CONGRESS OF T

CONGRESSIONAL

^^^^^H^ffl fTED STATH

,ETOF

An Analysis of the President's Budgetary

Proposals for Fiscal Year 1991

Prepared at the Request of the

Senate Committee on Appropriations

CBO Publication

#511

CONGRESSIONAL

BUDGET OFFICE

Second and D Streets, S. W.

Washington, D.C. 20515

S U M M A R

March 1990

CBO ANALYSIS OF THE PRESIDENTS 1991 BUDGET

The Congressional Budget office estimates that the 1991 budget deficit under the

President's policy proposals would be $131 billion, almost $70 billion higher than the

Administration's estimate. The difference in estimates arises largely because the President's budget makes no allowance for the sizable needs of the Resolution Trust Corporation (RTC) for working capital and also because it uses more optimistic economic

assumptions.

In its report, An Analysis of the President's Budgetary Proposals for Fiscal Year

1991, CBO recasts the Administration's policy proposals using CBO economic and

technical assumptions to assess the likely effect on federal outlays, revenues, and the

deficit. CBO's current estimate of the baseline deficit-that is, the deficit that would

result from a continuation of current policies-is close to $160 billion for both 1990 and

1991. These figures are more than $20 billion higher than previous CBO estimates,

which did not reflect RTC's full needs for working capital. The Administration's recent

decision to provide the needed sums through bridge loans from the Treasury's Federal

Financing Bank will increa.se budget outlays and the deficit in 1990 and 1991. In later

years, when the RTC sells the assets that it acquires from insolvent thrifts, the proceeds

from the sales will reduce the deficit. Consequently, the CBO baseline deficit falls to

$124 billion in 1992 and $110 billion in 1995.

The Administration estimates that its proposals will bring the federal budget into

surplus by 1993, when it will begin retiring debt held by the public. In contrast, CBO

estimates that carrying out the policies proposed in the Administration's budget would

still leave a deficit of $79 billion in 1993, although it would nearly balance the budget by

1995 (see table overleaf). Measured against CBO's latest baseline estimates, the

President's budget would cut more than $30 billion from the projected 1991 deficit, and

almost $100 billion from the 1995 deficit. The largest savings would come from

reductions in inflation-adjusted defense spending and from entitlements (mostly Medicare, farm price supports, and federal employee retirement and health benefits).

The budgetary landscape for the next several years is clouded by the costs of the

savings and loan crisis, which can wreak havoc with achieving the Balanced Budget Act

deficit targets. For some time, CBO has argued that RTC spending should be included in

the budget totals but largely excluded from the Balanced Budget Act calculations. The

rationale for the exclusion is that such spending does not affect national saving or

consumption in the way most federal spending does and that it would also be consistent

with the treatment of asset sales under the act.

Questions regarding the budget estimates should be directed to the Budget Analysis

Division (202-226-2880), and inquiries about the economic assumptions should be

addressed to the Fiscal Analysis Division (226-2750). The Office of Intergovernmental

Relations is CBO's Congressional liaison office and can be reached at 226-2600. For

additional copies of the report, please call the Publications Office at 226-2809.
CBO ESTIMATES OF THE ADMINISTRATION'S BUDGETARY PROPOSALS

(By fiscal year, in billions of dollars)

CBO Baseline Deficit

Policy Changes

Revenues*

National defense

Nondefense discretionary spending

Entitlements and other

mandatory spending

Offsetting receipts

Net interest

Total

President's Budget

as Estimated by CBO

President's Budget Estimates

CBO Reestimates

Economic

Techinical

Total Reestimates

1991

161

-9

-3

-1

-13

-3

^1

-31

131

61

26

44

69

1992

124

-4

-8

-2

-18

-4

_^

-41

84

24

54

_5

60

1993

132

b

-16

-4

-21

-6

_J_

-54

79

(20)c

84

15

99

1994

121

-2

-26

-7

-23

-6

-11

-74

47

(64)c

105

6

112

1995

110

-2

-35

-11

-26

-8

dl

-99

11

(lll)c

117

5

122

SOURCE: Congressional Budget Office.

NOTE: The budget figures include Social Security and exclude the Postal Service.

a. Revenue increases are shown with a negative sign because they reduce the deficit.

b. Less than $0.5 billion.

c. Figures in parentheses represent estimated surpluses.
AN ANALYSIS OF THE PRESIDENT'S

BUDGETARY PROPOSALS

FOR FISCAL YEAR 1991

The Congress of the United States

Congressional Budget Office
! IL

NOTES

Unless otherwise indicated, all years referred to in Chapter II and Appendix B

are calendar years, and all years in all other chapters and Appendix A are

fiscal years.

Unemployment rates throughout the report are calculated on the basis of the

civilian labor force.

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

rounding.

The source of data concerning President Bush'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 (popularly

known as Gramm-Rudman-Hollings) is also referred to in this volume more

briefly as the Balanced Budget Act. This act was amended by the Balanced

Budget and Emergency Deficit Control Reaffirmation Act of 1987.

The Omnibus Budget Reconciliation Act of 1989 is referred to more briefly as

the Reconciliation Act.

A glossary of economic and budget terms used in this report appears in

Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years

1991-1995 (January 1990).
PREFACE

This analysis of the President's budget for fiscal year 1991 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 1991 through 1995. 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 staffs of the Budget Analysis,

Fiscal Analysis, and Tax Analysis Divisions under the supervision of

James L. Blum, Frederick C. Ribe, and Rosemary Marcuss,

respectively. Paul N. Van de Water was responsible for Chapter I;

Douglas Hamilton for Chapter II; Kathleen M. O'Connell and Larry

Ozanne for Chapter IE; Michael Miller for Chapter IV; Charles E.

Seagrave and Robert A. Sunshine for Chapter V; Kathy Ruffing, Mary

B. Maginiss, Robert A. Sunshine, and Paul N. Van de Water for

Appendix A; and John Peterson for Appendix B. Principal contributors

to the revenue and spending estimates are listed in Appendix C.

Paul L. Houts, Francis S. Pierce, and Sherry Snyder edited the

report. Nancy H. Brooks provided editorial support during production.

The authors wish to thank Cindy Cleveland, Marion Curry, Janice

Johnson, Verlinda Lewis, L. Rae Roy, Simone Thomas, and Emma

Tuerk for typing the many drafts. Kathryn Quattrone prepared the

report for publication.

Robert D. Reischauer

Director

March 1990

"TT
Ill
CONTENTS

I SUMMARY AND INTRODUCTION 1

CBO and Administration Budget

Estimates 1

The Administration's Budget

Program 6

Issues in Measuring the Deficit 10

H COMPARISON OF ECONOMIC

ASSUMPTIONS 17

Short-Term Outlooks 18

Medium-Term Projections 20

Evaluating Economic Assumptions 26

Implications of Economic Assumptions

for Deficits 32

HI THE ADMINISTRATION'S

REVENUE PROPOSALS 35

Revenue Proposals 35

CBO Reestimates 59

IV THE ADMINISTRATION'S PROPOSALS

FOR DEFENSE AND INTERNATIONAL

AFFAIRS 65

The Defense Budget Compared

With the CBO Baseline 66

Major Defense Proposals 69

CBO Reestimates of the Administration's

Request for Defense 82

The Administration's Budget Request

for International Affairs 84

CBO Reestimates of the Administration's

Request for International Affairs 88

"i
vi ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

V THE ADMINISTRATION'S

DOMESTIC PROPOSALS 91

Entitlements and Other Mandatory

Spending 92

Nondefense Discretionary

Spending 94

Offsetting Receipts 98

Net Interest 100

The President's Domestic Proposals

by Function 101

250 General Science, Space,

and Technology 103

270 Energy 106

300 Natural Resources and

the Environment 110

350 Agriculture 113

370 Commerce and Housing

Credit 118

400 Transportation 125

450 Community and Regional

Development 128

500 Education, Training, Employment,

and Social Services 132

550 Health 139

570 Medicare 144

600 Income Security 154

650 Social Security 163

700 Veterans Benefits and

Services 166

750 Administration of Justice 171

800 General Government 174

900 Net Interest 777

920 Allowances 280

950 Undistributed Offsetting

Receipts 182
CONTENTS vii

APPENDIXES

A Baseline Budget Projections 189

B Comparison of the CBO and Administration

Economic Forecast Records 201

C Major Contributors to the Revenue

and Spending Estimates 213
viii ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

TABLES

I-1. CBO and Administration Estimates of

the Deficit Under Administration Policies 4

1-2. The Administration's Deficit Reduction

Program as Estimated by CBO 7

1-3. CBO Estimates of the Administration's

Budget Program 8

1-4. On-and Off-Budget Totals in CBO's

Estimate of the President's Budget 12

1-5. CBO Baseline and CBO Estimate of

the President's Budget Excluding

Noninterest Outlays of the Resolution

Trust Corporation 14

II-l. Comparison of CBO, Administration,

and Blue Chip Short-Run Economic

Forecasts 19

II-2. Comparison of CBO, Administration,

and Blue Chip Economic Assumptions,

Calendar Years 1989-1995 22

II-3. Growth of Nonfarm Business

Productivity 30

II-4. Effects of CBO Economic Assumptions

on Estimates of the Administration's

Budget 32

HI-1. Administration and. CBO Estimates of

Administration Budget Revenues, by

Major Source 36

III-2. CBO Estimates of Revenue Proposals

in the Administration's 1991 Budget 37
CONTENTS ix

ffi-3. CBO Estimates of the Administration's

Proposed Savings and Investment

Incentives 38

III-4. CBO Estimates of the Administration's

Proposed Extensions of Expiring Income

Tax Provisions 45

ni-5. CBO Estimates of the Administration's

Proposed Oil and Gas Industry

Incentives 47

ni-6. CBO Estimates of the Administration's

Proposed Payroll Tax Increases 49

DI-7. CBO Estimates of the Administration's

Proposed Excise Tax and Fee Increases 52

ni-8. CBO Estimates of the Administration's

Internal Revenue Service Initiatives 55

ni-9. CBO Estimates of the Administration's

Other Revenue Proposals 58

IH-10. CBO Reestimates of Administration

Budget Revenues 59

IV-1. Proposed Major Spending Changes in

the President's Budget for Function 050,

National Defense 67

IV-2. Real Changes in National Defense

Budget Authority 70

IV-3. Summary of Active Forces 72

IV-4. Investment in the Next Generation

and Current Generation of Weapons 77
x ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

IV-5. Selected Program Changes for Aircraft

and Missile Procurement in the

President's Request for Fiscal Year 1991 79

IV-6. Investment in Strategic and General

Purpose Weapons 81

IV-7. CBO Reestimates of Proposed

Spending in the President's Budget 83

IV-8. Proposed Major Spending Changes in

the President's Budget for Function 150,

International Affairs 85

IV-9. CBO Reestimates of Proposed Spending

in the President's Budget for Function 150,

International Affairs 89

V-l. CBO Estimates of the President's

Proposals for Entitlements and Other

Mandatory Spending 93

V-2. CBO Estimates of the President's

Proposals for Nondefense

Discretionary Spending 96

V-3. Nondefense Discretionary Spending,

Fiscal Year 1991 97

V-4. CBO Estimates of the President's

Proposals for Offsetting Receipts 99

A-l. Baseline Budget Projections 190

A-2. Revisions to CBO Baseline 191

A-3. CBO and Administration Estimates

of RTC Spending 196

A-4. Projected Uses and Sources of RTC

Cash, Fiscal Years 1990-1992 198
CONTENTS xi

B-l. Comparison of CBO and Administration

Two-Year Forecasts of Real GNP Growth 204

B-2. Comparison of CBO and Administration

Two-Year Forecasts of the CPI Inflation

Rate 205

B-3. Comparison of CBO and Administration

Two-Year Forecasts of Nominal ShortTerm Interest Rates 207

B-4. Comparison of CBO and Administration

Two-Year Forecasts of the InflationAdjusted Short-Term Interest Rate 208

B-5. Ranking of CBO and Administration

Two-Year Forecasts, Calendar Years

1978-1988 209

B-6. Comparison of CBO and Administration

Longer-Term Projections of Real GNP

Growth 210

FIGURES

1-1. Federal Deficit Projections 2

II-l. Comparison of CBO and Administration

Economic Assumptions 24

II-2. CBO, Administration, and the Range

of the Blue Chip Forecasts for

Calendar Years 1990 and 1991 27

BOX

IV-1. Deferrals and the Panama Supplemental 68

CHAPTER I

SUMMARY AND INTRODUCTION

The Congressional Budget Office (CBO) estimates that the Bush Administration's budget proposals would cut more than $30 billion from

the projected 1991 deficit, bringing it down to $131 billion. CBO's

deficit estimate is almost $70 billion higher than the Administration's.

The difference in estimates arises largely because the Administration's

budget makes no allowance for the sizable needs of the Resolution

Trust Corporation (RTC) for working capital and uses more optimistic

economic assumptions.

CBO's current estimate of the baseline deficit--that is, the deficit

that would result from a continuation of current policies-is close to

$160 billion in both 1990 and 1991. These figures are over $20 billion

higher than the previous CBO estimates, which did not reflect RTC's

full needs for working capital. The baseline deficit falls to $124 billion

in 1992 and $110 billion in 1995.

The Administration projects that its proposals will bring the federal budget into surplus by 1993, when it will begin retiring debt held

by the public. In contrast, CBO estimates that carrying out the policies

proposed in the Administration's budget would still leave a deficit of

$79 billion in 1993, although it would nearly balance the budget by

1995. Figure 1-1 compares CBO and Administration projections of the

federal budget.

CBO AND ADMINISTRATION BUDGET ESTIMATES

CBO analyzes the Administration's fiscal program in terms of changes

from CBO's baseline budget projections, which show what would happen if current taxing and spending policies were continued without

change. CBO reestimates, or reprices, the Administration's budget using CBO's economic assumptions and technical estimating methods.

The differences between the baseline and the CBO estimate of the budget measure the effect of the Administration's proposed policy changes.
2 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Figure 1-1.

Federal Deficit Projections

Billions of dollars

CBO Estimate of

Administration Program

-120

1989 1990 1991 1992

Fiscal Years

1993 1994 1995

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

NOTE: The budget figures include Social Security and exclude the Postal Service.
CHAPTER I SUMMARY AND INTRODUCTION 3

Baseline Budget Projections

CBO's baseline budget projections hew to the rules contained in the

Balanced Budget Act. For receipts and entitlement spending, the baseline generally assumes that laws now on the statute books will continue. For defense and nondefense discretionary spending, the projections for 1991 through 1995 are based on the 1990 appropriations,

increased only to keep pace with inflation.

The baseline budget projections contained in this volume update

those published in CBO's annual report of January 1990 to reflect

newly available information. While CBO has substantially increased

its estimate of the Resolution Trust Corporation's outlays, other revisions are small. In its annual report, CBO noted that RTC's outlays

were constrained because it lacked sufficient funds to deal with the

hundreds of insolvent thrift institutions that had been entrusted to it.

Since then, the Department of Justice has informed RTC that it is

eligible for bridge loans from the the Federal Financing Bank (FFB).

CBO now estimates that the RTC will borrow some $24 billion from the

FFB in 1990 and another $31 billion or so in 1991. The additional costs

of case resolutions financed by this borrowing will count as budget outlays and swell the federal deficit for the next two years. In later years,

when the RTC sells the assets that it acquires from insolvent thrifts,

the proceeds from the sales will reduce the deficit.

Under CBO's baseline budget projections, the deficit is projected to

rise from $152 billion in 1989 to $159 billion in 1990 and $161 billion

in 1991. The baseline deficit then drops to an average of $125 billion in

1992 through 1994 and to $110 billion in 1995. In relation to the size of

the economy, the baseline deficit is near 3 percent of gross national

product (GNP) in 1989,1990, arid 1991, 2 percent of GNP in 1992 and

1993, and 1.5 percent of GNP in 1995. Appendix A presents the baseline budget projections and explains the revisions, particularly the

estimates of RTC working capital.

Projections of the Bush Administration's Policies

CBO estimates that the 1991 budget deficit under the Bush Administration's policies would be $131 billion~$69 billion more than the

Administration's own estimate of $61 billion. About $44 billion of the
4 ANALYSIS OF THE PRESIDENTS BUDGET March 1990

$69 billion in reestimates is attributable to differing technical estimating assumptions, primarily for RTC working capital and other

costs of deposit insurance. The remaining $26 billion difference stems

from differences in economic assumptions. CBO's deficit estimates exceed the Administration's by $60 billion in 1992, $99 billion in 1993,

and $122 billion in 1995—mostly because of different economic assumptions (see Table 1-1).

TABLE 1-1. CBO AND ADMINISTRATION ESTIMATES OF

THE DEFICIT UNDER ADMINISTRATION POLICIES

(By fiscal year, in billions of dollars)

1990 1991 1992 1993 1994 1995

Administration Deficit

or Surplus Estimate 121 61 24

CBO Economic Reestimates

Revenues 1 19 36

Interest -1 6 17

Other outlays b 1 1

Subtotal b 26 54

(20)* (64)a (lll)a

55

27

_3

84

64

36

_5

105

63

44

9

117

CBO Technical Reestimates

Revenues

Deposit insurance

Medicaid and Medicare

Interest

Asset sales and leases

Other

Subtotal

Total Reestimates

CBO Deficit Estimate

5

31

-2

4

0

-1

36

37

158

5

29

2

4

3

1

44

69

131

3

-6

4

6

b

-1

5

60

84

-4

4

7

8

b

-2

15

99

79

-12

-6

10

10

b

5

6

112

47

-17

-3

12

11

b

1

5

122

11

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

NOTE: The budget figures include Social Security and exclude the Postal Service. Following standard

budgetary accounting, the estimates of the Administration budget do not treat payments to the

Social Security Integrity and Debt Reduction Fund as budget outlays.

b.

Figures in parentheses represent estimated surpluses.

Less than $0.5 billion.
CHAPTER I SUMMARY AND INTRODUCTION 5

Economic Assumptions. The Administration is considerably more

optimistic than CBO on the outlook for noninflationary growth, as discussed in Chapter n. Over the 1990-1995 period, the Administration

projects average real growth that is 0.7 percent a year higher than

CBO's. Despite this stronger growth, the Administration assumes

about the same inflation rates as CBO through 1992 and somewhat

lower inflation thereafter. The Administration's assumed inflationadjusted interest rates are also lower than CBO's by an average of

more than one percentage point.

Revenues and interest account for almost all of the differences

between CBO and the Administration attributable to economic factors.

Because of its projected higher growth rates, the Administration has

higher taxable incomes than CBO--and therefore larger tax collections—in all years. In addition, the Administration's higher revenues

and lower interest rates lead to lower federal borrowing costs. In total,

substituting CBO's economic assumptions for the Administration's increases the estimated deficit by $26 billion in 1991, $54 billion in 1992,

and $117 billion in 1995.

Technical Estimating Assumptions. CBO's technical reestimates increase the estimated 1991 deficit by $44 billion. Of this amount, $29

billion represents RTC working capital and other deposit insurance requirements. In its budget submission, the Administration deliberately excluded the RTC's working capital needs from its estimates.

The reason given was the problematic treatment of these transactions

under the Balanced Budget Act, an issue that is considered below.

Since the budget was released, however, the RTC has indicated its

intention to meet its working capital needs through borrowing from

the FFB, and CBO has included an estimate of this borrowing in its

figures.

More than $7 billion in technical differences in 1991 result from

lower CBO estimates of the effects of various Administration proposals. The Administration estimates that its proposal to exclude 30

percent of gains realized on capital assets will raise $4.9 billion in

revenue in 1991; the Joint Committee on Taxation estimate, with

which CBO concurs, shows a revenue gain of only $3.2 billion in 1991

and a revenue loss thereafter. CBO also assumes that no additional

revenues will result from the Administration's proposed improvements

to Internal Revenue Service management, changes that the Adminis-
6 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

tration estimates will yield $2.5 billion in 1991. On the outlay side of

the budget, CBO estimates that the proposed sale of part of the Southeastern Power Marketing Administration, which the Administration

assumes will produce $1.2 billion in offsetting receipts in 1991, cannot

be consummated until 1992. Also, leasing a portion of the unassigned

radio spectrum is likely to raise only $0.4 billion in 1991, not the $2.3

billion counted on by the Administration.

After 1991, technical estimating differences between CBO and the

Administration are smaller, adding an average of $8 billion per year to

CBO's deficit estimates. CBO's estimates of Medicaid, Medicare, and

interest spending are higher than the Administration's, but CBO's

revenue estimates-leaving aside differences stemming from economic

assumptions—are generally higher as well. CBO's reestimates of revenues, defense, and domestic spending are explained in more detail in

Chapters m, IV, and V.

THE ADMINISTRATION'S BUDGET PROGRAM

CBO's baseline projections provide a benchmark against which the

Administration's budget program can be measured. Because the baseline and the CBO estimate of the President's budget employ the same

economic and technical estimating assumptions, differences between

the two are solely the result of proposed policy changes. CBO estimates that the Administration's budget proposals would reduce the

deficit by $31 billion in 1991, substantially more than has been

achieved in most recent years. The proposed deficit reduction grows to

$41 billion in 1992 and $99 billion in 1995, as shown in Table 1-2.

Table 1-3 shows CBO's estimates of the Administration's budget program by major tax source and spending category.

President Bush proposes little in the way of higher taxes. The Administration's proposals (detailed in Chapter III) would increase

revenues by $9 billion in 1991 but only about $2 billion per year in

1992 through 1995. Excluding up to 30 percent of capital gains from

taxation would produce a $3 billion spurt of revenues in 1991 but a loss

of $3 billion to $4 billion per year thereafter. The budget also proposes

to increase revenues by $4 billion per year by extending Social Security coverage to state and local government employees not covered by a

retirement plan and by extending Medicare coverage to all state and
CHAPTER I SUMMARY AND INTRODUCTION 7

local workers. Excise tax proposals-primarily an extension of the telephone tax and an increase in airport and airway taxes-would raise $4

billion in 1991 and $7 billion in 1995. These revenue increases are

largely offset, however, by the cost of the capital gains exclusion,

family savings accounts, extension of the research and experimentation credit and allocation rules, and oil and gas preferences. Under the

Administration's proposals, revenues would represent 19.8 percent of

GNP in 1991 but would grow less rapidly than the economy thereafter.

For the first time since the end of the Vietnam War, the President's budget proposes a sustained reduction in real defense spending.

Despite nominal annual increases, the budget calls for a 2 percent decline each year in inflation-adjusted dollars. Thus, by 1995, defense

TABLE 1-2. THE ADMINISTRATION'S DEFICIT REDUCTION

PROGRAM AS ESTIMATED BY CBO

(By fiscal year, in billions of dollars)

1991 1992 1993 1994 1995

CBO Baseline Deficit 161 124 132 121 110

Policy Changes

Revenues* -9 -4 b -2 -2

National defense -3 -8 -16 -26 -35

Nondefense discretionary spending -1 -2 -4 -7 -11

Entitlements and other

mandatory spending -13 -18 -21 -23 -26

Offsetting receipts -3 -4 -6 -6 -8

Net interest _JL _^4 _J_ -11 -17

Total -31 -41 -54 -74 -99

President's Budget

as Estimated by CBO 131 84 79 47 11

SOURCE: Congressional Budget Office.

NOTE: The budget figures include Social Security and exclude the Postal Service.

a. Revenue increases are shown with a negative sign because they reduce the deficit.

b. Less than $0.5 billion.

"T"
8 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

TABLE 1-3. CBO ESTIMATES OF THE ADMINISTRATION'S

BUDGET PROGRAM (By fiscal year)

1990 1991 1992

In Billions of Dollars

Revenues0

Individual income 491 530 557

Corporate income 102 110 114

Social insurance 388 416 442

Other 87 91 95

Total 1,068 1,146 1,208

Outlays

National defense 296 304 309

Nondefense discretionary

spending 207 219 228

Entitlements and other

mandatory spending 604 635 636

Net interest 179 183 186

Offsetting receipts -60 -63 -68

Total 1,226 1,277 1,292

Deficit 158 131 84

As Percentages of GNP

Revenues

Individual income 9.0 9.1 9.0

Corporate income 1.9 1.9 1.9

Social insurance 7.1 7.2 7.1

Other L6 J.J5 1.5

Total 19.6 19.8 19.5

Outlays

National defense 5.4 5.2 5.0

Nondefense discretionary

spending 3.8 3.8 3.7

Entitlements and other

mandatory spending 11.1 11.0 10.3

Net interest 3.3 3.2 3.0

Offsetting receipts -1.1 -1.1 -1.1

Total 22.5 22.0 20.9

Deficit 2.9 2.3 1.4

SOURCE: Congressional Budget Office.

1993

593

118

467

99

1,276

312

233

690

191

-72

1,355

79

9.0

1.8

7.1

1.5

19.4

4.7

3.5

10.5

2.9

-1.1

20.6

1.2

1994

632

123

499

103

1,356

319

239

728

193

-75

1,404

47

9.0

1.8

7.1

1.5

19.3

4.6

3.4

10.4

2.8

-1.1

20.0

0.7

1995

673

130

530

107

1,440

320

243

778

191

-81

1,451

11

9.0

1.7

7.1

1.4

19.3

4.3

3.3

10.4

2.6

-1.1

19.4

0.1

NOTE: The projections include Social Security, which is off-budget but is counted for purposes of the

Balanced Budget Act targets. For comparability with the targets, the projections exclude the

Postal Service, which is also off-budget.
CHAPTER I SUMMARY AND INTRODUCTION 9

budget authority would decline by about 11 percent in real terms.

Compared with the baseline, the outlay savings would be small at

first-only $3 billion in 1991--but would grow to $35 billion by 1995.

By 1994 and 1995, cuts in defense spending represent fully one-third of

the Administration's proposed deficit reduction. The Administration's

budget proposals would cause defense outlays to fall from 5.4 percent of

GNP in 1990 to 4.3 percent of GNP in 1995, which would be (except for

1948) the lowest level since before World War II. Chapter IV describes

the Administration's defense and international affairs budget proposals in more detail.

In the aggregate, nondefense discretionary spending is not a major

target of the Administration's deficit reduction proposals. Some programs would be cut deeply, however, while a few would be increased

substantially. Increases are slated for the space station and other

space-related activities, the National Science Foundation, the superconducting super collider, aviation facilities and equipment, and Head

Start. The budget also provides for renewing long-term subsidized

housing contracts that are about to expire. Significant cuts would be

made in the direct loan programs of the Farmers Home and Rural Electrification administrations, construction grants for sewage treatment

plants, mass transit subsidies, community and regional development,

and low-income energy assistance. Now at 3.8 percent of GNP, its

lowest level in more than 30 years, nondefense discretionary spending

would fall to 3.3 percent of GNP in 1995 under the Administration's

proposals.

In 1991, the largest amount of deficit reduction~$13 billion-is to

be achieved from entitlements and other mandatory spending. Proposed cuts in Medicare payments to doctors and hospitals, including

the extension of cost-saving provisions that expire in 1990, total $5 billion. Reducing cost-of-living adjustments in the Civil Service and

Military Retirement systems and other changes in federal employee

retirement would save $3 billion. Yet-to-be-specified reforms in farm

price supports and federal employee health benefits would reduce outlays by almost $2 billion each. The only major increase in entitlement

spending recommended by the Administration is a refundable tax

credit for low-income working families with children. Together with

making the existing child care credit refundable, this proposal would

cost $2 billion by 1995. In total, entitlement spending in 1995 would be

cut by $26 billion. As a share of GNP, however, entitlement spending
10 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

would remain near recent levels (excluding extraordinary deposit insurance outlays).

The budget proposals would increase offsetting receipts by $3 billion in 1991 and more in later years. One-time savings would arise

from selling the Alaska and Southeastern power marketing administrations and other unspecified assets, leasing rights for oil and gas production in the naval petroleum reserves and Arctic National Wildlife

Refuge, and charging for the use of certain unassigned radio frequencies. Continuing reductions would result from maintaining premiums

for Part B of Medicare at a level sufficient to pay for 25 percent of the

program's costs and from extending customs user fees that are about to

expire. The Administration also proposes to charge governmentsponsored enterprises a fee for issuing securities.

Under the President's proposals, total spending would fall below

20 percent of GNP in 1995, a level last seen in the early 1970s. The

composition of spending, however, would be substantially different. In

1971, for example, defense and nondefense discretionary spending together accounted for about 60 percent of the budget. In 1995, under the

President's proposals, they would represent less than 40 percent of the

total.

ISSUES IN MEASURING THE DEFICIT

Recent discussions of budgetary policy have become mired in confusion

over what is the real deficit. For the most part, this confusion has

arisen over accounting for the surpluses of the Social Security trust

funds and the costs of the savings and loan rescue. The President's

budget contains a proposal to change the way Social Security surpluses

are treated under the Balanced Budget Act but does not deal with the

thrift insurance issue. In both cases, CBO argues, the proper deficit to

target is one that measures the extent to which the federal government

draws on private saving to finance government consumption.
CHAPTER I SUMMARY AND INTRODUCTION 11

Social Security

The current deficit targets are $64 billion for 1991, $28 billion for 1992,

and zero for 1993. The Balanced Budget Act includes Social Security

in these calculations and thereby makes Social Security subject to the

same fiscal discipline as the rest of the budget. From an economic

perspective, this treatment of Social Security makes sense.

The chief importance of the federal deficit is accounting for the

government's use of private saving. When the deficit increases (other

than for additional spending on physical or human investments), the

government is diverting more private saving to public consumption.

When the deficit is cut, the government is using less saving. The

annual balance in the Social Security programs affects national saving

in exactly the same way as the balance in any other government

accounts.

It is also difficult to make the case that the Social Security surplus

has been hiding the deficit in the remainder of the budget. The Balanced Budget Act took Social Security off-budget precisely to highlight

its importance to the overall deficit. Both CBO and the Administration

have been showing figures on the Social Security surplus and the deficit in the rest of the budget since early 1986, as have the budget resolutions adopted by the Congress (see Table 1-4).

Despite these arguments, recent months have produced a plethora

of proposals to exclude Social Security from the Balanced Budget Act

process. The Administration's budget contains a two-part variation on

this theme. First, the Administration would extend the requirement of

a balanced budget indefinitely, rather than allow it to expire after

1993. Second, the Administration proposes a Social Security Integrity

and Debt Retirement Fund, which would record a growing portion of

the anticipated Social Security surpluses as a budget outlay.

The Administration's proposed fund, however, is not really a fund

at all. It is merely an accounting change that would classify reduction

of debt as an outlay rather than simply as a use of the budget surplus.

Under standard accounting practices, the federal deficit is a good measure of the amount the government must borrow from the public.

Similarly, if the government ran a surplus as normally measured, the

surplus would approximate the amount of publicly held debt that

"T"
12 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

would be retired. By treating the retirement of debt as an outlay, the

Administration's plan for balancing the budget in fact involves

running a budget surplus under traditional accounting.

In any event, by CBO's estimates, the Administration's proposals

would not meet the current Balanced Budget Act targets and would not

balance the budget. Under those circumstances, the publicly held debt

would continue to increase. Because the Administration's proposed accounting change would have no substantive effect and would exaggerate the reported deficit, the budget estimates in this report follow

standard budgetary accounting rules.

TABLE 1-4. ON- AND OFF-BUDGET TOTALS IN CBO'S

ESTIMATE OF THE PRESIDENT'S BUDGET

(By fiscal year, in billions of dollars)

1990 1991 1992 1993 1994 1995

On-Budget

(Excludes Social Security and Postal Service)

Revenues 780 835 875 923 978 1037

Outlays 1,003 1,042 1,047 1,100 1,140 1,178

Deficit 223 207 172 177 162 142

Off-Budgeta

(Social Security)

Revenues 288 311 333 353 379 403

Outlays 223 235 245 255 264 273

Surplus 65 76 88 98 114 130

Total

Revenues

Outlays

Deficit

1,068

1,226

158

1,146

1,277

131

1,208

1,292

84

1,276

1,355

79

1,356

1,404

47

1,440

1,451

11

SOURCE: Congressional Budget Office.

a. For comparability with the Balanced Budget Act targets, the estimates exclude the Postal Service,

which is also off-budget.
CHAPTER I SUMMARY AND INTRODUCTION 13

Thrift Insurance

The budgetary landscape for the next several years is clouded by the

costs of the savings and loan crisis. The Financial Institutions Reform,

Recovery, and Enforcement Act of 1989 (FIRREA) authorized $50 billion for the Resolution Trust Corporation to close or sell hundreds of

insolvent institutions. This amount was intended to pay for deposit

insurance losses that would never be recovered, although it is almost

certainly insufficient for that purpose. CBO estimates that, by 1992,

RTC will need at least $25 billion to $30 billion more to cover net

losses.

In the course of liquidating insolvent institutions, however, RTC

will need to purchase assets well in excess of the amount of their net

losses. Eventually, the acquired assets will be sold, and part of their

purchase price will be recovered. In the meantime, however, RTC will

need substantial amounts of working capital~$40 billion to $100 billion by the Administration's estimate. RTC has recently indicated that

it will borrow the needed sums from the Treasury's Federal Financing

Bank.

The costs of the savings and loan crisis can wreak havoc with

achieving the Balanced Budget Act targets. The Congress effectively

excluded the $50 billion down payment authorized in FIRREA from

the Balanced Budget Act process: $20 billion was appropriated for

fiscal year 1989 when it was too late to affect the automatic reduction

procedure, and $30 billion is to be borrowed by an off-budget entity.

Likewise, borrowing from the FFB to meet working capital needs

would no longer affect the Balanced Budget Act process for 1990. But

it would put the 1991 deficit target of $64 billion even farther out of

reach. In 1992 and 1993, however, proceeds from asset sales could

make it easier to reach the targets.

For some time, CBO has argued that RTC spending should be

included in the budget totals but largely excluded from the Balanced

Budget Act calculations. The rationale for the exclusion is that such

spending does not affect national saving in the way that most federal

spending does. Unlike most recurrent federal expenditures, RTC

spending for thrift resolution involves only an exchange of one asset or

liability for another. These transfers of assets leave private income

and wealth unchanged, and thus do not affect saving or consumption.
14 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Excluding most RTC activities from the deficit calculations in the

Balanced Budget Act would also be consistent with the treatment of

asset sales under the act. The act excludes nonroutine asset sales from

the budget baseline used to compute the spending cuts required under

the automatic deficit reduction provisions. It is unclear whether RTC

asset sales are covered by this exclusion. If they are, it would certainly

make sense for the Congress also to exclude RTC's expenditures of

working capital to acquire these assets.

The argument for excluding RTC activities from the Balanced

Budget Act does not apply to its interest expenses. RTC's interest outlays are not merely an exchange of assets but represent a true increase

in the government's costs. Table 1-5 shows how the baseline and the

TABLE 1-5. CBO BASELINE AND CBO ESTIMATE OF THE

PRESIDENT'S BUDGET EXCLUDING NONINTEREST

OUTLAYS OF THE RESOLUTION TRUST CORPORATION

(By fiscal year, in billions of dollars)

1990 1991 1992 1993 1994 1995

Baseline Deficit

Resolution Trust

Corporation

(Except interest)

Baseline Deficit

Excluding RTC

Deficit as Estimated

by CBO

Resolution Trust

Corporation

CBO Baseline

159 161 124

32

127

158

28 -17

134 141

President's Budget

131 84

132

-16

148

79

121

-12

133

47

110

-8

119

11

(Except interest)

Deficit

Excluding RTC

32

126

28

103

-17

101

-16

94

-12

59

-8

19

SOURCE: Congressional Budget Office.
CHAPTER I SUMMARY AND INTRODUCTION 15

CBO reestimate of the President's budget would be affected by removing RTC's noninterest outlays from the deficit calculation.

Excluding RTC, CBO estimates that the President's policies would

produce a deficit of $103 billion in 1991. In 1992 and 1993 the deficit

would hardly decline at all, but the budget would come close to balance

by 1995. If reached, it would represent a substantial achievement.

Compared with today's deficits, balancing the budget would increase

national saving by 3 percent of GNP. Added saving will increase the

productivity of the economy, raise the growth of living standards, and

ease the strain of the baby boom's retirement 20 years hence.
JL_J
CHAPTER II

COMPARISON OF

ECONOMIC ASSUMPTIONS

The Administration's economic assumptions are more optimistic than

those developed by the Congressional Budget Office. Over the 1991-

1995 period, the Administration expects growth of real (inflationadjusted) GNP to be higher, inflation rates to be lower, and both shortand long-term interest rates to be much lower than does CBO. Interest

rates in the Administration's projections are lower because of both

lower inflation and lower real interest rates.

The Administration's projections rest on two critical expectations

that, while not implausible, may not be so easily realized. First, the

Administration anticipates that its policies to reduce the deficit will be

enacted and that this achievement, along with a credible monetary

policy, will change the perceptions of financial markets substantially,

which in turn will lead to lower interest rates. Second, the Administration expects that the growth of labor productivity will pick up--an

assumption that accounts for most of the difference in the growth of

output between the Administration's projections and CBO's. More

rapid growth in productivity raises the Administration's estimate of

the economy's potential growth rate to 3.0 percent a year, which is

higher than CBO's estimate of 2.5 percent. The potential growth rate

determines how fast an economy with full employment of labor and

capital can grow without experiencing higher inflation.

Differences between the Administration's economic assumptions

and those of CBO enable the Administration to project much lower

deficits than does CBO. Indeed, substituting CBO's economic assumptions for the Administration's adds $26 billion to the deficit in fiscal

year 1991 and $117 billion in fiscal year 1995. This chapter first

describes differences between CBO and the Administration in their

short-run economic outlooks and medium-term projections, then evaluates those differences, and lastly discusses the budgetary implications

of the different economic assumptions.

"T"
18 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

SHORT-TERM OUTLOOKS

The differences in the short-term outlooks of CBO and the Administration for 1990 and 1991 are found mainly in two major economic indicators: growth of real GNP and interest rates (see Table II-l). CBO expects the growth in real GNP in both years to be 0.8 percentage point

lower than the Administration does on a fourth-quarter-to-fourthquarter basis. Although the forecasts of interest rates are similar in

1990, the forecasts differ substantially in 1991, with CBO's forecast of

nominal short-term rates 1.8 percentage points higher and long-term

rates 0.9 percentage point higher than the Administration's. The

forecasts of nominal interest rates, especially short-term rates, differ

primarily because of differences in the forecasts of real interest rates.

In 1991, CBO expects inflation-adjusted (or real) short-term interest

rates to be 1.4 percentage points higher than does the Administration.l

Forecast Comparisons

Although CBO forecasts sluggish economic growth in 1990, it expects

the economy to avoid a recession, based largely on the assumption that

the Federal Reserve will continue to encourage lower interest rates.

Lower interest rates in turn stimulate housing and business investment. As a result, economic growth is expected to pick up in the last

half of 1990, but not by much. By early 1991, the Federal Reserve is

expected to encourage a rise in short-term interest rates, prompted by

a concern that faster growth in an economy with few idle resources

could lead to higher inflation. The Federal Reserve's anticipated efforts to control inflation help to reduce the spread between long-term

and short-term rates in 1991, making the spread similar to what it was

in 1989, when the Federal Reserve also encouraged a rise in interest

rates.

Because the Administration expects growth in productivity to pick

up, it is able to forecast relatively rapid economic growth without

1. Real interest rates are the difference between nominal interest rates and expected inflation.

Because expectations of inflation in the financial markets are unobservable, most analysts--

including CBO--approximate real interest rates by adjusting nominal interest rates by actual

inflation.
CHAPTER H COMPARISON OF ECONOMIC ASSUMPTIONS 19

TABLE II-l. COMPARISON OF CBO, ADMINISTRATION, AND

BLUE CHIP SHORT-RUN ECONOMIC FORECASTS

(By calendar year)

Actual Estimated Forecast

1988 1989 1990 1991

Fourth Quarter to Fourth Quarter (Percentage change)

Real Gross National Product

CBO 3.4 2.5 1.8 2.5

Administration 3.4 2.7 2.6 3.3

Blue Chip 3.4 2.4 1.9 2.4

Implicit GNP Deflator

CBO 4.0 3.9 4.1 4.0

Administration 4.0 4.0 4.2 4.1

Blue Chip 4.0 3.8 4.1 4.0

Consumer Price Index'

CBO 4.3 4.6 4.1 4.4

Administration 4.2 4.4 4.1 4.0

Blue Chip 4.3 4.6 4.3 4.3

Calendar Year Average (Percent)

Civilian Unemployment Rateb

CBO 5.5 5.3 5.6 5.5

Administration 5.4 5.2 5.4 5.3

Blue Chip 5.5 5.3 5.6 5.6

Three-Month Treasury Bill Rate

CBO 6.7 8.1 6.9 7.2

Administration 6.7 8.1 6.7 5.4

Blue Chip 6.7 8.1 7.3 7.3

Ten-Year Government Note Rate

CBO 8.8 8.5 7.8 7.7

Administration 8.8 8.5 7.7 6.8

BlueChiff 8.8 8.5 7.9 7.9

Inflation-Adjusted Three-Month

Treasury Bill Rated

CBO 2.4 3.5 2.8 2.8

Administration 2.4 3.7 2.6 1.4

Blue Chip 2.4 3.5 3.0 3.0

Spread Between Ten-Year Government

Note Rate and Three-Month Treasury Bill Rate

CBO 2.1 0.4 0.9 0.5

Administration 2.1 0.4 1.0 1.4

Blue Chip 2.1 0.4 0.6 0.6

SOURCES: Congressional Budget Office; Office of Management and Budget; Eggert Economic Enterprises, Inc., Blue Chip Economic Indicators (February 10,1990).

NOTE: The CBO forecast is based on data available through December 1989 and does not reflect the

fourth-quarter data for GNP or CPI published in January 1990. The Blue Chip forecast is an

average of 50 private forecasters.

a. Consumer price index for all urban consumers (CPI-U) for CBO and the Blue Chip; consumer price

index for urban wage earners and clerical workers (CPI-W) for the Administration.

b. The Administration's projection is for the total labor force, including armed forces residing in the

United States, while the CBO projection is for the civilian labor force excluding armed forces. In

recent years, the unemployment rate for the former has tended to be 0.1 to 0.2 percentage point below

the rate for the civilian labor force alone.

c. Blue Chip does not project a 10-year note rate. The values shown here are based on the Blue Chip

projection of the Aaa bond rate, adjusted by CBO to reflect the estimated spread between Aaa bonds

and 10-year government notes.

d. Inflation-adjusted interest rates are nominal rates less the fourth-quarter-to-fourth-quarter

percentage change in the CPI-U.
.L_L

20 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

higher inflation or rising interest rates. In 1990, the Administration

anticipates that the economy will grow somewhat more slowly than its

estimate of potential growth, which widens the gap between actual and

potential output. In 1991, however, the Administration forecasts that

the economy will grow faster than the potential growth rate, which

closes some of the gap between actual and potential output, though not

by enough to increase inflation. Real short-term interest rates in 1991

decline sharply in the Administration's forecast. This assumption

presumably derives from two factors: with rising productivity growth,

the Federal Reserve would see less need to restrain the economy, and

with the enactment of the President's proposals to cut the deficit in

1991, financial markets would become convinced that the federal government's demand for credit was clearly on a downward trend.

MEDIUM-TERM PROJECTIONS

Neither the CBO nor the Administration attempts to forecast developments in the economy past 1991. Instead, both organizations rely

primarily on mechanical extrapolations of historical trends to develop

the medium-term projections for the years from 1992 through 1995.

There are two major differences, however, in the approaches of CBO

and the Administration in developing these medium-term projections:

first, the Administration chooses a different historical reference period

than CBO when deciding the projected rate of growth in productivity;

and second, the Administration explicitly incorporates the effects of

prospective changes in economic policy, while CBO relies solely on historical trends.

Overall, the differences between the CBO and the Administration's medium-term projections can be summarized as follows (see also

Table II-2 and Figure II-l):

o The Administration assumes that economic growth over the

1992-1995 period will average about two-thirds of a percentage point higher than in the CBO projection;

o The Administration assumes that rates of inflation will drop

substantially, while CBO assumes that they will remain at

the levels expected for 1991;
CHAPTER H COMPARISON OF ECONOMIC ASSUMPTIONS 21

o Nominal interest rates in the Administration's projections

are much lower than in CBO's, because of both lower real interest rates and lower inflation; and

o The Administration's projected level of nominal GNP is higher than CBO's in all years, with the difference rising from

$109 billion in 1991 to almost $200 billion in 1995.

Projections of Economic Growth

In CBO's medium-term projections, the growth rate of the economy is

based on an accounting of three fundamental factors: the growth of the

total number of workers in the labor force, the amount produced (or

productivity) by each worker, and the change in the gap between

actual employment and full employment, which is related to the

change in the gap between actual output and potential output.2 In the

CBO projections, growth in the labor force is based on the middle of

three alternative projections made by the Bureau of Labor Statistics.3

Between now and the turn of the century, the labor force is expected to

grow at an annual rate of only 1.2 percent—below the rate of 1.6 percent since 1980. CBO also assumes that the growth in nonfarm business productivity will average 1.4 percent annually, which is its average growth since 1981. CBO's projection methods further assume that

levels of output by 1995 will reflect the average gap between actual

and potential output observed in the post-World War II period. Since

these historical numbers include both expansions and recessions, the

projections are consistent with the occurrence of a mild recession sometime during the 1992-1995 period.4

The Administration also bases its projections on assumptions of

growth in the labor force and productivity, and of the gap between

actual and potential output. While the Administration and CBO as2. Changes in hours per worker, which also enters into this accounting, have only a minor effect on the

growth of output.

3. For more details, see Howard Fullerton, "New Labor Force Projections, Spanning 1988 to 2000,"

Monthly Labor Review (November 1989).

4. For details on the methodology of CBO's medium-term projections, see Congressional Budget

Office, The Economic and Budget Outlook: Fiscal Years 1989-1993 (February 1988).

25-692 0-90- 2
22 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

TABLE II-2. COMPARISON OF CBO, ADMINISTRATION,

AND BLUE CHIP ECONOMIC ASSUMPTIONS,

CALENDAR YEARS 1989-1995

Estimated

1989

Forecast

1990 1991 1992

Projected

1993 1994 1995

Nominal GNP

(Billions of dollars)

CBO 5,235 5,534 5,893 6,279 6,688 7,121 7,579

Administration 5,236 5,583 6,002 6,439 6,881 7,324 7,771

Real GNP (Percentage

change, year over year)

CBO

Administration

Blue Chip

Consumer Price Index8

(Percentage change,

year over year)

CBO

Administration

Blue Chip

Implicit GNP Deflator

(Percentage change,

year over year)

CBO

Administration

Blue Chip

Unemployment Rateb

CBO

Administration

Blue Chip

Tax Bases (Billions

of dollars)

Wage and Salary

Disbursements

CBO

Administration

Other Personal

Income0

CBO

Administration

Corporate Profits'1

CBO

Administration

2.9

3.0

2.9

4.8

4.8

4.8

4.2

4.2

4.2

5.3

5.2

5.3

2,630

2,626

1,796

1,798

294

303

1.7

2.4

1.6

4.0

3.9

4.3

4.0

4.1

4.0

5.6

5.4

5.6

2,795

2,805

1,886

1,896

320

360

2.4

3.2

2.4

4.3

4.0

4.2

4.0

4.2

4.0

5.5

5.3

5.6

2,975

3,022

•

2,001

2,017

356

421

2.5

3.2

3.1

4.3

3.9

4.3

4.0

3.9

4.1

5.5

5.2

5.6

3,168

3,246

2,123

2,138

371

472

2.5

3.1

3.0

4.3

3.6

4.3

4.0

3.6

4.1

5.5

5.1

5.4

3,377

3,469

2,253

2,261

386

515

2.4

3.0

2.6

4.3

3.3

4.3

4.0

3.3

4.2

5.5

5.0

5.3

3,599

3,686

2,385

2,393

414

548

2.4

3.0

2.5

4.3

3.0

4.2

4.0

3.0

4.1

5.5

5.0

5.2

3,835

3,904

2,524

2,525

438

579

(Continued)

SOURCES: Congressional Budget Office; Office of Management and Budget; Eggert Economic Enterprises, Inc., Blue Chip Economic Indicators.
CHAPTER H COMPARISON OF ECONOMIC ASSUMPTIONS 23

TABLE II-2. Continued

Estimated

1989

Three-Month Treasury

Bill Rate (Percent)

CBO

Administration

Blue Chip

Ten- Year Government

Note Rate (Percent)"

CBO

Administration

Blue Chip

Inflation- Adjusted

Three-Month Treasury

Bill Ratef

CBO

Administration

Blue Chip

Spread Between Ten- Year

Government Note and

Three-Month Treasury

Bill Rate

CBO

Administration

Blue Chip

8.1

8.1

8.1

8.5

8.5

8.5

3.5

3.7

3.5

0.4

0.4

0.4

Forecast

1990

6.9

6.7

7.3

7.8

7.7

7.9

2.8

2.6

3.0

0.9

1.0

0.6

1991

7.2

5.4

7.3

7.7

6.8

7.9

2.8

1.4

3.0

0.5

1.4

0.6

1992

6.9

5.3

6.9

7.6

6.3

7.9

2.6

1.5

2.6

0.7

1.0

1.0

Projected

1993

6.5

5.0

7.0

7.5

6.0

7.8

2.2

1.5

2.7

1.0

1.0

0.8

1994

6.1

4.7

6.9

7.4

5.7

7.9

1.8

1.5

2.6

1.3

1.0

1.0

1995

5.8

4.4

6.8

7.3

5.4

7.9

1.5

1.5

2.6

1.5

1.0

1.1

NOTE: The CBO forecast is based on data available through December 1989 and does not reflect fourthquarter data for GNP or CPI published in January 1990. The Blue Chip forecasts through 1991

are based on a survey of 50 private forecasters, published on February 10,1990. The Blue Chip

projections from 1992 through 1995 are based on a survey of 41 forecasters, published on October

10,1989.

a. Consumer price index for all urban consumers (CPI-U) for CBO and the Blue Chip; consumer price

index for urban wage earners and clerical workers (CPI-W) for the Administration.

b. The Administration's projection is for the total labor force, including armed forces residing in the

United States, while the CBO projection is for the civilian labor force excluding armed forces. In

recent years, the unemployment rate for the former has tended to be O.l.to 0.2 percentage point below

the rate for the civilian labor force alone.

c. Personal income less wage and salary disbursements.

d. Corporate profits reported are book, not economic, profits.

e. Blue Chip does not project a 10-year note rate. The values shown here are based on the Blue Chip

projection of the Aaa bond rate, adjusted by CBO to reflect the estimated spread between Aaa bonds

and 10-year government notes.

f. Inflation-adjusted interest rates are nominal rates less the fourth-quarter-to-fourth-quarter

percentage change in the CPI-U, except for the Blue Chip projections from 1992 through 1995 in

which inflation-adjusted interest rates are nominal rates less the year-over-year percentage change

of the CPI-U.
24 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Figure 11-1.

Comparison of CBO and Administration Economic Assumptions

Real GNP Growth CPI-U Inflation

4

3

2

1

Percent

Administration

- v / CBO ^~ —

~ \f

I i 1 i 1 i

1989 1991 1993 1995

6

5

4

3

2

1

Percent

CBO

"\

 X

_ Vr— „,

Administration

I i 1 . 1 i

1989 1991 1993 1995

Three-Month Treasury Bills Ten- Year Government Notes

9

8

7

6

5

4

Percent

\

 CBO

~ \ Administration^

I i 1 . 1 i

9

8

7

6

5

4

Percent

\ CBO

\

\

\x

V

N

V,

>.

Administration

I i I i I i

1989 1991 1993 1995 1989 1991 1993 1995

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

NOTE: CPI-U = consumer price index for all urban consumers.
CHAPTER H COMPARISON OF ECONOMIC ASSUMPTIONS 25

sumptions are very similar for growth in the labor force, they differ

substantially for productivity. From now until 1995, the Administration assumes that nonfarm business productivity will grow 1.8 percent

annually, which is near its average for the post-World War II period

and higher than CBO's assumption of 1.4 percent. The Administration

assumes no gap between actual and potential output after 1993.

Projections of Inflation and Interest Rates

The inflation rate in the CBO projections is assumed to remain at its

1991 level. The rate of core inflation, as measured by the consumer

price index for all urban consumers (CPI-U) less food and energy, has

remained relatively close to this level over the past five years, and

CBO does not project any shocks to food and energy prices. In the Administration's projections, an increase in the credibility of macroeconomic policies convinces wage and price setters in the economy that

inflation is being rolled back, which lowers expectations of inflation

and eventually inflation in the prices of goods and services as well.

In the CBO projections, real short-term interest rates are assumed

to decline gradually in the 1992-1995 period to 1.5 percent, close to

their average level observed since 1973. The spread between longterm and short-term interest rates also moves gradually to its historical average since 1973, which was the first year in which the exchange

rate was allowed to fluctuate freely. Choosing a longer period for reference does not affect the calculation by much for either the real shortterm interest rate or the spread.

The Administration expects that its policy of deficit reduction will

have a powerful effect on expectations in the financial markets and,

along with more accommodative monetary policy, will lead to sharp

reductions in real interest rates in 1991. Real short-term rates fall to

their historical levels in 1991 and remain at those levels throughout

the projection period. A change in the perceptions of macroeconomic

policies in the United States also causes the spread between long-term

and short-term interest rates in the Administration's projections to fall

sharply in 1992 to a level below its historical average since 1973. The

spread presumably narrows because the President's policies, along

with a continuation of credible monetary policy, create expectations of

lower future inflation and less uncertainty in financial markets.
_L

26 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Projections of Nominal Income and Its Components

The Administration's assumptions of stronger real economic growth

account for the large difference in nominal GNP between the two projections. About two-thirds of the additional nominal income in the Administration's projections goes to increased corporate profits, mainly

because lower interest rates reduce the cost of corporate interest payments and boost operating profits. The Administration's projections of

wage and salary disbursements are higher than CBO's, in part because

of the assumption of higher productivity, which raises real wages.

EVALUATING ECONOMIC ASSUMPTIONS

Evaluating the reasonableness of alternative economic outlooks is

always a difficult task because of the uncertainty inherent in forecasting the future. One way to deal with this uncertainty is to evaluate forecasts using multiple criteria. This section evaluates the forecasts of CBO and the Administration using three criteria: a comparison with many private forecasts; an analysis of previous forecasting

and projection errors; and an examination of the reasonableness of fundamental assumptions. On the basis of these three criteria, the CBO

forecast appears more prudent than the Administration's. Nevertheless, the Administration's forecast is not unreasonable, especially

given the size of the average forecast error in the recent past.

Comparison with Forecasts from the Private Sector

Neither CBO's nor the Administration's forecast is far from the consensus of private forecasters for 1990, but the Administration's forecast is more optimistic than the consensus for 1991, especially in its

forecast for interest rates (see Table II-1 and Figure II-2). In the

February 10, 1990, Blue Chip survey of private forecasts for 1991, 39

out of 42 participants expected real growth to be weaker than the Administration's forecast, 32 out of 35 expected long-term interest rates

to be higher, and 37 out of 38 expected short-term interest rates to be

higher. In contrast, the CBO short-term forecast, which attempts to

balance the possibilities of both more favorable and more unfavorable

outcomes, is close to the consensus in both years.
CHAPTER II COMPARISON OF ECONOMIC ASSUMPTIONS 27

Figure 11-2.

CBO, Administration, and the Range of the Blue Chip Forecasts

for Calendar Years 1990 and 1991

Real GNP Growth

Number of Forecasts

1990 Number of Forecasts

1991

4

0

6

2

8

4

0

CBO

—

E33I [I f 1 |

F

i .

Admin.

1, ,

2-10 1 2 3 4 £

Percent

0

6

2

8

4

0

CBO

_

-

, , n.rfi

_

f '

2-101 2

Percent

_,

-

t

Admin.

in

3 4

CPI Inflation

1990

Number of Forecasts

24

20

16

12

8

4

n

Admin.

~~

—

ilHw

CBO

n

-~

V

Tf

2 3 4 5

Percent

Number of Forecasts

1 ,

20

16

12

8

4

n

1991

Admin.

—

—

—

i — i ro I..

672 3

-

CBO

me

...1T*1 EEJ3

456 "

Percent

Three-Month Treasury Bill Rate

Number of Forecasts ' 9«"

24

20

16

12

8

4

o

Admin.

^~

^

—

—

" , r

^ f

Number of Forecasts

___ — CBO

456 7

Percent

n ,

20

16

12

4

0

Admin.

—

1 —

1991

v<

'

CBO

"1

• b ,

8 9 1 0 456789 1

Percent

SOURCES: Congressional Budget Office; Office of Management and Budget; Eggert Economic Enterprises, Inc., Blue Chip Economic Indicators (February 10,1990).
28 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Over the 1992-1995 projection period, the Blue Chip consensus for

real GNP growth is about halfway between the CBO and the Administration projections on average (see Table II-2). At the same time,

the Blue Chip projection of interest rates is higher than CBO's and

much higher than the Administration's. In the first two years of this

period, the Administration's projection of real economic growth is

closer than CBO's to the Blue Chip; in the last two years of the projection period, CBO's projection of real economic growth is closer than

the Administration's to the Blue Chip. The Blue Chip projection of fast

economic growth in the first two years of the projection period, however, is accompanied by high interest rates~a projection that is much

different from the Administration's.

The Track Records of CBO and the Administration

In defending its relatively optimistic forecast, the Bush Administration has pointed to the accuracy of its forecast for calendar year 1989,

made during the mid session review. While this forecast was right on

the mark for many variables, despite being more optimistic than the

Blue Chip average, it is not a sure indicator of forecasting accuracy.5

For one thing, because it was made in July, it involved only six

months. Accuracy in forecasting six months ahead, when forecasters

differ by little, is not necessarily a good indicator of accuracy in forecasting one or two years ahead, when differences are substantial.

A larger sample~the experience of the last 12 years-shows that

CBO has compiled smaller errors than previous Administrations in

forecasting a majority of the most important economic variables. For

the two variables that affect the forecasts of the budget deficit most

strongly-real GNP and inflation-adjusted interest rates-CBO's shortterm forecasts have been somewhat better on average.6

 In the medium-term projections, CBO's projections of these variables have a larger

edge over the Administration's. The record is described more fully in

5. CBO's forecast for 1989, made six months earlier in the beginning of that year, was also right on the

mark for many of the same variables.

6. The differences in assumptions on inflation rates do not cause major differences in estimates of the

deficit. Higher inflation increases the costs of federal programs with cost-of-living adjustments and

raises interest rates, but also increases nominal incomes and the tax base. For more details, see

Congressional Budget Office, The Economic and Budget Outlook: Fiscal Years 1991-1995 (January

1990).
CHAPTER n COMPARISON OF ECONOMIC ASSUMPTIONS 29

Appendix B. Still, the historical record is short, and the differences between CBO and previous Administrations have been too small to suggest that either the present Administration or CBO is likely to enjoy a

decided advantage in future accuracy.

Evaluating the Reasonableness of the Fundamental Assumptions

CBO believes that the two fundamental assumptions on which the Administration's forecast is based this year are open to question. The

first assumption involves the growth of productivity, and the second

deals with the effects of the deficit reduction in the President's budget

on expectations in the financial markets and interest rates.

Growth of Potential Output and Productivity. The Administration's

assumption of nonfarm business productivity is close to the average

annual rate of the series-1.9 percent-over the post-World War II

period. The choice of the historical reference period, however, is particularly vital for the assumption of productivity growth, since the

average rate of growth of productivity is widely thought to have shifted

significantly several times during the post-World War II period (see

Table II-3). In the 1970s and 1980s, growth of productivity was substantially below the post-World War II average. The Administration

notes that productivity grew at a 1.8 percent rate during the 1986-1988

period. But productivity was unusually strong in these years for special and temporary reasons, mostly the result of the rebound in economic activity from the manufacturing slump of 1985 to 1986. Furthermore, a three-year period represents too short an interval to establish a new trend, especially in light of the poor performance in 1989,

when labor productivity grew by less than 1 percent.

In contrast, CBO assumes that nonfarm business productivity will

grow 1.4 percent annually, close to its average since 1981. Using the

period since 1981 seems reasonable, primarily because the latest shift

in the growth of productivity appears to have started sometime in the

late 1970s or early 1980s. Moreover, the period is long enough to en-
30 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

TABLE II-3. GROWTH OF NONFARM BUSINESS

PRODUCTIVITYdn percent)

Average Annual

Growth

Actual Growth

1948:IV through 1989:IV 1.9

1948:IV through 1973:IV 2.4

1973:IV through 1981:111 0.6

1981:111 through 1989:IV 1.4

Projected Growth Assumptions

Administration 1.8

CBO 1.4

SOURCES: Congressional Budget Office; Office of Management and Budget; Department of Labor,

Bureau of Labor Statistics.

compass both a recession and an expansion. CBO's projections of productivity also appear similar to those of the Federal Reserve. 7

Despite extensive research, economists have not been able to explain or predict a large fraction of the swings in productivity growth in

the post-World War II period. It is even harder to predict with confidence whether future growth will be above current rates. Although

several factors might lead to an increase in the growth of productivity

in the near future, other factors could lead to a slowdown. Two demographic developments are expected to increase the growth of productivity. First, the labor force is expected to grow at a much slower rate

over the next 10 years than it has over the past 10 years. This slower

7. The Federal Reserve does not publish its projections of the growth of productivity. But its estimates

of the growth of potential output are very close to CBO's, which implies a similar estimate for

productivity if the Federal Reserve uses a similar estimate of labor force growth-not an unreasonable supposition given that projections of labor force growth differ little among forecasters.
CHAPTER H COMPARISON OF ECONOMIC ASSUMPTIONS 31

growth of the labor force will raise the amount of capital that each

worker has available, given the current rate of national saving. Second, the aging of the baby-boom generation will increase the maturity

and experience of the work force, thereby raising productivity.

At the same time, two other factors suggest that productivity

growth will not pick up. First, growth of productivity during the 1980s

has been helped by a decline in energy prices. No such decline—or for

that matter any other favorable "supply shock"—is expected in either

the CBO or Administration projections. Second, the shift toward

shorter-lived capital goods, such as computers, probably helped productivity growth in the 1980s, but it is not expected to do so in subsequent decades. A shift to shorter-lived capital goods for a given

amount of investment causes aggregate capital services to rise temporarily. Over time, however, capital services decline to a level below

their initial value.8

Effects of Fiscal Policies on Expectations and Interest Rates. Expectations clearly play important roles in financial markets. But the

President's proposals to cut the deficit and extend the budget targets

beyond 1993 may not generate enough enthusiasm in financial markets to cause real interest rates to fall substantially in 1991. The proposed cuts for 1991 include some one-time-only reductions, and some

whose impact CBO and other analysts believe to have been overstated

in the President's budget. Although the Administration has also proposed setting new budget targets that call for large budget surpluses, it

has not released any detailed plan for reducing the deficit beyond 1991,

other than assuming high rates of economic growth and low interest

rates. Many analysts believe that, because of a history of unfulfilled

projections of lower deficits, financial markets are and will continue to

be skeptical about the future course of budget policy in the United

States. Until there is evidence of a sustained action to reduce the

8. For a description of how changes in the durability of capital goods affect aggregate capital services,

see Frank DeLeeuw, "Interpreting Inveatment-to-Output Ratios: Nominal/Real, Net/Gross,

Stock/Flow, Narrow/Broad," Carnegie-Rochester Conference Series on Public Policy (forthcoming);

and A.J. Katz, "Conceptual Issues in the Measurement of Economic Depreciation, Capital Input,

and the Net Capital Stock," Discussion Paper 30, Bureau of Economic Analysis, U.S. Department of

Commerce (1989).
32 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

TABLE II-4. EFFECTS OF CBO ECONOMIC ASSUMPTIONS

ON ESTIMATES OF THE ADMINISTRATION'S

BUDGET (By fiscal year, in billions of dollars)

1990 1991 1992 1993 1994 1995

Revenues -1 -19 -36 -55 -64 -63

Outlays

Benefit programs

Interest costs

As a result of

of interest rates

Debt service

Total

Deficit

a

-1

a

-a

a

1

5

1

7

26

1

13

4

18

54

3

18

9

29

84

5

20

16

41

105

9

21

24

54

117

SOURCE: Congressional Budget Office.

NOTES: Each entry in the table represents the difference between an estimate based on CBO's

economic assumptions and the corresponding projection reported in the Administration's

budget.

The totals include Social Security, which is off-budget,

a. Less than $0.5 billion.

deficit, financial markets will probably be unwilling to bid up the

prices of bonds enough to permit a sharp decline in real interest rates. 9

IMPLICATIONS OF ECONOMIC ASSUMPTIONS FOR DEFICITS

Administration economic assumptions imply somewhat lower levels of

federal spending, much higher levels of tax revenue, and, as a result,

significantly lower deficits for fiscal years 1990 through 1995 than

those projected by CBO. Higher nominal incomes raise revenues, and

lower interest rates reduce interest payments on federal debt. Substituting CBO's economic assumptions for the Administration's adds

9. For a detailed discussion of the effects of deficits on interest rates, see Congressional Budget Office,

"Deficits and Interest Rates: Theoretical Issues and Empirical Evidence," Staff Working Paper

(January 1989); and Congressional Budget Office, "Deficits and Interest Rates: Theoretical Issues

and Simulation Results," Staff Working Paper (January 1989).
CHAPTER II COMPARISON OF ECONOMIC ASSUMPTIONS 33

$26 billion to the deficit in fiscal year 1991 and $117 billion to the

deficit in fiscal year 1995, as shown in Table II-4 on page 32. Further

details on the effects of different economic assumptions for revenue

estimates are provided in Chapter HI. The effects of different interest

rate and inflation assumptions are discussed in Chapter V.

CHAPTER III

THE ADMINISTRATION'S

REVENUE PROPOSALS

The Congressional Budget Office (CBO) estimates total Administration budget revenues at $1,146 billion in 1991, $1,208 billion in 1992,

and $1,440 billion in 1995. Revenues would equal 19.8 percent of GNP

in 1991, falling to 19.5 percent in 1992 and 19.3 percent in 1994 and

1995 (see Table IH-l).

The President's budget contains a number of proposals affecting

revenues. They include increased coverage of workers by payroll

taxes, increased excise taxes and fees, management initiatives at the

Internal Revenue Service (IRS), a capital gains exclusion, new Family

Savings Accounts (FSAs), certain new income tax preferences, and

extensions of expiring income tax deductions and credits. Except for a

temporary increase in revenues from a spurt in realizations of capital

gains in 1990 and 1991, deficit reduction results from increases in

payroll taxes, excise taxes, and fees that more than offset the income

tax reductions. CBO estimates that these proposals would raise $9 billion in 1991, $4 billion in 1992, and $2 billion in 1995 (see Table III-2).

REVENUE PROPOSALS

The proposals discussed in this chapter are those classified as revenues

in the unified budget. Although the President's budget revenues include these same proposals, the discussion of receipts in the President's

budget document also includes user fees and offsetting collections.

Because these are classified as outlays in the unified budget, this report analyzes them in its discussion of specific outlay functions (see

Chapter V). The revenue effects of the proposals have been estimated

jointly by CBO and the Joint Committee on Taxation.
36 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

TABLE III-l. ADMINISTRATION AND CBO ESTIMATES OF

ADMINISTRATION BUDGET REVENUES,

BY MAJOR SOURCE (By fiscal year, in billions of dollars)

Revenue Source 1990 1991 1992 1993 1994 1995

Administration Estimates

Individual Income Taxes 489.4 528.5 561.5 593.6 632.4 668.7

Corporate Income Taxes 112.0 129.7 140.6 154.7 159.9 169.7

Social Insurance Taxes

and Contributions

On-budget

Off-budget*

Excise Taxes

Other

Total Revenues

Percentage of GNP

Individual Income Taxes

Corporate Income Taxes

Social Insurance Taxes

and Contributions

99.9 106.9 112.3 119.5 126.2 131.8

285.4 314.5 337.4 361.9 388.4 410.7

36.2 37.6 39.2 40.8 42.2 43.7

50.5 53.0 55.4 57.1 59.6 61.8

1,073.5 1,170.2 1,246.4 1,327.6 1,408.6 1,486.3

19.6 19.9 19.7 19.6 19.5 19.4

CBO Estimates

490.8 529.8 556.8 592.5 631.5 673.2

102.0 110.1 114.4 117.7 122.9 130.2

On-budget

Off-budget*

Excise Taxes

Other

Total Revenues

Percentage of GNP

99.9

287.8

36.1

51.2

1,067.7

19.6

104.6

311.3

38.1

52.5

1,146.4

19.8

109.2

332.7

39.4

55.2

1,207.8

19.5

114.2

353.2

40.9

57.7

1,276.3

19.4

120.6

378.5

42.4

60.3

1,356.2

19.3

126.7

403.3

43.8

62.8

1,440.0

19.3

SOURCES: Office of Management and Budget, Budget of the United States Government, Fiscal Year 1991

(January 1990); Congressional Budget Office revenue estimates.

a. Off-budget revenues consist of those from Old-Age, Survivors, and Disability Insurance (OASDI)

trust funds.
CHAPTER HI THE ADMINISTRATION'S REVENUE PROPOSALS 37

Savings and Investment Incentives

The Administration offers three tax proposals to increase personal

saving and encourage certain investment activities (see Table ffl-3).

These three proposals are included with others that increase public

saving by reducing the deficit.

TABLE III-2. CBO ESTIMATES OF REVENUE PROPOSALS

IN THE ADMINISTRATION'S 1991 BUDGET

(By fiscal year, in billions of dollars)

Proposal

CBO Baseline Revenues

Proposed Changes

Savings and investment incentives

Extensions of expiring

income tax provisions

Oil and gas industry

incentives

Payroll tax increases'5

Excise tax and

fee increases0

Internal Revenue

Service initiatives

Other revenue proposals

Total'

President's Budget Revenues

as Estimated by CBO

1991

1,137.0

2.6

-1.8

-0.3

4.6

3.5

0.3

0.5

9.4

1,146.4

1992

1,203.8

-5.1

-2.7

-0.5

6.1

5.5

0.4

0.4

4.0

1,207.8

1993

1,276.7

-4.7

-3.1

-0.5

1.0

6.0

1.0

_d

-0.4

1,276.3

1994

1,354.6

-5.7

-3.5

-0.6

4.2

6.5

1.2

-0.5

1.6

1,356.2

Cumulative

Five-Year

1995 Changes

1,437.8

-5.0

-3.9

-0.6

4.4

7.0

1.2

-0.9

2.3

1,440.0

-17.9*

-15.0

-2.5

20.3

28.4

4.1

-0.5e

16.8*. *

SOURCES: Congressional Budget Office and Joint Committee on Taxation revenue estimates.

a. Excludes a revenue increase of $0.7 billion in 1990 from the proposed capital gains exclusion.

b. Revenues are net of reduced income taxes.

c. Revenues are net of reduced income and payroll taxes.

d. Revenue decrease of less than $50 million.

e. Excludes a revenue increase of $0.2 billion in 1990 for the proposed change to loss deductions claimed

by insurance companies.
38 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Exclude 30 Percent of Capital Gains. The Administration proposes to

reduce the personal income tax rate on most long-term capital gains by

allowing individuals to exclude a percentage of capital gains that are

realized on qualifying assets. The percentage would increase with the

holding period: 10 percent for assets held one to two years, 20 percent

for assets held two to three years, and 30 percent for assets held over

three years. Thus, the marginal tax rate on capital gains on qualifying

assets held for more than three years would be 23.1 percent for taxpayers in the 33 percent tax bracket, 19.6 percent for taxpayers in the

28 percent bracket, and 10.5 percent for taxpayers in the 15 percent

bracket. The exclusion would apply to all capital assets except collectibles (for example, antiques and precious metals). The excluded portion

of capital gains would be considered a tax preference under the alternative minimum tax (AMT), which means that taxpayers subject to the

AMT would face an effective tax rate on capital gains of 21 percent.

Depreciation deductions would be recaptured as ordinary income; in

TABLE III-3. CBO ESTIMATES OF THE ADMINISTRATION'S

PROPOSED SAVINGS AND INVESTMENT INCENTIVES

(By fiscal year, in billions of dollars)

Cumulative

Five-Year

Proposal 1991 1992 1993 1994 1995 Changes

Exclude 30 Percent

of Capital Gains 3.2 -4.3 -3.6 -4.3 -3.1 -12.0*

Establish Family

Savings Accounts -0.3 -0.6 -1.0 -1.3 -1.8 -5.1

Waive the Penalty

for Early Withdrawals

from IRAs for FirstTime Homebuyers -0.2 -0.2 -0.2 -0.1 -0.1 -0.9

Total 2.6 -5.1 -4.7 -5.7 -5.0 -17.9*

SOURCES: Congressional Budget Office and Joint Committee on Taxation revenue estimates.

NOTE: IRA = individual retirement account.

a. Excludes a revenue increase of $0.7 billion in 1990.
CHAPTER HI THE ADMINISTRATION'S REVENUE PROPOSALS 39

other words, only the excess of the sales price over the original basis

would qualify for the exclusion.

The capital gains exclusion would apply to capital gains realized

after March 15,1990. The two- and three-year holding period requirements would be phased in over three years. In 1990, all qualifying

assets held for over one year would be eligible for the 30 percent exclusion. In 1991, assets held for over two years would be eligible for the

30 percent exclusion; assets held for over one year would receive a 20

percent exclusion. The full sliding scale described above would take

effect in 1992. The phase-in, by allowing the full 30 percent exclusion

for assets held less than three years in 1990 and 1991, would encourage

sales of assets during the first two years of the budget period and increase short-run receipts.

CBO estimates that the proposal would raise $3.2 billion in 1991

and lose $3 billion to $4 billion in each succeeding year. The net loss

from 1991 to 1995 would total $12.0 billion. This estimate is $24.0 billion below the Administration's estimate primarily because the Administration assumes that taxpayers are more responsive to changes

in capital gains tax rates than CBO research suggests.!

Establish Family Savings Accounts. The Administration proposes to

create a new tax-favored saving vehicle called the Family Savings Account. Under the proposal, taxpayers would be allowed to make nondeductible contributions of up to $2,500 annually to individual accounts, and the investment income of amounts left on deposit for at

least seven years would be tax free. The investment income of

amounts left on deposit between three and seven years would be subject to income tax but no penalty. A 10 percent penalty on investment

income would be added for amounts left on deposit less than three

years.

Eligibility to contribute to FSAs would be limited to people with

adjusted gross income below certain levels--$60,000 for single taxpayers, $100,000 for heads of households, and $120,000 for couples

filing joint returns. As with an individual retirement account (IRA),

contributions to an FSA could not exceed a person's earnings or the

1. Congressional Budget Office, How Capital Gains Tax Rates Affect Revenues: The Historical

Evidence (March 1988).
40 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

$2,500 contribution limit. Couples filing jointly, however, could each

contribute up to $2,500 provided their total contributions did not exceed their combined earnings. For example, a couple in which one

spouse worked outside the home earning $30,000 could contribute up

to $2,500 to each of two accounts for a total of $5,000. Dependents

would be ineligible.

FSAs could be invested in the same financial instruments as IRAs,

and contributions could be made to them in addition to any other taxadvantaged saving for which a person qualified, such as an IRA, Keogh

plan, employer pension, or 401(k) plan.

CBO estimates that the Treasury would lose about $300 million in

revenues from FSAs during 1991, and that the loss would cumulate to

$5.1 billion by 1995. This estimate is close to the Administration's

estimate.

The revenue loss from FSAs would continue to grow rapidly after

1995 as people shifted otherwise taxable savings into these accounts.

If people ultimately shifted 10 percent of their taxable savings into

FSAs, the annual revenue loss, measured in 1991 dollars, would reach

about $8 billion. If they shifted as much as one-quarter of their taxable

savings into FSAs, the annual revenue loss would reach $20 billion (in

1991 dollars).

Waive the Penalty for Early Withdrawals from IRAs for First-Time

Homebuyers. The Administration proposes to waive the 10 percent

penalty for premature IRA withdrawals used for the first purchase of a

home, effective as of January 1, 1990. Those withdrawals would only

be subject to income taxation, as are all IRA withdrawals under current law. Withdrawals for a first home purchase would be limited to

$10,000 and the home purchased could cost no more than 110 percent

of the median home price in its area.

CBO estimates the revenue loss from this proposal at more than

$200 million in 1991 and about $900 million over the five-year period.

The revenue loss decreases over the projection period—to about $100

million in 1995-because withdrawals from IRAs for home purchases

are assumed to begin before the end of the period. The Administration

estimates that the losses would be smaller, based on the assumption
CHAPTER III THE ADMINISTRATION'S REVENUE PROPOSALS 41

that fewer new contributions would be diverted from otherwise taxable

savings.

The Proposals' Saving Incentives. Each of the proposals would increase the return to saving, but to differing degrees for different

people. The 30 percent capital gains exclusion would raise the inflation-adjusted after-tax return to asset appreciation by about onequarter for typical investors today. Assets that pay income in the form

of taxable capital gains represent at most one-third of all assets owned

by households, so the higher rate of return on appreciating assets

would raise the overall return to saving by about 8 percent. (This is

equivalent to an increase in the before-tax rate of return from 8 percent to about 8.2 percent.) The return to saving would increase more

for the highest-income taxpayers who invest more heavily in assets

yielding taxable gains.

FSAs would raise the return to saving by more than would the proposed capital gains exclusion. Because FSAs would totally exempt

investment earnings from taxation, the inflation-adjusted after-tax

return on savings placed in FSAs would approximately double. (This is

equivalent to an increase in the before-tax rate of return from 8 percent to about 11 percent.) This higher return would be earned on an

additional dollar saved by many people eligible for FSAs because of the

proposal's relatively high contribution limit and because the contributions could be in addition to any other tax-advantaged saving.

Limiting eligibility for FSAs to people below certain income levels also

helps to target the proposal on those most likely to have an incentive to

increase their saving. Nonetheless, some eligible people would not

have an incentive to save more because they regularly save more than

the FSA limits in taxable accounts or because they have large asset

accumulations that could be gradually shifted into FSAs.

Waiving the 10 percent tax on premature IRA withdrawals would

allow people saving for their first home in deductible IRAs a tax-free

rate, the same benefit they would receive from FSAs. Few people in

any one year would benefit from this proposal because they must

qualify both as making deductible IRA contributions and as first-time

homebuyers. First-time buyers saving through nondeductible IRA

contributions would benefit only from deferral of taxation rather than

a tax-free return.

~T
J J

42 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Effect of the Proposals on Personal Saving. Although the three proposals would raise the return to additional saving, they cannot be

counted on to raise the personal saving rate significantly. An increased rate of return has two offsetting incentives—one that raises

saving and another that reduces saving. On the one hand, a higher

rate of return raises the amount of future spending that can be

achieved per dollar saved now. This encourages people to save more,

just as a lower price for a product encourages people to spend more on

it. On the other hand, the higher return also means that previous

levels of saving will allow an increase in future spending without

further sacrifice. The availability of that higher future spending

encourages people to divert some of the increase to current spending by

saving less. The net effect of these offsetting incentives could be either

to raise or to lower saving.

Most empirical studies of how people respond to increased rates of

return on savings find that the incentives to increase' and decrease

saving are largely offsetting. These studies indicate that personal

saving cannot be expected to respond much to the saving proposals. A

few recent studies of the effects of IRAs in the 1980s suggest that these

accounts raised saving, in part because contributions were deductible

and the 10 percent penalty discouraged withdrawals before retirement.

However, these studies have not resolved the issue of how much of IRA

contributions were additional savings and how much were shifts of

other savings into IRAs. Furthermore, the implications of these studies for FSAs are unclear because FSAs lack some of the special features

that may have made deductible IRAs effective.

Effect of the Proposals on National Saving. Standing alone, the proposals would permanently lose revenue and raise the deficit. A larger

deficit lowers national saving, so the proposals by themselves would

raise national saving only to the extent they raised personal saving by

more than they added to the deficit. Since studies indicate that any

positive effects on personal saving are likely to be small, the proposals

by themselves cannot be counted on to increase national saving.

If, however, these proposals were included in a package of other

tax increases and spending reductions that reached a previously

agreed-upon deficit reduction path, then the proposals would not be

adding to the deficit. In this case, whatever increase the proposals and
CHAPTER in THE ADMINISTRATION'S REVENUE PROPOSALS 43

the other elements of the package achieved in personal saving would

add to national saving.

In sum, the three tax savings incentives taken alone would not be

expected to add to national saving. Whatever personal saving they

might stimulate would be offset by the revenue they would lose. As

part of a long-run deficit reduction package, however, they could add to

national saving.

Effects of the Capital Gains Proposal on Entrepreneurial Activity and

Risky Investments. In addition to stimulating saving, the Administration advocates the capital gains exclusion as a means of encouraging entrepreneurial activity and high-risk investments. The proposal should provide an incentive for both of these activities, although

it is not clear that the incentive is needed.

Proponents of the measure argue that some activities with large

returns for society as a whole may not be pursued because the return

that an entrepreneur can capture is small compared with the risk.

They point out that current tax law places an extra burden on highrisk investment by limiting the deductibility of capital losses. This

burden is greatest for people who are heavily invested in a single

activity, such as their own businesses. Opponents reply that, although

entrepreneurs may not capture all of the returns from some activities,

the returns that they do receive provide sufficient incentive to undertake them. In addition, current law is not without incentives for entrepreneurial activity, including the deferral of taxation on the increasing

value of a business until it is sold. Finally, most investors can protect

themselves by diversifying their asset holdings so that losses on some

investments can be offset against gains on other investments.

Even if entrepreneurial activity and risky investments need encouragement, the Administration's proposal is not focused closely on

that end. The proposed capital gains exclusion would apply to gains on

past investments whose supply cannot be affected; and it would apply

to all new investments, only a small fraction of which are in new businesses.

Effect of the Proposals on the Distribution of Taxes. The proposals

would provide most of their direct benefits to taxpayers in the upper

half of the income distribution. According to the Joint Committee on
44 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Taxation, taxpayers with incomes of more than $200,000 would receive

66 percent of the tax reductions arising from the capital gains tax exclusion.2 Those with incomes above $50,000, who largely lost eligibility for deductible IRAs in 1987, would be the main beneficiaries of

the FSAs. These two proposals would thus shift some of the tax burden

from upper-income to lower-income taxpayers. The third proposal—to

allow IRA withdrawals for first-time home purchasers-would be too

limited to alter the distributional impact of the other two proposals.

Extension of Expiring Income Tax Provisions

Many tax deductions and credits enacted in recent years have included

statutory termination dates. The Administration's budget for 1991

proposes to extend four of these provisions that are scheduled to expire

by the end of 1990 (see Table HI-4).

Extend the Research and Experimentation Credit. The Administration proposes to extend permanently the income tax credit for research and experimentation (R&E) expenses, currently scheduled to

expire after December 31, 1990. The current tax credit for research

and experimentation expenses allows business taxpayers to reduce

their tax liability by 20 percent of the amount by which current R&E

expenditures exceed a base amount computed with reference to the

taxpayer's historical research expenditures. Expenditures that qualify

for the credit include wages and costs of supplies used in research, a

portion of contract research done by others and paid for by the taxpayer, and certain computer costs.

The R&E credit was enacted in the Economic Recovery Tax Act of

1981 as a four-year temporary credit and has been extended three

times since then. Most recently, it was extended in the Omnibus Budget Reconciliation Act of 1989 for tax year 1990, although the benefits

available for that year were reduced so that only three-quarters of a

full year's benefit is available. The Administration's proposal would

restore full benefits for tax year 1990. CBO estimates that permanent

extension of the R&E credit would lose $0.9 billion in revenue in 1991

and a total of $7.0 billion in the 1991-1995 period.

2. Joint Committee on Taxation, Estimate of Administration Proposal for a Reduction in Taxes on

Capital Gains of Individuals, JCX-5-90 (February 14,1990), Table 2.
CHAPTER III THE ADMINISTRATION'S REVENUE PROPOSALS 45

Extend and Revise Research and Experimentation Allocation Rules.

In addition to being eligible for the R&E credit, research and experimentation expenses can be deducted from current income as costs of

doing business, like other business expenses. Companies that conduct

operations both in the United States and abroad must allocate their

R&E expenses to their various operations. Because taxes paid to

foreign governments qualify the taxpayer for a foreign tax credit

against U.S. tax liability on foreign-source income, companies with

excess foreign tax credits have an incentive to increase their foreignsource income in order to increase the amount of foreign tax credits

they may claim.

Current tax law provides that the minimum fraction of R&E

expenses deductible from domestic income is 64 percent, but that is

scheduled to fall to 30 percent in 1991. The Administration proposes to

maintain the 64 percent rule permanently. Doing so allows fewer

TABLE III-4. CBO ESTIMATES OF THE ADMINISTRATION'S

PROPOSED EXTENSIONS OF EXPIRING INCOME

TAX PROVISIONS (By fiscal year, in billions of dollars)

Cumulative

Five-Year

Proposal 1991 1992 1993 1994 1995 Changes

Extend the Research

and Experimentation

(R&E) Tax Credit -0.9 -1.2 -1.4 -1.6 -1.8 -7.0

Extend and Revise R&E

Allocation Rules -0.4 -0.7 -0.8 -0.8 -0.9 -3.6

Extend the Partial

Deduction for Health

Insurance Premiums for

theSelf-Employed -0.4 -0.5 -0.5 -0.6 -0.7 -2.7

Extend the Low-Income

Housing Credit for

OneYear :0.1 -0.3 -0.4 ;04 :0.4 -1.7

Total -1.8 -2.7 -3.1 -3.5 -3.9 -15.0

SOURCES: Congressional Budget Office and Joint Committee on Taxation revenue estimates.
46 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

deductions from foreign income, thus creating the opportunity for larger foreign tax credits to be claimed. CBO estimates that this proposal

would reduce corporate tax receipts by $0.4 billion in 1991 and by $3.6

billion over the five-year period.

Extend the Partial Deduction for Health Insurance Premiums for the

Self-Employed. The President proposes to make permanent the deduction allowed to self-employed taxpayers for 25 percent of the cost of

providing health insurance for themselves and their families. Scheduled to expire on September 30, 1990, this deduction is designed to

reduce the inequality between self-employed taxpayers and those

employed by others. Employees whose health insurance is provided by

their employers do not owe tax on the value of the insurance premiums. Self-employed people, in effect, owe tax on the value of their

health insurance premiums because they are not allowed to deduct it

as a cost of doing business. The partial deduction reduces by onequarter the amount of tax they pay on the value of their insurance

premiums. CBO estimates that permanent extension of the deduction

would lose $0.4 billion in revenue in 1991 and $2.7 billion during the

years from 1991 through 1995.

Extend the Low-Income Housing Credit. The Administration proposes

to extend for one year the credit for certain expenditures made by the

owners of low-income housing projects. Eligible expenditures include

depreciable costs of new construction and renovation, and costs of

acquiring certain old buildings. The Reconciliation Act extended the

credit for one year through December 31, 1990, but the allowable

credits for calendar year 1990 were reduced by one-quarter from the

previous year's maximum. The Administration proposes to extend the

credit through December 31,1991, and to restore full benefits for 1990.

CBO estimates that this would cost the Treasury almost $150 million

in forgone revenue in 1991 and $1.7 billion over the five-year period.

Oil and Gas Industry Incentives

The Administration's budget proposes that four new tax preferences be

provided to the energy industry. All of these provisions were proposed

in last year's budget (see Table III-5).
CHAPTER in THE ADMINISTRATION'S REVENUE PROPOSALS 47

Provide a Credit for Exploratory Intangible Drilling Costs. Independent oil producers are currently allowed to deduct intangible drilling

costs (IDCs) for oil and gas wells as the costs are incurred. Integrated

producers—mainly major oil companies-may deduct only a portion of

these costs; they must capitalize the rest. The Administration proposes

that all producers be allowed a 10 percent tax credit for the first $10

million of IDCs for exploratory drilling, coupled with a 5 percent credit

for the remaining IDCs for exploratory drilling. The credit would be

phased out if the average wellhead price of oil was $21 per barrel or

higher for a full year, but neither CBO nor the Administration projects

oil prices to be that high during the next five years.

The Administration's stated goal is to encourage exploratory drilling, but this proposal may allow some development expenses to be

recharacterized as exploratory costs and thus become eligible for

TABLE III-5. CBO ESTIMATES OF THE ADMINISTRATION'S

PROPOSED OIL AND GAS INDUSTRY INCENTIVES

(By fiscal year, in billions of dollars)

Cumulative

Five-Year

Proposal 1991 1992 1993 1994 1995 Changes

Provide a Credit for

Exploratory Intangible

Drilling Costs (IDCs) -0.2 -0.3 -0.4 -0.4 -0.4 -1.7

Reduce the Minimum Tax

for Exploratory IDCs for

Independent Producers -0.1 -0.1 -0.1 -0.1 -0.1 -0.5

Modify Depletion Rules a a -0.1 -0.1 -0.1 -0.2

Provide a Credit for

Initial Capital Costs for

Tertiary Recovery

Total

a

-0.3

a

-0.5

a

-0.5

a

-0.6

a

-0.6

-0.1

-2.5

SOURCES: Congressional Budget Office and Joint Committee on Taxation revenue estimates,

a. Revenue decrease of less than $50 million.
48 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

greater tax benefits. CBO estimates that the forgone revenue would

total $0.2 billion in 1991 and $1.7 billion over the five-year projection

period.

Reduce the Minimum Tax for Exploratory Intangible Drilling Costs for

Independent Producers. A portion of intangible drilling costs are considered a preference item for purposes of computing the minimum tax

base. The Administration proposes to reduce by 80 percent the amount

of drilling costs of independent producers that is considered a tax

preference item. This reduction would allow many independent oil

producers to deduct their drilling costs much more quickly. CBO estimates that this proposal would reduce revenues by about $0.1 billion

per year, totaling $0.5 billion over five years.

Modify Depletion Rules. Current tax law allows cost recovery for investments in natural resources by means of depletion deductions.

Integrated oil and gas producers are not eligible for the percentage

depletion method, but independent producers are eligible. A provision

of the tax code (the "transfer rule") prevents oil and gas reserves of

integrated producers from being transferred to independent producers,

and thus from becoming eligible for percentage depletion deductions.

The Administration proposes to eliminate the transfer rule and to raise

the limit on percentage depletion deductions from 50 percent to 100

percent of net income. CBO estimates that these changes in the depletion rules would lose a small amount of revenue in the budget year, but

the revenue losses would cumulate to almost $250 million by 1995.

Provide a Credit for Initial Capital Costs for Tertiary Recovery.

Tertiary recovery techniques are chemically enhanced injection processes used to produce oil and gas from properties that have become

less productive using standard techniques. The President's budget

would establish a 10 percent tax credit for capital expenditures on new

tertiary recovery projects. The credit is intended to be limited to initial

expenses, and would be phased out if the wellhead price of oil rose to

$21 per barrel or higher. CBO estimates that this would reduce revenue by roughly $20 million annually, or $0.1 billion for the 1991-1995

period.
CHAPTER III THE ADMINISTRATION'S REVENUE PROPOSALS 49

Payroll Tax Increases

The Administration proposes to expand the populations covered by

certain payroll taxes that fund retirement benefit programs, to accelerate further the deadlines by which employers must remit withheld

taxes, and to reduce and delay for three months the 1991 pay raise for

federal employees. Several of these options have been proposed by the

previous Administration in several budgets. (Pay raise reductions and

delays have been allowed by the Congress without overriding legislation.) CBO estimates that these proposals, taken together, would raise

$4.6 billion in 1991 and a total of $20.3 billion over the five-year period

(see Table HI-6).

TABLE III-6. CBO ESTIMATES OF THE ADMINISTRATION'S

PROPOSED PAYROLL TAX INCREASES

(By fiscal year, in billions of dollars)

Proposal 1991 1992 1993 1994

Cumulative

Five-Year

1995 Changes

Require Social Security

Contributions for State

and Local Government

Employees Not Covered

by a Retirement Plan* 2.0 2.2

Require Medicare

Contributions for

All State and Local

Government Employees3 1.7 1.7

Accelerate Deposit Deadlines

for Withheld Income and

Payroll Taxes 0.9 2.2

Other Payroll Tax Proposals8 b b

Total3 4.6 6.1

2.4 2.5 2.7

1.6 1.6 1.6

-3.1 0.0 0.0

(U 0.1 OJL

1.0 4.2 4.4

11.8

8.2

0.0

0.3

20.3

SOURCES: Congressional Budget Office and Joint Committee on Taxation revenue estimates.

NOTE: Revenues are net of reduced income taxes, except for the revenue effects of accelerated deposits

of withheld taxes.

a. Benefit increases are not included.

b. Revenue increase of less than $50 million.
50 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Require Social Security Contributions for Employees of State and

Local Governments Who Are Not Covered by a Retirement Plan. The

Administration would require all state and local government employees not covered under another retirement plan to contribute to Social

Security (OASDI), beginning October 1, 1990. This proposal, included

in the budget for the first time, would extend coverage to and mandate

contributions from temporary workers such as students employed as

summer interns, part-time workers, and workers who do not currently

contribute but who expect to receive benefits through their spouses'

participation. CBO estimates that required Social Security coverage

for these state and local workers would raise $2.0 billion in additional

revenue in 1991 and $11.8 billion in the 1991-1995 period. Increased

benefit payments are likely to be small because most of these workers

would qualify for Social Security benefits through other jobs or

through their spouses'jobs.

Require Medicare Contributions for All State and Local Government

Employees. Under current law, all employees of state and local governments hired after March 31, 1986, are required to pay Medicare's

Hospital Insurance (HI) taxes. For the fourth year, the President's

budget proposes to extend this requirement to all state and local government workers. The vast majority of the currently exempt workers

already qualify for Medicare benefits because they have contributed to

the system at other jobs or because their spouses are covered through

their own employment. Although more than 90 percent of state and

local government employees receive Medicare benefits in retirement,

only 70 percent of them have paid Medicare taxes while employed in

government jobs. Therefore, they receive benefits in return for a

smaller amount of lifetime payroll taxes than paid by employees who

work continuously in covered employment. CBO estimates that mandatory HI contributions from state and local government workers

would raise $1.7 billion in 1991 and $8.2 billion over the budget projection period. Outlays for benefit payments would increase somewhat,

but only $50 million of the increased costs would occur by 1995.

Accelerate Deposit Deadlines for Withheld Income and Payroll Taxes.

The Omnibus Budget Reconciliation Act of 1989 accelerated the schedule on which large employers must deposit income and payroll taxes

withheld on behalf of their employees. Current law requires that these

employers remit withheld taxes on the first banking day after the

taxes total $100,000 during 1990, and during 1993 through 1995. In
CHAPTER III THE ADMINISTRATION'S REVENUE PROPOSALS 51

1991. such deposits must be made by the second banking day, and in

1992 by the third banking day. The President's budget would require

large employers to deposit these taxes on the first banking day after

they exceed the limit in all years. This proposal would not increase tax

liabilities of workers or of employers; it would simply speed up the

Treasury's receipt of these taxes. CBO estimates that this acceleration

would increase revenues by $0.9 billion in 1991 and by $2.2 billion in

1992. Because these revenues would have been paid anyway, albeit a

bit more slowly, future revenues would be decreased—by $3.1 billion in

1993. Because this is merely a speedup, these increases would not be

counted for purposes of the Balanced Budget Act.

Other Payroll Tax Proposals. The Administration proposes four other

payroll tax changes, the revenue effects of which are small. Taken together, CBO estimates that they would increase revenues by less than

$50 million in 1991 and by $275 million in 1991 through 1995.

First, the President's budget would require that Social Security

and Medicare coverage and contributions be extended to include all

District of Columbia workers hired after December 31, 1990. Certain

D.C. government workers in specialized occupations are covered under

separate retirement plans, and therefore are currently exempt from

paying Social Security and Medicare taxes. Second, the District of

Columbia's employer contributions for cost-of-living allowances

(COLAs) to the federal Civil Service Retirement program on behalf of

current workers and retirees would be increased from approximately 7

percent of the COLA's cost to 11 percent in 1991 and 14 percent by

1994. Third, the budget proposes to extend through 1992 the status of

commuter railway employers for unemployment insurance (UI) purposes. Through 1990, commuter railroads are allowed to reimburse the

UI trust fund for actual unemployment compensation benefits paid to

the railroads' former employees, rather than pay the 8 percent UI tax

rate on their covered wage base. The proposal would extend this

method through 1992, after which an experience-rated method of payment would be fully instituted. In addition, the reimbursable status

would be extended to Amtrak, which is not currently allowed this

method because it is not a commuter railroad. Fourth, the Administration plans to reduce and delay the 1991 pay raise for federal workers from the beginning of the fiscal year (October 1,1990) to January 1,

1991.
52 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Excise Tax and Fee Increases

The President's budget extends and increases several excise taxes,

speeds up collection of one excise tax and changes the collection point

of another, and imposes or increases a variety of fees. CBO estimates

that these proposals would raise $3.5 billion in 1991; the revenue gains

would cumulate to $28.4 billion over the five-year period (see Table

IH-7).

TABLE III-7. CBO ESTIMATES OF THE ADMINISTRATION'S

PROPOSED EXCISE TAX AND FEE INCREASES

(By fiscal year, in billions of dollars)

Proposal

Increase the Harbor

Maintenance Tax

Accelerate Deposit

Deadlines for Telephone

Tax Payments

Switch the Collection

Point of Certain Liquor

Taxes from Retailers

to Wholesalers

Impose or Increase

1991 1992 1993 1994

Cumulative

Five-Year

1995 Changes

Extend the Telephone

Tax Permanently

Increase Aviation Taxes3

1.5

1.3

2.6

2.3

2.7

2.5

2.9

2.7

3.1

3.0

12.9

11.8

0.3

0.1

0.3 0.4 0.4 0.4 1.8

0.2

0.2

Miscellaneous Fees

Total

0.2

3.5

0.2

5.5

O4

6.0

0.4

6.5

0.4

7.0

1.5

28.4

SOURCES: Congressional Budget Office and Joint Committee on Taxation revenue estimates.

NOTE: Revenues are net of reduced income taxes, except for the revenue effects of accelerated deposits

of telephone tax payments.

a. CBO estimates larger revenue gains from this proposal than does the Administration because the

CBO baseline includes lower tax rates. Therefore, larger increases are necessary to achieve the

Administration's proposed tax rates.

b. Revenue increase of less than $50 million.
CHAPTER III THE ADMINISTRATION'S REVENUE PROPOSALS 53

Extend the Telephone Tax Permanently. Under current law, local and

toll telephone and teletypewriter communication services are subject

to a 3 percent tax that is scheduled to expire on January 1,1991. It has

been imposed each year since 1932. Although it has been scheduled to

expire every few years since 1959, it has been extended many times.

The Administration proposes to make the telephone tax permanent.

CBO estimates that permanent extension would garner $1.5 billion in

additional revenue in 1991 and a total of $12.9 billion from 1991

through 1995.

Increase Aviation Taxes. The Administration proposes that most Airport and Airway Trust Fund (AATF) taxes be increased by 25 percent

over current levels. For example, the passenger ticket tax~the largest

aviation tax-would be increased from 8 percent of ticket value to 10

percent. Taxes on aviation fuel and cargo would also be increased. The

international departure tax, which was increased from $3 to $6 per

departure in the Omnibus Budget Reconciliation Act of 1989, would

not be affected by the budget proposal. CBO estimates that, relative to

its baseline, this proposal would raise $1.3 billion in 1991 and a total of

$11.8 billion over five years. This would provide increased funding for

federal aviation programs, which currently require greater spending

than is provided by the trust fund.

Airport and airway taxes are scheduled to expire at the end of

1990. Both CBO and the Administration estimate baseline revenues

assuming that these taxes will be extended. However, they project the

extension at different rates. Recognizing the provision of law ("the

trigger") that requires AATF tax rates to be halved on January 1,

1991, if appropriations and obligations fail to total a certain fraction of

authorizations, CBO projects AATF taxes at the reduced rates. The

Administration projects these taxes at full rates, implying repeal of the

trigger provision. Because CBO's baseline includes lower tax rates, a

larger increase is necessary to achieve the President's proposed rates.

While CBO attributes more revenue gain to this proposal than does the

Administration, its projection of total aviation taxes under the

President's proposed policy is quite similar to the Administration's.

Increase Harbor Maintenance Tax. Cargo shipped on the nation's

waterways is currently subject to a 4 percent ad valorem tax to help defray expenses of dredging and maintaining the nation's harbors. The

President's budget proposes to increase the tax rate to 0.125 percent of

25-692 0-90- 3
54 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

cargo value. The higher rate would yield tax collections large enough

to cover the Army Corps of Engineers' harbor maintenance costs. CBO

estimates that this would increase revenue by $300 million in 1991

and by $1.8 billion over the budget projection period.

Accelerate Deposit Deadline for Telephone Tax Payments. The Administration would permanently change the rules for deposits of telephone tax payments so that each deposit would be accelerated by approximately one week. This would not change tax liabilities; it would

simply speed up the point at which the Treasury records a payment.

This change would bring in a little more than $100 million in 1991 and

about $0.2 billion over the five years. Because this merely changes the

timing of these tax payments, it would not count as deficit reduction,

according to the rules of the Balanced Budget Act.

Switch the Collection Point of Certain Liquor Taxes from Retailers to

Wholesalers. The President's budget proposes to repeal the existing

taxes levied on business operations of liquor retailers, substituting an

increase in the existing taxes on liquor wholesalers and manufacturers. The purpose of changing the point in the distribution chain at

which the tax is collected is to improve compliance. No tax rates were

specified for the increase in the tax on wholesalers and manufacturers,

but the increase would be substantial if the proposal is to raise the

amount of revenue the Administration estimates. Because it is possible for the Administration to specify a tax rate that would raise sufficient revenue, CBO accepts the Administration's target revenue gain,

which is approximately $50 million per year and a total of more than

$200 million for the period.

Impose or Increase Miscellaneous Fees. The Administration proposes

to establish or change numerous fees, classified as revenues, that CBO

estimates would raise about $150 million in 1991 and a cumulative

total of $1.5 billion for the 1991 through 1995 period. The proposed

changes are: to increase and expand transaction, registration, and

filing fees charged by the Securities and Exchange Commission (SEC);

to extend permanently the fee, scheduled to expire September 30,1990,

that the Internal Revenue Service charges taxpayers who request

letter rulings, opinion letters, or similar determinations; to extend indefinitely mine reclamation fees, scheduled to expire in August 1992,

on surface-mined coal, underground coal, and lignite coal; to levy a

transactions fee on all "futures" and "options" contracts regulated by
CHAPTER III THE ADMINISTRATION'S REVENUE PROPOSALS 55

the Commodities Futures Trading Commission; to increase the fees

charged by the Army Corps of Engineers for permits to develop or use

navigable waterways and wetlands; and to impose fees to cover the

costs incurred by the Federal Emergency Management Agency in

regulating the evacuation plans of nuclear power plants. Most of these

increases are proposed in order to raise funds sufficient to cover some

or all of the agencies' costs in providing these services. The SEC fees

are, however, an exception. These fees currently are more than sufficient to cover the agency's costs.

The Administration also proposes to reclassify to the outlay side of

the budget an Environmental Protection Agency registration fee for all

toxins that are not pesticides, and to increase a Department of Housing

and Urban Development fee for inspection of real estate developments

that are marketed and sold nationally. These two changes would have

minor revenue effects.

Internal Revenue Service Initiatives. The President's budget proposes

to increase revenues through several initiatives affecting management

at the Internal Revenue Service (see Table III-8).

TABLE III-8. CBO ESTIMATES OF THE ADMINISTRATION'S

INTERNAL REVENUE SERVICE INITIATIVES

(By fiscal year, in billions of dollars)

Proposal

Initiate Management Reforms

Increase Enforcement Funding

Require the IRS to Absorb

Half the Cost of the 1991

Pay Raise

Total

1991

0.0

0.3

-0.1

0.3

1992

0.0

0.5

-0.2

0.4

1993

0.0

1.0

0.0

1.0

1994

0.0

1.2

OO

1.2

1995

0.0

1.2

0.0

1.2

Cumulative

Five- Year

Changes

0.0

4.3

-0.2

4.1

SOURCES: Congressional Budget Office and Joint Committee on Taxation revenue estimates.

NOTE: The cost of these initiatives, estimated at approximately $0.9 billion over the 1991-1995 period,

is not included in these revenue estimates.
56 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Initiate Management Reforms. The Administration proposes to improve management of IRS enforcement activities sufficiently to raise

$2.5 billion in additional revenue in the budget year. Specifically, the

IRS has identified five areas in which it believes reallocation of staff

and reorientation of programs would yield additional revenue during

the projection period.

These initiatives are described as requiring no increase in outlays.

Therefore, they require no legislative action or Congressional approval. They are, in effect, a statement that the IRS plans to improve

the efficiency of its enforcement activities. Improved management is

within the purview of the IRS already, and shifting of resources to increase efficiency and output is part of regular management. The IRS

has stated before that its enforcement operations are not designed to

maximize revenue yield, and therefore it is feasible that improvements

in operations could increase total revenues.

CBO estimates that this initiative will raise no revenue above

baseline levels, however, because the IRS has been unable to adequately document how this reallocation would be successfully implemented in the field and how it would raise additional revenue. Past

performance provides insufficient evidence of the IRS's ability to reorganize so as to generate such rapid and substantial increases in revenues above baseline levels. Also, recent General Accounting Office

studies indicate that IRS enforcement data and estimation methods

have been inadequate.

Increase Enforcement Funding. The Administration also requests an

increase in funding for the IRS to add to staff and other resources in

three areas so as to implement eight new enforcement initiatives. The

IRS would increase its examinations, collections, and returns-processing staffs. The new programs would encompass new audits of

excise tax and estate and gift tax returns; additional single-issue correspondence and follow-up contact with taxpayers subject to audit; a

program to employ retired IRS examiners to train new recruits instead

of using current employees as trainers; increased audits of returns

claiming very large refunds; increased collection of accounts receivable; investigation of returns of noncustodial parents claiming dependent exemptions; increased document matching of dependents' Social

Security numbers to detect excessive claims for dependent exemptions;
CHAPTER HI THE ADMINISTRATION'S REVENUE PROPOSALS 57

and document matching to check returns of low-income homeowners

who claim credits for certain mortgage interest.

CBO agrees that these programs could be effective in increasing

revenues, but not as rapidly or as substantially as the Administration

estimates. Also, the Administration has not projected sufficient funding for years beyond 1991 to support the number of additional personnel it proposes to hire. CBO estimates that these initiatives would

raise $0.3 billion in 1991 and $4.3 billion in the 1991-1995 period.

Require the IRS to Absorb Half the Cost of the 1991 Pay Raise. The

Administration's budget includes a revenue reduction to reflect the

effect on IRS enforcement activities of its proposal that part of the 1991

pay raise for federal employees be absorbed by their employing agencies. The IRS is expected to absorb half the pay raise by not filling

attrition vacancies during the year. CBO accepts the Administration's

estimate that this staff reduction would reduce revenue by almost $100

million in 1991 and by almost $250 million over the full five years.

Other Revenue Proposals

The President's budget includes several other proposals affecting revenues. All have small revenue effects; some would raise revenue and

some would lose revenue. Taken together, CBO estimates that they

would raise revenue by $0.5 billion in the budget year, but reduce

revenue by $0.5 billion over the five-year period (see Table III-9).

The Administration would make the current credit for child and

dependent care expenses refundable and enact a new refundable credit,

unrelated to child care expenses, of 14 percent of income or $1,000 per

child—whichever is smaller—for each child under age four. Parents

could choose the new credit if it was larger than the current credit. Because the primary budget effect of the proposal is to increase refundable outlays in function 500, it is discussed in more detail in Chapter

V. The Administration would restore and double the credit for unreimbursed expenses of adopting a child with special needs. It would

designate up to 50 enterprise zones over a four-year period, and allow

special income tax deductions and credits designed to encourage investment and employment in these zones. It would require property

and casualty insurance companies to reduce their loss deductions by
58 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

the expected salvage value of loss property that will be sold in the

future. It would allow corporations a one-time transfer of assets from

overfunded pension plans to be used to pay current retiree health

benefits. Finally, it would establish a separate, permanent appropriation account for the Bureau of the Public Debt's full reimbursement of

the Federal Reserve System for expenses incurred in managing the

TABLE III-9. CBO ESTIMATES OF THE ADMINISTRATION'S

OTHER REVENUE PROPOSALS

(By fiscal year, in billions of dollars)

Proposal 1991 1992 1993 1994

Cumulative

Five-Year

1995 Changes

Make the Dependent Care

Credit Refundable and

Establish a Child Care

Credit for Children

Under Age 4» b

Double and Restore the

Credit for Adoption Expenses b

Establish Enterprise Zones -0.1

Reduce Loss Deductions

of Insurance Companies

by Including Salvage Values 0.2

Permit Limited Use of

Excess Pension Fund Assets

to Finance Retiree Health

Benefits 0.3

Modify Reimbursement

to Federal Reserve for

Its Debt Management Operations 0.1

Total 0.5

-0.2

b

-0.2

0.2

0.5

-0.2

b

-0.3

0.2

0.2

-0.2

b

-0.5

0.1

0.0

01 01 0.1

0.4 b -0.5

-0.3

b

-0.8

0.1

0.0

0.1

-0.9

-0.9

b

-1.8

l.Oc

1.0

0.3

-0.5c

SOURCES: Congressional Budget Office and Joint Committee on Taxation revenue estimates.

a. Excludes refundable outlays.

b. Revenue decrease of less than $50 million.

c. Excludes a revenue increase of $0.2 billion in 1990.
CHAPTER III THE ADMINISTRATION'S REVENUE PROPOSALS 59

government's debt operations, thus preventing a reduction in Federal

Reserve net profits (counted in the unified budget as revenues) should

future appropriations be insufficient to allow full reimbursement.

CBO REESTIMATES

CBO's estimate of total revenues in 1991 under President Bush's

proposed budget is $24 billion less than the Administration's estimate.

The difference grows to $39 billion in 1992 and remains around $50

billion each year after that. Most of the difference reflects divergent

assumptions about the economy and its effects on underlying baseline,

or current services, revenues (see Table III-10).

TABLE 111-10. CBO REESTIMATES OF ADMINISTRATION BUDGET

REVENUES (By fiscal year, in billions of dollars)

1990 1991 1992 1993 1994 1995

Revenues as Estimated

by the Administration

CBO Reestimates

Economic

Baseline

Proposals

Subtotal

Technical

Baseline

Proposals

Subtotal

1,073.5 1,170.2 1,246.4

-0.8

0.0

-0.8

-5.2

0.2

-5.0

-19.0

a

-19.0

-0.3

-4.5

-4.8

-35.6

-0.1

-35.7

4.5

-7.3

-2.9

1,327.6 1,408.6 1,486.3

-54.6

-0.2

-54.8

7.9

-4.4

3.5

-64.1

-0.2

-64.3

16.7

-4.9

11.8

-62.9

-0.2

-63.1

19.9

-3.1

16.8

Total -5.8 -23.8 -38.6 -51.3 -52.5 -46.3

Revenues as

Estimated by CBO 1,067.7 1,146.4 1,207.8 1,276.3 1,356.2 1,440.0

SOURCES: Office of Management and Budget, Budget of the United States Government, Fiscal Year 1991

(January 1990); Congressional Budget Office revenue estimates.

NOTE: Revenues include payroll tax receipts of the Old-Age, Surviviors, and Disability Insurance

(OASDD trust funds, which are off-budget.

a. Revenue decrease of less than $50 million.
60 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Economic Reestimates

Revenues depend on the size of the economy—primarily, on personal

income and corporate profits and, less importantly, on the volume of

transactions. Most of the difference between CBO's and the Administration's budget revenue estimates is directly attributable to assumptions about the economy. CBO forecasts slower economic growth

than does the Administration, and higher inflation and interest rates.

CBO's estimate of GNP is $109 billion below the Administration's in

1991, and $192 billion below it in 1995. Also, CBO's estimate of total

taxable income as a share of GNP is lower than the Administration's.

(CBO's higher estimate of the personal income share is more than offset by a substantially lower estimate of the corporate share.) Consequently, CBO's estimate of the personal and corporate tax base is

substantially below the Administration's in every year. (The two sets

of economic assumptions are compared in more detail in Chapter II.)

Slightly more than half of the downward reestimates are in the

corporate income tax and reflect CBO's assumption of lower profits.

Most of the remaining reestimates are in personal income and payroll

taxes, reflecting CBO's lower estimate of personal income-in particular, lower wages and salaries. Only minor reestimates were made of

excise taxes and customs duties. Small upward reestimates were made

of Federal Reserve payments because of CBO's higher interest rates.

The economic reestimates are large by recent standards, mostly

because of an increase in the individual income tax reestimate. While

the Administration's and CBO's growth and inflation assumptions are

more alike this year than in the recent past, their projections of personal income have reversed. This year, CBO projects taxable personal

income to be $53 billion below the Administration's estimate for 1994.

Last year, CBO projected it to be $192 billion above the Administration's estimate for the same year. In addition, last year, the substantially lower inflation assumed by the Administration generated less

income tax indexation under Administration assumptions, resulting in

higher income tax liability per dollar of personal income and, therefore, a relatively small economic reestimate. This year, the Administration's projection of personal income is higher than CBO's and the

economic reestimate is much larger.
CHAPTER III THE ADMINISTRATION'S REVENUE PROPOSALS 61

The shift in personal income projections reflects the shift in GNP

projections. CBO's projection of GNP in 1991 is now $109 billion below

the Administration's, whereas last year it was $37 billion below the

Administration's projection for 1991. Similarly, CBO's projection of

GNP in 1994 is now $204 billion below the Administration's compared

with $149 billion above the Administration's last year.

The reestimates are further increased by larger differences in projections of profits. This year, CBO projects economic profits to be $79

billion below the Administration's estimate for 1992 and $112 billion

below its estimate for 1994. Last year CBO projected it to be $63 billion below the Administration's estimate for 1992 and a much more

modest $66 billion below that for 1994.

Technical Reestimates

Revenue estimation requires technical assumptions about, for example, taxpayer responses to law changes and the timing of tax collections. Technical reestimates reduce the President's estimates of total

revenues by $5 billion in 1991 and by $3 billion in 1992 but raise them

after that by amounts that grow from $4 billion in 1993 to $17 billion

in 1995. This reflects a combination of mostly positive reestimates of

baseline receipts and negative reestimates of the receipts from certain

policy proposals.

Baseline Reestimates. CBO's technical reestimates, computed using

Administration economic assumptions, raise individual income taxes

substantially above the Administration's estimates for every year from

1991 through 1995. This is the combined result of many different technical factors in estimation methods. Because these factors interact

with one another, the identification of a single causal factor is problematic.

This difference in personal income taxes is partially offset by

downward reestimates of corporate income taxes and excise taxes.

CBO's reestimates of baseline corporate income taxes are negative:

CBO projects a lower effective tax rate on taxable corporate profits.

This is a reversal of reestimates in recent years. The Administration

has raised its effective rate on profits this year, compared with recent

past years.
62 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

CBO's reestimates of baseline excise taxes are negative, mainly

because of assumptions about aviation taxes. As mentioned above,

CBO assumes that these taxes will be extended beyond their expiration date of December 31,1990, at lower rates than the Administration

assumes.

Proposal Reestimates. Reestimates of three of the President's proposals account for most of the technical reestimates.

The Administration estimates that enactment of a 30 percent exclusion of gains realized on capital assets would raise revenue from

1990 through 1995, producing $4.9 billion in additional revenue in

1991 and $12.5 billion over the six-year period. CBO estimates that

the exclusion would raise revenue by $3.2 billion in 1991 but would

lose revenue each year after that, resulting in a cumulative revenue

loss of $11.3 billion over the six-year period. The 30 percent exclusion

would significantly lower the effective tax rate on realized capital

gains. The Administration assumes that taxpayers would be so responsive to the lower tax rate that they would sell assets with sufficiently large gains (in the aggregate) that taxes paid on the nonexcluded portion would more than offset the effect of the lower tax rate

every year. Research by CBO and others indicates that taxpayers are

unlikely to be as responsive as the Administration assumes. Although

induced realizations would be initially large enough to yield a net

revenue gain in 1991, these would not be sustained at high enough

levels after that to offset the revenue loss from the lower effective rate.

This reestimate is classified as a technical reestimate because it reflects assumptions about taxpayer behavior rather than economic

activity.

The Administration estimates that improvement in Internal Revenue Service management would yield additional revenue of $0.1 billion

in 1990, $2.5 billion in 1991, and a total of $3.7 billion over the six-year

period. For reasons explained earlier in this chapter, CBO estimates

that the proposed management improvements would not yield additional revenue above baseline levels. This reestimate is classified as a

technical reestimate because it depends on administrative actions

only.

The Administration estimates that its proposed 25 percent increase in aviation tax rates above current levels would raise $0.5 bil-
CHAPTER HI THE ADMINISTRATION'S REVENUE PROPOSALS 63

lion in 1991 and $4.1 billion in the period 1991 through 1995. CBO

attributes more revenue to this proposal, measured relative to the CBO

baseline: $1.3 billion in 1991 and $11.8 billion over five years. This is

because the CBO baseline includes lower tax rates, as explained above.

This technical reestimate of the President's proposal counteracts the

technical reestimate of the baseline mentioned above; the two reestimates, taken together, have little effect on total revenues.

CHAPTER IV

THE ADMINISTRATION'S PROPOSALS FOR

DEFENSE AND INTERNATIONAL AFFAIRS

The budgets for defense (function 050) and international affairs (function 150) address complementary national security and foreign policy

objectives. This chapter describes each budget in terms of changes in

current policies as measured by the CBO baseline and provides a more

detailed analysis of major proposals.

The Bush Administration is requesting defense appropriations for

1991 totaling $307 billion, an increase of $5 billion over 1990. Based

on CBO estimates, outlays would total about $304 billion, an increase

of about $7 billion over 1990. Over five years, the request calls for budget authority totaling $1,584 billion, while outlays would total about

$1,564 billion. Despite nominal annual increases, the budget would

decline by 2 percent each year in inflation-adjusted dollars, and by

1995 the defense budget would be about 11 percent lower than in 1990.

The budget authority requested for international affairs would

rise by $1.8 billion from 1990 to total $20.3 billion in 1991 based on

CBO estimates. Outlays would reach $17.8 billion in 1991, an increase

of $3.6 billion. Over five years, budget authority would total $102.3

billion, while outlays accumulate to $92.1 billion.

Both budgets reached peaks, in real terms, in 1985 when the defense budget was the highest it has been since the Korean War and the

international affairs budget was the highest since the early 1960s. The

current budget proposals continue a general downward trend, even

though some individual programs would increase substantially. Military personnel and modernization offerees, especially strategic forces,

claim high priorities in defense. In the international affairs budget,

the increases in funding are concentrated in payments of assessed contributions to international organizations and development and humanitarian assistance.
66 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

THE DEFENSE BUDGET COMPARED

WITH THE CBO BASELINE

Reductions from the CBO baseline indicate a real cut in funding because the baseline adjusts each category of funding to be constant in

real terms. In 1991, all accounts except those for atomic energy defense activities and several other activities receive real cuts in funding. Table IV-1 highlights the Administration's proposed spending

changes for defense and their relationship to the CBO baseline.

Funding for weapons procurement would drop sharply in 1991—

about 9 percent after adjusting for inflation. The request would lower

budget authority by $8 billion below the baseline, in part because a

number of programs are terminated. Two of them account for about

$2.5 billion of the difference-the Navy's F-14 fighter aircraft ($1.0

billion) and the Army's Apache attack helicopter ($1.5 billion). The

Administration also proposes to defer budget authority appropriated

for certain programs in 1990 in the hope that as much as $1.4 billion

will be used instead to fund procurement of the Air Force's F-15

aircraft and the Army and Marine Corps' M-l tanks for one more year

(see Box IV-1).

Appropriations requested for military personnel are below the

baseline for three main reasons. First, the Administration proposes a

lower pay raise than was assumed in the baseline~a 3.5 percent pay

raise effective in January 1991 compared with CBO's assumed 4.0 percent pay raise effective in October 1990. This difference accounts for

$0.5 billion. Second, the Administration would lower active-duty personnel levels by about 37,600 and reserve forces by about 3,400. Lower

personnel levels save an additional $0.5 billion from the baseline.

Third, the military personnel budget for 1991 appears low because the

Administration has requested that more than $1 billion for subsistence-in-kind~food provided through mess halls instead of through

military pay-and other activities be shifted into the operation and

maintenance (O&M) accounts from the personnel accounts where the

funds appeared in 1990 and where they appear in the baseline.

Funding for operation and maintenance and for research, development, test, and evaluation (RDT&E) falls short of baseline levels in
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 67

TABLE IV-1. PROPOSED MAJOR SPENDING CHANGES IN THE

PRESIDENT'S BUDGET FOR FUNCTION 050,

NATIONAL DEFENSE (By fiscal year, in billions of dollars)

1991 1992 1993 1994 1995

Cumulative

Five- Year

Changes

Budget Authority

CBO Baseline

Proposed Changes

Military personnel

Operation and

maintenance

Procurement

RDT&E

Atomic energy defense

Other defense

Total

President's 1991 Budget

CBO Baseline

Proposed Changes

Military personnel

Operation and

maintenance

Procurement

RDT&E

Atomic energy defense

Other defense

Total

President's 1991 Budget

as Estimated by CBO

315.8

-2.6

-0.9

-8.0

-0.4

0.9

2.0

-8.9

306.9

306.9

-2.5

-1.0

-0.7

-0.3

0.6

0.7

-3.2

303.7

328.4

-4.2

-3.2

-10.4

-1.3

1.3

1.8

-15.9

312.5

Outlays

317.6

-4.1

-2.8

-3.2

-0.9

1.3

1.3

-8.5

309.2

341.6

-6.0

-5.7

-13.1

-2.3

1.4

1.6

-24.1

317.5

328.3

-5.9

-5.2

-6.6

-1.7

1.4

2.0

-16.0

312.3

355.3

-8.3

-8.7

-15.9

-3.5

1.4

1.3

-33.7

321.6

344.8

-8.1

-7.9

-9.8

-2.8

1.4

1,4

-25.7

319.1

369.7

-10.7

-11.8

-19.0

-4.8

1.3

1.0

-44.0

325.7

355.4

-10.6

-10.9

-13.1

-4.0

1.3

1.8

-35.5

319.9

-31.8

-30.3

-66.4

-12.2

6.4

7.8

-134.4

-31.2

-27.9

-33.3

-9.7

6.0

7.2

-96.0

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

NOTE: RDT&E =research, development, test, and evaluation.
68 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

BOX IV-1

DEFERRALS AND THE PANAMA SUPPLEMENTAL

In addition to the Administration's customary budgetary proposals, it is also

deferring funds appropriated for certain programs in 1990. In a related

action, it is asking for supplemental appropriations for aid to Panama and

migration and refugee assistance in Eastern Europe and the Soviet Union.

The deferrals mean that the Administration has chosen not to make certain

funds available for obligation during 1990. The aid to Panama and migration and refugee assistance totals about $570 million in budget authority

and $310 million in 1990 outlays and would require appropriation action.

The deferrals affect mostly procurement programs and have two parts

totaling $2,194 million. The Administration wants one set of deferrals to be

permanent and the funding to be transferred into the appropriation bill for

1991. In other words, it wants the funds--$l,359 million-to be used to buy

F-15 aircraft and M-l tanks in 1991 rather than fast sealift ships, certain

munitions, helicopters, weapons modifications, and other programs including some military construction. The second part of the deferrals totals $835

million and is aimed at funds appropriated in 1990 for an icebreaker, funds

from 1989 for the V-22 aircraft that the Administration sought to terminate

a year ago without clear success, and funds from 1988 and 1989 for ammunition facilities.

All told, the deferrals would save about $294 million in outlays for

1990. This reduction is their connection with the supplemental request for

Panama. The Administration links the deferral and supplemental to avoid

an increase in the deficit. The costs of aiding Panama are supposed to be

balanced by savings from the deferrals. The Administration excluded both

the supplemental and the impact of the deferrals on outlays from its budget

document, even though the deferrals are in place and the supplemental

requires Congressional action. For purposes of the Congressional Budget

Act, however, the deferral and supplemental package as submitted is not

deficit neutral. It adds to the deficit because only Congressional action on

the supplemental is counted or scored; the deferrals-an administrative

action-are not scored unless they are part of a bill signed into law.

It is possible that the deferrals will not be in place for the whole year as

planned by the Administration. The Congress might choose to overturn

them. In addition, there is some question about whether the funds are being

withheld inappropriately. If the deferrals have been made for policy reasons

rather than for administrative efficiency, the Congressional Budget Act outlines a procedure to require that the funds be made available for obligation.

To date, none of the legal steps necessary to release the funds has been

taken. However, the General Accounting Office has examined the President's impoundment message and has concluded that $1,251 million of the

deferrals are not authorized under the Congressional Budget Act. It is not

yet clear whether the Administration will release funds as a result of the

statement of the Comptroller General.
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 69

1991 for many reasons, including the application of the military personnel pay raise to civilians, as explained above. The shortfall from

the baseline in these accounts reflects the net effect of a myriad of program decisions, some of which involve increases and some decreases.

Two areas of the defense budget exceed baseline amounts-atomic

energy defense activities and other defense programs, mainly the revolving and management funds. The increase in funding for atomic

energy can be traced to programs that would modernize the nuclear

weapons complex ($0.5 billion) and to programs that would restore and

correct some of the environmental and safety problems that plague the

Department of Energy's defense facilities ($0.4 billion). The revolving

funds, which provide goods and services related to logistics functions,

exceed the baseline because the Administration requests appropriations totaling $2.2 billion to make up for shortfalls in the industrial

funds ($0.4 billion), to accumulate war reserve stocks ($0.6 billion),

and to purchase certain spare parts for weapons ($1.3 billion). In contrast, the baseline assumes that only $0.2 billion would be included for

these accounts based on the amount appropriated in 1990 and an adjustment for inflation.

Outlays in all years are a function of the budget authority for appropriation accounts and their historical spendout rates. Consequently, even though procurement funding in the budget falls below

the baseline by much greater amounts than funding for military personnel and operation and maintenance, procurement outlays are closer

to the baseline than are outlays in the other two categories. Once

funds are appropriated, the Department of Defense (DoD) executes the

program-and consequently writes checks~at different rates. For example, for each dollar of procurement funding saved, outlays fall by

only 15 cents in the first year compared with 95 cents and 78 cents for

each dollar of military personnel and operation and maintenance,

respectively.

MAJOR DEFENSE PROPOSALS

The Bush Administration's defense budget for 1991 is only the second

budget since 1971 to request a real decline in funding for defense programs. The other budget was the Reagan Administration's 1989 request, which reflected the real decline called for by the two-year budget
70 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

agreement reached with the Congress in November 1987. But in that

budget the out-years contained real growth. This is not the case for the

1991-1995 proposals in the Bush Administration budget request for

1991.

The defense budget for 1991 through 1995 would continue a trend

that began in 1986. The defense budget has fallen by 13 percent in real

terms over the 1985-1990 period and would fall by 22 percent over the

1985-1995 period. Nevertheless, real growth from 1980 through 1985

was very rapid, and so the Administration's 1991 budget would still

leave de-fense funding 30 percent higher in real terms than it was in

1980; by 1995, it would remain 19 percent higher than in 1980 (see

Table IV-2).

TABLE IV-2. REAL CHANGES IN NATIONAL DEFENSE BUDGET

AUTHORITY (By fiscal year, in percent)

Real Change Real Change

1980- 1985- 1990- Compared with 1980

1985 1990 1995 1990 1991 1995

Department of Defense-Military

Military Personnel 31- 9 42- 5

Operation and Maintenance 38 -4 -10 32 32 19

Procurement 115 -29 -19 52 38 24

RDT&E 82 -1 -11 80 78 61

Military Construction 97 -21 -9 56 59 42

Family Housing 48 -5 -7 41 45 31

Other DoD--Military n.a. n.a. n.a. n.a. n.a. n.a.

Weighted Average 52 -14 -11 31 28 16

Other National Defense

Atomic Energy Defense 93 10 11 113 132 136

Other Agencies 186 _4 JL1 178 230 207

Weighted Average 97 9 11 116 137 139

Total, National Defense

Weighted Average 53 -13 -11 33 30 19

SOURCE: Congressional Budget Office.

NOTES: RDT&E = research, development, test, and evaluation; n.a. = not applicable.
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 71

The budget totals force the Administration to make certain

choices. The Administration states that its priorities within this budget are:

o Highly qualified and fairly compensated military personnel,

o Technological superiority,

o Efficient acquisition of weapons,

o Maintaining and investing in strategic nuclear forces,

o Maritime superiority, and

o Preparedness for mobilization through reserve forces and a

responsive industrial base.

The next two sections analyze the request with an emphasis on how

these priorities are actually reflected in the budget request.

Force Operations

Funding for force operations reflects some of the Administration's

priorities. Specifically, force size and composition show the budget's

effect on the quality and compensation of military personnel, the importance of strategic forces, and preparedness for mobilization.

Force Structure. A dramatic easing of East/West tensions is contributing to a changing structure for U.S. forces. The Administration and

U.S. allies are negotiating a treaty with the Soviet Union and its allies

that would limit conventional forces in Europe (CFE). At the same

time, the United States and the Soviet Union are negotiating a

strategic arms reduction treaty (START). Perhaps most important,

political changes in Eastern Europe have reduced the threat of conventional war. The budget for 1991 supports a force structure that

changes more for general purpose (or conventional) forces than strategic forces (see Table IV-3). Strategic forces have a net gain of 48 intercontinental ballistic missiles (ICBMs) based on Trident submarines,

but general purpose forces would lose 2 Army divisions, 2 battleships,
72 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

and 5 attack submarines. Of the conventional forces, only tactical air

forces show a net increase.

The structure of the reserve force changes more subtly. The Navy

Reserve would increase by 7 frigates and 55 new aircraft. The Air

Force's reserve components decline slightly and receive more up-toTABLE IV-3. SUMMARY OF ACTIVE FORCES

(By fiscal year, in numbers)

Category 1989 1990 1991

Strategic Forces

Land-Based ICBMs 1,000 1,000 1,000

Strategic Bombers 263 244 244

Sea-Launched ICBMs 576 608 656

Strategic Interceptors 36 18 18

General Purpose Forces

Army Divisions 18 18 16

Marine Corps Divisions 33 3

Conventional Bombers 61 33 33

Air Force Tactical Aircraft 1,769 1,743 1,746

Navy Tactical Aircraft 730 698 684

Marine Corps Tactical Aircraft 335 348 383

Naval Forces

Aircraft carriers 14 14 14

Battleships 44 2

Nuclear attack submarines 96 91 86

Other warships 260 244 237

Amphibious assault ships 65 64 66

Airlift and Sealift Forces

C-5 Aircraft 110 110 110

Other Air Force Aircraft 783 741 735

Ships 69 68 66

SOURCE: Compiled by Congressional Budget Office based on data supplied by the Department of

Defense.

NOTE: ICBMs = intercontinental ballistic missiles.
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 73

date aircraft such as the F-16. The Army's reserve components have no

detectable changes, though their equipment will probably be improved. Nevertheless, these seemingly small changes in force structure increase preparedness to mobilize: even though the reserve force

structure—measured in terms of units such as divisions—does not increase much absolutely, it does not decline either and consequently

rises as a proportion of the total force.

Overall funding for reserve components declines, however, by

about 4.5 percent in real terms in 1991. This drop occurs because there

are no new starts in reserve military construction and because the

separate request for National Guard and Reserve procurement is far

below the 1990 level. In recent years, the Congress has tended to add

to the Administration's budget request in these areas.

Military Personnel. In cutting the defense budget, the Administration

faced a choice between quantity and quality of military personnel. The

Administration appears to have opted for the latter since it reduces the

number of personnel in 1990 and 1991 by about 41,000 active and

reserve people and provides a pay raise of 3.5 percent, which is close to

its projected increase of 4.2 percent in the cost of living. That pay raise

will cost $1.8 billion in 1991.

Furthermore, funding for recruiting has been maintained so that

the most qualified people can still be recruited. Because some of the

changes in force structure begin in 1990-mainly the deactivation of

two Army divisions-it is useful to look at the change in personnel

strength from 1989 through 1991. By that measure, Army active

strength declines by 42,000 people compared with 8,000 for the Navy

and 41,000 for the Air Force. The Marine Corps is not cut. Personnel

levels in the reserve component fall by 19,000. The change in active

Army strength is consistent with the loss of two divisions, but reductions in the Air Force and the reserve component go beyond the

changes in force structure.

Whether or not a pay raise of 3.5 percent is close enough to the rate

of inflation (4.2 percent) projected by the Administration to maintain

the current high quality of personnel is uncertain. During the last few

years, shortfalls in pay raises from the inflation rate have not hampered these recruiting efforts significantly.
74 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

The budget also proposes denying cost-of-living adjustments

(COLAs) in 1991 to most retired military personnel and reducing

COLAs by one percentage point thereafter. The former proposal affects people who will have retired by the scheduled COLA date, while

the latter affects everyone who entered the military before August 1,

1986. (Under current law, people entering after that date have their

retirement benefits indexed to the change in the consumer price index

less one percentage point.) This proposal would reduce the Defense

Department's contribution to the Military Retirement Trust Fund

(function 600--income security), where the net budget impact would be

felt. Nevertheless, this proposal represents a significant change for

members of the armed forces who have based career decisions on fully

indexed retirement benefits.

Operation and Maintenance. Operation and maintenance (O&M)

funding declines by about 1 percent in real terms. Some of this decline

can be traced to reductions in civilian personnel, which would fall by

5,000 from the 1990 level and by 21,000 from the 1989 level. In 1991,

the Defense Department would employ 1.1 million civilians.

In January 1990, the Defense Secretary imposed a hiring freeze on

civilian personnel positions in the Department of Defense for the remainder of the fiscal year. This action could reduce the DoD civilian

work force by more than 40,000 people, or nearly 4 percent, by the end

of 1990 if the freeze is not altered or revoked. This freeze could save

more than $500 million in defense budget authority in 1990 from what

was appropriated, and more than $1 billion in 1991 from what is requested.

The change in O&M funding is difficult to interpret in the aggregate for two reasons. First, the O&M account funds many diverse programs that are hard to summarize. Second, the picture is clouded by

several accounting changes. For example, the subsistence-in-kind

activities that were funded in 1990 in military personnel are funded in

O&M in 1991. Conversely, some other programs, such as certain spare

parts, previously funded in O&M are funded in the stock funds this

year. Even without accounting changes, most of the net reductions not

resulting from civilian personnel cuts seem to come from a wide variety of increases and decreases. One set of important indicators for assessing the contribution of O&M funding to readiness--the operating
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 75

tempos for ground forces, pilot training, and ship operations-does not

change from 1990 to 1991.

Base Closures. Following Congressional acceptance of the recommendations of the Defense Secretary's Commission on Base Realignment

and Closure in 1989, closures or major reductions at more than 40

bases were begun in January 1990. Implementation is expected to

take five years and could eventually result in annual operating savings of nearly $500 million. Closures cost money in the near term,

however, and the Department of Defense has requested more than

$900 million in 1991 for the Defense Base Closure Account, which

funds military construction and other one-time costs associated with

realignment activities.

In January, after the budget was prepared, the Secretary of Defense released a list of more than 50 additional installations as candidates for closure or realignment. CBO's preliminary estimates suggest

that savings in operating costs could eventually amount to $1.5 billion

to $2.5 billion each year. As with the closures currently under way,

there would be significant near-term costs before these savings would

be realized. In addition, the eventual savings would depend on many

other factors, including the extent to which force structure is actually

reduced.

The lower range of this estimate assumes that personnel reductions would occur at the same proportion of the bases' personnel

strength as in the earlier round of closures recommended by the commission. In those actions, military missions performed at affected

bases were generally transferred to other bases, and personnel reductions resulted from lower overhead costs and management efficiencies.

Using this assumption, carrying out the newly recommended closures

would decrease military and civilian end strength by about 40,000. If

DoD chooses to discontinue many of the missions currently conducted

at these bases, the reduction in personnel requirements would be

greater and the annual savings would be nearer to the high end of the

estimate.

The estimate also assumes, based on analyses by the General Accounting Office, that savings in operating costs aside from personnel

would occur at approximately the same rate as in earlier closures.

However, as with the previous closures, the savings in salary associ-
76 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

ated with reducing the total number of personnel employed by DoD

would be the most significant source of savings, accounting for nearly

80 percent of eventual yearly operating savings.

Force Investment

Funding for force investment consists of procurement and the research,

development, test, and evaluation of weapons. By examining the budget request for these accounts, one can see the relatively high priority

that the Administration assigns to technological superiority, efficient

acquisition, and strategic systems.

Technological Superiority. The defense budget attempts to ensure

"technological superiority" of U.S. forces, by emphasizing research and

development and by terminating some older programs to fund more

advanced systems. Consequently, although "technological superiority" has no obvious definition, one measure of the Administration's

emphasis on technological superiority is the change in funding it proposes for the next generation of weapons compared with funding for the

current generation; "next generation" refers to weapons still in the

research and development stage or the earliest stage of procurement.

Funding for procurement, RDT&E, and some military construction for the next generation of weapons grows by $5 billion, from $49

billion to $54 billion in 1991 (see Table IV-4). Most of this growth

stems from just two systems~the SSN-21 nuclear attack submarine,

which receives nearly $3 billion more in funding, and the B-2 Stealth

bomber, which receives about $1 billion more. Funding for the SSN-21

increases because none was purchased in 1990 and the Administration

proposes to buy two in 1991. The B-2 bomber funding grows because

DoD bought two aircraft in 1990 and would buy five in 1991, which

would bring the total commitment to date for the B-2 to 15 aircraft.

The C-17 cargo aircraft increases by $0.3 billion, or 13 percent, to $2.7

billion. Procurement and RDT&E funding for other new weapons rises

by $0.8 billion in this budget compared with the CBO baseline.

In contrast, investment in the current generation of weapons falls

by nearly $12 billion, or 16 percent, as increases in such systems as the

MX missile are more than offset by reductions in programs such as the
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 77

TABLE IV-4. INVESTMENT IN THE NEXT GENERATION

AND CURRENT GENERATION OF WEAPONS

(In billions of dollars of budget authority)

1991

CBO President's Difference

Category Baseline Request Dollars Percent

Next Generation

Selected Weapons Systems

SSN-21 submarine 0.8 3.7 2.9 337

B-2 bomber aircraft 4.5 5.5 1.1 24

C-17 aircraft 2.4 2.7 0.3 13

Other 7.2 7.1 a b

Other

ArmyRDT&E 5.5 5.9 0.3 6

Air Force RDT&E 10.5 10.6 0.1 1

NavyRDT&E 9.2 8.6 -0.6 -7

Other 8.7 9.7 1.0 11

Total 48.8 53.9 5.1 10

Current Generation

Selected Weapons Systems

MX missile 1.8 2.8 1.0 58

Apache helicopter 1.7 0.2 -1.5 -90

Mobile subscriber equipment 1.0 a -1.0 -97

M-ltank 1.8 0.8 -0.9 -53

F-14 aircraft 1.7 1.1 -0.6 -34

Other

Air Force aircraft 12.3 8.2 -4.0 -33

Air Force missiles 5.4 6.1 0.7 12

Air Force other procurement 8.7 8.3 -0.3 -4

Navy ships 7.1 4.1 -3.0 -42

Navy aircraft 8.1 8.8 0.7 9

Navy weapons 3.7 3.9 0.2 5

Navy other procurement 8.1 6.1 -2.0 -25

All other procurement 14.4 13.3 -1.1 -8

Total 75.7 63.8 -11.9 -16

SOURCE: Compiled by Congressional Budget Office based on data supplied by the Department of

Defense.

NOTE: RDT&E = research, development, test, and evaluation.

a. Less than $50 million.

b. Leas than 0.5 percent.
78 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Army's AH-64 Apache attack helicopter, a field-telephone system

known as mobile subscriber equipment, M-l Abrams tanks, and the

Navy's F-14 fighter aircraft. The Apache program would end with last

year's particularly large procurement. The mobile subscriber equipment, the Abrams tank, and the F-14 programs would also come to the

end of their acquisition.

The RDT&E budget might also give some indication of the commitment to technological superiority except that funding for it would

decline in real terms, though less than the budget as a whole. Within

the RDT&E total, the commitment to technological superiority is

somewhat ambiguous. The largest real growth occurs in management

and support (8 percent), a category in which the technological payoff

could be quite small. Other categories of RDT&E funding that support

basic scientific research into new technologies increase by 1 percent in

real terms. The second stage of research-exploratory development--

examines the results of pure research for defense applications; that

category decreases in the request by 2 percent in real terms. RDT&E

funding for projects in a third stage of advanced development grows by

3 percent, while engineering development, a fourth stage, declines by 7

percent-both in real terms. Finally, development funding to improve

weapons already in use increases by 1 percent.

Acquisition Efficiency. The Administration attempts to improve the

efficiency of its acquisition process through economical production

rates, but the budget shows mixed results for this objective. Of the 17

aircraft programs that claim $16 billion in the 1991 budget, the unit

costs of 8 are higher in 1991 than in 1990. Furthermore, although unit

costs decline in some of the larger programs such as the B-2 bomber,

the reductions may be the natural result of a maturing production line

rather than any special emphasis on economic purchases. Even though

systems with increases in the annual procurement have declining unit

costs, seven aircraft programs with no change in quantity have rising

unit costs (see Table IV-5).

Missiles, torpedoes, and other weapons programs reveal changes

in unit cost that are more in line with the Administration's goal. Of 26

systems, 19 had unit cost reductions from 1990, while 7 had cost increases. Like the aircraft category, the reasons for the cost changes are
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 79

TABLE IV-5. SELECTED PROGRAM CHANGES FOR AIRCRAFT

AND MISSILE PROCUREMENT IN THE PRESIDENT'S

REQUEST FOR FISCAL YEAR 1991

(In millions of dollars of budget authority)

Weapons System

1991 Request

Quantity Dollars

Change from 1990

Unit Cost

Quantity (Percent)

B-2A Aircraft

Tanker Transport (TTTS)

MH-60G Helicopter

Civil Air Patrol Aircraft

SH-60B Helicopter

E-2C Aircraft

CH/MH-53E Helicopter

C-17 Aircraft

F-16 Aircraft

Grisly Hunter Aircraft

F/A-18 Aircraft

C-27A Aircraft

AV-8B Aircraft

UH-60 Helicopter

F-14 Aircraft

F-15 Aircraft

RC-12 Aircraft

Aircraft

5

28

4

38

6

6

23

6

150

1

66

5

24

72

12

36

5

3,828

193

44

2

168

411

460

2,146

2,903

10

2,123

91

535

469

997

1,751

87

3

14

0

0

0

2

13

2

0

0

0

0

0

0

-12

0

0

Missiles, Torpedoes, and Other Weapons

-42

-38

-27

-27

-20

-16

-10

-4

-1

2

2

5

6

16

16

32

62

AGM-130 Powered GBU-15

AMRAAM MiBsile (Navy)

ADATS (LOS-F-H) FAADS

Penguin Missile

Stinger Missile

Hellfire Missile (Navy)

MK-50ALWT Torpedo

Tomahawk Missile

Trident n Missile

AMRAAM Missile (Air Force)

MK-48 ADCAP Torpedo

TOW Missile (Marine Corps)

MX Missile

HAVE NAP Missile

ATACMS Missile

Laser Hellfire Missile (Army)

Patriot Missile

Harpoon Missile

HARM Missile (Navy)

HARM Missile (Air Force)

RAM Missile

Advanced Cruise Missile

PMS Stinger (LOS-R) FAADS

TOW 2 Missile (Army)

Standard Missiles (MR)

MLRS Rocket System

63

550

220

65

6,922

1,198

265

600

52

1,250

240

662

12

26

318

3,002

817

215

1,320

120

405

100

88

13,284

900

24,000

38

423

272

48

252

43

334

837

1,538

916

356

10

672

28

187

123

883

244

341

34

71

489

123

220

614

374

35

465

110

1

4,547

100

65

200

10

435

-20

85

0

4

166

698

2

25

158

-206

-175

0

-34

3,829

-40

-24,000

-49

-42

-33

-32

-27

-26

-22

-20

-18

-18

-16

-15

-11

-10

-10

-8

-5

-3

-1

4

8

9

14

43

57

60

SOURCE: Compiled by Congressional Budget Office based on data supplied by the Department of

Defense.
80 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

not clear; some programs with increases in production rates have lower

unit costs, and the opposite tends to be true for systems with cuts in

production rates.

Strategic and General Purpose Forces. Strategic nuclear forces and

the Strategic Defense Initiative (SDI) claim a high priority in the 1991

budget derived from what the DoD considers "uniquely important

security needs." Accordingly, strategic weapons programs increase by

$4 billion, or 25 percent—both in real terms (see Table IV-6). Much of

this growth can be traced to the B-2 bomber. Funding for the rail

garrison MX missile rises by $1.0 billion, to $2.8 billion in 1991. Also,

RDT&E funding for the SDI would increase by more than $0.7 billion,

or 20 percent, in real terms over 1990.

In contrast, funding for general purpose weapons declines by $11

billion, or 10 percent. The Army and the Air Force suffer the greatest

reductions in procurement of general purpose weapons. The Navy also

experiences a reduction of comparable funds but to a much lesser

extent, consistent with another of the Administration's priorities--

maritime superiority.

Army procurement funding would be one-third lower than in 1990

on an inflation-adjusted basis. Part of this cut (about $1.4 billion) is

the result of accounting changes, since certain spare parts would be

purchased out of unobligated balances in revolving funds. Still, the

Army has reduced its procurement program for aviation, combat vehicle, ammunition, intelligence, and communications systems in anticipation of buying more modern systems later in this decade. This

emphasis in the out-years is underscored by the Army's increase in

RDT&E-the only overall increase for general purpose programs.

Atomic Energy Defense Activities

Currently, the Department of Energy's (DoE's) nuclear weapons production complex faces severe environmental and operational safety

problems. The Administration's request focuses on overhauling this

complex and starting a five-year plan for environmental cleanup.
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 81

TABLE IV-6. INVESTMENT IN STRATEGIC AND GENERAL PURPOSE

WEAPONS (In billions of dollars of budget authority)

1991

CBO President's Difference

Category Baseline Request Dollars Percent

Strategic

Selected Weapons Systems

B-2 bomber aircraft 4.5 5.5 1.1 24

MX missile 1.8 2.8 1.0 58

Strategic Defense Initiative 3.7 4.5 0.7 20

Other procurement 4.3 4.6 0.3 8

Research Development,

Test, and Evaluation

Air Force 1.6 1.9 0.3 21

Army 0.2 0.3 0.1 53

Navy 0.2 0.2 a 5

Other 0.3 0.8 0.4 136

Total 16.5 20.6 4.1 25

General Purpose

Procurement

Army

Navy

Air Force

Other

Research, Development,

Test, and Evaluation

Army

Navy

Air Force

Other

Total

15.0

32.6

27.6

3.7

5.5

9.4

9.5

4.6

107.9

10.6

30.3

24.5

3.6

5.7

8.8

9.0

4.5

97.0

-4.4

-2.2

-3.1

-0.2

0.3

-0.6

-0.5

-0.2

-10.9

-29

-7

-11

-4

5

-6

-5

-4

-10

SOURCE: Compiled by Congressional Budget Office baaed on data supplied by the Department of

Defense.

a. Leas than $50 million.
82 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

The budget request for these activities is $1.3 billion more than

the budget for 1990 and $0.9 billion above the CBO baseline. Over half

of this increase is for maintenance and repairs necessary before production of nuclear materials can restart in compliance with safety requirements and environmental laws. The future scope of modernization remains uncertain in light of the changing strategic and environmental priorities facing the aging defense energy complex. The DoE

will have a new modernization plan later this year.

Beginning this year, DoE's Environmental Restoration and Waste

Management Five-Year Plan consolidates the department's defense

and nondefense programs for cleaning up environmental damage from

past actions and preventing new damage. Continuing last year's

significant increase in cleanup funding, the plan adds $0.5 billion to

the CBO baseline in 1991 and $4.5 billion by 1995, 80 percent of which

is related to defense activities. However, the plan is subject to many

technological and economic variables that may change future spending

as the size of the problem becomes clearer.

CBO REESTIMATES OF THE ADMINISTRATION'S

REQUEST FOR DEFENSE

In general, CBO and the Administration have a common estimate for

outlays in each account in the defense budget. The total annual differences are less than $0.5 billion for 1990 through 1993 but are more

than $3 billion for 1994 and $1 billion for 1995. These changes represent certain differences in technical assumptions used for the calculation (see Table IV-7).

The first difference stems from assumptions about pay dates.

When the first paycheck of a fiscal year falls on a weekend, current law

allows the Department of Defense to issue that paycheck on the previous Friday, pushing it into the previous fiscal year. The first payday of

fiscal year 1990 fell on Sunday, October 1, 1989, and checks were

issued on Friday, September 29, which was in fiscal year 1989. The

first paydays of 1995 and 1996 fall on the weekend. CBO assumed

these paydays will be advanced to the previous fiscal year. This assumption affects the timing of outlays but not budget authority.

Second, CBO assumed different spendout rates than the Administra-
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 83

tion for aircraft procurement for the Air Force based on a different

interpretation of the historical data. This is the only account with this

kind of difference. Third, the use of a different estimating technique

led to differences in 1995 for overall procurement accounts ($1.4 billion) and revolving and management funds ($0.2 billion).

Finally, the deferrals described in Box IV-1 are not reflected in the

Administration's estimates, but are included in the CBO reestimate of

the request because they represent Administration policy. The Administration is using part of the savings from these deferrals to offset

the Panama supplemental (see Box IV-1). However, these deferrals

are in effect now.

TABLE IV-7. CBO REESTIMATES OF PROPOSED SPENDING

IN THE PRESIDENT'S BUDGET

(By fiscal year, outlays in billions of dollars)

1990 1991 1992 1993 1994 1995

President's 1991 Budget 296.3 303.3 309.2 311.9 315.7 318.6

CBO Technical Reestimates

Military personnel

payday advance 0.0 0.0 0.0 0.0 3.6 0.1

Aircraft procurement,

Air Force 0.4 0.7 0.1 a -0.1 -0.2

Overall procurement a 0.0 0.0 0.0 -0.1 1.4

Revolving and management funds 0.0 0.0 0.0 0.0 0.0 -0.2

Deferralsb -0.3 -0.2 -0.1 0.3 a 0.2

Total

President's 1991 Budget

as Estimated by CBO

0.1

296.5

0.5

303.7

a

309.2

0.4

312.3

3.4

319.1

1.3

319.9

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

a. Leas than $50 million.

b. These deferrals were announced with the President's budget but were not reflected in the budget's

estimates. Rather, the Administration is claiming the savings from the deferrals as part of the

Panama supplemental. However, the legal status of the deferrals is uncertain, and the outlay effects

shown here may not occur if the deferrals are withdrawn (see Box IV-1).
84 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

THE ADMINISTRATION'S BUDGET REQUEST

FOR INTERNATIONAL AFFAIRS

The international affairs function is composed of foreign aid, the conduct of foreign affairs through the State Department and U.S. membership in international organizations, foreign information and exchange activities, and international financial activities, primarily export financing through the Export-Import Bank (Eximbank).

The President's budget follows a well-established pattern of requesting real increases in the budget year and supplemental in the

current year, offset by requests for future years that represent a real

decline. In 1991, the President requests a large increase for contributions to international organizations and development assistance, and

requests decreases in food aid, export financing, and construction of

radio facilities.

Foreign Aid

Foreign aid comprises development and humanitarian assistance and

security assistance. The latter includes foreign military sales financing and the economic support fund provided for political or national

security purposes. The creation of special assistance initiative (SAI)

accounts, special regional appropriations, and earmarks that cross accounts has obscured the distinction between development and economic support aid. The President is requesting a modest real increase

of $0.2 billion in foreign aid over the next five years, with the increase

concentrated in bilateral economic assistance (see Table IV-8).

Bilateral Economic Assistance. Bilateral economic assistance includes

development assistance administered by the Agency for International

Development and the economic support fund. The President's request

represents a continued shift of resources away from functional development accounts to special regional appropriations. The budget's increase for economic assistance appears to be for an SAI for Eastern

Europe, but that SAI program is the second year of a three-year initiative authorized last autumn and funded in the economic support fund,

which has now been recast in a separate account. The actual increase

is for a $175 million Andean drug initiative in the economic support

fund, increases for the Philippines, and restoration of economic support
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 85

funds to other countries-primarily the American republics, Africa,

and Turkey--that were squeezed in 1990 by the funding for Eastern

Europe.

Military Assistance. The foreign military sales (FMS) financing program provides credits and grants to enable foreign countries to buy

U.S. military equipment and services. The President's request for

TABLE IV-8. PROPOSED MAJOR SPENDING CHANGES IN THE

PRESIDENT'S BUDGET FOR FUNCTION 150,

INTERNATIONAL AFFAIRS (By fiscal year,

outlays in billions of dollars)

1991 1992 1993 1994 1995

Cumulative

Five-Year

Changes

CBO Baseline 16.9 18.0 18.4 18.6 19.6

Proposed Changes

Foreign aid

Bilateral economic

assistance 0.2 0.3 0.3 0.3 0.2 1.4

Military assistance -0.1 -0.1 -0.1 -0.1 -0.2 -0.6

P.L. 480, food aid -0.1 -0.1 -0.1 -0.1 -0.1 -0.5

Other 0.0 JU) -0.1 0.0 -0.1 -0.2

Subtotal 0.1 0.1 0.1 0.1 -0.1 0.2

Conduct of foreign affairs

International

organizations 0.8 0.2 0.2 0.2 0.2 1.7

State Department

and other 0.0 JU 0 .0 0.0 -0.1 -0.1

Subtotal 0.8 0.3 0.2 0.2 0.1 1.6

Foreign information and

cultural exchanges 0.0 -0.1 -0.2 -0.2 -0.3 -0.8

Export-Import Bank 0.0 0,0 -0.1 -0.1 -0.1 -0.3

Total 0.9 0.2 0.0 0.0 -0.4 0.7

President's 1991 Budget

as Estimated by CBO 17.8 18.2 18.4 18.5 19.2

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

25-692 0-90- 4
86 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

FMS financing for the next five years is slightly below the projected

rate of inflation. Financing for Israel and Egypt is frozen at $1.8

billion and $1.3 billion, respectively, with the entire outlay savings in

1991, relative to the baseline, resulting from the nominal freeze for

Israel. Since these two countries represent 64 percent of the program,

the request offers a real increase of 6 percent in financing for the rest of

the world, with the Philippines, Turkey, Portugal, and the American

republics receiving the largest increases. The President is again requesting that all FMS assistance be provided as grants. In recent

years, only Greece and Turkey have received financing in the form of

loans at concessional rates. These two countries would be the beneficiaries of an all-grant program.

Public Law 480. Food Aid. In 1991, the President is requesting $80

million less than was appropriated in 1990, and a cut in new spending

authority from $1,522 million to $1,463 million, for the Public Law 480

food aid program. The anticipated drop in commodity costs, especially

wheat, would permit an estimated increase in the shipment of commodities from 5.7 million metric tons in 1990 to 5.9 million metric tons

in 1991. Shipments in 1992 through 1995 are projected to exceed 6 million metric tons each year. Rather than reflecting a program cut, savings occur relative to the baseline because the Balanced Budget Act requires the use of the GNP deflator instead of a commodity price deflator.

Other Foreign Aid. The President is requesting full funding of scheduled contributions and subscriptions to the multilateral development

banks (MDBs) and funding to compensate for past cuts in the scheduled payments, or arrearages. In the aggregate, the 1991 request is a

one-time increase over baseline budget authority for the MDBs. This

increase is largely offset, however, by a lower request for the contribution to the subsidy account of the International Monetary Fund's enhanced structural adjustment facility. In other programs, the President is requesting a one-time increase for migration and refugee assistance, increases in all years for international narcotics control, and a

cut in voluntary contributions to international organizations.
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 87

Conduct of Foreign Affairs

The conduct of foreign affairs includes funds for the State Department

for carrying out relations with foreign governments. It also includes

funds for assessed payments to international organizations of which

the United States is a member.

International Organizations and Conferences. The United States pays

assessed contributions to international organizations such as the

United Nations, and also pays a share of the expenses for international

peacekeeping activities in regions such as the Middle East. Since

1986, arrearages have been accumulating for many of these programs

because appropriations have fallen short of assessments. The President proposes full funding for payment of arrearages in 1991, and full

funding of assessments for the five-year period. These proposals increase spending by $0.8 billion in 1991 and $0.2 billion annually thereafter.

State Department. The President proposes $270 million in 1991 for a

new embassy building in Moscow. This request would increase outlays

by about $10 million in 1991 and by $270 million over the five-year

period. The Administration is requesting a funding increase in 1991

for salaries and expenses, but funding increases in later years do not

keep pace with inflation.

Foreign Information and Exchange Activities

In 1990, the Congress appropriated $183 million for the construction of

a radio relay station in Israel for the Board for International Broadcasting and the U.S. Information Agency. The savings of $0.8 billion

over the five-year period relative to the baseline reflects the completion of this project and the baseline's inclusion of funds for similar

projects even though none is currently planned.

Eximbank

The President is requesting a direct loan limit of $500 million for

Eximbank, or a real reduction of more than 20 percent. Direct loan

obligations would be reduced by $0.8 billion through 1995, resulting in
88 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

outlay savings relative to the baseline of $0.3 billion. Appropriations

for the bank's tied-aid program would be held at baseline levels for the

next two years. The request does not include new funds for the Congressionally initiated interest equalization program.

CBO REESTIMATES OF THE ADMINISTRATION'S

REQUEST FOR INTERNATIONAL AFFAIRS

CBO reestimates to the President's request result from both economic

and technical estimating assumptions. CBO's assumption of higher interest rates increases the interest income of the Exchange Stabilization Fund by $0.1 billion in 1990 and $1.5 billion over the next six

years (see Table IV-9). Technical reestimates are discussed below.

Foreign Military Sales Financing. Disbursements for foreign military

sales financing-grants and credits for foreign military sales—have

been falling faster than reductions in new appropriations since 1987.

This has resulted in the buildup of large undisbursed and uncommitted

balances concentrated in programs in a few countries. The Administration's estimate assumes that these balances will be drawn down

over the next two years. However, new sales have not yet materialized. Even if the uncommitted balances were applied to new sales of

military equipment and services, disbursements for procurement

would be spread over at least five years.

International Organizations. Membership in various international

organizations, such as the United Nations and its affiliated agencies,

entails a treaty obligation to pay an assessed portion of the organization's operating expenses. The assessed payment is due in the organization's fiscal year. The Administration is proposing to pay in full

amounts due in calendar year 1990 with the fiscal year 1991 appropriation. While the Administration is asking for an appropriation for

arrearages incurred through 1990, in 1991 it proposes to pay only a

portion of the amounts due for those earlier years. CBO estimates,

however, that any funds appropriated to pay arrearages will be spent

in the first year of availability, consistent with historical spendout

rates.
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 89

Eximbank. The President's request includes a sharp increase in disbursements for direct loans and a deterioration in the collection rate on

outstanding loans. The CBO estimate assumes no sharp change from

the disbursement and collection experience of the last eight quarters.

State Department. The Administration estimates that 1991 outlays

for the Department of State's foreign buildings account will fall below

the 1989 level. CBO estimates that spending will be $0.5 billion higher over five years than the Administration estimates for three reasons:

the large increase in construction funds the department received in

1990, the requested reprogramming of $65 million in unobligated balances for construction security in 1991,, and the change in policy away

TABLE IV-9. CBO REESTIMATES OF PROPOSED SPENDING

IN THE PRESIDENT'S BUDGET FOR FUNCTION 150,

INTERNATIONAL AFFAIRS

(By fiscal year, in billions of dollars)

1990 1991 1992 1993 1994 1995

President's 1991 Budget 14.6 18.2 19.4 18.8 18.9 19.7

CBO Reestimates

Economic (Exchange

Stabilization Fund) -0.1 -0.2 -0.3 -0.3 -0.3 -0.3

Technical reestimates

Foreign military sales

fund -0.1 -0.7 -1.0 -0.1 -0.2 -0.2

International

organizations 0.0 0.5 -0.1 -0.1 -0.1 -0.1

Export-Import Bank -0.3 -0.3 -0.2 -0.2 -0.1 -0.1

State Department

administration 0.1 0.2 0.2 0.2 0.1 0.0

Other -0.1 0.0 0.2 0.2 0.2 0.1

Subtotal -0.3 -0.2 -0.9 0.0 -0.1 -0.2

Total -0.4 -0.4 -1.2 -0.3 -0.3 -0.5

President's 1991 Budget

as Estimated by CBO 14.1 17.8 18.2 18.4 18.5 19.2

SOURCES: Office of Management and Budget; Congressional Budget Office.
90 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

from full funding of construction projects. CBO also expects spending

for salaries and expenses to be $0.3 billion higher during the same

period.
CHAPTER V

THE ADMINISTRATION'S

DOMESTIC PROPOSALS

Domestic programs account for most of the deficit reductions in President Bush's proposed 1991 budget. The President's budget, if enacted,

would reduce three broad categories of domestic spending—entitlements and other mandatory programs, nondefense discretionary

spending, and offsetting receipts~by about $18 billion below baseline

levels in 1991. Savings in these three categories would exceed $150

billion over the 1991-1995 period. Additional savings would occur in

the other domestic spending category, net interest, as the deficit reductions proposed by the Administration shrink the borrowing needs of

the government.

Some domestic programs would fare better than others. The biggest domestic program, Social Security, would change only negligibly,

as would many other major benefit programs. But several large entitlement programs—notably Medicare, federal employees' retirement

and health benefits, and farm price supports—are targeted for significant reductions by the President. The Administration would change

the current mix of discretionary spending, boosting spending in selected areas (chiefly science and space, subsidized housing renewals,

and air traffic control) beyond baseline levels but curtailing a host of

others. Finally, the President proposes to sell or lease a variety of federal assets and collect new or increased fees from users and beneficiaries of selected government programs.

This chapter summarizes the chief domestic spending proposals in

the President's 1991 budget. Programs slated for the biggest

changes—whether savings or increases—relative to the baseline are

highlighted. The introduction summarizes major proposals within the

four broad categories of spending typically used by the Congress and

the Administration: entitlements and other mandatory spending (primarily benefit programs), nondefense discretionary programs, offsetting receipts, and net interest, Offering a more detailed perspective,

the rest of the chapter shows how the President's proposals would
92 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

affect spending in 18 budget functions, each covering specific domestic

needs.

ENTITLEMENTS AND OTHER MANDATORY SPENDING

Entitlements and other mandatory spending constitute nearly half of

federal outlays and are the fastest-growing category of spending under

baseline assumptions. Entitlement and mandatory programs make

payments to people, businesses, or other applicants who meet eligibility rules set by law. This category includes most of the benefit programs of the government (notably Social Security, Medicare and Medicaid, unemployment compensation, and others) along with programs

such as farm price supports and deposit insurance.

The President's proposals would curtail the growth of this category, with the bulk of the reductions clustered in a handful of major

programs (see Table V-l). The fast-growing Medicare program accounts for the biggest proposed savings in 1991, approximately $5 billion; savings would climb to almost $10 billion in 1995. The proposed

savings would amount to roughly 5 percent of Medicare benefit outlays

in all years. Major proposals include cutting capital reimbursements

for hospitals and special payments to teaching hospitals, restricting

future increases in payments to hospitals and physicians, and accelerating reforms designed to reduce the government's outlays for overpriced services. The President also proposes to hike the premiums paid

by Medicare beneficiaries beyond the levels that would prevail under

current law and proposes modest changes in Medicare administrative

costs, separate recommendations that are classified as offsetting receipts and discretionary spending, respectively.

Federal employees' retirement is marked for almost $3 billion in

savings in 1991 and $6.5 billion in 1995. The Administration urges

reducing cost-of-living adjustments to retirees and eliminating the option to take a portion of benefits in a lump sum at retirement. The resulting savings would amount to about 4 percent of total outlays in

these programs in 1991 and 8 percent by 1995. Farm price supports

(administered by the Commodity Credit Corporation, or CCC) and crop

insurance are targeted for $1.5 billion in savings in 1991 and $6.1

billion in 1995; the Administration favors eliminating the crop insurance program, but leaves the CCC savings unspecified.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 93

Federal employees' and annuitants' health benefits are singled out

for savings of approximately $2 billion a year in 1991 through 1995.

Roughly half of the proposed savings were not specified in the budget,

but await submission of the Administration's proposals to reform the

Federal Employees Health Benefits program. The remaining savings

involve directing the District of Columbia government and the U.S.

TABLE V-l. CBO ESTIMATES OF THE PRESIDENTS PROPOSALS

FOR ENTITLEMENTS AND OTHER MANDATORY

SPENDING (By fiscal year, in billions of dollars)

Cumulative

Spending Proposal Five-Year

and Function 1991 1992 1993 1994 1995 Changes

CBO Baseline* 648.0 654.5 711.2 751.1 803.6

Proposed Changes

Medicare (570) -5.2 -6.9 -7.8 -8.7 -9.6 -38.3

Federal employees'

retirement (600) -2.7 -4.3 -5.0 -5.7 -6.5 -24.2

Farm price supports and

crop insurance (350) -1.5 -3.7 -5.0 -5.4 -6.1 -21.7

Federal employees' and

annuitants' health

benefits (550 and 920) -1.6 -1.7 -1.8 -2.0 -2.1 -9.2

Child nutrition (600) -0.7 -0.8 -0.9 -1.0 -0.8 -4.2

Child care tax credit (500) 0.2 1.8 2.0 2.1 2.3 8.5

Other -1.4 -2.7 -2.8 -2.7 -3.1 -12.7

Total -12.9 -18.3 -21.3 -23.4 -25.9 -101.8

President's 1991 Budget

as Estimated by CBO 635.1 636.2 689.9 727.7 777.6

SOURCE: Congressional Budget Office.

NOTE: Most domestic budget functions contain spending in all three categories-entitlements and other

mandatory spending, nondefense discretionary programs, and offsetting receipts. This table

summarizes only spending that is classified in the first of these three categories.

a. Includes a small amount of mandatory spending in the international affairs function, discussed in

Chapter IV. No changes are proposed.
94 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Postal Service to pay a greater share of their annuitants' health

costs~a change that would require the Postal Service to raise postage

rates or cut other spending.

The Administration proposes to reform the child nutrition program through enhanced targeting, ending subsidized meals for students with household incomes well above the poverty line (while increasing benefits modestly for some poorer students). Finally, emphasizing the wide variety of formal and informal child care arrangements that parents use, the Administration advocates creating a

new, refundable tax credit for low-income working families with children and making the current child and dependent care tax credit refundable. Refundable tax credits result in direct payments to families

if the credit exceeds their income tax liabilities. The refundable portions are conventionally treated as budget outlays, just as if they were

straightforward transfer programs.

Other proposals affecting entitlement and mandatory programs

would reduce spending below baseline levels by $1.4 billion in 1991

and by $13 billion in 1991 through 1995. These budget-cutting

initiatives would affect a wide range of programs, including assistance

to Puerto Rico, veterans' compensation and pensions, student loans,

several social service programs, and activities of the Federal Housing

Administration and the power marketing administrations (PMAs).

NONDEFENSE DISCRETIONARY SPENDING

Nondefense discretionary programs encompass a wide variety of federal activities that are controlled through the annual appropriation

process. The Congress votes anew each year on funding for these programs. In the baseline, as specified by the Balanced Budget Act, funding levels are assumed to keep pace with inflation, rising by about 4

percent per year. Such increases would maintain today's level of real

resources for discretionary programs, but do not provide enough money

for new initiatives, including some projects that are in their early

stages.

On balance, domestic discretionary programs contribute about

$2.1 billion to President Bush's proposed deficit reductions in 1991,
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 95

and about $25 billion over the 1991-1995 period (see Table V-2).

Within this broad category of spending, the President's budget recommends distinct changes in the allocation of resources.

The first four areas listed in Table V-2 are slated for significant increases in spending, relative to baseline levels. The President proposes

above-inflation increases for the space program, listing the space station, manned missions to the moon and Mars, and space-based climate

and geophysical research (dubbed the "Mission to Planet Earth") as

key priorities. Additional funds for housing assistance are needed primarily to renew the large number of existing contracts that will expire

in the next few years. Spending would surpass baseline levels for air

transportation under the Administration's proposals to enhance the air

traffic control system. And spending for general science and research

would exceed baseline levels, with additional funds earmarked for

National Science Foundation and Energy Department programs.

Other programs (not detailed in Table V-2) that the President has

chosen for major spending increases include Internal Revenue Service

assistance and enforcement, law enforcement and judicial programs,

the Federal Buildings Fund, and Head Start.

Curtailing other nondefense discretionary activities would generate significant deficit reductions. In dollar terms, the biggest reductions would occur in ground transportation, as the Administration

proposes to end subsidies to Aintrak and cut spending for highways

and mass transit. Restricting loans made by the Rural Electrification

Administration (REA) and the Farmers Home Administration

(FmHA) would yield considerable savings. For both REA and FmHA,

as well as for lending programs of the Small Business Administration

(SBA), the President proposes to shift from direct federal loans to private financing with partial federal guarantees. Under current budget

accounting, such a shift reduces the deficit, because the budget counts

direct loans as outlays but defers recognition of defaults on guaranteed

loans (while recording receipts from guarantee fees at the outset). But

even though standard accounting practices exaggerate the savings, the

President's proposal would reduce the subsidies afforded to borrowers

and would limit the government's overall exposure.
96 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

TABLE V-2. CBO ESTIMATES OF THE PRESIDENTS PROPOSALS

FOR NONDEFENSE DISCRETIONARY SPENDING

(By fiscal year, in billions of dollars)

Spending Proposal

and Function 1991 1992 1993 1994

Cumulative

Five-Year

1995 Changes

CBO Baseline

Domestic functions

International affairs*

201.9

18.0

210.3

19.1

217.6

19.6

225.5

19.9

233.1

20.7

Total

Proposed Domestic Changes

Space (250)

Housing assistance (600)

Air transportation (400)

General science and

research (250)

Amtrak, mass transit,

and other ground

transportation (400)

Rural Electrification

and Farmers Home

Administration

programs (various)

Census (370)

Disaster relief and

insurance(450)

Other

Subtotal

International affairs (150)a

Total

President's 1991 Budget

as Estimated by CBO

Domestic functions

International affairs*

Total

219.9

-1.3

-0.9

-0.6

0.1

-2.1

0.9

-1.2

199.8

18.9

229.4

-2.0

-1.2

-1.1

-0.8

-2.0

0.2

-1.8

208.3

19.3

237.1 245.4 253.8

1.3

0.2

0.1

0.2

•1.3

3.2

1.2

0.6

0.6

-2.5

4.6

2.1

1.1

0.8

-3.5

5.4

2.9

1.4

1.1

-4.3

5.8

3.7

1.6

1.2

-5.1

20.3

10.2

4.9

3.9

-16.6

-2.6

-1.3

-1.4

-3.8

-4.0

-3.9

213.6

19.6

-3.2

-1.5

-1.5

-7.0

-6.5

-6.5

219.0

19.9

218.7 227.6 233.2 238.9

-3.7

-1.5

-1.5

-10.7

-10.3

-0.4

-10.7

222.8

20.3

243.1

-12.7

-6.4

-6.0

-22.3

-24.8

0.7

-24.1

SOURCE: Congressional Budget Office.

NOTE: Most domestic budget functions contain spending in all three categories—entitlements and other

mandatory spending, nondefense discretionary programs, and offsetting receipts. This table

summarizes only spending that is classified in the second of these three categories.

a. The President's proposals for international affairs spending were discussed in Chapter IV.

b. Less than $50 million.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 97

Two categories that feature large spending reductions-census activities and disaster relief and insurance—illustrate an anomaly of

baseline projections. Because of the decennial census and two recent

natural disasters (Hurricane Hugo and California's Loma Prieta earthquake), both programs will generate large outlays in 1990; the Administration's budget envisions a return to more normal spending levels,

well below 1990's level adjusted for inflation. Other discretionary activities that are targeted for major spending reductions include

education and training, community and regional development, agriculture, health research and delivery of health care services, and low income energy assistance.

Nondefense discretionary programs are controlled through the appropriation process, in which the Congress sets budget authority or

TABLE V-3. NONDEFENSE DISCRETIONARY SPENDING,

FISCAL YEAR 1991 (In billions of dollars)

CBO Baseline

Committee and

Subcommittee

Appropriations Committee

Commerce, Justice, State

District of Columbia

Energy and Water

Foreign Operations

Interior

Labor, Health and Human

Services, Education

Legislative Branch

Rural Development,

Agriculture

Transportation

Treasury, Postal Service

Veterans, Housing and

Urban Development,

Independent Agencies

Subtotal

Other Committees

Total

Budget

Authority

19.6

0.6

9.2

14.7

12.3

46.4

2.1

9.5

13.3

10.3

51.8

189.7

20.1

209.8

Outlays

18.6

0.6

9.1

12.6

11.6

52.4

2.0

9.4

28.9

10.2

57.7

213.1

6.8

219.9

President's

Budget as

Estimated

by CBO

Budget

Authority

18.8

0.5

9.1

14.9

10.7

46.8

2.3

7.2

11.4

9.9

59.2

190.7

20.2

210.9

Outlays

19.0

0.5

9.0

12.8

11.2

52.3

2.2

7.7

27.9

10.1

59.3

212.0

6.7

218.7

Difference

Budget

Authority

-0.8

a

-0.1

0.2

-1.7

0.4

0.2

-2.3

-1.9

-0.4

7.4

1.0

0.1

1.1

Outlays

0.4

a

-0.1

0.2

-0.4

-0.1

0.2

-1.7

-1.0

-0.1

1.6

-1.1

-0.1

-1.2

SOURCE: Congressional Budget Office,

a. Less than $50 million.
98 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

other limitations on agencies' ability to commit funds, thereby influencing actual outlays. The Congress focuses on 13 regular appropriation bills, two of them dealing exclusively with the defense budget.

Table V-3 shows the implications of the President's proposals for the

remaining 11 nondefense bills. One subcommittee would mete out

substantially greater budget authority, compared with the baseline, if

the President's proposals for fiscal year 1991 are enacted: the

Veterans, Housing and Urban Development, and Independent Agencies subcommittee has jurisdiction over both subsidized housing and

the space program-two programs targeted for substantial increases by

the President. Major reductions in budget authority would face the

Subcommittees on Commerce, Justice, and State (with jurisdiction

over the census), Interior (responsible for many energy and natural

resource programs), Rural Development and Agriculture, and Transportation.

OFFSETTING RECEIPTS

Offsetting receipts are recorded in the budget as negative outlays,

rather than as revenues. Most are intrabudgetary or are collected by

the government in the course of voluntary, business-type transactions.

President Bush's proposed 1991 budget would increase offsetting

receipts—thereby reducing the deficit—by $2.9 billion in 1991, and by

an average of $5 billion a year in the 1991-1995 period. Key proposals

are shown in Table V-4.

The Administration proposes to sell or lease a variety of federal

assets. The Reagan and Bush Administrations have been rebuffed in

previous years' budgets when they advocated selling the naval petroleum reserves; now, the Administration recommends leasing the reserves. Like an outright sale, this proposal would reduce the deficit

immediately (by an estimated $1 billion in 1991), but lease and royalty

income in subsequent years would not quite offset the loss of income

from continued production under government ownership. The Administration proposes to sell selected power marketing administrations

(PMAs), namely Alaska and part of Southeastern; CBO estimates that

significant proceeds would not occur until 1992. Auctioning a portion

of the unassigned electromagnetic spectrum would earn an estimated

$0.4 billion in both 1991 and 1992 for the Federal Communications
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 99

TABLE V-4. CBO ESTIMATES OF THE PRESIDENTS PROPOSALS

FOR OFFSETTING RECEIPTS

(By fiscal year, in billions of dollars)

Spending Proposal

and Function 1991 1992 1993 1994

Cumulative

Five-Year

1995 Changes

CBO Baselines

Proposed Changes

-60.4 -63.4 -66.0 -69.3 -72.8

Naval petroleum reserves

leasing (950 and 270)b

Sale of power marketing

administrations

(950 and 270)">

Federal Communications

Commission auctions

(950)

Arctic National Wildlife

Refuge (950)

Unspecified asset sales

(950)

Medicare premiums (570)

Customs user fees (750)

Government-sponsored

enterprise fees (800)

Other domestic

Total

President's 1991 Budget

as Estimated by CBO*

-1.0

-0.1

-0.4

0

0

0

-0.7

-0.1

-0.7

-2.9

-63.2

0.3

-1.2

-0.4

0

-1.6

-0.5

-0.8

-0.3

0.2

-4.3

-67.8

0.3

0.1

0

-1.6

-1.6

-1.7

-0.8

-0.7

0.2

-5.8

-71.7

0.6

0.1

0

c

-1.6

-3.0

-0.8

-0.9

0

-5.5

-74.9

0.6

0.1

0

-0.9

-1.6

-4.5

-0.8

-1.1

0.4

-7.9

-80.7

0.7

-1.0

-0.8

-2.5

-6.4

-9.7

-3.7

-3.0

0.1

-26.4

SOURCE: Congressional Budget Office.

NOTE: Most domestic budget functions contain spending in all three categories-entitlements and other

mandatory spending, nondefense discretionary programs, and offsetting receipts. This table

summarizes only spending that is classified in the third of these three categories.

a. Includes offsetting receipts in the international affairs function, discussed in Chapter IV. No changes

are proposed.

b. Further savings of several hundred million dollars a year would be realized in the costs of

administering the naval petroleum reserves and the power marketing administrations. These

savings are classified as discretionary.

c. Less than $50 million.
100 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Commission. Opening the Arctic National Wildlife Refuge to oil and

gas exploration and development would generate an estimated $1.6

billion in 1993 and another $900 million in 1995. Unspecified asset

sales are targeted to yield $1.6 billion a year in 1992 through 1995.

The Administration proposes to increase Medicare premiums beginning in 1992 beyond the levels that would prevail under current

law, yielding an extra $0.5 billion in 1992 and an extra $4.5 billion in

1995. Increases in these premiums, under current law, cannot exceed

the rate of inflation, and thereby fail to keep up with costs in the

fast-growing Supplementary Medical Insurance (SMI) program for

which they are earmarked. The Administration's proposal would keep

total collections from premiums at about 25 percent of SMI program

costs. The President's budget proposes to extend certain user fees that

finance the processing of passengers and merchandise by the Customs

Service, otherwise slated to expire later this year. Fees would be

collected from government-sponsored enterprises, such as the Federal

National Mortgage Association (Fannie Mae) and the Federal Home

Loan Mortgage Corporation (Freddie Mac), whose securities enjoy

special standing in the credit markets even though they do not bear the

full faith and credit of the government. The Administration also

proposes to charge a variety of increased user fees for Coast Guard

services, recreational resources, and licensing and inspection.

NET INTEREST

Net interest spending is not controlled directly, but reflects the impact

of other spending and revenue decisions made by policymakers. The

Administration's budget proposals, if fully enacted, would reduce

federal government deficits and borrowing needs significantly below

baseline levels. Large savings in interest costs would result. As shown

in Table V-5, adopting the Administration's proposals would reduce

net interest costs by $1.1 billion below the baseline in 1991, and by $17

billion in 1995. Federal debt held by the public at the end of 1995

would reach about $2.7 trillion-higher than today's figure, but nearly

$300 billion below the level that would be reached in the absence of

policy changes. And the ratio of federal debt to GNP, which falls

gradually even in the baseline, would drop more sharply under the

President's proposed policies: from 43 percent at present to 36 percent

by 1995.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 101

TABLE V-5. CBO ESTIMATES OF THE PRESIDENTS PROPOSALS

FOR FEDERAL DEBT AND NET INTEREST COSTS

(By fiscal year)

1990 1991 1992 1993 1994 1995

Net Interest Outlays

(In billions of dollars)

CBO Baseline 178.8 184.0 190.1 198.2 204.1 208.2

Proposed Changes a -1.1 -3.7 -6.9 -11.3 -17.0

President's 1991 Budget

as Estimated by CBO 178.7 182.9 186.5 191.3 192.8 191.2

Federal Debt Held by the Public

(In billions of dollars)

CBO Baseline 2,344 2,504 2,627 2,758 2,878 2,988

President's 1991 Budget

as Estimated by CBO 2,343 2,472 2,555 2,633 2,678 2,689

Federal Debt Held by the Public

(As a percentage of GNP)

CBO Baseline

President's 1991 Budget

as Estimated by CBO

43.0

43.0

43.2

42.6

42.5

41.3

41.9

40.0

41.1

38.2

40.0

36.0

SOURCE: Congressional Budget Office,

a. Less than $50 million.

THE PRESIDENTS DOMESTIC PROPOSALS BY FUNCTION

The remainder of this chapter presents detailed descriptions of the

President's proposals as they affect 18 budget functions, covering the

entire domestic budget. Budget functions summarize federal spending

that addresses a specific national need. Most functions include all

three types of spending-entitlements, discretionary spending, and

offsetting receipts-discussed above. The analyses feature additional
102 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

details about the savings or increases in spending compared with the

CBO baseline, and summarize the key estimating differences--

stemming from contrasting economic assumptions or from other, technical factors-between the CBO and the Administration's Office of

Management and Budget (OMB) projections.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 103

FUNCTION 250: GENERAL SCIENCE. SPACE. AND TECHNOLOGY

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item 1991 1992 1993 1994

Cumulative

Five-Year

1995 Changes

CBO Baseline

Proposed Changes

15.2 15.7 16.1 16.8 17.5

National Aeronautics and

Space Administration

Space station

Space shuttle

Space science

Other NASA

National Science

Foundation

Department of Energy

Superconducting

super collider

Other general

science research

Total

President's 1991 Budget

as Estimated by CBO

President's 1991 Budget

CBO Reestimates

0.4

0.6

0.4

a

0.1

0.1

_a

1.5

16.7

16.6

0.1

1.0

0.9

1.1

a

0.3

0.2

01

3.6

19.3

19.4

a

1.3

1.0

2.1

0.1

0.5

0.3

0.1

5.3

21.4

21.4

a

1.2

1.0

3.0

0.1

0.7

0.2

(U

6.3

23.2

22.9

0.2

0.8

1.2

3.8

a

0.9

0.3

OJL

6.9

24.4

24.0

0.4

4.6

4.7

10.4

0.2

2.5

1.1

0.3

23.7

a. Leas than $50 million.

Proposed Policy Changes

In conjunction with the President's theme of "Investing in the Future,"

programs in function 250 are slated for major increases in the 1991

budget. Beginning with a 22 percent increase in budget authority for

1991 (over the 1990 level), spending would be 29 percent above the

baseline for the 1991-1995 period. This increase would be distributed

among all the agencies in the function. Outlays for the National Aeronautics and Space Administration (NASA) would increase by 31 percent over the baseline; Department of Energy (DOE) general science
104 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

programs would rise by 23 percent; and the National Science Foundation (NSF) would get a 21 percent increase. For all of these major

spending proposals, the 1991 level would be only a down payment on

future spending requirements; the budget includes further spending

increases in later years to carry out these proposals.

Much of the increased spending would go toward completing two

major science projects—the space station and the superconducting

super collider (SSC). Both projects are targeted for funding at levels

significantly above the CBO baseline. The President's budget includes

a three-year advance appropriation request for the space station:

$2.5 billion for 1991, $2.9 billion for 1992, and $3.0 billion for 1993,

compared with $1.7 billion in 1990. NASA's request also includes

$4.7 billion in spending above the baseline for the shuttle program,

mostly for an increase in shuttle flights but also for shuttle modifications needed to support construction of the space station. For the SSC,

the President is seeking $312 million for 1991, $559 million for 1992,

and $503 million for 1993, compared with $219 million for 1990.

Spending for the remainder of the DOE general science budget would

increase at a slightly faster rate than the baseline.

Two main features of this budget-NASA's human exploration initiative and the Mission to Planet Earth—are at the beginning of their

funding cycle. The human exploration initiative includes plans for a

lunar base and a mission to Mars. The Mission to Planet Earth, which

features the launch of Earth-observing satellites, would be a centerpiece of the Administration's Global Change Research Program. Total

funding requested for these programs for 1991 is around $450 million.

Their funding is scheduled to increase quickly, however, and the President proposes to spend roughly $10 billion on them through 1995.

The President is also proposing to continue increasing the size of

the NSF budget. For 1991, the NSF appropriation would increase by

$300 million above the 1990 level of $2.1 billion. Increases would continue in subsequent years, with the agency's appropriation rising to

$3.5 billion in 1995. Spending over this period would be $2.5 billion

above the baseline. All major parts of the NSF budget-research and

related activities, science and engineering education, and the Antarctic program-would receive increased funding.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 105

CBO Reestimates

CBO estimates for outlays are very close to the Administration's figures in most years, but are slightly higher for space science research

and development in 1994 and 1995.
1

106 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

FUNCTION 270: ENERGY

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item

CBO Baseline

Proposed Changes

Power marketing reforms

Rural electrification

Nuclear regulation fees

Fossil energy research

and development

Conservation

Strategic Petroleum

Reserve

Sale of power marketing

administrations3

Lease of naval petroleum

reserves3

Energy supply research

and environmental

restoration

Other

Total

President's 1991 Budget

as Estimated by CBO

President's 1991 Budget

CBO Reestimates

1991

4.5

0

-0.1

-0.3

-0.1

-0.1

-0.1

0

0

0.1

-0.1

-0.6

3.9

3.0

0.9

1992

4.4

-1.0

-0.3

-0.3

-0.2

-0.2

-0.1

b

0.6

0.2

_b

-1.3

3.1

3.1

b

1993

5.1

-0.9

-0.6

-0.3

-0.2

-0.2

-0.1

0.1

0.5

0.2

_b

-1.5

3.7

3.2

0.5

1994

5.5

-0.9

-0.9

-0.3

-0.3

-0.3

-0.1

0.1

0.5

0.3

_b

-1.9

3.6

3.0

0.6

Cumulative

Five-Year

1995 Changes

5.2

-0.8

-1.1

-0.4

-0.3

-0.3

-0.1

0.1

0.4

0.1

-0.3

-2.6

2.6

2.6

b

-3.5

-3.0

-1.7

-1.1

-1.0

-0.5

0.3

1.9

1.0

-0.4

-7.8

a. The receipts from the proposed lease of the naval petroleum reserves and the proposed sale of the

Alaska and portions of the Southeastern power marketing administrations are shown in function

950. Outlays in function 270 would increase, relative to the baseline, after these proposed asset

transactions, because the assets would no longer generate direct receipts to the government.

b. Less than $50 million.

Proposed Policy Changes

The President proposes to increase receipts and cut spending in energy

programs, which together would reduce net outlays in function 270 by

12 percent below the baseline in 1991. The effect of these proposals
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 107

accelerates over time, reducing outlays by 50 percent below the baseline in 1995. Outlay savings would total $0.6 billion in 1991 and

$7.8 billion over the 1991-1995 period. These savings are net of losses

in receipts that would result from the proposed sale of the Alaska

Power Marketing Administration (PMA) and part of the Southeastern

PMA, and from the proposed lease of the naval petroleum reserves

(NPRs). Excluding the outlay effects of these asset transactions, outlay savings would total about $10.0 billion from 1991 through 1995.

Most of the proposed spending reductions are similar or identical to

ones that have been included in previous budgets.

Power Marketing Repayment Reforms. The President is seeking to

raise interest rates and speed up principal repayments to the Treasury

made by PMAs. These reforms would increase the price of federally

generated hydropower, and would increase offsetting receipts by $3.5

billion over the 1991-1995 period, assuming the policy can by fully implemented in 1992.

Rural Electrification. The President proposes to eliminate most direct

federal loans to rural electric and telephone cooperatives after 1990,

and to discontinue appropriations to the revolving fund that administers such loans. The proposed 1991 loan level is almost 90 percent

below the baseline total of $1.8 billion. These direct loans would be

replaced with partial federal guarantees of privately financed loans.

Borrowers would pay a fee on the guaranteed portion of new private

loans. These proposals would save an estimated $3.0 billion over the

1991-1995 period.

Nuclear Regulatory Commission Fees. The President proposes to increase fees charged by the Nuclear Regulatory Commission (NRG) to

nuclear utilities so that they would cover 100 percent of the agency's

budget, excluding any amounts appropriated to NRG from the nuclear

waste fund. Under current law, NRG is required to charge fees covering 33 percent of its budget in 1991. Over the five-year period, the proposal to raise fees would increase receipts by $1.7 billion.

Fossil Energy Research and Development. The President's appropriation request for fossil energy in 1991 is 53 percent below the baseline

level. Under the proposed budget, federal spending for fossil energy

research and development would be reduced by $1.1 billion, or 46 per-
108 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

cent, over the 1991-1995 period. Nearly all of the proposed reduction is

in funding for research on the use of coal.

Conservation. The appropriations requested for energy conservation

in 1991 represent a reduction of 50 percent relative to the baseline.

Over five years, conservation spending in the budget is $1.0 billion, or

46 percent, below baseline levels. About $0.7 billion of this reduction

would result from cuts in grants to states for energy conservation programs, with the remainder from reductions in conservation research

and development activities.

Strategic Petroleum Reserve. The President proposes to fill the Strategic Petroleum Reserve (SPR) at rates varying between 50,000 and

60,000 barrels per day over the 1991-1995 period. Ten million barrels

would be set aside as a defense petroleum inventory, if the Administration's proposal to sell lease rights to the NPRs is also adopted. CBO

estimates that the budget plan would yield a total of about 685 million

barrels in the SPR by the end of fiscal year 1995. By comparison, the

baseline would allow for fill rates between 60,000 and 70,000 barrels

per day over the next five years, for a total of about 710 million barrels

at the end of 1995. As of January 1, 1990, the SPR contained 580 million barrels. The President's budget for the SPR would result in fiveyear savings of $0.5 billion, relative to the baseline.

Power Marketing Administrations and Naval Petroleum Reserves.

Income from the sale of the Alaska PMA and part of the Southeastern

PMA and from leasing the NPRs appears in budget function 950 and is

estimated to total $3.3 billion over the 1991-1995 period. These savings would be partially offset, however, by an increase in outlays in

function 270, because the government would no longer be collecting

receipts from selling oil or electricity produced by these assets. (For

NPR leasing, the government would receive annual royalty payments,

included in function 950). In 1992, the proposed asset sales would result in a loss of receipts of $0.6 billion, with similar losses in subsequent years. Over the five-year period, net outlays in function 270

would increase, relative to the baseline, by $1.9 billion from the sale of

NPR lease rights, and by $0.3 billion from the sale of the PMAs.

Energy Supply Research and Environmental Restoration. The President's proposals for energy supply research and environmental restoration activities would increase outlays by $1.0 billion over five years
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 109

from baseline levels. Most of the proposed increase is for waste cleanup

and other environmental work. The environmental restoration request of $429 million for 1991 is about 65 percent higher than the 1990

level. The President also proposes a 30 percent one-year increase, to

$116 million in 1991, in funding for solar and other renewable energy

sources.

Other. The budget also includes proposals to establish a governmentowned uranium enrichment corporation and to provide no additional

funding for the clean coal program beyond what has already been appropriated. CBO estimates that these proposals would lower outlays

by about $0.4 billion below the baseline for the 1991-1995 period.

CBO Reestimates

CBO's estimates of net outlays for function 270 under the President's

budget proposals are above the Administration's estimates by $0.9

billion in 1991. The largest estimating difference involves PMA repayment reform. The budget assumes that PMA rates could be increased

in time to collect an additional $1.0 billion in power receipts for 1991.

CBO estimates that such a large electric rate increase would require

more time to implement, and that additional receipts could not be

collected until 1992. Most of the remaining CBO reestimates are for

rural electrification loans; CBO expects higher outlays for approved

but unadvanced loans than are estimated in the President's budget,

particularly in 1993 and 1994.

"T"
110 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

FUNCTION 300: NATURAL RESOURCES AND THE ENVIRONMENT

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item 1991 1992 1993

Cumulative

Five-Year

1994 1995 Changes

CBO Baseline

Proposed Changes

Water resources

Conservation, land management, and recreational resources

Pollution control and

18.7 19.3

-0.1

-0.2

19.9

-0.4

-0.3

20.3

-0.5

-0.5

20.7

-0.8

-0.7

-1.8

-1.7

abatement

Other natural resources

Total

President's 1991 Budget

as Estimated by CBO

President's 1991 Budget

CBO Reestimates

0.1

_a

a

18.7

18.2

0.6

0.1

a

-0.3

19.1

18.9

0.1

-0.1

-0.1

-0.9

19.0

18.4

0.6

-0.5

-0.1

-1.6

18.7

18.3

0.3

-0.9

-0.4

-2.7

18.0

17.8

0.2

-1.3

-0.6

-5.5

a. Leas than $50 million.

Proposed Policy Changes

The President's budget for natural resources and the environment

would result in estimated outlays of $18.7 billion in 1991, the same as

the CBO baseline. Over the 1991-1995 period, however, the President's proposals would result in outlay savings relative to the baseline

totaling $5.5 billion, a reduction of about 6 percent. Spending in most

program areas would be held below baseline levels over the five-year

period.

Water Resources. The President's budget would result in outlays for

water resources programs that are below the baseline by $1.8 billion

through 1995. Most of these savings would result from reductions in

water development construction programs, with the largest reduction

in activities of the Bureau of Reclamation ($1.2 billion).
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 111

The total proposed budget authority of $4.3 billion for water resource activities in 1991 is about 2 percent ($80 million) below baseline

levels, resulting in first-year outlay savings of $18 million. This

amount reflects decreases from baseline levels of 10 percent ($95

million) for the Bureau of Reclamation's water development program

and 21 percent ($44 million) for the water conservation activities carried out by the Soil Conservation Service. Funding requested for the

Army Corps of Engineers' water resource development activities would

be 2 percent ($57 million) above the baseline.

Conservation, Land Management, and Recreational Resources. Proposed funding for conservation, land management, and recreational

activities totals $5.9 billion in 1991, 4 percent below the baseline projection of $6.2 billion. Major activities in this area would remain below

the baseline through 1995, with the exception of a new tree-planting

program to be administered by the Forest Service. Total outlays would

be below the baseline by $31 million in 1991 and by $1.7 billion over

the five-year period.

As part of the America the Beautiful Initiative, the President has

requested budget authority of $175 million a year for a new program to

finance technical assistance and cost-sharing for tree planting by private landowners and local communities. Additional spending would be

$131 million in 1991 and $0.8 billion over the 1991-1995 period.

The recreational land acquisition and construction activities to be

carried out by the Departments of Agriculture and the Interior are

slated for reductions relative to the baseline. The proposed appropriations of about $390 million a year would be $249 million below the

baseline in 1991 and would reduce outlays by about $50 million in

1991 and $1.0 billion over the five-year period.

The President's proposals for other activities carried out by the

Forest Service, including the timber sales program and road construction activities, would also result in outlay savings relative to the baseline of $59 million in 1991 and $0.8 billion through 1995. Similarly,

other activities of the Bureau of Land Management would remain below baseline levels in all years, with outlay savings of $68 million in

1991 and $0.6 billion over the five-year period.
112 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Pollution Control and Abatement. The budget for environmental programs would result in outlays that are $1.3 billion below the baseline

over the 1991-1995 period. By 1995, outlays would be about $0.9 billion, or 14 percent, below the baseline. The proposed phaseout of the

wastewater treatment construction grants program would produce

most of these savings~$ 1.7 billion over five years. Appropriations

would drop from $1.9 billion in 1990 to $1.6 billion in 1991 and to zero

in 1995. In addition, proposed fees for certain environmental services

would result in five-year outlay savings of nearly $0.2 billion. The

spending reductions would be partially offset by requested increases in

other programs. The President's budget includes spending for the

Superfund program that would be $0.4 billion above the CBO baseline

during the five-year period. Outlays for the Environmental Protection

Agency's (EPA's) operating programs would also exceed the baseline

by $0.1 billion through 1995; proposed 1991 appropriations would be

$149 million above the baseline. Much of the increase is to implement

proposed revisions to the Clean Air Act.

Other Natural Resources. The President's proposals for other natural

resources would lower spending by $0.6 billion relative to the CBO

baseline through 1995. The majority of these spending reductions—

$0.5 billion over five years-come from the operations, research, and

facilities of the National Oceanic and Atmospheric Administration.

The Administration also proposes to sell all assets of the Bureau of

Mine's helium operations, which would raise $12 million in 1991.

CBO Reestimates

The major estimating differences involve spending for emergency fire

fighting and EPA wastewater treatment construction grants. CBO's

estimate of emergency fire-fighting costs incurred by the Departments

of Agriculture and the Interior, which is based on a five-year historical

average, is approximately $1 billion higher than the President's over

the 1991-1995 period. CBO also estimates that the pace of outlays for

the construction grants program will quicken as a consequence of recent changes, resulting in spending that is $0.6 billion above the

amounts anticipated in the President's budget over the five years.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 113

FUNCTION 350: AGRICULTURE

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item

Cumulative

Five-Year

1991 1992 1993 1994 1995 Changes

CBO Baseline 16.3 17.4

Proposed Changes

Commodity Credit

Corporation -1.4 -3.1

Crop insurance -0.2 -0.7

Agricultural Credit

Insurance Fund -0.5 -0.6

Temporary emergency

food assistance 0.1 0.1

Other -0.1 Jll

Total -2.1 -4.4

President's 1991 Budget

as Estimated by CBO 14.3 13.0

16.0 15.5

-4.4

-0.8

-0.6

0.1

-0.2

-5.9

10.1

-4.8

-0.8

-0.6

0.1

-0.2

-6.4

9.2

14.7

-5.5

-0.9

-0.7

0.1

-0.2

-7.1

7.5

-19.3

-3.4

-2.9

0.6

-0.8

-25.9

Proposed Policy Changes

The Administration proposes to reduce spending on agriculture by

making unspecified cuts in farm commodity programs, by eliminating

the federal crop insurance program, by reducing direct loans to farmers

provided through the Farmers Home Administration, and by increasing user fees for the services provided by the Department of Agriculture (USDA). The budget also reduces funding for the Extension Service and for a number of other USDA activities, continues funding for

emergency food assistance that would otherwise expire, and increases

funding for agricultural research. CBO estimates that these proposals

would reduce outlays by $2.1 billion in 1991 and by $25.9 billion over

the 1991-1995 period, nearly one-third of spending projected under

baseline assumptions.

Commodity Credit Corporation (CCC). The budget includes outlay

reductions of $19.3 billion over the 1991-1995 period in the CCC's farm

price support programs. Virtually all of this reduction would come

from unspecified cuts, beginning with $1.5 billion in 1991 and rising
114 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

each year to $5.4 billion in 1995. These unspecified reductions total

$19.2 billion-29 percent of the Administration's current services estimate of CCC spending and 36 percent of CCC spending projected under

CBO baseline assumptions.

The Administration has not yet indicated what cuts are envisioned, either in the budget presentation or in testimony to the Congress on the farm bill. It has, however, indicated its intent to work

with the Congress to develop legislation that would accomplish the indicated savings. The CBO estimate of the President's budget includes

the Administration's savings estimates since they represent savings

that could be realized through legislation. Most of these cuts would

probably come from direct payments to farmers, which account for the

bulk of CCC spending. If these savings were realized by reducing target prices, for example, CBO estimates that reductions of about 5 percent per year beginning with the 1991 crops would be needed to meet

the Administration's savings goal. Other ways of cutting direct payments to farmers include cutting the acreage on which payments are

made or further limiting payments per farmer.

Crop Insurance. The Administration proposes to terminate the current

crop insurance program effective with the 1991 crop year. This action

would eliminate both administrative expenses and net indemnity

payments to farmers. CBO estimates savings of $0.2 billion in 1991

and $3.4 billion over the 1991-1995 period from eliminating the program. Even though the Administration has proposed to replace crop

insurance with a permanent disaster assistance program, the budget

includes no details of this program and no future costs for such disaster

assistance. The CBO baseline does not assume disaster assistance in

future years, so any proposal for permanent disaster assistance would

increase outlays relative to the baseline.

Agricultural Credit Insurance Fund (ACIF). As in several recent budgets, the President proposes to reduce the level of direct loans to farmers as well as the level of federal guarantees of private loans. The

President requests $525 million in new authority for direct loans for

farm operation and ownership in 1991, and a $50 million decrease in

the limit each year thereafter. (The limit on such direct loans in 1990

is $981 million.) The budget also includes a new funding request of

$33 million in 1991 to provide interest subsidies for some guaranteed
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 115

loans. These ACIF proposals would save about $2.9 billion over five

years relative to the CBO baseline.

Temporary Emergency Food Assistance Program (TEFAP). The Administration proposes to continue annual funding of commodity purchases under TEFAP at the 1990 level of $120 million, but requires

purchases to come first from surplus CCC inventories. The CBO baseline includes no TEFAP spending after 1990, because under current

law the program expires this year. The program's extension would add

$0.6 billion to TEFAP outlays and $0.2 billion to CCC receipts over five

years.

Other. The Administration's proposals for other agriculture programs

would result in net savings of $0.1 billion to $0.2 billion a year compared with the CBO baseline. The budget includes proposed user fees,

especially for the Animal and Plant Health Inspection Service, that

would result in savings of almost $0.5 billion over the 1991-1995 period. Proposed spending for the Extension Service and the Agricultural

Research Service is below the baseline. In contrast, the Agricultural

Marketing Service and the Cooperative State Research Service are

slated for increases totaling $0.2 billion above the CBO baseline over

the 1991-1995 period.

CBO Reestimates

CBO estimates outlays for agriculture programs that are lower than

the Administration's estimates in each year through 1995. The difference is $1.1 billion in 1990, $0.7 billion in 1991, and an average of

about $3 billion each year thereafter.

CBO estimates that agriculture outlays in 1990 will be $1.1 billion

less than projected by the Administration, mainly because of lower

CCC spending. Major crop program outlays will be about $0.6 billion

lower than projected by the President because CBO expects corn prices

for the 1989 marketing year to be about $0.10 per bushel higher, resulting in lower deficiency payments and outlays for nonrecourse

loans. CBO's estimate is below the Administration's by another $0.3

billion, mainly because CBO assumes that crop insurance indemnity

payments for the 1990 crops will be disbursed at the recent historical
_ . jL_J

116 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

rate rather than at the greatly accelerated rate assumed by the Administration.

In 1991, CBO estimates that agriculture outlays under the President's budget would be $0.7 billion lower than the Administration estimates. ACIF outlays are expected to be $0.3 billion higher, mainly because CBO projects sales of property in inventory to be lower than

estimated in the President's budget. CBO also projects that CCC outlays would be $1.1 billion lower, with $0.4billion of that difference

caused by higher estimated 1990 crop prices, particularly for corn and

wheat. CBO's price assumptions are based on recent USDA reports

that reflect smaller corn stocks and less acreage planted to wheat than

was expected when the Administration made its projections. Lower

estimates of corn and wheat deficiency payments are partly offset by

higher expected cash redemptions of generic commodity certificates

and defaults on export credit loan guarantees. Another $0.5 billion of

the 1991 CCC difference occurs because, unlike the Administration,

CBO REESTIMATES OF PROPOSED SPENDING IN THE

PRESIDENT'S BUDGET (By fiscal year, in billions of dollars)

1990 1991 1992 1993 1994 1995

President's 1991 Budget 14.6 14.9 15.6 13.5 11.8 10.4

CBO Reestimates

Commodity Credit

Corporation

Market assumptions -0.6 -0.4 -1.8 -2.4 -1.7 -2.0

Working capital change 0 -0.5 -0.8 -1.0 -1.0 -1.0

Other adjustments -0.2 -0.2 -0.1 -0.1 -0.1 -0.1

Subtotal -0.8 -1.1 -2.7 -3.5 -2.8 -3.1

Other ^3 1J a 0.1 0.1 0.3

Total -1.1 -0.7 -2.7 -3.4 -2.7 -2.8

President's 1991 Budget

as Estimated by CBO 13.5 14.3 13.0 10.1 9.2 7.5

a. Less than $50 million.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 117

CBO does not project any change in working capital, which has historically averaged near zero.

For 1992 through 1995, CBO outlay reestimates result primarily

from differences in CCC estimates, mostly reflecting lower corn stocks

and higher corn prices than assumed by the Administration, and differences in the assumption about working capital. CBO's outlay estimates for the CCC average about $3 billion per year below the Administration's over the 1992-1995 period.

25-692 0-90- 5
118 ANALYSIS OF THE PRESIDENT'S BUDGET Match 1990

FUNCTION 370: COMMERCE AND HOUSING CREDIT

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item

CBO Baseline

On-budget

Off-budget*

1991

46.4

0.7

1992

6.2

-0.8

1993

16.5

0.8

1994

4.1

-1.3

1995

6.4

-0.4

Cumulative

Five- Year

Changes

Proposed Changes

On-budget

Rural Housing

Insurance Fund -0.7 -1.0 -1.3 -1.6 -1.8 -6.4

Federal Housing

Administration Fund -0.4 -0.4 -0.4 -0.4 -0.4 -2.0

Periodic censuses -0.9 -1.2 -1.3 -1.5 -1.5 -6.4

Small Business

Administration -0.2 -0.2 -0.2 -0.2 -0.3 -1.1

Other ^1 :0.1 ^.1 ^.3 ^.3 -0.9

Total -2.2 -2.9 -3.4 -3.9 -4.3 -16.8

Off-budget (Postal

Service Fund) 0. 8 000 0 0. 8

President's 1991 Budget

as Estimated by CBO

On-budget 44.2 3.3 13.1 0.2 2.0

Off-budget* 1.5 -0.8 0.8 -1.3 -0.4

a. Postal Service Fund, which was taken off-budget by the Omnibus Budget Reconciliation Act of 1989

(Public Law 101-239).

Proposed Policy Changes

The Administration's proposals for spending for commerce and housing

credit are lower than baseline estimates in all years. The budget

would shift emphasis from direct loan programs for rural housing and

small business assistance to guaranteed loans, and would increase

guarantee fees. Mortgage insurance income would be increased, while

census activities would be reduced to reflect completion of the decennial census. Savings would total $2.2 billion in 1991 and $16.8 billion

over the 1991-1995 period relative to the CBO baseline.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 119

Rural Housing Insurance Fund (RHIF). The President's budget includes significant changes to the Farmers Home Administration's

rural housing programs. Currently, most of this assistance is provided

in the form of subsidized direct mortgage loans to low-income households or to developers of low-income rental housing. Beginning in

1991, the President proposes to replace some direct federal loans with

subsidized and unsubsidized guaranteed private loans. The budget for

1991 includes slightly more than $1 billion in direct loan authority and

$594 million for guarantees, compared with $2 billion in direct loan

authority in 1990. (Last year's budget request included only $100 million in RHIF direct loans.) According to Administration estimates, the

1991 request would provide direct; loans for about 24,260 households

and guarantees for another 10,400 borrowers, compared with 44,700

units assisted in 1990.

Low-income borrowers with guaranteed loans would benefit from

federal subsidies that would reduce effective interest rates on their

loans by an average of five percentage points. To fund these interest

subsidy payments, the President is requesting $362 million in 1991,

which is estimated to be sufficient to support 30 years of subsidies for

about 5,200 loans. Moderate-income borrowers with loan guarantees

would receive no assistance beyond the guarantee. In total, the President's budget proposals would lower RHIF outlays by $0.7 billion in

1991 and by $6.4 billion over the 1991-1995 period.

The Administration proposes to implement a rental voucher program patterned after that operated by the Department of Housing and

Urban Development. The $190 million requested for 1991 would assist

more than 7,000 units for five years and would partially offset the proposed cuts in loan authority. This program would be included in function 600.

Federal Housing Administration (FHA). The President's budget includes a proposal to extend the higher 1990 mortgage limits for FHA's

single-family insurance to 1991 and beyond through a permanent

change in the authorizing statute. These limits were increased-for

fiscal year 1990 only--in the Departments of Veterans Affairs and

Housing and Urban Development, and Independent Agencies Appropriations Act (Public Law 101-144). A permanent increase in the limit

would bring in additional receipts in the short run, because FHA would
120 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

insure more mortgages and collect additional up-front premiums.

Claims would also increase, but over many years.

In addition, the Administration proposes to offer cash settlements

to mortgage lenders to prevent claims on certain mortgages that are

not in default but are eligible for assignment to FHA. These loans are

covered by Section 221(g)(4) of the National Housing Act, which allows

lenders to assign them to FHA after 20 years and to receive full payment of the outstanding principal. Together, these changes would reduce outlays by $0.4 billion in 1991 and by $2.0 billion over the next

five years relative to the CBO baseline.

Periodic Censuses. In 1990, the Census Bureau received an unusually

high appropriation of $1.3 billion for periodic censuses and programs to

fund the decennial census. Consistent with the provisions of the Balanced Budget Act, the CBO baseline projects a continuation of this

high level of funding, while the President proposes 1991 funding of

$316 million to reflect completion of the decennial census. The President's proposal would reduce outlays by about $0.9 billion in 1991 and

by $6.4 billion over the five-year period relative to the CBO baseline.

Small Business Administration (SBA). About $1.1 billion of the fiveyear savings relative to the CBO baseline is achieved through SBA

programs. The President proposes to convert all SBA direct lending to

guaranteed lending, except for certain direct loans to minority-owned

firms, and to increase the fees that are charged on guaranteed loans.

This proposal, which is similar to ones in previous budgets, would

reduce outlays by about $0.7 billion over the five-year period relative

to the CBO baseline. In addition, the budget includes funding for SBA

salaries and expenses below the CBO baseline, with outlay savings

totaling $0.4 billion over the five-year period. Much of these savings

would result from the gradual elimination of grants to small business

development centers.

Other. The Administration is proposing sharp reductions in the Department of Housing and Urban Development's elderly and handicapped housing direct loan program. The $283 million of direct loan

authority requested could assist almost 4,000 units, compared with the

CBO baseline authority level of $492 million for about 7,000 units.

Outlays in 1991 would not be affected, but over the next five years they

would be $0.3 billion below the baseline.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 121

The President's budget also contains a legislative proposal that

would increase the Government National Mortgage Association's

mortgage-backed security guarantee fee from 6 to 10 basis points. This

proposal would lower outlays by am estimated $8 million in 1991 and

$0.3 billion over the 1991-1995 period.

Postal Service (Off-Budget). The President is proposing to increase

Postal Service payments to the Civil Service Retirement Fund (see

function 950) and to the Federal Employees Health Benefits Fund (see

function 550). These increases, totaling $7.8 billion over the next five

years, are intragovernmental transactions and would be reflected as

offsetting receipts in functions 950 and 550, respectively. To recover

these costs, the Postal Service is likely to increase postal rates, resulting in net savings to the federal government. The Postal Service surplus or deficit, which is off-budget, would be unaffected once the additional costs are covered by higher rates. The savings would appear in

the on-budget retirement and health benefits funds.

In addition, the President is proposing to terminate or restrict certain preferred postage rates and eliminate the portion of the appropriated subsidy that covers these reduced rates. These changes would

save almost $100 million in 1991, relative to the CBO baseline, and

almost $400 million over the 1991-1995 period. The President also proposes to establish a separate subclass for government mail, which

would reduce the need for appropriations by $220 million annually (see

function 920). To recover these revenue losses, the Postal Service is

likely to increase postal rates, resulting in net savings to the federal

government.

The baseline assumes that first-class postage will be increased to

30 cents in February 1991 without these proposals. Covering the full

cost of these proposals through rate changes would necessitate an additional increase approximately equivalent to one cent in the price of

first-class postage. These changes would result in reduced appropriations of $1.5 billion (shown mostly in function 920) and increased

receipts of $7.8 billion (in functions 950 and 550), for a net spending

reduction of about $9.3 billion (on-budget) relative to the baseline over

the five-year period. The Postal Service could recover, through higher

postal rates, only about half of the additional costs and revenue losses

in 1991. As a result, net outlays of the off-budget Postal Service would
122 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

increase by $0.8 billion in 1991; this amount would not be counted for

purposes of the Balanced Budget Act.

CBO Reestimates

CBO's estimate of outlays for this function exceeds the Administration's by more than $30 billion in 1990 and about $29 billion for 1991,

largely because of substantially higher outlay estimates for the Resolution Trust Corporation (RTC) and the Bank Insurance Fund.

Resolution Trust Corporation Revolving Fund. CBO has reestimated

the RTC's net outlays in the President's budget upward by $31 billion

in 1990 and $24 billion in 1991, largely to reflect additional spending

of working capital by the RTC. CBO expects that the RTC will borrow

about $55 billion from the Federal Financing Bank over the next two

years to finance the purchase of assets from failed savings and loans.

Over the 1992-1995 period, when most of the assets would be sold,

outlays would be an estimated $43 billion lower than the budget figures. (See Appendix A for more details on RTC spending.)

Federal Deposit Insurance Corporation's Bank Insurance Fund. Over

the five-year period, CBO's estimate of outlays from the fund exceeds

the amounts estimated in the President's budget by close to $5 billion

each year. The CBO estimate assumes that current problems facing

banks will result in greater demands upon the fund than the Administration anticipates. These problems include regional real estate downturns, exposure to highly leveraged transactions, growing delinquency

rates for consumer debt, and loans to less developed countries. Consequently, CBO estimates that the Federal Deposit Insurance Corporation will continue to provide assistance to failed and troubled banks in

amounts that are similar to the historically high levels of assistance

experienced in the past few years.

FSLIC Resolution Fund. This fund is the successor to the Federal Savings and Loan Insurance Corporation (FSLIC), and has assumed the

liabilities and assets from thrift insurance failures through 1989.

Disbursements from this fund mostly cover interest payments on outstanding debt of about $19 billion, and cash to maintain yields or pay

capital losses on assets purchased from failed thrifts. A portion of insurance premiums, plus proceeds from asset liquidations, help offset
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 123

these costs, with Treasury appropriations paying the difference. CBO

estimates that outlays will be higher than the Administration's estimates in 1991 and 1992, by $0.6 billion and $0.7 billion, respectively,

but lower by an estimated $0.2 billion to $0.8 billion in the 1993-1995

period, largely reflecting differing assumptions about the size and timing of payments for past losses, which are highly uncertain.

CBO REESTIMATES OF PROPOSED SPENDING IN THE

PRESIDENT'S BUDGET (By fiscal year, in billions of dollars)

1990 1991 1992 1993 1994 1995

President's 1991 Budget

On-budget 20.3 15.5 9.6 9.5 7.8 6.6

Off-budget" 2.4 0.9 0.7 0.1 -0.1 -0.4

CBO Reestimates

On-budget

Resolution Trust Corporation Revolving Fund 30.7 23.7 -13.0 -13.0 -10.0 -7.0

FDIC Bank Insurance Fund 0.5 4.7 4.9 5.1 4.7 4.8

FSLIC Resolution Fund b 0.6 0.7 -0.2 -0.8 -0.5

Savings Association

Insurance Fund 0 0 1.3 12.2 -0.3 -0.2

Treasury interest payment

toREFCORP -0.4 0.3 0.1 0.1 0.1 0.1

Federal Housing Administration Fund -0.7 -0.6 -0.5 -0.8 -1.5 -2.0

Other 0.1 0.1 0.2 0.2 0.2 0.3

Total 30.3 28.8 -6.3 3.6 -7.6 -4.6

Off-budget (Postal

Service Fund) b -0.2 -1.5 0.7 -1.2 -0.1

President's 1991 Budget

as Estimated by CBO

On-budget 50.6 44.2 3.3 13.1 0.2 2.0

Off-budget" 2.4 0.7 -0.8 0.8 -1.3 -0.4

NOTE: FDIC = Federal Deposit Insurance Corporation; FSLIC = Federal Savings and Loan Insurance

Corporation; REFCORP = Resolution Funding Corporation.

a. Postal Service Fund, which was taken off-budget by the Omnibus Budget Reconciliation Act of 1989

(Public Law 101-239).

b. Less than $50 million.
124 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Savings Association Insurance Fund (SAIF). This fund will assume

responsibility for new thrift insolvencies beginning in 1992. CBO

projects that SAIF outlays in 1992 will exceed the Administration's

estimate by $1.3 billion, because the likely caseload of insolvent thrifts

will require use of the entire $4 billion permitted to be obligated in

that year. When the obligation cap is lifted in 1993, CBO expects that

the SAIF will spend $16 billion for case resolutions, $12.2 billion more

than assumed in the President's budget.

Treasury Interest Payment to the Resolution Funding Corporation

(REFCORP). In 1990, CBO estimates that Treasury payments to bondholders for interest costs associated with REFCORP borrowing will be

made in April and July for bonds issued in October 1989 and January

1990. The Administration has different assumptions about the timing

of payments, and CBO expects the Treasury to pay $0.4 billion less

than estimated in the President's budget for 1990. In subsequent

years, these payments are expected to be higher by $0.3 billion in 1991,

and by $0.1 billion in each year thereafter.

Federal Housing Administration Fund. CBO's estimates of net outlays

for the FHA are lower than the Administration's in each year of the

1991-1995 period. This difference increases from $0.6 billion for 1991

to $2.0 billion for 1995, and amounts to $5.4 billion over the entire

period. The Administration's estimates are based on much higher

levels of annual claims payments, particularly single-family claims.

CBO's claims estimates are based on historical claims rates that reflect

the age of loans in FHA's portfolio.

Postal Service Fund (Off-Budget). CBO estimates of Postal Service

outlays are different from the Administration's because the budget

does not reflect the large year-to-year swings in net operating income

that result from periodic rate increases. Over the 1991-1995 period,

CBO's estimates of Postal Service outlays are about $2.3 billion below

the Administration's.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 125

FUNCTION 400: TRANSPORTATION

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item 1991 1992 1993 1994 1995

Cumulative

Five-Year

Changes

CBO Baseline 30.7 32.13 33.1 34.4 35.7

Proposed Changes

Federal-aid Highways -0.2 -1.0 -1.8 -2.4 -2.9 -8.3

Mass transit -0.4 -0.6 -0.7 -0.9 -1.1 -3.7

Amtrak -0.6 -0.7 -0.7 -0.7 -0.7 -3.4

FAA operations a 0.2 0.4 0.7 0.9 2.2

FAA facilities and

equipment 0.1 0.3 0.6 0.7 0.8 2.5

Coast Guard operating

expenses 0.2 0.2 0.2 0.2 0.2 1.0

Coast Guard user fees -0.2 -0.2 -0.2 -0.2 -0.2 -1.1

Other _a -JM -0.3 -0.4 -0.6 -1.4

Total -1.2 -1.9 -2.4 -2.9 -3.6 -12.1

President's 1991 Budget

as Estimated by CBO

President's 1991 Budget

CBO Reestimates

29.6

29.8

-0.2

30.0

30.2

-0.2

30.7

30.7

a

31.4

31.3

0.1

32.0

31.3

0.7

NOTE: FAA = Federal Aviation Administration.

a. Leas than $50 million.

Proposed Policy Changes

The Administration is proposing to hold ground transportation spending below the 1990 level through 1995, while increasing spending for

air traffic control and for Coast Guard operations. In total, spending

for the function would be $12.1 billion below the CBO baseline over the

1991-1995 period. For 1991, the budget includes a 6 percent cut in

budget authority ($2.0 billion) relative to the CBO baseline, resulting

in first-year outlay savings of $1.2 billion. Many of the proposals are

similar to those in previous budgets, though the requested reductions

in funding for mass transit are less severe.
126 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Ground Transportation. Reductions in spending for ground transportation, particularly Federal-aid Highways, would account for most of

the savings in this function. Under the Administration's proposal,

total obligations for Federal-aid Highways in 1991 would be $13.6

billion--$1.2 billion below the CBO baseline and $0.5 billion below estimated 1990 obligations. The difference in obligations relative to the

baseline would increase in future years, with total outlay savings of

$8.3 billion over the five years. About $2 billion of this difference occurs because the baseline, consistent with the provisions of the Balanced Budget Act, assumes future appropriations of more than $1

billion a year for emergency relief, as was provided in 1990 in response

to the Loma Prieta earthquake in California. The budget includes no

such funds. The bulk of the savings is from proposals to reduce the

obligation ceiling below the 1990 level, include currently exempt

demonstration projects under the ceiling, and eliminate a provision

that allows certain states to incur additional obligations in the last two

months of the fiscal year.

The 1991 budget includes budget authority for transit programs

totaling $2.6 billion--$0.6 billion below the 1990 appropriation and

$0.8 billion below the CBO baseline. The Administration proposes to

eliminate operating assistance to large urban areas and to place funding for interstate transfer grants for transit projects under the Federal-aid Highways obligation ceiling;. Over the five-year period, outlay

savings for transit programs, relative to the baseline, would total $3.7

billion.

The Administration also proposes to eliminate all subsidies for

Amtrak, reducing outlays over the five years by $3.4 billion, relative to

the baseline.

Air Transportation. Aviation is targeted for significant funding increases in 1991. Most of this increase would be used to modernize and

improve the air traffic control system. Under the President's budget,

spending authority for Federal Aviation Administration (FAA) facilities and equipment would be increased from $1.7 billion in 1990 to

$2.5 billion in 1991~a 45 percent increase~and would average $2.75

billion a year from 1992 through 1995. Additional funds for FAA

operations would be used to hire more air traffic controllers, safety

inspectors, and security specialists. The Administration proposes to

derive 85 percent of the funds for the FAA from the Airport and Air-
CHAPTER V THE ADMIOTSTRATION'S DOMESTIC PROPOSALS 127

way Trust Fund over the 1991-1995 period, compared with 58 percent

in 1990. Under the President's revenue assumptions (which include a

25 percent increase in most aviation tax rates), funds would be available in the Airport and Airway Trust Fund to support this spending.

The fund's surplus would, however, decline gradually over time.

Water Transportation. The President's proposals for water transportation would result in net outlay saArings of about $40 million in fiscal

year 1991 and $0.2 billion through 1995, relative to the CBO baseline.

The 1991 appropriation for U.S. Coast Guard operations would be

about $200 million, or 9 percent, above the baseline. This increase in

spending would be offset by proposed user fees of similar amounts, as

well as funding cuts of about $40 million for the Coast Guard's acquisition programs.

CBO Reestimates

CBO estimates that spending under the President's policies would be

slightly lower than the Administration estimates in 1991 and 1992,

but somewhat higher in 1994 and 1995. In general, these reestimates

result from different assumptions about the rate of spending for mass

transit programs and Coast Guard operating expenses.
128 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

FUNCTION 450: COMMUNITY AND REGIONAL DEVELOPMENT

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars!)

Item

CBO Baseline

Proposed Changes

Community development

programs

Regional development

programs

Disaster relief

and insurance

Total

President's 1991 Budget

as Estimated by CBO

President's 1991 Budget

CBO Reestimates

1991

8.5

a

-0.2

-0.6

-0.8

7.7

7.8

-0.1

1992

8.6

-0.1

-0.5

-1.4

-2.0

6.6

6.5

0.1

1993

8.6

-0.3

-0.8

-1.5

-2.5

6.1

6.1

-0.1

1994

8.9

-0.4

-1.0

-1.6

-2.9

5.9

5.9

a

1995

9.1

-0.5

-1.1

-L6

-3.3

5.8

6.2

-0.4

Cumulative

Five-Year

Changes

-1.3

-3.6

-6.6

-11.5

a. Less than $50 million.

Proposed Policy Changes

The 1991 budget proposes substantial reductions in community and

regional development programs relative to CBO's baseline. Total fiveyear savings would be $11.5 billion, or about 26 percent of total spending in this function. But these figures overstate the programmatic

impact of the Administration's proposals. Much of these savings would

come from disaster relief programs, because the CBO baseline would

continue at the unusually high 1990 program levels while the President's budget assumes that funding in 1991 and beyond will return to

average levels. Excluding the reductions in disaster relief spending,

the budget would result in a 14 percent decline in other function 450

outlays over the 1991-1995 period.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 129

Community Development. Administration proposals for community

development programs, which focus primarily on housing and economic development in urban areas, would result in net savings of

$1.3 billion from 1991 through 1995. Most of the savings would come

from reducing funding for the Community Development Block Grant

(CDBG) program, from $2.9 billion in 1990 to $2.75 billion per year

thereafter, which would generate five-year savings of $1.5 billion.

The President would also eliminate the Section 108 loan guarantee program, which provides federal guarantees to enable cities to finance community development activities over an extended period.

Other proposals would eliminate the Section 312 rehabilitation loan

program and would reduce funding for rental rehabilitation grants.

These initiatives, which have been proposed in previous budgets,

would result in savings of an additional $0.5 billion in outlays over five

years.

These reductions would be partially offset by a number of housing

and management initiatives that would increase outlays by $0.7 billion relative to the CBO baseline over the 1991-1995 period. The budget proposes changing the nature of the Supplemental Facilities to

Assist the Homeless program, from a focus on providing temporary

shelter for the homeless to giving them rental assistance. Appropriations for the program, which is part of the HOPE initiative (Homeownership and Opportunity for People Everywhere), would be increased

from $11 million in 1990 to $161 million in 1991, and outlays would

exceed the baseline by almost $300 million over the five years. The

Administration would also increase funding for the existing urban

homesteading program from $24 million in 1990 to $50 million in

1991, with outlays about $200 million above CBO's baseline projections over the 1991-1995 period. Other proposals would increase appropriations and outlays for research, increased staffing, and computer

systems by about $200 million over five years, to enhance the Department of Housing and Urban Development's management and evaluation capabilities.

Area and Regional Development. Once again, the budget proposes to

scale back funding for rural economic development programs and to

eliminate the Economic Development Administration. Over five

years, these proposals would save $3.6 billion, which represents a de-
130 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

crease of about 23 percent from CBO baseline projections for area and

regional development programs.

The President proposes a reducti on in funding for rural water and

waste grants, and would shift financing of rural water and waste and

other community facilities from direct loans to loan guarantees. Direct

loans would be reduced from $450 million in 1990 to $220 million in

1995, to be replaced by loan guarantees. These proposals would generate outlay savings of $0.7 billion over five years relative to the CBO

baseline. The rural business and industry loan program of the Farmers Home Administration would also be eliminated.

The budget would terminate the Economic Development Administration, saving $0.7 billion over five years. It would also reduce loan

levels and raise interest rates in the Rural Telephone Bank, and would

reduce funding for Bureau of Indian Affairs programs, the Appalachian Regional Commission, and the Tennessee Valley Authority's

rural development programs. These proposals would save another

$2.2 billion relative to the baseline over the 1991-1995 period.

Disaster Relief and Insurance. Two programs—the disaster relief fund

of the Federal Emergency Management Agency and funds appropriated to the President for unanticipated needs for natural disasters--

were funded at unusually high levels in 1990 because of the damages

that resulted from Hurricane Hugo and the Loma Prieta earthquake in

California. In accordance with the procedures of the Balanced Budget

Act, the CBO baseline projects a continuation of this high level of funding for these two accounts ($1.5 billion in 1991), while the President

proposes to fund these accounts at historically average levels ($0.3 billion a year). The President's proposal would reduce outlays by about

$5.4 billion over the five-year period relative to the CBO baseline.

About $1.2 billion of the five-year savings relative to the CBO

baseline results from changes in other disaster assistance and insurance programs. The President is proposing to limit Small Business

Administration (SBA) disaster loans only to those unable to obtain

loans from private lenders. In addition, the interest rate on such disaster loans would be increased to the Treasury cost of borrowing. These

proposals for the SBA program would reduce outlays by $0.6 billion

over five years relative to the CBO baseline.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 131

Finally, the President's budget assumes that the National Flood

Insurance Fund (NFIF) will be reauthorized upon its expiration on

September 30, 1991. The baseline assumes the program expires and

premium income to the fund ends, although the insurance policies

would remain in force for up to three years. Reauthorizing the NFIF

would result in five-year outlay savings of $0.6 billion relative to the

CBO baseline. In the long term, however, the additional premium income would be roughly offset by additional operating and claims costs.

CBO Reestimates

CBO's estimates of outlays for function 450 are very close to the Administration's through 1994. For 1995, CBO's estimate of outlays for

urban development action grants is about $0.2 billion less than the Administration's because of different assumptions about spending rates.
132 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

FUNCTION 500: EDUCATION. TRAINING. EMPLOYMENT.

AND SOCIAL SERVICES

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item 1991 1992 1993 1994

Cumulative

Five-Year

1995 Changes

CBO Baseline

Proposed Changes

41.3 42.9 44.0 45.4 47.0

Preschool, elementary, and

secondary education

Head Start 0.2

Other a

Higher education

Grants a

Loans -0.2

Education-related programs a

Training and employment -0.1

Social services

Child care tax credits 0.2

Legalization grants -0.2

Foster Care and

Adoption Assistance -0.1

Community Services

Block Grant -0.3

Other 0.1

Total -0.4

President's 1991 Budget

as Estimated by CBO 40.9

0.4

0.2

-0.1

-0.1

a

-0.2

1.8

-0.4

-0.1

-0.4

a

1.3

44.1

0.4

a

-0.5

-0.2

-0.1

-0.3

2.0

-0.4

-0,2

-0.4

a

0.2

44.2

0.4

-0.3

-0.7

-0.3

-0.2

-0.5

2.1

-0.1

-0.4

-0.4

-0.1

-0.4

45.0

0.4

-0.8

-0.8

-0.3

-0.3

-0.7

2.3

a

-05

-0.4

-0.2

-1.3

45.7

1.8

-0.9

-2.0

-1.1

-0.6

-1.9

8.5

-1.1

-1.3

-1.9

-0.1

-0.7

a. Leas than $50 million.

Proposed Policy Changes

The President's proposals would reduce spending for education, job

training, employment, and social service programs by $0.7 billion--or

less than one-half of 1 percent-below CBO's baseline projections over

the 1991-1995 period. Underlying this small change in the total,

however, are major spending increases and decreases, many proposed

in previous budgets. Many current programs are held below baseline

levels. Federal spending for education and training would decrease
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 133

despite the budget's discussion of their importance for future economic

growth. One major exception is spending on Head Start, which would

rise by $1.8 billion over five years. Under the President's plan, the tax

system would become an important distributor of social service monies.

A new refundable child care tax credit and reform of the existing dependent care tax credit would raise spending by $8.5 billion over five

years. Five-year spending for other social service programs would decline by $4.4 billion.

Preschool, Elementary, and Secondary Education. In 1991, the President's budget would fund preschool, elementary, and secondary education programs at $14.0 billion, an increase of almost 7 percent from

the CBO baseline projection. By 1995, however, funding would be

$14.4 billion, a decline of 6 percent from the CBO baseline, which inflates spending in future years. Over the five-year period, spending

would rise by $0.9 billion, or just over 1 percent.

Most of the increased funding would be for preschool education,

especially for the Head Start program, which was highlighted in the

President's budget. Head Start, which provides comprehensive services to low-income children, would be funded at $1.9 billion in 1991--

an increase of about one-third from CBO's baseline projection. The

higher funding level would be maintained over the five years after

allowing for projected inflation, and five-year spending would rise by

$1.8 billion. New Head Start monies could be used to enroll about

175,000 more children or to improve the educational services available

to the 450,000 current participants.

For elementary and secondary education, the President proposes

funding of $11.9 billion in 1991, an increase of almost 4 percent from

CBO's baseline. Funding for these programs increases more gradually

after 1991, failing to keep pace with projected inflation, so that by 1995

funding would be 9 percent below CBO's baseline. Spending over the

five-year period would be $0.9 billion lower (including a $0.1 billion

reduction for preschool programs).

The President's budget proposes several new initiatives, such as

Presidential Merit Schools and teacher certification programs, and

substantial increases in 1991 funding for Drug-Free Schools, Magnet

Schools, Mathematics and Science Education, and Adult Education.

Some other programs, such as Compensatory Education (Chapter 1),
134 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

would receive modest funding increases above inflation in 1991, while

most other programs would receive less than full inflation adjustments. The budget proposes again to virtually eliminate Impact Aid

"b" grants.

Higher Education. The President's budget proposes funding for higher

education grants, loans, and loan subsidies at $10.8 billion in 1991,

close to CBO's baseline projection. However, outlays would decline by

$0.2 billion in 1991 from sales of loan assets. By 1995, funding would

be $1.2 billion, or almost 11 percent, below the baseline.

Federal grant programs for aid to students and institutions would

account for almost two-thirds of the five-year spending decline. Most of

the spending reductions result from eliminating grants for Perkins

loan capital and State Student Incentive Grants and freezing Work

Study Grants and Supplemental Education Opportunity Grants. The

President proposes modest changes in Pell grants, the largest grant

program. Students without high school diplomas who do not pass an

independently administered test would not receive aid, while those

attending school less than half-time would qualify for aid. Together,

these proposals are estimated to reduce participation marginally. Although tuition costs have been rising at almost twice the rate of

inflation, the President proposes to limit the maximum level for the

neediest students to the 1990 level of $2,300.

The President's budget would continue current efforts to reduce

student loan defaults in the Stafford Student Loan Program. The

budget includes a proposal that would shift some federal costs of loan

defaults to the guaranteeing agencies by increasing insurance fees and

lowering the proportion of a loan that is insured. In addition, the

budget would tighten requirements for loans to first-time students

and, as for Pell grants, would make it more difficult for students without a high school diploma to qualify for loans. Estimated five-year

savings for these changes would total $0.9 billion.

In 1991, the President proposes to sell more college housing and

facilities loans. Loan assets with a face value of approximately $400

million are to be sold, with proceeds totaling an estimated $235 million.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 135

Education-Related Programs. Education-related programs, including

those in the arts and humanities, would be funded at $3.9 billion in

1991, virtually identical to the CBO baseline. As with other education

programs, funding would be lower by 1995. Over five years, spending

for education-related programs would decline by $0.6 billion. The

Administration's requested 1991 funding for education research, construction of a new Smithsonian museum, and operation of the Library

of Congress and the Department of Education would be an increase

relative to CBO's baseline. These funding increases would be more

than offset over the five-year period by the proposed elimination of

grants for public libraries and public telecommunications and reduced

support, relative to the baseline projections, for the Corporation for

Public Broadcasting, the National Endowments for the Arts and for

the Humanities, and other educational programs.

Training and Employment. The budget proposes to fund training and

employment services at the baseline level of $6.6 billion in 1991 and to

reduce funding by just under 10 percent by 1995. Spending would

decline by $1.9 billion over five years. Funds for training of welfare

recipients, however, would increase, as mandated by the Family Support Act of 1988; these funds ares shown in function 600.

As in recent years, the President's budget proposes a single discretionary program (Worker Readjustment) to serve dislocated

workers—those who have worked for several years and whose jobs have

been eliminated. This program would replace Trade Adjustment

Assistance training programs (as well as cash payments in function

600) and the Job Training Partnership Act (JTPA) program for dislocated workers. Funding of $0.4 billion-28 percent lower than the

CBO baseline estimate for the existing programs-is requested in 1991.

Because the President requests constant funding for the new program

over the five-year period while CBO's baseline rises with inflation, the

funding request is 40 percent below the baseline in 1995. A second

major reduction, accounting for $0.7 billion of the $1.9 billion of reduced spending in employment and training, is in funding for administration of the Employment Service program.

At the same time, the Administration proposes to retarget JTPA

funds on people who are most in need of training by replacing the

existing block grant and summer youth programs with separate

year-round programs for low-income adults and youth. Also, a new
1L -.

136 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Youth Opportunities Unlimited grant program is proposed to provide

comprehensive services to youth living in high-poverty areas. Additional funding of $0.3 billion a year would be available for these programs.

Social Services. The President's budget proposes a new spending

initiative through the tax system (refundable portions of the child tax

credits) increasing spending by $8.5 billion over five years and major

reductions, totalling $4.3 billion, in three programs (Legalization Impact Assistance Grants, Foster Care and Adoption Assistance, and the

Community Services Block Grant). Other changes in social service

programs—except for Head Start, which was discussed above—are

modest.

In order to assist low-income families who have earnings and children, the Administration again proposes to create a new refundable

child care tax credit. The new credit-14 percent of the parents' earnings up to a maximum credit of $1,000 for each child under the age of

four-would be available to all families with earnings. In 1991, the

credit would be phased out gradually for families with incomes over

$8,000, and would be completely phased out for incomes of $13,000 or

more. In addition, the Administration proposes making the existing

tax credit for child and dependent care refundable, thus helping

families with incomes too low to require the payment of federal income

taxes. As a result, more than 3 million additional families would be

assisted in 1991. These two proposals would raise spending by $2.3

billion in 1995, and by $8.5 billion over five years.

The President's budget proposes to reduce funding for State

Legalization Impact Assistance Grants (SLIAG) to $0.3 billion in 1991

and to zero in 1992, resulting in estimated outlay savings of $1.1

billion over the five-year period. These grants go to states to pay for

certain costs of the legalization of undocumented aliens required by the

Immigration Reform and Control Act of 1986. States have been spending the federal funds much more slowly than expected, and by the end

of 1989 unspent balances reached $1.5 billion. At this time, however,

it is not clear to what extent state costs associated with the legalized

aliens are below original projections and to what extent spending is

simply delayed because states are having difficulty documenting and

claiming legitimate costs.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 137

In the Foster Care program, the Administration proposes to limit

administrative costs to a maximum growth of 10 percent a year in each

state, saving $0.1 billion in 1991. Annual savings in 1995 would

increase to $0.5 billion, or 14 percent of outlays for foster care and

adoption assistance. Administrative costs have been growing much

faster than caseloads in recent years, and their growth--in the absence

of any legislation-is expected to continue at a rate of 24 percent in

1991, declining to 18 percent in 1995. CBO's projections of growth

rates are lower than the Administration's projections—35 percent in

1991, declining to 14 percent in 1995-and thus CBO estimates are

lower for both baseline spending and legislative savings.

Once again, the President; proposes eliminating the Community

Services Block Grant program,, reducing spending by $1.9 billion over

five years. The program would be eliminated in 1991.

CBO REESTIMATES OF PROPOSED SPENDING IN THE

PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars)

1990 1991 1992 1993 1994 1995

President's 1991 Budget 37.7 41.0 42.9 43.5 44.1 44.9

CBO Reestimates

Economic

Interest rates a. 0.5 0.8 0.8 0.7 0.6

Other a. a a a 0.1 0.1

Subtotal a 0.5 0.8 0.8 0.8 0.7

Technical

Education 0.7 -0.5 0.1 -0.1 0.2 0.3

Other JU ;<L2 0.3 a -0.1 -0.1

Subtotal 0.8 -0.7 0.4 -0.1 0.1 0.1

Total 0.8 -0.1 1.2 0.7 0.8 0.8

President's 1991 Budget

as Estimated by CBO 38.4 40.9 44.1 44.2 45.0 45.7

a. Leas than $50 million.
138 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

CBQ Reestimates

The CBO reestimates of the President's budget are dominated by the

economic reestimates, which raise spending by $0.5 billion in 1991 and

$0.7 billion in 1995. CBO projects higher interest rates than the Administration and thus higher interest subsidies in the Stafford Student

Loan Program.

CBO also projects $0.7 billion more spending for education in 1990,

partially offset by $0.5 billion less spending in 1991. CBO estimates a

faster use of available resources by state and local governments, reflecting historical spending patterns. Other technical reestimates are

either small or largely offsetting.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 139

FUNCTION 550: HEALTH

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item 1991 1992 1993 1994

Cumulative

Five-Year

1995 Changes

CBO Baseline

Proposed Changes

Federal Employees

Health Benefits

Public Health Service

Medicaid

Other

Total

President's 1991 Budget

as Estimated by CBO

65.0

-0.7

0.1

-0.1

-0.1

-0.9

64.2

72.7

-0.8

-0.1

-0.1

-0.1

-1.1

71.7

80.2

-0.9

-0.5

-0.1

-0.1

-1.5

78.7

88.2

-1.0

-0.8

a

-0.1

-1.9

86.3

96.8

-1.0

-1.2

0.1

-0.1

-2.3

94.5

-4.4

-2.5

-0.2

-0.5

-7.6

a. Less than $50 million.

Proposed Policy Changes

The President's 1991 budget proposes spending cuts that would reduce

health expenditures by $7.6 billion over the 1991-1995 period. The

largest reductions are proposed in the Federal Employees Health

Benefits (FEHB) program and the Public Health Service (PHS). Small

net reductions are proposed in Medicaid, primarily as a result of new

user fees. This budget differs significantly from those in the Reagan

years, because it does not propose large Medicaid reductions.

Federal Employees Health Benefits Fund. The President's budget for

the FEHB program would reduce federal spending for annuitants'

health benefits by transferring responsibility for annuitants who retired from the Postal Service between October 1, 1971, and October 1,

1986, to the Postal Service. The District of Columbia would also assume responsibility for its annuitants. This action would save $0.7 billion in 1991 and $4.4 billion over five years. Total premium payments

and overall benefits under the FEHB program would not change. An
140 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

additional proposal to change the financing of FEHB benefits is discussed under the function for allowances (920).

Public Health Service. The Administration would slow the growth

rate of PHS funding to about 4 percent in 1991, and to approximately

2 percent in 1992 through 1995. Slowing the growth rate would hold

spending for the discretionary health programs below the CBO baseline, saving $1.2 billion in 1995.

Within the PHS, the Administration's funding request for the

National Institutes of Health (NIH) is at baseline levels in 1991 and

then falls progressively further below the CBO baseline in 1992

through 1995. NIH spending would fall below the baseline by $0.7 billion in 1995.

As in previous budgets, most health profession grants within the

Health Resources and Services Administration (HRSA) would be

eliminated, and the growth in HRSA funding would be held below

baseline levels. Savings would grow from $0.1 billion in 1991 to $0.4

billion in 1995.

Funding for the Alcohol, Drug Abuse, and Mental Health Administration (ADAMHA) would increase by 8 percent in 1991, reflecting

the Administration's commitment to anti-drug abuse treatment and

research programs. However, because funding grows more slowly than

the CBO baseline in 1992 through 1995, spending for ADAMHA would

be $0.1 billion lower than the baseline in 1995.

Finally, the Administration proposes to institute user fees for certain Food and Drug Administration (FDA) activities, such as product

reviews, surveillance, and inspection services. Although these fees

would reduce federal funding for the FDA by 10 percent in 1991, overall FDA activities would remain unchanged.

Medicaid. The rapidly growing Medicaid program would be reduced by

$0.2 billion over five years under the President's request. The reductions would result from proposed user fees for providers and would not

be fully offset by estimated increases from a managed care initiative

and the effects on Medicaid of proposed changes in Medicare.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 141

The President's budget proposes that certain Medicaid providers,

primarily nursing homes, pay the costs of the government's survey and

certification activities. These activities ensure that providers meet

current Medicaid standards for quality of care and patient safety. Currently, these activities are jointly funded by federal, state, and local

governments. Funding these activities by requiring providers to pay

user fees would reduce federal spending by an estimated $0.7 billion

over the five years.

Proposed changes to the Medicare program would raise Medicaid

costs by an estimated $0.4 billion over the five years. These increases

would result primarily from the Administration's proposal to set the

Supplementary Medical Insurance premium at 25 percent of program

costs, which Medicaid pays for approximately 3.8 million recipients.

Finally, the budget includes several legislative changes to encourage the use of managed care systems by state Medicaid programs.

These systems involve arrangements with providers so that most

health care is provided by a single group, an integrated network of

health care providers, or an individual acting as a case manager. Some

analysts believe that managed care systems can provide quality health

care at reduced prices, but the evidence is mixed.

As an incentive to use managed care systems, the states would receive an increase of three percentage points, beginning in 1991, in the

federal match rate for expenditures associated with increased enrollment in managed care plans. To offset any increase in federal costs

caused by the enhanced match for certain managed care services, the

federal match rate for services provided under traditional fee-forservice arrangements would then be reduced beginning in 1993. The

proposal would be budget neutral by 1994. As an additional incentive

to use managed care systems, states would be permitted to enroll beneficiaries without asking for waiver authority, which is currently required. Finally, a number of current restrictions on health maintenance or-ganizations would be lifted.

CBO estimates these initiatives would cost $70 million over the

five- year period, roughly half of the Administration's estimate of $145

million. States have indicated that the need for state legislation,

planning, provider licensure, and other factors would make it difficult

for them to significantly increase the use of managed care in 1991. In
142 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

1992, the CBO estimate assumes that states would double the approximately 1.6 million Medicaid beneficiaries currently enrolled in managed care systems.

Other. The Administration proposes to convert the PHS Commission

Corps Retirement program to an accrual-based system, similar to military and civilian retirement systems. Although this proposal would

not change benefit payments over five years, it would transfer certain

payments from the health function (550) to the income security function (600).

CBO Reestimates

CBO has reestimated the President's budget outlays downward by $0.9

billion in 1990 and upward by $0.5 billion in 1991 and $6.2 billion in

1995. Most of the upward change occurs in the Medicaid program, but

technical differences are also found in the Public Health Service estimates.

CBO's Medicaid baseline is $0.7 billion lower than that of the Administration in 1990. The Administration's estimate is based primarily on state estimates submitted to the Health Care Financing Administration (HCFA). Based on conversations with state Medicaid

staff, CBO believes that those spending estimates are too high. Over

the 1991-1995 period, the CBO Medicaid estimates grow more rapidly

than the Administration's. For example, the Administration's growth

rate for 1992 is 10.7 percent compared with CBO's 12.6 percent. As a

result, CBO's 1992 estimate is $1.0 billion higher than the Administration's. This discrepancy stems from differing assumptions about the

effects of recent legislation. The main effects of the provisions for

nursing home reform contained in the Omnibus Budget Reconciliation

Act of 1987 will first be felt in 1992. These provisions will increase the

cost of nursing home services, which represent over 42 percent of Medicaid expenditures. In the 1993-1995 period, the CBO baseline growth

rate is about 11.5 percent, the average annual Medicaid growth rate

for 1985 through 1989. In contrast, the Administration projects that

Medicaid growth will slow to 8.8 percent by 1995~a rate that is lower

than the actual growth rate in 23 of the last 25 years. The combination

of CBO's higher estimate of 1992 outlays and the difference of about

two to three percentage points in the growth rates for 1993 through
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 143

1995 make CBO's baseline $5.7 billion higher than the Administration's baseline in 1995.

The reestimates of the Administration's request for the Public

Health Service are based on different spending assumptions. The CBO

spending estimate of the President's request for the Health Resources

and Services Administration exceeds the Administration's estimate by

$0.3 billion in 1991 and $0.4 billion in 1995, for two reasons. First, the

budget projects outlays to fall $0.2 billion below requested funding

levels in 1992 through 1995, whereas CBO projects that outlays would

follow budget authority more closely. Second, CBO estimates that

total outlays from the Vaccine Injury Compensation Trust Fund will be

approximately $0.2 billion to $0.3 billion higher than the Administration's projections from 1991 through 1995. CBO's estimate is based on

information on the number of claims awarded, the average size of those

awards, and the average lag between the time a deserving claim is

filed and awarded. Because the program is just beginning, however,

the estimates are very uncertain.

CBO REESTIMATES OF PROPOSED SPENDING IN THE

PRESIDENTS BUDGET (By fiscal year, outlay sin billions of dollars)

1990 1991 1992 1993 1994 1995

President's 1991 Budget 57.8 63.7 69.9 75.9 82.0 88.3

CBO Reestimates

Economic (Cost-of-living

adjustments) 0.0 0.0 0.0 a a a

Technical

Medicaid -0.7 0.1 1.0 2.1 3.7 5.7

Public Health Service ^.2 O4 0.7 O7 0.6 0.6

Total -0.9 0.5 1.7 2.8 4.3 6.2

President's 1991 Budget

as Estimated by CBO 56.9 64.2 71.7 78.7 86.3 94.5

a. Less than $50 million.
144 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

FUNCTION 570: MEDICARE

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item

CBO Baseline

Proposed Changes

Extensions of 1990

practices

Hospital capital

Supplementary Medical

Insurance premiums

New physicians

Subtotal

Previously rejected

proposals

Medical education

Outpatient hospital

services

Durable medical

equipment

Subtotal

Other proposed changes

Reduction in inflationrelated updates

Accelerated transition

to physician

fee reform

Technical services

and supplies

Other

Subtotal

Total

President's 1991 Budget

as Estimated by CBO

1991

104.9

-1.5

0.0

-0.1

-1.6

-1.2

-0.4

-0.1

-1.7

-1.0

-0.6

-0.3

0.1

-1.8

-5.1

99.8

1992

120.0

-1.9

-0.6

-0.1

-2.5

-1.5

-0.5

-0.2

-2.2

-1.4

-1.0

-0.5

0.1

-2.8

-7.4

112.6

1993

135.0

-2.1

-1.7

-0.1

-3.9

-1.6

-0.6

-0.2

-2.4

-1.6

-1.1

-0.6

0.1

-3.1

-9.4

125.6

1994

151.4

-2.3

-3.0

-0.1

-5.5

-1.8

-0.7

-0.2

-2.7

-1.7

-1.3

-0.6

0.2

-3.5

-11.7

139.7

1995

168.8

-2.6

-4.5

-0.2

-7.3

-2.0

-0.8

-0.2

-3.0

-1.9

-1.4

-0.7

0.2

-3.9

-14.2

154.6

Cumulative

Five-Year

Changes

-10.4

-9.8

-0.6

-20.8

-8.1

-3.0

-0.9

-12.0

-7.6

-5.5

-2.7

0.7

-15.1

-47.8

Proposed Policy Changes

Once again, the President's budget proposes significant cuts in the

Medicare program--$5.1 billion in 1991, rising to $14.2 billion in 1995,

and amounting to $47.8 billion over the five-year projection period. If
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 145

enacted, these proposals would reduce Medicare spending by about 7

percent over five years. About half of the proposed savings in Medicare

would come from extensions of provisions that expire in 1990. Of the

remaining proposed savings, about half would come from proposals

that have been rejected by the Congress in the past and the remainder

from a mix of new proposals and reductions in payments to providers

that are similar to previously enacted changes.

The budget proposes to extend permanently several provisions of

law that, in the past, have been enacted by the Congress for one or two

years at a time. In total, these proposals would save $1.6 billion in

1991 and $20.8 billion over five years.

Hospital Capital. Beginning in 1987, the Congress has reduced capital

payments to hospitals by increasingly larger percentages each year.

For most of 1989 and 1990, the reduction was 15 percent of allowable

capital-related costs. Starting in 1992, Medicare payments for inpatient hospital capital expenses will be made on a per case basis instead of the current reasonable cost reimbursement method. In fiscal

year 1991, the President's budget proposes to reduce capital payments

to urban hospitals by 25 percent, and capital payments to rural hospitals by 15 percent. These reductions would apply to both inpatientand outpatient-related capital expenses, and would be permanent.

Savings in 1991 would be $1.5 billion and would total $10.4 billion over

five years.

SMI Premiums. Under current law, the Supplementary Medical Insurance (SMI) premium is set to cover 25 percent of program costs in 1990

and will increase by the Social Security cost-of-living adjustment

(COLA) in future years. Since 1984, the SMI premium paid by beneficiaries for physician and other health services has been set to cover

25 percent of projected program costs. The President's budget proposes

to set the premium permanently at the maximum of a rate that would

cover 25 percent of program costs or the previous year's premium increased by the Social Security COLA, whichever is higher. Because

program costs generally grow faster than the COLA, the premium under this proposal would usually be based on program costs. However,

when the premium is calculated to cover a percentage of program costs,

adjustments are made to allow for estimation errors and reserve requirements. When trust fund reserves are large, a cost-based premium will be set below the level actually needed to cover costs so that the
146 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

excess reserves are reduced. The SM! trust fund currently has large

reserves. For this reason, estimates of a cost-based premium for the

President's budget in 1991 are below the level of the COLA-adjusted

premium. The estimated 1991 premium would be the COLA-adjusted

premium, which is the same as the premium estimated under current

law. Thus, there are no savings for this proposal in 1991, although it

would save an estimated $9.8 billion over the 1992-1995 period.

New Physicians. In 1987, the Congress limited payments to physicians

in their first year of practice to 80 percent of the amount that would

otherwise be paid for a service. For 1990 only, this policy was expanded to limit payments to second-year physicians to 85 percent of

what would otherwise be paid for a service. The budget proposes to

make the 85 percent limit permanent and expand the policy further so

that third-year physicians would be limited to 90 percent and so on.

This proposal would also limit payments to health practitioners who

are not physicians (for example, chiropractors, optometrists) in a similar manner. The proposal is estimated to save $55 million in 1991 and

$595 million over five years.

Previously Rejected Proposals. Several proposals in the President's

budget resemble proposals made in previous years but not enacted.

These include reductions in payments to hospitals for indirect and

direct medical education, across-the-board reductions in payments for

outpatient hospital services, and a revision in the basis of payment for

part of the durable medical equipment fee schedule that was enacted in

1987. In Chapter III, a revenue proposal that would make state and

local employees eligible for Medicare is discussed. This proposal has

been made for several years and would generate small increases in

Medicare benefit payments if enacted. Savings from these proposals

would be $1.7 billion, or 33 percent of total savings in 1991, and $12.0

billion or 25 percent of total savings over the five-year period.

Inflation-Related Updates. Over the past few years the Administration has proposed, and Congress has enacted, reductions in the automatic payment updates that hospitals, physicians, laboratories, and

other suppliers receive to adjust for increased costs of providing services. This year, the President's budget proposes to reduce the hospital

payment update, or market basket, by 1.5 percentage points, saving

$0.6 billion in 1991 and $4.0 billion over five years. CBO projects that
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 147

the market basket will increase by 4.8 percent in 1991; the budget

proposal would reduce this increase to 3.3 percent.

For physicians, the budget proposes to freeze payments for nonprimary care services at 1990 levels. Nonprimary care services such as

radiology, surgery, and anesthesiology account for 83 percent of payments for physicians' services. The remaining 17 percent of payments

are for primary care services such as office and nursing home visits.

Payments for these services would increase at the rates allowed under

current law. Most fees are increased annually by the growth in the

Medicare economic index. CBO projects that this index will increase

by 4.1 percent in 1991. The proposal would save $0.3 billion in 1991

and $3.0 billion over five years.

Laboratory services and durable medical equipment are reimbursed under regional fee schedules updated annually by the consumer

price index. Different periods are used to calculate the increase for

laboratories and durable medical equipment. CBO projects these indexes will increase at 4.4 percent and 3.6 percent, respectively, in

1991. The budget proposes to freeze payment levels for all services and

supplies that are currently reimbursed at a level higher than the

national median fee schedule amount. This freeze would save an estimated $0.1 billion in 1991 and $0.7 billion over five years. Overall, reductions in inflation-related updates would reduce spending by $1.0

billion in 1991 and by $7.6 billion, or 1.1 percent, over five years.

Accelerated Transition to Physician Fee Reform. In the Omnibus

Reconciliation Act of 1989, the Congress enacted a major reform in the

way Medicare pays for physicians' services. The major provisions of

this reform will be phased in over five years starting in 1992. Physician fees will be paid on the basis of work performed and costs incurred

in providing a service, and will take account of geographic differences

in the costs of providing services. Many of the proposals related to

physician payment in the President's budget can be characterized as

accelerating the transition to this reform. The fee schedule would reallocate payments between specialties, types of service, and geographic

areas—from those currently overpaid (based on the new fee schedule) to

those currently underpaid. The budget would exempt underpaid services and providers from payment cuts, and reduce payments for currently overpaid services. This would have the effect of bringing payment levels closer together so that when the fee schedule is
148 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

implemented, the reallocation will be less dramatic. Proposals that

speed up the transition would save $0.6 billion in 1991 and $5.5 billion

over five years. This would reduce spending for physicians' services by

about 3 percent over five years.

In the Reconciliation Act, the Congress reduced payments for certain services based on the difference between current payment levels

and estimated payment levels under a folly implemented fee schedule.

This provision eliminated one-third of this difference; the budget

proposes to eliminate the remaining two-thirds of the difference between fully implemented fee schedule payment levels and current law

payment levels. This proposal would affect about 20 percent of all

payments for physicians' services and reduce spending by an estimated

$120 million in 1991 and $1.1 billion over five years. The budget also

proposes to reduce payments for services where the relationship between current payment levels is higher than the national average by

more than can be explained by geographic differences in the cost of

providing services. This proposal would only affect services that are

not affected by other proposals in the budget. It would save $50 million

in 1991 and $460 million over five years.

Radiology and anesthesia services as a whole appear to be overpriced relative to other services, based on the studies used to generate

the physician fee schedule. These services account for about 15 percent

of all payments to physicians. The budget proposes to reduce payments

for these services by 10 percent. These two proposals would save $85

million in 1991 and $750 million over five years.

Three other proposals would reduce payments for services where

more than one provider is involved and where there seems to be wide

variation in medical practice. Payments for supervised anesthesia,

assistants at surgery, and surgical global fees would be reduced.

Anesthesiologists are paid at one rate if they perform a service personally and at lower rates if they are supervising certified registered

nurse anesthetists (CRNAs). CRNAs are paid under a separately

established fee schedule. The budget proposes to cap payments for

supervised anesthesia at the amount that would be paid to an

anesthesiologist personally performing a service. CRNA payments

would be unaffected by this proposal; rather, the supervising

anesthesiologist's payment would be limited to the difference between

payment for personally performing a service and the CRNA payment
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 149

for providing the service. This proposal would save $80 million in 1991

and $725 million over the five-year period.

There is wide variation in the use of assistants at surgery. Currently, a physician who acts as an assistant at surgery receives 20 percent of the primary surgeon's payment. The budget proposes to eliminate extra payments for assistants at surgery; each surgery would be

reimbursed at the same level whether an assistant was present or not.

Exceptions would be made for certain procedures and special circumstances. The proposal would save an estimated $135 million in 1991

and $855 million over five years.

The budget would reduce surgical global fees by 2 percent. A

global fee is a payment that includes the payment for the surgery as

well as for associated services like postsurgical hospital visits. (A

different reduction might be made if reliable data so warrant.) This

proposal would save an estimated $40 million in 1991 and $365 million

over five years.

Some facility payments to outpatient hospitals are based on payments to physicians, so that when payments to physicians are lowered,

outpatient hospital payments are also reduced. The savings from all of

the budget proposals affecting physician payments on outpatient hospital payments are estimated at $125 million in 1991 and $1.3 billion

over five years.

Technical Services and Supplies. The budget proposes several changes

in payment for technical services and supplies. Technical services are

services that a physician does not routinely perform personally. The

budget proposes to cap payments for these technical components of

radiology and diagnostic services (other than laboratory services) at a

national median payment amount. These proposals would save $70

million in 1991 and $600 million over five years. Similarly, the

budget proposes to cap durable medical equipment payments at the

national median, saving $110 million in 1991 and $1.0 billion over five

years. Laboratory payments were capped at 93 percent of the national

median in the 1989 Reconciliation Act and would be further reduced

under the President's budget plan. Certain high-volume multiple lab

tests would be capped at 80 percent of the median, while other less

common procedures would be capped at 90 percent of the median. This

25-692 0-90- 6

IT"
150 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

proposal would save $50 million in 1991 and $465 million over five

years.

In addition, the budget proposes to limit payments for certain

other supplies and equipment. Rental payments under the durable

medical equipment fee schedule would be limited to 120 percent of the

purchase price for the item, rather than the 150 percent allowed under

current law. This proposal would save $35 million in 1991 and $340

million over five years. Payments for oxygen would be reduced by

5 percent for estimated savings of $190 million over five years. Certain

feeding supplies were not included in the original durable medical

equipment fee schedule, and the budget proposes to include them for

five-year savings of $75 million. Proposals to reduce payments for

technical services and supplies are expected to save $0.3 billion in 1991

and $2.7 billion over five years.

Other. Miscellaneous proposals would increase Medicare spending by

$130 million in 1991 and $690 million over the five-year period.

Most of the spending increase would result from a proposal to increase payments to health maintenance organizations (HMOs). Under

current law, HMOs are paid 95 percent of the average Medicare benefit

cost for Medicare beneficiaries not enrolled in HMOs. Payment rates

for individual HMO enrollees are adjusted to reflect age, sex, geographic location, and other characteristics that are thought to affect

health benefit costs. The budget proposes to increase this payment

amount to 100 percent of average costs per Medicare beneficiary. This

proposal would cost an estimated $190 million in 1991 and $1.5 billion

over five years. In addition, the budget requests $145 million more for

program research and administration over five years than projected in

the CBO baseline.

Several miscellaneous proposals would reduce Medicare spending.

The budget proposes to extend the period of required employer-based

coverage for persons with end-stage renal disease (ESRD) from the

current 12 months to 18 months. This proposal would save $45 million

in 1991 and $270 million over five years. The budget also proposes to

give Medicare carriers the authority to require that providers obtain

permission to perform certain nonemergency services. This proposal

would save $165 million over five years. Under current law, proprietary skilled nursing facilities are able to count return on equity for
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 151

their investors as part of the operating costs for which they are reimbursed by Medicare. The budget proposes to eliminate these payments,

saving $205 million over five years. Previously, the Congress eliminated similar payments to hospitals. The Administration proposes to

set a limit on the interns-and-residents-to-beds (IRB) ratio that is used

to calculate the amount of the indirect teaching adjustment for PPS

hospitals. Current (1989) levels would be a cap, and would discourage

hospitals from closing beds in order to increase payments by increasing

their IRB ratios. This proposal would save an estimated $240 million

over five years. Altogether, the reductions from these miscellaneous

proposals would save $0.9 million over five years, while the increases

would add $1.6 billion over five years.

CBO Reestimates

CBO projects $1.0 billion less spending in 1990 than estimated in the

budget, but $1.2 billion higher spending in 1991, rising to $5.6 billion

in 1995. The lower 1990 estimate results mostly from different estimates of the effects of the Reconciliation Act on SMI spending, and

partly from different expectations about program growth in 1990. Although the President's Medicare estimates are lower overall than

CBO's, projections of the market basket update for hospital services

and the MEI increase for physician services are higher than CBO's.

These updates are heavily weighted toward wage growth. The Administration's projections of wage growth are significantly higher than

those of the CBO. If the Administration's updates were used, the CBO

baseline would be higher by $0.3 billion in 1991 and $1.2 billion by

1995. Most of this difference occurs in the Hospital Insurance (HI) program.

The remaining difference results mostly from technical differences

in the estimates of the Hospital Insurance (HI) program. Two major

differences are notable. First, CBO uses a significantly different assumption about case-mix index (CMI) growth for Prospective Payment

System (PPS) hospitals than does the Administration. Second, CBO

assumes that covered days in skilled nursing facilities (SNFs) paid by

Medicare will be higher than does the Administration.

With regard to CMI growth, CBO assumes that the index will grow

2.5 percent in 1991 and the rate of growth of the index will decline
152 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

steadily to a 1.2 percent rate by 1995. The Administration assumes

CMI growth to be constant at 1.0 percent per year over the projection

period. The Prospective Payment Assessment Commission estimates

that CMI growth in 1989 was 2.9 percent. Previously, CMI growth has

been lower than 2.9 percent only in 1986 and 1987, when it was 2.8

percent and 2.6 percent, respectively. These different assumptions

generate a difference of about $0.6 billion in 1991 estimates of PPS

hospital payments, and about $2.8 billion by 1995.

The CBO estimates of reimbursements for SNFs are $0.8 billion

above the Administration's in 1990, rising to $2.0 billion in 1995.

Medicare reimbursements for SNFs rose rapidly from January to

CBO REESTIMATES OF PROPOSED SPENDING IN THE

PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars)

1990 1991 1992 1993 1994 1995

President's 1991 Budget 96.6 98.6 110.1 121.9 135.0 149.1

CBO Reestimates

Economic

Hospital Insurance 0 -0.4 -0.8 -1.0 -1.1 -0.9

Supplementary Medical

Insurance 0 0.1 a a -0.1 a

Premiums _0 _0.0 _a __a -0.1 -0.2

Subtotal 0 -0.3 -0.8 -1.1 -1.3 -1.2

Technical

Hospital Insurance 0.1 1.6 2.7 3.8 4.7 5.5

Supplementary Medical

Insurance -1.1 a 0.5 0.9 1.1 1.0

Premiums _a _a 0.1 0.1 0.1 Q.3

Subtotal -1.0 1.5 3.2 4.8 5.9 6.7

Total -1.0 1.2 2.5 3.7 4.6 5.6

President's 1991 Budget

as Estimated by CBO 95.6 99.8 112.6 125.6 139.7 154.6

a. Less than $50 million.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 153

December 1988, apparently as a result of a new SNF instruction

manual developed by the Health Care Financing Administration and

several court decisions liberalizing the benefit. In January 1989, the

SNF benefit was significantly enhanced by provisions of the Medicare

Catastrophic Coverage Act of 1988 (MCCA). Medicare SNF reimbursements skyrocketed as the new benefit began. Late in 1989, the

new SNF benefit was repealed effective January 1, 1990. CBO's current estimates assume that the eArents of 1988 and the increased SNF

visibility resulting from MCCA will propel future reimbursements to

higher levels than those anticipated by the Administration.

Most of the technical reestimates in SMI stem from lower estimated savings for the budget proposals. About half of these differences

result from a miscalculation the Administration made of the savings

from the physician fee freeze. The Administration has indicated that

an alternative proposal to replace the lost savings will be forthcoming.
11.-

154 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

FUNCTION 600: INCOME SECURITY

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item 1991 1992 1993 1994

Cumulative

Five-Year

1995 Changes

CBO Baseline

Proposed Changes

Civil Service Retirement

Military Retirement

Housing programs

Nutrition programs

Low-income energy

assistance

Trade Adjustment

Assistance

Family support payments

Other

Total

President's 1991 Budget

as Estimated by CBO

156.8

-2.1

-0.6

0.2

-0.8

-0.4

-0.1

-0.1

0.3

-3.6

163.6 171.7

-3.2

-1.1

1.2

-1.1

-0.5

-0.1

-0.1

0.2

-4.7

-3.6

-1.4

2.0

-1.3

-0.5

-0.1

-0.1

0.2

-4.7

181.5

-4.0

-1.7

2.9

-1.4

-0.6

-0.1

-0.1

0.1

-4.9

153.1 158.9 167.0 176.6

188.8

-4.4

-2.1

3.7

-1.3

-0.6

-0.2

-0.1

0.1

-4.9

184.0

-17.2

-6.8

9.9

-5.9

-2.5

-0.7

-0.4

0.9

-22.8

Proposed Policy Changes

The President has proposed net reductions of almost $23 billion in income security programs over five years. If enacted, these proposals

would lower outlays 3 percent below CBO baseline projections for the

1991-1995 period. The largest spending reductions--in civilian and

military retirement, child nutrition, and low-income energy assistance

programs—are identical or similar to changes requested in previous

budgets. Major increases are proposed only in housing programs.

Civil Service and Military Retirement. The largest savings in income

security programs would occur in the Civil Service and Military Retirement programs. Once again the Administration proposes to eliminate next year's cost-of-living adjustment (COLA) for nondisabled civil

service and military retirees. In subsequent years, the Administration

would limit COLAs for all civil service and military retirees to the in-
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 155

crease in the consumer price index (CPI) minus one percentage point,

with lesser reductions if the CPI rises by less than 3 percent.

Based on an expected COLA of 4.1 percent in 1991, CBO estimates

that eliminating the COLA would save $800 million in Civil Service

Retirement and $600 million in Military Retirement in 1991. Savings

from eliminating the 1991 COLA and reducing later COLAs would

total $8.7 billion (civil service) and $6.8 billion (military) over the

1991-1995 period. The Administration assumes a 3.9 percent increase

in 1991 and therefore estimates smaller savings from these COLA

changes. (See function 650 for CBO and Administration COLA assumptions for 1992 through 1995.)

Under CBO economic assumptions, the COLA proposals would reduce benefits for military and civilian retirees by 7 percent below baseline levels in 1995. The last time the COLA was eliminated was in

1986 as a result of sequestration. Real benefits (adjusted for inflation)

of federal retirees fell by 1.3 percent from that change.

The President's budget would also eliminate the option of a lumpsum payment in Civil Service Retirement. Under current law, civilian

employees retiring from the federal government after September 30,

1990, may withdraw 100 percent of their contributions to the retirement system in the year they retire, with correspondingly lower annuitant payments in the future. CBO estimates that eliminating this

option would save $8.5 billion over five years. The Administration

estimates savings of $9.4 billion because it assumes larger lump-sum

payments than CBO under current law. Because annuity payments

are reduced for those electing a lump-sum distribution, eliminating the

lump-sum option would eventually increase costs.

Housing Assistance. The President's budget would result in spending

$9.9 billion above the CBO baseline for housing programs over the

1991-1995 period, largely for the Department of Housing and Urban

Development's (HUD's) low-income rental assistance programs and for

modernization of public housing projects. The 1991 appropriation

request includes $15.1 billion for these programs, compared with the

baseline level of $9.3 billion. This increase reflects the large number of

existing rental assistance contracts that are expiring in the coming

year. Of the 1991 funds, $7.7 billion would be used to renew expiring

assistance contracts covering 294,500 rental units. (Only $1.1 billion
156 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

was needed in 1990 to renew expiring contracts.) Another $5.6 billion

would provide assistance for an estimated 98,000 rental units, 75,000

of which could be receiving rental assistance for the first time. The remaining $1.8 billion would be for the modernization of existing public

housing projects. Based on amounts appropriated in 1990, budget

authority in the CBO baseline would provide only $1.1 billion to renew

41,000 expiring assistance contracts and $8.2 billion to assist about

88,000 rental units and to modernize public housing projects.

Outlays for these rental assistance and modernization programs

under the President's budget proposal would exceed the baseline by

$120 million in 1991 and by $7.5 billion over the five-year period. The

CBO baseline, however, does not include enough funds to renew all expiring contracts. If sufficient authority were added to the CBO baseline to renew all expiring assistance contracts, as assumed in the HUD

budget, the Administration's proposals could result in outlays that are

$1.3 billion below the adjusted baseline over the five-year period.

As part of the HOPE initiative (Homeownership and Opportunity

for People Everywhere), the President is requesting $250 million in

1991 for a new grant program. The bulk of this funding would be used

to encourage tenant ownership in existing public housing and other

HUD-subsidized projects. According to HUD, assistance for about

29,000 rental units will be used in 1991 to supplement the requested

HOPE funding. The goal is to encourage low-income families to help

manage the rental facility in which they live and eventually to own

their units. The budget includes funding of $650 million for the new

grant program in 1992 and $1 billion a year thereafter. This proposal

would not add to 1991 outlays but would result in an estimated $1.9

billion in outlays over the five-year period.

The Administration is also proposing a new voucher program for

rural housing. About $190 million in budget authority is requested for

1991 and a total of $1.5 billion for the 1991-1995 period. If funded, the

program would add $2 million to outlays in 1991 and $473 million over

the five-year period. This voucher program is intended as a partial

substitute for the direct loan authority that would be reduced in function 370. The cuts requested in loan authority (function 370) would

more than offset the additional costs (function 600).
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 157

Nutrition Programs. The largest savings for nutrition programs—

netting $2.8 billion over five years—are proposed in the National

School Lunch program. The Administration proposes to eliminate cash

and commodity subsidies for school lunches served to children from

families with incomes above 350 percent of the poverty level. In contrast to similar proposals in past years, children in families with incomes between 185 percent and 350 percent of the poverty level would

be allowed to apply for continued lunch subsidies. The Administration

also would increase lunch subsidies for children from families with

incomes between 130 percent and 185 percent of poverty.

Eliminating lunch subsidies for children from families with incomes above 350 percent of poverty would save $1.1 billion over five

years. CBO estimates that requiring children from families with incomes between 185 percent and 350 percent of poverty to apply for

lunch subsidies would save an additional $1.9 billion because the

majority of these children would probably not complete the newly

required applications for a regular lunch subsidy (29 cents in 1991).

Fewer than one-half of eligible children today complete applications

for the larger reduced-price lunch subsidy ($1.33 in 1991). In addition,

the CBO estimate includes savings of less than $0.3 billion, which

results from schools leaving the National School Lunch program. The

Administration shows much smaller savings ($1.3 billion over five

years compared with CBO's $3.3 billion) because it assumes that all

eligible children would apply for the regular lunch subsidies and that

no schools would drop out of the program. Finally, increasing school

lunch subsidies for children from families with incomes between 130

percent and 185 percent of poverty would cost an estimated $0.5 billion

over five years. Of this estimate, $0.3 billion would be in direct costs

for higher subsidies and $0.2 billion in costs for children who join the

program as a result of the 20-cent reduction in lunch prices. The Administration's estimate does not include any costs associated with

increased participation.

The Administration has modified a previously submitted budget

request to institute a means test for subsidized meals in family day

care homes. This year's budget proposes to reduce, rather than to

eliminate, child care food subsidies for children from families with

incomes above 185 percent of poverty, saving $1.7 billion over five

years. Subsidies would be lowered for more than 70 percent of the children receiving subsidized meals in family day care homes.
158 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

The Administration also proposes spending $825 million in each

year for a new Fiscal Assistance to Puerto Rico program. The current

Nutrition Assistance to Puerto Rico program, funded at $937 million in

1990, would be eliminated. Because funding levels for the new program fall below the CBO baseline, outlays would fall $1.1 billion over

the 1991-1995 period. In the Food Stamp program, policy changes

include a cap on expenditures for employment and training and mandatory referral of certain recipients to Child Support Enforcement

agencies, saving a total of $0.4 billion between 1991 and 1995.

Low-Income Home Energy Assistance. The Administration requests

$1.05 billion for the Low Income Home Energy Assistance Program in

1991 and the same in subsequent years. This funding level is $0.3

billion below the 1990 appropriation and $0.4 billion below the CBO

baseline for 1991. Five-year outlay savings relative to the CBO baseline total $2.5 billion, a reduction of 32 percent.

The Low Income Home Energy Assistance Program was first funded in 1981, received a peak appropriation of $2.1 billion in 1985, and

has received declining funding levels since. The President's 1991 request is exactly half of the 1985 level.

Trade Adjustment Assistance. The President again proposes eliminating the Trade Adjustment Assistance program for workers who lose

their jobs because of competition from foreign imports. The proposal

would save an estimated $0.7 billion over the 1991-1995 period. These

workers would be eligible for a new comprehensive program to provide

training services for dislocated workers and other workers (see function 500). However, savings would result because the new Worker Readjustment program would not pay the cash benefits paid by the Trade

Adjustment Assistance program.

Family Support Payments to States. The President's proposed savings

are modest in the account that includes the Aid to Families with

Dependent Children (AFDC) and the Child Support Enforcement

(CSE) programs~an estimated $0.4 billion over five years. Changes in

funding focus on CSE, for which federal and state government savings

from collections of child support for AFDC families have fallen below

costs for the first time since the CSE program was established in 1975.

Moreover, states' net savings from the CSE program have continued to
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 159

grow-reaching about $370 million in 1989-while federal net costs

have climbed to about $470 million. The President's major proposals--

capping the federal match rate on CSE program expenditures and

requiring states to charge higher fees for services to families able to

pay-would reduce the federal government's share of costs and improve

the overall program's cost effectiveness.

Other. The President's requests for administrative funds in unemployment compensation are above CBO baseline projections. This difference is partially offset by lower requests for administrative and research funds in the Family Support Administration and for general

management of the Department of Health and Human Services. In addition, proposed funding levels for refugee assistance would be frozen

at 1990 levels for five years, saving $0.2 billion from CBO baseline

levels.

CBO Reestimates

CBO has reestimated the President's budget for income security

programs downward by $0.3 billion in 1990 and upward by $2.6 billion

in 1995. The CBO economic assumptions for higher COLAs, higher

inflation, and higher unemployment rates lead to upward reestimates

in all five years. These economic differences rise from $0.2 billion in

1990 to $3.2 billion in 1995.

The largest technical reestimate is in unemployment compensation. After adjusting for differences in economic assumptions, CBO's

estimates for the unemployment compensation program are $0.6

billion below the Administration's estimates in 1990 and $1.3 billion

below in 1995. CBO estimates that fewer people will receive benefits

and that the average benefit will be lower. By 1995, CBO projects that

7.1 million people will receive an average weekly benefit of $186, while

the Administration projects that 7.2 million people will receive an

average weekly benefit of $205.

CBO's technical reestimate of the Supplemental Security Income

(SSI) program decreases program outlays by a negligible amount in

1990 and raises them by $0.8 billion in 1995. Most of the SSI reestimate reflects different assumptions about the number of beneficiaries. CBO assumes that the number of aged SSI recipients will
160 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

decline less rapidly than is assumed in the Administration's estimate.

In addition, CBO assumes that the number of blind and disabled

recipients will increase at an average annual rate of 3.3 percent, while

the Administration assumes an average annual growth rate of 2.4

percent.

CBO's estimate of benefit payments for AFDC--the major program

in the Family Support Payments account—is $1.1 billion above the Administration's estimate in 1995. CBO projects both more AFDC

families and higher average family benefits, with each projection

accounting for roughly one-half of the reestimate. By 1995, CBO

projects that 4.1 million families will be receiving AFDC, compared

with 3.8 million in 1989, while the Administration projects a rise to 3.9

million families. For average benefits, CBO projects an annual growth

of about 3 percent, roughly in line with recent growth in benefits, while

the Administration projects an annual growth of about 2 percent.

CBO has also reestimated 1995 spending downward by $0.2 billion

for two new programs in the Family Support Payments account. These

new programs of child care assistance for current and former AFDC

beneficiaries are just now taking effect, and little will be known about

actual spending levels for at least another year. The major source of

the estimating difference is that CBO expects state spending on the

new Job Opportunities and Basic Skills Training Program (JOBS) to

be significantly lower than does the Administration, thus reducing the

demand for child care by participants in the JOBS program.

CBO's reestimate of JOBS reduces spending by $0.2 billion to $0.3

billion each year over the 1991-1995 period. The JOBS program for

AFDC beneficiaries, enacted in the Family Support Act of 1988, must

be implemented by the states no later than October 1, 1990. Federal

funds are provided through a capped entitlement, which rises from

$1.0 billion in 1991 to $1.3 billion in 1995, and are allotted to the states

according to each state's share of adult AFDC beneficiaries. States

must match the federal funds at various rates, ranging from 10 percent

to 50 percent. The Administration is assuming that all states will fully

use their allotments of federal funds. Based on 1990 spending estimates by the states and on discussions with officials in several states,

CBO is assuming that some states will not have sufficient state funds

to allow them to use their full federal allotments. On average, CBO
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 161

estimates that 65 percent of the 1991 federal funds for all states will be

used, rising to about 80 percent in 1995.

CBO's outlay estimates for the Pension Benefit Guaranty Corporation (PBGC) differ from the Administration's estimates by $0.4 billion

in 1990 and by $0.2 billion each year over the 1991-1995 period. This

difference in estimates reflects uncertainty over the pension benefits of

the LTV Corporation. The Supreme Court has agreed to hear arguments to decide whether the PBGC should continue to pay LTV's pension benefits or whether LTV should resume responsibility for the

payments. While CBO's estimates assume that PBGC will continue to

CBO REESTIMATES OF PROPOSED SPENDING IN THE

PRESIDENTS BUDGET (By fiscal year, outlays in billions of dollars)

1990 1991 1992 1993 1994 1995

President's 1991 Budget 146.6 153.7 159.6 166.3 174.6 181.4

CBO Reestimates

Economic

Cost-of-living

adjustments a 0.1 0.2 0.5 1.1 2.0

Other <L2 OJi QJ5 Oj) LI 1.2

Subtotal 0.2 0.6 0.8 1.5 2.2 3.2

Technical

Unemployment -0.6 -0.8 -1.0 -1.1 -1.2 -1.3

Supplemental Security

Income a 0.2 0.3 0.5 0.9 0.8

Family Support

Payments -0.1 0.2 0.3 0.5 0.7 0.9

JOBS a -0.3 -0.2 -0.2 -0.3 -0.3

Child nutrition -0.1 -0.3 -0.4 -0.4 -0.4 -0.5

Other 0.4 -0.2 -0.6 -0.1 0.1 -0.1

Subtotal -0.5 -1.2 -1.5 -0.8 -0.2 -0.6

Total -0.3 -0.6 -0.7 0.7 2.0 2.6

President's 1991 Budget

as Estimated by CBO 146.3 153.1 158.9 167.0 176.6 184.0

a. Less than $50 million.
162 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

pay LTV benefits, as is currently the case, the Administration's estimates assume LTV will resume responsibility for the payments.

Reestimates in outlays for child nutrition programs result from

the differences in CBO's and the Administration's estimates of proposed policy changes, discussed above. Remaining differences in estimates include negative reestimates in Civil Service and Food Stamp

programs, positive reestimates in the Military Retirement program,

and both positive and negative reestimates in housing programs.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 163

FUNCTION 650: SOCIAL SECURITY

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Cumulative

Five-Year

Item 1991 1992 1993 1994 1995 Changes

CBO Baseline 265.8 282.7 300.4 318.6 337.6

Proposed Changes a -0.1 -0.1 -0.2 -0.2 -0.6

President's 1991 Budget

as Estimated by CBO 265.8 282.6 300.3 318.4 337.4

a. Leas than $50 million.

Proposed Policy Changes

The Administration proposes several relatively small changes in

Social Security benefits payments, as well as an 8.6 percent increase in

the limitation on administrative expenses (LAE) for the Social Security Administration in 1991. Projected increases in the LAE for the

1992-1995 period, however, fall short of maintaining administrative

services at the 1991 level. The budget also includes several revenue

proposals affecting Social Security, which are discussed in Chapter HI.

Relative to the CBO baseline, the proposed budget would save about

$0.6 billion over the next five years, with about 70 percent of the savings attributable to administrative costs.

The Administration proposes to create new federal accounting procedures in 1993. These procedures would extend indefinitely the requirements of the Balanced Budget Act rather than let them expire

after 1993 as under current law, and would create a new bookkeeping

entry~the Social Security Integrity and Debt Retirement Fund. The

Administration asserts that these measures will ensure that the large

and growing surpluses in Social Security are used to help the economy

meet the increased costs of paying for the retirement of the baby-boom

generation. In fact, however, this change would mask the requirement

that the federal government run an overall surplus.
. U_

164 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

The new accounting entry or "fund," which would be displayed as a

new mandatory outlay from the general fund, would be related to the

size of the anticipated Social Security trust fund surpluses and, according to the Administration's published descriptions, would be used

to retire outstanding federal debt held by the public. If the overall

budget were in surplus, as the Administration expects it to be after

1993, this proposal in essence suggests a change in federal accounting

that would treat some monies used to retire debt as spending (the mandatory payments to this new "fund") and others as merely an entry in

the means-of-financing statements. Because it does not follow standard accounting practices, this proposal is not reflected in CBO's reestimates of the President's 1991 budget.

CBO Reestimates

CBO has reestimated the President's budget request upward by a total

of $15 billion from 1991 through 1995. CBO's projection of higher

inflation and the resulting higher cost-of-living adjustments (COLAs)

for Social Security accounts for $14.3 billion of the reestimates, with

technical reestimates amounting to $0.7 billion. The CBO estimates

of COLAs average about 0.5 percentage points more than the Administration's over the next five years, with the largest difference occurring

in 1994 and 1995 (see table below).

Social Security Cost-of-Living Adjustments

Assumed by CBO and the Administration

(In percent)

1991 19J92 1993 1994 1995

CBO 4.1 4.3 4.3 4.3 4.3

Administration 3.9 4.1 3.8 3.6 3.3

CBO's technical reestimates increase spending each year through

1993, but reduce spending thereafter. In general, CBO projects a

slightly faster growth in the number of Social Security recipients than

does the Administration. However, by 1994, CBO's projections of average real benefits (that is, average benefits after adjusting for COLAs)

are lower than the Administration's, probably because of less rapid

real wage growth. CBO's lower projections for average real benefits
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 165

more than offset its larger caseload projections in 1994 and 1995. In

addition, CBO projects that retroactive benefit payments will be growing less rapidly by the end of the five-year period.

CBO REESTIMATES OF PROPOSED SPENDING IN THE

PRESIDENTS BUDGET (By fiscal year, outlays in billions of dollars)

1990 1991 1992 1993 1994 1995

President's 1991 Budget 248.8 264.8 280.9 297.7 314.6 331.4

CBO Reestimates

Economic (Cost-of-living

adjustments) 0 0.4 0.9 2.1 4.0 7.0

Technical

Number of

beneficiaries a a 0.2 0.3 0.4 0.7

Average benefits

adjusted for

inflation 0.1 0.5 0.5 0.2 -0.5 -1.4

Retroactive

benefits adjusted

for inflation 0.2 0.2 0.1 a -0.1 -0.3

Other a a 0.1 a a 0.1

Subtotal 0.4 0.6 0.8 0.5 -0.2 -1.0

Total 0.4 1.0 1.7 2.6 3.8 6.0

President's 1991 Budget

as Estimated by CBO 248.8 265.8 282.6 300.3 318.4 337.4

a. Leas than $50 million.
166 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

FUNCTION 700: VETERANS BENEFITS AND SERVICES

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item 1991 1992 1993 1994 1995

Cumulative

Five-Year

Changes

CBO Baseline 31.5 32.4 33.6 36.2 36.0

Proposed Changes

Pensions a -0.2 -0.2 -0.3 -0.3 -1.0

Medical care 0.2 0.2 0.2 0.1 a 0.8

Reimbursements,

medical care -0.1 -0.1 -0.1 -0.1 -0.1 -0.6

Compensation -0.1 -0.2 -0.2 -0.2 -0.2 -0.8

Guaranty and Indemnity

Fund -0.1 -0.1 -0.1 -0.2 -0.2 -0.6

Loan Guaranty Revolving

Fund -0.1 a a a a -0.1

Allother jy. _OJL JU. .0.1 JU 0.5

Total -0.2 -0.2 -0.3 -0.5 -0.6 -1.9

President's 1991 Budget

as Estimated by CBO 31.3 32.2 33.3 35.7 35.4

a. Less than $50 million.

Proposed Policy Changes

The President's 1991 budget includes more than 20 legislative proposals for veterans' benefits and services. The combined effect of these

proposals would reduce spending in function 700 by $1.9 billion

through 1995 or by 1.1 percent.

Pensions. The President proposes to authorize the Department of

Veterans Affairs (VA) to access Internal Revenue Service (IRS) data in

order to verify the income reported by VA pensioners. Enacting this

legislation before the end of fiscal year 1990 would reduce outlays by

nearly $1.0 billion over the next five years. These savings would be

partially offset by an estimated $0.2 billion in higher administrative

costs in the general operating expenses account. Other proposed legislation would extend the period during which a pensioner could remain
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 167

in a VA nursing home or domiciliary before having his or her pension

reduced. This provision is expected to cost $7 million to $8 million a

year.

Medical Care and Reimbursements. The Administration's requested

appropriation for VA medical care exceeds CBO's baseline budget

authority by more than $800 million over the next five years. In addition, certain legislative proposals in the President's budget would

further increase spending. The President proposes to reform the

nurses' pay system and to increase the special pay for physicians and

dentists. Because the proposed pay structures are not yet available

from the VA, CBO is unable to estimate the cost of the pay proposals.

The Administration has estimated that the two proposals combined

would cost $70 million per year. A number of minor changes proposed

in the outpatient dental program would increase costs by an estimated

$19 million over the next five years.

These increases would be partially offset by savings from two measures to increase reimbursements for medical care. The 1991 budget

proposes to institute copayments for veterans in the middle-income

category who receive inpatient care, outpatient care, or prescription

drugs, and to increase such copayments for veterans in the higherincome category. This proposal Avould decrease medical care outlays by

about $300 million over five years by reducing the demand for care,

and would increase copayment receipts over the same period by nearly

$150 million. Another provision would authorize the VA to bill health

insurers for the treatment of non-service-connected conditions of

veterans who have service-connected disabilities. This proposal would

increase reimbursements by an estimated $475 million over the next

five years.

Compensation. The compensation program is not indexed by law.

Historically, its benefits have been increased for inflation each year

through legislation. The President's budget proposes to index the

benefits permanently. Because the CBO baseline includes these outyear inflation increases as specified in the Balanced Budget Act, this

proposal has no cost relative to the baseline. A proposal to discontinue

compensation benefits to incompetent veterans (veterans who lack the

mental capacity to contract or to manage their own affairs) who have

no dependents and who have assets of $25,000 or more would reduce
168 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

outlays by nearly $800 million between 1991 and 1995. Approximately 14,000 veterans would lose benefits.

Veterans' Housing. The President proposes several changes in VA

housing programs, which would reduce net outlays by $0.7 billion over

the next five years. One measure would increase the origination fee on

all newly guaranteed loans to 1.75 percent of the mortgage principal,

regardless of the size of down payment. Currently, veterans making

down payments of 5 percent or more pay lower origination fees than

the 1.25 percent charged for no-down-payment loans. This change

would reduce net outlays by around $100 million a year. New guarantees would be further restricted by the requirement of a 4 percent

down payment on loan amounts over $25,000. The resulting declines

in loan originations, default rates, and the cost of claim terminations

would reduce outlays by $80 million over five years.

Another proposal would change the calculation by which the VA

determines its most cost-effective course of action in response to a

default on a guaranteed loan. This proposal would increase the number of foreclosures in which the VA pays off the guaranty instead of

reimbursing the lender's loss and acquiring the securing property.

Outlays would decline by approximately $170 million over five years.

CBO Reestimates

CBO estimates for the compensation and pensions accounts exceed

those of the Administration by $23 million in 1991, growing to $408

million in 1995, because CBO's economic assumptions indicate higher

cost-of-living adjustments than are shown in the budget. In addition,

CBO projects a much slower decline in the disability compensation

caseload than the VA, and a slower decrease in real average pension

benefits. Finally, large differences in projected benefit payments for

1993 through 1995 result from a technical error in the budget regarding the number of payments per fiscal year. The first day of fiscal

years 1995 and 1996 falls on a weekend. Under these circumstances,

the VA is expected to mail the October compensation and pension

checks so that they will arrive on the Friday before October 1. Doing so

would result in 13 payments being made in fiscal year 1994 and 11

payments in 1996. The President's budget, however, assumes 13 payments in 1993 and 11 payments in 1995. As a result, the budget
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 169

assumes one more month of benefits in 1993 than CBO and one less in

1994 and 1995 (see table below).

Number of Assumed Benefit Payments Per Fiscal Year

1991-

1991 1992 1993 1994 1995 1995

CBO 12 12 12 13 12 61

Administration 12 12 13 12 11 60

The budget also projects that reimbursements for medical care

from veterans and health insurers will rise from $119 million in 1990

to more than $400 million in 1991 and to more than $800 million by

CBO REESTIMATES OF PROPOSED SPENDING IN THE

PRESIDENTS BUDGET (By fiscal year, outlays in billions of dollars)

1990 1991 1992 1993 1994 1995

President's 1991 Budget 28.9 30.3 31.0 33.3 32.6 31.7

CBO Reestimates

Economic (Cost-of-living

adjustments) 0.0 a 0.1 0.1 0.3 0.4

Technical

Compensation and

pensions 0.1 0.4 0.6 -0.7 2.2 2.6

Reimbursements for

medical care

Other

Subtotal

Total

President's 1991 Budget

as Estimated by CBO

a

a

0.1

0.1

29.0

0.3

0.3

1.0

1.0

31.3

0.4

0.2

1.2

1.2

32.2

0.5

a

-0.1

a

33.3

0.6

-0.1

2.8

3.1

35.7

0.6

a

3.3

3.7

35.4

a. Leas than $50 million.
170 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

1995. The budget, however, offers no plan to accomplish this increase.

The CBO estimate, which shows $2.5 billion less in receipts, assumes a

continuation of recent trends.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 171

FUNCTION 750: ADMINISTRATION OF JUSTICE

PROPOSED MAJOR SPENDING CBLANGES

(By fiscal year, outlays in billions of dollars)

Item

Cumulative

Five-Year

1991 1992 1993 1994 1995 Changes

CBO Baseline

Proposed Changes

Customs user fees

Law enforcement

programs

The Judiciary

Federal prison system

Other

Total

President's 1991 Budget

12.6 13.9

-0.7

0.2

0.2

a

-0.1

-0.8

0.3

0.4

-0.1

0.1

-0.2

14.6

-0.8

0.2

0.4

-0.1

a

-0.3

15.2

-0.8

0.1

0.4

-0.3

a

-0.6

15.8

-0.8

a

0.3

-0.3

-0.1

-0.9

-3.7

0.7

1.6

-0.8

0.1

-2.1

as Estimated by CBO

President's 1991 Budget

CBO Reestimates

12.5

12.6

-0.1

13.7

13.9

-0.2

14.3

14.2

0.1

14.5

14.3

0.2

14.9

14.6

0.3

a. Less than $50 million.

Proposed Policy Changes

The President's proposals for administration of justice would result in

net outlays that are $2.1 billion (3 percent) below the CBO baseline for

the 1991-1995 period. This reduction results from the proposed extension of customs user fees, which would generate $3.7 billion in receipts

over the five-year period. Excluding these fees, spending in this function would be $1.7 billion (2 percent) above the baseline.

Customs User Fees. The President's budget includes a proposal to

extend and restructure customs user fees. This proposal would save

$3.7 billion relative to the baseline through 1995 because the fees are

currently scheduled to expire after 1990. The proposed restructuring,

which is to be specified later, would convert the ad valorem portion of

the fees to a transaction-based fee designed to cover the cost of the Cus-
172 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

toms Service's commercial activities. This restructuring would make

the fees consistent with the General Agreement on Tariffs and Trade

(GATT).

Law Enforcement Programs. Spending in 1991 for federal law enforcement activities would be $6.2 billion, which is $0.2 billion, or 4 percent,

above the baseline. Outlays over the five-year period would be $0.7 billion, or 2 percent, above the baseline. Customs Service salaries and expenses would exceed the baseline by $0.6 billion over five years, reflecting direct spending from the additional customs user fee receipts.

Other law enforcement spending would be slightly above the baseline

over this period. Spending for organized crime drug enforcement

would rise sharply, as the result of a funding increase from $215 million in 1990 to $330 million in 1991. Other programs with increased

spending would include the Federal Bureau of Investigation and the

Drug Enforcement Administration, while spending for the Immigration and Naturalization Service and the Bureau of Alcohol, Tobacco,

and Firearms would be below the baseline.

The Judiciary. Spending by the Judiciary would be $1.6 billion, or 17

percent, above the baseline level from 1991 through 1995. The budget

proposes major increases in spending authority for 1991 and 1992, and

would increase spending at close to the baseline rate of growth in

subsequent years. Budget authority for 1991 would total $2.1 billion,

compared with $1.7 billion in 1990. Most of this increase would be for

the courts of appeals, district courts, and other judicial services.

Federal Prison System. The President's proposals would reduce spending on the federal prison system by almost $800 million, or 6 percent,

below the CBO baseline from 1991 through 1995. This results from

spending below baseline levels for buildings and facilities but above

the baseline for operating expenses. Funding for prisons in 1990 was

much higher than usual because it included an additional $1 billion for

prison construction provided in the emergency drug funding appropriation (Public Law 101-164). The baseline includes similar funding

in future years, while the President proposes to reduce funding substantially. (The appropriation request for 1991 is $374 million, compared with $1.4 billion provided for 1990.) As a result, proposed spending for buildings and facilities would be more than $4.5 billion, or 65

percent, below the CBO baseline over the five-year period.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 173

The budget also includes an increase in spending for salaries and

expenses of almost $3.8 billion, or 57 percent, relative to the CBO baseline from 1991 through 1995. The largest increases in spending authority would occur after 1992. These increases are primarily to staff

and operate new prisons.

Other. The President's budget would increase spending for other

justice programs by $135 million relative to the CBO baseline from

1991 through 1995. Spending for U.S. Attorneys would be more than

$300 million (11 percent) above the CBO baseline, while general legal

activities, the U.S. Marshals Service, and support of U.S. prisoners in

nonfederal institutions would also be targeted for significant increases.

The President would hold budget authority for the Legal Services

Corporation constant at the 1990 level, resulting in a reduction in

spending of almost $200 million below the CBO baseline from 1991

through 1995. The President's proposed spending levels for justice

assistance programs would also be below the baseline, by $250 million.

This reduction is the result of the President's proposal to eliminate

nearly all juvenile justice programs. The spending levels for other

parts of the Office of Justice Programs, including the anti-drug abuse

grants, would increase at roughly the same rate as the baseline.

CBO Reestimates

CBO estimates that spending under the Administration's policies

would be slightly higher over the five-year period than estimated in

the budget. In general, these reestimates result from small differences

in estimated spending rates. CBO expects that receipts from customs

user fees would be $50 million to $100 million per year lower than the

Administration estimates, reflecting implementation of the free trade

agreement between the United States and Canada.
174 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

FUNCTION 800: GENERAL GOVERNMENT

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item 1991 1992 1993 1994

Cumulative

Five-Year

1995 Changes

CBO Baseline 11.2

Proposed Changes

Government-sponsored

enterprise fees -0.1

Federal Buildings Fund 0.2

Internal Revenue Service 0.2

Other _a

Total 0.3

11.6

-0.3

0.4

0.4

-0.1

0.4

11.7

-0.7

0.6

0.5

-0.3

0.1

11.9

-0.9

0.6

0.5

-0.3

12.3

-1.1

0.6

0.6

-0.5

-0.4

-3.0

2.5

2.2

-1.2

0.4

President's 1991 Budget

as Estimated by CBO

President's 1991 Budget

CBO Reestimates

11.5

11.3

0.2

12.1

11.9

0.1

11.8

11.7

0.1

11.8

11.6

0.2

12.0

11.7

0.3

a. Leas than $50 million.

Proposed Policy Changes

The Administration's proposal to increase spending on general government activities would raise outlays by $0.4 billion above the CBO baseline over the 1991-1995 period. Several programs would receive large

increases in spending, but these increases would be offset in part by

new general government receipts.

GSE Fees. The largest change relative to the CBO baseline would

result from a proposal, similar to one in the 1990 and previous budgets,

to levy an annual fee on debt and other securities issued by government-sponsored enterprises (GSEs) beginning in 1991. The affected

agencies include the Federal National Mortgage Corporation (Fannie

Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac),

and the Student Loan Marketing Association. The fee would start at

10 basis points in 1991, increasing to 20 basis points in 1992 and 30
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 175

basis points in 1993 and thereafter. Mortgage-backed securities issued

by Fannie Mae and Freddie Mac would carry a fee of 5 basis points in

1991,10 basis points in 1992, and 15 basis points each year thereafter.

Together these fees would generate an estimated $3 billion in receipts

over the next five years.

Federal Buildings Fund. The largest spending proposal is for the

Federal Buildings Fund for leasing space and repairing buildings. The

request would increase outlays by $2.5 billion above the baseline over

the 1991-1995 period, mostly because of higher rental costs for leased

property as a result of increases in the government's space needs and

rising rental rates.

Internal Revenue Service Initiatives. The President's proposal to hire

about 3,500 new employees for a variety of initiatives aimed at increasing revenue collections would raise outlays by $0.2 billion above

the baseline in 1991. To continue these initiatives and to fund improvements in information systems over the next five years, the

President would spend a total of $2.2 billion above baseline levels.

Further details on these proposed initiatives and CBO's estimates of

the revenues they would generate are provided in Chapter III.

Other. The budget also includes spending for the legislative branch

that would exceed the baseline by $0.2 billion in 1991 and $0.6 billion

over the five-year period. Offsetting this increase is a reduced request

for payments to the District of Columbia, which would result in

payments to the District that are $0.5 billion less than baseline levels

over the next five years. Other proposed reductions in general government spending are largely intragovernmental and would not affect

total federal spending. In addition, both the budget and the CBO

baseline include 1991 outlays of $500 million for the first restitution

payments to Japanese-American World War II internees; total costs

are expected to be $1.3 billion over the 1991-1993 period.

Social Security Integrity and Debt Retirement Fund. Beginning in

1993, the President proposes to record a portion of expected Social

Security surpluses as general government spending. This proposal,

however, is just an accounting device that would have no substantive

effect on the budget. For this reason, discussed further in Chapter I,

CBO follows standard budgetary accounting rules and does not include

these outlays in the spending totals.
176 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

CBO Reestimates

The budget assumes that ongoing efforts to identify and sell surplus

federal property would raise about $0.8 billion over the next five years.

Repeated efforts throughout the 1980s to sell property have fallen far

short of their stated goals, and the lengthy process of declaring

property to be surplus and then selling it indicates that an increase in

the near future is unlikely. CBO therefore estimates that receipts

from surplus property sales will remain at historical levels, and will

net about $0.3 billion over five years. CBO's estimates of outlays for a

number of other programs, primarily the Internal Revenue Service and

claims and judgments, are based on historical spending patterns and

are also higher than those in the budget.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 177

FUNCTION 900: NET INTEREST

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Cumulative

Five-Year

Item 1991 1992 1993 1994 1995 Changes

CBO Baseline 184.0 190.1 198.2 204.1 208.2

Proposed Changes

Net interest on the

public debt -1.2 -3.9 -7.4 -11.9 -17.9 -42.2

Other interest JX1 .0.2 jy> 0.6 0.9 2.3

Total -1.1 -3.7 -6.9 -11.3 -17.0 -40.0

President's 1991 Budget

as Estimated by CBO 182.9 186.5 191.3 192.8 191.2

a. Less than $50 million.

Proposed Policy Changes

Net interest outlays cannot be controlled directly, but are fundamentally determined by the government's deficit and by interest rates.

The Administration's spending and revenue proposals, if enacted,

would lead to smaller deficits than contained in the CBO baseline

projections, and reduce the government's need to borrow. Under the

Administration's deficit reduction program, debt held by the public is

$31 billion lower than in the baseline at the end of 1991, and nearly

$300 billion lower at the end of 1995. The resulting savings in debt

service costs climb from $1.2 billion in 1991 to $17.9 billion in 1995.

While net interest primarily represents the government's cost of

financing its debt, a variety of other interest payments and collections

are also included. In particular, this category of spending reflects

interest income collected by the government from loans or similar

transactions. Modest reductions in interest income would occur under

the Administration's proposals. By curtailing certain loan programs,

the President's program would lead to reductions in interest income of

$0.1 billion in 1991 and $0.9 billion in 1995.
178 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

CBO Reestimates

Reestimates of the Administration's net interest spending total $3.1

billion in 1990, $9.9 billion in 1991, and $55.1 billion in 1995. These

differences stem overwhelmingly from, higher interest rates and higher

deficits under the Administration's plan as reestimated by CBO.

CBO assumes higher interest rates and significantly greater outlays for interest payments on the public debt than does the Administration. Reestimates attributable to this source grow from $5.1 billion

in 1991 (when CBO's short-term interest rate projections are 1.5 percentage points above the Administration's, and longer-term maturities

are 0.7 percentage points higher) to $20.6 billion in 1995 (when the

interest rate differentials are 1.4 percentage points and 1.8 percentage

points, respectively). Contrasting interest rate assumptions lead to

relatively small differences in other interest.

Technical estimating differences are much less significant than

economic reestimates, but add increasing amounts to interest outlays

through 1995. Technical reestimates to net interest on the public debt

grow from $2.6 billion in 1991 to $4.7 billion in 1995. In keeping with

recent Treasury practice, CBO assumes greater reliance on mediumand long-term securities (which typically carry higher interest rates

than short-term securities); CBO also assumes that borrowing takes

place somewhat earlier in the year. CBO's estimates also incorporate

nearly $20 billion in matured debt, omitted by the Administration,

that was outstanding at the end of fiscal year 1989 and had to be

refinanced, leading CBO to estimate additional interest costs of $0.6

billion in 1990 and about $1.5 billion thereafter. In 1991, these upward reestimates are partially offset by CBO's lower projection

(amounting to $650 million) of interest on certain savings bonds that

become eligible for a special bonus payment.

Technical reestimates of other interest programs reduce outlays

over the projection period. Outlays are lower by $2.7 billion in 1991,

and by $1.1 billion in 1995. These reestimates primarily reflect

interest receipts earned by the Federal Financing Bank on its loans to

the Resolution Trust Corporation for working capital, a plan that

became final after the President's budget was released and was not reflected in the Administration's estimates.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 179

As explained in Chapter I, CBO believes that the Administration

has greatly underestimated the deficits that would result from its budget proposals. CBO's reestimates of the deficit under the Administration's plan grow from $37 billion in 1990 to $122 billion in 1995, and

total nearly $500 billion over the 1990-1995 period. Increased interest

costs from the additional borrowing required to finance these higher

deficits grow from $1.0 billion in 1990 to $31.1 billion in 1995.

CBO REESTIMATES OF PROPOSED SPENDING IN THE

PRESIDENTS BUDGET (By fiscal year, in billions of dollars)

1990 1991 1992 1993 1994 1995

President's 1991 Budget 175.6 173.0 163.5 157.0 147.8 136.1

CBO Reestimates

Economic (Interest rates)

Net interest on the

public debt -0.5 5.1 12.9 17.0 19.5 20.6

Other interest _a -0.2 -0.1 _a _a -0.2

Subtotal -0.5 4.8 12.8 17.1 19.5 20.4

Technical

Net interest on the

public debt 3.4 2.6 3.7 4.1 4.4 4.7

Other interest -0.8 -2.7 -3.6 -2.8 -2.0 -1.1

Subtotal 2.6 -0.1 0.1 1.4 2.3 3.6

Debt Service

Economic reestimates a 1.0 4.0 9.1 15.9 23.5

Technical reestimates 1.0 4.3 6.1 6.8 7.4 7.6

Subtotal 1.0 5.3 10.1 15.9 23.3 31.1

Total 3.1 9.9 23.0 34.3 45.0 55.1

President's 1991 Budget

as Estimated by CBO 178.7 182.9 186.5 191.3 192.8 191.2

a. Leas than $50 million.
180 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

FUNCTION 920: ALLOWANCES

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item

Cumulative

Five-Year

1991 1992 1993 1994 1995 Changes

CBO Baseline

Proposed Changes

Employee health

benefits reform

Reduced government

mail rates

Total

President's 1991 Budget

-0.9

-0.2

-1.1

-0.9

-0.2

-1.1

-1.0

-0.2

-1.2

-1.0

-0.2

-1.2

-1.1

-0.2

-1.3

-4.8

-1.1

-5.9

as Estimated by CBO

President's 1991 Budget

CBO Reestimates

1.1

1.1

0

1.1

1.1

0

1.2

1.2

0

1.2

1.2

0

1.3

1.3

0

Proposed Policy Changes

The allowances function contains savings for two Administration

initiatives—federal health benefits for federal employees and reduced

government mail rates. Savings would total $1.1 billion in 1991 and

$5.9 billion over five years. Both initiatives would require reductions

in agency appropriations if the savings are to be achieved.

Employee Health Benefits. Proposed changes to the Federal Employees Health Benefits plan (FEHB) would save $850 million in 1991

and $4.8 billion over five years relative to the CBO baseline. At the

time the budget was prepared, the Administration had not reached

agreement on a specific plan to achieve these savings. One possibility

is that the Administration will again propose the "weighted average"

method of determining the government's contribution to FEHB. Under this plan, the government's contribution would fall from 67 percent

of total plan costs to 60 percent, while the employee's contribution

would rise by compensating amounts. If appropriate adjustments were
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 181

made to agency appropriations, such a plan would save approximately

the amounts included in the budget. The Administration reportedly is

continuing to develop an alternative plan for federal employee health

benefits, but no details are currently available.

Reduced Government Mail Rates. The President's budget again

includes a proposal to establish reduced rates for government mail,

resulting in savings of $0.2 billion in 1991 and of $1.1 billion over five

years. To recover the lost payments from the government, the Postal

Service would increase postal rates for nongovernment users or cut its

expenses.

Davis-Bacon Act. The Administration has indicated its intention to

submit legislation modifying the requirements of the Davis-Bacon Act,

a law that regulates wage rates paid on construction contracts funded

at least in part by the federal government. Though not included in the

original budget submission, the proposal would raise the minimum

contract size covered under the act from $2,000 to $250,000, and would

allow employers to pay lesser-skilled workers lower wages than they

pay to journeymen. If this proposal were enacted and the appropriations for federal construction activities were reduced accordingly, an

estimated $0.2 billion in savings would accrue in 1991 and federal

spending would be lowered by $2.5 billion over the next five years.

(For more details, see Congressional Budget Office, Reducing the Deficit: Spending and Revenue Options (February 1990), pp. 319-320.)

25-692 0-90- 7
182 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

FUNCTION 950: UNDISTRIBUTED OFFSETTING RECEIPTS

PROPOSED MAJOR SPENDING CHANGES

(By fiscal year, outlays in billions of dollars)

Item 1991 1992 1993 1994 1995

Cumulative

Five-Year

Changes

CBO Baseline -38.8 -40.9 -42.7 -45.2 -47.6

Proposed Changes

Lease of naval petroleum

reserves* -1.0 -0.4 -0.4 -0.1 -0.1 -2.0

Sale of power marketing

administrations* -0.1 -1.2 00 0 -1.3

Lease of Arctic National

Wildlife Refuge 0 0 -1.6 b -0.9 -2.5

Spectrum auction -0.4 -0.4 00 0 -0.8

Unspecified asset sales 0 -1.6 -1.6 -1.6 -1.6 -6.4

Employer's share of

employee retirement -0.1 1.3 1.2 1.1 1.4 4.8

Total -1.6 -2.3 -2.4 -0.6 -1.2 -8.2

President's 1991 Budget

as Estimated by CBO -40.4 -43.2 -45.1 -45.8 -48.8

a. The receipts from the proposed lease of the naval petroleum reserves and the proposed sale of the

Alaska and portions of the Southeastern power marketing administrations are shown in function

950. Outlays in function 270 would increase, relative to the baseline, after these proposed asset

transactions, because the assets would no longer generate direct receipts to the government.

b. Less than $50 million.

Proposed Policy Changes

The budget includes measures for increasing undistributed offsetting

receipts by $8.2 billion over the 1991-1995 period. The President proposes to sell the rights to oil and gas production at the naval petroleum

reserves (NPRs), government interests in two of the five power marketing administrations (PMAs), and oil and gas exploration rights for

the Arctic National Wildlife Refuge (ANWR). The budget also includes proposed fees for the rights to use communications frequencies

and an allowance for unspecified asset sales in future years. Finally, a

number of proposals would affect the amounts agencies contribute for

employee retirement, which appear as receipts in this function.
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 183

Almost all of these proposals are similar or identical to ones in previous budgets.

Naval Petroleum Reserves. The President proposes to sell the rights to

produce petroleum products at the government's Elk Hills and Teapot

Dome oil fields through a long-term lease. The buyer(s) of these rights

would pay the government a fixed bonus bid of $1 billion in 1991, and

$0.4 billion in both 1992 and 1993. The government would also receive

royalties on future production, at rates offered by the highest bidder(s).

CBO estimates that the NPR royalties and bonus payments would

total $2 billion over the 1991-1995 period. These receipts would be

almost completely offset (in function 270) over five years by a loss of

about $1.9 billion in net income from the direct government sale of

NPR products. The government would forgo additional net income

after 1995.

Sale of Power Marketing Administrations. The President proposes to

sell the Alaska PMA, and the Georgia-Alabama system within the

Southeastern PMA, at the end of 1991. CBO estimates, however, that

only the Alaska PMA could be sold in 1991 and that proceeds from its

sale would be about $85 million. The Georgia-Alabama system could

be sold for an estimated $1.2 billion. The budget includes the proceeds

from this sale in 1991, but CBO believes the sale of this larger system

could not be completed until 1992. Potential receipts from selling the

PMAs are very uncertain because of the unknown structure of the sale,

differing values of these assets to prospective buyers, and the uncertain impact of the sale on federal tax revenues. PMA sales receipts

would be partially offset by lost income (in function 270) of about

$0.3 billion over the 1991-1995 period and by additional amounts after

1995.

Arctic National Wildlife Refuge. The President proposes opening the

ANWR to exploration and drilling for oil and gas, with lease sales

occurring in 1993 and 1995. CBO expects that bonus bid receipts from

these sales would total $1.6 billion in 1993 and $0.9 billion in 1995.

Spectrum Auction. The President proposes to authorize the Federal

Communications Commission (FCC) to assign six megahertz of the

nonbroadcast spectrum through competitive bidding. The budget does

not provide details of the proposal, but the Administration estimates

that it would generate additional receipts of $2.3 billion in 1991 and
184 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

$1.1 billion in 1992. In contrast, CBO estimates spectrum fees of $375

million in both 1991 and 1992.

Unspecified Asset Sales. The budget assumes receipts of $1.6 billion

per year from 1992 through 1995 from as yet unspecified asset sales.

Employer's Share of Employee Retirement. Agency contributions to

employee retirement programs are intragovernmental payments that

are paid out of individual program accounts and recorded as offsetting

receipts in function 950. The President proposes four changes in these

agency payments, for a net decrease in receipts of $4.8 billion over the

1991-1995 period. These changes are offset in agency spending accounts.

First, the President requests lower civilian and military pay raises

than assumed in the baseline, and delays raises from October until

January of each year. This proposal would decrease agency payments

for retirement by $0.3 billion in 1991, and by $2.6 billion over the

1991-1995 period. Second, the President proposes to reduce the size of

military forces in each year, thus reducing retirement contributions by

the Department of Defense (DoD). Contributions would fall by $200

million in 1991, and by more than $2.5 billion over the 1991-1995

period.

Third, beginning in 1992, the President would limit civil service

and military retirees' cost-of-living adjustments (COLAs) to the

change in the consumer price index minus one percentage point. This

change would reduce military retirement contributions, shown as receipts in this function, by $3.4 billion through 1995. (It has no effect on

agencies' payments to civilian retirement funds, which have different

funding procedures.) Finally, the budget includes increases in Postal

Service employer contributions of approximately $600 million in 1991,

and $3.6 billion over the 1991-1995 period. Postal Service contributions would increase from 7 percent of employees' salaries to 11.7

percent for 1991 through 1993, then to 14 percent for 1994 and 1995.

CBO Reestimates

CBO estimates that outlays in this function would be above the Administration's estimates by $3.2 billion in 1991 and by another $3.1
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 185

billion over the following four years. Reestimates of receipts from the

spectrum auction and the sale of the Southeastern PMA account for

most of the 1991 reestimate.

Spectrum Auction. The Administration projects receipts from the spectrum auction that are greater by $1.9 billion in 1991 and $0.8 billion in

1992 than those estimated by CBO. Any estimate of receipts from auctioning parts of the spectrum is uncertain because the FCC has never

used competitive bidding to assign licenses. Also, it is likely that the

FCC would have considerable discretion over a number of important

factors, including (1) whether or not to use an auction for license assignment; (2) the types of services that would be allowed to bid; (3) the

amount of spectrum that would be auctioned; and (4) the timetable for

issuance of licenses and receipt of payments. Because of these uncertainties and because the budget does not provide details of the proposal, the range of potential receipts is very wide and could encompass

the Administration's estimate. Nevertheless, CBO believes that there

are many scenarios under which receipts could be much less than projected by the Administration and could in fact be zero in 1991. CBO's

estimate reflects the likelihood that auction receipts would fall toward

the lower end of the range.

CBO REESTIMATES OF PROPOSED SPENDING IN THE

PRESIDENT'S BUDGET (By fiscal year, in billions of dollars)

1990 1991 1992 1993 1994 1995

President's 1991 Budget -36.5 -43.6 -43.8 -46.2 -46.6 -49.5

CBO Reestimates

Spectrum auction 0 1.9 0.8 0 0 0

Sale of Southeastern Power

Marketing Administration 0 1. 2 -1.2 00 0

Employer's share of employee

retirement 0.1 0.3 1.2 1.1 1.1 0.9

Other -0.3 -0.2 -0.2 -0.1 -0.3 -0.2

Total -0.2 3.2 0.6 1.0 0.8 0.7

President's 1991 Budget

as Estimated by CBO -36.6 -40.4 -43.2 -45.1 -45.8 -48.8

25-692 0-90- 8
186 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Sale of Southeastern PMA. While the Administration includes sale

receipts in 1991, CBO believes that the sale will not be completed until

1992, because a sale as large and complex as Southeastern's GeorgiaAlabama system would require significant further study and negotiations among several affected utilities and government agencies.

Employer's Share of Employee Retirement. The Administration

makes no adjustment to the military retirement contribution for the

proposal to limit retirees' COLAs. CBO estimates that this proposal

would lower DoD's rate of contribution by over 5 percent in 1992, and

would reduce total DoD payments by almost $3.4 billion over the 1992-

1995 period. This difference accounts for most of the reestimate in employee retirement receipts.

Other. CBO estimates higher net receipts from leasing the ANWR,

NPR, and Outer Continental Shelf, totaling about $1 billion more than

the Administration's projections over the 1991-1995 period. These

reestimates primarily reflect CBO's assumption of higher oil prices

than were used in the President's budget.
APPENDIXES

APPENDIX A

BASELINE BUDGET PROJECTIONS

The CBO baseline is a neutral benchmark against which the budgetary impact of various proposals and options can be measured and

evaluated. It is constructed according to rules specified in the Balanced Budget Act for projecting current taxing and spending policies

into the future.

Table A-l summarizes CBO's latest baseline projections. These

are consistent with the economic assumptions discussed in Chapter II.

Over the 1990-1995 period, they show revenues growing at about 6 percent a year, outlays increasing at less than 5 percent a year, and the

deficit declining from $159 billion in 1990 to $110 billion in 1995.

REVISIONS IN THE CBO BASELINE

CBO issued its initial baseline projections for this year in the Economic

and Budget Outlook: Fiscal Years 1991-1995, published in January

1990. Since that time, with additional information available from

various sources and the release of the President's 1991 budget, CBO

has updated its spending and revenue projections. With one significant exception, spending for the Resolution Trust Corporation (RTC),

the changes are small. But the RTC change has a dramatic impact,

particularly on the 1990 and 1991 deficits. This appendix will briefly

identify the major revisions to the January baseline and then provide

extensive detail on the updated projections of RTC activity.

The RTC is charged with the task of closing or selling hundreds of

insolvent savings and loans. Until recently, there was no determination as to how the agency would obtain the large amounts of up-front

cash necessary to resolve its cases. For this reason, both the President's budget and CBO's January baseline included relatively modest

outlays for the RTC. (The budget request shows a total of $9.6 billion

in 1990 and 1991; the January baseline, $18.9 billion.) It now appears
190 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

TABLE A-l. BASELINE BUDGET PROJECTIONS (By fiscal year)

1990 1991 1992 1993 1994 1995

In Billions of Dollars

Revenues

Individual income

Corporate income

Social insurance

Other

Total

Outlays

National defense

Nondefense discretionary spending

Entitlements and other

mandatory spending

Net interest

Offsetting receipts

Total

Deficit

Deficit Targets

Debt Held by the Public

490

102

388

87

528

111

412

86

564

116

437

87

602

120

465

90

641

126

495

94

682

134

526

97

1,067 1,137 1,204 1,277

As a Percentage of GNP

Revenues

Individual income

Corporate income

Social insurance

Other

Total

9.0

1.9

7.1

1.6

19.6

9.1

1.9

7.1

JJ>

19.6

9.1

1.9

7.1

1.4

19.5

9.1

1.8

7.1

1.4

19.4

1,355

9.1

1.8

7.1

1.3

19.3

1,438

297

206

604

179

-60

1,226

159

100

2,344

307

220

648

184

-60

1,298

161

64

2,504

318

229

654

190

-63

1,328

124

28

2,627

328

237

711

198

-66

1,409

132

0

2,758

345

245

751

204

-69

1,476

121

a

2,878

355

254

804

208

-73

1,548

110

a

2,988

9.1

1.8

7.0

1.3

19.3

Outlays

National defense

Nondefense discretionary spending

Entitlements and other

mandatory spending

Net interest

Offsetting receipts

Total

Deficit

Debt Held by the Public

5.4

3.8

11.1

3.3

-1.1

22.5

2.9

43.0

5.3

3.8

11.2

3.2

-y>

22.4

2.8

43.2

5.1

3.7

10.6

3.1

-1.0

21.5

2.0

42.5

5.0

3.6

10.8

3.0

-1.0

21.4

2.0

41.9

4.9

3.5

10.7

2.9

-1.0

21.1

1.7

41.1

4.8

3.4

10.8

2.8

-1.0

20.7

1.5

40.0

SOURCE: Congressional Budget Office.

NOTE: The projections include Social Security, which is off-budget but is counted for purposes of the

Balanced Budget Act targets. For comparability with the targets, the projections exclude the

Postal Service, which is also off-budget.

a. The Balanced Budget and Emergency Deficit Control Reaffirmation Act of 1987 established targets

for 1988 through 1993.
APPENDIX A BASELINE BUDGET PROJECTIONS 191

that the RTC will meet its working capital needs by borrowing from

the Federal Financing Bank (FFB), an arm of the Treasury. CBO

therefore has revised its baseline projections to reflect such borrowing-currently estimated to total $55 billion by late 1991. While

the borrowing itself does not affect the budget, spending of the borrowed amounts will count as budget outlays and increase the federal

deficit. Some of this added spending will be offset by increased asset

sales that will result from the higher case resolution activity. The net

result is to add $19 billion to the 1990 baseline deficit and $26 billion to

the red ink in 1991. Such sales will continue for many years, and baseline outlays after 1991 have been reduced by several billion dollars a

year to reflect the added income. Table A-2 summarizes these and

other major changes in the January baseline.

The other baseline revisions are much smaller—resulting in a $2

billion deficit increase for 1990, and $2 billion to $3 billion decreases

over the next five years. Estimates of farm price support spending

have been reduced by $1.3 billion in 1991 and by $0.6 billion in 1992

and 1993. Most of this change is based on recent Department

TABLE A-2. REVISIONS TO CKO BASELINE

(By fiscal year, in billions of dollars)

1990 1991 1992 1993 1994 1995

January Baseline Deficit 138 138 135 141 130 118

Changes

Resolution Trust Corporation

Farm price supports

Medicare

Other

Total

February Baseline Deficit

19

a

1

_1

21

159

26

-1

-2

.1

23

161

-10

-1

-1

a

-11

124

-6

-1

-1

^1

-9

132

-5

a

-2

JL

-8

121

-4

a

-3

_J,

-7

110

SOURCE: Congressional Budget Office,

a. Less than $0.5 billion.
192 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

of Agriculture reports indicating smaller corn stocks and less acreage

planted to wheat than previously thought. This is likely to cause higher grain prices and lower deficiency payments to farmers over the next

few years than projected earlier.

Estimates of Medicare spending have been increased by $1 billion

in 1990, and reduced by $1 billion to $3 billion a year from 1991

through 1995. Most of the baseline revisions for 1990 and 1991 reflect

an announced Administration plan to speed up the payment of Medicare claims in fiscal year 1990 and slow them back to current rates in

fiscal year 1991 and beyond. This timing shift increases estimated

1990 outlays by $1.5 billion and reduces 1991 outlays by the same

amount. Because CBO practice is to include the effects of administrative actions in its projections, this timing shift is incorporated in the

baseline. The plan, however, is clearly a budget gimmick. By simply

shifting payments from one fiscal year to another, it will not contribute

to meaningful deficit reduction. About two-thirds of the Medicare

baseline reestimates for 1992 through 1995 stem from lower estimates

of spending for the Supplementary Medical Insurance program. Other

revisions involve a wide variety of spending programs and are small in

the aggregate. Reestimates of revenues are minor.

The baseline does not incorporate the deferral of funds appropriated for certain defense programs in 1990. Although the Administration has announced its desire to defer $2.2 billion in defense appropriations, the deferrals may not remain in place for the entire year. As

discussed in Box IV-1, GAO has questioned the legality of the deferrals, and the Administration may choose to withdraw some or all of

them.

CBO'S BASELINE PROJECTIONS OF RTC SPENDING

The Financial Institutions Reform, Recovery and Enforcement Act of

1989 (FIRREA), enacted in August 1989, established the mechanisms

for dealing with the savings and loan crisis. The Federal Deposit Insurance Corporation (FDIC), through the Federal Savings and Loan

Insurance Corporation (FSLIC) Resolution Fund, is to complete the

resolution of institutions sold before March 1989. The Resolution

Trust Corporation (RTC) is to close or sell savings and loan institutions

that are currently insolvent or expected to fail through August 1992,
APPENDIX A BASELINE BUDGET PROJECTIONS 193

and the new Savings Association Insurance Fund (SAIF) is responsible

for dealing with problem thrifts after that date.

The legislation provided the RTC with $50 billion to close or

subsidize the sale of hundreds of insolvent thrift institutions—

$18.8 billion from the Treasury, $1.2 billion from the Federal Home

Loan Banks, and another $30 billion to be borrowed through the offbudget Resolution Funding Corporation (REFCORP) starting in 1990.

The $50 billion was intended to pay for insurance losses that could

never be recovered. In the process of resolving the problem thrifts,

however, the RTC will need cash far in excess of the $50 billion

authorized by FIRREA to finance the purchase of assets that will

subsequently be sold. For example, if an institution has assets with a

book value of $100 million and insured liabilities of $130 million, a

liquidation could require the RTC to spend $130 million immediately

in cash to pay off creditors. It is further possible that an amount less

than the book value would be recovered in future years as assets were

sold, say $70 million. In this example, up-front cash of $130 million

would be necessary, even though the ultimate loss would be only

$60 million. Theoretically, the use of working capital is temporary.

But if recoveries from asset sales are less than initially estimated,

some of the working capital may not be repaid and the government's

ultimate losses will increase.

The need for working capital appears to be substantial. The Administration has indicated a range of $40 billion to $100billionbecause the least costly method of resolving many institutions is believed to be through liquidations or "clean-bank" transactions, which

require the RTC to strip out bad assets and sell them separately. Such

transactions require much more up-front cash than selling or merging

the entire institution. RTC's authority to borrow working capital for

this purpose is not unlimited, however. FIRREA effectively caps RTC's

obligations so that its liabilities may not exceed its assets, with assets

in receivership valued at 85 percent of their net realized value, an

amount that cannot be known at the time and would have to be estimated. FIRREA does not specify the source of working capital or the

form that the borrowing could take.

The Department of Justice recently clarified the legal authority of

the RTC to raise working capital by borrowing from the Federal Financing Bank (FFB), and the RTC Oversight Board has announced
194 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

that the RTC will begin borrowing from the FFB very soon. Funds borrowed from the FFB will add to the federal deficit when spent. Another

potential source of working capital is the RTC's $5 billion line of credit

with the Treasury, although the RTC expects to use this source of

funds primarily for emergency purposes. In addition, the RTC could

use private markets to raise off-budget funding for insolvent thrifts to

supplement its FFB borrowing, but this form of financing would be

more costly and has limited usefulness,.

Baseline Projections for the RTC

The budgetary impact of spending by the RTC is still highly uncertain,

even for 1990 and 1991. Closing or selling hundreds of insolvent

thrifts may involve potential swings of tens of billions of dollars from

year to year, depending on a host of interrelated factors that are

extremely difficult to predict, including:

o The number of institutions that the Office of Thrift Supervision will identify for the RTC caseload;

o The form of the resolutions, with liquidations requiring

much larger cash expenditures up front than assisted acquisitions, but resulting in more cash income in subsequent

years;

o The order in which cases are resolved: if institutions with

larger losses are resolved first, there will be greater spending

in initial years;

o The pace of resolutions, which has been slow to date;

o The form and timing of borrowing of working capital; and

o The timing and value of asset sales.

Also, the RTC could take steps that would increase or accelerate

its use of working capital and affect the budget as well. For example, it

could delay some or all of the REFCORP borrowing, thus shifting

outlays from 1991 to 1990. Such a delay would also allow the RTC to

borrow working capital equal to 100 percent of the unused REFCORP
APPENDIX A BASELINE BUDGET PROJECTIONS 195

borrowing authority, whereas if the REFCORP funds were used to purchase assets, borrowing for working capital would be limited to 85 percent of the value of the assets acquired. Also, it could overvalue some

of its assets, thus allowing additional borrowing, and could seek Congressional approval, without statutory changes required, to make use

of its legal authority to incur net obligations beyond $50 billion.

(FIRREA technically allows the RTC to spend a net of $68.8 billion,

though the higher figure was apparently unintended.)

Given these uncertainties and the volatile nature of spending for

this purpose, a number of assumptions had to be made in updating the

CBO baseline to include the RTC's use of working capital. The baseline assumes that $24 billion will be borrowed from the FFB in 1990,

and another $31 billion in 1991. Other critical assumptions are spelled

out below. The net result is to increase CBO baseline projections for

RTC outlays by $19 billion in 1990 and by $26 billion in 1991 from the

January baseline levels (see Table A-3). Because this additional

spending in 1990 and 1991 would permit the acquisition and subsequent sale of more assets, baseline outlays in later years are negative, and below previous estimates by a total of almost $25 billion over

the 1992-1995 period.

The Baseline Compared with the President's Budget

The President's budget provides few details about the assumptions

used to estimate spending for the RTC over the next five years, and

several financial statements normally included are missing. In the

President's 1991 budget request, the RTC uses only limited working

capital, largely by spending previous appropriations and REFCORP

funds for temporary lending to thrifts to replace funds borrowed at

high interest rates. These loans are technically repaid and that cash is

reused when the institution is finally closed. Proceeds from asset sales

are also used for working capital.

The CBO reestimate of the President's budget is identical to the

baseline, because no legislation is proposed in the budget. Thus, CBO's

estimate of RTC outlays exceeds the estimates in the President's budget by about $31 billion in 1990 and $24 billion in 1991, but is lower by

$13 billion in 1992 and 1993, $10 billion in 1994, and $7 billion by 1995
196 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

(see Table A-3). A more detailed discussion of the assumptions underlying the CBO baseline follows.

Baseline Assumptions

The CBO baseline assumes that the ETC will borrow from the FFB

until it reaches the statutory cap on its outstanding obligations. However, there is some uncertainty about the amount of this cap. While it

appears that the intent of the Congress was to limit the ETC to net

spending of no more than $50 billion, the formula limiting ETC's obligations in FIEEEA failed to include Treasury appropriations of $18.8

billion in 1989. Thus, FIEEEA technically allows the ETC to spend a

net of $68.8 billion. The Administration has indicated that it will

honor the $50 billion ceiling, and the General Accounting Office, when

calculating ETC's net cumulative losses, will assume that the $50 bilTABLE A-3. CBO AND ADMINISTRATION ESTIMATES OF RTC

SPENDING (By fiscal year, in billions of dollars)

1990 1991 1992 1993 1994 1995

CBO February Baseline

and Reestimate of the

President's Budget 33.0 31.0 -13.0 -13.0 -10.0 -7.0

Change in CBO Baseline

CBO January Baseline 14.0 4.9 -3.5 -6.9 -4.8 -3.3

Change in Baseline from

January to February 19.0 26.1 -9.5 -6.1 -5.2 -3.7

Reestimate of President's Budget

President's 1991 Budget 2. 3 7. 3 000 0

Difference Between

President's 1991 Budget

and February Baseline 30.7 23.7 13.0 13.0 10.0 7.0

SOURCES: Congressional Budget Office; Office of Management and Budget.
APPENDIX A BASELINE BUDGET PROJECTIONS 197

lion limitation applies. Consistent with this treatment, the CBO baseline assumes that the RTC will borrow as much as it can pay back from

liquidating assets, while realizing net losses of no more than $50 billion over time.

A key to determining the amounts the RTC is likely to borrow are

the expected proceeds from the sale of assets, which represent the

second largest source of cash to the RTC. Estimating the pace and size

of sale proceeds realized by the RTC is highly speculative, given that

there is little historical precedent for sales of this magnitude, and

given the competing goals of minimizing the losses to the federal government, minimizing the effects of disposal of assets on local economies, and generating sufficient cash for case resolutions. CBO's estimates assume that the RTC will recover an average of about 70 percent

of the estimated value of assets at the time they are acquired. Collections are expected over an eight-year period after the assets are placed

in receivership; more than 75 percent of the collections is expected in

the first four years. CBO's caseload projections are based on RTC's

priorities for selecting cases for resolution.

CBO estimates that the RTC could borrow about $55 billion in

working capital and pay it back from asset sales over the next 10 years.

During the 1990-1992 period, cash raised by the Resolution Funding

Corporation ($30 billion), remaining 1989 Treasury contributions ($9

billion), asset sales ($37 billion), repayments of advances ($11 billion

net), and FFB borrowing ($55 billion) would allow the RTC to spend

about $120 billion on case assistance, and make interest ($8 billion)

and principal ($13 billion) payments to the FFB (see Table A-4).

RTC's Additional Funding Needs

The $120 billion included in the baseline for RTC case resolutions for

1990 through 1992 is probably sufficient to resolve 250 to 350 insolvent

institutions, but is almost certainly not enough to resolve the 500 to

600 institutions now in the RTC caseload or expected to join it during

the next three years. Almost all of that spending is expected to occur

before the end of 1991, when the RTC would run out of cash-both for

insurance losses and for working capital. CBO now estimates that by

1992 the RTC will need at least an additional $25 billion to $30 billion

for net losses, plus working capital of at least the same amount, in
198 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

order to resolve the entire inventory of 500 to 600 insolvent thrifts.

This estimate does not include costs for additional thrifts that are

likely to become insolvent in the next few years. Under current law,

SAIF would have to handle cases that remain after the RTC authority

to resolve cases ends in 1992.

The Budget Treatment of RTC Spending

The President's budget distinguishes between two types of working

capital: "normal," which is repaid from asset sales within months, and

TABLE A-4. PROJECTED USES AND SOURCES OF RTC

CASH, FISCAL YEARS 1990-1992 (In billions of dollars)

1990 1991 1992

RTC Disbursements

Case resolutions 62 55 3

Advances (loans) t o thrifts 2 0 0

Interest payments t o FF B 13 4

Principal payments to FFB _0 _0 (13)

Total 65 58 20

RTC Sources of Cash

REFCORP funding

Asset sales

Repayment of advances

Treasury appropriations

FFB borrowing

Total

Net Outlays

SOURCE: Congressional Budget Office.

NOTE: Items in parentheses do not count

19

4

9

(9)

(24)

65

33

toward the

11

14

3

0

(31)

58

31

calculation of RTC's budget o

0

19

1

0

_0

20

-13

lutlays. RTC

principal repayments to the FFB are repayment of agency debt and do not add to the deficit.

Treasury appropriations and proceeds from FFB borrowing are a means of financing agency

spending and do not count as offsetting collections to the RTC or reduce outlays. RTC =

Resolution Trust Corporation; FFB = Federal Financing Bank; REFCORP = Resolution

Funding Corporation.
APPENDIX A BASELINE BUDGET PROJECTIONS 199

"extraordinary," which is repaid from asset sales over a long period of

time. The normal working capital, which is included in the President's

budget, is paid off within a fiscal year and has little impact on the

deficit.

The President's budget makes a case for excluding the "extraordinary" working capital from the budget calculations used to determine

sequestration amounts under the Balanced Budget Act. CBO agrees

that such spending has no real economic effect. Moreover, the cashbased budget is ill suited for measuring the long-term impact on taxpayers of RTC's activities, which increase the deficit in early years

while lowering it in later years when the proceeds from asset sales offset other government spending.

The Balanced Budget Act excludes asset sales from both the budget baseline and the calculation of budgetary savings-except for

"routine, ongoing" asset sales or sales previously mandated by law. It

is not clear whether RTC asset sales are covered by the exclusion; if

they are, so that asset sales would not count as receipts, it would also

make sense not to count RTC's expenditure of working capital to acquire the assets. Counting asset acquisitions but not sales against

budget targets would overstate outlays over time and needlessly and

inconsistently bias budget policy toward fiscal constraint. Nonetheless, the act contains no provision that would allow this difficulty to be

resolved, and CBO believes that a statutory change would be required

to exclude the spending of working capital from the deficit totals used

for the Balanced Budget Act.

Indeed, a clear economic case exists for excluding from the act's

baseline deficit calculation all of RTC's net expenditures except payment of interest on RTC's debt to the FFB. (Repayment of principal

does not count as an outlay in any event.) This case is based on the fact

that such spending does not change the government's balance sheet

and does not affect national saving in the way that most federal spending does. The same case cannot be made for the interest on government borrowing, whether through the FFB, REFCORP, or the Treasury. (Table 1-5 shows CBO's deficit estimates excluding noninterest

outlays of the RTC.)

APPENDIX B

COMPARISON OF THE CBO AND

ADMINISTRATION ECONOMIC

FORECAST RECORDS

On average, the Congressional Budget Office's economic forecasts have

been more accurate than the Administration's for the 11 forecasts

made between 1978 and 1988. CBO's forecasts have been slightly better than the Administration's for the period that affects the accuracy of

the estimates for the budget year deficit—that is, the two-year horizon—and have a larger edge over the longer horizon. None of the differences, however, is large enough to be significant in a statistical

sense. In other words, the historical record alone cannot provide strong

evidence regarding which forecast will do better in the future.

This appendix compares CBO forecasts with the corresponding

forecasts of the Carter and Reagan Administrations. Forecasts issued

early in 1978 through early 1988 are included. The Reagan/Bush forecast of early 1989 cannot be included because the budget year that was

the subject of that forecast, the 1990 fiscal year, is not yet complete.

Three important summary measures of forecast performance are:

the mean error, the mean absolute error, and the root mean square error.1 The first measure, the simple average of all the errors, indicates

the bias of the forecasts. In this measure, the underestimates and overestimates will offset each other, thereby showing whether the forecasts

overestimate or underestimate on average. The second measure, the

mean absolute error, indicates the average size of the overestimates

and underestimates without regard to sign. The root mean square

error also shows the size of the error without regard to sign, but it gives

greater weight to larger errors.

A less important measure of forecast performance compares forecasts by the number of times one or the other was the more accurate of

the two. Such rankings could be misleading, however, because they do

1. The mean absolute error is the average of all errors without regard to sign. Root mean square error

is calculated by first taking the square of all errors, then taking the square root of the average of the

squared errors.
202 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

not measure how much better each forecast was on average. For

example, if one forecaster does only trivially better than another on

numerous occasions but much worse in a few years, the ranking

measure would improperly indicate that forecaster was the better of

the two. Therefore, the forecast rankings mentioned below should be

interpreted with caution.

This appendix considers two time periods. The time period of most

interest for deficit forecasters is the two-year forecast horizon. Both

the Administration and CBO publish forecasts in January or February

for the budget year that begins in October of that year. An economic

forecast that is accurate for both the months leading up to the budget

year and the months of the budget year itself will provide the basis for

an accurate forecast of the deficit. A second time period, a four-year

horizon, is used to examine the accuracy of longer-term projections of

real growth in gross national product.

THE TWO-YEAR FORECAST HORIZON

For the two-year forecast horizon, CBO has a better record for forecasting real GNP growth and the inflation-adjusted short-term interest rate. There was little difference, however, between the Administration and CBO in the accuracy of their forecasts of the inflation rate

and the nominal short-term interest rate.

CBO's edge in forecasting real GNP growth gave it an advantage

in forecasting the deficit, since real growth is the most important variable for minimizing errors in forecasting deficits. Forecasting inflation, nominal GNP growth, and nominal interest rates accurately is

less important for deficit forecasting now than it was in the late 1970s

and the early 1980s. Given current law and the current level of the

national debt, higher inflation increases both revenues and outlays by

similar amounts. Revenues increase because taxes are levied on nominal incomes, profits, and transactions. Outlays increase for two reasons: first, because various entitlement programs are indexed to infla-
APPENDIX B CBO AND ADMINISTRATION FORECAST RECORDS 203

tion, and second, because nominal interest rates increase, and therefore federal debt service increases when inflation rises.2

Real GNP Growth

CBO had a slightly better record than the Administration over the

two-year horizon in forecasting real GNP growth, the single most important variable for forecasting the deficit (see Table B-l). CBO's average error, or bias, was a 0.1 percentage point overestimate and the Administration's was 0.4 percentage point. This slightly higher average

error indicates a mild optimistic bias on the part of the Administration,

but it is not large. The root mean square errors were 1.2 percentage

points for CBO and 1.5 percentage points for the Administration.

CBO's forecast was closer to the true value in seven of the eleven periods, the Administration forecast better in two, and the two forecasters

had equal errors in two of the periods (see Table B-5).

The bulk of the difference between CBO's and the Administration's record is the result of the forecasts issued in January of 1981,

1982, and 1983. Although virtually all forecasters turned out to be too

optimistic for 1981 and 1982, the Administration's forecasts in those

years turned out to be particularly optimistic. In the January 1983

forecast, however, the reverse was true. The Administration's forecast

had a large error on the low side. In recent years, the 1984 through

1988 forecasts, there was not a large difference in the accuracy of the

two organizations' forecasts.

CPI Inflation

There is essentially no difference in the records for forecasting the

average annual growth of the consumer price index over the two-year

horizon (see Table B-2). Both organizations underestimated future

inflation in their 1978, 1979, and 1980 forecasts, and both tended to

overestimate inflation in their 1981 through 1986 forecasts. The

2. Rules of thumb for estimating the effect on the deficit of changes in various macroeconomic variables are given in The Economic and Budget Outlook: Fiscal Years 1991-1995 (January 1990), p. 55.
204 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

TABLE B-l. COMPARISON OF CBO AND ADMINISTRATION

TWO-YEAR FORECASTS OF REAL GNP GROWTH

(By calendar year)

CBO

1978-1979

1979-1980

1980-1981

1981-1982

1982-1983

1983-1984

1984-1985

1985-1986

1986-1987

1987-1988

1988-1989

Mean Error

Mean Absolute Error

Root Mean Square

Error

Actual

3.9

1.1

0.9

-0.3

0.5

5.2

5.1

3.0

3.2

4.0

3.6

n.a.

n.a.

n.a.

Forecast

3.9

2.6

0.5

1.9

2.1

3.4

4.7

3.3

3.1

2.9

2.4

n.a.

n.a.

n.a.

Error

0.0

1.5

-0.4

2.2

1.6

-1.8

-0.4

0.3

-0.1

-1.1

-1.2

0.1

1.0

1.2

Administration

Forecast

4.7

2.9

0.5

2.6

2.7

2.6

4.7

3.9

3.7

3.3

2.9

n.a.

n.a.

n.a.

Error

0.8

1.8

-0.4

2.9

2.2

-2.6

-0.4

0.9

0.5

-0.7

-0.7

0.4

1.3

1.5

SOURCES: Congressional Budget Office; Office of Management and Budget; Department of Commerce,

Bureau of Economic Analysis.

NOTES: Actual values are the two-year growth rates for real gross national product (GNP) currently

reported by the Bureau of Economic Analysis, not the first reported values. Forecast values are

for the average annual growth in GNP over a two-year period. The forecasts were issued in

January of the initial year of the period. Errors are forecast values minus actuals; thus, a

positive error is an overestimate.

n.a. = not applicable.
APPENDIX B CBO AND ADMINISTRATION FORECAST RECORDS 205

TABLE B-2. COMPARISON OF CBO AND ADMINISTRATION

TWO-YEAR FORECASTS OF THE CPI INFLATION

RATE (By calendar year)

Actual

1978-1979

1979-1980

1980-1981

1981-1982

1982-1983

1983-1984

1984-1985

1985-1986

1986-1987

1987-1988

1988-1989

Mean Error

Mean Absolute

Error

Root Mean Square

Error

CPI-U

9.5

12.4

11.9

8.2

4.7

3.8

3.9

2.8

2.8

3.9

4.4

n.a.

n.a.

n.a.

CPI-W

9.5

12.4

11.9

8.1

4.5

3.2

3.5

2.5

2.6

3.8

4.4

n.a.

n.a.

n.a.

CBO

Forecast

6.0

8.1

10.1

10.5

7.2

4.8

5.0

4.1

3.8

4.0

4.7

n.a.

n.a.

n.a.

Error

-3.5

-4.3

-1.8

2.3

2.5

1.0

1.1

1.3

1.0

0.1

0.3

0.0

1.7

2.1

Administration

Forecast

6.0

7.4

10.5

9.7

6.6

4.8

4.5

4.2

3.8

3.3

4.2

n.a.

n.a.

n.a.

Error

-3.5

-5.0

-1.4

1.6

2.1

1.6

1.0

1.7

1.2

-0.5

-0.2

-0.1

1.8

2.2

SOURCES: Congressional Budget Office; Office of Management and Budget; Department of Labor,

Bureau of Labor Statistics.

NOTES: Values are for the average annual growth of the consumer price index (CPD over the two-year

period. CBO forecast the CPI-U (for all urban consumers). The Administration forecast the

CPI-W (for urban wage earners and clerical workers). The forecasts were issued in January of

the initial year of the period. Errors are forecast values minus actuals; thus, a positive error is

an overestimate.

n.a. = not applicable.
206 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

measures of bias and the size of the errors are virtually the same for

CBO and the Administration. The Administration was closer to the

true value in five of the eleven periods, CBO closer in five, and both

had the same error for one period.

Nominal Short-Term Interest Rates

CBO's record is marginally better than the Administration's for nominal short-term interest rates over the two-year horizon (see Table B-3).

The sizes of their errors were similar, but CBO had a smaller downward bias in forecasting interest rates than the Administration. CBO

was closer to the true value in seven of the eleven periods, and the

Administration was closer in four.

Inflation-Adjusted Short-Term Interest Rates

CBO had a better forecasting record for inflation-adjusted short-term

interest rates. The inflation-adjusted rate used in this discussion is the

three-month Treasury bill rate less the growth rate of the CPI. The

growth of the CPI is measured as the average annual rate from the

fourth quarter of the preceding year to the fourth quarter of the second

year of the period. Since CBO had forecast the CPI-U, and the Administration the CPI-W, two actual inflation-adjusted interest rates

are given in the table and used for analyzing forecast accuracy (see

Table B-4).

CBO's errors were smaller than the Administration's for all of the

measures. Both CBO and the Administration had an optimistic biasthat is, they forecast lower inflation-adjusted interest rates than have

actually occurred on average-but the Administration's bias is greater.

The Administration's mean absolute and root mean square errors were

also larger, and CBO was closer to the actual value in nine of the eleven periods (see Table B-5).

Note that the optimistic biases are greater in the last nine years

than indicated by the average of the entire period. Inflation-adjusted

short-term interest rates were higher in the 1980s than in previous

decades. Forecasters in general failed to anticipate this departure

from historical norms.
APPENDIX B CBO AND ADMINISTRATION FORECAST RECORDS 207

TABLE B-3. COMPARISON OF CBO AND ADMINISTRATION

TWO-YEAR FORECASTS OF NOMINAL SHORTTERM INTEREST RATES (By calendar year)

CBO

1978-1979

1979-1980

1980-1981

1981-1982

1982-1983

1983-1984

1984-1985

1985-1986

1986-1987

1987-1988

1988-1989

Mean Error

Mean Absolute Error

Root Mean Square

Error

Actual

8.6

10.8

12.7

12.3

9.6

9.1

8.5

6.7

5.9

6.2

7.4

n.a.

n.a.

n.a.

Forecast

6.5

8.4

9.5

13.3

12.6

7.1

8.8

8.5

6.8

5.7

6.5

n.a.

n.a.

n.a.

Error

-2.1

-2.4

-3.2

1.0

3.0

-2.0

0.3

1.8

0.9

-0.5

-0.9

-0.4

1.6

1.9

Administration

Forecast

6.1

8.2

9.8

10.0

11.1

8.0

8.1

8.0

6.9

5.5

5.3

n.a.

n.a.

n.a.

Error

-2.5

-2.6

-2.9

-2.3

1.5

-1.1

-0.4

1.3

1.0

-0.7

-2.1

-1.0

1.7

1.9

SOURCES: Congressional Budget; Office of Management and Budget; Federal Reserve Board.

NOTES: Values are the average of the three-month Treasury bill rate for the two-year period. The

forecasts were issued in January of the initial year of the period. Errors are forecast values

minus actuals; thus, a positive error is an overestimate.

n.a. = not applicable.
208 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

TABLE B-4. COMPARISON OF CBO AND ADMINISTRATION

TWO-YEAR FORECASTS OF THE INFLATIONADJUSTED SHORT-TERM INTEREST RATE

(By calendar year)

Actual

1978-1979

1979-1980

1980-1981

1981-1982

1982-1983

1983-1984

1984-1985

1985-1986

1986-1987

1987-1988

1988-1989

Mean Error

Mean Absolute

Error

Root Mean Square

Error

Based on

CPI-U

-2.2

-1.9

1.6

5.3

5.7

5.4

4.7

4.3

3.0

1.8

2.9

n.a.

n.a.

n.a.

Based on

CPI-W

-2.3

-1.9

1.8

5.4

6.0

5.9

5.1

4.6

3.2

1.8

3.0

n.a.

n.a.

n.a.

CBO

Forecast

0.5

0.5

0.0

3.5

5.8

2.3

3.8

4.3

2.8

1.3

2.2

n.a.

n.a.

n.a.

Error

2.7

2.4

-1.6

-1.8

0.1

-3.1

-0.9

0.0

-0.2

-0.5

-0.7

-0.3

1.3

1.7

Administration

Forecast

0.0

1.3

0.1

1.2

6.2

3.3

3.6

3.7

2.9

1.0

1.2

n.a.

n.a.

n.a.

Error

2.3

3.2

-1.7

-4.2

0.2

-2.6

-1.5

-0.9

-0.3

-0.8

-1.8

-0.7

1.8

2.1

SOURCES: Congressional Budget Office; Office of Management and Budget; Federal Reserve Board;

Department of Labor, Bureau of Labor Statistics.

NOTES: Values are for the three-month Treasury bill rate less the respective forecast for inflation aa

measured by the change in the consumer price index (CPI). CBO forecast the CPI-U (for all

urban consumers). The Administration forecast the CPI-W (for urban wage earners and clerical

workers). The change in the CPI for the two-year periods is measured as the average annual

rate from the fourth quarter of the preceding year to the fourth quarter of the second year of the

period. The forecasts were issued in January of the initial year of the period. Errors are forecast

values minus actuals; thus, a positive error is an overestimate.

n.a. = not applicable.
APPENDIX B CBO AND ADMINISTRATION FORECAST RECORDS 209

THE LONGER HORIZON

The Administration's errors for real GNP growth for the longer horizon, measured here as four years ahead, were larger than CBO's. Although this does not directly affect the estimates of the budget year

deficit, accuracy in the longer term is obviously important for multiyear budget planning. It should be noted that neither the Administration nor CBO considers its projections to be its best guess about the

year-to-year course of the economy for those years. The Administration indicates that its projection is based on the adoption of the President's budget, and CBO in recent years has considered its projections

an indication of the average future performance of the economy if

major historical trends prevail. Neither attempts to forecast any cyclical fluctuations in the projection period.

In the few years that are available for comparison, the Administration's projections had an upward bias of 1.1 percentage points for

the average annual rate of real GNP growth over four-year periods,

and CBO had an upward bias of 0.7 percentage point (see Table B-6).

The biases was largely the result of the inability of the projections

made in January of 1978,1979, and 1980 to anticipate the recessions of

TABLE B-5. RANKING OF CBO AND ADMINISTRATION TWOYEAR FORECASTS, CALENDAR YEARS 1978-1988

Number of Times a

Forecaster Had a Smaller Error

CBO Administration Ties

Growth i n Gross National Product 7 2 2

Inflation as Measured by the

Consumer Price Index 5 5 1

Nominal Short-Term Interest Rates 74 0

Inflation-Adjusted Short-Term Rates 92 0

SOURCE: Congressional Budget Office.
210 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

TABLE B-6. COMPARISON OF CBO AND ADMINISTRATION

LONGER-TERM PROJECTIONS OF REAL GNP

GROWTH (By calendar year)

CBO

1978-1981

1979-1982

1980-1983

1981-1984

1982-1985

1983-1986

1984-1987

1985-1988

1986-1989

Mean Error

Mean Absolute Error

Root Mean Square

Error

Actual

2.4

0.4

0.7

2.4

2.7

4.1

4.1

3.5

3.4

n.a.

n.a.

n.a.

Forecast

4.6

3.5

2.0

2.6

2.8

3.6

4.1

3.3

3.3

n.a.

n.a.

n.a.

Error

2.2

3.1

1.3

0.2

0.1

-0.5

0.0

-0.2

-0.1

0.7

0.9

1.4

Administration

Forecast

4.8

3.7

2.6

3.7

3.8

3.3

4.3

4.0

3.8

n.a.

n.a.

n.a.

Error

2.4

3.3

1.9

1.3

1.1

-0.8

0.2

0.5

0.4

1.1

1.3

1.6

SOURCES: Congressional Budget Office; Office of Management and Budget; Department of Commerce,

Bureau of Economic Analysis.

NOTES: Actual values are the four-year growth rates for gross national product (GNP) currently

reported by the Bureau of Economic Analysis, not the first reported values. Forecast values are

for the real average annual growth in GNP over the four-year period. The forecasts were issued

in January of the initial year of the period. Errors are forecast values minus actuals; thus, a

positive error is an overestimate.

n.a. = not applicable.
APPENDIX B CBO AND ADMINISTRATION FORECAST RECORDS 211

1980 and 1982. In subsequent years, the upward bias was much

smaller for the Administration's projections, and there was virtually

no bias in CBO's projections.

The size of the root mean square errors for the entire period for

both CBO and the Administration is also largely the result of errors in

the first three years. Moreover, CBO had a definite edge in the projections made in January 1981 and 1982, and a lesser edge in later

years. CBO's projection of four-year real GNP growth was more accurate than the Administration's for every one of the nine periods compared here.

THE USE OF STATISTICS ON FORECAST ACCURACY

For a number of reasons, the statistics on errors reported here may not

be useful for estimating the accuracy of future forecasts. The first is

that the sample here of 11 forecasts for the two-year horizon is relatively small, and the difference between the accuracy of CBO's forecasts and those of the Administration is not statistically significant

given the small sample. Second, the procedures and purposes of each

organization's forecasts have changed over the period and may change

in the future. For example, in the late 1970s, CBO characterized its

long-term projection as a goal for the economy, whereas now CBO considers it a projection that will prevail on average if the economy continues to reflect historical trends. Third, an institution's ability to

forecast may change over time. Lastly, forecast errors are closely related to how erratically the economy performs. This relationship can

be clearly seen in the tables by comparing the errors in the 1980-1983

period with those of subsequent years. If the economy were again to

experience a severe recession, both CBO's and the Administration's

forecast errors would almost certainly be larger than the averages of

the 11 forecasts examined here.

APPENDIX C

MAJOR CONTRIBUTORS TO THE

REVENUE AND SPENDING ESTIMATES

The following analysts prepared the revenue and spending estimates

in this report:

Revenue Estimates

Mark Booth Corporate income taxes,

Federal Reserve System earnings

Leonard Burman Individual income taxes

Maureen Griffin Social insurance contributions,

excise taxes, estate and gift taxes

Jon Hakken Corporate income taxes

Richard Kasten Individual income taxes

Eric Nicholson Excise taxes

Rosemarie Nielsen Individual income taxes

Larry Ozanne Individual income taxes

Linda Radey Individual income taxes, excise taxes

Caroline Ratcliffe Customs duties,

miscellaneous receipts

Frank Sammartino Individual income taxes

Spending Estimates

Defense and International Affairs

Eugene Bryton Defense

Kent Christensen International affairs

Raymond Hall Defense

Barbara Hollinshead Defense

William Myers Defense

Amy Plapp Defense

Lisa Siegel Defense

Joseph Whitehill International affairs

Ben Wolters Defense
214 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990

Spending Estimates (continued)

Human Resources

Paul Cullinan

Cathy Ellman

Alan Fairbank

Karen Graham

Alice Grant

Holly Harvey

Jean Hearne

Lori Housman

Julia Isaacs

Deborah Kalcevic

Cory Leach

Donald Muse

Janice Peskin

Kathleen Shepherd

Social Security

Civil Service Retirement,

Supplemental Security Income

Hospital Insurance

Public Health Service

Social service programs, Head Start

Supplementary Medical Insurance

Medicaid

Medicare

Food Stamps, child nutrition

Education

Unemployment Insurance, training

programs, veterans' education

Medicaid, Medicare

Aid to Families with Dependent

Children, child support

enforcement

Veterans' benefits

Natural and Physical Resources

Laura Carter

Kim Cawley

Douglas Criscitello

Peter Fontaine

Theresa Gullo

James Hearn

David Hull

Mary Maginniss

Eileen Manfredi

Pollution control and abatement,

deposit insurance

Energy

Commerce, disaster relief and

insurance

Energy

Water resources, conservation, and

land management

General government, Agricultural

Credit Insurance Fund, Outer

Continental Shelf receipts

Agriculture

Deposit insurance

Agriculture
APPENDIX C MAJOR CONTRIBUTORS 215

Spending Estimates (continued)

Natural and Physical Resources (continued)

Marjorie Miller

Marta Morgan

Andrew Morton

Deborah Reis

Mitchell Rosenfeld

Brent Shipp

Michael Sieverts

Transportation, Federal Housing

Administration

Community and regional

development, general

government

Agriculture

Recreation, water transportation

Air transportation, justice,

Postal Service

Housing and mortgage credit

Science and space, justice,

other natural resources

Other

Janet Airis

Edward Blau

Paul Christy

David Elkes

Betty Embrey

Kenneth Farris

Danila Girerd

Glen Goodnow

Vernon Hammett

Sandra Hoffman

Richard Krop

Fritz Maier

Rodney Rasmussen

Kathy Ruffing

Robert Sempsey

Karla Sweeney

Jeff Swersey

Rick Williams

Appropriation bills

Appropriation bills

Other interest

National Income and

Product Accounts

Appropriation bills

Computer support

Credit budget

Authorization bills

Computer support

Computer support

Civilian agency pay

Computer support

Net interest on the public debt

Treasury borrowing,

interest, and debt

Appropriation bills

Appropriation bills

Computer support

Computer support