CONGRESS OF THE UNITED STATES

CONGRESSIONAL BUDGET OFFICE FEBRUARY 1

An Analysis of the President's

Budgetary Proposals for Fiscal Year 1987

Prepared at the Request of the

Senate Committee on Appropriations

NOTICE

, This Document is Not Available

for Public Release Until.

1:30 p.m. (EST)

Wednesday, February 26, 1986

AN ANALYSIS OF THE PRESIDENT'S

BUDGETARY PROPOSALS

FOR FISCAL YEAR 1987

The Congress of the United States

Congressional Budget Office

IT
J1LUM1

NOTES

Unless otherwise indicated, all years referred to in this report

are fiscal years.

Details in the text and tables of this report may not add to

totals because of rounding.

The source of data concerning the President's budget is the

Office of Management and Budget. The source of other data,

unless otherwise noted, is the Congressional Budget Office.

The Balanced Budget and Emergency Deficit Control Act of

1985 is also referred to in this volume more briefly as the

Balanced Budget Act.
PREFACE

This analysis of the President's budget for fiscal year 1987 was

prepared at the request of the Senate Committee on Appropriations. The

report discusses the President's policy proposals in terms of changes from

the Congressional Budget Office (CBO) baseline budget projections for 1987-

1991. It provides estimates of the budgetary impact of the Administration's

proposals using CBO's economic assumptions and technical estimating

methods.

This report was prepared by the staff of the Budget Analysis, Fiscal

Analysis, and Tax Analysis Divisions under the supervision of James L. Blum,

William J. Beeman, and Rosemary D. Marcuss, respectively. Paul Van de

Water was responsible for the Summary; George Iden, John Peterson, and

Frank Russek for Chapter I; Rosemary D. Marcuss for Chapter II; Michael A.

Miller for Chapter HI; Charles E. Seagrave and Robert A. Sunshine for

Chapter IV; Richard P. Emery for Appendix A; Kathleen M. O'Connell for

Appendix B; and Kathy A. Ruffing for Appendix C. Principal contributors

are listed in Appendix D.

The authors wish to thank the editorial staff for its assistance in the

final production of the report. Thelma L. Jones coordinated the preparation

of the report. The final manuscript was prepared for publication by Barbara

Bakari, Debra Blagburn, Linda Brockman, Cindy Cleveland, Judy Freeman,

Janice Johnson, Dorothy J. Kornegay, Simone McKay, and Earnestine Miles.

Rudolph G. Penner

Director

February 1986

iii
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CONTENTS

SUMMARY vii

CHAPTER I THE ADMINISTRATION'S

ECONOMIC ASSUMPTIONS 1

The Short-Run Outlook 1

Medium-Term Projections 4

CHAPTER II THE ADMINISTRATION'S REVENUE

PROPOSALS 9

Estimated Revenue Levels 9

Proposed Legislation and

Administrative Action 12

CHAPTER III THE ADMINISTRATION'S

DEFENSE BUDGET 21

Defense Funding Levels 22

Defense Outlay Estimates 27

Major Defense Proposals 32

CHAPTER IV THE ADMINISTRATION'S

NONDEFENSE BUDGET 45

150 International Affairs 50

250 General Science, Space,

and Technology 55

270 Energy 57

300 Natural Resources and

Environment 61

nmrnir
JILLUIJLH

Contents (continued)

350 Agriculture 64

370 Commerce and Housing Credit 68

400 Transportation 73

450 Community and Regional

Development 76

500 Education, Training, Employment,

and Social Services 80

550 Health 85

570 Medicare 88

600 Income Security 92

650 Social Security 98

700 Veterans Benefits and Services 100

750 Administration of Justice 104

800 General Government 106

850 General Purpose Fiscal

Assistance 108

900 Net Interest 110

920 Allowances 113

950 Undistributed Offsetting

Receipts 115

APPENDIX A THE ADMINISTRATION'S

CREDIT INITIATIVES 121

APPENDIX B CBO REVENUE REESTIMATES 129

APPENDIX C CBO OUTLAY REESTIMATES 135

APPENDIX D MAJOR CONTRIBUTORS TO THE

PREPARATION OF THIS REPORT 151

VI
SUMMARY

The Congressional Budget Office (CBO) estimates that the federal government deficit under Administration policies would decline from $204.7 billion

in 1986 to $159.7 biUion in 1987 and $40.1 billion in 1991. The Administration's program would reduce total spending and the deficit substantially

compared with CBO's baseline projections. Using CBO's economic

assumptions and technical estimating methods, however, the resulting

deficit exceeds the 1987 target in the Balanced Budget and Emergency

Deficit Control Act of 1985 (Public Law 99-177) by $15.7 billion (see

Summary Figure 1 and Summary Table 1).

Summary Figure 1.

Federal Deficit Projections"

CBO Estimate of

Administration Program

Administration

Policy Proposals

CBO

Reestimates

1987 1988 1989

Fiscal Years

1990 1991

SOURCE: Congressional Budget Office; Office of Management and Budget.

a

 Includes Social Security, which is off-budget.

Vll

irrnir
• II I HI III I

CBO has reestimated the Administration's deficit figures for two main

reasons. First, CBO assumes a lower rate of real economic growth and,

until 1991, higher inflation-adjusted interest rates than does the Administration. (CBO and Administration economic assumptions are compared in

Chapter I.) Second, based on the historical relation between appropriations

and outlays, CBO estimates that spending for national defense will be

significantly greater than shown in the President's budget.

THE ADMINISTRATION'S BUDGET PROGRAM

CBO's baseline projections provide a benchmark against which the Administration's budget program can be measured. The baseline generally assumes

that defense and nondefense appropriations are held constant in real terms

SUMMARY TABLE 1. THE BUDGET OUTLOOK UNDER ADMINISTRATION

POLICIES (By fiscal year, in billions of dollars) a/

1986 1987 1988 1989 1990 1991

Revenues

Administration

Estimate 777.1 850.4 933.2 996.1 1,058.1 1,124.0

CBO Estimate 778.7 849.9 928.1 999.9 1,074.8 1,150.2

Outlays

Administration

Estimate 979.9 994.0 1,026.8 1,063.6 1,093.8 1,122.7

CBO Estimate 983.5 1,009.7 1,060.3 1,091.4 1,141.3 1,190.2

Deficit (-) or

Surplus

Administration

Estimate -202.8 -143.6 -93.6 -67.5 -35.8 1.3

CBO Estimate -204.7 -159.7 -132.3 -91.4 -66.6 -40.1

Deficit Targets b/ -144.0 -108.0 -72.0 -36.0 0

SOURCE: Congressional Budget Office; Office of Management and Budget.

a. Includes Social Security revenues and outlays, which are off-budget.

b. The Balanced Budget Act set a target of $171.9 billion in fiscal year

1986, but limited the sequestration to $11.7 billion.

vin
and that tax and entitlement laws are continued unchanged. Under these

assumptions, CBO projects that the federal deficit will fall from

$208.3 billion in 1986 to $181.3 billion in 1987 and $104.3 billion in 1991.

The baseline projections are described in more detail in CBO's recent annual

report, The Economic and Budget Outlook; Fiscal Years 1987-1991.

As in recent years, the Administration proposes to increase defense

spending above baseline levels and to reduce the deficit primarily through

large cuts in domestic programs. Over the 1987-1991 period, the Administration's proposals would reduce the deficit by a total of $224.1 billion (see

Summary Table 2).

SUMMARY TABLE 2. THE ADMINISTRATION'S DEFICIT REDUCTION

PROGRAM AS ESTIMATED BY CBO (By fiscal

year, in billions of dollars) a/

Major Program 1987 1988

Cumulative

Five-Year

1989 1990 1991 Changes

CBO Baseline Deficit

Proposed Changes

Revenues

Outlays

National defense

Entitlements and other

mandatory spending

Nondefense discretionary spending

Offsetting receipts

Net interest

Subtotal, outlays

Total Policy Changes

President's Budget as

Estimated by CBO

President's Budget

CBO Reestimates

181.3

-5.9

12.7

-15.2

-8.7

-4.1

-0.2

-15.6

-21.6

159.7

143.6

16.1

164

-7

20

-20

-16

-7

-1

-25

-32

132

93

38

.9

.1

.2

.3

.0

.9

.7

.6

.7

.3

.6

.7

143

-8

25

-23

-26

-14

-4

-43

-52

91

67

23

.6

.6

.1

.2

.3

.8

.4

.5

.1

.4

.5

.9

120.

-7.

29.

-26.

-32.

-9.

-7.

-46.

-53.

66.

35.

30.

1

2

6

7

7

1

4

3

6

6

8

8

104

-6

32

-30

-40

-9

-10

-57

-64

40

-1

41

.3

.5

.9

.1

.6

.2

.7

.7

.2

.1

.3

.4

-35

120

-115

-124

-45

-24

-188

-224

b/

150

.4

.6

.5

.3

.2

.4

.7

.1

.9

SOURCE: Congressional Budget Office; Office of Management and Budget.

a. Includes Social Security revenues and outlays, which are off-budget.

b. Surplus.

ix

TITO IF
ill III III ill

The Administration is proposing roughly 6 percent real growth in

defense appropriations in 1987 and an annual average of about 3 percent real

growth over the 1987-1991 period. This policy would increase defense

spending by $120.6 billion above the baseline, which assumes no real growth

in defense. To allow for this growth in defense and to reduce the deficit,

the required cuts in nondefense spending and increase in revenues total

$34.3 billion in 1987 and $344.7 billion over five years. They are to be

achieved as follows:

o $35.4 billion in higher revenues. Of this amount, more than half—

$19.4 billion—results from increased Internal Revenue Service

(IRS) staff and other IRS initiatives. Extension of the cigarette

tax increase of 8 cents per pack will generate $9.3 billion.

Increasing the federal employee contribution to Civil Service

Retirement from 7 percent to 9 percent of earnings will bring in

an additional $5.6 billion.

o $115.5 billion in reductions in entitlement programs. The cuts are

similar to last year's Administration proposals. The largest

reductions—$45.6 billion—would be targeted on Medicare and

Medicaid. General Revenue Sharing would be eliminated, thereby

saving $22.5 billion. Federal employee retirement and health

benefits would be cut by $17.7 billion, child nutrition and food

stamps by $7.3 billion, and guaranteed student loans by

$7.2 billion. No reductions are proposed in Social Security,

unemployment compensation, or veterans benefits. Only small

cuts would be made in means-tested, income transfer programs.

o $124.3 billion in lower nondefense discretionary spending. Among

the largest proposed reductions are transportation programs

($17.4 billion), Farmers Home Administration direct loans

($15.2 billion), civilian agency pay raises ($13.4 billion), housing

assistance ($14.5 billion), health research and education

($8.8 billion), training, employment, and social services

($8.4 billion), Pell Grants for needy college students ($8.2 billion),

and elementary and secondary education ($6.8 billion). Increases

are proposed for international affairs, science and space, and the

Internal Revenue Service.

o $45.2 billion in increased offsetting receipts. About $18 billion

would come from increases in premiums charged to participants in

Supplementary Medical Insurance (Part B of Medicare). Over $12

billion would result from fees charged to users of government

services, such as navigation and boating assistance, customs and

meat inspection, park and forest recreation, and governmentsponsored enterprises. (Some proposed user fees are included in
revenues and in other spending categories.) The sale of five

Power Marketing Associations and the Naval Petroleum Reserves

would raise, net of forgone receipts, about $11 billion.

o $24.4 billion in reduced net interest costs would result from the

other policy changes.

The Administration's proposed revenue and spending changes are described

in detail and analyzed in Chapters II through IV of this report.

As in last year's budget, the Administration proposes to transfer

certain federal activities to state and local governments and to reduce

federal involvement in credit markets. Of the $309 billion in proposed

nondefense outlay reductions, $92 billion—or 30 percent—would come from

grants to state and local governments. Many grant programs are targeted

for elimination, notably General Revenue Sharing ($22.5 billion in cuts) and

grants for the construction of sewage treatment plants ($2.9 billion). Others

would be subject to large reductions, including education, training, and

social services ($17.0 billion), Medicaid ($10.0 billion), federal-aid highways

($5.5 billion), other transportation grants ($8.5 billion), and housing

assistance ($8.1 billion). Under the Administration's proposals, federal

grants would represent 1.7 percent of gross national product (GNP) in 1991,

as compared with 2.7 percent of GNP in 1985 and 3.4 percent of GNP as

recently as 1980.

The Administration proposes to cut federal direct lending over the

next five years by one-quarter, or $44.6 billion. Eliminating Farmers Home

Administration and Small Business Administration direct loans would

account for $28 billion of this reduction. The volume of federally

guaranteed loans would also be reduced by restricting eligibility and

lowering the amount of subsidy. A more detailed overview of the Administration's credit proposals is given in Appendix A.

The proposed increases in defense and the cuts in nondefense programs

would change the composition of federal spending as set forth in Summary

Table 3 and Summary Figure 2. With 3 percent real growth, defense outlays

would grow only slightly less rapidly than GNP. National defense spending

would absorb 6.4 percent of GNP in 1987 and 6.2 percent in 1991. In the

CBO baseline, which assumes no real defense growth, the 1991 defense share

is only 5.7 percent of GNP.

The budget proposals would accelerate the projected decline in

nondefense spending. Nondefense discretionary spending currently

represents 4.1 percent of GNP, about the same level as it did 25 years ago.

In the baseline it declines to 3.4 percent of GNP by 1991, and under the

Administration program it would fall to 2.7 percent. Spending for Social

XI

mm ni
SUMMARY TABLE 3. CBO ESTIMATES OF THE ADMINISTRATION'S

BUDGET PROGRAM (By fiscal year) a/

1986 1987 1988 1989 1990 1991

In Billions of Dollars

National Defense

Entitlements and Other

Mandatory Spending

Nondefense Discretionary

Net Interest

Offsetting Receipts

Total Outlays

Revenues

Deficit

Debt Held by the Public

269.5 296.7 316.6 336.1 356.5 376.9

452.7

172.0

139.8

-50.5

458.3

165.6

144.7

-55.6

488.7

166.7

152.7

-64.3

513.2

162.1

153.2

-73.3

539.8

163.2

151.7

-69.9

573.9

163.4

149.6

-73.6

983.5 1,009.7 1,060.3 1,091.4 1,141.3 1,190.2

778.7 849.9 928.1 999.9 1,074.8 1,150.2

204.7 159.7 132.3 91.4 66.6 40.1

1,716.6 1,875.3 2,006.6 2,097.0 2,162.6 2,201.7

As a Percent of GNP

National Defense

Entitlements and Other

Mandatory Spending

Nondefense Discretionary

Net Interest

Offsetting Receipts

Total Outlays

Revenues

Deficit

Debt Held by the Public

Memorandum: GNP

6.4

10.8

4.1

3.3

-1.2

23.5

18.6

4.9

41.0

4,192

6.6

10.2

3.7

3.2

-1.2

22.4

18.9

3.5

41.6

4,504

6.5

10.1

3.4

3.2

-1.3

21.9

19.2

2.7

41.5

4,838

6.4

9.8

3.1

2.9

-1.4

20.9

19.2

1.8

40.2

5,214

6.3

9.6

2.9

2.7

-1.2

20.3

19.1

1.2

38.5

5,619

6.2

9.5

2.7

2.5

-1.2

19.7

19.0

0.7

36.4

6,047

a. Includes Social Security revenues and outlays, which are off-budget. On-and offbudget totals are shown in Summary Table 5.

Xll
Summary Figure 2.

The Composition of Federal Spending

National Defense

7.8

6.4

5.3

6.2

5.7

1966 1976 1986 1991

CBO AdminBase- istration

line Program

- Actual Estimate

Social Security and

Medicare Benefits

6.4

6.6

5.2

2.7

6.4

1966 1976 1986 1991

CBO AdminActual- ' Estimate

Base istration

line Program

Fiscal Years

SOURCE: Congressional Budget Office.

Nondefense Discretionary

5.1

5.4

4.1

3.4

2.7

1966 1976 1986

- Actual- Estimate

1991

CBO AdminBase- istration

line Program

Other Entitlements and

Mandatory Spending

1966 1976 1986

Actual - Estimate

1991

CBO Admin

Base istration

line Program

Fiscal Years

xiii
Security and Medicare benefits is projected to rise slightly in the baseline

relative to GNP but remains constant under Administration policy. Other

entitlements and mandatory spending are projected to decline from their

current level of 4.4 percent of GNP, but the drop is greater with the budget

proposals.

CBO BUDGET ESTIMATES

For purposes of comparability with the CBO baseline projections and with

other deficit reduction plans, the foregoing estimates of the Administration's budget use CBO baseline economic and technical estimating

assumptions. As indicated earlier, however, CBO's estimates of the deficit

are somewhat higher than those of the Administration.

Summary Table 4 shows the CBO reestimates of the Administration's

budget. The CBO reestimates add $16.1 billion to the projected deficit in

1987, $38.7 biUion in 1988, and $41.4 billion in 1991. In 1987 and 1988,

technical differences between CBO and the Administration predominate.

Differences in economic assumptions are more important thereafter. The

reestimates of revenues and spending are detailed in Appendixes B and C,

respectively.

CBO's economic assumptions reduce the estimated deficit slightly in

1986 and 1987, but they add to the deficit estimates by increasing amounts

thereafter. In 1991, CBO's estimate of the deficit is $24.4 billion higher

than that of the Administration because of differing economic assumptions.

CBO's economic assumptions add to both revenues and outlays as a result of

higher rates of inflation than the Administration assumes. Because CBO

assumes lower real growth and higher real interest rates than the Administration, however, the addition to outlays is greater than the addition to

revenues.

CBO's real growth projection is based on average economic growth for

nine-year periods following recession troughs. On average, since World War

II, the annual growth rate of real over such nine-year periods has been 3.7

percent, and the CBO projection closely approximates that result. The

Administration's projection for real growth is not much higher for any one

year and is well within the range of historical experience. By 1991,

however, the level of real gross national product assumed by the Administration is about 2 i percent higher than in CBO's projection.

Both the Administration and CBO assume a decline in nominal and real

(inflation-adjusted) interest rates over the 1987-1991 period. By 1991, both

assume a Treasury bill rate between one and two percentage points above

inflation—about equal to the average over the past 30 years. But the CBO

xiv
assumptions envision real interest rates declining gradually to this level,

while the Administration assumes that inflation-adjusted rates return much

more quickly to their historical averages.

Technical estimating differences between CBO and the Administration

add an average of $18 billion per year to the projected deficits. Of this

amount, about $14 billion per year involves national defense. Each year the

Congress appropriates new budget authority, which allows the Department

of Defense to enter into spending obligations. But these obligations may not

result in cash outlays for some years. CBO uses historical spending rates to

estimate the amount of outlays that will occur each fiscal year from given

levels of budget authority. The Administration, however, believes that

historical defense spending patterns will not apply in the future.

SUMMARY TABLE 4. CBO REESTIMATES OF THE ADMINISTRATION'S

BUDGETARY PROPOSALS (By fiscal year, in

billions of dollars) a/

1986 1987 1988 1989 1990 1991

Deficit

President's Budget

CBO Reestimates

Economic

Revenues

Outlays

Deficit

Technical

Revenues

Outlays

Deficit

Total Reestimates

Deficit,

President's Budget as

Estimated by CBO

202.8 143.6 93.6 67.5 35.8 -1.3 b/

2.2

-1.3

-3.5

-0.6

4.8

5.4

1.9

-1.7

-2.3

-0.6

1.2

17.9

16.7

-4.2

3.8

8.0

-0.9

29.8

30.7

1.2

14.5

13.3

2.7

13.3

10.6

11.1

28.6

17.5

5.5

18.9

13.3

16.1 38.7 23.9 30.8

204.7 159.7 132.3 91.4 66.6

21.9

46.3

24.4

4.2

21.2

17.0

41.4

40.1

SOURCE: Congressional Budget Office.

a. Includes Social Security revenues and outlays, which are off-budget.

On-and off-budget totals are shown in Summary Table 5.

b. Surplus.

xv
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Other technical estimating differences, in total, increase both estimated revenues and outlays. On the revenue side, the major difference

between CBO and the Administration concerns the proposed limitation on

pay raises for federal civilian employees. CBO assumes that this proposal

has no net effect on revenues, while the Administration assumes a $7 billion

revenue loss. Most of the remaining differences on the outlay side result

from the higher net interest costs necessitated by other technical reestimates to revenues and outlays. These additional debt service costs add

$20 billion over the 1987-1991 period. CBO and the Administration also

differ in their estimates of farm price supports, Outer Continental Shelf

escrow releases, and the proceeds from sale of the Naval Petroleum

Reserves and Power Marketing Administrations.

SUMMARY TABLE 5. CBO ESTIMATES OF ON-BUDGET AND OFFBUDGET SPENDING AND REVENUES IN

THE ADMINISTRATION'S PROGRAM (By

fiscal year, in billions of dollars)

1986 1987 1988 1989 1990 1991

Revenues

On-budget 580 636 687 738 788 839

Off-budget (OASDI) 198 214 241 262 287 311

Total 779 850 928 1,000 1,075 1,150

Outlays

On-budget 799 811 850 870 907 941

Off-budget (OASDI) 184 198 210 222 235 249

Total 983 1,010 1,060 1,091 1,141 1,190

Deficit (-) or Surplus

On-budget -219 -175 -163 -132 -119 -102

Off-budget (OASDI) 14 15 31 40 52 62

Total -205 -160 -132 -91 -67 -40

SOURCE: Congressional Budget Office.

xvi
ON-AND OFF-BUDGET SPENDING AND REVENUES

The total outlays and revenues of the federal government includes both onbudget and off-budget activities. The Balanced Budget Act returned all

previously off-budget entities to the budget, but moved off-budget the

Social Security trust funds—Old-Age, Survivors, and Disability Insurance

(OASDI). On-budget and off-budget activities must be added together,

however, to determine the total federal deficit that must be financed by

borrowing from the public. The estimated total deficit is also used in

calculating the excess deficit amount for purposes of the Balanced Budget

Act.

This volume focuses on total federal government fiscal activities

because of their significance for the economy and for implementing the

Balanced Budget Act. Moreover, distinguishing between on-and off-budget

items would add significant complexity to the summary tables and thereby

obscure the basic analytical story. Nevertheless, it is important to note

that Social Security represents roughly 20 percent of outlays and 25 percent

of revenues (see Summary Table 5). Also, in contrast to the on-budget

activities, the Social Security trust funds are running growing surpluses.

The Administration's fiscal year 1987 proposals include a modest speedup in

the deposit of Social Security tax payments by state and local governments

and a reduction in Social Security administrative costs, but no changes in

benefit levels.

xvn

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CHAPTER I

THE ADMINISTRATION'S ECONOMIC ASSUMPTIONS

Economic projections play an important role in budget estimates. Assumptions about the rate of economic growth and the rate of inflation have a

substantial effect on projected tax receipts and on the growth of certain

entitlement programs such as Unemployment Insurance. With the rapid

growth of federal debt in recent years, interest-rate projections also have a

major impact on projected budget outlays.

This chapter briefly compares the Administration's economic projections with those of the Congressional Budget Office (CBO), and discusses the

Administration's proposed fiscal policy. The CBO economic projections are

used in later chapters in reestimating the Administration's 1987 budget

proposals.

THE SHORT-RUN OUTLOOK

While economic growth was sluggish last year, conditions appear to be

favorable for a resumption of somewhat stronger growth this year. The

slowdown last year was associated with a large reduction in inventory

investment and a further deterioration of the trade balance. But the

inventory adjustment appears to be largely over, and since the first quarter

of last year the dollar has been on a substantial decline. Over the second

half of the year, particularly in the last quarter, long-term interest rates

fell sharply; during that same quarter, the stock market surged. Finally,

early this year oil prices dropped precipitously. For these reasons, there is a

fairly wide consensus among forecasters that the near-term economic

outlook is quite favorable.

CBO's short-run economic forecast for 1986 and 1987 and that of the

Administration are conditional on several specific assumptions regarding

policy and such key factors as dollar exchange rates and oil prices. The

CBO forecast is based on these assumptions:

o The budget deficit targets of the Balanced Budget and Emergency

Deficit Control Act of 1985 (Public Law 99-177) are assumed to

unriiTnir
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TABLE 1-1. COMPARISON OF ADMINISTRATION AND CBO SHORT-RUN

ECONOMIC FORECASTS (By calendar year)

Economic Actual Forecast

Variable 1985 1986 1987

Fourth Quarter to Fourth Quarter (Percent change)

Real GNP

Administration 2.5 4.0 4.0

CBO 2.5 3.6 3.0

Nominal GNP

Administration 5.8 8.0 8.3

CBO 5.8 7.6 7.2

Consumer Price Index a/

Administration 3.2 3.7 4.1

CBO 3.2 3.5 4.5

Calendar year Average (Percent)

3-Month Treasury BiU Rate

Administration 7.5 7.3 6.5

CBO 7.5 6.8 6.7

10-Year Government

Bond Rate

Administration 10.6 8.9 8.5

CBO 10.6 9.0 8.9

Civilian Unemployment Rate

Administration b/ 7.2 6.7 6.5

CBO 7.2 6.7 6.7

SOURCE: Congressional Budget Office.

a. Urban wage and clerical workers.

b. The Administration's projection is for the total labor force including

armed forces residing in the United States, while CBO's is for the

civilian labor force excluding armed forces. In recent years, the

former has tended to be 0.1 to 0.2 percentage points below the rate

for the civilian labor force alone.
be fully implemented. The budget deficit is estimated at $208.3

billion in fiscal year 1986, and for fiscal year 1987 is assumed to

be at the target of $144 billion.

o With respect to monetary policy, the behavior of the monetary

aggregates is assumed to be within the ranges announced by the

Federal Reserve on February 19.

o Food prices are expected to increase less than the general price

level.

o The international value of the dollar is assumed to continue to

decline, though less rapidly than in the last three months.

o The price (refiners' acquisition cost) of imported oil is assumed to

fall about 18 percent between the last quarter of 1985 and mid1986. I/

In general, the assumptions underlying the Administration's forecast

appear to be similar to CBO's. Both forecasts were prepared before the

recent drop in oil prices. Spot prices are currently well below the oil price

assumed in CBO's and the Administration's forecasts. The Administration's

forecast assumes the fiscal policy contained in its 1987 budget, with large

reductions in the federal deficit of roughly the magnitude assumed by CBO.

Both CBO and the Administration expect good economic performance

in 1986 and 1987, with the Administration's forecast showing somewhat

stronger economic growth than CBO's (see Table 1-1). According to CBO's

forecast, growth picks up from the sluggish 2.5 percent rate during 1985

(fourth quarter to fourth quarter) to 3.6 percent during 1986 and then slows

moderately to 3.0 percent during 1987. 2/ The Administration's forecast

1. For a detailed discussion of the current economic outlook and CBO's

forecast, see Congressional Budget Office, The Economic and Budget

Outlook; Fiscal Years 1987-1991 (February 1986), pp. 1-58.

2. Neither the Administration's nor CBO's forecast reflects the recent

GNP revisions for the fourth quarter of 1985. After the revisions, real

growth during 1985 (fourth quarter to fourth quarter) was 2.3 percent

rather than 2.5. If the same level of GNP is assumed for 1986, this

would raise growth to 4.0 percent in the CBO forecast.

Mmrrnir
JILLlLUiJilllL

shows growth of 4.0 percent during both years. Thus, the difference in

growth forecasts for 1987 is one percentage point, a magnitude that is of

consequence for budget estimates but well within the usual range of

economic forecast errors. As this report is being written, the consensus for

real growth among private forecasters is very slightly below CBO's

estimates. The plunge in oil prices early this year has, however, caused

many private forecasters to begin raising their growth forecasts. If lower

oil prices prevail, the consensus forecast of growth could eventually turn out

to be stronger than projected by CBO.

Both the CBO and Administration forecasts show slightly higher

inflation in 1986 and 1987 than in 1985. In 1987, CBO has inflation slightly

higher than the Administration. The Administration's forecast for shortterm interest rates is 0.5 percentage point higher in 1986 than CBO's, but

slightly lower in 1987. The temporary rise in short rates in the Administration's forecast stems in part from its forecast of relatively strong growth.

Long-term rates, as measured by the 10-year government bond rate, decline

moderately in the Administration's 1987 forecast, but remain essentially flat

in the CBO forecast. The forecasts for unemployment are virtually the

same.

The CBO's and the Administration's forecasts contain a considerable

measure of uncertainty. Two major factors contributing to the uncertainty

are oil prices and the value of the dollar—both of which have shown large

movements in recent months. Lower oil prices and a cheaper dollar both

tend to raise real growth. But while lower oil prices would help to reduce

the rate of inflation, a cheaper dollar would tend to raise it.

MEDIUM-TERM PROJECTIONS

Neither CBO nor the Administration attempts to forecast the economy

beyond the end of 1987. In making their projections for 1988 through 1991

(shown in Table 1-2), both organizations rely on simple rules of thumb based

on historical experience.

CBO's projection is based on average economic growth for nine-year

periods following recession troughs. On average, since World War n, the

annual growth rate of real GNP over such nine-year periods has been 3.7

percent; and the CBO projection closely approximates that result. In

addition, CBO's projection shows inflation, measured by the Consumer Price

Index, remaining relatively flat over the 1988-1991 period. Nominal and

real interest rates are both assumed to decline over the period, reflecting

the impact of lower deficits under current law. By 1991, real interest rates
TABLE 1-2. COMPARISON OF ADMINISTRATION AND CBO ECONOMIC

ASSUMPTIONS, 1986-1991 (By calendar year)

Economic Actual

Variable 1985

Nominal GNP

(billions of

current dollars)

Administration 3

CBO 3

Real GNP (percent

change, year over

year)

Administration

CBO

Consumer Price

Index a/ (percent

change, year

over year)

Administration

CBO

GNP Deflator

(percent change,

year over year)

Administration

CBO

Three-Month Treasury

Bill Rate (percent)

Administration

CBO

Ten-Year Government Bond Rate

(percent)

Administation

CBO

Civilian Unemployment Rate (percent)

Administration b/

CBO

,993

,993

2.3

2.3

3.5

3.5

3.3

3.3

7.5

7.5

10.6

10.6

7.2

7.2

1986

4,274

4,269

3.4

3.2

3.5

3.4

3.5

3.6

7.3

6.8

8.9

9.0

6.7

6.7

1987

4,629

4,583

4.0

3.1

4.1

4.2

4.2

4.1

6.5

6.7

8.5

8.9

6.5

6.7

1988

4,995

4,930

4.0

3.3

3.7

4.4

3.7

4.1

5.6

6.4

7.3

8.2

6.3

6.5

1989

5,359

5,313

3.9

3.5

3.3

4.4

3.3

4.1

4.8

6.1

5.5

7.5

6.1

6.3

1990

5,709

5,725

3.6

3.5

2.8

4.3

2.8

4.1

4.3

5.7

4.8

6.8

5.8

6.1

1991

6,036

6,152

3.5

3.2

2.1

4.3

2.1

4.1

4.0

5.4

4.5

6.1

5.6

6.0

SOURCE: Congressional Budget Office

a. Urban wage and clerical workers.

b. The Administration's projection is for the total labor force. See

footnote b of Table 1-1.

"TMimrnr
• II III I 111 ill Hill

in CBO's projection are about equal to the average real rates over the last

30 years.

The Administration's medium-term projections differ somewhat from

CBO's in regard to real growth, inflation, and interest rates; the differences

are smaller for unemployment and nominal GNP. The Administration's

medium-term projections for economic growth appear to be based on a

projection of hours worked from the end of 1985 to the end of 1991, and an

assumption that the growth in output per hour will approximate the average

growth rate in the 1948-1981 period. |/ Its projection for real growth is not

much higher than CBO's for any one year. By 1991, however, the level of

real GNP is about 1\ percent higher than in CBO's projection. The

economic expansion envisioned in the Administration's projection would be

above average for the period since World War II, but well within the range of

historical experience. It is, for example, within CBO's "high growth path"

projection—based on the pattern of the strongest nine-year expansion of the

postwar period, which occurred after the recession of 1957-1958. 4/

The Administration's projection shows inflation trending downward

during the 1988-1991 period, reflecting the assumption that monetary policy

will tend to reduce growth rates for money aggregates. CBO's flat rate of

inflation implicitly assumes that labor markets start to tighten when the

unemployment rate nears 6.0 percent. The Administration clearly assumes

that this does not occur until unemployment is somewhat lower. By 1991,

the increase in the Consumer Price Index under the Administration's

projection is about half the increase shown in the CBO projection, or 2.1

percent versus 4.3 percent (see Table 1-2). By 1991, the CPI is roughly 5

percent higher with CBO's projection than with the Administration's.

Consistent with the projected decline in inflation, the Administration's

projection shows interest rates falling considerably more than does CBO's:

by 1991, the three-month Treasury Bill rate averages 4.0 percent and the

ten-year government bond rate averages 4.5 percent. Adjusted for

inflation, however, the Administration's real interest rates end up approximately the same as CBO's, although CBO's projections imply that the real

rates decline more gradually.

3. See Economic Report of the President (February 1986), pp. 67-69.

4. See Congressional Budget Office, The Economic and Budget Outlook;

Fiscal Years 1987-1991 (February 1986), pp. 8-10.
The Administration's projection of nominal GNP is above CBO's during

1986-1989, but the difference reverses in 1990-1991. Nonetheless, the

Administration projects a lower taxable share of GNP, which tends to

reduce the Administration's budget receipts relative to CBO's. J>/ The

differences in the unemployment projections are relatively small. By 1991,

the Administration unemployment projection, on a comparable basis, is only

a few tenths of a percentage point below CBO's.

5. For further discussion of revenues, see Chapter II.

mninrnr

CHAPTER II

THE ADMINISTRATION'S REVENUE PROPOSALS

The Administration's budget program contains relatively modest revenue

increases above those that would result from current law. Relative to CBO

baseline projections, the President's revenue proposals would increase total

revenues—including off-budget Social Security revenues—by $6 billion in

1987, $9 billion in 1989, and $7 billion in 1991. CBO's estimates of total

revenues including the President's proposals are close to the Administration's—virtually the same as the Administration's estimate in 1987, $5 billion

below in 1988, and $4 billion above in 1989. After 1988, CBO's reestimates

add revenues in each year. In 1991, CBO's estimate is $26 billion—about 2

percent—above the Administration's. Almost all of the CBO reestimates

derive from the use of somewhat different economic assumptions.

ESTIMATED REVENUE LEVELS

CBO estimates revenues under the Administration's program (including offbudget revenues) at $850 billion in 1987, $928 billion in 1988, and $1,150

billion in 1991 (see Table II-l). Administration revenues are projected to

grow slightly faster than GNP in 1986-1988, reaching 19.2 percent of GNP in

1988, and more slowly than GNP thereafter, claiming 19.0 percent of GNP

in 1991.

CBO projects lower real growth and higher inflation throughout the

projection period than does the Administration. While differences between

projected real growth rates are significant, differences between projected

inflation rates are larger. The net result is that CBO's projected nominal

GNP path rises from $65 billion below the Administration's GNP in 1988 to

$116 billion above the Administration's GNP in 1991. (For a discussion of

CBO's economic projections, see Chapter I.) Federal revenues roughly

follow nominal income because over 90 percent of revenues come from

income and payroll taxes. Therefore, the differences in nominal GNP paths

MiHirnir
TABLE II-l. ADMINISTRATION AND CBO ESTIMATES OF

ADMINISTRATION'S PROGRAM REVENUES BY SOURCE

(By fiscal year, in billions of dollars)

Revenue Source 1986 1987 1988 1989 1990 1991

Individual Income Taxes

Corporate Income Taxes

Social Insurance Taxes

and Contributions

On-budget

Off-budget a/

Excise Taxes

Windfall profit taxes

Other

Other

Total Revenues

Percent of GNP

Administration Estimates

353.7 386.0 425.9 455.5 482.0 516.3

70.9 86.7 101.2 111.8 119.7 125.6

280.4 302.8 335.0 358.1 384.1 407.7

82.5 88.5 92.1 94.5 97.9 102.3

197.9 214.3 242.8 263.7 286.1 305.4

4.1 2.8 1.9 1.5 1.3 1.0

30.5 32.4 31.6 31.2 31.9 32.6

37.5 39.7 37.7 38.0 39.1 40.8

777.1 850.4 933.2 996.1 1,058.1 1,124.0

18.5 18.7 19.0 18.9 18.8 18.9

Individual Income Taxes

Corporate Income Taxes

Social Insurance Taxes

and Contributions

On-budget

Off-budget a/

Excise Taxes

Windfall profit taxes

Other

Other

Total Revenues

Percent of GNP

CBO Estimates

354.2 385.0 422.0 460.8 500.3 542.7

72.2 89.4 101.2 109.7 114.1 116.0

280.8 302.3 333.5 357.7

82.5 88.7 92.6 95.6

198.3 213.7 240.9 262.1

386.8 415.8

100.0 104.6

286.8 311.3

4.2 2.0

30.3 32.3

1.6 1.6

31.4 31.1

1.5

31.7

1.4

32.5

37.1 38.9 38.2 39.0 40.4 41.6

778.7 849.9 928.1 999.9 1,074.8 1,150.2

18.6 18.9 19.2 19.2 19.1 19.0

SOURCES: Budget of the United States Government for Fiscal Year 1987 and

Congressional Budget Office.

a. Off-budget revenues consist of Federal Old-Age and Survivors Insurance Trust

Fund and Disability Insurance Trust Fund (OASDI) revenues.
work to reduce CBO's estimates of Administration program revenues below

the Administration's estimates in 1987 through 1989 and to raise them above

the Administration's in 1990 through 1991 (see Table II-2).

Another major economic assumption affecting revenue projections is

the share of GNP that will take the form of taxable income, both individual

and corporate. CBO projects this share as being higher than does the

Administration. This assumption works to raise CBO's estimated revenues

above the Administration's in each year (see Table II-2). It mostly offsets

the effect of the difference in nominal GNP paths in 1987 through 1989, and

reinforces the effect in 1990-1991. Because the government receives tax

TABLE II-2. CBO'S REESTIMATES OF ADMINISTRATION'S PROGRAM

REVENUES (By fiscal year, in billions of dollars)

1987 1988 1989 1990 1991

Revenues as Estimated

by Administration a/ 850 933 996 1>058 1,124

Reestimates Caused by

Differences in Assumptions

About:

Nominal GNP path -8-9- 8 1 18

Income shares 6 7 8 8 11

Timing adjustments b/ 3-4 3 6 ~5

Proposals -1 1 1 2 2

Total Reestimates c/ J> 4 17 26

Revenues as Estimated

by CBO a/ 850 928 1,000 1,075 1,150

a. Unless otherwise noted, aggregate program revenues include payroll

tax receipts of the Federal Old-Age and Survivors Insurance Trust

Fund and Disability Insurance Trust Fund (OASDI), which are offbudget.

b. Including some technical adjustments.

c. Negative reestimate of less than $500 million.

11

~minrnr
payments with various lags after incomes are earned, the full budgetary

effects of income growth usually take two years to play out. The net result

of these assumptions is to leave CBO's estimates of the Administration's

program revenues close to the Administration's estimates in 1987 through

1989 and above the Administration's in 1990-1991.

Several Administration program proposals were reestimated by CBO.

Only two reestimates are significant. CBO assumes that the federal

government will not receive the $1 billion in petroleum overcharge restitution funds budgeted in 1987. CBO does not follow the Administration's

practice of assuming a reduction in aggregate wages as a result of proposed

reductions in federal civilian employee pay raises and, therefore, the CBO

estimate of the revenue effect of this proposal is zero. CBO's baseline

economic and technical estimating assumptions are described in more detail

in Appendix B.

PROPOSED LEGISLATION AND ADMINISTRATIVE ACTION

CBO estimates that the President's legislative and administrative proposals

would add $36 billion to revenues between 1986 and 1991 (see Table II-3).

Half of the legislative proposals are repeats from last year—as is the major

administrative proposal, an increase in Internal Revenue Service staffing.

User fees and trust fund reforms account for about 10 percent of net

proposed revenue increases, with user fee increases of $1 billion. Other

proposals for an additional $12 billion in user fees are included on the

spending side of the budget as offsetting receipts and collections.

Education tax incentive proposals (education savings accounts and

tuition tax credits) would reduce income taxes by roughly $6 billion during

1987-1991. Over half of proposed revenue increases would result from

Internal Revenue Service (IRS) initiatives, such as increased enforcement

made possible by additional IRS examiners, more automation, and more

return-checking. Another 40 percent of increased revenues would come

from excise tax and fee increases. The extension of the higher cigarette tax

enacted in 1982 in the Tax Equity and Fiscal Responsibility Act (TEFRA)

would provide about two-thirds of this increase. A two-percentage-point

increase in employee contributions to Civil Service Retirement would

provide another $6 billion, or 15 percent, of new revenues. Descriptions of

these proposals follow.

12
TABLE II-3. CBO ESTIMATES OF REVENUE EFFECTS OF PRESIDENT'S LEGISLATIVE

AND ADMINISTATIVE PROPOSALS, BY MAJOR TYPE

(By fiscal year, in billions of dollars)

Cumulative

1986-1991

1986 1987 1988 1989 1990 1991 Changes

CBO Baseline a/ 777.8 844.0 921.0 991.3 1,067.5 1,143.6

Proposed Changes

Education tax incentives — -0.4 -0.8 -1.2 -1.5 -1.7 -5.6

IRS initiatives b/ c/ 2.2 3.3 4.5 4.4 4.9 19.4

Excise taxes and fees

(net) 0.9 2.7 2.8 2.8 2.8 2.7 14.7

Civil Service Retirement and

Railroad Industry taxes — 1.1 1.6 1.5 1.5 1.5 7.2

Other

Acceleration of state

and local deposits of

payroll taxes — 0.4 0.3 1.2 0.1 -0.9 1.1

All other -Q.l -Q.l -Q.l -0.1 -0.1 -0.5

Total 0.9 5.9 7.1 8.6 7.2 6.5 36.3

President's Budget as

Estimated by CBO 778.7 849.9 928.1 999.9 1,074.8 1,150.2

a. Revenues under current law, including extensions of Superfund, Airport and Airway, and

Highway Trust Fund taxes at rates in effect upon expiration of these taxes in September

1985, December 1987, and September 1988, respectively. Baseline also includes offbudget OASDI revenues.

b. Mostly tax collection gains from proposed Internal Revenue Service expenditures.

c. Revenue gain of less than $50 million.

13

mil • in our
TABLE II-4. CBO ESTIMATES OF REVENUE EFFECTS OF

ADMINISTRATION'S PROPOSED EDUCATION TAX

INCENTIVES (By fiscal year, in billions of dollars)

Proposal

Cumulative

Five-Year

1987 1988 1989 1990 1991 Changes

Education Savings

Accounts

Tuition Tax Credits

Total

a/ -0.2 -0.3 -0.6 -0.7 -1.8

-0.4 -0.6 -0.9 -0.9 -0.9 -3.8

-0.4 -0.8 -1.2 -1.5 -1.7 -5.6

a. Revenue loss of less than $50 million.

Education Savings Accounts

Under the education savings account proposal, parents could set up an

account to fund post-secondary education for each dependent child under 18

years of age, and contribute up to $1,000 per year to the account. Interest

earnings would be tax-free. The $1,000 maximum contribution would

decline for parents with adjusted gross incomes (AGI) above $40,000,

reaching zero for those with AGIs above $60,000. The accounts could be

spent on tuition and room and board for full-time students in degree

programs. For part-time students, expenditures would be restricted to

tuition.

The revenue loss from these accounts would be small initially, but

would grow as amounts deposited cumulated, reaching $700 million in 1991

(see Table II-4). Revenue losses would continue to increase after 1991 and

could reach $2 billion in 1996.

Several bills permitting education savings accounts have been introduced in the 98th and 99th Congresses, although none has been voted out of

committee. These bills differ from the Administration's proposal in that

contributions would be deductible from the parents' AGI and, in most bills,

the accumulated value of an account would be included in the child's AGI

after college. Initial-year revenue losses are much higher when deposits are

14
deductible, but the difference narrows over time because the account

ultimately is included in the AGI of the child.

Tuition Tax Credits

The President's proposed tax credit for elementary and secondary school

tuition would be capped at $300 or 50 percent of tuition costs up to $600.

Like the education savings accounts, this proposal was also included in the

President's last three budgets. During a two-year transition period, the

proposed credit would rise from $100 to $200 and then stay at $300 per

dependent. The maximum would be phased downward for taxpayers with

AGIs above $40,000. Taxpayers with AGIs of $60,000 or more would not be

eligible for the credit. The credit would not be refundable. The estimated

revenue loss from the credit would level off at roughly $900 million per year

when it was fully phased in.

One bill to establish a tuition tax credit has been introduced in the

99th Congress (H.R. 96). A number of tuition credit bills were introduced in

the 98th Congress. One of these, S. 528, similar to this proposal, was

reported out of the Senate Committee on Finance but did not come to a

floor vote.

If enacted, the tax credit would constitute a relatively large share of

total general-purpose federal aid proposed in the budget for elementary,

secondary, and vocational education, providing about $4 billion in tuition

subsidies over the 1987-1991 period (see Table II-4). Currently, the major

source of untargeted federal aid is the Chapter II block grant, with proposed

budget authority of $500 million for 1987. Most of the remaining $6.7

billion in aid proposed for elementary, secondary, and vocational education

is targeted on children or districts with special needs, on districts with

federal installations, or on particular services such as science education.

Internal Revenue Service Initiatives

Of the $19.4 billion in increased revenues resulting from proposed IRS

initiatives, over half are attributed to increases in IRS staff (see Table II-5).

The Administration proposes to increase the permanent IRS examination

staff by 2,500 positions each year over the 1987 to 1989 period (for a total

increase of 7,500 positions), with some advance hiring taking place during

1986. About three-quarters of the additional personnel would be examiners.

Other new personnel would provide direct and indirect support to the

examiners. Also proposed is the purchase of about 9,000 portable computers

15

WlHFlillT
iliaiii iiiiiiiiinii

TABLE II-5. CBO ESTIMATES OF REVENUE EFFECTS OF

ADMINISTRATION'S PROPOSED INTERNAL

REVENUE SERVICE INITIATIVES

(By fiscal year, in billions of dollars)

Proposal

Cumulative

Five-Year

1987 1988 1989 1990 1991 Changes

Examination Staff Increases 0.6

0.3

0.2

Increased Automation of

Examination System

Increased Follow-Up of

Information Returns

1.5 2.6 2.8 2.9 10.4

0.8 1.2 1.3 1.5 5.1

0.2 0.2 0.2 0.2 1.0

Charges for Collection

Costs

All Other

Total

0

0

2

.3

.7

.2

0

0

3

.4

.4

.3

0.4

0.2

4.5

0.

-o.

4.

4

2

4

0

4

.4

a/

.9

1.

1.

19.

8

1

4

a. Revenue loss of less than $50 million.

for use by auditors, along with additional desktop personal computers and

related computer hardware. The increased automation would bring in an

estimated $5 billion in collections over 1987-1991. Another proposal would

increase the follow-up of discrepancies between information returns supplied by third parties (such as W-2 and 1099 forms) and taxpayer returns.

In addition, the Administration proposes to replace existing penalties

for overdue taxes with charges calibrated to cover the total cost of

collecting the money, and to establish user charges for IRS letters of

determination and private letter rulings. Letters of determination are

requested primarily by employee benefit plans and tax-exempt organizations. Private letter rulings are clarifications of IRS positions in particular

cases, such as those involving changes in accounting periods or methods.

The implementation of the fees for letters and rulings will require legislation. Taken together, they would generate about $30 million in revenues per

year.

16
The Administration program contains roughly $1.6 billion in IRS spending over 1986-1991 to fund these initiatives. Most of these funds are

earmarked for new hiring. The increased collections are also predicated

upon a 1986 supplemental appropriation for IRS of $340 million.

Excise Taxes and Fees

As mentioned above, the principal revenue raiser among the excise tax

proposals is the extension of the 16-cents-per-pack tax on cigarettes,

scheduled under current law to drop to 8 cents per pack on March 15, 1986.

The maintenance of the 16-cents-per-pack rate would generate about $9

billion in net revenues over 1986-1991 (see Table II-6).

TABLE II-6. CBO ESTIMATES OF REVENUE EFFECTS OF ADMINISTRATION'S

PROPOSED EXCISE TAXES AND FEES (By fiscal year,

in billions of dollars)

Proposal

Cumulative

1986-1991

1986 1987 1988 1989 1990 1991 Changes

Extension of Cigarette Tax

Increase (net)

Black Lung Fee Increase (net)

Superfund Tax Increase (net) a/

0.8

0.1

1.7

0.2

0.5

1.7

0.2

0.4

1.7

0.2

0.4

1.7

0.2

0.4

1.7

0.3

0.4

9.3

1.1

2.3

Elimination of Highway

Excise Tax Exemptions (net)

Nuclear Regulatory Commission

User Fees

All Other

Total

0.2 0.2 0.2 0.2 0.2

0.2 0.2 0.2 0.2 0.2

b/

0.9

b/ 0.1 0.1 0.1

2.7 2.8 2.8 2.8 2.7

1.0

0.8

0.3

14.7

a. Increases in Superfund revenues above those that would be generated under an

extension of the tax rates in effect at the end of September 1985, when Superfund

taxing authority expired.

b. Revenue increase of less than $50 million.

17

im
in in iiuiiiniiiii

The proposed Black Lung Disability and Superfund tax increases

included in this year's budget appeared in last year's budget as well. The

Administration proposes to increase the Black Lung Disability Trust Fund

tax on coal production from $1.00 to $1.50 per ton for underground mining

and from $0.50 to $0.75 per ton for surface mining. These were last

adjusted by the Black Lung Revenue Act of 1981 (Public Law 97-119), which

raised the taxes from $0.50 to $1.00 per ton for underground mining and

from $0.25 to $0.50 per ton for surface mining. The proposed fee increases

are sought to help offset trust fund debt, which is increasing by more than

$400 million per year. The higher fees are estimated to raise total revenues

by about $1 billion over the 1987-1991 period.

The Administration proposes to reauthorize and expand the taxing

authority under the Comprehensive Environmental Response, Compensation,

and Liability Act of 1980, which expired at the end of fiscal year 1985,

leaving the proposed mix of taxes unspecified. These taxes finance the

clean-up of waste sites by the Hazardous Substance Response Trust Fund, or

Superfund. The Administration proposes to provide the fund with about $5

billion in revenues over the 1986-1991 period. This is about $3 billion above

the CBO baseline estimate of Superfund revenues generated under an

extension of the tax rates in effect in September 1985. The $5 billion in

Superfund receipts would meet the Administration's proposed spending for

waste removal over the period. This level of funding would provide $3.6

billion in total budget revenues over 1986-1991 (measured as total Superfund

receipts less resulting income tax offsets).

The Administration proposes repeal of the present gasohol and alcohol

exemptions from federal gasoline and diesel fuel excise taxes. It also

proposes repeal of the exemptions from tire, gasoline, and diesel fuel

taxes available to bus operators. CBO's estimate of the 1987-1991 revenue

gain from repeal of the exemptions is $1.0 billion. This estimate assumes a

coordinated phasing-out of the existing alternative alcohol fuels tax credit,

which is not specified in the Administration's proposal. The revenue gain

would be lower if the credit were to remain in place. The budget proposals

also include several new user fees, including fees for services performed by

the Nuclear Regulatory Commission and the Federal Emergency Management Agency.

Civil Service Retirement (CSR) and Railroad Taxes

The Administration proposes to increase the CSR contribution rate for most

federal civilian employees from 7 percent to 9 percent of pay, effective

January 1, 1987. Variants of this proposal were included in the Administra18
tion's 1984 and 1985 budgets. CBO estimates that this increase would bring

an additional $5.6 billion in revenues (see Table II-7). The Administration

also proposes to reduce federal civilian pay increases below average privatesector wage growth projected for the 1987-1991 period. This can be done at

the President's discretion, unless the Congress passes legislation overruling

the decision. CBO estimates that this proposal would have no effect on

total revenues.

The Administration is proposing that the rail industry finance a larger

portion of rail pension benefits, reducing the federal government subsidy,

and that these benefits be taxed under the general rules for private-sector

pension benefits. Taken together, the two proposals would increase revenues by about $150 million per year. In addition, the Administration is

proposing for the third year to extend unemployment insurance (UI) coverage to the rail industry—at present, the only sector not covered under the

insurance system. If brought into the system, the rail industry UI contributions would come to $100-$!50 million per year. The Administration is also

TABLE II-7. CBO ESTIMATES OF REVENUE EFFECTS OF

ADMINISTRATION'S PROPOSED CIVIL SERVICE

RETIREMENT AND RAILROAD INDUSTRY TAXES

(By fiscal year, in billions of dollars)

Proposal

Cumulative

Five-Year

1987 1988 1989 1990 1991 Changes

Increase in CSR Employee

Contribution

Railroad Industry Tax

Increases

Increase in D.C. Government Retirement Contri0.9 1.2 1.2 1.2 1.1

0.2 0.3 0.3 0.3 0.2

a. Revenue gain of less than $50 million.

5.6

1.3

bution

Total

a/

1.1

a/

1.6

0.

1.

1

5

0.

1.

1

5

0.

1.

1

5

0

7

.3

.2

19

llliiillllj HIT
I IB 1

proposing, for the third year, to increase the District of Columbia employer

contribution to CSR to the level needed to cover the full cost of the

retirement program. Higher D.C. government employee contributions and

reduced program benefits are also proposed.

Other Proposals

The budget includes two other significant budgeted revenue increases, from

the acceleration of state and local government deposits of payroll taxes and

from petroleum overcharge restitution fund receipts. CBO estimates that

the acceleration of deposits would bring $2 billion in revenues forward into

1987-1990, resulting in a reduction in 1991 revenues of about $900 million

(see Table II-3). This year's proposal, in contrast to the proposal in last

year's budget, would move state and local governments to the faster

schedule in stepwise fashion over two years to give them time to adjust to

the change. A similar proposal, discussed this year in the Senate, met some

opposition from state and local governments.

CBO assumes that the Administration's estimated $1 billion in federal

government collections from the petroleum overcharge restitution fund

during 1987 will not materialize because of a recent Supreme Court decision

that requires apportionment of these funds to state governments by early

March 1986—too soon for passage of legislation mandating a federal

government share in the apportionment.

CBO estimates that the President's remaining budget proposals would

have, at most, minor effects on revenues. Additional detail on CBO's

estimates of Administration revenues is contained in Appendix B.

20
CHAPTER m

THE ADMINISTRATION'S DEFENSE BUDGET

The President's budget for fiscal year 1987 proposes 3 percent real growth

in national defense over the 1987-1991 period—the same real program level

that was contained in the 1986 Congressional budget resolution. That

resolution assumed zero real growth for defense in 1986. Congress actually

provided less than zero real growth in defense appropriations in 1986, and

the Balanced Budget Act sequestration for 1986 reduced the program level

further—to 3 percent below the previous year in real terms.

The Administration's budget requests $320 billion in budget authority

for the national defense function in 1987, an increase of $33 billion over the

post-sequestration level for 1986 and $19 billion over the CBO baseline.

Over the 1987-1991 period, the budget would exceed the CBO baseline—

which assumes zero real growth in defense appropriations—by $163 billion.

In terms of real growth, the measurement depends on whether year-to-year

changes in new budget authority alone is considered, or whether the focus is

on year-to-year changes in program levels. On the basis of actual 1986

budget authority after sequestration—about $286.8 billion—and an inflation

rate of about 3.4 percent, the President's request for 1987 new budget

authority reflects about 8 percent real growth. In order to pay for certain

1986 military personnel costs, however, the Congress made unobligated

balances available in lieu of new budget authority. This has the effect of

raising the real program level in 1986 by about $5 billion above what it

would be under new budget authority. If the higher program level is used as

the base, then the President's request contains about 6 percent real growth

in 1987. Real growth averages about 3 percent annually over the five-year

period.

The largest defense funding increases proposed in the President's

budget are in the readiness accounts, especially operation and maintenance

(O&M). In 1987, real growth is concentrated in O&M and research and

development, and procurement declines in real terms. From 1988 through

1991, O&M would continue to experience greater relative real growth;

however, unlike 1987 procurement would grow faster than research and

development during the out-years.

21

IF
CBO estimates that outlays for the national defense function under

Administration proposals would be significantly higher than the estimates

contained in the President's budget—$68 billion higher over the next fiveyears. In 1987 alone, the CBO estimate is higher by $14.5 billion. Most of

the differences in outlay estimating are concentrated in the operation and

maintenance, procurement, and research and development accounts. Estimating defense outlays is difficult because appropriations for different

activities are spent over varying periods .and can be affected by many

factors. In the past, both CBO and the Administration have employed

historical spending patterns to estimate outlays from given levels of budget

authority. This year, CBO continues this approach while the Administration

believes that various factors—such as slower progress payments to contractors—will alter the historical patterns. In CBO's view, most of these

factors have been taken into account in its spending rate assumptions (see

box).

DEFENSE FUNDING LEVELS

The Administration's budget request of $320 billion in budget authority for

the national defense function in 1987 represents an increase of $33 billion

over the post-sequestration level for 1986 and $19 billion over the CBO

baseline as noted above. These increases translate into 6 percent real

growth in 1987 and an annual average of about 3 percent real growth over

the 1987-1991 period (see Table III-l).

The real growth in budget authority would continue the trend of annual

real increases since 1980 (with the exception of 1986 in which year the

defense budget declined about 3 percent in real terms). The real decline in

1986 came after a 9 percent average annual real growth in the previous five

years.

The request for 1987 contains a slight shift in the composition of

budget authority. From 1980 through 1986, the budget became more heavily

weighted towards investment, with the procurement accounts growing the

most—from about 24 percent to almost 32 percent of the defense budget.

All but two major categories of accounts (military personnel and research,

development, testing and evaluation—RDT&E) showed real declines in

1986, but procurement is the only major category that would decline in real

terms in 1987. Operation and maintenance (O&M) and RDT&E receive by

far the largest increases. The request for O&M exceeds the CBO baseline

by $9.0 billion and the RDT&E request is $7.5 billion over the baseline.

Procurement's share of the request falls from 32 percent of the defense

budget to about 30 percent in 1987, while the shares for O&M and RDT&E
DEFENSE BUDGET ESTIMATES

The CBO and Administration estimates for the defense budget differ in two basic

ways. First, CBO and the Administration use different concepts for defining

the defense baseline. The Administration's defense baseline, or current services

projections, for 1987 and 1988 are the same as those of the 1986 Congressional

budget resolution. For 1989 through 1991, the estimates reflect the budget

resolution policy of 3 percent annual real growth in budget authority. The CBO

defense baseline, on the other hand, assumes no real growth in program level

throughout the five-year projection period. The two different defense baselines

are as follows:

(in billions of dollars)

1987 1988 1989 1990 1991

CBO Baseline

Budget Authority 300.9 314.7 329.5 345.0 361.5

Outlays 284.0 296.4 310.9 326.9 343.9

Administration Current Services

Budget Authority 323.4 346.8 371.5 397.2 423.5

Outlays 284.9 303.7 328.6 354.1 379.4

The second major difference in the defense budget estimates results from

the use of different technical methods for estimating the outlays that would

result from the Administration's budget proposals. As explained more fully

in this chapter and in Appendix C, CBO uses historical spending rates to estimate

outlays that will occur each fiscal year from given levels of budget authority

provided in appropriation bills. The Administration also uses the same

methodology, but believes that historical spending patterns will not hold for

the future. The different outlay estimates for the Administration's 1987-1990

defense budget authority proposals are shown below (in billions of dollars).

(in billions of dollars)

1987 1988 1989 1990 1991

Outlays Resulting from

Administration Budget

Authority Proposals

CBO 296.7 316.6 336.1 356.5 376.9

Administration 282.2 299.1 322.3 344.8 366.3

23

WHIT
Ill III Illillllllilll

TABLE III-l. MAJOR SPENDING CHANGES PROPOSED IN ADMINISTRATION'S 1987 BUDGET FOR FUNCTION 050: NATIONAL

DEFENSE (By fiscal year, in billions of dollars)

Five-Year

Changes 1987 1988 1989 1990 1991 Totals

CBO Baseline

Budget Authority

300.9 314.7 329.5 345.0 361.5 1,651.6

Proposed Changes

Military personnel

Operation &

maintenance

Procurement

RDT&E a/

Military construction

Other-DoD

Subtotal

Other defense

Total Changes

President's 1987 Budget

as Reestimated by CBO

CBO Baseline

Proposed Changes

Military personnel

Operation &

maintenance

Procurement

RDT&E a/

Military construction

Other-DoD

Subtotal

Other Defense

Total Changes

President's 1987 Budget

as Reestimated by CBO

1.5

9.0

-0.9

7.5

1.3

0.2

18.5

0.8

19.4

320.2

284.0

1.2

6.4

1.2

3.5

0.1

0.2

12.6

0.1

12.7

296.7

2.3

12.0

1.7

6.5

3.4

-0.2

25.6

1.0

26.6

341.3

296.4

2.2

10.6

1.3

5.9

0.9

-0.9

19.9

0.3

20.2

316.6

2.5

16.3

7.2

4.4

3.1

-1.4

32.2

1.2

33.4

362.9

Outlays

310.9

2.4

14.5

2.5

5.1

1.9

-1.9

24.6

0.5

25.1

336.1

2.7

20.8

9.7

3.6

4.3

-2.9

38.1

1.2

39.3

384.3

326.9

2.6

18.7

4.1

4.1

2.7

-3.3

29.0

0.6

29.6

356.5

2.6

22.1

12.3

6.9

3.9

-5.0

42.6

1.2

43.8

405.3

343.9

2.5

20.8

5.2

5.6

3.5

-5.3

32.3

0.7

32.9

376.9

11.5

80.2

29.9

28.9

15.9

-9.4

157.1

5.4

162.5

1,814.0

1,562.1

11.0

71.0

14.3

24.2

9.1

-11.2

118.4

2.2

120.6

1,682.8

SOURCE: Congressional Budget Office.

a. Research, development, test, and evaluation.

24
rise slightly from 26 percent to 27 percent and from 11.6 percent to 13.1

percent, respectively.

The relative shares continue to change after 1987. By 1991, RDT&E's

share of budget authority returns to its 1986 value— about 11.5 percent.

Procurement's share rises to about 31 percent and O&M's share is one

percentage point higher than 1987 at 28 percent. As Table III-l shows, all

major accounts would experience real growth after 1987, so the change in

relative shares reflects differences in the rates of growth rather than actual

reductions in some accounts and increases in others. (The only reductions

from the CBO baseline after 1987 occur because of lower pay raise assumptions in the Administration's budget.) (See box on inflation.)

Outlays under the Administration's budget, as estimated by CBO,

increase $27 billion in 1987 over the level estimated for 1986 and exceed

CBO baseline projections by $13 billion, as shown in Table III-l. Compared

with 1986 outlays—estimated to be about $269.5 billion — outlays would grow

by about $9 billion as the result of past increases in budget authority (and

assuming that budget authority in 1987 was held at the 1986 post-sequestration level). Covering the costs of inflation would add about $6 billion.

The final $13 billion of outlay growth estimated for 1987 would stem from

the real growth in budget authority. These differences are shown in Figure

III-l.

Figure 111-1.

Sources of Outlay Growth in Defense Outlays, Fiscal Years 1 987-1 991

I^U

100

80

60

40

20

n

Real Growth

pllll Inflation

-

-

W Other

:

:

:

:

:

:i3'x>:

:SSS

§xli

22 '.

16

§^§§

28

29

§§§§§S

.'.-. 34. •.-.- .

§§8$$8

•40

58

•

$$§vl§^

~~

-

-

1987 1988

SOURCE: Congressional Budget Office

1989

Fiscal Years

1990 1991

25
INFLATION AND REAL GROWTH IN THE DEFENSE BUDGET

The annual defense budget request is for new budget authority and includes funds to

cover anticipated inflation. The budget authority represents the right to enter into

contracts to buy goods and services. Since these contracts--in particular those for major

weapons such as ships, tanks, and aircraft-can extend over several years, budget

authority to fund the estimated costs of inflation must also extend over the life of each

contract. Thus, a substantial part of the DoD budget request represents future price

changes.

Both CBO and the Administration base their estimates for defense price changes

on their overall economic forecasts. The Administration uses deflators for pay, fuel,

and other purchases. In recent years, the Administration has used a special deflator

for major commodities that assumed 30 percent faster price growth for them than for

the general economy, but the 1987 budget excludes this premium. The following table

shows CBO and Administration outlay estimates for all defense purchases less

compensation. The differences are very close to the differences between CBO and

Administration estimates of the GNP deflator (see Chapter I).

COMPARISON OF CBO AND ADMINISTRATION INFLATION

ASSUMPTIONS FOR DEFENSE PURCHASES

(Percent change, purchase deflator for outlays)

1986 1987 1988 1989 1990 1991

CBO 3.1 3.1 3.8 4.1 4.1 4.1

Administration 2.7 3.8 3.7 3.3 2.9 2.3

Pay raises pose a unique problem in that they are treated as administered price

changes. Real growth in military personnel is determined by increases in strengths;

in the short term, pay raises do not affect strength and quality appreciably and are a

suitable proxy for price changes. In the long run, differences in pay between federal

and private employees can make a difference in measuring real growth because quantity

and quality have timo to change.

Concern about aggregate real growth focuses on defense budget authority, however,

and requires use of budget authority deflators rather than outlay deflators. (The latter

are more relevant for comparisons with other price indexes.) Budget authority deflators

are a weighted average of outlay deflators reflecting price changes over the period when

funds are spent. Using the Administration's pay assumptions and the individual

forecasts of CBO and the Administration for other defense purchases, real growth in

budget authority averages about 3 percent from 1987 through 1991.

Measuring real growth in 1987 depends on whether the year-to-year change in new

budget authority is considered or whether the focus is on year-to-year changes in program

levels. On the basis of actual 1986 budget authority after sequestration—about $286.8

billion-the President's request for 1987 new budget authority reflects about 8 percent

real growth. In order to pay for certain 1986 military personnel costs however, the

Congress made unobligated balances available in lieu of new budget authority. This

raised the real program level in 1986 by about $5 billion above what it would be under

new budget authority. If the higher program level is used as the base, then the

President's 1987 budget authority request represents about 6 percent real growth.

26
The future pattern of outlay growth under the Administration's budget

proposals shows that the largest growth is attributable to meeting the costs

of inflation. Over the five years, outlays would grow by $336 billion over

the 1986 level. About 45 percent of the increase, or about $152 billion,

would result from expected price growth. Another 40 percent, or $137

billion, would represent real growth in budget authority and the remaining

15 percent, or $47 billion, would stem from past increases in budget

authority.

DEFENSE OUTLAY ESTIMATES

Using the Administration's budget authority request and historical spendout

rates, CBO estimates that outlays for the national defense function will be

significantly higher than the estimates contained in the President's budget.

Table III-2 shows that the CBO estimates for some program areas are lower

than the Administration's, but that higher estimates for operation and

maintenance, procurement, and research and development dominate the net

result. The estimating differences follow the same pattern in the out-years,

with the major discrepancies concentrated in the same three categories.

The net difference rises from $14.5 billion in 1986 to $17.5 billion in 1988

and then declines gradually to $10.6 billion in 1991, which is still a very

large estimating difference by historical standards.

Comparison with Past Estimating Differences

CBO and the Administration have never had estimating differences of this

magnitude before. The 1986 difference—$14.5 billion—is more than double

the greatest difference that occurred before this year in terms of current

dollars; after accounting for program growth, the difference between the

two estimates is only 50 percent greater. Table III-3 shows that before

1986 the CBO and Administration "budget year" estimates usually have been

very close and that CBO's estimate is as likely to be lower as higher than

the Administration's; the two estimates varied widely—by $6.5 billion—only

for the Administration's first (1982) budget. I/ Table III-3 shows 30 data

points for estimating differences for the 1982-1986 budget requests. Only

two are greater than $10 billion and they are two to four years after the

budget year. For budget year 1987, all but the current year estimates (five

of six) are greater than $10 billion.

1. The term budget year refers to the upcoming fiscal year budget. The

term current year refers to the fiscal year in progress.

27

ruin
Relevance of Historical Outlay Rates

In the past, both CBO and the Administration have employed historical

outlay rates to estimate outlays from given budget authority. The Administration published its outlay rates based on past spending patterns in the

Defense Department's Financial Summary Tables. This year, CBO continues

this approach while the Administration is .deviating from it. Using the

Administration's historical outlay rates for O&M, procurement, and RDT&E,

CBO computed outlays $14.3 billion higher than the President's budget

estimates for 1987 and $61.6 billion higher for the 1987-1991 period. CBO's

own estimates for these accounts are also $14.3 billion higher for 1987 and

$64.2 billion higher for the five years. If first-year outlay rates and outlay

TABLE III-2. CBO OUTLAY REESTIMATES OF PRESIDENT'S 1987

REQUEST FOR FUNCTION 050: NATIONAL DEFENSE

(By fiscal year, in billions of dollars)

1987 1988 1989 1990 1991

President's Budget 282.2

Reestimates

Military personnel -0.2

O&M 0.7

Procurement 9.6

RDT&E 4.1

Military construction 0.6

Family housing 0.5

Revolving funds -0.6

Pay raises -0.2

Other -0.1

Subtotal 14.5

President's Budget

as Reestimated

by CBO 296.7

299.1

-0.1

6.3

8.1

2.6

0.7

0.4

-0.3

-0.2

-0.1

17.5

316.6

322.3

-0.1

5.8

6.1

1.3

0.8

0.5

-0.3

-0.3

-0.1

13.8

336.1

344.8 366.3

.1

.1

-0.1

4.6

6,

0.

0.9

0.6

-0.1

-0.3

-0.1

11.7

356.5

10.6

376.9

SOURCE: Congressional Budget Office.

28
rates and outlays from prior year appropriations used by the Administration

in its 1986 budget request are employed, a similar analysis shows 1987

outlays in the three major accounts to be $15.1 billion higher than the

budget estimates.

In short, there is little disagreement between CBO and the Administration over outlays levels under historical spending patterns or outlay

rates. Outlay estimating, nevertheless, is an imprecise process that uses

both historical data and analytical judgments. In the past few years,

defense outlays have been underestimated as well as overestimated by

varying amounts. For example, applying both CBO and Administration

spending rate assumptions to the levels of budget authority provided in

previous years, estimated outlays are within 2 percent to 4 percent of actual

outlays for the 1980-1985 period for the operations and maintenance,

procurement, and research and development categories. (See details in

Appendix C.) In contrast, the estimating differences between CBO and the

Administration for these categories for the 1987-1991 period range from

4 percent to 8 percent per year, or double the historical experience.

TABLE III-3. DIFFERENCES IN OUTLAY ESTIMATES OF PRESIDENT'S

1987 BUDGET REQUEST (CBO'S ESTIMATES LESS

ADMINISTRATION'S ESTIMATES) (By fiscal year,

in billions of dollars)

Budget Current Budget

Year Year Year (BY) BY+1 BY+2 BY+3 BY+4

1982 0.7 6.5 4.7 11.4 -0.6 a/

1983 3.3 1.8 1.8 2.0 3.7 9.3

1984 -0.5 -0.6 -3.0 -1.5 3.3 4.2

1985 -2.9 1.5 4.7 3.9 7.7 10.2

1986 -1.2 -1.3 -1.9 0.1 4.2 6.1

1987 3.7 14.5 17.5 13.8 11.7 10.6

SOURCE: Congressional Budget Office

a. Less than $500 million.

29
Other Factors Affecting Outlays

The Administration's outlay estimates for 1987 reflect the levels contained

in the Congressional budget resolution of last August, as adjusted for new

pay and inflation assumptions. It should be noted, however, that the budget

resolution targets for defense programs were derived from Senate budget

authority figures and the House outlay estimates, with no program detail.

The Senate-passed resolution had an outlay target for 1987 that was $7

billion higher than the final resolution—an amount equal to about half of the

CBO and Administration estimating difference. Also, the Senate resolution

anticipated a much slower spending program than the Administration is

proposing. The Senate resolution assumed the greatest increases in procurement outlays which spend out slowly while the Administration proposes

increases in the fast spending categories of operation and maintenance and

RDT&E. Thus, program composition can account for much of the remaining

estimation difference between the CBO and Administration outlay estimates

for 1987.

The Administration also justifies its budget estimates on the basis of

policy changes and other considerations that it believes will result in slower

spending than that implied by historical outlay rates. The main policy

changes that, in its judgement, slow outlays are:

o Reduced progress payments to defense contractors—a policy decision that went into effect during fiscal year 1985.

o Suspensions of contractors and the introduction of tougher audits

to reduce costs.

o The large amount of funding-about $24 billion—being withheld

from obligation because of uncertainty over its availability; these

funds are associated with the 1986 sequestration, potential transfers, and limits on appropriations in excess of authorizations.

o Uncertainty and hesitation on the part of contracting and finance

officers who do not know the ultimate availability of funding as

the result of possible future sequestrations.

CBO believes that these factors will affect outlays by only a small

amount, if at all. What impact they might have should be temporary and

would not affect outlays beyond a few months. For example, the Department of Defense (DoD) decided to slow progress payments during fiscal year

30
1985; any impact, however, would be limited to 1986 and 1987 because

outlay savings in later years would be offset mostly by payments that were

withheld earlier. In other words, this policy affects only the timing of

outlays and, over time, the savings vanish. Similarly, the outlay effects of

temporary suspensions of contractors would affect only timing of outlays

and would be small in the long run .

Withholding funds does not affect outlay rates per se; rather it affects

the base against which the outlay rates are multiplied. CBO's estimates

reflect the outlay savings from the 1986 sequestration, the transfers to

military personnel, and other factors leading to ultimate expenditures

2 percent to 3 percent less than the full appropriations.

If these policies and considerations were going to affect outlays, their

effect should already be observed. Since last July, however, defense outlays

have speeded up and have been 14 percent above previous year levels. This

rate of spending is expected to slow considerably during the next few

months as a result of the 1986 appropriation and sequestration actions, but

CBO does not expect it to slow down as much as implied by the Administration's estimates. In CBO's view, the policy and other factors that the

Administration assumes will slow spending will have little or no additional

effect on spending rates; those that do have impact are reflected in CBO's

estimates as well. CBO believes that historical spending patterns are still

relevant and should continue to be used for outlay estimates.

Finally, the Administration has argued that it can manage its outlays

to achieve its budget estimates. CBO believes this would be possible,

though difficult. A fundamental difficulty centers on the decentralized

nature of the defense finance and accounting system. Managing outlays

would require an intricate set of controls and procedures that do not exist

now and would take some time to develop.

Another difficulty stems from the fact that about a third of all

defense outlays result from prior-year appropriations and contract commitments. Controlling these outlays would be difficult because, as contractors

make deliveries, they expect to be paid. In those instances where delays are

legally possible, they may induce contractors to raise future contract bids,

thereby raising the cost of procurement.

Finally, one way to manage outlays is to slow obligations, yet this

avenue has certain problems that stem from conflicting objectives of

31

Nil 111 111 Ml
keeping outlays down and, at the same time, using appropriations to serve

their purpose of improving national defense. Further, the ability to slow

obligations is constrained by time limits on the availability of funding after

which unobligated funds lapse or are no longer available. To the extent that

obligations were slowed, inefficiencies and cost growth might result, making

the slowdown undesirable even if it were possible.

MAJOR DEFENSE PROPOSALS

The defense budget serves the national security objectives of the United

States by supporting a variety of land, air, and naval forces. Under the

Administration's budget, most major force categories would increase in

1987—especially the strategic forces in which the number of bomber

aircraft would increase about 10 percent and the number of sea-based

intercontinental ballistic missiles would increase about 6.5 percent. In addition to greater numbers, forces would be modernized; for example, M-60

tanks now in the Army's inventory would be replaced with M-l tanks. Also,

increases in manpower might make some units more effective even though

the number of units was unchanged.

Table III-4 examines the proposed funding for the defense force

structure in terms of the appropriation categories used by the Congress. The

categories of military personnel and O&M fund the operations and readiness

of currently deployed forces. Military personnel pays for those people on

active and reserve duty and O&M finances a wide range of logistical and

personnel support functions. The procurement accounts contribute to force

operations and readiness with funding for spare parts.

Table III-4 presents the sources of the 6 percent real growth proposed

by the Administration. For example, it shows that the military personnel

account would grow in real terms in 1987 by 2 percent—the same rate of

increase as in 1986, but a slightly lower rate than annual increases from

1980 through 1985. O&M, on the other hand, would recover from the real

decline in 1986 by growing at a rate of about 12 percent—a rate much higher

than the average rate of about 6 percent achieved for the 1980-1985 period.

Though not shown in the table, funding for procurement of spare and repair

parts would decline about 1 percent in real terms between 1986 and 1987;

these funds fell about 20 percent in real terms between 1985 and 1986, but

they had grown in real terms by an annual average rate of about 24 percent

for the 1980-1985 period.

3Z
The force growth projected for 1987 results from past decisions to

procure ships, aircraft, and vehicles. The improvements in quality of

weapons results from past decisions to pursue technological initiatives with

RDT&E funding. These accounts grew rapidly from 1980 through 1985 and,

TABLE III-4. REAL GROWTH IN DEFENSE BUDGET AUTHORITY, BY

APPROPRIATION CATEGORIES (By fiscal year,

in billions of dollars and percent change)

Real Growth

Category

1987

Request

(Dollars)

1980-85

Average

(Percent)

1985-1986 1986-1987

(Percent) Percent Dollars

Military

Personnel

Operation and

Maintenance

Procurement

RDT&E

Military

Construction

Family Housing

Other-DoD

Subtotal-DoD

Other Defense

Total, National

Defense

76.8

86.3

95.9

42.0

6.8

3.4

0.3

311.5

8.7

320.2

3

6

15

12

14

8

a/

9

II

9

2

-6

-2

7

-7

-5

a/

-3

-4

-3

2

12

-1

22

24

17

a/

6

9

6

1.5

9.0

-0.9

7.5

1.3

0.5

-0.4

18.5

0.8

19.4

SOURCE: Compiled by Congressional Budget Office based on data supplied

by the Department of Defense.

a. Because this category includes offsetting receipts and other

miscellaneous accounts, real growth in percentage terms is misleading.

33

1HIH
ill PI III ill III I

while procurement suffered a real decline in 1986, RDT&E grew about 7

percent in real terms. Similarly, procurement would decline in real terms in

1987 by about 1 percent and RDT&E would grow about 22 percent.

The following sections of this chapter discuss the composition of the

Administration's defense budget in more detail, starting with the readiness

accounts—military personnel and O&M—and concluding with the investment

accounts—procurement and RDT&E.

Military Personnel

The military personnel appropriation funds the pay and allowances of

members of active and reserve forces. The Administration has requested

$6.5 billion more in 1987 than was appropriated in 1986 for this account, the

1987 figure, however is only $1.5 billion more than the CBO baseline—for a

total of $74.2 billion. The request calls for increasing both active and

reserve (including the National Guard) strengths by 2.0 percent, or 65,000

people, by the end of 1987; this is the same rate of increase as the 1980-

1985 average. Also, the request would raise certain components of military

pay and allowances.

Table III-5 shows the average percent growth in strength levels for

three periods: from 1980 through 1985, from 1985 to 1986, and from 1986 to

1987. Since 1980, active end strength—that is, the number at the end of the

fiscal year—has increased by an average of 20,000 people, or 1.0 percent,

per year. The growth in 1987 would be less—14,000 people, or 0.6 percent.

Of the four services, the Army has had the smallest amount of growth over

the 1980-1985 period. In 1987 the Army requests only 100 more active

service personnel; however, as discussed below, Army Reserve components

are growing. The largest active force growth would occur in the Navy, with

the goal of manning a larger fleet. Of the 11,400 additional personnel

requested by the Navy, 10,000 would be assigned to new ships and squadrons.

The Marine Corps has requested the second largest growth in active service

personnel as it continues to improve readiness, mobility, and fire power,

highlighted by the addition of a target acquisition battery to its artillery

forces. The Air Force increase would be relatively small, providing for new

and revised force structure and modernization.

The 1987 request would raise end strengths in the reserve components

by 51,263, or 4.5 percent, over 1986; this is slightly lower than the average

increase since 1980. Army Reserve and National Guard strengths would

increase by a combined 29,000 people (or 3.8 percent), mainly for combat

support and combat service support. This increase would enable the Army

34
Reserve to reach its goal for 1987 of having 90 percent of its perceived

requirement and allow the National Guard to build toward its 1991 strength

goal of 492,100 people. Of the 29,000 additional people, 6,400 would be fulltime personnel. The Navy Reserve would grow by 13,547, mainly for

increased manning of Naval Reserve ships and for greater tactical, mobility,

and support activities. The Marine Corps Reserve would grow by 1,381

people who would assume additional duties and missions. The Air Force

Reserve and Air National Guard would increase by 7,441 people, mainly to

support increased force structure and modernization.

CBO estimates the cost of the strength increases at $330 million for

active forces and $570 million for the reserves. The Administration also is

requesting $2.9 billion for retired pay accrual and $1.9 billion for the cost of

TABLE III-5. INCREASES MILITARY STRENGTH LEVELS (By fiscal year,

in thousands of people at year end and percents)

Percent Increase

1987 1980-1985

Service Branch Request Average 1985-1986 1986-1987

Army

Navy

Marine Corps

Air Force

Subtotal

Reserves

Total

781

593

200

607

2,181

1,186

3,367

§/

1.6

1.0

1.5

1.0

4.8

2.2

§/

1.9

0.4

0.8

0.8

4.3

1.9

§/

2.0

0.8

0.1

0.6

4.5

2.0

SOURCE: Compiled by Congressional Budget Office from data supplied by

the Department of Defense.

a. Less than 0.5 percent.

35

fill I IT
the pay raise in calendar year 1986, neither of which were funded in 1986

with new budget authority because unobligated balances from procurement

and RDT&E were made available instead.

Other significant increases include $80 million for permanent change

of station allowances, $70 million for enlisted subsistence, and $170 million

for reenlistment bonuses. The budget contains an allowance—$2.6 billion—in

addition to the requested budget authority, for a 4 percent military pay

raise effective October 1, 1986. The CBO baseline assumes a 3.3 percent

military pay raise.

Operation and Maintenance

The O&M accounts fund a wide range of activities—some directly related to

force operations, such as training exercises, weapons maintenance, supplies,

and other general logistical support. O&M also funds personnel support

activities—such as training of individual members (apart from training in

units), medical care, and military base or. community services—which are

only indirectly related to force readiness. Overall, O&M has a much higher

rate of real growth—about 12 percent—in 1987 than the 6 percent average

from 1980 through 1985, allowing some recovery from the 6 percent real

decline experienced in 1986. As shown in Table HI-6, all individual activities

of the O&M account follow the overall pattern of real growth, except airlift

and sealift—the program for moving forces over long distances.

In dollar terms, the largest real growth—about $2 billion—would go to

general purpose forces. These include active duty conventional forcesarmy divisions, aircraft carrier battle groups, and tactical air wings—along

with theater nuclear forces like Pershing missile batteries. In contrast,

strategic forces embrace intercontinental nuclear forces such as the Minuteman and MX missiles, the Trident submarine and missiles, B-52 and B-l

bombers, and other support forces. Strategic forces would grow by about

$1.0 billion in real terms under the President's budget. The increases in

these two major force programs would fund about 200,000 hours of flying

time for Army and Air Force units; support additional forces, like a new

Trident submarine and several B-l aircraft; and pay for force modernization, for example, the M-l tank and the Apache attack helicopter.

Reserve force funding would grow by over 10 percent in 1987. These

forces would receive the additional money for training and weapons support.

Flying time for aviation units and time at sea for the naval reserve both

would increase. Backlogs in clothing and equipment supplies would be

reduced by the budget request. Intelligence and communications programs

36
would experience real growth of about 20 percent in 1987. These funds

would be used to improve integration of strategic communications and to

improve overall communications reliability.

The remaining activities funded in the O&M account serve centralized

support functions. Central supply and maintenance activities include major

overhauls of weapons which would receive much of the real growth in this

TABLE III-6. REAL GROWTH IN OPERATION AND MAINTENANCE

(By fiscal year, in billions of dollars and percents)

Real Growth

Activity

Strategic Forces

General Purposes

Forces

Intelligence and

Com munications

Airlift and Sealif t

Reserve Forces

Central Supply and

Maintenance

Training, Medical

and other

Administration

and Associated

Support of

other Nations

Total

1987

Request

(Dollars)

6.1

26.3

8.7

1.8

6.5

20.0

12.7

3.4

0.2

85.8

1980-85

Average

(Percent)

3

8

12

13

6

3

8

9

10

6

1985-86

(Percent)

-9

-5

-1

-7

«.O

-9

-5

-9

-13

-6

1986-1987

Percent

19

9

20

-1

12

9

15

14

45

12

Dollars

1.0

2.2

1.4

0.0

0.7

1.6

1.6

0.4

0.1

9.0

SOURCE: Compiled by Congressional Budget Office, based on data supplied

by the Department of Defense.

37
category. Two additional overhauls of strategic submarines are planned as

well as reductions in maintenance backlogs. Centralized training, medical

care, and administration funding would increase by about 14 percent for

combined real growth of about $2 billion. O&M provides most of the funding

for civilian employees of the Defense Department. The budget allows for a

3.0 percent civilian pay raise effective January 1, 1987, compared with the

CBO baseline assumption of 3.3 percent effective October 1, 1986. Also,

the Administration's allowance covers the full cost of the pay raise in

defense compared with 50 percent in the request for nondefense agencies.

Procurement

The procurement account funds the purchase of weapons and other equipment. The weapons purchased in this account include new ships, aircraft,

missiles, and combat vehicles like tanks. The procurement account also

funds major modification or weapons improvement programs as well as spare

and repair parts. Other purchases include trucks, bridging equipment,

radios, and satellites. As shown in Table III-7, the procurement account is

the only major funding category for which the 1987 budget request contains

a real decline in budget authority—about 1 percent. In 1986 it experienced

real decline of about 2 percent after growing at a 15 percent average annual

rate in the preceding five years.

Support Equipment. The largest single activity within the procurement

account for 1987 is support and other procurement. Its large absolute and

relative size stems from the fact that "other" equipment is itself a large

category and that all major weapons systems require general and sometimes

specialized equipment for maintenance and test purposes. While not a part

of actual weapon systems, these items are important parts of all weapons

programs. In real terms, this category was unchanged in 1986 and would

grow about 16 percent in 1987—the same average annual rate sustained in

1980-1985 period.

Aircraft. The next largest single category, aircraft procurement, would see

real decline for the second consecutive year—a drop of about 22 percent in

1987 following a decline of about 9 percent in 1986. Aircraft procurement

grew at an average annual rate of about 18 percent from 1980 through 1985.

In terms of the numbers of aircraft, the Administration's budget calls for

buying 870 aircraft in 1987 compared with about 889 in 1986—a decline of

only 2 percent.

38
TABLE III-7. REAL GROWTH IN PROCUREMENT BUDGET AUTHORITY

(By fiscal year, in billions of dollars and percents)

Real Growth §/

Activity

1987

Request

(Dollars)

1980-85

Average

(Percent)

1985-1986

(Percent)

1986-1987

Percent Dollars

Support and Other

Equipment 22.4

Aircraft 17.5

Shipbuilding and

Conversion 11.1

Other Missiles,

Torpedoes, and

Weapons 9.9

Communications and

Electronic Equipment 9.2

Spares and Repair

Parts b/ 7.0

Vehicles, All

Types c/ 5.9

Modifications 5.5

Ammunition, Munitions

and Related

16

18

18

13

24

20

9

-0

-9

-8

7

15

-19

7

-6

16

-22

6

20

-1

-24

-7

3.1

-5.0

0.4

0.6

1.5

-0.1

-1.9

-0.4

Equipment

Ballistic Missiles d/

Total

4.4

2.9

95.9

16

-2

15

-6

91

— O

6

27

-1

0.3

0.6

-0.9

SOURCE: Compiled by Congressional Budget Office from data supplied by

the Department of Defense.

a. Real growth computed using CBO's economic assumptions and the

President's pay-raise assumptions.

b. Spares and repair parts for Navy weapon procurement, Navy "other"

procurement, and Marine Corps procurement were not broken out in

the DoD justification materials until 1986.

c. Includes Army weapons and tracked combat vehicles and purchases of

National Guard and Reserve equipment, but excludes all Navy vehicles

which are included in Support and Other Equipment.

d. Fiscal year 1985 does not include $1.5 billion of prior-year funds for

the purchase of 21 MX missiles; if these funds were included in the

analysis, the five-year average for ballistic missiles would be 16.1

percent and the growth between 1985 and 1986 would be -18.0

percent.

39

nun IT
The budget shows a greater decline in costs than in aircraft procured

for reasons that are not entirely clear at this time. The largest declines for

individual aircraft occur for miscellaneous Army helicopters and Navy

aircraft, the Air Force's KC-10 aerial refueling tankers, and the B-l

bomber (48 in 1986 to zero in 1987). The Air Force would also buy a cheaper

mix of aircraft in that 120 of the 216 requested F-16s would be a stripped

down variant. Another contributing factor to the relatively greater decline

in costs might be lower unit costs through repricing and other factors.

Shipbuilding. The Administration's request of $11 billion for shipbuilding and

conversion represents 4 percent real growth, slightly below the 6 percent

average annual rate for the 1980-1985 period Despite the funding increase,

three fewer ships would be purchased in 1987 than in 1986 (24 versus 27).

This would occur because the 1987 request contains a more expensive mix of

ships—the additional cost of one more major warship and auxiliary ship more

than offsets the savings from buying three fewer amphibious ships and two

fewer mine warfare and patrol ships.

Missiles. Funding for nonballistic missiles, torpedoes, and other weapons

would continue to increase in real terms with growth of about 6 percent in

1987, compared with 7 percent in 1986 and a 18 percent annual average for

1980 through 1985. The many weapons funded in this area are not easily

summarized, but examining the Administration's plan for tactical missile

procurement reveals that the number purchased in 1987 would be about

4 percent lower than that for 1986. The program mix can influence the

result, but certain missile programs show large increases in unit costs. For

example, the rolling airframe missile has a unit cost four times greater than

projected in the Administration's budget of a year ago. Similarly, compared

with the Administration's 1986 projections, the advanced medium-range,

air-to-air missile, AMRAAM, has unit costs 86 percent higher; the Chaparral

missile is 75 percent more expensive; the Sidearm missile is 41 percent

higher; a Phoenix missile costs 33 percent more; and the Harpoon is

21 percent more costly.

Communications Equipment. The Administration's budget proposes to

purchase about $9 billion worth of communications and electronic equipment, ranging from radios for tactical forces to satellites for strategic

communications. The request contains real growth of about 20 percent in

1987, which is an increase from the 15 percent rate in 1986 and the 13

percent annual average for the 1980-1985 period.

40
Vehicles. Funding for procurement of vehicles—primarily for the Army and

Marine Corps—would decline in real terms by about 24 percent in 1987. In

contrast, this budget activity averaged 20 percent annual real growth from

1980 through 1985 and 7 percent in 1986. This category buys all kinds of

vehicles from trucks and other wheeled support vehicles to tanks and other

tracked combat vehicles. Like the nonballistic missile category, the items

funded in this category are not easily summarized. Focusing on major

combat vehicles, the number of vehicles procured would fall from about

2,519 in 1986 to about 2,151 in 1987. The budget request would buy

21 percent, or 154 more, Bradley Fighting Vehicles in 1987, for a total of

870. Also, the budget contains funding for twice as many mobile command

posts (300 in 1987 compared with 144 in 1986) and slightly more vehicles to

carry artillery shells. Two systems that received funding in 1986 would not

be funded in 1987—the armored personnel carrier, which is being replaced

by the Bradley, and a recovery vehicle designed to retrieve other vehicles

damaged in battle.

Modifications. The budget for weapons modification would decline in real

terms for the second consecutive year; for the five years preceding 1986, it

had grown on average by about 9 percent annually. Modifications of major

weapons result in improvements ranging from small programs aimed at the

reliability or maintainability of parts of a weapon to large-scale programs

that add new capabilities to existing weapons or extend their useful lives.

The request for 1987 contains a real decrease of about 7 percent—the result

of a decrease in planned modification to Navy antisubmarine warfare

aircraft and Army Apache attack helicopters. This decrease is slightly

offset by planned increases in the Air Force for modifications for the F-15,

KC-135, B-1B and C-5 aircraft.

Ammunition. Ammunition procurement, like spare parts procurement, is

sometimes considered to be a readiness activity. The 1987 request would

increase ammunition procurement 6 percent over the 1986 level; it fell

6 percent in real terms between 1985 and 1986. For the five years before

1986, this activity had grown about 16 percent each year.

Ballistic Missies. Procurement of ballistic missiles in 1987 would total

about $2.9 billion—the least amount shown in Table III-7—for a real increase

of about 27 percent. Two programs account for this growth, namely, the

Trident II missile, of which the first 21 missiles is requested, and the MX,

with a request for 21 missiles, the same number as funded in 1985, but 9

more than were funded in 1986. Both the Trident II and the MX would cost

more than the Administration estimated a year ago. The 26 percent

41

TO Mil 1P1T
increase in unit costs for the MX stems partly from the lower number

bought in 1986 and previously planned for 1987. Similarly, although this is

the first procurement request for the Trident II, the Administration had

planned to request 27 missiles in 1987 instead of 21.

In sum, the procurement budget for 1987 shows real growth in some

activities and declines in others. The program contains many changes from

the plan of a year ago; procurement is begun.for some systems and ended for

others. Overall, unit costs are about 1 percent less than the Administration

projected last year, although a few systems—like the rolling airframe

missile, AMRAAM, the Chaparral missile, and the Sidearm missile—show

unusually high growth in unit costs.

Research, Development, Test, and Evaluation

RDT&E funding is usually the first commitment to a weapons acquisition

program and it continues through the early stages of production. The

Administration is seeking funds to continue the increases in RDT&E funding

that have averaged 12 percent annually in real terms since 1980. RDT&E

was one of only two major accounts to avert real decline in 1986—growing

about 7 percent—and it would grow another 22 percent in 1987.

All aspects of the RDT&E account have significant growth in the 1987

request as shown in Table III-8. The technology base, in which pure

research is conducted on subjects not necessarily restricted to weapons,

would receive about a 7 percent increase. Advanced technology development would grow almost 60 percent, largely because of a proposed $2 billion

increase in the Strategic Defense Initiative (SDI). Whereas programs like SDI

take emerging technologies into the early stages of weapons acquisition, the

request for RDT&E calls for a 21 percent real increase in strategic

programs that have already passed these early developmental stages. The

increase in strategic programs reflects a $1.4 billion commitment to

research on a small ICBM—the so-called Midgetman—and $0.4 billion for

research into how to base another 50 MX missiles.

The 20 percent real increase in tactical programs for 1987 results

from a number of programs, the larger of which include a new attack

submarine (the SSN-21) which would receive $0.3 billion; the C-17 cargo

aircraft ($0.6 billion); and a tilt rotor aircraft ($0.4 billion). Intelligence and

communications and defense-wide programs (that is, programs with many

and diverse applications) both would increase by more than 10 percent in

real terms under the Administration's budget.

42
Other Accounts

Military construction and family housing funds support both weapons and

personnel programs. The Administration's request for military construction

would fund many projects within the United States and overseas, including

facilities for a new Army division at Fort Drum, New York; a Trident

submarine base at Kings Bay, Georgia; and facilities related to deployment

of other weapons, such as the B-l bomber and the ground-launched cruise

missile. The family housing program provides living accommodations for

service members and their families, particularly in areas where private

housing is scarce. The increase in funding for family housing would allow

construction of 5,920 new housing units, operate and maintain about 400,000

other units, and lease yet another 28,000 housing units.

TABLE III-8. REAL GROWTH IN RESEARCH, DEVELOPMENT,

TEST, AND EVALUATION (By fiscal year, in billions

of dollars and percents)

Activity

Real Growth

1987 1980-85

Request Average 1985-86 1986-1987

(Dollars) (Percent) (Percent) Percent Dollars

Technology Base

Advanced Technology

Development

Strategic Programs

Tactical Programs

Intelligence and

Communications

Defense-wide Mission

Support

Total

3.6

6.6

9.4

12.7

5.1

4.6

41.9

I

28

23

5

22

8

12

3

44

-8

12

11

1

7

7

60

21

20

12

14

22

0.2

2.5

1.6

2.1

0.5

0.6

7.5

SOURCE: Compiled by Congressional Budget Office, based on data supplied

by Department of Defense.

43
am mm it

The Department of Energy (DOE) conducts research and production

programs for nuclear weapons and materials. DOE also administers programs for storing nuclear waste and for designing reactors for nuclearpowered naval vessels. The President requested a real increase of about

$800 million, or 9 percent, over the 1986 budget for these programs. The

largest real percentage increase was for weapons, materials, production, and

waste management, a 12 percent real increase.

44
CHAPTER IV

THE ADMINISTRATION'S NONDEFENSE BUDGET

The President's proposals would result in nondefense outlays totaling $713

billion in 1987, about the same as the 1986 level and $29 billion below the

CBO baseline. Social Security and net interest account for half of these

expenditures, but virtually none of the 1987 savings. Outlays for other

nondefense activities would fall below the baseline by 7 percent in 1987 and

17 percent in 1991.

Over the period 1987 through 1991, the Administration's request would

reduce nondefense spending by $309 billion below baseline levels. All but

four nondefense functions are targeted for reductions. In only three of the

four functions—International Affairs (150), General Science, Space, and

Technology (250), and General Government (800)—would spending rise

significantly above CBO baseline levels over the projection period. These

increases largely result from higher proposed spending levels for the State

Department to improve security for U.S. diplomatic missions abroad, for the

National Aeronautics and Space Administration in 1990 and 1991 for a space

station, and for the Internal Revenue Service. Outlays for the

Administration of Justice (750) would remain near baseline levels throughout

the period. Spending for these four functions would be about $11.5 billion

above the baseline from 1987 through 1991 (see Table IV-1).

Reductions in human resources programs would exceed $160 billion

over five years, accounting for more than half of the proposed nondefense

reductions. For Social Security (650), which would experience the smallest

reduction, benefit payments would be maintained at current law levels, and

only administrative costs would be reduced. Medicare, however, would be

targeted for the largest dollar reductions in any nondefense program,

accounting for one-sixth of all proposed reductions in nondefense spending.

Proposed increases in Medicare premiums and deductibles would be

combined with reductions in payments to hospitals for capital and medical

education and to physicians and other providers to reduce Medicare costs by

almost $53 billion over five years.

45
TABLE IV-1. CBO ESTIMATE OF THE ADMINISTRATION'S PROPOSALS IN

NONDEFENSE SPENDING (By fiscal year, in billions of dollars)

Increase or Decrease (-) in

Outlays Relative to CBO Baseline

Total

Budget Function 1987 1991 1987-1991

Above Baseline Over Five Years

International Affairs (150) 1.2 0.9 7.1

General Science, Space, and

Technology (250) a/ 1.1 2.8

Administration of Justice (750) 0.1 -0.1 0.1

General Government (800) 0.5 -0.2 1.5

Subtotal 1.8 1.7 11.5

Below Baseline Over Five Years

Human Resources

Education, Training, Employment,

and Social Services (500) -3.6 -10.6 -36.3

Health (550) -3.5 -7.1 -25.4

Medicare (570) -4.7 -16.7 -52.8

Income Security (600) -4.6 -10.8 -40.1

Social Security (650) 0.1 -0.4 -0.9

Veterans' Benefits and Services (700) -0.6 -2.3 -7.0

Subtotal -16.9 -47.9 -162.5

Natural and Physical Resources

and Other Government Services

Energy (270) -0.8 -2.6 -8.4

Natural Resources and Environment (300) -1.0 -3.5 -10.2

Agriculture (350) -1.3 -2.9 -10.3

Commerce and Housing Credit (370) -1.7 -4.4 -17.7

Transportation (400) -1.8 -5.9 -19.5

Community and Regional

Development (450) -1.4 -3.3 -13.6

General Purpose Fiscal Assistance (850) -4.4 -4.8 -23.6

Subtotal -12.4 -27.4 -103.3

Other

Net Interest (900)

AUowances (920)

Undistributed Offsetting Receipts (950)

Subtotal

Total

-0.2

-0.4

-0.9

-1.5

-29.0

-10.7

-4.8

-1.5

-17.0

-90.6

-24.4

-11.3

-19.4

-55.1

-309.4

a. Less than $50 million.

46
Other federal health spending would also be reduced sharply. Federal

Medicaid spending would be capped below baseline levels in 1987 and

allowed to grow only with increases in medical prices. Payments for the

Public Health Service would be reduced, as would payments for Federal

Employees Health Benefits. Finally, a means test would be applied to

veterans using the Veterans Administration hospital system. Altogether

these proposed reductions in Medicare and in other federal health care

expenditures would save $82 billion over the five years, over one-fourth of

all proposed nondef ense changes.

Income Security (600) and Education, Training, Employment, and

Social Services (500) are also targeted for large reductions—$40 billion and

$36 billion, respectively, over five years. The President's proposals for

income security would eliminate 1987 cost-of-living adjustments in civilian

and military retirement systems, further reduce civilian retirement

benefits, sharply cut rental assistance and public housing programs, and

eliminate nutritional assistance to children from families with incomes

above 185 percent of the poverty level. The largest reductions in education,

training, employment, and social service programs are proposed in student

aid and guaranteed student loans. Deep reductions are also proposed in

funding for summer youth employment, job corps, and assistance for

dislocated workers. In social service programs, the community services

block grant would be eliminated, and many programs would be funded at or

near their 1986 levels.

In programs affecting natural and physical resources and other

government services, the total dollar reduction would be about $103 billion

over five years, only two-thirds of that in the human resources programs.

The percentage reduction, however, would be much larger—24 percent,

compared with 6 percent for human resources programs. The Commerce

and Housing Credit (370) and General Purpose Fiscal Assistance (850)

functions are targeted for reductions of 83 percent and 71 percent below

baseline over five years (see Table IV-2). These reductions arise primarily

from the proposed elimination of the Small Business Administration, the

Farmers Home Administration rural housing programs, and General Revenue

Sharing. The elimination of these three programs alone is estimated to save

almost $39 billion (less about $2 billion in offsetting interest losses in

function 900).

Proposed reductions in Energy (270) and in Community and Regional

Development (450) exceed 30 percent over five years. The President's

largest cut in energy programs would occur in the Rural Electrification

Administration, with both direct and guaranteed loans eliminated by 1990.

Federal energy research and development efforts would be curtailed, and

spending for conservation programs and the Strategic Petroleum Reserve

virtually eliminated. Many community and regional development programs

are slated for elimination. The largest savings would come from eliminating

47

iwimr
TABLE IV-2. CBO ESTIMATE OF THE ADMINISTRATION'S PROPOSALS IN

NONDEFENSE SPENDING (By fiscal year, in percent differences

from the CBO baseline)

Percent Increase or Decrease (-)

in Outlays Relative to Baseline

Total

Budget Function 1987 1991 1987-1991

Above Baseline Over Five Years

International Affairs (150) 85 9

General Science, Space, and

Technology (250) a/ 11 6

Administration of Justice (750) 1 -1 a/

General Government (800) 9-4 5

Below Baseline Over Five Years

Human Resources

Education, Training, Employment,

and Social Services (500) -12 -29 -22

Health (550) -9 -14 -12

Medicare (570) -6 -14 -11

Income Security (600) -4 -7 -6

Social Security (650) a/ a/ a/

Veterans' Benefits and Services (700) -2 -8 -5

Natural and Physical Resources

and Other Government Services

Energy (270) -16 -46 -32

Natural Resources and

Environment (300) -8 -25 -15

Agriculture (350) -6 -23 -11

Commerce and Housing Credit (370) -35 -176 -83

Transportation (400) -7 -20 -14

Community and Regional

Development (450) -18 -40 -35

General Purpose Fiscal Assistance (850) -72 -69 -71

Other

Net Interest (900) a/ -7 -3

Allowances (920) -34 -45 -40

Undistributed Offsetting

Receipts (950) b/ -3 -3 -9

a. Less than 0.5 percent.

b. Offsetting receipts rise, decreasing the deficit.

48
new disaster loans under the Small Business Administration beginning in

1987, eliminating Urban Development Action Grants, and reducing funding

for community development block grants. Savings in these two functions

would total $22 billion over the 1987-1991 period.

The budget includes smaller reductions of between 11 percent and 15

percent for three other functions. The President is proposing reductions

totaling almost $20 billion in Transportation (400) by eliminating funding for

Amtrak, sharply reducing funding for mass transit, and cutting highway and

airport grants as well as maritime subsidies. Another $10 billion in savings

would be obtained in Natural Resources and Environment (300) by phasing

out the construction grants program of the Environmental Protection

Agency and by reducing spending for conservation, forestry, and other

natural resources activities. In Agriculture (350), the largest savings would

result from eliminating disaster loans and phasing out other direct loans in

the Agricultural Credit Insurance Fund. Crop insurance subsidies would be

eliminated, export credit fees increased, and funding for the Extension

Service would be sharply cut, for total savings in agriculture programs of

$10 billion over the five-year period.

The President proposes to limit pay rate increases to 3.0 percent each

year for civilian employees. However, for 1987, the budget includes only 50

percent of the funds for such an increase for nondefense agencies, thereby

requiring those agencies to reduce other activities to pay for part of the

increase. The CBO baseline assumes increases averaging over 5 percent per

year based on projected growth in private-sector pay. Primarily as a result

of these differences, the baseline spending in Allowances (920) would be

reduced almost 40 percent by the President's request.

The President's proposals would increase Undistributed Offsetting

Receipts (950) by $19 billion through 1991. The major saving would result

from the proposed sale of the government's interest in the Naval Petroleum

Reserves and five power marketing administrations. Receipts from these

sales are estimated to total nearly $15 billion, but receipts generated by

these assets would be reduced by almost $4 billion through 1991, and by

additional amounts in subsequent years.

The President's proposals for nondefense spending are discussed in

more detail, by budget function, on the following pages.

49
FUNCTION 150; INTERNATIONAL AFFAIRS

MAJOR SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 150:

INTERNATIONAL AFFAIRS (By fiscal year, outlays in billions of dollars)

Cumulative

Five-Year

Item 1987 1988 1989 1990 1991 Changes

CBO Baseline

Proposed Changes

Administration of

Foreign Affairs

Export Financing

Foreign Military

Sales Financing

Other Security

Assistance

Broadcast Services

Other Development

Assistance

Other

Total

President's 1987 Budget

as Estimated by CBO

President's 1987 Budget

CBO Reestimates

15.3

0.*

0.1

0.3

0.3

0.1

0.1

-0.1

1.2

16.5

18.6

-2.1

15.8

0.8

0.3

0.2

0.3

0.2

a/

a/

1.7

17.5

18.3

-0.7

15.8

1.0

0.3

0.3

0.2

0.2

-0.2

a/

1.8

17.7

18.0

-0.*

16.0

0.9

0.3

0.2

0.2

0.2

-0.3

-0.1

1.5

17.4

17.5

a/

16.6

0.8

0.2

0.1

0.1

0.2

-0.*

-0.1

0.9

17.5

17.7

-0.2

4.0

1.1

1.1

1.0

0.8

-0.8

-0.3

7.1

-3.5

a. Less than $50 million.

Proposed Policy Changes

For international affairs, the President is proposing spending above baseline

levels in all years, with increases totaling $7.1 billion, or 9 percent, over the

1987-1991 period. The largest increase is for administration of foreign

affairs, reflecting a five-year program in the State Department to improve

50
security of U.S. diplomatic missions abroad. Proposed funding for the new

security program totals $4.4 billion for 1986 through 1990, including a 1986

supplemental of $0.7 billion. The security program includes requests for

appropriations of $2.7 billion for embassy construction, $1.6 billion for

salaries and expenses, and $0.1 billion for counterterrorism research and

development. As a result, outlays for administration of foreign affairs are

$4.0 billion above baseline over the 19557-1991 period.

Export Financing. The President's bucget includes two changes in programs

of government-assisted export financing. The Administration is requesting a

one-time appropriation of $300 million for a "war chest" in the Department

of the Treasury to provide grants of 25 percent or more of the value of the

export to foreign customers of U.S. goods. The grants are to support U.S.

negotiations with other exporting countries to end the abuse of highly

concessional credits for commercial advantage. Outlays for this program

are estimated to add $0.2 billion in 1987-1991 to CBO's baseline.

In addition to the war chest, the President's budget includes an

interest subsidy program for the Export-Import Bank (Eximbank). The

President is requesting authority to obligate $1.8 billion in subsidized loans

in 1987 and to finance the loans through a guarantee of the timely payment

of loan principal and interest against all risk. The subsidized loans are the

same to the borrower and the exporter as the existing direct loans? only the

means of financing is changed. The proposed guaranteed financing is

equivalent to an agency debt transaction. In this analysis, CBO has recorded

the subsidized loans as direct loans rather than as loan guarantees, the

approach used in the President's budget. Higher loan levels would increase

outlays over baseline by $0.1 billion in fiscal year 1987 and by $0.9 billion

over the five-year period. (For further discussion of the subsidized loan

program, see Appendix A.)

Foreign Military Sales and Other Security Assistance. Proposed funding for

foreign military sales is above the CBO baseline by $0.7 billion in 1987 and

by $1.9 billion over the 1987-1991 period. As a result, outlays over the fiveyear period would be $1.1 billion above baseline levels. The request includes

1987 funding for Israel and Egypt al: 1986 presequestration levels. The

Administration is also seeking increases in other security assistance

programs. It proposes to restore both the sequestered amounts and the

$1.0 billion cut in security assistance appropriations previously enacted for

1986.

Broadcast Services. The President's budget also includes an increase in

funding for foreign information and exchange activities, with outlays

$0.8 billion above baseline levels over i:he 1987-1991 period. This increase is

mainly attributable to the modernization and expansion of transmission sites

for the Voice of America and Radio Free Europe/Radio Liberty.

51

eiiiiiniEi
illlJMIl

Other Development Assistance. Increases in funding for Public Law 480

food assistance are requested to maintain tonnage shipments at 1986 levels.

These shipments were partially funded through carry-over balances in 1986.

The increases in Public Law 480 are offset by cuts in other development

programs, the only major program area in this function targeted for cuts

below the baseline. The President's budget provides increases at half the

rate of inflation for bilateral aid and includes no increases or provisions for

arrearages for the multilateral development banks.

Other Proposals. The President is requesting an additional $100 million

capitalization for the Special Defense Acquisition Fund (SDAF). This shifts

$0.1 billion in offsetting receipts from the defense function to offsetting

collections in SDAF. The President has not requested recapitalization of

the Guarantee Reserve Fund, which presently is thinly capitalized. The

fund's reserves were only $271 million in 1986 against $20 billion in

outstanding guarantees. In December 1985, one-quarter of these reserves

was consumed when a country missed a scheduled payment.

CBO Reestimates

CBO has lowered the President's outlay estimates for foreign military sales

by $2.1 billion in 1987 and $6.0 billion over the 1987-1991 period, reflecting

large balances of undisbursed and uncommitted funds. Since some countries,

particularly those that have granted the U.S. Department of Defense rights

to use certain facilities, historically have received new financing in excess

of new sales, CBO assumes the increase in new financing will add only

marginally to outlays and, thus, projects that uncommitted or unused

balances of foreign military sales credits will rise.

CBO has recorded the interest subsidy loans in the Eximbank as direct

loans rather than loan guarantees, as treated in the President's budget. As a

result, CBO has increased the President's outlay estimate for the Eximbank

by $0.3 billion in 1987 and $3.2 billion over the 1987-1991 period.

Credit Programs

The President is requesting an increase of $0.5 billion for foreign military

sales credits in fiscal year 1987, and an increase of $1.2 billion for the fiveyear period. The Administration's budget also proposes slightly higher levels

of direct loans for Public Law 480 and the economic support fund in 1987.

The request for these direct loan programs grows at half the rate of

inflation in the years 1988 through 1991.

52
The President is requesting to eliminate the Agency for International

Development's Housing Investment Guarantee program in fiscal year 1987

and to privatize the Overseas Private Investment Corporation by 1989.

In fiscal year 1986, the Eximbank has authority for $1.1 billion in

direct loans and $11.5 billion in guarantees and insurance. The 1987 request

is for a limit of $12.0 billion in guaranteed loans, of which $1.8 billion is for

interest subsidized loans. CBO views the interest subsidized loans to be the

equivalent of direct loans, which results in an increase of $0.7 billion in

fiscal year 1987 over the CBO baseline and $3.0 billion for the 1987-1991

period. The proposal for Eximbank guarantees and insurance is $1.8 billion

less than projected in the CBO baseline. The Administration's request has

no increase for inflation, which reduces the total limits for subsidized loans

and guarantees and insurance for the five-year period by $13.9 billion.

The major changes proposed for the credit programs in this budget

function are summarized in the table on the following page.

53

iliB 111111:111 1111
MA3OR CREDIT PROGRAM CHANGES PROPOSED FOR FUNCTION 150:

INTERNATIONAL AFFAIRS (By fiscal year, in billions of dollars)

Item 1987 1988 1989 1990

Cumulative

Five- Year

1991 Changes

Direct Loan Obligations

CBO Baseline

Proposed Changes

Foreign Military Sales

Eximbank

Other

Total

President's 1987 Budget

as Estimated by CBO

8.8

0.5

0.7

0.1

1.2

10.0

Guaranteed

CBO Baseline

Proposed Changes

OPIC

AID (Housing Investment Guarantees)

Eximbank

Total

President's 1987 Budget

as Estimated by CBO

12.2

a/

-0.2

-1.8

-1.9

10.3

9.0

0.4

0.6

0.1

1.1

10.1

9.3

0.3

0.6

a/

0.9

10.2

9.7

0.1

0.6

-0.1

0.6

10.3

10.0

-0.1

0.5

-0.2

0.3

10.3

1.2

3.0

-0.1

4.1

Loan Commitments

12.8

a/

-0.2

-2.2

-2.4

10.3

13.3

-0.2

-0.2

-2.8

-3.1

10.2

13.8

-0.2

-0.2

-3.3

-3.6

10.2

14.4

-0.2

-0.2

-3.8

-4.2

10.2

-0.5

-0.8

-13.9

-15.2

a. Less than $50 million.

54
FUNCTION 250; GENERAL SCIENCE, SPACE, AND TECHNOLOGY

MA3OR SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 250:

GENERAL SCIENCE, SPACE, AND TECHNOLOGY

(By fiscal year, outlays in billions of dollars)

Cumulative

Five-Year

Item 1987 1988 1989 1990 1991 Changes

CBO Baseline

Proposed Changes

National Science

Foundation

Department of Energy

(General science)

National Aeronautics

and Space Administration

Total

President's 1987 Budget

as Estimated by CBO

President's 1987 Budget

CBO Reestimates

9.1

0.1

0.1

-0.1

a/

9.1

9.2

-0.1

9.4

0.1

0.1

-0.2

a/

9.4

9.3

0.2

9.8

0.1

0.1

0.2

0.5

10.3

10.2

0.1

10.3

0.1

0.2

1.0

1.2

11.5

11.0

0.5

10.8

0.0

0.2

0.9

1.1

11.9

11.7

0.3

0.4

0.7

1.8

2.8

1.0

a. Less than $50 million.

Proposed Policy Changes

The President proposes spending at or above baseline levels in all years for

the basic research programs and National Aeronautics and Space Administration (NASA) activities in this function. The major increase relative to

the CBO baseline is for NASA, primarily in fiscal years 1990 and 1991, for

the proposed space station. The space station is expected to be in operation

by the mid-1990s, and funding in the budget grows rapidly from a fiscal year

1986 base of about $200 million to around $2 billion annually beginning in

55
fiscal year 1990. (The CBO baseline assumes funding for the space station

at 1986 levels, adjusted for inflation.) Neither the President's budget nor

the baseline reflects the possible consequences of the recent explosion of

the space shuttle Challenger. Significant budgetary changes will likely

result, especially if the decision is made to build another shuttle orbiter.

For the National Science Foundation (NSF), the President's budget

proposes spending increases of almost $150 million above the CBO baseline

in fiscal year 1987. This increase would fund more research grants and

provide additional resources for science and engineering education

activities. The budget also includes an increase of about $90 million above

the baseline in 1987 for the general science programs of the Department of

Energy (DOE), including funding to upgrade the current accelerator

facilities and to construct a new electron accelerator. Proposed funding for

the NSF and DOE research activities is above baseline levels throughout the

1987-1991 period.

CBO Reestimates

CBO reestimates result primarily from differences in projected spending

rates, especially for space station activities in 1990 and 1991.

56
FUNCTION 270; ENERGY

MAJOR SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 270:

ENERGY (By fiscal year, outlays in billions of dollars)

Cumulative

Five-Year

Item 1987 1988 1989 1990 1991 Changes

CBO Baseline

Proposed Changes

Rural Electrification

Energy R&D

Conservation

Strategic Petroleum

Reserve

Uranium Enrichment

Naval Petroleum

Reserves a/

Power Marketing

Administrations a/

Nuclear Waste Disposal

Other

Total

President's 1987 Budget

as Estimated by CBO

President's 1987 Budget

CBO Reestimates

5.2

-0.3

-0.1

-0.1

-0.2

-0.1

b/

b/

b/

b/

-0.8

4.4

4.0

0.4

5.3

-0.6

-0.4

-0.3

-0.3

-0.2

0.8

-0.1

0.1

-0.2

-1.2

4.1

4.5

-0.4

5.3

-1.0

-0.5

-0.4

-0.3

-0.2

0.7

b/

0.1

-0.2

-1.8

3.4

3.9

-0.5

5.4

-1.4

-0.7

-0.4

-0.3

-0.2

0.6

0.5

0.1

-0.2

-2.0

3.3

3.7

-0.4

5.6

-1.8

-0.9

-0.4

-0.3

-0.2

0.6

0.6

0.1

-0.3

-2.6

3.1

3.9

-0.8

-5.1

-2.6

-1.6

-1.5

-0.9

2.6

1.0

0.3

-0.6

-8.4

-1.8

a. The receipts from the proposed sale of the Naval Petroleum Reserves

and the power marketing administrations are shown in function 950.

Function 270 outlays would increase, relative to the baseline, after the

proposed asset sales, because these assets would no longer generate

receipts for the government.

b. Less than $50 million.

57
'illHI lIHIHIHIh

Proposed Policy Changes

The President is proposing substantial cuts in energy programs, which would

reduce outlays by 16 percent below the baseline in 1987, and by *f6 percent

in 1991. Outlay savings would total $8.* billion over the 1987-1991 period,

or almost one-third of projected baseline spending for the five years. These

savings are net of losses in receipts that would result from the proposed sale

of the power marketing administrations (PMAs) and the Naval Petroleum

Reserves (NPR). Excluding the reduction in receipts, outlay savings would

total over $12 billion from 1987 through 1991.

Rural Electrification. The largest savings would occur in activities of the

Rural Electrification Administration (REA). The President would phase out

REA's direct and guaranteed loans by 1990, while increasing the interest

rate on remaining direct loans; would levy a fee on power supply borrowers

to cover the cost of loan defaults; and would sell a portion of REA's direct

loan portfolio.

Reducing REA's lending costs would lower outlays by a total of

$5.1 billion over the next five years. Most of this reduction, or about

$3.3 billion, results from phasing out new direct and guaranteed loans.

Imposing a fee on power supply borrowers to recover the cost to the

government of loan defaults would reduce outlays by an additional

$1.2 billion over the five years relative to CBO's baseline assumptions.

Income from selling portions of the direct loan portfolio accounts for most

of the remaining savings.

Energy Research and Development. Under the President's proposed budget,

federal efforts in energy research and development for fossil, nuclear, solar,

and other energy technologies would be reduced by about $2.6 billion over

the 1987-1991 period.

Conservation. Conservation spending would be reduced by $1.6 billion over

five years under the President's plan. Most of this reduction results from

the proposed elimination of conservation grants. The budget proposal

asserts that states are expected to receive significant funds for conservation as a result of the settlement of federal cases involving the alleged

violation of oil price controls. For example, a recent court ruling directed

that over $2.0 billion in oil price overcharges be disbursed to the states.

Strategic Petroleum Reserve. The President proposes to stop filling the

Strategic Petroleum Reserve at the end of 1986, when the reserve will

contain approximately 500 million barrels. Current policy calls for a

reserve of 750 million barrels. The President proposes a moratorium on

increased oil reserves at the 500 million barrel level and reprogramming of

58
facilities development funds to maintain the current reserve without

increasing storage capacity to the 750 million barrel goal. A five-year

moratorium on both additional oil reserves and new capacity development

would save $1.5 billion, relative to current policy.

Uranium Enrichment. Reducing spending in uranium enrichment activities

would enable the program to pay the Treasury for past federal investments,

thereby reducing outlays by about $0.9 billion by 1991.

Naval Petroleum Reserves and Power Marketing Administrations. Income

from the sale of the power marketing administrations and Naval Petroleum

Reserves appears in budget function 950, and are estimated to total

$14.8 billion over the 1987-1991 period. These savings would be partially

offset, however, by an increase in outlays in budget function 270, because

these assets would no longer generate receipts for the government. By

1991, net outlays would increase in function 270 by $1.0 billion because of

the sale of the PMAs, and by $2.6 billion because of the sale of the Naval

Petroleum Reserves. Outlay increases would continue in subsequent years.

Nuclear Waste Disposal. Spending on nuclear waste activities would

increase by a total of $0.3 billion over the five-year period. The baseline

includes the President's proposed spending for developing the first and

second nuclear waste repositories; the budget also reflects an increase in

management, research, and other activities.

Other. Proposed increases in Federal Energy Regulatory Commission fees

would reduce outlays by a total of $0.3 billion by 1991. Reduced spending in

other regulatory and administrative programs would lower outlays by a total

of $0.3 billion over the next five years.

CBO Reestimates

CBO estimates of the President's budget outlays are above the Administration's figures by $0.4 billion in 1987 but are below them in 1988 through

1991. As a result, the CBO outlay projections are $1.8 billion below the

Administration's for the five-year period.

CBO assumes that sale of the Naval Petroleum Reserves will occur in

1988 rather than 1987, which means that the government would receive a

full year of receipts in 1987. These additional receipts would lower 1987

outlays by $0.4 billion. CBO estimates for other programs exceed the

Administration's by about $0.8 billion in 1987. They reflect higher

estimated spending by the REA, a lag in implementing repayment reforms

for the Bonneville Power Administration, and higher spending rates for a

number of other programs.

59
Reestimates for 1988 through 1991 reflect CBO's different assumption

about the timing of the sale of the Bonneville Power Administration (see

budget function 950), which results in larger receipts in 1988 and 1989.

They also reflect higher estimates of REA receipts in 1990 and 1991, and

lower estimates of spending by the Tennessee Valley Authority and in

several other programs.

Credit Programs

The President proposes to phase out REA's direct and guaranteed loan

programs by 1990, and to increase the interest rate on any future direct

loans. Under this policy change, REA's direct loans, which currently bear

interest at 5 percent, would be reduced by a total of about $4.0 billion over

the next five years. Terminating the REA guaranteed-loans program would

reduce federal lending activity by a total of $4.8 billion by 1991, because

virtually all of the guaranteed loans are financed by the Federal Financing

Bank (FFB).

MA30R CREDIT PROGRAM CHANGES PROPOSED FOR FUNCTION 270:

ENERGY (By fiscal year, in billions of dollars)

Item 1987 1988 1989

Cumulative

Five-Year

1990 1991 Changes

CBO Baseline

Proposed Changes

Rural Electrification

Rural Electrification

(FFB Loans)

Total

President's 1987 Budget

as Estimated by CBO

Direct Loan Obligations

2.1 2.2 2.2 2.3

-1.2

0.9

2.4

-0.5

-0.7

-0.6

-0.9

-0.8

-1.0

-1.0

-1.1

-1.1

-1.1

-4.0

-4.8

-1.5

0.6

-1.8

0.4

-2.1

0.1

-2.2

0.1

-8.8

60
FUNCTION 300; NATURAL RESOURCES AND ENVIRONMENT

MAJOR SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 300:

NATURAL RESOURCES AND ENVIRONMENT

(By fiscal year, outlays in billions of dollars)

Item 1987 1988 1989

Cumulative

Five-Year

1990 1991 Changes

CBO Baseline

Proposed Changes

Construction Grants

Soil and Water

Conservation

Forest Service

NOAA Operations,

Research and

Facilities

Land Acquisition

Bureau of Reclamation

Corps of Engineers

Spending

Receipts

Other

Total

Other Adjustments b/

President's 1987 Budget

as Estimated by CBO

President's 1987 Budget

CBO Reestimates

13.1

a/

-0.3

-0.2

-0.2

-0.1

0.1

0.2

-0.3

-0.3

-1.0

-0.1

12.0

12.0

§/

14.1

-0.1

-0.4

-0.2

-0.2

-0.1

0.2

0.4

-0.3

-0.6

-1.3

-0.9

11.9

11.8

0.1

13.9

-0.4

-0.5

-0.3

-0.3

-0.1

0.2

0.5

-0.3

-0.5

-1.7

-0.4

11.8

11.7

0.1

14.0

-0.9

-0.5

-0.3

-0.4

-0.1

0.2

0.6

-0.5

-0.8

-2.7

-0.3

11.1

11.2

-0.1

14.3

-1.5

-0.6

-0.4

-0.4

-0.1

0.2

0.6

-0.5

-0.8

-3.5

-0.3

10.4

10.7

-0.3

-2.9

-2.4

-1.3

-1.5

-0.6

0.8

2.4

-1.9

-2.9

-10.2

-2.0

-0.2

a. Less than $50 million.

b. CBO's estimate of the President's budget includes additional changes

from the baseline in the outlay estimates for the Environmental

Protection Agency's construction grant program, to reflect technical

adjustments made after completion of the baseline.

61

OIF
U1U

Proposed Policy Changes

While the President's budget proposes increased spending in 1987 for Bureau

of Reclamation and Corps of Engineers water resource programs, these

proposed increases are more than offset by reductions for most other

natural resources and environment activities. CBO estimates that enactment of the President's proposals would result in net outlay savings from the

CBO baseline of $1.0 billion in 1987 and $10.2 billion over the 1987-1991

period. The budget proposals would reduce spending for this function by 15

percent below baseline levels over the five years.

The largest savings in this function would result from the Administration's proposal to phase out the construction grants program of the Environmental Protection Agency beginning in 1987. New funding would be limited

to projects already under way, and budget authority would fall from

$2.4 billion in 1986 to zero by 1990. Outlay savings would total $2.9 billion

through 1991.

The President's budget would also reduce spending by shifting the

focus of soil and water conservation activities as a result of the new

conservation reserve program (in budget function 350, Agriculture)

authorized by the Food Security Act of 1985. Except for Soil Conservation

Service technical assistance of $0.4 billion a year to support the conservation reserve, the budget proposes to eliminate by 1988 the current soil and

water conservation activities of the Agricultural Stabilization and

Conservation Service and the Soil Conservation Service. Savings from these

reductions would total $0.3 billion in 1987 and $2.4 billion over the 1987-

1991 period.

Additional savings totaling $6.3 billion through 1991 would be obtained

through a variety of other program reductions in the Agriculture,

Commerce, and Interior Departments. The budget contains a 12 percent

decrease from 1986 to 1987 for existing Forest Service programs, with

funding frozen at about the 1987 level thereafter. The decrease reflects a

reduction in planned timber sales and associated road construction, termination of forestry grants to states, and reduction of forest research funds for

projects determined to directly support private industry. Requested budget

authority for the National Oceanic and Atmospheric Administration's

(NOAA) operations research and facilities account is about $0.2 billion, or

about 21 percent less than the fiscal year 1986 level. Significant cuts are

proposed for several NOAA programs, including most ocean and coastal

activities (sea grants would again be slated for termination) and marine

fisheries activities. Requested budget authority for NOAA reflects no

additional subsidies for Landsat and assumes a one-satellite polar orbiting

system. The proposed reduction would be partially offset by a $50 million

62
increase in the transfer from the Airport and Airways Trust Fund for the

aviation weather services program and other activities.

The Administration has also proposed overall cuts in spending for land

acquisition and recreational construction in this function, as well as new

offsetting receipts of about $100 million a year from additional recreation

user fees. These receipts would be earmarked for operation and maintenance of Forest Service and Park Service facilities rather than being

deposited in the Land and Water Conservation Fund, as is now done. For

federal land management activities of the Bureau of Land Management, the

President's budget proposes reductions from 1986 to 1987 of less than 2

percent, with the Bureau of Indian Affairs conservation activities slated for

a 7 percent reduction.

The reductions in other areas are partially offset by increased

spending for water projects of the Bureau of Reclamation and the Corps of

Engineers. The Administration has proposed a 19 percent increase in

funding over fiscal year 1986 levels for the Bureau's activities, or 10 percent

above the baseline. Outlays over the 1987-1991 period would be about

$0.8 billion above baseline levels. Most of the increase is proposed for

accelerated activity on continuing the Bureau's construction projects.

The Administration's budget proposes 1987 funding of $3.3 billion for

the Army Corps of Engineers. This represents an 18 percent increase over

fiscal year 1986 levels and an 11 percent increase over the baseline. Most

of the increase is proposed to begin work on 19 new construction projects

and to continue construction on 41 projects authorized in the 1985

supplemental appropriation. These plans assume enhanced cost-sharing

arrangements with nonfederal interests. The spending increase would be

partially offset by $0.3 billion to $0.5 billion per year in new user fees for

deep draft navigation. Additional revenues from the increases in the barge

fuel tax for the inland waterway system are estimated to total less than

$50 million over the 1987-1991 period. In total, additional revenues and

receipts would cover $1.9 billion of the Corps' $2.4 billion in additional

spending over the 1987-1991 period.

CBO Reestimates

CBO's outlay estimates do not differ significantly from the Administration's

estimates for this function.

63
.1111

FUNCTION 350; AGRICULTURE

MAJOR SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 350:

AGRICULTURE (By fiscal year, outlays in billions of dollars)

Cumulative

Five-Year

Item 1987 1988 1989 1990 1991 Changes

CBO Baseline 23.2 24.7 21.1 15.8 12.9

Proposed Changes

Agricultural Credit

Insurance Fund -0.7 -0.2 -0.7 -1.1 -1.1 -3.8

Federal Crop Insurance -0.1 -0.3 -0.4 -0.5 -0.6 -1.9

Commodity Credit

Corporation -0.1 -0.3 -0.4 -0.5 -0.5 -1.9

Extension Service -0.2 -0.2 -0.2 -0.3 -0.3 -1.1

Other -0.2 -0.2 -0.4 -0.4 -0.4 -1.6

Total -1.3 -1.2 -2.1 -2.8 -2.9 -10.3

President's 1987 Budget

as Estimated by CBO

President's 1987 Budget

CBO Reestimates

21

19

2

.9

.5

.3

23

19

3

.5

.7

.8

19

18

0

.0

.9

.1

13.

15.

-2.

0

4

4

10

11

-1

.0

.4

.4 2.4

Proposed Policy Changes

The President's budget proposes spending reductions in the agriculture

function by reducing federal subsidies or charging fees for activities that

benefit specific groups, and cutting back on certain research and education

programs. Total savings relative to the CBO baseline would be $10.3 billion

over the 1987-1991 period, with spending 23 percent below the baseline level

at the end of the period. Furthermore, outlays are expected to drop sharply

under current law, primarily as a result of changes in price support programs

enacted in the Food Security Act of 1985. Consequently, total outlays for

agriculture programs would drop from $30.4 billion in 1986 to an estimated

$10.0 billion in 1991.

64
The largest outlay savings from proposed policy changes would occur

in the Agricultural Credit Insurance Fund (ACIF). Emergency disaster loans

would be eliminated in 1987, and other direct loans would be phased out by

1990. (The CBO baseline maintains direct loans at levels projected from

1988 loan limits specified in the Food Security Act of 1985.) There would be

no direct loan obligations in 1990 (compared with $2.0 billion in 1986), while

guaranteed loans would increase from $1.9 billion in 1986 to $4.0 billion in

1991. Resulting outlay savings would total $3.8 billion over the five-year

period.

The President's budget would also phase out support for the Federal

Crop Insurance Corporation over a five-year period. Currently, farmer

premiums are subsidized, and federal funds are used to cover administrative

and operating expenses of the corporation. The Administration intends to

continue to operate the crop insurance program, but with participants

eventually bearing all the costs. Annual savings would reach $0.6 billion by

1991.

Commodity Credit Corporation (CCC) spending would also be reduced

by an increase in origination fees for export credit guarantees. In addition,

the President is proposing to reduce the required level of export credit loan

guarantees from $5.5 billion per year to $3.0 billion per year beginning in

1987. This reduction in guarantee levels would cause lower outlays for

direct loans in later years because of reduced claims for defaulted loans.

Savings as a result of increased fees and reduced guarantee claims would

grow from $140 million in 1987 to $530 million in 1991.

Further savings would be obtained by a sharp reduction in funding for

the Extension Service, from $328 million in 1986 to $140 million annually

beginning in 1987. All categorical programs, the largest of which is the

Expanded Food and Nutrition Education Program, would be eliminated.

Savings would total $1.1 billion over the 1987-1991 period.

Other proposed spending reductions in the President's budget result

from new and expanded user fees in marketing and inspection service

programs, including grain inspection, activities of the Packers and Stockyards Administration, and services to agricultural cooperatives. In addition,

no further funding is being requested for the Temporary Emergency Food

Assistance Program.

CBO Reestimates

Most of the CBO outlay reestimate is for the Commodity Credit Corporation, as the result of differing assumptions concerning the supply and use of

65
linn

supported commodities and the Secretary of Agriculture's use of discretion

in implementing the support programs. In the first two years, the

reestimates result primarily from differences in assumptions about advanced

deficiency payments. The CBO estimates assume that advanced deficiency

payments would be made on the 1987 crops and in subsequent years,

following the policies already announced for the 1986 crop. The Administration, on the other hand, assumes that no advanced payment would be made

on crops after 1986. The ACIF also contributes to the upward reestimate

during the first three years, largely because CBO has projected lower loan

repayments from the existing portfolio than are implicit in the President's

budget estimates.

Credit Programs

As indicated above, the President's budget proposes reductions in loan

guarantees and in resulting direct loans made by the CCC. The Administration also seeks to eliminate ACIF direct lending, while increasing

guarantees. These proposals are summarized in the table on the following

page.

66
MAJOR CREDIT PROGRAM CHANGES PROPOSED FOR FUNCTION 350:

AGRICULTURE (By fiscal year, in billions of dollars)

Item 1987 1988

Cumulative

Five-Year

1989 1990 1991 Changes

Direct Loan Obligations

CBO Baseline

Proposed Changes

Agricultural Credit

Insurance Fund

Agricultural Credit

Insurance Fund

(Disaster)

Commodity Credit

Corporation

Total

President's 1987 Budget

as Estimated by CBO

14.3

a/

-0.7

a/

-0.8

13.5

Guaranteed

CBO Baseline

Proposed Changes

Agricultural Credit

Insurance Fund

Commodity Credit

Corporation

Total

President's 1987 Budget

as Estimated by CBO

8.0

a/

-2.5

-2.5

5.5

12.1

a/

-0.1

-0.2

-0.3

11.8

11.3 10.0 9.4

-0.6 -1.1 -1.2

-0.1 -0.1 -0.1

-0.3 -0.4 -0.4

-1.0 -1.6 -1.6

10.4 8.5 7.8

-3.0

-1.1

-1.2

-5.3

Loan Commitments

8.5

a/

-2.5

-2.5

6.0

8.6 8.8 8.9

0.4 0.7 0.6

-2.5 -2.5 -2.5

-2.1 -1.8 -1.9

6.5 7.0 7.0

1.7

-12.5

-10.8

a. Less than $50 million.

67

BIT
FUNCTION 370; COMMERCE AND HOUSING CREDIT

MAJOR SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 370:

COMMERCE AND HOUSING CREDIT

(By fiscal year, outlays in billions of dollars)

Item 1987 1988 1989 1990

Cumulative

Five-Year

1991 Changes

CBO Baseline

Proposed Changes

Rural Housing Insurance

Fund

Small Business

Administration

Housing for the Elderly

or Handicapped

Federal Housing

Administration

Guarantees of MortgageBacked Securities

U.S. Postal Service

Other

Total

Other Adjustments b/

President's 1987 Budget

as Estimated by CBO

President's 1987 Budget

CBO Reestimates

4.0

-1.4

-0.7

-0.1

-0.2

a/

0.7

a/

-1.7

0.8

3.1

1.4

1.8

5.3

-1.9

-1.4

-0.2

-0.4

-0.1

1.0

a/

-2.9

2.0

4.3

3.8

0.5

3.6

-2.1

-1.4

-0.4

-0.4

-0.1

0.3

-0.1

-4.2

-0.5

-1.1

-0.5

-0.6

3.6

-2.2

-1.5

-0.5

-0.3

-0.2

0.4

-0.2

-4.5

-0.1

-1.0

-1.0

£/

2.3

-2.2

-1.1

-0.6

-0.2

-0.2

0.1

-0.1

-4.4

0.2

-1.9

-1.8

-0.1

-9.9

-6.1

-1.8

-1.5

-0.6

2.5

-0.4

-17.7

2.4

1.6

a. Less than $50 million.

b. CBO's estimate of the President's budget includes additional changes

from the baseline totaling $2.4 billion over five years, to reflect

technical adjustments in the Postal Service estimates made after

completion of the baseline.

68
Proposed Policy Changes

The President proposes terminating or reducing a number of programs that

currently support commerce or housing activities, on the grounds of

removing the federal government from activities that the Administration

believes compete directly with the private sector. Over $4 billion a year in

spending would be eliminated by 1989, and offsetting receipts and collections in this function would exceed spending by that time. CBO estimates

that enactment of the President's proposals for this budget function would

result in net outlay savings of $1.7 billion in 1987, with savings totaling

$17.7 billion over the 1987-1991 period.

SBA and FmHA Programs. Most of the savings in this function would result

from the proposed elimination of the Small Business Administration (SBA)

and the rural housing programs of the Farmers Home Administration

(FmHA) beginning in 1987. Most of the FmHA assistance is provided by the

Rural Housing Insurance Fund (RHIF) in the form of reduced interest rates

for mortgage loans to low-income households or to developers of low-income

rental housing. The President is proposing to reduce the 1986 program level

to $1.3 billion, $700 million below the $2.0 billion currently authorized by

the Congress, and to eliminate RHIF loans thereafter. Outlay savings would

exceed $2 billion a year by 1989, and would total $9.9 billion over the 1987-

1991 period.

To eliminate the Small Business Administration, as was proposed last

year, the Administration would terminate the programs providing direct and

guaranteed loans and equity investments, and sell the agency's portfolio over

a four-year period. Certain SBA activities that provide advocacy, management, technical, and procurement assistance would be transferred to the

Department of Commerce, to be funded at less than $40 million annually

through 1991. Eliminating the agency would reduce outlays relative to the

baseline by $0.7 billion beginning in 1987, with a cumulative savings of

$6.1 billion over the five-year period.

HUD Programs. Currently, the Department of Housing and Urban Development (HUD) makes direct loans to nonprofit sponsors to finance construction

of housing for low-income elderly or handicapped residents. The Administration's budget proposes to rescind virtually all of the more than

$600 million authorized by the Congress for use in 1986 and to eliminate this

program. Rental assistance payments would be provided by HUD to eligible

households living in private housing.

At the time a mortgage loan guaranteed by the Federal Housing

Administration (FHA) is closed, the borrower pays a fee typically amounting

to 3.8 percent of the loan amount. Beginning in 1987, the President is

69

1HMIBOF
proposing to increase the fee to 5.0 percent and to require that it be paid in

cash. In addition, HUD intends to limit its insurance program to households

with incomes no higher than $40,000. These proposals would increase

government receipts by an estimated $1.5 billion through 1991.

The HUD budget also includes a proposed increase in the fees charged

for mortgage-backed security guarantees. Fees would rise 9 basis points in

1987 and another 5 basis points in 1988. In total, this would increase fees

from today's 6 basis points (0.06 percent) to 20 basis points (0.20 percent) in

1988. Income from such fees would reach $0.2 billion annually by 1990.

Postal Service. The President is proposing to increase by 2 percent annually

the Postal Service payments to the Civil Service Retirement Fund. As a

result, the Postal Service share of the actuarial costs of employee pensions

would grow from the current level of 7 percent to 17 percent by 1991.

Another proposal would require the Postal Service to begin paying the cost

of postal annuitants' health benefit premiums beginning in 1987. These two

changes would increase the costs of the Postal Service by about $0.7 billion

in 1987, increasing to $1.5 billion by 1991. (These payments, totaling

$6.4 billion over the five years, are intragovernmental transactions and

would be reflected as offsetting receipts in other functions.) To recover

these costs, the Postal Service would increase postal rates, resulting in net

savings to the federal government over time.

The President is again proposing to eliminate the revenue forgone

appropriation for the Postal Service. This payment compensates the Postal

Service for revenues lost because the Congress has specified reduced

postage rates for certain classes of mailers, primarily religious and other

nonprofit organizations, blind and otherwise handicapped people, smallcirculation newspapers, and libraries. Rather than continue taxpayer

support for these subsidies, the President is proposing to eliminate eligibility

for certain groups and maintain the subsidy for the remaining groups by

increasing rates for other classes of mail. These changes would reduce

appropriations by between $700 million and $800 million per year through

1991, but would increase the Postal Service deficit by similar amounts until

the projected rate increase goes into effect in 1989. Because prior-year

losses to the Postal Service are generally recovered over 10 years, the 1987

and 1988 reduction in the revenue forgone payment would not be fully

recovered until 1999.

Assuming enactment of these proposals, CBO estimates that the price

of first-class postage would increase to 26 cents in the second quarter of

1989, or 1 cent more than assumed in the CBO baseline. Such an increase

would generate an additional $4 billion in revenue relative to the baseline in

the 1989-1991 period. The combination of proposals affecting the Postal

70
Service would result in increased net spending in this function of $2.5 billion

over the 1987-1991 period and increased receipts in other budget functions

of $6.4 billion, for a net spending reduction of about $3.9 billion.

CBO Reestimates

Postal Service outlays exceed those estimated by the Administration by

$1.0 billion in 1987 and $0.8 billion in 1988, but are lower in 1989 by

$0.3 billion. In part, these adjustments reflect lower net income estimates

of $1.0 billion in 1987 and $0.3 billion in 1988 resulting primarily from

different productivity assumptions. Beginning in 1988, the Postal Service

costs for increased health contributions were not included in the 1987

budget estimates. CBO has added about $500 million annually in 1988-1991

to reflect these expenses. These increases are partly offset by projected

income of $0.8 billion in 1989, $0.6 billion in 1990, and $0.5 billion in 1991

resulting from CBO's assumptions about increased postal rates.

Because of the extent of the problems affecting financial institutions,

outlays for the Federal Deposit Insurance Corporation (FDIC) and the

Federal Savings and Loan Insurance Corporation (FSLIC) insurance funds are

expected to exceed the Administration's estimates by about $0.4 billion in

1987. CBO assumes that a special assessment will be imposed on thrift

institutions to maintain the solvency of the FSLIC fund, resulting in net

outlays about $0.2 billion to $0.4 billion less than those assumed by the

Administration in 1988 and each year beyond.

CBO estimates of FHA Fund outlays exceed the Administration's by

$0.3 billion in 1990 and $0.4 billion in 1991, because CBO estimates lower

receipts and higher payments for insurance claims.

Credit Programs

Consistent with the President's proposal to terminate or curtail a number of

commerce and housing programs, direct and guaranteed loans would be cut

by about $19 billion and $59 billion, respectively, from 1987 through 1991.

Most seriously affected would be FHA, SBA, and RHIF.

Beginning in 1987, SBA would no longer be providing, on an annual

basis, direct financial assistance of about $750 million or guaranteed loans

of about $3 billion. Loan assets totaling about $4.8 billion would be sold in

1987 through 1990. Offsetting the receipts from the sale of these assets is a

loss of interest that otherwise would have been paid to the government. The

reduction in interest receipts is reflected in budget function 900. These

proposals are summarized in the table on the following page.

71

HIT
Illlil

MA3OR CREDIT PROGRAM CHANGES PROPOSED FOR FUNCTION 370:

COMMERCE AND HOUSING CREDIT (By fiscal year, in billions of dollars)

Cumulative

Five-Year

Item 1987 1988 1989 1990 1991 Changes

Direct Loan Obligations

CBO Baseline 5.1 5.2 5.6 5.6 5.7

Proposed Changes

RHIF -2.1 -2.2 -2.3 -2.4 -2.5 -11.5

Housing for Elderly -0.6 -0.6 -0.7 -0.7 -0.8 -3.*

Small Business

Administration

Business -0.1 -0.1 -0.1 -0.1 -0.1 -0.5

Federal Financing

Bank Loans -0.3 -0.7 -0.7 -0.7 -0.8 -3.2

Defaults a/ a/ -0.2 -0.3 -0.4 -0.9

Government National

Mortgage Association

(Repurchases) 0.2 - —- 0.2

Other — — a/ — a/ 0.1

Total -2.9 -3.6 -4.0 -4.2 -4.5 -19.2

President's 1987 Budget

as Estimated by CBO 2.2 1.6 1.7 1.4 1.2

Guaranteed Loan Commitments

CBO Baseline 40.5 42.2 43.8 45.6 47.4

Proposed Changes

Farmers Home

Administration -5.4 -6.9 -8.5 -10.2 -11.9 -42.9

SBA (Business) -3.0 -3.1 -3.3 -3.4 -3.5 -16.3

Other — a/ a/ a/ a/ -0.2

Total -8.4 -10.1 -11.8 -13.7 -15.5 -59.4

President's 1987 Budget

as Estimated by CBO 32.1 32.1 32.0 31.9 31.9

a. Less than $50 million.
FUNCTION 400; TRANSPORTATION

MAJOR SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 400:

TRANSPORTATION (By fiscal year, outlays in billions of dollars)

Cumulative

Five-Year

Item 1987 1988 1989 1990 1991 Changes

CBO Baseline

Proposed Changes

Mass Transit

Federal-aid Highways

Amtrak

Grants-in-aid to

Airports

Coast Guard Operations

Coast Guard User Fees

Ocean Freight

Differential

Other

Total

President's 1987 Budget

as Estimated by CBO

President's 1987 Budget

CBO Reestimates

27.4

-0.7

-0.2

-0.6

a/

0.2

-0.2

-0.1

-0.2

-1.8

25.6

25.5

0.1

27.4

-1.0

-0.9

-0.5

-0.2

0.2

-0.5

-0.2

a/

-3.0

24.3

24.1

0.2

28.1

-1.4

-1.3

-0.6

-0.3

0.2

-0.5

-0.3

a/

-4.1

23.9

23.4

0.5

28.8

-1.6

-1.3

-0.7

-0.4

0.2

-0.5

-0.3

a/

-4.7

24.2

23.7

0.5

29.6

-2.2

-1.8

-0.7

-0.5

0.2

-0.5

-0.3

-0.1

-5.9

23.7

23.1

0.6

-6.9

-5.5

-3.1

-1.4

1.0

-2.1

-1.2

-0.3

-19.5

1.9

a. Less than $50 million.

Proposed Policy Changes

The Administration is proposing to reduce transportation spending below the

CBO baseline in all years, with total savings of almost $20 billion over the

1987-1991 period. The budget includes a 20 percent cut ($6.2 billion) from

the baseline in 1987 budget authority, with first-year outlay savings of $1.8

billion.

73

HlHIlllIiill 111 II
Ground Transportation. Most of the outlay savings in this function would

occur in ground transportation programs, with the largest reductions in mass

transit. The Administration proposes to limit authorizations and obligations

for transit programs to $1.2 billion annually, the amount that is generated

by 1 cent of the 9-cent-per-gallon gasoline tax and earmarked for transit.

This represents a decrease of $2.3 billion from the 1986 level. Of these

funds, $1.1 billion would go to states as part of a new block grant proposal,

and would be available for spending either on transit or highway projects.

The remaining money would be spent on administration, research, and

planning. Only small cities and rural areas would be able to use funds for

operating assistance. In addition, the Administration would rescind over

$500 million in contract authority in 1986 from funds earmarked for

construction of new transit systems. Outlay savings in transit programs

would total $6.9 billion over the 1987-1991 period.

The budget also includes reductions in the Federal-aid Highways

program, reflecting the Administration's proposal for reauthorizing highway

programs through 1990. Total obligations would be reduced from $13.2

billion in 1986 to $12.8 billion annually in 1987 through 1990, resulting in

outlay savings of $5.5 billion over the five-year period. Annual budget

authority for programs funded from the highway trust fund would be limited

to estimated annual receipts, not including interest earned by the trust fund.

The Administration proposes to create a $3.3 billion block grant program for

states, using the $1.1 billion in transit funds mentioned above and $2.2

billion in highway funds. The highway portion of the grant comes from funds

formerly earmarked for construction and rehabilitation of roads on the

secondary and urban systems, as well as bridges not on the primary system.

The budget also includes five-year savings of $3.1 billion from

eliminating all subsidies for Amtrak, which would reduce outlays by approximately $600 million per year. A similar proposal was made in last year's

budget.

Air Transportation. The President's budget proposes only slight decreases in

spending for aviation programs in 1987, but would reduce outlays by almost

$1.5 billion over the five-year period. Most of the reductions would come

from the grants-in-aid program for airport capital improvements. Under the

President's budget, the obligation ceiling for airport grants would be reduced

from $885 million in 1986 to $712 million in 1987, and then further reduced

to $500 million annually in 1988 through 1991. Contract authority would

also be reduced from the 1987 level of $1.0 billion (as authorized by

Public Law 97-248), to $500 million per year in 1988 through 1991.

Although spending for Federal Aviation Administration operations would be

maintained at levels close to the baseline, the Administration proposes to

derive 75 percent of the funds from the Airport and Airway Trust Fund,

compared with only 16 percent in 1986.

74
Water Transportation. The budget reflects a net reduction of $2.5 billion in

spending on water transportation from 1987 through 1991. As in previous

budgets, the President is proposing user fees for certain Coast Guard

services, yielding estimated receipts of $238 million in 1987 and a total of

$2.1 billion over the 1987-1991 period. These savings would be partially

offset by increases in Coast Guard operating expenses of about $0.2 billion

annually, for capital investments and an increased emphasis on drug law

enforcement and defense readiness activities.

The President is also proposing to terminate the new ocean freight

differential program, which was established pursuant to the Food Security

Act of 1985 (Public Law 99-198). The legislation increased from 50 percent

to 75 percent the proportion of agricultural commodities shipped under

certain programs that must be carried on U.S.-flag vessels. Termination of

this expanded cargo preference requirement would result in estimated

savings of $0.1 billion in 1987 and $1.2 billion over the 1987-1991 period.

CBO Reestimates

CBO estimates that spending under the Administration's proposed policy

changes would be $1.9 billion higher over the five-year period than

estimated in the budget. Much of this difference results from CBO's higher

estimates of defaults on loans made by the Federal Ship Financing Fund

(approximately $1 billion higher than the President's estimate over the five

years). Other changes result from different spending rates, especially for

aviation grants-in-aid and mass transit formula grants.

75

HIT
FUNCTION 450; COMMUNITY AND REGIONAL DEVELOPMENT

MAJOR SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 450:

COMMUNITY AND REGIONAL DEVELOPMENT

(By fiscal year, outlays in billions of dollars)

Item 1987 1988 1989

Cumulative

Five-Year

1990 1991 Changes

CBO Baseline 7.7 7.8 8.0 8.0 8.2

Proposed Changes

Community Development

Block Grants a/

Urban Development

Action Grants a/

Other Community

Development

Programs -0.2

Rural Development

Insurance Fund -0.1

Economic Development

Assistance Programs -0.1

Other Regional

Development

Programs _

Small Business ~

Administration

Disaster Loans -0.7

Other Disaster

Programs -0.3

Total

President's 1987 Budget

as Estimated by CBO

President's 1987 Budget

CBO Reestimates

-0.2

-0.1

-0.3

-0.2

-0.1

-0.5 -0.6 -0.6

-0.2 -0.3 -0.3

-0.3 -0.* -0.4

-0.3 -0.4 -0.5

-0.2 -0.2 -0.2

a/ -0.2 -0.3 -0.5 -0.6

-1.0 -1.0 -1.0 -0.5

-0.2 -0.2 -0.2 -0.2

-1.4 -2.4 -3.1 -3.5 -3.3

6.3 5.4 4.9 4.5 4.9

6.5 5.5 5.0 5.2 5.2

-0.3 a/ -0.1 -0.7 -0.3

-1.9

-0.9

-1.6

-1.5

-0.8

-1.6

-4.2

-1.1

-13.7

-1.3

a. Less than $50 million.

76
Proposed Policy Changes

As in previous budgets, the 1987 budget proposes major reductions in

spending on community and regional development. Many of the programs

within this function are proposed for elimination, while others are slated for

large reductions. Total savings are estimated to be $13.7 billion over the

1987-1991 period, a reduction of about 35 percent in spending in this

function. The President's proposals are based on the view that many of the

benefits provided by these programs are local in nature, and, therefore, that

the costs should be borne locally as well.

Community Development. About $4.4 billion of the five-year savings is in

community development programs, which are aimed at urban areas. Funding

for community development block grants (CDBGs) would be reduced by

between $500 million and $600 million per year, beginning with a deferral of

$500 million of 1986 budget authority. Urban development action grants

(UDAGs) would be eliminated, beginning in 1987, after a rescission of

$200 million of 1986 authority.

Rental housing development grants (HODAGs), rental rehabilitation

grants, Section 312 rehabilitation loans, and CDBG Section 108 loans would

also be eliminated in 1987. Partial rescissions of 1986 budget authority for

some of these programs are also proposed, and reductions would be made in

a number of smaller urban development programs. By 1991, community

development spending would be 30 percent below CBO's baseline levels, and

would consist almost entirely of community development block grants.

Regional Development. Over the 1987-1991 period, the President's budget

would result in estimated savings of $3.9 billion in regional development

programs, which are largely aimed at rural areas. Direct loan and loan

guarantee activities of the Rural Development Insurance Fund (RDIF) would

be terminated in 1987, and $100 million of the outstanding portfolio of

direct loans would be sold to the public each year for five years. (This is

part of a pilot program to determine the feasibility of such sales.) Economic

Development Administration programs would also be eliminated, after a

$100 million rescission of 1986 budget authority. The President is also

proposing to eliminate rural water and waste disposal grants, the

Appalachian Regional Commission and Appalachian regional development

programs, and purchases of capital stock of the Rural Telephone Bank. New

loan obligations by the Rural Telephone Bank would be phased out by fiscal

year 1990, and spending would be reduced for the Tennessee Valley

Authority, Bureau of Indian Affairs operations and construction programs,

and many smaller programs. A rescission of about $80 million of fiscal year

1986 budget authority for Appalachian regional development is also

proposed. By 1991, regional development outlays would be 45 percent below

baseline levels.

77

JIT
Ill

Disaster Relief and Insurance. The President's proposals would reduce

disaster assistance by $5.3 billion over the 1987-1991 period. Under the

President's proposed budget, the Small Business Administration (SBA) would

make no new disaster loans beginning in 1987, and the outstanding portfolio

would be sold over four years. Outstanding loans would be administered by

the Department of the Treasury, and the receipts from loan sales, as well as

the repayments on the outstanding unsold portfolio, would accrue to the

Treasury. The budget also includes proposals to raise flood insurance

premiums in 1986 and 1987 and to increase the share of disaster costs

expected to be borne by state and local governments. The flood plain

management program would be funded from flood insurance premiums, and

the U.S. Fire Administration would be eliminated.

CBO Reestimates

The roughly $700 million difference in fiscal year 1990 is primarily attributable to CBO's much higher estimate of receipts from the sale of SBA

disaster loans. Otherwise, CBO's outlay estimates do not differ significantly

from the Administration's estimates for this function.

Credit Programs

The CBO baseline projects direct loan obligations of $2.4 billion in 1991,

largely for SBA disaster loans and rural development loans of the RDIF. As

shown in the table on the following page, the President is proposing to end

virtually all lending activity in this function.

78
MAJOR CREDIT PROGRAM CHANGES PROPOSED FOR FUNCTION 450:

COMMUNITY AND REGIONAL DEVELOPMENT

(By fiscal year, in billions of dollars)

Item

Cumulative

Five-Year

1987 1988 1989 1990 1991 Changes

Direct Loan Obligations

CBO Baseline

Proposed Changes

Rural Development

Insurance Fund

Rural Telephone

Bank

Small Business

Administration

(Disaster Loans)

Community Development

Block Grant

(Section 108)

Other

Total

President's 1987 Budget

as Estimated by CBO

1.7

-0.4

a/

-0.7

-0.2

-1.3

0.4

2.3

-0.5

-0.1

-1.1

-0.2

-1.9

0.4

2.2

-0.5

-0.2

-1.1

-0.2

-Ji/

-2.0

0.2

2.3

-0.5

-0.2

-1.1

-0.2

-0.3

-2.3

a/

2.4

-0.5

-0.2

-1.2

-0.2

-0.3

-2.4

a/

10.9

-2.4

-0.7

-5.2

-0.8

-0.6

-9.7

1.2

a. Less than $50 million.

79

• If
i iin

FUNCTION 500; EDUCATION, TRAINING, EMPLOYMENT,

AND SOCIAL SERVICES

MAJOR SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 500:

EDUCATION, TRAINING, EMPLOYMENT, AND SOCIAL SERVICES

(By fiscal year, outlays in billions of dollars)

Item 1987 1988 1989 1990

Cumulative

Five-Year

1991 Changes

CBO Baseline

Proposed Changes

Elementary and

Secondary Education

Higher Education

Student Aid

Guaranteed Student

Loans

College Housing

Other Education

Training and

Employment

Social Services

Total

President's 1987 Budget

as Estimated by CBO

President's 1987 Budget

CBO Reestimates

30.9

-0.4

-0.6

-0.8

-0.6

-0.1

-0.6

-0.5

-3.6

27.3

27.4

-0.1

32.2

-0.8

-1.4

-1.1

-0.4

-0.4

-0.8

-0.8

-5.7

26.5

26.3

0.1

33.4

-1.3

-1.7

-1.7

a/

-0.5

-1.1

-1.0

-7.4

26.0

26.4

-0.5

34.8

-1.9

-2.0

-1.8

a/

-0.7

-1.4

-1.2

-9.0

25.7

26.0

-0.3

36.3

-2.4

-2.4

-1.8

a/

-0.7

-1.8

-1.5

-10.6

25.7

26.0

-0.3

-6.8

-8.2

-7.2

-1.0

-2.4

-5.7

-5.0

-36.3

-1.0

a. Less than $50 million.

Proposed Policy Changes

The Administration proposes major reductions in federal funding for

education, training, employment, and social service programs. In 1987,

spending would be reduced by $3.6 billion or 12 percent below CBO's

80
baseline. By 1991, spending would be reduced $10.6 billion or about onethird. Proposed changes include 1986 rescissions totaling $1.8 billion and

proposals to eliminate or substantially reduce many of the major programs

in this function. No major programs are increased in the President's

request.

Elementary and Secondary Education. The President proposes rescinding

$330 million in funding for elementary and secondary education grant

programs in 1986 and reducing spending by 5 percent in 1987 and 25 percent

in 1991. The Administration's request maintains funding for disadvantaged

students at or near 1986 levels, and, as a result, elementary and secondary

education grants are reduced by somewhat less than the average reduction

in the function.

Higher Education. The Administration proposes major reforms and

reductions for higher education programs, which would require many

families and students to increase their financial commitment to higher

education. Only the neediest students would continue to receive their

current levels of federal assistance. Under the Administration's request,

federal spending for student aid grants and guaranteed student loans would

be reduced by 17 percent in 1987 and 44 percent in 1991.

In 1986, $450 million in student aid grants is proposed for rescission.

In addition, the President proposes to reduce the Pell grant program by 17

percent in 1987 and 35 percent in 1991. Expected contributions from the

family would be increased, and benefits would be targeted toward students

from families with incomes below $23,000. Remaining student aid grants

would be eliminated, restructured, or reduced.

The President is requesting 20 major and other minor changes to the

Guaranteed Student Loan (GSL) program. These changes would reduce the

number of eligible students and federal subsidies to those students. They

would also reduce yields to lenders and reduce payments to state guarantee

agencies. Spending in 1987 would decline by 22 percent and in 1991 by 60

percent.

The specific changes proposed in the GSL program include a revised

financial needs test that would further target program eligibility. Over 1

million students—about 25 percent of current borrowers—would have their

loan levels reduced or eliminated from the subsidized regular GSL program

as a result of the more restrictive financial needs test. In-school interest

subsidies would also be eliminated; students eligible for a loan would be

required to pay all the interest on the loan, which would be made at a

market rate of interest. Loan limits would be increased to cover the cost of

interest payments. The current 5 percent origination fee would continue to

be collected, but it would be used as an insurance fee against default. The

81
JJIU

present supplemental loan program for parents and independent students

would be expanded to include all students, and the federal interest subsidies

on those loans would be eliminated by charging borrowers a market rate of

interest. The borrowers in this supplemental loan program would be charged

a 1 percent insurance fee against default. Yields to private lenders would

be changed from a variable rate tied quarterly to the 91-day Treasury bill

rate to a lower-yielding fixed rate. Private lenders and state guarantee

agencies would be required to pay at least 10 percent of default claims on

future loans, and state agencies would no longer receive an administrative

allowance.

The President also proposes selling $2.1 billion in college housing loans

to private investors during 1987 and 1988. These loan assets would be sold

at a discount and are estimated to yield about $1.0 billion. The federal

government would lose approximately $2.6 billion in the receipts from these

loans over the next 20 years.

Other Education. Other education activities, which currently account for $2

billion of spending in this function, would be reduced by 7 percent in 1987

and by one-third in 1991. In 1986, $250 million in grants is proposed for

rescission. In 1987 and beyond, reductions result from the elimination of

funding for libraries, public telecommunication, and museum services. The

amount of institutional aid given to colleges would be reduced by 45

percent, and most of the remaining programs would be maintained at or near

their 1986 levels.

Training and Employment. Under the President's proposals, baseline

spending for training and employment programs would decline by 12 percent

in 1987 and 29 percent by 1991. In 1986, $450 million in grants are proposed

for rescission. Basic training grants would be funded at or near 1986 levels

throughout the period 1987-1991. Funding for summer youth employment,

job corps, and assistance for dislocated workers would be reduced by

between 50 percent and 60 percent over the projection period. In addition,

the Work Incentive (WIN) program would be eliminated; work requirements

would be picked up under the Aid to Families with Dependent Children

program with 50 percent federal matching rates.

Social Services. The Administration proposes reducing current spending of

$7.4 billion for social service programs by 7 percent in 1987 and 17 percent

in 1991. In 1986, rescissions would total $300 million. In 1987 and the outyears, funding for the community services block grant would be eliminated,

and grants for vocational rehabilitation programs would be reduced 9

percent in 1987 and 23 percent by 1991. Funding of the foster care program

would be fixed at its 1984 level adjusted by changes in the Consumer Price

Index (CPI), and the remaining social service programs would be funded at or

near their 1986 levels.

82
CBO Reestimates

Most of the CBO reestimate of the President's budget in this function occurs

in the GSL program. CBO projects lower loan volume and related budget

costs including interest subsidies and default costs.

Credit Programs

Direct Loan Obligations. The President proposes to reduce direct loan

obligations under this function by $700 million over the next five years. In

the GSL program, federal default claim payments are considered direct

loans of the federal government. The President has proposed two major GSL

program changes that would result in lower federal default payments. First,

program eligibility and thus loan volume would be reduced by requiring a

more restrictive financial needs test. Second, private lenders and state

guarantee agencies would be required to assume responsibility for at least

10 percent of future default claims, thus lowering federal default payments.

In 1991, federal default payments would be reduced by an estimated $225

million.

The President has also proposed to rescind the 1986 loan obligation

authority of $57 million for the college housing program and to terminate

the authority in the out-years. In addition, the President proposes to sell

existing loans to private investors.

As part of its student aid reform package, the Administration has

proposed establishing a new, unsubsidized direct loan program to replace the

National Direct Student Loan (NDSL) program. This proposed incomecontingent loan program would allow borrower repayments to vary with

earnings after school. The President proposes to finance this new program

at higher levels than the current NDSL program contribution rate.

Guaranteed Loan Commitments. The Administration's request for the GSL

program includes several reforms that would lower new guaranteed loan

volume under the subsidized regular loan program and would also transfer

some of the volume to the proposed unsubsidized supplemental program.

These changes would reduce new guarantees by $1.4 billion over the next

five years.

As a result of the more restrictive needs test and reduced interest

subsidies in the GSL program, loan volume would decrease an estimated $1.6

billion in 1987 and by larger amounts in the out-years. This reduction of

loan volume would be partially offset by allowing eligible students to

increase their borrowing to cover the cost of interest while they are in

school. Also, students made ineligible by the proposed needs test in the

regular program could transfer to the supplemental loan program.

83
mil ill in

budget proposes a single match rate of 50 percent for state and local

administrative costs, which would eliminate higher special matching rates.

In 1987, this would save an additional $0.3 billion. After 1987, the federal

cap would grow by the increase in the medical care component of the CPI.

A similar proposal was made last year.

States would also be required to seek third-party reimbursements,

reform prescription drug reimbursement, and require second surgical opinion

and inpatient hospital preadmission review programs. These changes would

not add to Medicaid savings because of the program cap.

Federal Employees Health Benefits. The Administration is again proposing

to replace the formula by which the government contribution for health

insurance premiums is determined with a fixed dollar amount that would be

adjusted each year by the change in the implicit price deflator for the gross

national product (GNP). The current 75 percent limit on government

contributions for insurance premiums would be dropped, and enrollees could

receive rebates of up to 40 percent of the government contribution if they

selected plans costing less than the fixed government payment. The

Administration also proposes to have the U.S. Postal Service and the

District of Columbia pay the total government share of their employees'

health insurance, and to discontinue payments to insurance companies from

the Employees Health Benefits contingency reserves. Finally, the

Administration would require insurance companies to return their excess

reserves to the federal government in 1987.

Public Health Service. Funding for the Public Health Service is frozen

through 1991 at a level slightly below the 1986 level. Half of the savings

would result from a freeze on research funding for the National Institutes of

Health (NIH). The President's proposal would maintain 18,000 NIH research

grants in each year, about 800 fewer grants than were supported by the 1986

appropriation. Rescissions are requested in 1986 for NIH in order to reach

the proposed grant level by 1987.

The President's budget would rescind more than $0.4 billion in 1986,

including funds for NIH, from funds appropriated for the Public Health

Service. The Administration also proposes to eliminate health professions

education and training programs in 1987 as well as funding for construction

of Indian health facilities.

Other. In other health-related areas, the Administration proposes to charge

fees for services provided by the Food Safety and Inspection Service (FSIS).

Fees would be set to recover the full cost of FSIS activities, thereby

reducing outlays in the President's budget by $0.3 billion to $0.4 billion

below the CBO baseline in each year.

86
CBO Reestimates

CBO has reestimated upward the President's budget for the Medicaid

program by $2.4 billion over the five years. CBO projects higher price

increases for medical care than does the Administration. Since the

Administration proposes to limit Medicaid growth by the growth in the

medical care component of the CPI, CBO projects larger Medicaid spending.

87
Jill.

FUNCTION 570; MEDICARE

MAJOR SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 570:

MEDICARE (By fiscal year, outlays in billions of dollars)

Item 1987 1988 1989 1990

Cumulative

Five-Year

1991 Changes

CBO Baseline

Proposed Changes

75.3 84.6 94.8 106.2 119.0

Beneficiary Costs

SMI Premiums

Private Coverage for

Aged and Disabled -0.5

Deductible -0.3

Eligibility -0.2

Home Health Copayment -0.1

Subtotal -1.9

-0.9 -2.0 -3.4 -5.0 -6.8 -18.0

Hospital Reimbursements

Capital

Medical Education

Indirect costs

Direct costs

Interaction

Subtotal

Reimbursements to

Other Providers

Physicians

Other

Subtotal

Total

President's 1987 Budget

as Estimated by CBO

President's 1987 Budget

CBO Reestimates

-0.4 -1.4 -1.9

-1.4 -1.8 -2.0

-0.4 -0.5 -0.6

0.0 0.1 0.1

-2.2 -3.7 -4.4

-0.4

-0.1

70.6

70.2

0.4

-0.5

-0.2

-0.5 -0.7

76.9

76.0

0.8

-0.6

-0.3

-0.9

-4.7 -7.8 -10.3

84.5

83.0

1.4

-0.8

-0.6

-0.4

-0.1

-6.8

-2.8

-2.2

-0.7

0.2

-5.5

-0.6

-0.5

-1.1

-13.4

92.8

90.5

2.3

-0.9

-0.7

-0.4

-0.2

-8.9

-3.5

-2.4

-0.8

0.2

-6.5

-0.7

-0.6

-1.3

-16.7

102.3

98.4

3.9

-10.1

-9.8

-3.0

0.6

-22.2

-2.9

-1.7

-4.6

-52.8

8.9

88
Proposed Policy Changes

The President proposes a number of changes in Medicare that would reduce

spending relative to the CBO baseline by $4.7 billion in 1987 and $52.8

billion over the projection period. Many of the proposals have been included

in similar forms in previous budgets. The 1987 budget, however, includes a

major new initiative to reimburse hospitals for capital costs.

Almost half of the federal savings would come from proposals to

increase the costs paid by beneficiaries or their insurance companies.

Another 43 percent of the savings would be achieved by reducing reimbursements to hospitals. The remaining savings would result from reducing

reimbursements to physicians, laboratories, or other providers of medical

services.

Beneficiary Costs. Out-of-pocket costs to beneficiaries would be increased

significantly through proposed increases in the SMI premiums. The

President's proposal would establish separate premiums for individuals and

third-party payers, thereby saving $18 billion over five years. A related

proposal has been included in previous budgets.

For individuals, the premium would be gradually increased over the

next five years from 25 percent to 35 percent of program costs. For

calendar year 1987, for example, the monthly premium would be increased

by $1.40 above the baseline premium of $18.10.

For third-party payers who buy Medicare Part B coverage, the

premiums would be set at 50 percent of costs. This proposal would have the

greatest impact on the states that pay the Medicare premium for their

Medicaid beneficiaries. For calendar year 1987, the monthly premium paid

by third-party payers would be doubled. The projected monthly baseline

premium in 1991 of $21.30 would be increased to $38.50 for individuals and

to $54.90 for third-party payers.

The Administration also proposes to require employers to offer the

same insurance coverage to employees over age 69 that they provide to

other employees. The Congress recently enacted legislation to require such

coverage for employees aged 65 through 69. The proposal would make

Medicare the secondary payer for any worker choosing to accept the

insurance coverage offered by his or her employer. The same opportunity

for insurance coverage would also be required for disabled or aged

beneficiaries who have access to health insurance coverage through their

spouse's employer. Over one-half of the $3.4 billion five-year savings would

be achieved by changing the insurance coverage of the disabled.

89

IT"
JM1L

The President again proposes raising the Medicare Part B deductible

from $75 to $100 effective January 1, 1987, and indexing the deductible to

annual changes in the Medicare Economic Index (MEI) thereafter. The

deductible would be rounded to the nearest whole dollar. The estimated

deductible under this proposal for 1987 through 1991, respectively, would be

$100, $103, $107, $111, and $115.

The other proposed changes that would increase beneficiary costs have

also been included in past Administration budgets. Eligibility for Medicare

would be delayed by one full month, saving $1.6 billion over the projection

period. Beneficiaries who have not been hospitalized but use home health

care would be required to make a per-visit copayment of 1 percent of the

hospital deductible (or about $5 per visit in 1987).

Hospital Reimbursements. The President's budget includes several proposals

to reduce reimbursements to hospitals, saving $22.2 billion over the next

five years. Almost one-half of these savings would result from the

Administration's proposal, through regulation, to phase capital reimbursement into a national rate per admission by 1991. The Administration would

also disallow reimbursement for return-on-equity payments and would

change the treatment of interest earned on funded depreciation. This

change would be phased in by 1990. CBO estimates that the proposal

affecting capital would reduce reimbursements to hospitals by over 40

percent in 1991. CBO's savings estimates for this proposal are smaller than

the Administration's because of CBO's lower projected growth rates in

Medicare capital reimbursements.

The Administration would also reduce Medicare's reimbursement for

both the direct and indirect costs of medical education. These changes

require both legislative and regulatory action and would produce savings of

$12.8 billion over five years. The change in direct medical reimbursements

would eliminate payments for allied health professionals, nursing training

programs, and classroom-related expenses for residency programs.

Hospital-specific limits on residency expenditures would also be set. The

change in indirect payments would alter the formula for reimbursement and

would cut the indirect teaching adjustment in half. CBO's estimates of

savings from the indirect proposals are higher than the Administration's

because of higher growth rate assumptions in hospital spending and therefore higher indirect medical education add-on costs.

The proposed reform in capital reimbursement interacts with the

proposal to reduce reimbursement for indirect education. Indirect education

costs are calculated as a function of prospective payments. Including

capital in prospective payment rates would thus increase reimbursements

for indirect education. This interaction would reduce the savings from

enacting both proposals by $0.6 billion over the projection period.

90
Reimbursements to Other Providers. Various proposals to reduce reimbursements to physicians, laboratories, and other providers of medical services

would save an estimated $4.6 billion over the 1987-1991 period.

Five proposals would affect reimbursements to physicians. Payments

for selected physician procedures would be reduced where technological and

productivity advances, or geographic variations, indicate a cost below

existing Medicare rates. Payments would be limited both to physicians who

furnish standby anesthesia services and to those who provide unnecessary

assistants at surgery. Lens replacements after cataract surgery would be

reduced by adopting criteria that would ensure medical necessity, and

excessive payments for lens replacements would be reduced. Finally, the

MEI would be recomputed for past years using a "rental equivalence"

measure of housing prices in the Consumer Price Index, which forms part of

the MEI.

The Administration also proposes to freeze, during 1987, Medicare's

reimbursement for laboratory services performed in clinical laboratories,

physicians' offices, and in hospital out-patient departments; to revise

payment rates for end-stage renal disease treatments where recent data

indicate that payments may be too high; and to eliminate payments to

providers for services not covered under Medicare for which a partial

payment is currently made.

CBO Reestimates

CBO projects higher growth in baseline spending for Medicare than does the

Administration, primarily for the Hospital Insurance program. CBO's

projected payments to hospitals under the prospective payment system (PPS)

show higher growth for both economic and technical reasons. The prices of

goods and services in the hospital market basket used to determine hospital

payments are higher in 1990 and 1991 under CBO's assumptions. Also,

reflecting a continuation of recent trends, CBO projects somewhat larger

changes in the mix of cases toward those with higher payment rates. By

1991, the CBO projections are about 3 percent above those of the

Administration.

91
iiiiii tillH mini

FUNCTION 600; INCOME SECURITY

MAJOR SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 600:

INCOME SECURITY (By fiscal year, outlays in billions of dollars)

Item 1987 1988 1989 1990

Cumulative

Five-Year

1991 Changes

CBO Baseline 124.1 130.6 135.2 140.5 148.2

Proposed Changes

Retirement and Disability

Civil Service -0.6 -1.3 -1.9

Military and Other -0.5 -0.7 -0.8

Housing Assistance -2.1 -3.2 -3.6

Nutrition -0.9 -1.1 -1.2

Aid to Families with

Dependent Children -0.1 -0.2 -0.2

Food Stamps -0.2 -0.3 -0.4

Pension Benefit

Guaranty Corporation -0.2 -0.2

Low-Income Energy 0.2 0.1

Refugee Assistance -0.1 -0.1

Other -0.1 -0.1

-2.5

-0.9

-4.0

-1.3

-0.2

-0.5

-0.1

a/

-0.1

-0.1

-3.3

-0.9

-4.1

-1.5

-0.2

-0.5

-0.1

-0.1

-0.1

-0.1

Total

President's 1987 Budget

as Estimated by CBO

President's 1987 Budget

CBO Reestimates

119.5 123.7 127.0

118.4 123.1 125.7

1.1 0.5 1.2

130.9 137.4

128.3 132.5

2.6 4.9

-9.6

-3.8

-17.0

-5.9

-0.7

-1.9

-0.7

0.2

-0.4

-0.4

-4.6 -6.9 -8.3 -9.6 -10.8 -40.1

10.4

Proposed Policy Changes

The President's proposals in income security would reduce outlays below

CBO's baseline by 7 percent in 1991 and would save $40.1 billion over the

1987-1991 period. Several of the President's major policy themes are

evident in the income security cuts. The Administration proposes to reduce

retirement and disability benefits of government employees to, in its view,

make them more comparable with private-sector benefits. The budget also

proposes to curtail housing assistance by almost 25 percent, and shift to

92
vouchers, to encourage privatization. Programs for low- and moderateincome families would be affected in several ways. Benefits from child

nutrition programs would be targeted more toward lower-income families by

abolishing the subsidies to families with incomes above 185 percent of the

poverty threshold. Work requirements would be strengthened in Aid to

Families with Dependent Children and in Food Stamps.

Retirement and Disability. The President proposes several changes for

retirement and disability programs, many of which have appeared in several

of his previous years' budgets. The Congress spent much of last year

working on legislation to create a new retirement system for federal

employees hired after 1984, but adopted none of the President's proposed

changes to the current retirement system. There also were no legislative

changes in the military or railroad retirement programs. In fact, the only

reduction in these programs that would occur as a result of legislative

action last year is the elimination of the cost-of-living adjustments (COLAs)

for 1986 under the sequestration provisions of the Balanced Budget Act.

This year the President again proposes to limit COLAs, which accounts

for 90 percent of the savings proposed in retirement and disability programs.

COLAs would be eliminated in 1987 for military retirees and rail industry

pensioners. The COLA would also be eliminated in 1987 for Civil Service

and Foreign Service retirees and, in addition, their benefits would be

increased in future years by 2 percentage points less than the Consumer

Price Index (CPI). By 1991, Civil Service Retirement benefits would be 10

percent lower under this proposal than under current law.

Other proposals in Civil Service Retirement would reduce benefits for

early retirement, change the basis on which benefits are calculated from the

highest three years of salary to the highest five years, and change certain

benefits to conform with treatment of similar benefits in Social Security.

These latter two changes would also apply to Foreign Service Retirement.

In addition to the proposed outlay reductions in Civil Service

Retirement, the President's budget proposes an increase of 2 percentage

points in agency and employee contributions for retirement. The U.S. Postal

Service and the District of Columbia would also be required to pay the full

government share of their employees' retirement benefits. These changes

would increase trust fund balances, but would have no effect on retirement

outlays.

The Administration also proposes to reclassify certain Railroad

Retirement beneficiaries so that they would receive the lower rail industry

pension COLA instead of the Social Security COLA they currently receive.

The President also proposes reducing the federal subsidy for windfall

benefits received by some railroad retirees. The reduced federal subsidy

would be covered by increased rail industry contributions.

93
•Ill

Benefits in the Black Lung and Special Benefits for Disabled Coal

Miners programs are indexed to changes in federal pay. The President

proposes to limit federal pay increases to 3 percent in each year, lowering

outlays in the two disability programs below the CBO baseline.

Housing Assistance. The President's budget would cut housing assistance

sharply from current levels. For fiscal year 1986, the Congress has

appropriated over $9.8 billion for the Department of Housing and Urban

Development's (HUD) rental assistance and public housing programs. After

the reductions required by the Balanced Budget Act, this amount is

estimated to be sufficient to assist about 93,000 additional housing units,

over 11,000 of which would be newly built units intended for elderly or

handicapped households. Also included was funding for about 6,500 public

housing units and $1.4 billion for modernizing existing public housing

projects. The CBO baseline is based on the 1986 appropriation act and

includes the amounts estimated to be necessary to provide for 93,000

additional units in each year.

The Administration's budget proposes that newly assisted units be

limited to 50,000 per year starting in 1986. The budget also assumes that

these subsidies would be in the form of five-year vouchers rather than the

more traditional 15- to 20-year rental assistance contracts. No additional

funding would be provided for the elderly, handicapped, or public housing

construction programs. In addition to these changes, the President has

proposed a one-year freeze on rent increases for much of the assisted

housing inventory. Annual rent adjustments to allow for cost increases

would resume in 1988. In order to further reduce program costs, HUD

intends to reduce sharply the administrative fees paid to public housing

authorities. It is anticipated that local governments would offset the lower

federal payments. Together, these cuts would total $13.8 billion over five

years.

The President's budget would also cut spending of the Public Housing

Loan Fund, by a five-year total of $2.2 billion. New public housing

construction would be eliminated. The modernization of existing projects,

however, would continue. It is proposed that this activity be financed with

federal grants rather than with the long-term direct loans now used. Since,

under existing procedures, HUD provides both the direct loans and the

payments necessary to amortize the loans, this proposal would have no

effect on overall program costs. The Administration's budget includes

limited modernization funding for 1986 and 1987, but assumes increased

spending in 1988 through 1991.

Finally, public housing operating subsidies and other assistance would

be cut by $0.9 billion over five years. The Administration proposes a

reduction in operating subsidies in 1987, with moderate increases in later

years, while CBO's baseline is based on the 1986 level, adjusted for inflation.

94
Nutrition Programs. The Administration's major proposal to reduce

nutrition programs is to eliminate cash and commodity subsidies to children

from families with incomes above 185 percent of the poverty level. In

addition to this proposal, which was also included in last year's budget, the

Administration proposes capping extra payments for breakfasts and lunches

served in schools designated in "severe need," lowering summer food rates to

be comparable with rates in schools and child care centers, eliminating the

Nutrition Education and Training program, and eliminating administrative

funding for child care audits.

Eliminating subsidies to children from families with incomes above 185

percent of the poverty level is estimated to save a five-year total of $4.5

billion. Subsidies would be eliminated for approximately 50 percent of the

lunches and 10 percent of the breakfasts served in schools, 25 percent of the

meals served in child care centers, 65 percent of the meals served in family

day care homes, and 95 percent of the half-pints of milk served under the

Special Milk program. Total program spending would be cut less

dramatically because the per-meal subsidy is lower for the eliminated

subsidies than for the remaining subsidies to children from low- and

moderate-income families.

Although the proposal would not directly cut subsidies to families with

incomes below 185 percent of poverty, some children from lower-income

families would be affected if the schools they attend were to drop out of the

program. The Administration assumes that no schools would discontinue the

program and thus is showing slightly lower savings than CBO, which assumes

some schools would drop out.

The Administration also proposes eliminating the Emergency Food

Distribution and Shelter program, saving $0.4 billion over five years. The

Nutrition Assistance program in Puerto Rico would receive a flat grant of

$825 million annually, which is $0.4 billion below the baseline levels for 1987

through 1991. Proposed funding for the Supplemental Food Program for

Women, Infants, and Children (WIC) equals CBO's baseline in 1987, but would

save $0.2 billion over the next four years through small caseload reductions.

Aid to Families with Dependent Children (AFDC). The most far-reaching

AFDC proposal in the President's budget would require most employable

AFDC recipients to participate in a work-related activity, such as job

search or workfare. CBO's estimate of the proposal shows costs to exceed

savings in AFDC, while the Administration's estimate shows savings to

exceed costs. Studies of job search programs, which often entail two to six

weeks of search, have found them to save money on balance. The first

adequate evidence on workfare programs should become available shortly,

but until then their cost effectiveness is uncertain. Moreover, existing state

workfare programs typically require participants to remain in workfare for

95
only a few months, whereas the Administration's proposal would require

continual participation for many AFDC recipients, adding to the proposal's

cost. The proposal also generates sizable savings in Medicaid, which would

more than offset CBO's estimated costs in AFDC. However, because the

President's budget proposes a cap on the Medicaid program, these potential

savings would not be realized by the federal government.

Other AFDC proposals, like work requirements, have in most cases

been proposed before. These proposals would require that most mothers

under 18 years of age live with their parents; remove an employable adult's

benefits when the youngest child reaches age 16; and tighten the definition

of an "essential" person. Together these proposals would save an estimated

$125 million a year and affect about 175,000 families. In addition, matching

rates on costs from automatic data processing systems would be reduced to

50 percent by 1990 and thereafter from the current 90 percent. Matching

rates would also be reduced for a few states with administrative costs per

recipient that are greater than 175 percent of the U.S. median.

Food Stamps. The President's budget proposes to reduce Food Stamp

spending by repealing the program expansions authorized under the recently

enacted Food Security Act of 1985. The repeal of increases in the asset

limitation and in the earned income, dependent care, and shelter deductions,

which are scheduled to occur May 1, 1986, is estimated to save less than

$0.1 billion in 1986 and $1.2 billion over the following five years. The

budget also proposes to eliminate some overlap of benefits between the

Food Stamp Program and assistance received under the Low-Income Home

Energy Assistance Act and the Job Training Partnership Act. These two

proposals, considered but rejected during last year's farm bill debate, would

together save an estimated $0.4 billion over five years.

The Administration would also modify the employment and training

program authorized last December by increasing the percentage of work

registrants required to participate to 25 percent in 1987, 50 percent in 1988,

and 75 percent in 1989; adding an additional requirement of universal job

search upon application; and reducing the federal share of administrative

costs. CBO estimates that savings in the work program would be $0.1 billion

annually. Lack of certainty about how either the existing program or the

proposed program would be implemented make this estimate quite tentative.

The budget also proposes to increase fiscal sanctions for states with high

error rates. Based on the difficulty in collecting fiscal sanctions thus far,

CBO estimates that the proposed 1987 sanctions would not be collected until

1990.

Pension Benefit Guaranty Corporation (PBGC). The President's budget

proposes an increase in the PBGC premium for the single employer plan

from $2.60 to $8.10 per employee per year. This proposal has appeared in

96
several previous budgets. The CBO estimate of savings from the premium

increase is significantly lower in the out-years than the Administration's

because CBO assumes that the additional premiums would merely partially

substitute for other receipts (transfers from trust funds).

Low-Income Energy Assistance. In the President's budget, the energy

assistance program for low-income households would be funded at $2.1

billion through 1991. The CBO baseline is below this level in 1987 through

1989 because it reflects falling energy prices in the near term. Thus, the

program would show costs through 1989 followed by savings in later years.

Refugee and Entrant Assistance. The Administration is proposing, beginning

in 1987, that refugees become ineligible for AFDC and Medicaid and instead

become eligible for yet-to-be-proposed cash and medical assistance under

the refugee program. While this proposal increases budget authority for the

refugee program, a corresponding decrease in budget authority would occur

in AFDC and Medicaid. In addition, the Administration is proposing that

refugees receive assistance only for the first 18 months after arriving in the

United States, rather than for 36 months as under current law. After the

first 18 months, refugees could become eligible for AFDC and Medicaid, but

the states would not be reimbursed for their share of these costs.

Other. Other proposed changes in income security include those in

Supplemental Security Income (SSI), Child Support Enforcement (CSE), and

in the Department of Health and Human Services' management and research

activities. The President's budget carries savings of $34 million a year in

SSI. Because the proposed changes have not yet been specified, however,

CBO shows no savings. In CSE, the lower federal match rate required under

the Balanced Budget Act would be continued, and the match rate on

automatic data processing would be reduced, leading to savings of $0.1

billion over the five-year period. In general departmental management,

policy research, and the Office of the Inspector General, the President's

budget requests constant budget authority throughout the 1987-1991 period,

resulting in cumulative five-year savings of $0.3 billion compared to CBO's

baseline.

CBO Reestimates

CBO reestimates raise the President's budget by $10.4 billion over the fiveyear period. More than three-quarters of the reestimate reflects different

economic assumptions—mainly CBO's higher prices and thus COLAs but also

CBO's higher unemployment rates. Technical reestimates total $2.3 billion

over the period and are the net of many upward and downward reestimates

in the various income security programs. The larger income security

programs are entitlements, and the technical reestimates usually reflect

differences either in projected numbers of beneficiaries or in average

benefit levels per beneficiary, or in both.

97

~~ ' i iiHillllllll BIB I
FUNCTION 650; SOCIAL SECURITY

MAJOR SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 650:

SOCIAL SECURITY (By fiscal year, outlays in billions of dollars)

Item 1987 1988 1989 1990

Cumulative

Five-Year

1991 Changes

CBO Baseline

Proposed Changes

Administrative costs

Total

211.6 226.3 241.7 258.2 275.9

0.1

0.1

-0.1

-0.1

-0.2

-0.2

-0.3

-0.3

-0.4

-0.4

President's 1987 Budget

as Estimated by CBO 211.6 226.2 241.5 257.9 275.5

President's 1987 Budget 212.2 226.1 239.9 254.7 263.5

CBO Reestimates -0.6 0.1 1.6 3.2 12.0

-0.9

-0.9

16.4

Proposed Policy Changes

The President proposes no changes to Social Security cash benefits, but

resubmits the proposal in last year's budget to reduce the number of Social

Security Administration (SSA) employees to 63,000 by 1990—a reduction of

17,000 from the fiscal year 1984 level. This initiative, combined with a

freeze in other administrative costs, would save about $0.9 billion over the

next five years. On the other hand, the President's 1987 request for SSA

administrative expenses is about $73 million higher in the Old-Age and

Survivors Insurance (OASI) and Disability Insurance (DI) programs than is

assumed in the CBO baseline. In essence, the President's request for 1987

administrative expenses would restore much of the base reduction that

occurred from the 1986 sequestration.

The Administration proposes these staffing reductions because of

increases in productivity arising from the systems modernization program

now under way at SSA. It is uncertain what the magnitude of these

productivity increases might be. Last year the Congress appropriated more

98
funds than the President had requested specifically to ensure that the

proposed staffing reduction would not be undertaken so quickly as to

jeopardize service delivery.

CBO Reestimates

CBO has reestimated the President's budget request upward by a total of

$16.4 billion for 1987-1991. Most of this increase results from the higher

cost-of-living adjustments (COLA) in the CBO economic assumptions. The

difference is particularly significant in 1991, the year for which CBO

projects a 4.3 percent COLA and the Administration shows no COLA,

because it projects prices to increase by less than 3.0 percent. (Under

current law, Social Security COLAs are delayed if the year-to-year price

increase—measured on a third-quarter basis—is less than 3 percent.)

99
Jill

FUNCTION 700; VETERANS' BENEFITS AND SERVICES

MAJOR SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 700:

VETERANS' BENEFITS AND SERVICES

(By fiscal year, outlays in billions of dollars)

Item 1987 1988 1989 1990

Cumulative

Five-Year

1991 Changes

CBO Baseline

Proposed Changes

Medical Care

Reduce number

of patients

Require insurance

reimbursement

Loan Guaranty

Job Training

New GI Bill

Compensation

Other

Total

President's 1987 Budget

as Estimated by CBO

President's 1987 Budget

CBO Reestimates

27.0 27.8 28.1 28.5 29.2

-0.3 -0.6 -0.9 -1.0 -1.0 -3.7

-0.1

-0.1

a/

a/

a/

a/

-0.1

-0.2

-0.1

a/

a/

a/

-0.2

-0.2

-0.1

a/

-0.1

-0.1

-0.2

-0.2

-0.1

-0.1

-0.2

-0.2

-0.2

-0.2

-0.1

-0.1

-0.6

-0.2

-0.7

-0.9

-0.3

-0.2

-0.8

-0.5

-0.6 -0.9 -1.4 -1.8 -2.3 -7.0

26.5 26.9 26.7 26.7 26.8

26.4 26.9 26.9 27.2 27.1

a/ a/ -0.2 -0.5 -0.3 -0.9

a. Less than $50 million.

Proposed Policy Changes

The President's 1987 budget for veterans' benefits and services proposes

sharp reductions in spending for veterans' medical care, as well as changes

in veterans' education, housing, and burial benefits.

100
Medical Care. The largest reductions proposed by the President in function

700 are in spending for medical care services provided by the Veterans

Administration (VA). The outlays projected by the President over the 1987-

1991 period are $4.4 billion below the CBO baseline. These spending cuts

are to be achieved primarily through a reduction in the number of patients

treated in VA health care facilities. In connection with this reduction, the

Administration is again proposing a means test to assist the VA in

identifying those veterans with the least need for free VA care. However,

the President's requested budget authority levels would necessitate a

reduction in the number of patients even if the means test were not

enacted. The Administration has estimated that by 1991, hospital

discharges and outpatient visits would each be reduced by 15 percent in

order to achieve the spending reductions.

A means test for VA health care was also proposed in the President's

1986 budget but was rejected by the Congress in favor of a provision to

require copayments by veterans without service-connected disabilities who

have incomes above a certain level. The requirement of copayments,

however, would reduce medical care outlays by far less than the

Administration's means test. The Congressional proposal was included in the

conference version of H.R. 3128, the 1986 reconciliation bill.

The President is also repeating his proposal to require third-party

health care insurers to reimburse the VA for care provided to insured

veterans without service-connected disabilities. The CBO estimates that

the receipts from this proposal would be less than 60 percent of the amounts

estimated by the VA, however. A similar provision was included in the

conference version of H.R. 3128.

Loan Guaranty Revolving Fund. The 1987 budget includes a proposal to

increase the origination fee required of veterans and others obtaining VA

guaranteed and direct loans. The fee would be raised from its current level

of 1.0 percent of the mortgage principal to 2.0 percent in 1987, 2.5 percent

in 1988, 3.0 percent in 1989, and 3.8 percent in 1990 and thereafter. In his

1986 budget request, the President proposed that the origination fee be

increased to 5.0 percent.

The VA estimate of the savings from this proposal assumes that the

only effect would be an increase in fee collections. The CBO estimate, on

the other hand, assumes that the rising fees would reduce the demand for

loans and increase default rates. This results in a lower CBO estimate of

savings in the out-years than that reflected in the President's budget.

Job Training. The President has not requested any funding for veterans' job

training. Since the CBO baseline assumes that the job training program will

be extended at the current level, the Administration's proposal would result

in outlay savings of between $49 million and $66 million a year.

101

~ imniiin urn i
New GI Bill. The President has proposed to repeal the All-Volunteer Force

Educational Assistance program (New GI Bill) starting on October 1, 1986,

and to reinstate the Post-Vietnam Era Veterans' Educational Assistance

program (VEAP). Under current law, this change is not scheduled to occur

until June 30, 1988. The savings from the President's proposal result from

the fact that the increase in VEAP outlays would not be as large as the

reduction in New GI Bill spending, especially in 1990 and 1991.

Compensation. Even though the compensation program is not indexed by

law, its benefits historically have been increased for inflation each year

through legislation. Both the CBO baseline and the President's budget

request reflect these out-year inflation increases. The President's budget,

however, assumes significantly lower cost-of-living adjustments (COLAs)

than are reflected in the CBO baseline. Because the compensation COLAs

are discretionary, CBO's estimate of the President's budget uses the budget's

assumed COLA levels.

Other. In a variety of medical and other accounts, the President's requested

budget authority does not accommodate the full effects of inflation, which

are assumed in the CBO baseline.

CBO Reestimates

In addition to the CBO reestimates of the impact of the President's

legislative proposals, there are a number of reestimates of current law

spending. Lower outlay estimates in compensation and pensions, resulting

from lower average benefit projections, and a slower spending estimate in

the Construction and Major Projects appropriation account cause the CBO

estimate to be more than $900 million below the President's over the fiveyear period.

Credit Programs

The President's proposed increase in the loan origination fee would affect

guaranteed loan commitments, in addition to lowering program outlays. The

CBO estimates that the demand for new loans would fall by approximately

15 percent by 1991, because some marginal borrowers would no longer be

able to qualify for mortgages after the higher fee level is added to the

mortgage principal. Other borrowers may find conventional financing to be

more advantageous in light of the higher fees. The Administration has

assumed that the fee increase would not affect the demand for loans. These

proposals are summarized in the table on the following page.

102
MAJOR CREDIT PROGRAM CHANGES PROPOSED FOR BUDGET

FUNCTION 700: VETERANS' BENEFITS AND SERVICES

(By fiscal year, in billions of dollars)

Cumulative

Five-Year

Item 1987 1988 1989 1990 1991 Changes

Guaranteed Loan Commitments

CBO Baseline 16.3 16.9 17.5 18.1 18.8

Proposed Changes

Loan Guaranty -0.7 -1.1 -1.5 -2.1 -2.2 -7.0

President's 1987 Budget

as Estimated by CBO 15.6 15.9 16.1 16.0 16.6

103

iw»inr GUI
II 111

FUNCTION 730; ADMINISTRATION OF JUSTICE

MAJOR SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 750:

ADMINISTRATION OF JUSTICE

(By fiscal year, outlays in billions of dollars)

Item 1987 1988 1989

Cumulative

Five-Year

1990 1991 Changes

CBO Baseline

Proposed Changes

FBI and DEA

The Judiciary

Legal Services

Corporation

Criminal Justice

Assistance

Other Enforcement,

Litigative, and Correctional Activities

Total

President's 1987 Budget

as Estimated by CBO

President's 1987 Budget

CBO Reestimates

7.0

0.1

0.1

-0.3

-0.1

0.2

0.1

7.1

6.9

0.1

7.1

0.1

0.2

-0.3

-0.2

0.3

0.1

7.2

7.0

0.2

7.3

0.1

0.2

-0.3

-0.2

0.3

a/

7.3

7.1

0.2

7A

0.1

0.2

-0.*

-0.2

0.2

0.1

7.3

7.1

0.2

7.5

0.1

0.2

-0.*

-0.1

0.2

0.1

7.4

7.2

0.2

0.6

0.8

-1.7

-0.9

1.2

0.1

1.0

a. Less than $50 million.

Proposed Policy Changes

Unlike most functions in the budget, the President is proposing to increase

funding for the administration of justice in 1987 and to maintain spending at

clsoe to the baseline level over the 1987-1991 period. Increased spending is

being proposed for law enforcement, particularly drug enforcement, prison

104
construction and maintenance, and federal litigative activities. These

increases are partially offset by proposed reductions in legal services for the

poor and justice assistance programs.

The Administration is requesting additional funding for the Federal

Bureau of Investigation (FBI) and Drug Enforcement Administration (DEA)

to increase personnel and acquire advanced technology. The requested 1987

budget authority for these agencies is $1.7 billion, compared with the CBO

baseline of $1.6 billion. The planned increases are for additional FBI

positions for foreign counterintelligence and support staffing, for additional

DEA drug enforcement agents, and for the design and development of

investigative computer capabilities. The Administration is requesting an

additional $27 million in budget authority for implementation of a system to

maintain privacy of investigative communications at these agencies. The

budget includes spending for these agencies that is about $0.6 billion above

the baseline for 1987-1991.

The President's budget includes additional spending for judicial activities, largely for supporting personnel, especially clerks for bankruptcy

offices. Increases over the baseline are also requested for other

Department of Justice activities, including litigation and operation of the

federal prison system. Total outlays for the department's litigative and

correctional activities would be about $1.1 billion above the baseline over

the 1987-1991 period, and spending for other law enforcement agencies

would be about $0.2 billion above the baseline for the five-year period.

The President is also proposing selected reductions in this function.

As in previous years, this budget proposes to terminate the Legal Services

Corporation in 1987, with savings of $300 million to $400 million annually

relative to the CBO baseline. Unobligated funds for justice assistance would

be rescinded in 1986 and programs reduced or eliminated in 1987. Grants

for juvenile justice and delinquency programs, as well as state and local

assistance, Mariel Cubans, and the regional information sharing system

would be terminated. In addition, the Administration is proposing to limit

obligations from the Crime Victims fund to $35 million in 1987 and later

years. Spending reductions for justice assistance would total $0.9 billion

from 1987 through 1991.

CBO Reestimates

Based on historical spending rates, CBO estimates slightly higher spending

than the Administration for programs in this function.

105
.JIM

FUNCTION 800; GENERAL GOVERNMENT

MA3OR SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 800:

GENERAL GOVERNMENT (By fiscal year, outlays in billions of dollars)

Cumulative

Five-Year

Item 1987 1988 1989 1990 1991 Changes

CBO Baseline 5.7 5.9 5.9 6.2 6.3

Proposed Changes

Internal Revenue

Service 0.5 0.8 1.0 1.1 1.1 4.5

Legislative Branch 0.2 0.2 0.1 0.1 0.1 0.7

Government-sponsored

Enterprise Fees a/ -0.2 -0.5 -0.7 -1.0 -2.4

Customs Fees -0.5 -0.5 -0.5 -0.5 -0.5 -2.5

Federal Financing Bank 0.2 0.2 0.4 0.3 0.2 1.3

Other 0.1 — — -0.1 -0.1 -0.1

Total 0.5 0.5 0.5 0.2 -0.2 1.5

President's 1987 Budget

as Estimated by CBO

President's 1987 Budget

CBO Reestimates

6.2

6.1

0.1

6.4

5.7

0.7

6.4

6.1

0.3

6.4

5.9

0.5

6.0

5.6

0.4 2.0

a. Less than $50 million.

Proposed Policy Changes

The President is proposing increased funding for general government activities that, when offset by proposed user fees, would result in outlays $1.5

billion above the baseline over the 1987-1991 period. The largest increase is

for the Internal Revenue Service, to fund several initiatives aimed at

increasing revenue collections, including the hiring of 7,500 new examiners

beginning in 1987. Additional spending would be more than $1.0 billion a

year by 1990, and would total $4.5 billion over the five-year period.

Increases above the baseline are also requested for many legislative branch

accounts.

106
The budget also assumes enactment of the conference provisions of

H.R. 3128, the Consolidated Omnibus Budget Reconciliation Act of 1985,

which authorize the Customs Service to collect user fees for the processing

of passengers and commercial carriers entering the United States. The

Administration intends to propose additional fees for the processing of

merchandise, with total collections from customs fees estimated to be $0.5

billion annually.

The budget includes a proposal, similar to one in the 1986 budget, to

levy an annual fee on debt and other securities issued by governmentsponsored enterprises, beginning in 1987. The affected enterprises include

the Federal National Mortgage Association (Fannie Mae), the Federal Home

Loan Mortgage Corporation (Freddie Mac), the Student Loan Marketing

Association (Sallie Mae), the Farm Credit System, and the Federal Home

Loan Bank System. The fees would vary among institutions according to the

extent of government risk. Fees would begin at 0.1 percent for net new

debt issued in 1987, except for the Farm Credit System, which would start

at a fee of 0.01 percent. By 1991, fees on net new debt would rise to 0.5

percent for Fannie Mae and the Farm Credit Banks, and to 0.15 percent for

the other affected enterprises. These fees would raise $2.4 billion over the

1987-1991 period, as larger amounts of debt become subject to the annually

increasing fees. (These fees are discussed further in Appendix A.)

The budget also proposes to show the surplus income of the Federal

Financing Bank in the net interest function of the budget rather than in the

general government function, which would increase general government

outlays by $1.3 billion over five years, but would have no net effect on the

budget.

CBO Reestimates

The budget assumes that renewed efforts to identify and sell surplus federal

property would raise about $1.5 billion over the 1987-1991 period. Because

earlier attempts by the Administration to sell property fell substantially

short of stated goals, CBO estimates that surplus property sales will result

in receipts of only $0.3 billion over the next five years. For a number of

other programs, CBO has estimated outlays greater than in the budget,

based on historical patterns.

107
FUNCTION 850; GENERAL PURPOSE FISCAL ASSISTANCE

MAJOR SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 850:

GENERAL PURPOSE FISCAL ASSISTANCE

(By fiscal year, outlays in billions of dollars)

Cumulative

Five-Year

Item 1987 1988 1989 1990 1991 Changes

CBO Baseline 6.2 6.6 6.7 6.8 6.9

Proposed Changes

Elimination of General

Revenue Sharing -4.2 -4.6 -4.6 -4.6 -4.6 -22.6

Payments to states,

mineral and timber

receipts cost sharing

Other

Total

President's 1987 Budget

as Estimated by CBO

President's 1987 Budget

CBO Reestimates

-0.2

a/

-4.4

1.7

1.7

a/

-0.2

a/

-4.8

1.8

1.8

a/

-0.3

0.1

-4.8

1.9

1.9

!/

-0.3

0.1

-4.8

2.0

2.0

a/

-0.3

0.1

-4.8

2.1

2.0

0.1

-1.3

0.3

-23.6

0.1

a. Less than $50 million.

Proposed Policy Changes

The President's budget proposes a sharp reduction in general purpose fiscal

assistance funds provided to state and local governments, largely by eliminating General Revenue Sharing (GRS). Total spending for the function

would decline from $5.9 billion in 1986, to $1.7 billion in 1987, with slight

increases thereafter.

Between 1981 and 1985, GRS provided $4.6 billion annually in unrestricted grants to approximately 39,000 local governments—counties,

108
municipalities, townships, and Indian tribes. For 1986, the Congress reduced

funding to $4.2 billion, before reductions required by the 1985 Balanced

Budget and Emergency Deficit Control Act. Elimination of GRS, including a

rescission of the fourth quarterly payment for 1986, would result in savings

from the CBO baseline of approximately $4.2 billion in 1987 and $4.6 billion

annually thereafter, for total savings over five years of $22.6 billion. The

Administration argues that local governments have become less dependent

on revenue sharing funds and that the federal government can no longer

afford the program.

The President's budget would also reduce the amount of federal timber

and mineral receipts shared with state and local governments by calculating

their share after deducting collection costs. Currently the states' and

counties' share of such receipts is calculated by the Forest Service and

Bureau of Land Management as a percentage of gross, not net, receipts.

CBO estimates that this proposal would result in savings of approximately

$240 million in 1987, increasing to $270 million in 1991.

CBO Reestimates

CBO's outlay estimates do not differ significantly from the Administration's

estimates for this function.

109
IIHII HHIIIMIfl!

FUNCTION 900: NET INTEREST

MA30R SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 900:

NET INTEREST (By fiscal year, outlays in billions of dollars)

Item 1987 1988 1989

Cumulative

Five-Year

1990 1991 Changes

CBO Baseline

Proposed Changes

Public Debt

HUD Interest

Federal Financing

Bank

SBA Interest

Sale of Bonneville

Power Administration

Other

Total

President's 1987 Budget

as Estimated by CBO

President's 1987 Budget

CBO Reestimates

145.0

-1.2

1.*

0.1

-0.4

0.0

-0.2

-0.2

144.7

148.0

-3.3

154.4

-3.4

1.5

0.3

0.1

0.0

-0.2

-1.7

152.7

145.1

7.6

157.6

-6.5

1.6

0.5

0.2

0.2

-0.3

-4.4

153.2

136.0

17.2

159.1

-10.1

1.7

0.7

0.3

0.2

0.2

-7.4

151.7

125.6

26.1

160.3

-13.9

1.8

1.1

0.3

0.2

-0.1

-10.7

149.6

115.9

33.8

-35.1

8.0

2.7

0.5

0.6

-1.1

-24.4

81.4

Proposed Policy Changes

The largest change in net interest spending in the budget occurs because the

Administration's projected deficits are lower than those contained in the

CBO baseline. The lower deficits are the consequence of the proposed

spending cuts, which reduce the government's borrowing needs and its

interest costs. These interest savings rise dramatically over time, from $1.2

billion in 1987 to $13.9 billion in 1991.

Several of the proposals would increase net interest outlays compared

with the CBO baseline. The largest of these is the forgiveness of an interest

110
payment owed by the Department of Housing and Urban Development (HUD)

to the Treasury. Since passage of the Deficit Reduction Act of 1984 (Public

Law 98-369), HUD has financed the low-rent public housing program by

direct loans rather than by guaranteeing the tax-exempt market borrowing

of local public housing authorities. In 1985, when approximately $14 billion

in outstanding guaranteed loans reached maturity, HUD borrowed from the

Treasury to redeem the loans. HUD now owes the Treasury this $14 billion,

plus capitalized interest, plus additional debt service. The Administration

proposes to forgive this obligation and any interest due the Treasury. This

proposal reduces outlays in budget function 600 (Income Security) by $1.4

billion in 1987 and by $1.8 billion in 1991. Because interest receipts in the

net interest function are reduced by an equal amount, the proposal has no

net budgetary effect.

The President's budget proposes to curtail the Federal Financing

Bank's (FFB) lending activity. By the end of 1991, total FFB loans

outstanding are projected to be $153 billion, under the President's proposals,

compared with $173 billion in the CBO baseline. As a result, interest

receipts from the FFB are only slightly lower than the CBO baseline in 1987,

but are lower by $1.1 billion in 1991. (Since FFB interest enters the budget

as an offsetting receipt—a negative outlay—reductions in interest receipts

are recorded with a positive sign.)

Two of the President's proposals that affect net interest involve the

sale of assets. The sale of the loan portfolios of the Small Business

Administration (SBA) would reduce interest receipts by $0.5 billion over the

1987-1991 period. The proposal to sell the Bonneville Power Administration

(BPA) in 1988 results in a loss of interest receipts to the Treasury from

BPA's borrowing. The loss is $0.2 billion in each year, from 1989 through

1991. The proceeds from the proposed sales are shown in budget functions

370 and 450 (for SBA) and 950 (for Bonneville).

Other proposals result in small changes in net interest. Among these

are reclassifying the FFB surplus (interest receipts in excess of administrative costs) from general government (budget function 800) to net interest,

increasing the FFB lending premium from one-eighth percentage point to

one-half percentage point, and various changes that affect intragovernmental interest receipts.

CBO Reestimates

Of the $81.4 billion in reestimates made to the budget's net interest figures

over the 1987-1991 period, over two-thirds—$57 billion--results from

differences in interest rate assumptions. These reestimates range from

111

HIHTIIT
-$1.6 billion in 1987 (when CBO's interest rate assumptions are below the

President's for most of the fiscal year) to $24.1 billion in 1991.

Another $26 billion in reestimates over the five-year period results

from deficits that are higher than those contained in the President's budget.

Because of reestimates revenues and outlays in other budget functions, CBO

projects that federal borrowing needs would be higher than those forecast by

the Administration. Additional interest costs from this borrowing grow

from $0.8 billion in 1987 to $9.3 billion in 1991.

The rest of the CBO reestimates of net interest are of varying signs,

and their effect over the 1987-1991 period totals -$1.6 billion. One of the

largest among these reestimates is for interest receipts from Outer

Continental Shelf escrow accounts, where CBO estimates differ in timing

and amount from those of the Administration, as discussed in budget

function 950. Additional reestimates result from different assumptions

about patterns of lending through the FFB and other programs, different

assumptions about the maturity mix of Treasury borrowing, and other

factors. These reestimates are more fully discussed in Appendix C.

112
FUNCTION 920; ALLOWANCES

MAJOR SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 920:

ALLOWANCES (By fiscal year, outlays in billions of dollars)

Cumulative

Five-Year

Item 1987 1988 1989 1990 1991 Changes

CBO Baseline 1.1 3.2 5.5 8.0 10.7

Proposed Changes

Civilian Agency Pay

Raises -0.7 -1.3 -2.5 -3.7 -5.2 -13.4

Increased Employer

Share, Employee

Retirement 0.3 0.5 0.4 0.4 0.4 2.0

Total -0.4 -0.8 -2.0 -3.3 -4.8 -11.3

President's 1987 Budget

as Estimated by CBO

President's 1987 Budget

CBO Reestimates

0.7

0.8

a/

2.3

2.4

a/

3.5

3.5

a/

4.7

4.7

a/

5.9

5.9

-0.1 -0.2

a. Less than $50 million.

Proposed Policy Changes

The allowances function contains two proposals affecting pay levels and

retirement contributions for employees of civilian agencies. The Administration is proposing to limit pay rate increases to 3.0 percent each year for

white- and blue-collar civilian employees, effective in January for whitecollar employees and with a three-month delay for blue-collar

employees. The Administration, however, requests only one-half of the

amount necessary to fund the proposed increase in 1987. Thus, civilian

agencies would be required to pay for 50 percent of the 1987 pay raise from

other funds. On the other hand, the Administration requests funding of the

total cost of the 1987 pay raise for Department of Defense civilians, shown

113
in the national defense function. Uniformed employees of civilian agencies

would receive the same increases as Department of Defense military employees.

The CBO baseline assumes pay rate increases equal to the annual rate

of projected growth in private-sector pay: 3.3 percent in fiscal year 1987,

5.8 percent in 1988, 5.9 percent in 1989, 5.9 percent in 1990, and 6.1

percent in 1991, effective in October each year for white-collar employees.

CBO estimates that the Administration's proposal will reduce outlays by

$0.7 billion in 1987 and by a total of $13.* billion through 1991, compared

with the CBO baseline.

The Administration also proposes to increase the amount that all

civilian workers and their employing agencies pay into the Civil Service

Retirement trust fund from 7 percent to 9 percent of earnings, beginning in

January 1987. The Administration includes an allowance in this function to

cover the cost of the additional contributions by civilian agencies, excluding

the U.S. Postal Service. An allowance for increased contributions by the

Department of Defense for its civilian employees is included in the national

defense function.

CBO estimates that this proposal would increase the contributions of

employing agencies by $0.3 billion in 1987, and by a total of $2.0 billion

through 1991. These increased agency contributions, however, are also

reflected as offsetting receipts in budget function 950 and have no net

budgetary effect. (The increased employee contributions to Civil Service

Retirement are shown in the budget as higher revenues.)

CBO Reestimates

CBO's outlay estimates do not differ significantly from the Administration's

estimate for this function.

114
FUNCTION 950; UNDISTRIBUTED OFFSETTING RECEIPTS

MAJOR SPENDING CHANGES PROPOSED FOR BUDGET FUNCTION 950:

UNDISTRIBUTED OFFSETTING RECEIPTS

(By fiscal year, outlays in billions of dollars)

Cumulative

Five-Year

Item 1987 1988 1989 1990 1991 Changes

CBO Baseline -35.

Proposed Changes

Employer Share,

Employee Retirement -0.

Sale of Naval Petroleum

Reserves a/

Sale of Power Marketing

Administrations a/

Total -0.

9

9

-

_

9

-39.8

-1.3

-2.4

-0.8

-4.5

-41.1

-1.3

—

-8.5

-9.8

-42.6

-1.1

—

-1.6

-2.7

-45.4

-0.1

—

-1.4

-1.5

-4.7

-2.4

-12.3

-19.4

President's 1987 Budget

as Estimated by CBO -36.8 -44.2 -50.9 -45.3 -46.8

President's 1987 Budget -38.1 -46.4 -43.8 -49.3 -50.2

CBO Reestimates 1.3 2.2 -7.1 3.9 3.3 3.6

a. The receipts from the proposed sale of the Naval Petroleum Reserves

and the power marketing administrations appear in function 950.

Function 270 outlays would increase relative to the baseline after the

sales occur, because these assets would no longer generate receipts for

the government.

Proposed Policy Changes

The budget includes new measures for increasing undistributed offsetting

receipts by about $19.4 billion over the 1987-1991 period. First, the

President's budget proposes several changes that would increase offsetting

receipts for the employer's share of employee retirement. The President

115

iaiimm em i
requests lower military and civilian pay increases than assumed in the CBO

baseline. The budget also assumes that the percentage of basic pay required

for military retirement contributions is lower than that assumed by CBO.

This results in offsetting receipts that are initially below those in the CBO

baseline. Increases in receipts resulting from proposed legislation, however,

more than offset these decreases. Proposed legislation includes an increase

of 2 percent in federal employers' payments for the costs of Civil Service

and Foreign Service Retirement. The U.S. Postal Service and the District of

Columbia would be required to pay the full government share of the cost of

their employees' retirement. The net effect of these proposals is to

increase offsetting receipts by $0.9 billion in 1987, declining to $0.1 billion

by 1991. These changes simply represent larger intragovernmental

transfers.

The President also is proposing to sell the government's interests in

the Naval Petroleum Reserves (NPRs) and the power marketing administrations (PMAs). If undertaken, these sales are likely to occur over the next

several years, probably beginning no earlier than 1988. CBO estimates that

receipts from these sales would total $14.8 billion over the 1988-1991

period. Spending in budget function 270 (Energy) would increase by about

$3.6 billion in this period, however, because the government would not

receive the net income that these assets would generate if not sold. Income

would be lost in years after 1991 as well.

Naval Petroleum Reserves. The government owns approximately 78 percent

of the Elk Hills oil field, known as NPR-1, and 100 percent of the Teapot

Dome oil field, known as NPR-3. Selling these interests is estimated to

increase federal receipts by $2.4 billion in 1988. The selling price is highly

dependent on the timing of these sales and the private market's expectations

of future oil prices. If the sale were to take place in 1987, the expected

bids could be 53 billion or higher because of the greater income potential to

the buyer by owning and operating the oil fields for another year. On the

other hand, if oil prices are expected to remain below $20 per barrel, the

total bids for the NPRs could be less than $2 billion in 1988. Lost receipts

from oil sales would be about $0.8 billion in 1988 and $2.6 billion over the

1988-1991 period.

The budget includes receipts from the sale of the NPRs of $1.2 billion

in 1987 and $2.4 billion in 1988, for a total of $3.6 billion. CBO estimates

total receipts of $2.4 billion, all in 1988. The primary reason for the

reestimate is that CBO expects that the sale of the NPRs would not be

completed until 1988, while the Administration assumes that the sale would

occur in 1987. CBO estimates a lower sale price, because it assumes lower

oil prices and because the value of the reserves declines over time as more

of the proved oil reserves are produced and sold. (On the other hand, later

116
sale would also result in higher receipts from the sale of NPR oil in budget

function 270.)

Power Marketing Administrations. The President recommends selling the

five power marketing administrations (PMAs) in the Department of Energy:

the Alaska PMA, the Bonneville Power Administration (BPA), the Southeastern PMA, the Southwestern PMA, and the Western PMA. These

agencies sell and transmit the electricity produced at federal dams owned

and operated by the Corps of Engineers and the Bureau of Reclamation.

Together they market about 9 percent of the electricity sold in the United

States, and have a book value of about $15.6 billion. The Administration

believes that marketing electricity is no longer a federal responsibility, and

that states, localities, and private management could be more responsive to

customer needs. CBO estimates that the government could receive about

$12.3 billion from such sales by 1991, which would be partially offset by lost

income (in the energy function) of about $1 billion in 1990 and 1991 and

additional amounts in subsequent years.

Potential receipts from selling the PMAs are very uncertain, because

of the differing values of these assets to prospective buyers, and because of

the uncertain impact of the sale on federal tax revenues. Although the

President's estimate of $13.9 billion in sales receipts falls within a range of

possible values, CBO estimates that the receipts are likely to be

lower—about $12.3 billion by 1991. This estimate assumes that purchasers

would be able to set electric rates to their customers at competitive levels,

and that purchase prices will reflect this expectation. The reestimate also

reflects CBO's assumption that all of the assets of the Bonneville Power

Administration will be sold at the same time (in fiscal year 1989) and that

the government will receive full payment in that year. The budget figures,

on the other hand, arbitrarily spread the payments out over a number of

years.

Conrail. The President's budget assumes that Conrail will be sold to the

Norfolk Southern Corporation in fiscal year 1986. CBO estimates that the

government would receive $1.25 billion at the time of such sale, but would

lose, over the 1987-1991 period, approximately $1.0 billion in interest and

dividend payments from Conrail and about $0.5 billion in tax revenues. (The

dividend and interest losses would be reflected in budget function 400.)

CBO Reestimates

The President's budget projects receipts from the Outer Continental Shelf

and the sale of the NPRs and PMAs that are $5 billion greater than those

estimated by CBO over the 1987-1991 period. However, because the CBO

117

IKIHIlllllirHF
estimate of receipts from retirement contributions is $1.4 billion greater

than the Administration's, the net estimating difference in this function for

the five-year period is $3.6 billion. The effect of the CBO reestimates is to

increase budget outlays by $3.6 billion above the level estimated by the

Administration for the 1987-1991 period.

118
APPENDIXES
i n 111 min
APPENDIX A

THE ADMINISTRATION'S CREDIT INITIATIVES

The Balanced Budget and Emergency Deficit Control Act of 1985 fully

integrates federal credit programs into the required, phased reduction of the

budget deficit. The President's 1987 proposals contain a number of changes

in federal credit assistance that would reduce the deficit. These proposals

fall into three general categories: those that would reduce program activity;

those that would change direct loan programs to loan guarantees; and

structural changes, including loan asset sales and user fees for sponsored

financial intermediaries. Although all these changes could contribute to

short-term deficit reduction, they have somewhat different long-term

budgetary effects and capital market implications. This appendix describes

the President's credit budgetary reduction strategies by broad category and

discusses their effects on the budget and credit markets.

The magnitude of the President's credit reduction proposals is

summarized in Table A-l. New direct loans over the next five years would

be reduced by $45 billion or 25 percent from CBO projected baseline levels.

New loan guarantee commitments would be reduced by $98 billion or

21 percent

PROGRAM REDUCTIONS

The President proposes to reduce the levels of credit activity by lowering

both the supply and demand for federal credit assistance.

To reduce the supply of credit, the President proposes to terminate

programs. Direct lending for rural housing by the Farmers Home Administration is to be terminated and replaced in part by Housing and Urban

Development (HUD) housing vouchers. Water and waste disposal,

community facilities, and industrial development loans now provided by the

Farmers Home Administration are to be discontinued. The direct loan and

loan guarantee programs of the Small Business Administration are to be

halted. Ship construction loan guarantees will no longer be available from

the Maritime Administration if the President's proposal is adopted. Agency

for International Development housing loan guarantees and Department of

Education subsidized college housing loans would also be ended.

121
The demand for federal credit assistance would be reduced by placing

restricitons on the eligibility of beneficiaries and by lowering the amount of

the subsidy conveyed in many assisted transactions. Mortgage loan

guarantees from the Federal Housing Administration would be available in

the future only to those with gross family incomes of $40,000 or less, thus

reducing the potential number of eligible borrowers. The up-front insurance

premium on FHA loans would be increased from 3.8 percent of principal to

5 percent, and these premiums and other closing costs could no longer be

financed by adding them to the loan amount. The rate of interest on Rural

Electrification Association direct loans would be raised from 5 percent to

the Treasury's cost of money plus 11/8 percent. The interest rate on

National direct Student Loans would rise from 5 percent to 3 percent above

the 91-day Treasury bill rate. The origination fee charged by the Veterans

Administration on mortgage loan guarantees would be raised in steps from

1 percent of principal to 3.8 percent by 1990.

TABLE A-l. PROPOSED CHANGES IN CREDIT PROGRAMS

(By fiscal year, in billions of dollars)

1987 1988 1989 1990

Cumulative

Five-Year

1991 Total

CBO Baseline

Proposed Changes

Direct Loans

37.5 36.1 35.2 34.2 33.9

-5.3 -7.2 -9.2 -11.1 -11.9

President's 1987 Budget

as Estimated by CBO 32.2 28.9 26.0 23.1 22.0

CBO Baseline

Proposed Changes

President's 1987 Budget

as Estimated by CBO

Primary Guaranteed Loans

88.1 91.6 94.7 97.9 101.3

-14.8 -16.9 -19.0 -21.5 -25.8

176.9

-44.7

132.2

473.6

-98.0

73.3 74.7 75.7 76.4 75.5 375.6

SOURCE: Congressional Budget Office.

122
Both of these approaches will reduce activity levels in federal credit

programs. The supply side restrictions will do so directly; the demand side

measures will do so by restricting eligibility and by increasing the attractiveness of alternatives to federal assistance. Reductions in new direct loan

disbursements will have a direct and immediate effect on current budget

outlays. Disbursements that otherwise would have occurred will be avoided.

In future years, however, repayments of principal and interest that would

have been received will not take place. Reduced levels of new loan

guarantee commitments have a more distant effect on outlays because the

costs of a guarantee is recognized in the budget only when a guaranteed

borrower defaults and the government must honor its commitment. Thus,

the budget saving from lower levels of guarantees will occur mostly in the

budget out-years.

To the extent that activity levels decline because of the increase in

guarantee fees and direct loan interest charges, current year collections

from the higher charges will be offset by the reduced volume of loans. The

size of the offset will depend on the sensitivity of demand to these higher

fees.

The capital market effects of these proposed changes depend largely

on how the potential beneficiaries of federal credit programs react. To be

sure, as program levels decline, the federal government will have to borrow

less to finance its direct loans and to honor its guarantee commitments. But

to some extent, borrowers excluded from federally assisted credit, either by

program cutbacks or higher fees, will borrow from other sources. Consequently, the total demand for credit will not be reduced by the amount of

the federal reduction. At one extreme, if all federally-assisted borrowers

excluded by these program cutbacks switched to private lenders instead, the

total demand for credit would be unchanged. At the other extreme, if none

of those squeezed out of the federal programs obtained credit elsewhere,

total credit market demand would fall by the full amount of the proposed

volume reductions. In fact, some but not all excluded federal borrowers will

obtain credit elsewhere. The most deeply-subsidized borrowers in federal

programs are most likely to be unwilling, and perhaps unable, to find credit

elsewhere.

CHANGE DIRECT LOANS TO GUARANTEES

The President proposes to change several direct loan programs to loan

guarantees. Important examples are the farm operating and farm ownership

loans of the Agricultural Credit Insurance Fund (ACIF) administered by the

Farmers Home Administration and the direct loan program of the ExportImport Bank of the United States (Eximbank).

123

"BIT
JULlfllUl

Currently, ACIF provides direct loans to farmers at interest rates

below 9 percent for up to seven years for operating loans and up to 40 years

for ownership loans. The Office of Management and Budget (OMB)

estimates that in 1985 these concessionary loan terms constituted a subsidy

with a present value equal to 14 percent of direct loan obligation for

operating loans and 28 percent of obligations for ownership loans. ACIF also

guarantees loans extended by commercial lenders to qualified farmers. The

ACIF guarantee permits the borrower to obtain funds on more favorable

terms than would otherwise be available. OMB estimates that the subsidy

value of guaranteed operating loans is 6 percent of principal, and that of

guaranteed ownership loans is 15 percent of principal. Thus, to switch

borrowers from more heavily subsidized direct loans to guarantees with only

about half the subsidy would both reduce the demand for these loans and the

government's cost per dollar of loans assisted.

The lower ACIF subsidy will diminish the demand for assisted lending,

and the need for government funding of the loan will be reduced. As a

consequence, short-term budget outlays will fall by the amount the cash

disbursement and the interest rate subsidy are reduced. Direct demands by

government on credit markets will be similarly reduced. Total credit

demand will decline, however, only by the amount that former direct loan

borrowers do not switch to guaranteed loans.

The Eximbank proposal is fundamentally different from the ACIF

change. The Administration's proposes to restructure the subsidized loan

program to finance the loans with agency guaranteed borrowing rather than

by Treasury borrowing, without changing the nature or terms of the loans.

Eximbank would continue to select the borrowers, provide an interest

subsidy equal to the subsidy provided for a direct loan through the current

program, and service the loan after arranging financing through a private

lender. Lenders would be selected competitively, but would be guaranteed

payment of interest and principal. Since borrowers would be subsidized as

heavily as they are now, there would be no reduction in the cost to the

government or in the federal intervention in the capital markets. The

Eximbank guaranteed financing is equivalent to an agency debt transaction.

The Congressional Budget Office (CBO) continues to record the subsidized

loan transactions as direct loans, requiring budget authority and outlays by

the agency. In contrast, the budget records them as guaranteed loans.

STRUCTURAL CHANGES

The President proposes that the government begin a pilot program of loan

assets sales. The budget assumes that loans with a face value of $4.4 billion

from 13 federal programs will be sold for revenues of $2.0 billion. The

largest sales would be from the Small Business Administration disaster loan

and business programs ($2.3 billion), Veteran's Administration vendee loans

124
($0.8 billion), college housing loans ($0.6 billion) and the Government

National Mortgage Association tandem plan loans ($0.5 billion). The 1987

budget deficit would be reduced by $1.7 billion, but this decrease would be

offset by future deficit increases as a result of reduced repayments received

from the loans that have been sold.

The proposal to sell government loans is recommended not because of

the deficit effect—which as noted above is temporary—but because of the

potential for improving the management of federal credit programs. The

price paid for the loans by the private investor provides an improved

measure of the subsidy cost to the government of providing the loans. The

investors will offer a price that will reflect the present value of the future

stream of repayments expected for the loan. The face value of the loan will

be discounted to reflect the difference between the rate for a comparable

unassisted loan to the same borrower. The discount covers both the interest

subsidy and the potential loss from default. The budget assumes that the

discount will reduce the value of the loans from their face value of $4.4

billion to $2.0 billion. CBO has not reestimated the potential revenues from

these sales. The sale of the loans is needed to provide better data on the

appropriate discount rates. More informed decisions on the appropriate

budget levels for credit programs should results from having better information on the cost of the subsidies conveyed by the federal loan.

The Administration's policy is to sell loans to the public without a

government guarantee. This policy is important for two reasons. First, the

sale of loan assets with a guarantee has the effect of exchanging one form

of government paper (a government guaranteed security) for another

(Treasury debt used to finance direct loans). No reduction in government

intervention in the capital markets results from this exchange. Because of

the relatively illiquid nature of the federal guaranteed security compared

with Treasury debt, the guaranteed security will cost the government more

than comparable Treasury securities. Second, the government guarantee

obscures the value of the subsidy conveyed by the original federal loan. Not

only does the guaranteed sale not have the intended economic effects,

improvement in government credit management resulting from better cost

information would be prevented.

The President has proposed user fees for government-sponsored enterprises, both to raise revenue and to improve credit management. Fees are

to be levied on net new debt securities issuances by Federal National

Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac), Federal Home Loan Banks, Farm Credit Banks, and

Student Loan Marketing Association (Sallie Mae). In addition, a smaller fee

is proposed for new mortgage backed securities issued by Fannie Mae and

Freddie Mac. The fees would begin in 1987 and increase gradually through

1991. The fee schedule distinguishes the higher risk enterprises, Farm

Credit and Fannie Mae, from other lower risk entities by a higher debt fee.

The weakened, current financial condition of the Farm Credit System is

recognized by the longer phase-in period.

125

APPENDIX B

CBO REVENUE REESTIMATES

This appendix explains how CBO reestimated the Administration's budget

revenues as published in the Budget of the U.S. Government for Fiscal Year

1987. It is a companion to Appendix C, which discusses CBO's reestimates

of the Administration's expenditures. Although the two estimates of total

revenues for 1987 are almost the same, CBO's estimates are above those of

the Administration in four of six years by amounts that grow from $1.6

billion in 1986 to $3.8 billion in 1989 and to $26.1 billion in 1991. The CBO

revenue reestimates produce a net increase of $42.6 billion above the

Administration's projected revenues over the 1986-1991 period. Virtually all

of this net increase is estimated to occur in 1990 and 1991 (see Table B-l).

Most of these upward reestimates result from differences between

CBO's and the Administration's economic assumptions and arise as differences between CBO's baseline revenues and the Administration's current

services revenues. Technical reestimates, about half of which derive from

differences in estimates of proposed legislation and administrative actions,

are small and, for the most part, offsetting.

REVENUE REESTIMATES REFLECTING DIFFERENT

ECONOMIC ASSUMPTIONS

Since taxes are generally paid on the nominal values of the various tax bases

and market transactions—personal and corporate incomes, imports, goods

and services subject to excise taxes—different assumptions about the future

values of these measures greatly affect the level of projected revenues.

CBO's economic forecast supports higher levels of revenues than does the

Administration's in 1986 and in each year after 1988. Economic reestimates

appear by major tax source in Table B-2.

129
illII II ill III I

Personal and corporate income taxes and social insurance contributions account for most of CBO's economic reestimates. Differences in

assumptions about the tax bases of these three major tax sources are shown

in Table B-3.

CBO projects lower levels of taxable personal income through 1988,

but significantly higher levels in the last three years of the projection

period. This is directly responsible for somewhat lower individual income

taxes early in the period and higher income taxes by growing amounts in

1989 and thereafter. The pattern of wage and salary assumptions roughly

parallels that of the more aggregrate personal income assumptions. CBO's

lower projections from 1987 through 1989 yield less revenue in payroll taxes,

but the reverse is true in 1990 and 1991.

TABLE B-l. CBO'S REESTIMATES OF ADMINISTRATION'S

BUDGET REVENUES (By fiscal year, in billions

of dollars)

1986 1987 1988 1989 1990 1991

Revenues as Estimated

by Administration a/ 777.1 850.4 933.2 996.1 1,058.1 1,124.0

CBO Reestimates by Type

Different economic

assumptions 2.2-1. 7 -4.2 1.2 11.1 21.9

Different technical

assumptions

Baseline -0.8 1.9 -1.7 1.4 3.7 1.9

Proposals 0.1 -Q.7 0.8 1.3 1.8 2.3

Subtotal 1.6-0. 4 -5.1 3.8 16.7 26.1

Revenues as Reestimated

byCBOa/ 778.7849.9928.1 999.9 1,074.8 1,150.2

SOURCES: Budget of the United States Government for Fiscal Year 1987

and Congressional Budget Office.

a. Aggregate revenues include payroll tax receipts of the Federal OldAge and Survivors Insurance Trust Fund and Federal Disability

Insurance Trust Fund (OASDI), which are off-budget.

130
TABLE B-2. CBO'S REVENUE REESTIMATES REFLECTING DIFFERENT

ECONOMIC ASSUMPTIONS (By fiscal year, in billions

of dollars)

Tax Source

Individual Income Taxes

Corporate Income Taxes

Social Insurance Taxes

Customs Duties

Other a/

Total Reestimates

1986

-0.

1.

0.

0.

0.

2.

3

7

6

2

1

2

1987

-2

2

-0

0

-1

-1

.8

.6

.8

.4

.1

.7

1988

-1.

-o.

-2.

0.

-o.

-4.

4

2

5

5

6

2

1989

4

-2

-2

0

0

1

.7

.0

.2

.6

.1

.2

1990

16.

-5.

0.

0.

-o.

11.

1

7

7

7

5

1

1991

25.1

-9.9

7.5

0.7

-1.5

21.9

SOURCE: Congressional Budget Office.

a. Estate and gift taxes, excise taxes, and miscellaneous receipts.

TABLE B-3. DIFFERENCES BETWEEN CBO AND ADMINISTRATION

ECONOMIC ASSUMPTIONS ABOUT TAX BASES

(By calendar year, in billions of dollars)

Tax Base 1986 1987 1988 1989 1990 1991

Taxable Personal Income -3 -18 -6 34 91 173

Wage and Salary Disbursements 4 -11 -18 -8 33 85

Corporate Book Prof its 11 a/ -8 -14 -32 -35

SOURCE: Congressional Budget Office,

a. Less than $500 million.

131

i• HI
JULLM1

CBO's forecast of economic profits is below the Administration's in

1986 and 1987, but projected book profits (a closer measure to taxable

profits) are higher—by $11 billion in 1986 and less than one-half billion

dollars in 1987. This is because CBO's valuation of inventory profits is

larger and its depreciation deductions for new investment are smaller than

those of the Administration. CBO's lower investment assumptions lead to

smaller estimates of tax credits taken on new investment. Together, these

factors generate higher corporate income taxes in 1986, and in 1987 as well

because of lags between corporations' receipt of income and their payment

of the associated income tax. From 1988 through 1991, CBO's assumptions

about both economic and book profits are below the Administration's by

significant amounts. This results in negative reestimates of corporate

income taxes by amounts that grow to $10 billion by 1991.

Economic assumptions about international trade have become increasingly important in estimating revenues because of the dramatic growth in

the last two years in imports and, therefore, customs duties. CBO's higher

projection of imports generates almost $1 billion more in duties each year

after 1987 than the Administration projects.

REVENUE REESTIMATES REFLECTING DIFFERENT

TECHNICAL ASSUMPTIONS

Technical reestimates are small, about $1 billion or less from 1986 through

1988 and between $3 billion and $6 billion in each of the last three years of

the projection period. On balance, these raise estimated budget revenues by

$12 billion over the six-year period (see Table B-4). They arise in estimates

of both baseline revenues and the effects of proposed legislative and

administrative changes.

CBO's estimates of baseline levels of unemployment insurance (UI)

taxes are higher than the Administration's each year after 1986 because

CBO assumes that, as estimated balances in trust funds grow, states will

lower their UI tax rates more slowly than the Administration assumes.

CBO's incorporation of recent data on the proportion of merchandise trade

subject to duty and the effects of the changing composition of imports on

the effective tariff rate results in higher customs duties projections than

those of the Administration.

Reestimates of two proposals, taken together, account for $5.9 billion

or about half of all technical reestimates. First, CBO has discounted the

Administration's claim to $1.0 billion in petroleum overcharge restitution

fees because it appears unlikely that legislation necessary to allocate the

132
fees to the federal government can be introduced and passed before the

early March deadline for disposition of these funds. Second, CBO estimates

that the revenue effects of the proposed limitation on pay increases for

federal civilian employees will have no net effect on revenues. The

Administration's $6.9 billion revenue loss attributed to this administrative

change requires the assumption that total wages in the economy will fall by

the full amount of the pay reduction. CBO does not assume this to be a

necessary outcome of such a policy change, thus raising projected budget

revenues relative to Administration estimates by $6.9 billion over six years.

These and all other proposals with revenue effects are discussed in Chapter

II.

TABLE B-4. CBO'S REVENUE REESTIMATES REFLECTING

DIFFERENT TECHNICAL ASSUMPTIONS

(By fiscal year, in billions of dollars)

1986 1987 1988 1989 1990 1991

Individual Income Taxes

Corporate Income Taxes

Social Insurance Taxes

Customs Duties

Other b/

Total Reestimates

0.

-0.

-0.

-0.

-0.

-0.

7

4

2

3

4

6

1.

0.

0.

0.

-1.

1.

7

1

3

3

2

2

-2.

0.

1.

0.

-o.

-o.

6

2

1

8

4

9

0

-0

1

1

-0

2

.5

.1

.8

.2

.7

.7

2

2

1

-o

5

.2

a/

.1

.6

.3

.5

1.2

0.2

0.7

2.0

a/

4.2

SOURCE: Congressional Budget Office.

a. Less than $50 million.

b. Estate and gift taxes, excise taxes, and miscellaneous receipts.

133

Biffiwriiiir
i in nun
APPENDIX C

CBO OUTLAY REESTIMATES

As part of its analysis of the President's budget proposals, CBO has reestimated the Administration's outlay estimates using its own economic assumptions and technical estimating methods. By putting the two sets of estimates—the current policy baseline and the President's proposals—on a comparable footing, CBO provides its independent estimate of the budget impact

of the policy changes that are proposed by the Administration.

Outlay reestimates stem from two sources: different economic

assumptions and different technical estimating methods. Economic reestimates result from the use of different assumptions about unemployment,

inflation, and interest rates. While the CBO and Administration forecasts

are similar for 1986 and 1987, in later years the Administration assumes

higher real economic growth, lower inflation, and lower interest rates than

CBO (as discussed in Chapter I). Different economic assumptions primarily

affect the spending projections for benefit programs such as Social Security

and unemployment insurance, as well as the federal government's net interest costs.

Technical differences comprise estimating differences not directly

attributable to economic assumptions. Assumptions about spendout rates—

the speed at which budget authority in discretionary programs is translated

into actual outlays—are one of the most important sources of technical reestimates. Other technical differences result from the use of more recent

program data (such as crop projections), different evaluations of the proceeds and timing of asset sales, different assumptions about Treasury

financing mix, and so forth.

CBO economic and technical reestimates combined add $16 billion to

the Administration's outlay estimates for 1987, and $68 billion in 1991.

These reestimates are discussed in more detail in the remainder of this

appendix.

135

•IIII111II DIM
illiIII ill Hi I

DIFFERENCES IN ECONOMIC ASSUMPTIONS

Different economic assumptions have little effect on the outlay estimates in

1986 and 1987 but account for large reestimates thereafter. By 1991, economic reestimates total $46 billion—over half of which is attributable to

higher interest costs. CBO's economic reestimates of the President's projected outlays are shown in Table C~l.

Most of the large retirement and disability programs—Social Security,

veterans' compensation and pensions, federal civilian and military retirement, and others—are allowed cost-of-living adjustments (COLAs) in

January of each year. The increase is based on the year-over-year increase

TABLE C-l. CBO OUTLAY REESTIMATES RESULTING FROM

DIFFERENT ECONOMIC ASSUMPTIONS

(By fiscal year, in billions of dollars)

Program Type 1986 1987 1988 1989 1990 1991

Social Security and Other

Indexed Programs

Unemployment Compensation,

Food Stamps, and AFDC

Medicare and Medicaid

Net Interest and Other

Interest-Sensitive

Spending

Due to different rates

Due to different

deficits

Subtotal

Total

§/

a/

a/

-1.2

-0.1

-1.3

-1.3

-0.5

0.2

0.1

-1.7

-0.3

-2.0

-2.3

§/

0.2

-0.2

3.8

a/

3.8

3.8

2.0

0.6

-0.2

11.4

0.8

12.2

14.5

5.2

1.0

0.3

20.3

1.9

22.2

28.6

15.8

1.5

1.4

24.4

3.1

27.5

46.3

SOURCE: Congressional Budget Office,

a. Less than $50 million.

136
in the Consumer Price Index (CPI) in the third quarter of the previous year.

CBO projects slightly lower inflation during the remainder of 1986 than does

the Administration, leading to a slightly lower January 1987 COLA. In later

years, CBO assumes modest annual declines in COLAs in contrast to the

sharp declines used in the Administration's projections (Table C~2). The

Administration's assumptions, in fact, imply no cost-of-living adjustment in

January 1991 for Social Security and veterans' programs, because the yearover-year CPI increase falls below the 3 percent threshold specified in law.

The Administration assumes slightly lower unemployment rates during

most of the 1987-1991 period than does CBO. As a result, CBO's estimates

of outlays for unemployment compensation and other unemployment-sensitive programs are slightly higher than the Administration's, as shown in

Table C-l.

The Medicare and Medicaid programs are sensitive to the rate of inflation in the health care sector, and the Medicaid program is sensitive to the

unemployment rate. The Administration's budget includes a proposal to cap

Medicaid growth after 1987 by the rate of .medical care inflation. Because

CBO assumes higher medical inflation, it reestimates the Administration's

TABLE C-2. COST-OF-LIVING ADJUSTMENTS ASSUMED

BY ADMINISTRATION AND CBO (In percents)

Program 1987 1988 1989 1990 1991

Social Security and

Veterans (January)

Administration 3.7 4.3 3.6 3.3 a/

CBO 3.4 4.6 4.4 4.4 4.3

Military and Civil

Service Retirement

(January)

Administration 3.7 4.3 3.6 3.3 2.7

CBO 3.4 4.6 4.4 4.4 4.3

SOURCES: Office of Management and Budget, Congressional Budget Office,

a. No cost-of-living adjustment.

137

iwrnnr
outlays upward. Economic reestimates to Medicare and Medicaid total $0.1

billion in 1987 and $1.3 billion in 1987 through 1991.

By far the largest economic reestimate of outlays over the five-year

period occurs in net interest and other interest-sensitive spending. As discussed in Chapter I, one of the sharpest differences between the Administration's and CBO's medium-term outlook lies in the interest rate assumptions. Both the Administration and CBO assume a decline in nominal interest rates over the five-year period, because of the federal government's

commitment under the Balanced Budget Act to reduce deficits dramatically

from current levels; and the Administration also assumes declining inflation.

By 1991, both the Administration and the CBO assume a government bond

rate about two and a half percentage points above the inflation rate and a

short-term Treasury bill rate one to two percentage points above inflation--

about equal to the average over the past 30 years. The CBO assumptions

envision interest rates (adjusted for inflation) declining gradually during the

intervening period as they approach these historical averages. The Administration, in contrast, assumes that inflation-adjusted rates return much

sooner to their historical averages, as shown in Table C~3.

Projections of budget outlays depend on nominal interest rate assumptions. Because CBO's short-term interest rate assumptions are lower than

the Administration's in 1986 (while the long-term rates are roughly the

same), CBO estimates lower interest outlays for 1986 than does the Administration, as shown in Table C-1. Most of the reestimates occur in the net

interest function—reflecting the government's interest costs on its borrowing and, as offsets, interest receipts on loans and on cash balances. (Other

interest-sensitive outlays include guaranteed student loans, the Exchange

Stabilization Fund, and Export-Import Bank programs.) While CBO's interest

rate assumptions are slightly higher than the Administration's in calendar

1987, for most of the fiscal year short-term rates remain lower in the CBO

forecast; as a result, CBO continues to project lower interest outlays in

1987. After 1987, however, CBO's economic reestimates due to interest

rate assumptions are large and growing. In 1991, reestimates attributable to

this source amount to $24.4 billion.

CBO's net interest projections also reflect the additional borrowing

necessitated by other economic reestimates of outlays and revenues. As

shown in Table C-1, the added debt service costs resulting from CBO's economic reestimates of the President's budget range from $-0.3 billion in 1987

to $3.1 billion in 1991.

Table C-1, along with the discussion in the previous appendix of CBO's

revenue projections, make clear the critical importance of economic

assumptions in federal budget estimates. Nevertheless, all economic

138
assumptions are uncertain, especially those extending more than a few

quarters into the future. Relatively small errors in the economic forecast

can have large budget effects. A one-percentage-point change in the interest rate assumptions, for example, would add to CBO's estimate of the President's proposed outlays $10 billion in 1987 and $24 billion in 1991.

TECHNICAL ESTIMATING DIFFERENCES

CBO's technical reestimates add $18 billion to the President's outlay estimates in 1987 and $101 billion over the entire period from 1987 through

TABLE C-3. NOMINAL AND INFLATION-ADJUSTED INTEREST RATES

ASSUMED BY ADMINISTRATION AND CBO

(By calendar year, in percents)

Rate 1986 1987' 1988 1989 1990 1991

Nominal Interest Rates

3-month Treasury bills

Administration 7.3 6.5 5.6 4.8 4.3 4.0

CBO 6.8 6.7 6.4 6.1 5.8 5.4

20-year Treasury bonds

Administration 8.9 8.5 7.3 5.5 4.8 4.5

CBO 9.3 9.1 8.4 7.7 7.0 6.4

Inflation-Adjusted

Interest Rates

3-month Treasury bills

Administration 4.0 2.3 1.9 1.5 1.5 1.9

CBO 3.2 2.6 2.3 2.0 1.7 1.3

20-year Treasury bonds

Administration 5.6 4.3 3.6 2.2 2.0 2.4

CBO 5.7 5.0 4.3 3.6 2.9 2.3

Memorandum: Gross

National Product

Deflator

Administration

CBO

3.3

3.6

4.2

4.1

3.7

4.1

3.3

4.1

2.8

4.1

2.1

4.1

SOURCES: Office of Management and Budget, Congressional Budget

Office.

139
1991. As shown in Table C-4, these technical reestimates are primarily in

six areas: defense, agriculture, net interest, receipts from the Outer Continental Shelf, and sales of the government's Naval Petroleum Reserve and

Power Marketing Administrations.

Defense (Function 050)

CBO reestimates add $14.5 billion to estimated defense outlays in 1987 and

$17.5 billion in 1988, gradually declining to $10.6 billion in 1991. Over the

entire five-year period, defense reestimates total $68 billion. The reestimates occur primarily in three areas: operation and maintenance (O&M);

procurement; and research, development, test, and evaluation (RDT&E).

O&M contributes relatively little to the total reestimate in 1987, and

RDT&E contributes little after 1989 (see Table III-2 in Chapter III).

TABLE C-4. CBO OUTLAY REESTIMATES RESULTING FROM

DIFFERENT TECHNICAL ASSUMPTIONS

(By fiscal year, in billions of dollars)

Program Area

Defense

Agriculture

Net Interest

Due to different deficits

Other

OCS Receipts

Naval Petroleum Reserves

and Power Marketing

Administrations

All Other

Total

1986

3.7

4.5

0.2

-2.0

0.3

§/

-1.9

4.8

1987

14.5

2.3

1.2

-2.5

0.1

1.2

1.1

17.9

1988

17.5

3.8

3.1

1.0

1.5

1.0

1.8

29.8

1989

13.8

0.1

4.7

0.7

0.3

-7.0

0.7

13.3

1990

11.7

-2.4

5.4

-1.2

0.2

4.1

1.0

18.9

1991

10.6

-1.5

6.2

0.3

0.1

3.4

2.0

21.2

SOURCE: Congressional Budget Office.

140
1987 Reestimates. In fiscal year 1987, CBO estimates higher outlays both

from budget authority requested for 1987 and from budget authority provided in earlier years. Specifically, CBO projects spending from new budget

authority to be $5.6 billion higher than the Administration. Spending from

prior years' budget authority is projected by CBO to be $8.9 billion higher.

Table C~5. shows how these differences arise in the major accounts.

Because many defense activities require long-range planning and execution, defense budget authority is never spent entirely in the year it is

made available. Outlay (or spendout) rates are the percentages of budget

authority that are spent in the year of appropriation and following years. As

such, they sum to 100 percent unless some amount of budget authority will

lapse or never be spent. Estimating differences due to different outlay

rates should tend to offset each other over time (as evidenced by the largely

offsetting differences in O&M outlays for 1987 from new and prior years'

appropriations).

The estimating difference for 1987 O&M accounts is relatively small

given the $86 billion level of budget authority. The Administration has

lowered its first-year O&M spendout rate from a year ago, to reflect an

assumed slower spending program and other considerations. A difference of

$3.9 billion reflects a four-percentage-point difference in the CBO and Administration first-year outlay rates. This difference is offset for the most

part in assumed second- and third-year rates, as reflected by CBO's lower

estimate ($3.2 billion) of outlays from prior years' budget authority. Thus

TABLE C-5. CBO AND ADMINISTRATION DEFENSE OUTLAY

ESTIMATING DIFFERENCES BY BUDGET TITLE FOR 1987

(In billions of dollars)

Outlays From Outlays From Total

Budget Title 1987 BA Prior Year BA Outlays

Operation & Maintenance 3.9 -3.2 0.7

Procurement -0.1 9.7 9.6

RDT&E 1.8 2.2 4.1

All Other, Net -Q.l 0.2 0.2

Total 5.6 8.9 14.5

SOURCE: Congressional Budget Office.

141
Jllil

the net difference in CBO and Administration estimates of O&M spending in

1987 is relatively small—only $0.7 billion.

The net difference in procurement, $9.6 billion, is much more

significant both in absolute terms and as a percent of program (about $90

billion per year since 1982). CBO's reestimate is almost entirely in outlays

from prior-year authority. Procurement first-year spendout rates are very

low, and so afford little room for disagreement. The spendout period for

procurement is typically seven years or more. CBO estimates much higher

outlays in 1987 from budget authority made available during the defense

buildup begun by the previous Administration and accelerated during the

current Administration.

Like procurement, the 1987 estimating difference in RDT&E is large

in absolute and relative terms (about 10 percent of the 1987 request).

Unlike procurement and O&M, the difference is split about evenly between

outlays from new and prior-year budget authority. The first-year spendout

rate for RDT&E is typically about 50 percent, but the remaining spending

occurs over four or five years; in other words, the first-year rate is somewhat high (like O&M) and the spendout period is long (like procurement). As

a result, there can be relatively large differences in first-year outlays without offsetting differences in outlays from prior-year authority.

1988-1991 Reestimates and the Relevance of Historical Spendout Rates.

CBO's technical reestimates for 1988-1991 stem primarily from its application of historical spendout rates. The Administration, in contrast, implicitly

uses spendout rates that are considerably lower than historical averages,

citing management initiatives and other factors that it believes will lower

these rates. For reasons that are discussed in Chapter HI, CBO's view is

that these management initiatives and other factors will not materially

affect future spendout rates.

How well do historical spendout rates predict defense outlays? The

spendout rates published by the Defense Department in its Financial Summary Tables published in conjunction with the 1987 budget are similar to

CBO's assumptions and to historical experience. As discussed in Chapter III,

CBO applied its own and the Department's spending rates to budget authority provided in previous years for the O&M, procurement, and RDT&E

accounts to test their accuracy. Both sets of spendout rates produce similar

results for the 1980-1985 period, as shown in Table C~6. For 1980 through

1983, current CBO and Defense Department spendout rates would both have

underestimated actual outlays by $3 to $4 billion in each year, or by 2 to 4

percent. For 1984 and 1985, the current CBO and Defense Department

spendout rates would have overestimated actual outlays by $3 to $6 billion,

again by 2 to 4 percent. Over the entire six-year period, the average absolute percentage difference between these retrospective outlay estimates

estimates and actual outlays is about 3 percent, with the CBO rates slightly

closer than the Administration's.

142
Applying the Defense Department's spending rates to its budget

authority proposals for 1987-1991 produces outlays that are very close to

CBO's estimates, as discussed in Chapter HI. These projections are well

above the Administration's outlay estimates. CBO concludes that the

factors cited by the Administration that would lower spendout rates are

likely to have little effect, and that as a result defense outlays are substantially underestimated in the President's budget.

Agriculture (Function 350)

CBO reestimates for agricultural outlays are dominated by those of the

Commodity Credit Corporation (CCC). CCC outlays in 1986 are likely to be

about $4.3 billion above the levels projected by the Administration. CCC

reestimates total $1.9 billion in 1987 and $2.6 billion over the 1987-1991

period. Generally, the reestimates are caused by differing assumptions concerning the supply and use of supported commodities and the Secretary of

Agriculture's use of discretion in implementing provisions of the Food

TABLE C-6. DIFFERENCES BETWEEN OUTLAY ESTIMATES

AND ACTUAL OUTLAYS FOR O&M, PROCUREMENT,

AND RDT&E ACCOUNTS, 1980-1985

(By fiscal year)

Estimate

Source 1980 1981 1982 1983 1984 1985

Administration Rates

CBO Rates

Billions of Dollars

-3.3 -4.0 -4.2 -3.4 3.1 6.4

-2.9 -3.3 -3.5 -3.1 3.3 6.4

Administration Rates

CBO Rates

-3.8

-3.3

-3.9

-3.2

Percent

-3.5 -2.3

-2.9 -2.2

2.0

2.1

3.8

3.8

NOTE: Negative values indicate that actual outlays exceeded the

estimate.

SOURCE: Congressional Budget Office, based on data supplied by the Department of Defense.

143

11 mr
: ill ill Ill

Security Act of 1985. The 1986 reestimate is caused primarily by CBO's

assuming lower levels of repayments of commodity loans on 1985 crops and

slower implementation of the dairy termination program, in which producers

will bid to remove their dairy herds from production in return for a government payment. CBO's estimate exceeds the Administration's in 1987 because CBO assumes that advance deficiency payments will be made on the

1987 and later crops, while the Administration assumes no such advance

payments will occur.

The remaining reestimates are primarily attributable to the Agricultural Credit Insurance Fund (ACIF). The CBO estimates exceed the Administration's over the 1986-1989 period because CBO assumes lower repayments from the ACIF's existing loan portfolio.

Net Interest (Function 900)

Most of the technical reestimates of net interest result from the additional

borrowing necessitated by other technical reestimates of revenues and outlays. These additional debt service costs add $20.5 billion over the 1987-

1991 period.

Other technical reestimates of net interest include several components. Net interest on the public debt is reestimated downward in 1986 and

1987, by $1.6 billion and $0.9 billion respectively, but upward in later years.

Total reestimates are $3.5 billion over 1987-1991. These reestimates result

because CBO assumes lower interest payments on federal debt held by certain revolving trust funds and other funds in all years, based on the approximately two-percentage-point spread between the interest rates on this debt

versus those on the debt held by non-revolving trust funds. The Administration assumes a much smaller spread. These downward reestimates are outweighed over time by additional outlays largely attributable to CBO's different financing mix assumptions. CBO assumes that only about one-fifth of

new borrowing each year is accomplished through short-term Treasury bills,

which carry lower interest rates than medium- and long-term securities.

The Administration assumes one-half of new financing is in bills, although

this would imply rapid escalation in weekly auction sizes and is at variance

with recent Treasury practices.

CBO assumes about $1 billion larger intragovernmental interest

receipts in 1987, and smaller reestimates in other years, mainly as a result

of larger receipts from the Commodity Credit Corporation and the Agricultural Credit Insurance Fund. These reestimates—which reduce net interest outlays—are offset by upward reestimates in those programs that borrow

through the Treasury.

144
Net interest includes interest disbursements from escrow accounts

containing Outer Continental Shelf receipts that are currently the subject of

dispute between the federal government and the states. The Administration

assumes that the bulk of the funds will be disbursed in 1988 and 1989, on

terms favorable to the federal government. CBO assumes different timing

and amounts of escrow releases, as discussed further below. These differing

assumptions cause CBO's estimate of net interest to be slightly lower in

1987 but $1.4 billion higher over 1987-1989, when all funds are assumed to

be disbursed.

Other technical reestimates to net interest include CBO's estimate of

higher interest receipts from loans based on different lending and repayment

assumptions, smaller interest receipts from the foreign military sales program due to slower loan disbursements, and higher interest receipts from

Treasury's cash balances in tax and loan accounts at commercial banks.

Outer Continental Shelf (Subfunction 953)

Differences between the President's budget and CBO's reestimate of Outer

Continental Shelf (OCS) receipts are attributable primarily to different

assumptions about escrow releases.

The disputes between the federal government and a handful of coastal

states over the allocation of OCS receipts are in various stages of litigation

or negotiation. These disputes arise because bonuses, rents, and royalties

have been received for tracts that are adjacent to the boundary between

federal and state jurisdictions. No agreement has been reached on the fair

and equitable allocation of these receipts. CBO assumes that the Supreme

Court will rule in 1987 on the boundary dispute with Alaska, and that other

cases will be resolved in 1988 and 1989. CBO's estimates assign the federal

government about 50 percent of the funds in dispute in most cases. CBO's

50 percent assumption is not a prediction of the legal outcome. Rather, the

50 percent figure reflects the midpoint of the two possible outcomes and is

designed to make the budget projections less sensitive to errors in the OCS

escrow assumptions. The Administration also assumes that most of the

cases will be decided in 1988 and 1989, but on terms much more favorable to

the federal government. The government would receive about 96 percent of

the funds in dispute in the Administration's estimate.

Aside from escrow releases, CBO and the Administration differ less

sharply on their estimated bonuses, rents, and royalties. CBO bases its 1987

estimate of bonuses on the proposed five-year schedule that was announced

after the release of the President's budget, which includes three sales in

1987. CBO's outyear estimates are somewhat higher than the 1987 level

(due to the unusually small number of sales in 1987). The Administration

145

iiiiiiiii rmr
.JIUIII

assumes six lease sales in 1987 and projects outyear receipts on a sale-bysale basis. CBO assumes lower royalties than the Administration, based on

less optimistic oil and gas production assumptions.

Naval Petroleum Reserves and Power Marketing Administrations

(Subfunction 954)

The Administration proposes to sell a variety of government assets, including the Naval Petroleum Reserves (NPR) and the Power Marketing Administrations (PMAs), to the public. CBO's estimates of the timing and likely

proceeds of these sales differ from the Administration's.

The Administration proposes to sell two oil fields—Elk Hills and Teapot Dome—to the private sector. The Administration projects total offsetting receipts of $3.6 billion over the fiscal years 1987 and 1988. In the light

of previous experience with sales of government assets, CBO expects that

the sale will not be completed until 1988. CBO estimates total proceeds of

$2.4 billion, all of them in fiscal year 1988. The principal reason for the

difference in estimates is the expected timing, because in the interim the

fields continue to lose some of their proven reserves. CBO also bases its

estimates on oil prices that are $3 to $4 per barrel lower than the Administration's. Income from the sale of the Naval Petroleum Reserves would be

partly offset by reduced receipts in function 270, because the government

would no longer generate receipts from the sale of NPR oil.

The Administration also proposes to sell the five power marketing administrations—Bonneville, Western Area, Southeastern, Southwestern, and

Alaska—to the public. The Administration expects proceeds to total about

$14 billion over the 1988-1991 period. CBO assumes that Bonneville will be

sold as a single entity and that the government will receive full payment in

the year of sale. (CBO assumes that all receipts from the sale of Bonneville

occur in 1989.) CBO also estimates a lower sales price than does the Administration for Bonneville, but a slightly higher price for other PMA assets.

CBO's reestimates of the sale of PMAs total $1.6 billion over the 1988-1991

period. The sale proceeds are partially offset by lower receipts in function

270.

Other Technical Reestimates

All other technical reestimates total $1.1 billion in 1987 and $6.7 billion

over the 1987-1991 period. They are described in Table C~7.

CBO's reestimates of outlays for international affairs (function 150)

result in lower outlays in 1987, primarily because the foreign military credit

146
program spends much more slowly than assumed by the Administration. This

reestimate lowers outlays by $2.1 billion in 1987 and by $6.0 billion over the

1987-1991 period. Partly offsetting this reestimate is CBO's higher estimate of interest subsidies in the Eximbank program, which CBO treats as

direct loans rather than as loan guarantees. The Eximbank reestimate adds

$0.3 billion in 1987 and $3.2 billion in 1987-1991.

Technical reestimates for science, space, and technology (function

250) are attributable primarily to different spendout rates assumed by the

Administration and CBO. The technical differences are largest in 1990 and

1991, and are related to spending for the proposed space station.

Reestimates for energy programs (function 270) make these projections consistent with the timing of asset sales in function 950. The government would continue to earn income from continued production until the

Naval Petroleum Reserves and Power Marketing Administrations are actually sold. Remaining reestimates are attributable primarily to different

spendout rates.

Spendout rates also account for the bulk of reestimates in the natural

resources and environment function (function 300). CBO also projects

higher spending for construction grants and Superfund, partially offset by

greater timber receipts in all years except 1986.

The largest reestimates in the commerce and housing credit area

(function 370) are for the Postal Service, the Federal Deposit Insurance

Corporation (FDIC), and the Federal Savings & Loan Insurance Corporation

(FSLIC). CBO projects lower net income for the Postal Service in 1987 and

1988, raising outlays by $1 billion and $300 million, respectively. After

1988, CBO assumes increases in postage rates sufficient to pay for additional retirement and health contributions proposed in the President's budget. The required increase is higher than estimated by the President,

because the Administration did not reflect the cost of higher health contributions. CBO assumes that the FSLIC will incur higher outlays to assist

troubled thrift institutions than projected by the Administration; these are

partly offset by higher projected income for the FDIC.

CBO estimates more defaults under the federal ship financing fund

than does the Administration, accounting for the largest technical reestimate in the transportation function (function 400). Other technical reestimates stem primarily from different spendout rates. Different spendout and

disbursement rates also account for most of the technical reestimates in

147

HIT
TABLE C-7. OTHER CBO TECHNICAL REESTIMATES, BY FUNCTION

(In billions of dollars)

Function

150

250

270

300

370

400

450

500

550

570

600

650

700

750

800

850

920

950

International Affairs

General Science,

Space, and Technology

Energy

Natural Resources

and Environment

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

General Purpose

Fiscal Assistance

Allowances

Undistributed

Offsetting Receipts b/

Total

1986

§/

a/

-0.2

-0.3

a/

0.2

-0.1

-0.1

-0.2

-0.3

-0.2

-0.5

0.1

a/

§/

-0.3

a/

a/

-1.9

1987

-2.1

-0.1

0.4

a/

1.8

0.1

-0.3

a/

a/

0.4

0.9

-0.1

0.1

0.1

0.1

a/

§/

a/

1.1

1988

-0.8

0.2

-0.4

0.1

0.5

0.2

§/

-0.1

a/

1.2

0.2

0.3

-0.1

0.2

0.7

a/

a/

-0.3

1.8

1989

-0.4

0.1

-0.5

0.1

-0.6

0.6

-0.1

-0.8

a/

2.0

0.1

0.2

-0.2

0.2

0.3

a/

a/

-0.4

0.7

1990

-0.1

0.5

-0.4

-0.2

a/

0.5

-0.7

-0.6

a/

2.6

0.4

-0.7

-0.5

0.2

0.5

a/

a/

-0.4

1.0

1991

-0.3

0.3

-0.8

-0.3

-0.1

0.7

-0.3

-0.5

a/

3.6

0.6

-0.9

-0.5

0.2

0.4

0.1

-0.1

-0.2

2.0

SOURCE: Congressional Budget Office.

a.

b.

Less than $50 million.

Excluding OCS receipts, sale of Naval Petroleum Reserves, and sale o

Power Marketing Administrations.

148
community and regional development (function 450), along with different

timing and proceeds in the sales of Small Business Administration disaster

loans.

The technical reestimates in education, employment, and social services (function 500) are almost entirely in the guaranteed student loan program. CBO assumes lower loan volume and defaults than does the Administration. The technical adjustment peaks in 1989 because the Administration

includes a large, unexplained adjustment to outlays in that year to capture

program interaction effects. This unexplained adjustment leads to an odd

pattern of annual savings from the Administration's legislative program.

CBO estimates do not include such a large adjustment.

Technical reestimates for Medicare (function 570) reflect different

CBO assumptions about case mix and utilization of medical services. The

Administration projects program growth resulting from case mix changes of

1 percent in 1988 and 0.5 percent thereafter. CBO projects case mix increases of 1.5 percent from 1988 through 1991. While case mix increases

are an especially difficult component of hospital insurance spending to project, the CBO assumptions are more consistent with recent program trends.

The largest technical reestimate for income security programs (function 600) is for the Aid to Families with Dependent Children (AFDC) program. Technical reestimates to AFDC total $1.3 billion in 1987. Of this

amount, $0.8 billion results because CBO assumes that no fiscal sanctions

imposed on the states for erroneous payments will be collected in 1987.

States intend to litigate the sanctions, resulting in several years' delay in

their collection. CBO assumes that only about one-half to two-thirds of

sanctions will be collected following waivers and court action, whereas the

Administration assumes a 100 percent collection rate. In addition, CBO

estimates a higher annual growth in average benefits—about 3.5 percent—

that is more in line with historical experience, and estimates lower savings

from legislative proposals in the President's budget (primarily the proposal

to strengthen work requirements). The technical reestimate of AFDC declines from $1.3 billion in 1987 to $0.9 billion in 1991. Technical reestimates of other programs in function 600 are smaller, generally reflecting

different assumptions about numbers of beneficiaries and average benefits.

CBO technical reestimates of Social Security (function 650) reflect a

higher assumed rate of growth in the disabled worker population in all years.

In the later years, this is more than offset by a lower projection of the

retired worker population.

149

•mrriir'
MIII in Htiiimill

The relatively small technical reestimates for veterans' programs

(function 700) in 1986 through 1988 reflect offsetting technical reestimates

of a number of accounts. Veterans' compensation and pensions are reestimated downward in all years, reflecting declining caseloads and declines in

real average benefits. CBO assumes lower spendout rates for the construction program. Partly offsetting these downward reestimates are higher

assumed defaults for the loan guaranty revolving fund. Downward reestimates dominate after 1988.

Higher spendout rates account for most of the reestimates in administration of justice (function 750). Technical reestimates in general government (function 800) are dominated by less optimistic projections of sales of

surplus properties. The Administration assumes a reinvigorated effort to

identify and dispose of surplus properties; CBO assumes that most sales will

be of properties already in inventory.

Technical reestimates in allowances (function 920) are small. Most

technical reestimates for undistributed offsetting receipts (function 950) are

described above, in the discussions of Outer Continental Shelf receipts and

sales of the government's Naval Petroleum Reserve and Power Marketing

Administrations. The remaining reestimates are for the employer share of

employee retirement, and result from slightly different assumptions about

the composition of the covered payroll.

150
APPENDIX D

MAJOR CONTRIBUTORS TO THE PREPARATION OF THIS REPORT

Members of the Budget Analysis, Fiscal Analysis, and Tax Analysis Divisions

were major contributors to this report. The individuals who helped prepare

the analyses for each chapter are listed below:

Chapter

Summary

Chapter I

Chapter II

Chapter in

Function 050

Chapter IV

Function 150

Analyst

Paul N. Van de Water

George Iden

Frank Russek

Rosemary Marcuss

Kathleen O'Connell

Valerie Amerkhail

Neil Fisher

Bob Lucke

Rosemarie Nielsen

Larry Ozanne

Linda Radey

Jan Sundgren

Michael A. Miller

Eugene Bryton

Diane Griffith

Barbara Hollinshead

Alex G. Manganaris

Michael J. McCord

William Myers

Jonathan Tyson

Charles E. Seagrave

Robert A. Sunshine

Lisa Brown

Joseph Whitehill

Telephone

Number

226-2880

226-2759

226-2750

226-2680

226-2680

226-2680

226-2680

226-2680

226-2680

226-2680

226-2680

226-2680

226-2840

226-2840

226-2840

226-2840

226-2840

226-2840

226-2840

226-2840

226-2820

226-2860

226-2840

226-2840

151

nmTin
Appendi

x D (Continued)

Function 250

Function 270

Function 300

Function 350

Function 370

Function 400

Function 450

Function 500

Function 550

Function 570

Function 600

Function 650

Function 700

Function 750

Function 800

Function 850

Function 900

Function 920

Paul DiNardo

Peter H. Fontaine

Kathleen Gramp

Carol Camp

Theresa A. GuUo

Deborah Reis

Roger Hitchner

Andrew Morton

Theresa A. GuUo

Mary Maginniss

Brent Shipp

Keith Chase

Kathleen Kelly

Carol Camp

Paul DiNardo

Bernadette Costello

Marianne Deignan

Deborah Kalcevic

Kenneth Pott

Carmela Dyer

Anne R. Manley

Diane Burnside

Hinda Ripps Chaikind

Marianne Deignan

Carmela Dyer

Richard J. Hendrix

Julia B. Isaacs

Anne R. Manley

Michael J. Me Cord

Janice Peskin

Brent Shipp

Paul Cullinan

Marianne Deignan

Kathleen W. Shepherd

Debra Goldberg

Marjorie Miller

James Hearn

Carol Camp

Paul Christy

Kathy A. Ruffing

David Bashore

Richard Krop

226-2860

226-2860

226-2860

226-2860

226-2860

226-2860

226-2860

226-2860

226-2860

226-2860

226-2860

226-2860

226-2860

226-2860

226-2860

226-2820

226-2820

226-2820

226-2820

226-2820

226-2820

226-2820

226-2820

226-2820

226-2820

226-2820

226-2820

226-2820

226-2840

226-2820

226-2860

226-2820

226-2820

226-2820

226-2860

226-2860

226-2860

226-2860

226-2880

226-2880

226-2880

226-2880

152
Appendix D (Continued)

Function 950 Carmela Dyer 226-2820

Kathy Gramp 226-2860

James Hearn 226-2860

Kathleen Kelly 226-2860

Peter Fontaine 226-2860

Appendix A Richard Emery 226-2835

Marvin Phaup 226-2835

Mark Weatherly 226-2835

Appendix B Kathleen O'Connell 226-2680

Appendix C Kathy A. Ruffing 226-2880

Computer support for the spending analysis in this report was provided

by David Bashore, Marion Curry, Kenneth Farris, Vernon Hammett, Vera

Powell, David Sanders, and Paula Williams. Other technical support was

provided by Janet Airis, George Arnold, Priscilla Aycock, Edward Blau,

Betty Embrey, Glen Goodnow, Andrew F. Haughwout, Richard A. Krop, and

Robert Sempsey. C.G. Nuckols, Jr. also gave valuable assistance in

reviewing the many drafts of the spending chapters.

153

unrmir

IHIIL

ill 111 Hi I
Ill