research, training, and
human resources programs in all phases of urban 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 $82 million to
continue research programs in highway planning, design, construction, and maintenance to ensure an effective and efficient highway
system. Research will also be conducted in identifying and correcting impediments to highway safety and improving common carrier
safety.
The Federal Railroad Administration will obligate $9 million in
research and development efforts in support of safety regulation
responsibilities.
The U.S. Coast Guard will obligate $19 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 which benefit all
Coast Guard programs. The proposed FY 1989 figure represents no
change over the FY 1988 level.
The Research and Special Programs Administration will obligate
$3 million for R&D in hazardous materials, pipeline safety, radionavigation, transportation statistics, and emergency transportation.
The Office of the Secretary will obligate $7 million for broadbased policy research on domestic and international transportation
issues of importance to the nation, and research in support of
licensing of expendable launch vehicles.
ENVIRONMENTAL PROTECTION AGENCY

The Environmental Protection Agency's (EPA) Research and Development Program supports EPA's statutory and regulatory responsibilities to protect human health and the environment. Since
1984, four of EPA's eight major environmental laws have been
substantially amended. The 1989 budget proposes $374 million in
total obligations, representing an increase of 7 percent above 1988,
to meet environmental statutory mandates and to understand
emerging environmental concerns. The 1989 budget emphasizes: (1)
expanded efforts to understand the phenomena related to stratospheric ozone; (2) techniques for mitigating human exposure to

F-88

THE BUDGET FOR FISCAL YEAR 1989

radon; (3) continued development of scientific information about
acid deposition; (4) support of the 1987 Clean Water Act Amendments; and (5) reducing uncertainties in risk assesssments.
The air research program will expand to further characterize the
effects of stratospheric ozone depletion. Research on other emerging environmental concerns such as global climate change and
indoor air pollution will continue. Research on ambient air quality
standards and toxic hazardous air pollutants will also continue.
The radon research program will continue to demonstate techniques of reducing exposure to indoor radon gas in a variety of
housing structures. The number of mitigation demonstrations initiated in homes will be increased.
The acid disposition program will continue to support the objective of the National Acid Precipitation Assessment Program
(NAPAP) Interagency Task Force which is to understand and predict the phenomenon of acid disposition. Such research will ultimately provide information and predictive tools for the 1990 Assessment Report to Congress on acid deposition.
The water quality research program will continue to support the
mandates of the 1987 Clean Water Act Amendments. Research will
emphasize risk assessments, monitoring methods, pretreatment,
sludge, biological monitoring, complex effluent toxicity, and water
assessments to control toxic pollutants. Research on wetlands will
attempt to determine attainable standards and load limits of critical pollutants.
The pesticides research program will continue to develop methods
to assess risks to human health and the environment from exposure to pesticide products. Research will be increased to support
the evaluation of new technologies for destruction and disposal of
pesticides cancelled or suspended under FIFRA. Research efforts on
environmental effects from biotechnology products will continue.
The toxic substances research program will continue to support
EPA's Office of Toxic Substances by performing research in the
areas of test methods development and evaluation; structure activity relationships; environmental engineering and technology; and
biotechnology. Technical support in the areas of exposure assessment/monitoring procedures and risk assessment methodologies
will also continue.
The hazardous waste research program will develop scientific
and technical information to support regulatory development and
implementation. Alternatives to conventional means of disposing of
and destroying wastes will continue to be evaluated as will controls
for emissions from municipal waste combustors.
The interdisciplinary research program will expand to support a
new program to reduce uncertainties in risk assessments. This
research is designed to improve EPA's assessments of environmen-

SPECIAL ANALYSIS F

F-ll

tal and health risks in order to reduce uncertainties in risk management decisions.
The Superfund research program will continue to support EPA,
States, and industry in resolving technical problems which inhibit
the effective implementation of removal and remedial actions. In
addition, research and development will support the commercialization of alternative and innovative treatment techniques for use
in response actions through the Superfund Innovative Technology
Evalutation (SITE) program.
Finally, the leaking underground storage tanks (LUST) program
will provide technical support to EPA's Office of Underground
Storage Tanks, EPA regions, States, and local agencies responsible
for the implementation of the LUST Trust Fund Program. Technical support will focus on providing scientific expertise on low cost
approaches for assessing site contamination and evaluating remedial technologies.
VETERANS' ADMINISTRATION

The Veterans' Administration (VA) conducts and administers an
intramural program of medical, rehabilitation and health services
research designed to improve the quality and increase the effectiveness of health care for veterans. In 1989, the VA will obligate $216
million for the conduct of R&D.
The VA's medical research program covers a wide range of medical problems, with special emphasis on the health problems of
women veterans, the biological processes of aging, the health consequences of exposure to Agent Orange, the health problems of
former prisoners of war, the treatment of alcoholism, Acquired
Immune Deficiency Syndrome (AIDS), and post traumatic stress
disorder.
Rehabilitation research is committed to meeting the health care
needs of aging, disabled veterans with state-of-the-art devices that
minimize their disability and improve the quality of their lives.
Rehabilitation research is making use of such concepts as: voice
controlled robotics for the totally paralyzed; computer controlled
electrical stimulators to restore function to paralyzed limbs; new
ultra light materials for artificial limbs; advanced mobility aids for
the blind using cellular radio networks and computer assisted hearing aids.
Health services research is putting in place an information network designed to generate and disseminate to health care systems
managers, providers and consumers the kind of information that
will help make the most effective use of research findings directed
at improving health care services for veteran patients. Emphasis
will be placed on such areas as technology transfer, aging, preventive health and cost effectiveness.

F-88

THE BUDGET FOR FISCAL YEAR 1989
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 $199
million for 1989, a decrease of $9 million from 1988.
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 $585 million in 1989, for the
conduct of R&D, an increase of about 5 percent from the 1988 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 1989 are the U.S. Army Corps of Engineers,
and the Departments of 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.

F-ll

SPECIAL ANALYSIS F
Table J-10. TRENDS IN CONDUCT OF R&D
(Obligations in billions of dollars)
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
198 7
1988 (estimate)
1989 (estimate)
1
2

Includes military-related programs of the Departments of Defense and Energy.
Included in totals for conduct of R&D.

Defense1

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
38.4
40.3
41.2

All other

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
17.6
19.7
21.3

Full text of Budget of the United States Government, Special Analyses : Fiscal Year 1989

FRASER