GAO

United States General Accounting Office

Testimony

Before the Subcommittee on Transportation and Related 

Agencies, Committee on Appropriations, House of 

Representatives

For Release on Delivery

Expected at

10 a.m.

Tuesday,

March 9, 1999

BUDGET ISSUES

Trust Funds in the Budget

Statement of Susan J. Irving

Associate Director, Budget Issues

Accounting and Information Management Division

GAO/T-AIMD/RCED-99-110

Page 1 GAO/T-AIMD/RCED-99-110

Mr. Chairman, Members of the Subcommittee:

It is a pleasure to appear here today to talk about budget accounting and

budget enforcement as they relate to trust funds and other special funds in

the budget. As requested, my statement today will discuss three areas:

(1) the structure of the federal budgetespecially categorizations within

the unified budget, (2) the budget outlook, discretionary caps, and

enforcement situation as we enter a projected era of unified budget

surpluses, and (3) potential implications of changes in the treatment of the

aviation programs.

Budget Structure The unified budget was adopted in 1969 as a way of capturing all federal

receipts and expenditures. This was seen as important to permit the

federal budget to be used as an instrument of economic/fiscal policy. In

addition, if the budget is to help the Congress and the President allocate

federal resources, it should cover all activities and transactions that are

federal in nature and not subject to the economic disciplines of the

marketplace. Removing something that is federal in nature from the

budget does not make it less a government activity. If relevant activities of

the budget are omitted, the budget presents an incomplete picture of the

true magnitude of the federal governments activities. Equally important,

the budget display needs to show distinctions between types of federal

programs and the information necessary for evaluating the budget year and

future years. Such a balance between a unified overview and sufficient

compositional information ensures that programs included in the budget

are subject to the kind of priority-setting and oversight deliberations the

Congress must make during the budget and appropriations debate.

As all of you know, the Congress provides funds to agencies through

budget accounts. These accounts vary in their orientation, specificity, and

size.1 A relatively few large accounts are associated with three-quarters of

budgetary resources, and the rest are comparatively quite small. Accounts

may be oriented to program, process, organization, or object--and more

than one orientation is likely to be found in a given agency. For example,

the Federal Aviation Administration (FAA) has four major budget accounts

covering funding for airport grants, operations, capital improvements, and

research and development.

1Budget Account Structure: A Descriptive Overview (GAO/AIMD-95-179, September 18, 1995).
Page 2 GAO/T-AIMD/RCED-99-110

The Congress has also recognized the variation among federal programs

and activities in how it provides funding to these activities. For example,

because the school year and the fiscal year do not match, the Congress

generally advance-funds education programs so that the school year begins

with funding for the first quarter in place. Some funds expire in 1 year if not

obligated; others are available for several years, and some are permanently

available for obligation.

What Is a Trust Fund? 

How Do Trust Funds 

Fit Into the Federal 

Budget?

The federal budget consists of several types of funds: the general fund,

special funds, public enterprise funds, intragovernmental funds, and trust

funds.2 All of these except trust funds are considered to be federal funds.

All unified budget transactions fall within either of two fund groups:

(1) federal funds and (2) trust funds.

Although some budget summary tables show only 12 major trust funds, in

fiscal year 1997 there were 110 trust funds. 3 These covered a wide range of

purposes: from social insurance (social security and medicare), employee

compensation (pensions and health benefits), insurance, natural resources

and environmental cleanup to transportation. Social Security is by far the

largest trust fund, followed by federal employee retirement funds (civilian

and military) and the medicare trust funds.

The term trust fund as used in the federal budget is neither the same as a

private trust fund nor does it have unique characteristics within the federal

budget. The manager of a private trust has a fiduciary obligation to the

beneficiary and must manage the trusts assets on behalf of that beneficiary

according to the stipulations of the trust. The manager cannot unilaterally

alter the terms of that trust. In contrast, the federal government both owns

the assets of most trust funds and can, through legislation, raise or lower

the funds collections or payments, or alter the purposes of the trust fund. 4

2There are both revolving and nonrevolving trust funds, but that difference is not relevant to this

analysis.

3This is based on the Congressional Research Service report Federal Trust Funds: How Many, How Big,

and What Are They For? , updated June 30, 1998.

4The federal government manages some trust funds in a fiduciary capacity, such as trust funds owned

by Indian tribes. These are not discussed in this testimony.
Page 3 GAO/T-AIMD/RCED-99-110

Within the federal budget there is no substantive difference between a trust

fund and a special fund. Both are internal accounting devices used to track

the collection and use of funds earmarked for specific purposes. The only

difference between a special fund and a trust fund is the word trust in

the legislation establishing the account.

If a trust/special fund collects more in receipts than it spends in a year, its

annual surplus adds to the unified budget surplusor reduces the unified

deficit if it spends more than it receives. For example, for fiscal year 1998,

within the unified budgets $70 billion surplus, a federal funds deficit of

$83 billion was offset by a Social Security Trust Funds surplus of $99 billion

and other trust fund surpluses of $54 billion. Even these surplus figures,

however, can be misleading since a significant portion of trust fund

revenue comes from transfers within the budget. The largest of these

general fund transfers is interest credited to the trust funds. Interest is

credited to a trust fund because under current law trust funds lend any

annual cash surpluses to the general fund. 5 These surpluses are

commingled with other revenues and used to finance other governmental

activities. While all of these general fund transfers were instituted for a

purpose--often to better allocate costs--the fact remains that they are

intragovernmental transfers. Without such transfers, the trust funds as a

whole would run a deficit.

How Do Trust Funds 

Fit Into the Budget 

Enforcement Regime?

The Budget Enforcement Act6 (BEA) established a budgetary control

regime that divided the budget into two major parts: discretionary

spending, defined as spending that stems from annual appropriations acts,

and direct spending, or spending that flows directly from authorizing

legislation; this latter is often known as mandatory. As all of you know,

discretionary spending is controlled by annual dollar limits (spending

caps). Mandatory spending and receipts legislation are controlled by a payas-you-go (PAYGO) requirement that legislation enacted during a session of

Congress be deficit neutral.

5As part of the change in treatment of the Highway Trust Fund in the Transportation Equity Act for the

21st Century (TEA-21) (P.L. 105-178), interest is no longer paid to the Highway Trust Fund.

6Balanced Budget and Emergency Deficit Control Act of 1985 as amended by the Budget Enforcement

Act of 1990 (BEA) as further amended by the Omnibus Budget Reconciliation Act of 1993 and the

Budget Enforcement Act of 1997.
Page 4 GAO/T-AIMD/RCED-99-110

There is no single rule for budgetary control of trust funds. Knowing that a

given account has been designated a trust fund does not tell you either

whether spending is controlled through the appropriations process or

whether it is subject to any limitations. Trust funds are classified as

discretionary or mandatory depending on the nature of the substantive

legislation creating the fund--i.e., depending on the nature of the activity

funded by the trust fund. For example, Medicare and employee pensions

are direct spending, or mandatory, programs. Outlays are solely a

function of the design of the program, such as eligibility requirements and

benefit formulas. As a result, under the BEA enforcement provisions,

spending for these programs is subject to the PAYGO rules. 7 In contrast,

spending for discretionaryi.e., appropriatedprograms is governed by

the spending caps regardless of whether that spending flows from federal

funds or trust funds. Spending from discretionary trust funds, such as the

transportation trust funds, often is controlled by obligation limits, which

limit outlays.

As you know, when the Congress created the various transportation trust

funds, it dedicated trust fund receipts to trust fund purposes, but retained

annual control over the timing of the expenditures. Therefore, spending

from these trust funds is dependent on annual appropriations and has

counted under the discretionary caps.

Budget Outlook and 

the Discretionary Caps

After nearly 30 years of unified budget deficits, current projections are for

surpluses as far as the eye can see. Although many recent budget

agreements (Gramm-Rudman-Hollings, the Budget Enforcement Act, and

the Balanced Budget Agreement) were designed to achieve this fiscal

position, the BEAs enforcement regime does not end with the advent of a

surplus. Direct spending is still subject to the PAYGO rules, and

discretionary spending is still subject to specified dollar caps. 8

According to the Congressional Budget Office (CBO), discretionary

spending in 1999 made up about one-third of total outlays. Under the caps,

these outlays will remain almost unchanged in dollar terms between fiscal

7Social Security has its own set of budget enforcement rules which protect its balances and remove its

transactions from the deficit/surplus estimates and calculations made according to BEA.

8CBO has opined that BEA enforcement applies regardless of whether or not there is a deficit. OMB

has noted that there is still an on budget [budget less social security and postal service] deficit so the

question is moot.
Page 5 GAO/T-AIMD/RCED-99-110

years 1999 and 2002. Even if discretionary spending grows with inflation

between fiscal years 2002 and 2009, it will fall to 29 percent of total outlays.

Discretionary caps were first imposed by the BEA in 1990. Their structure

has varied. The matrix below shows the current structure of the

discretionary caps and its evolution. For most categories, there are limits

on both budget authority and outlays. However, because spending from the

transportation trust funds is controlled by obligation limits, for the highway

and mass transit categories, there are only outlay caps. 9

Table 1: Discretionary Spending Categories by Fiscal Year

Over the next few years, the limits on discretionary spending are very tight,

as shown in figure 1. The statutory caps are below the fiscal year 1999

freeze level (the 1999 freeze line) and substantially below the fiscal year

1999 level adjusted for inflation.

If the appropriations designated as emergency for fiscal year 1999 were to

be repeated as nonemergency spending this year, budget authority for

fiscal year 2000 would have to be cut by $26 billion below the fiscal year

1999 appropriated level. Even if those emergency appropriations from

fiscal year 1999 are not repeated for fiscal year 2000, budget authority must

be cut $10 billion below the fiscal year 1999 nominal level.

9Accounts in the highway category provide contract authority, which is liquidated from the Highway

Trust Fund. Budget accounts for mass transit include both contract authority, liquidated from the

Highway Trust Fund, and authorizations of appropriations from the General Fund of the Treasury.

Contract authority is a form of budget authority that permits obligations to be incurred in advance of

appropriations.

1997 1998 1999 2000

Violent Crime 

Reduction

Violent Crime 

Reduction

Violent Crime

Reduction

Violent Crime 

Reduction

Discretionary Defense Defense Discretionary

Nondefense Nondefense

Highway Highway

Mass Transit Mass Transit
Page 6 GAO/T-AIMD/RCED-99-110

Figure 1: How Tight Are the Budget Authority Caps?

In its outlook volume, CBO noted the outlay caps may be even harder to

meet. Outlays are projected to rise by $21 billion between fiscal years

1998 and 1999. However, if the Congress froze appropriations at the fiscal

year 1999 nominal dollar level, outlays in fiscal year 2000 would be

$13 billion over the outlay caps.

In summary then, the Congress and the President face a real challenge on

the discretionary side of the budget this year. To comply with the current

statutory caps, discretionary spending must be cut from its fiscal year 1999

appropriated level: budget authority by $10 billion and outlays by

$13 billion, even assuming that none of the emergency spending is

continued.

500

510

520

530

540

550

560

570

580

590

600

1999 2000 2001 2002

Fiscal year

Caps 1999 Freeze 1999 Adjusted for Inflation

Billions of dollars
Page 7 GAO/T-AIMD/RCED-99-110

Potential Implications 

of Changing Budget 

Treatment for Aviation 

Programs

You asked me to discuss briefly the Airport and Airway Trust Funds in this

context. In our March 1995 report, we discussed the budgetary treatment

of transportation trust funds. 10 We noted that there is some tension

between the collection of earmarked revenues and the trade-offs the

Congress must make about spending priorities.

Last year the Congress chose to make a change in the operations of the

Highway Trust Fundboth its highway account and its mass transit

account. The major changes were: (1) creation of separate outlay caps for

highway and mass transit and (2) specification of annual guaranteed

minimum spending levels--tied in the case of highways to Highway Trust

Fund receipts.

You asked me to discuss issues related to providing treatment for the

Airport and Airway Trust Fund analogous to that for the Highway Trust

Fund. As background, I should note that obtaining a picture of aviation

financing is more complicated than obtaining a picture of highway

financing. Almost all highway programs are carried out by bureaus within

the Department of Transportation. In contrast, although the FAA is

responsible for the greatest share of aviation-related activities, the

Department of Defense (DOD) and the National Aeronautics and Space

Administration (NASA) also play major roles. 11

In addition, most highway programs are funded by the Highway Trust Fund,

but aviation-related activities receive far more general fund support. NASA

and DOD aviation-related activities are funded in those agencies

appropriations and financed through general funds. The FAA receives

funding both from the Airport and Airway Trust Fund and from general

fund appropriations.

10Correspondence to Honorable Frank R. Wolf on Transportation Trust Funds. GAO/AIMD-95-95R,

March 15, 1995.

11DOD provides air tr affic control services to military and civil users. The latest figures available from

DOD indicated that it cost the department approximately $680 million to provide services related to the

National Airspace System in fiscal year 1995. NASAs aviation activities include aviation research and in

fiscal year 1999, the Congress appropriated $1.2 billion to NASA for these activities.
Page 8 GAO/T-AIMD/RCED-99-110

The Airport and Airway Trust Fund is used almost entirely to support FAA

activities. Figure 2 shows reported trust fund receipts minus outlays for

fiscal years 1980 through 1999. As this figure shows, in recent years the

outlays from the trust fund have exceeded the receipts collected. 12

Figure 2: Airport and Airway Trust Fund, Tax Receipts Minus Outlays

Note: Positive amounts indicate years when taxes exceeded spending. Negative amounts indicate 

years when spending exceeded taxes.

Source: As reported by the Department of Transportation.

As noted, the FAA also receives a significant share of its funding from

general fund appropriations. Figure 3 shows the composition of FAA

appropriations for fiscal years 1980 through 1999.

12The Airport and Airway Trust Fund balance at the end of fiscal year 1997 was $6.4 billion.

-5

-4

-3

-2

-1

0

1

2

3

Fiscal year

Billions of dollars
Page 9 GAO/T-AIMD/RCED-99-110

Figure 3: Composition of FAA Appropriations

Finally, you asked about the budgetary implications of creating a new

separate spending category for aviation. In part, that depends on the

design of the category. In the past, separate caps within the overall

discretionary spending limit were designed to place firewalls between

different areas of spending and to limit trade-offs to programs within each

category. For example, creation of separate defense and nondefense caps

did not guarantee minimum funding levels for either category, but it did

limit the extent to which one could be increased at the expense of the

other. The same would be true for a separate cap for aviation spending--

regardless of whether funding was from the trust fund or the general fund.

However, if a separate category is designed as a guaranteed minimum

funding level, there are additional issues. For example, if creation of a

separate spending category for aviation resulted in increased spending on

aviation, and the remaining caps were not lowered to offset this, total

discretionary spending would increase, and the surplus would fall (or the

deficit increase). If aviation spending were increased and this increase was

carved out of the general discretionary cap, then the remaining activities

within that general category would compete for fewer total dollars.

0

10

20

30

40

50

60

70

80

90

100

Fiscal year

Trust Fund General Fund

Percentage of appropriations
Page 10 GAO/T-AIMD/RCED-99-110

Conclusion In general, providing guaranteed funding levels to any one activity in the

budget protects that activity from competition with other areas for scarce

resources. The design of any guarantee can have implications for other

federal activities and for federal resources. Whether to provide such a

guarantee and to what activities is fundamentally a decision about

priorities that only the Congress and the President can make.

This concludes my statement. My colleagues and I would be happy to

answer any questions you or your colleagues may have.

(935306) Letr
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